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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended January 31, 2002
Commission file number 000-27141
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TIVO INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0463167
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation or
organization)
2160 Gold Street, PO Box 95002
2160, Alviso, CA
(Address of principal (Zip Code)
executive offices)
(408) 519-9100
(Registrant's telephone
number including area
code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE PER SHARE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [_]
As of March 18, 2002 there were 47,429,196 shares of the registrant's common
stock outstanding, and the aggregate market value of such shares held by
non-affiliates of the registrant (based upon the closing sale price of such
shares on the NASDAQ National Market on March 18, 2002) was approximately
$136.4 million.
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DOCUMENTS INCORPORATED BY REFERENCE
Parts of Registrant's Proxy Statement for the Annual Meeting of Stockholders
to be held on August 2, 2002 are incorporated by reference into Part III of
this Annual Report on Form 10-K (The Report of the Compensation Committee, the
Report of the Audit Committee and the Comparative Stock Performance graph of
the Registrant's Proxy Statement are expressly not incorporated by reference
herein.)
TABLE OF CONTENTS
TABLE OF CONTENTS........................................................................ 2
PART I................................................................................... 3
ITEM 1. BUSINESS..................................................................... 3
ITEM 2. PROPERTIES................................................................... 22
ITEM 3. LEGAL PROCEEDINGS............................................................ 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................... 24
PART II.................................................................................. 25
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS...................................................................... 25
ITEM 6. SELECTED FINANCIAL DATA...................................................... 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................................. 28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.................... 55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................. 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.................................................................. 92
PART III................................................................................. 93
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.............................. 93
ITEM 11. EXECUTIVE COMPENSATION....................................................... 93
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............... 93
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................... 93
PART IV.................................................................................. 94
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............. 94
SIGNATURES............................................................................. 100
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (The "Annual Report") contains certain
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 statements relate to, among other things, our future
financial position, services, business development, strategy and our
management's plans and objectives for future operations. Forward-looking
statements generally can be identified by the use of forward-looking
terminology such as, "believe," "expect," "may," "will," "intend," "estimate,"
"continue," "ongoing," "predict," "potential," and "anticipate" or similar
expressions or the negative of those terms or expressions. These statements
involve known and unknown risks, uncertainties and other factors, which may
cause our actual results, performance or achievements to differ materially
from those expressed or implied by such forward-looking statements. Such
factors include, among others, the information contained under the captions
"Part I, Item 1. Business," and "Part II, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Annual
Report. The reader is cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date of this Annual Report. The reader is strongly urged to read the
information set forth under the captions "Part I, Item 1, Business," and "Part
II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations," in particular "Factors That May Affect Future
Operating Results," for a more detailed description of these significant risks
and uncertainties.
PART I
Item 1. BUSINESS
General Development of Business
TiVo is a pioneer in the personal television industry. We have created a
unique personal television service that allows viewers to watch what they want
when they want. The TiVo Service creates a richer and more enjoyable television
experience by offering viewers greater control, choice and convenience. We
believe that the TiVo Service also allows television programmers and
advertisers to reach a broader audience by making shows more accessible and
easier to record and to target their programming and advertising to specific
viewers. The TiVo Service is a subscription-based service enabled by a personal
video recorder designed and developed by TiVo.
TiVo was incorporated in August 1997 as a Delaware corporation with
facilities in California. On August 21, 2000, TiVo (UK) Ltd., a wholly owned
subsidiary of TiVo, was incorporated in the United Kingdom. On October 9, 2001
we formed a new subsidiary TiVo International, Inc., also a Delaware
corporation. We conduct our operations through one reportable segment.
Industry Background
The television is a truly ubiquitous consumer product. According to the
market research film Nielsen Media Research over 105 million households owned
at least one television at the end of 2001. On average those households watch
an estimated seven hours of programming per day.
The emergence of new technologies and delivery systems for television
programming has facilitated the reach and popularity of television. These new
technologies have enhanced the clarity, color and sound of television and, as a
result, have increased the entertainment value of watching television. In
addition, new delivery systems, including cable and satellite systems, now
offer a large number of programming choices and specialized programming such as
pay-per-view promotions. This change has not been lost on advertisers, who have
made television their largest, most popular medium for reaching consumers.
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As the reach and popularity of television has grown, so too has the amount
of programming available to viewers. Cable and home satellite television
systems have dramatically increased the number of networks and channels
available to today's television viewer. Direct satellite broadcast systems now
available in most areas of the United States can deliver over 200 channels. The
adoption of digital broadcasting technology and further improvement in
compression technologies promise an even greater increase in channel capacity
(300 to 500 channels) in digital cable or terrestrial digital broadcast
systems. The explosive growth in available channels has led to an
overwhelmingly diverse selection of programming and content. This is due in
large part to the emergence of specialized television channels and networks,
which are formed around a given subject, theme or category of interest. For
example, channels have been created to deliver programming to targeted groups,
such as women or children, or to deliver specialized content, such as news,
cartoons, classic movies, golf, comedy or educational programming.
Subscription-based premium channels, such as HBO and Showtime, also offer
specialized programming, including major motion pictures, made-for-television
movies and sporting events. Clearly, there is more television programming to
choose from now than ever before.
The Need for Personal Television
From the introduction of color television and remote controls to the
proliferation of cable and satellite programming and home theater systems,
improvements in the television experience have been aimed at meeting viewer
demand for richer programming and a more enjoyable viewing experience. However,
the dramatic increase in the volume and diversity of television programming has
fragmented viewing audiences and created new challenges for viewers, television
programmers, network operators and advertisers.
Challenges Faced by Viewers. TiVo believes that today's television viewer
wants greater control, choice and convenience when watching television. Today's
television viewers:
. are unable to easily navigate through hundreds of channels and thousands
of programs;
. are unable to easily identify programs of interest;
. are limited to either watching shows at the time they are broadcast or
recording shows by using a VCR; and
. are often forced to miss portions of shows due to interruptions.
Challenges Faced by Television Programmers. Although the television has
become a ubiquitous product, the dramatic increase in the volume and diversity
of channels and programming has drawbacks for networks and other television
programmers. The major networks have been particularly affected by the
proliferation of channels and specialized programming and are suffering from:
. brand dilution and declining viewer loyalty;
. greater fragmentation of their audience base; and
. the inability to effectively evaluate viewing habits, preferences and
demand.
As television becomes more fragmented and the competition for viewers
increases, networks and other television programmers must find new ways to
attract viewers and increase viewer loyalty.
Challenges Faced by Advertisers. Similarly, TiVo believes that today's
television advertisers face new challenges as they seek greater effectiveness
and efficiency in targeting specific viewers and establishing brand identity
and loyalty. For example, advertisers must:
. spend increasing amounts of time and money to target desired demographic
groups;
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. spread their advertising budgets over an ever-expanding number of
channels and programs; and
. find new ways to identify, monitor and respond to viewers' programming
and advertising preferences.
As viewer fragmentation has increased, so too has the cost of advertising.
Prime time advertisements on the major television networks are more expensive
today than ever before, yet ratings and market share for these networks are
declining. Like television programmers, advertisers must find new ways to reach
their targeted audience and to establish brand identity and loyalty among
viewers.
Challenges Faced by Cable and Satellite Network Operators. As a result of
increased competition, cable and satellite network operators have begun placing
greater emphasis on acquiring and retaining subscribers and finding ways to
increase the monthly revenue they receive from these subscribers. In order to
accomplish this successfully, they must:
. improve customer satisfaction;
. enhance programming choice; and
. provide new features and functionality.
TiVo Solution
TiVo has created a personal television service that we believe meets the
challenges faced by viewers, television programmers, advertisers and network
operators. The TiVo Service provides viewers with greater control, easier
navigation and a wider range of viewing options when watching television than
what was formerly available. The TiVo Service creates a richer and more
enjoyable viewing experience by allowing viewers to watch what they want when
they want. The TiVo Service also creates a new platform that enables television
programmers, advertisers, and network operators to deliver television
programming, advertising and in-home commerce. We believe that our service
allows television programmers and advertisers to reach a broader audience by
making shows more accessible and easier to record and to target their
programming and advertising to specific viewers. The TiVo Service is a
subscription-based service enabled by a personal video recorder designed and
developed by TiVo. The personal video recorder is a device that includes a hard
disk drive for recording shows and accessing the content available on the TiVo
Service.
The TiVo Service has many features that distinguish it from traditional
television viewing, including:
Locate and Record Multiple Shows Quickly and Easily. The TiVo Service
offers a variety of easy-to-use navigation and recording features that allow
viewers to easily locate and record their favorite shows. Viewers can record
and play back a single show or record a customized line-up of several shows
without entering specialized codes, setting a timer or using a video tape. With
the Season Pass feature, the TiVo Service automatically records all episodes of
viewers' favorite shows.
Control Live Television. Using the TiVo Service and the personal video
recorder, viewers have more control over live television. For example, viewers
can use advanced viewing commands, such as pause, rewind, fast forward and
frame-by-frame. When a viewer pauses live television, the personal video
recorder continues to record the program that the viewer is watching. The
viewer can then resume viewing in normal mode, fast forward to catch up to the
live telecast, or execute any of the other advanced viewing commands. Before
the introduction of TiVo, live television could not be controlled in this
manner.
Viewing Preferences and Suggested Programming. The TiVo Service allows
viewers to create viewing preferences around particular shows or categories of
interest. Using the Thumbs Up and Thumbs Down buttons on the TiVo remote,
viewers can express their preferences for a particular type of show. These
preferences accumulate over time and are stored locally on the personal video
recorder. Based on the viewer's stored preferences, TiVo recommends programming
that viewers are likely to enjoy and, when storage space is available, the TiVo
Service will automatically record shows that are most likely to match viewers'
individual preferences.
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Specialized Content. The TiVo Service also enables a variety of specialized
content. For example, the TiVo Service allows television programmers to develop
and deliver Showcases that feature selected programming, such as an upcoming
movie, special event or mini-series, on easy-to-use interactive screens.
Currently, Showcases available on the TiVo Service include directories of
simplified recording options for groups of related shows of particular
programmers. In the future, television programmers could use the TiVo Service
to directly offer viewers special programming packages and pay-per-view
promotions such as movies, sporting events, news headlines and other
programming. Subscribers to the TiVo Service also have access to TiVolution
Magazine, which features theme-based collections of shows compiled by TiVo.
Menu-Driven Navigation and Viewer Interface. The TiVo Service employs a
menu-driven interface and easy-to-use navigation system. TiVo Central, the main
screen of the TiVo Service, allows viewers to access their customized lineup of
shows, Showcases, TiVolution Magazine and other TiVo Services and features. The
Pick Programs to Record feature, located on the TiVo Central screen, allows
viewers to search for shows to record by subject, title, channel or time of
showing. Using the on-air guide, viewers can quickly and efficiently browse
through a schedule of up to two weeks of available television programming and
descriptions for each show.
Benefits of the TiVo Service
For viewers, television programmers, advertisers and network operators, the
TiVo Service offers several benefits over traditional television viewing.
Benefits to Viewers. We believe that our service offers an enhanced
television viewing experience. Key benefits offered to viewers include the
following:
Greater Control, Choice and Convenience. The TiVo Service provides viewers
with greater control, choice and convenience in watching television. Using the
search and navigation features and variety of recording options, viewers can:
. automatically record all episodes of their favorite shows;
. record two shows at the same time with the DIRECTV Receiver with TiVo
service;
. quickly and easily create a customized lineup of shows to be recorded up
to two weeks in advance;
. pause, rewind and fast-forward live television;
. skip through programming that they do not want to see; and
. access their customized lineup of recorded shows and other specialized
content.
Making Sense of Available Content. The TiVo Service assists viewers in
navigating through the hundreds of channels and thousands of programs available
for viewing. Using the TiVo Service, viewers can browse pre-set categories of
programming, such as sports or action/adventure, and select a desired show for
viewing or recording simply by entering the title, channel or time. With the
TiVo Service, viewers can easily organize their television viewing around shows
they want to watch and receive suggestions for programming that they are likely
to enjoy.
Programming that Matches Viewers' Preferences. The TiVo Service ranks and
recommends programming according to viewers' preferences. This functionality
not only gives viewers access to programming that meets their personal tastes,
but also displays programming, based on viewer preferences, that they might
otherwise never have known was being broadcast.
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Benefits to Television Programmers. We believe our TiVo Service offers
television programmers a new and exciting way to reach the viewing audience.
Key benefits offered to television programmers include the following:
Enhanced Viewer Loyalty and Retention. By making it easy for viewers to
find and record the shows they want to watch, the TiVo Service enables
programmers to make their shows accessible to a broader audience. TiVo believes
that these easy to use features, especially the Season Pass feature, will
increase the likelihood that viewers will continue viewing new episodes of a
particular series or show. Viewers also can easily play back the shows they
have recorded long after they have aired, enhancing viewer retention and
loyalty.
More Effective Promotions and Previews. The TiVo Service provides
television programmers with an opportunity to create more effective promotions
and previews such as Showcases for selected programming and pay-per-view
events. TiVo developed a service, called Ipreview, that consists of active
previews and promotions that allow a viewer to easily record featured
programming at the touch of a button. TiVo believes these promotions will be
effective in attracting viewers and increasing a network's brand presence
because they allow viewers to "impulse record" featured programming and to
watch these programs at a more convenient time. TiVo also believes that by
taking advantage of these features, television programmers have a greater
opportunity to reach a larger viewing audience.
New Platform for Content Delivery. TiVo anticipates that television
programmers will embrace the TiVo Service as a new way to reach audiences with
programming, products and services and as a way to enable electronic commerce.
For example, the TiVo Service can enable television programmers to allow
viewers to order and automatically record special programming packages,
including bundled episodes of previously run shows and pay-per-view promotions.
TiVo anticipates that viewers would be able to simply "point and click" to
order movies, sports events, programming packages, games and other products and
services.
Audience Measurement. TiVo is working to help the television industry and
advertisers understand the impact of how television viewers are going to
embrace and use emerging technologies, particularly the personal television
services. We believe that our research will provide the television industry
with accurate audience data and will help programmers and advertisers speak
more effectively to their audiences.
Benefits to Advertisers. We believe that our TiVo Service will offer
advertisers a new platform with more efficient and effective ways to reach
their targeted audience. Key benefits offered to advertisers include the
following:
Platform for New Advertising Opportunities. The TiVo Service provides
advertisers with a new platform to offer advertisements to viewers. For
example, advertisers may be able to combine new advertising with recorded shows
and special promotions to reach new and existing viewers. TiVo also intends to
offer advertisers a new service that will allow viewers to get more information
about and possibly purchase a featured product or service using the TiVo
remote. In this way, TiVo expects to create an interactive on-air shopping
experience for the viewer.
Targeting Consumers. In the future, the TiVo Service will allow advertisers
to offer advertising that is related to the viewing preferences stored on the
personal video recorder. For example, working with our network partners TiVo
could download and store several commercials on the personal video recorder and
select which of these commercials to show based on the viewer's preferences.
For example, an automobile advertiser may want to advertise one of several
models during the airing of a particular program, depending on each viewer's
preferences. If the viewer's preferences suggest that the viewer is an outdoor
enthusiast, the commercial might feature a sport utility vehicle.
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Benefits to Cable and Satellite Network Operators. The TiVo Service
provides a unique platform for network operators to reduce subscriber churn and
create new sources of revenue. Key benefits offered to cable and satellite
network operators include the following:
Ability to Differentiate Services and Reduce Churn. By offering subscribers
the ability to customize their viewing experience, the TiVo Service allows
network operators to differentiate and enhance their service offerings relative
to their competitors. The TiVo Service can also help network operators reduce
churn by making available programming more accessible to subscribers and thus
increasing the perceived value of their service offerings.
Platform for New Service Opportunities. The TiVo Service can also provide
new sources of revenue for network operators, such as personal video recording
("PVR") service subscription fees, content delivery revenues and advertising
revenues.
TiVo Strategy
TiVo's objective is to establish the TiVo Service as the platform for
delivering richer television programming, advertising and in-home commerce. The
key elements of our strategy are:
Promote mass deployment of digital video recording ("DVR") technology
through licensing partners. TiVo's licensing strategy focuses on developing
platform standards and promoting mass deployment of DVR technology through
licensing partners. TiVo is working in partnership with consumer electronics
manufacturers and others to develop new and complementary products that use the
TiVo technology, such as televisions, DVD players and satellite television
receivers. This strategy is based on TiVo's belief that the TiVo technology
enhances the value of other television, entertainment and home theater products
and services.
Maintain the TiVo Service as the Market Leader in Personal Television. TiVo
is a pioneer in the personal television industry. As the personal television
industry develops, we intend to grow our subscriber base, create specialized
content to enhance the value of the TiVo Service and develop new ways to
deliver effective targeted advertising. TiVo also intends to augment these
efforts through strategic partnerships with cable and satellite network
operators, television programmers, advertisers and consumer electronics
manufacturers. TiVo believes that maintaining a market leadership position in
personal television is critical to establishing new sources of revenues and the
overall growth of our business.
Maintain, Promote and Leverage the TiVo Brand. TiVo believes that
maintaining the TiVo brand is critical to attracting subscribers, advertisers
and strategic partners. We have dedicated substantial resources to promoting
our brand through multiple advertising and marketing channels, participation in
trade shows, sponsoring events, merchandising and by leveraging existing and
future strategic partnerships.
Aggressively Build and Defend Our Patent Portfolio. TiVo has continued to
build a defensible and useful intellectual property portfolio. We intend to use
our patent portfolio to license our technology to consumer electronics
companies and service providers for the purpose of creating an open standards
platform for digital video recorders to earn licensing revenue.
Leverage Partnerships to Continue to Gain Market Acceptance. TiVo believes
that leveraging partnerships to continue to gain market presence, brand
recognition and distribution resources of established television industry
participants will help us maintain broad consumer awareness and acceptance of
the TiVo Service and personal television. We intend to continue to maintain
partnerships with leading television industry participants to expand our
subscriber base, provide content and develop and distribute a wide variety of
devices that enable the TiVo Service. Such partnerships may include:
Network Operators and Other Content Distributors. TiVo intends to continue
to establish partnerships with an increasing number of network operators,
including cable and satellite operators. TiVo believes that
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agreements with these companies will provide access to a large and established
base of viewers who are likely to purchase the TiVo Service. Relationships with
these companies will also provide opportunities to develop additional devices
that enable the TiVo Service and provide specialized programming to viewers.
For example, TiVo's agreement with DIRECTV provides for a variety of assisted
and joint marketing activities targeting DIRECTV's installed base of
subscribers.
Networks and Other Television Programmers. TiVo has established
partnerships with a number of television programmers, including broadcast and
premium-service providers. TiVo believes that partnerships with these companies
have increased the amount and diversity of customized content available on the
TiVo Service and provided a significant opportunity to offer specialized
programming to viewers. Partnerships with these companies also provide TiVo
with opportunities to develop new interactive services. For example, TiVo has
relationships with NBC and Discovery Communications.
Consumer Electronics Manufacturers. TiVo intends to continue to establish
partnerships with consumer electronic and other device manufacturers for the
development, manufacture and marketing of devices that enable the TiVo Service.
TiVo believes this strategy will accelerate the growth of the market for
personal television.
Advertisers. TiVo has established partnerships with advertisers in an
effort to generate new sources of revenue. TiVo believes that garnering
advertiser support for the TiVo Service accelerated the market acceptance for
personal television. We also believe that our proprietary software and other
technology embedded in the personal video recorder and the TiVo Service enables
advertisers to reach desired viewers more effectively. Not only will
advertisers be better equipped to reach consumers with specific tastes or
preferences, viewers will receive more information about products in which they
are likely to be interested.
Offer an Increasing Range of Features. TiVo intends to continue to offer
new features in order to enhance the value of the TiVo Service and create new
sources of revenue. TiVo's technology allows for frequent updates and
improvements to the programming and features offered on the TiVo Service. TiVo
believes that the TiVo Service allows television programmers and advertisers to
reach a broader audience by making shows more accessible and easier to record
and to target their programming and advertising to specific viewers. Potential
future services include:
Active Promotions. TiVo anticipates that programmers will be able to
continue to use the TiVo Service to allow viewers to easily record a variety of
programming such as movies, sports events, television series and other products
and services. For example, TiVo has developed "Ipreview", a service that allows
viewers to schedule and record featured programming using a "point and click"
feature during previews.
Active Ads. TiVo anticipates that advertisers will be able to use special
coding, called "data tags," to allow viewers to interact with commercials. For
example, when viewing a commercial, viewers may be able to click a button on
their remote control to request a longer infomercial about the product, to
request a brochure or ask for the nearest retailer. TiVo is currently
developing a service that allows viewers to get more information about and
possibly purchase featured products or services using the TiVo remote control.
Targeted Ads. TiVo anticipates that advertisers will use the TiVo Service
to reach a broader base of consumers and offer commercials that better match
viewers' interests. For example, based on the viewers' preferences stored on
the personal video recorder, an automobile advertiser can feature a sport
utility vehicle in one household and a minivan in another. This would be
accomplished by a software program utilizing data stored on the personal video
recorder. In accordance with TiVo's privacy policy, personally identifiable
viewing information would not be released to advertisers or other third parties
without the viewer's consent.
Entertainment Services. TiVo intends to distribute new digital music, video
party games and video-on-demand services. For example, TiVo has partnered with
each of RealNetworks, Inc., Jellyvision and Radiance Technologies, Inc. with
the intention of delivering new entertainment services for the TiVo Series2
digital video recorder.
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What Viewers Experience Using the TiVo Service
The TiVo Service is designed to appeal to a broad consumer base by being
easy-to-use and intuitive. The TiVo Service gives viewers the ability to
control and personalize television by letting them watch what they want when
they want. Navigation through the TiVo Service's menu-driven interface starts
from the TiVo Central screen.
TiVo Central. TiVo Central is the main screen on the TiVo Service and is
the first screen viewers see when they turn on their television and access the
TiVo Service. TiVo Central can also be accessed from anywhere in the TiVo
Service by pushing the TiVo button on the TiVo remote. Viewers can access most
of the recording and viewing features available on the TiVo Service through
this screen.
Now Showing. The Now Showing screen allows viewers to easily choose from
their customized lineup of shows, which have been recorded and are stored on
the personal video recorder. For each show, viewers can get detailed
information, including a description of the show and its recorded time. Viewers
can also see when the program will be deleted from the personal video recorder
and can change the deletion time if desired.
Showcases. Showcases can be used by television programmers and advertisers
to feature selected programming and products. Within their own Showcase,
programmers can customize the manner in which they highlight and package shows.
In the future, we believe that programmers will create a unique look and feel
for their Showcases and may include promotional video clips and trailers.
Pick Programs to Record. Pick Programs to Record allows viewers to easily
select shows to record. Viewers can choose to select shows by name, channel or
time. In addition, viewers can choose from a list of shows recommended by the
TiVo Service based upon their individual preferences.
On-Air Program Guide. The TiVo Service includes an easy-to-use on-air
program guide that allows viewers to browse through available programming and
receive information about upcoming shows. The on-air program guide includes a
brief description of the program and the time and channel for viewing.
TiVolution Magazine. TiVolution Magazine features theme-based collections
of shows and other content compiled by TiVo.
How TiVo Works
The TiVo Service relies on three key components: the personal video
recorder, the TiVo remote control and the TiVo Broadcast Center. Individually,
each of these components serves a vital function in the TiVo Service.
The Personal Video Recorder. The personal video recorder was initially
designed and developed by TiVo and enables the basic functionality of the TiVo
Service. The two categories of personal video recorders manufactured are
stand-alone recorders and DIRECTV Receivers with TiVo Service. The stand-alone
recorders work with analog broadcast satellite and cable systems. The DIRECTV
Receiver with TiVo Service is an integrated device that can store programming
recorded straight from the digital bitstream coming off the DIRECTV satellite.
In January 2002, we introduced our new TiVo Series2 digital video recorder.
TiVo's next-generation digital video recorder offers more recording capacity at
a lower cost and is designed to enable new entertainment services such as
digital music, digital photos, broadband video-on-demand and video party games.
The 40-hour version of the Series2 recorder is currently available from AT&T
Broadband; the 60-hour Series2 is available from TiVo to consumers online at
our website and is expected to be available in May 2002 at Best Buy.
After the initial set-up of the TiVo Service, the personal video recorder
will automatically dial into the TiVo Broadcast Center via a telephone line on
a daily basis to download the program guide data, Showcases and other programs
or features of the TiVo Service. Software upgrades to the stand-alone personal
video recorder are also delivered directly to the personal video recorder via
the phone line. The DIRECTV Receivers with TiVo Service are updated via
satellite link instead of phone lines. The program guide data downloaded from
the TiVo Broadcast Center does not decrease the amount of programming that can
be recorded by the subscriber on the personal video recorder.
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When enabled with the TiVo Service, the personal video recorder stores the
subscribers' viewing preferences. Based on these preferences, the TiVo Service
ranks every show listed in the on-air program guide and then recommends the
highest ranked shows to the viewer. If there is available storage capacity in
the personal video recorder, the personal video recorder may automatically
record the show or shows with the highest ranking.
The TiVo Service uses an advanced disk scheduling technique, which manages
the recording and deletion of programs on the system. This allows viewers to
select programming to record well in advance of airing and receive confirmation
that the selected program will be recorded, even if the length of the
programming selected for recording exceeds the then available storage capacity
on the recorder.
TiVo expects that the vast majority of purchasers of the personal video
recorder will activate the TiVo Service. However, if the TiVo Service is not
activated or is subsequently cancelled, the personal video recorder provides
viewers with several basic capabilities.
The TiVo Remote Control. The TiVo remote control can operate both the
personal video recorder and the viewer's television. Using the TiVo remote
control, a viewer is able to take advantage of the functionality of the TiVo
Service, including navigation of programming, selection of shows to be recorded
and advanced viewing features. The TiVo remote control also enables viewers to
indicate personal preferences through the use of the Thumbs Up or Thumbs Down
buttons.
The TiVo Broadcast Center. The TiVo Broadcast Center is a series of
computer servers that manage all of TiVo's programming and service data. The
TiVo Broadcast Center distributes proprietary services and specialized content
such as TiVo's on-air program guides, Showcases, TiVolution Magazine and other
content provided by our partners and us. The TiVo Broadcast Center is designed
to be a platform for future interactive services.
Strategic Partnerships
Our success depends on our ability to quickly build a large subscriber base,
integrate TiVo functionality into a broad range of consumer electronics
products, and develop new services and programming to enhance the TiVo Service.
In order to achieve these goals, TiVo has chosen to aggressively pursue
strategic partnerships with:
. cable and satellite network operators;
. television programmers;
. consumer electronics manufacturers;
. consumer electronic retailers; and
. suppliers of key components of the TiVo technology.
By working with strategic partners to develop a business model that
complements the businesses of other industry stakeholders, TiVo is seeking to
aggressively develop personal television as a major category of home
entertainment.
Through our partnerships, TiVo's personal video recorders and other devices
have been manufactured and distributed through retail and other channels. These
partners will also provide access to a large number of potential subscribers
and the resources to effectively market and promote the TiVo Service. In
addition, these partnerships will allow us to provide our subscribers with
richer content, including Showcases, previews and promotions of upcoming shows
and other specialized viewing options on the TiVo Service. Some of TiVo's major
partnerships include:
11
DIRECTV. DIRECTV is promoting TiVo and the TiVo Service to its subscribers.
DIRECTV provides a variety of marketing and sales support, including commercial
air-time on the DIRECTV system, access to DIRECTV subscribers for targeted
mailings and placement on its web site and in its on-air magazine. DIRECTV has
also made a portion of the high bandwidth capacity of DIRECTV's satellite
network available to TiVo. DIRECTV made an equity investment in TiVo. DIRECTV
will share in specified revenues that we receive that relate to subscribers to
the TiVo Service who also subscribe to the DIRECTV satellite service.
Additionally, we agreed to make buy-down contribution payments such that we and
DIRECTV contribute money to DIRECTV dealers selling the DIRECTV recorder with
TiVo Service.
In February 2002, we entered into a new product development agreement and a
services agreement with DIRECTV. Under the terms of the new development
agreement, DIRECTV has agreed to pay us a technology development fee to develop
a next-generation advanced DIRECTV receiver based on our recently announced
Series2 digital video recording technology platform. Under this agreement,
DIRECTV will assume primary responsibility for customer acquisition and support
for all next-generation DIRECTV receivers, as well as packaging and branding of
DIRECTV's digital video recording services. Provided that TiVo meets its
obligations under this agreement, TiVo will not be required to subsidize or to
make other payments to support the sale of current or next-generation
receivers. DIRECTV will pay us per-account monthly fees to provide server
support and limited customer support to users of the next-generation receivers.
The term of the product development agreement is five years.
Under the terms of the services agreement, DIRECTV has agreed to distribute,
under a revenue-sharing relationship, TiVo Service that enables advanced
automatic recording capabilities and the delivery of promotional video to the
receiver's hard-disk drive. In exchange for a license to use the software tools
that allow DIRECTV to distribute these services directly, DIRECTV has agreed to
pay us a fee. The license is granted to DIRECTV in exchange for the fee on an
annual basis and is renewable up to four times. The term of the services
agreement is three years.
BSkyB. TiVo launched the TiVo Service in the United Kingdom in cooperation
with British Sky Broadcasting Group, Ltd., ("BSkyB"). Thomson UK, a consumer
electronic manufacturer, manufactures the personal video recorder that enables
the TiVo Service under the Thomson SCENIUM brand. The SCENIUM recorder became
available in October 2000. As of January 31, 2002, we have not recognized
significant revenue from this partnership.
AT&T Broadband. In 2001, we entered into a marketing arrangement with AT&T
Broadband, pursuant to which AT&T Broadband agreed to market the TiVo digital
video recorder and the TiVo Service to its cable customers in the Boston,
Denver and Silicon Valley areas. AT&T Broadband cable customers are being
offered the opportunity to purchase the TiVo Series2 digital video recorder and
subscribe to the TiVo Service. For each AT&T Broadband cable subscriber who
activates the TiVo Service under this arrangement, we agreed to remit to AT&T
Broadband a portion of the subscription fee for that activation. We will also
share with AT&T Broadband a portion of the revenues received from advertising
and promotional activities on the TiVo digital video recorders deployed to AT&T
Broadband customers under the terms of the arrangement.
AOL. In 2000, TiVo closed an Investment Agreement with AOL for $200 million.
The AOL investment is part of a three-year strategic Production Integration and
Marketing Agreement between AOL and TiVo, in which TiVo was to become an AOL TV
programming partner offering AOL TV subscribers access to features of the TiVo
Service. Additionally, TiVo signed media insertion orders for calendar years
2000 and 2001 with AOL for advertising programs to promote the TiVo Service on
AOL Time Warner properties. At this point, we believe that AOL does not plan to
deploy the AOL TV/TiVo set-top box as originally envisioned. TiVo and AOL are
currently in discussions concerning options for bringing the combined
technology to market, as well as concerning the restricted cash originally
intended to subsidize the production of the AOL TV (see Item 8. Note 9).
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Discovery Communications. TiVo worked with Discovery to produce Showcases
and other programming packages that highlight current and upcoming Discovery
programs. We granted Discovery preferential placement on our Showcases screen.
As a result of the August 28, 2001 private placement, Discovery holds notes
convertible into and warrants exercisable for our shares of common stock.
Discovery is one of our stockholders.
NBC. TiVo worked with NBC to produce Showcases and other programming
packages that highlight current and upcoming NBC programs. We granted NBC
preferential placement on our Showcases screen. In connection with this
agreement, NBC made an equity investment in TiVo. In August of 2001, we agreed
with NBC to extend the original term of this agreement to August 9, 2003. As a
result of the August 28, 2001 private placement, NBC holds notes convertible
into and warrants exercisable for our shares of common stock. NBC is one of our
stockholders.
Philips. In 1999, Philips agreed to manufacture and distribute co-branded
personal video recorders that enable the TiVo Service. TiVo agreed to offset a
portion of Philips' manufacturing costs by paying a subsidy to Philips for each
personal video recorder that Philips manufactured and sold. TiVo also agreed to
share a portion of the TiVo Service subscription revenues it receives from
purchasers of the personal video recorders manufactured by Philips that enables
the TiVo Service. Philips is one of our stockholders.
As part of a general reorganization of its U.S. consumer electronics
business, Philips ceased manufacturing TiVo personal video recorders in fiscal
year ending January 31, 2002. TiVo and Philips have had discussions concerning
the potential Philips production of digital video recorder products based on
TiVo's Series2 hardware platform. However, we have not reached any agreement
and there can be no assurance that Philips will continue to actively
manufacture digital recorders that enable the TiVo Service.
Sony. In 1999, Sony agreed to manufacture, market and distribute personal
video recorders that enable the TiVo Service. TiVo agreed to offset a portion
of Sony's manufacturing costs by paying a subsidy to Sony for each personal
video recorder that Sony manufactured and sold. TiVo has also agreed to share a
portion of the TiVo Service subscription revenues it receives from purchasers
of the personal video recorders manufactured by Sony that enables the TiVo
Service. Sony is one of our stockholders.
In fiscal year 2001, TiVo and Sony Corporation of Japan(" Sony Corporation")
signed a licensing agreement. Through the agreement, Sony Corporation will
license TiVo technology, allowing Sony Corporation to incorporate the TiVo
personal digital recording technology in various consumer electronics products.
The agreement may enable TiVo to place its service on Sony digital recording
devices, which TiVo believes will create a broader market for the TiVo Service
and encourage the growth of the TiVo subscriber base (see Item 8, Note 11).
Independent of our licensing arrangement, TiVo and Sony have had discussions
concerning potential Sony production of digital video recorder products based
on TiVo's Series2 hardware platform. However, at this time, no agreement has
been reached.
Best Buy. On March 3, 2002 we entered into an agreement with Best Buy,
pursuant to which Best Buy agreed that our digital video recorders will be the
only stand-alone personal video recorders with electronic program guide-based
service sold by Best Buy. Under the agreement, Best Buy will be the exclusive
retail distributor of the TiVo-only branded Series2 digital video recorders.
The agreement does not place any limitations on the manufacture and
distribution by our partners of co-branded digital video recorders with the
TiVo Service. The agreement is effective until February 1, 2003, provided,
however, that either TiVo or Best Buy may terminate the agreement upon 60 days
notice to the other party. We have arranged to have a contract manufacturer
produce the Series2 digital video recorders that Best Buy will sell. We
consider these sales as incidental to our business and, as a result, anticipate
reporting such transactions as Other Operating Expense, net, during the
upcoming year. TiVo will share with Best Buy a portion of the TiVo Service
revenue from the TiVo personal video recorders sold under this arrangement.
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Quantum. Quantum agreed to develop and supply the hard disk drives used in
personal video recorders that enable the TiVo Service. Under the agreement, we
or a designated third-party buyer may purchase from Quantum up to an agreed
number of hard disk drives at a discount. In addition, Quantum agreed to work
with TiVo to customize its hard disk drives for devices that enable the TiVo
Service. Quantum acquired shares of our stock in connection with this
agreement. We have agreed to share a portion of the TiVo Service subscription
revenues we receive from the subscribers who have purchased personal video
recorders and other devices equipped with Quantum hard disk drives on which we
received a discount from Quantum.
Sales and Marketing
TiVo has built a team of sales and marketing professionals focused on
establishing the TiVo brand, educating consumers on the features and benefits
of the TiVo Service and personal television, and promoting sales of personal
video recorders and other devices that enable the TiVo Service.
TiVo has found that retail stores are the primary distribution channel for
the personal video recorders and has established direct relationships with
retail partners. Our marketing team maintains an ongoing dialogue with viewers
via research and other consumer response vehicles to ensure that TiVo continues
to deliver services that match viewers' needs.
TiVo initiated a marketing campaign in support of the retail launch of the
personal video recorder that utilized print, outdoor, web and television
advertising. TiVo also targeted certain DIRECTV subscribers with direct mail
and bill inserts. The goal of these efforts was to increase awareness of the
personal television category and to promote the TiVo brand as the leader in
this category.
During fiscal year ended January 31, 2001, personal video recorders with the
TiVo Service were available from online retailers at stores nationwide such as
Best Buy, Circuit City, Good Guys, Ultimate Electronics and The Wiz. We also
sold TiVo personal video recorders directly to consumers through our website
and our toll-free telephone number. In the U.K. Thomson SCENIUM brand personal
video recorders with the TiVo Service were available at Dixons and Curry's.
In fiscal year ending January 31, 2003, to transition to the Series2
platform, we will contract for the manufacture of certain Series2 personal
video recorders with contract manufacturers. We will sell these units through
Best Buy and AT&T Broadband, as well as through TiVo's own online sales
efforts. As part of this effort, we expect to maintain some inventory of the
Series2 units throughout the year.
Privacy Policy
TiVo has adopted a privacy policy, which we make available on our web site
and deliver to each new subscriber to the TiVo Service. This policy was updated
in January 2002 to cover new commerce features which we plan to introduce in
the future. This policy explains that we collect certain types of information
such as anonymous viewing and diagnostic information but all viewing
information that is linked or associated with an individual identity will not
be disclosed without the viewer's affirmative consent. TiVo further gives
subscribers the ability to "opt-out" from the collection of anonymous viewing
information and diagnostic information log files.
TiVo has designed a system that ensures that any viewing information
transmitted from the TiVo receiver is anonymous on the receiver and remains
unidentifiable to a particular viewer (known as anonymous viewing information),
unless that subscriber affirmatively consents to such identification before any
viewing data leaves
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the receiver. Anonymous viewing information is collected and stored separate
from any information that identifies a viewer personally. As a result, unless
subscribers affirmatively consent to the collection of personally identifiable
viewing information before the file containing such viewing information is
transmitted from the receiver to TiVo's distribution servers, we have no way of
matching anonymous viewing information with particular subscribers. We may be
able to use this anonymous information to tell a broadcaster the percentage of
TiVo viewers that recorded a particular program, but we will not know, nor be
able to tell the broadcaster, which of our viewers did so, unless a viewer
decides to provide that information.
Competition
The market for home entertainment goods and services is intensely
competitive, rapidly evolving and subject to rapid technological change. The
delivery of video and television programming is particularly competitive as new
products and services continue to be introduced and marketed. TiVo believes
that the principal competitive factors in these markets are name recognition,
performance, pricing, ease of use and functionality. Because the personal
television market is new and rapidly evolving, we expect we will face
significant barriers in our efforts to secure broad market acceptance and
intense competition at several different levels.
Established competitors in the consumer electronics market. Personal
television competes in a consumer electronics market that is crowded with
several established products and services, especially products delivering
television programming and other home video entertainment. Personal video
recorders and the TiVo Service compete with products and technologies that have
established markets and proven consumer support, such as VCRs, DVD players and
cable and satellite television systems. In addition, many of the manufacturers
and distributors of these established products have greater brand recognition,
market presence, distribution channels and advertising and marketing budgets,
and more strategic partners than we do.
TiVo's success will depend not only on consumers agreeing to purchase a
personal video recorder, but also paying a subscription fee to receive the TiVo
Service. This is a significant cost, and many consumers who have purchased
VCRs, DVDs or other home video entertainment products may be reluctant to
purchase personal television systems and services. The personal video recorder
enabled with the TiVo Service does, however, offer several advantages over
competing home video entertainment products, including:
. an on-air guide to up to 12 days of television programming, updated on a
nightly basis;
. the DIRECTV Receiver with TiVo Service allows recording of two shows at
the same time;
. the ability to pause, rewind and fast-forward live television;
. the ability to record every episode of a given show at the click of a
button;
. the ability to recommend television shows to viewers based upon their
particular preferences; and
. specialized content, including Showcases and TiVolution Magazine.
Although the personal video recorder is not well-suited as an archival
system for recorded television shows, personal video recorders enabled with the
TiVo Service do contain a feature that allows viewers to off-load recorded
programming to a VCR. While the personal video recorder and TiVo Service allow
viewers to control live television, the current stand-alone version of the
personal video recorder does not permit viewers to record a show on one channel
and watch a show being broadcast at the same time on another channel. However,
the DIRECTV Receivers with TiVo Service have dual tuners to allow a viewer to
record one show while watching another.
Companies offering similar products and services. TiVo faces competition
from companies such as Microsoft, OpenTV, Replay TV and NDS. These competitors
are seeking to meld traditional broadcast, cable or satellite television
programming with enhanced information or television recording services. For
example,
15
Microsoft launched UltimateTV during the spring of calendar year 2001.
UltimateTV combines elements of Microsoft's WebTV, a television-based e-mail
and Web surfing service with DIRECTV's satellite service and digital video
recorder technology. DIRECTV and TiVo recently announced a long-term
relationship to create DVR/Satellite products and Microsoft has announced the
restructuring and downsizing of the UltimateTV program. Even with these
announcements, significant inventory of UltimateTV product continues to be
available in retail stores. This inventory may be subject to discounting in the
coming year, impeding our ability to acquire new subscribers.
Also, in 2001, OpenTV and EchoStar Communications Corporation released the
Dish501, which is a product that combines basic VCR-like disk recording with a
program guide and the ability to pause live television. Echostar has announced
that it will continue to develop new products in this area, including products
with expanded recording space and multiple satellite tuners.
TiVo's primary competitor in the personal television market is ReplayTV,
Inc. ReplayTV manufactured and marketed a personal television recorder that
included a hard disk drive and functionality similar to that of our partners'
personal video recorders. While ReplayTV's personal video recorder was more
expensive than our partners' personal video recorders enabled with TiVo
Service, ReplayTV did not charge a monthly subscription fee for its service. In
February 2001, SONICblue Incorporated ("SONICblue") acquired ReplayTV.
SONICblue introduced a new line of ReplayTV recorders late in calendar year
2001. This product line includes a $2,000 model and allows consumers to
automatically skip commercials and share recordings via the Internet.
Several new competitors have entered the DVR market in the past year,
including Keen Personal Media Inc., CacheVision and Moxi Digital. Although none
of these competitors have launched products to date, they all have demonstrated
technology prototypes and will likely pursue partnerships with companies in the
consumer electronics and television services markets.
Research and Product Development
From TiVo's inception until March 1999, TiVo's research and development
efforts were focused on designing and developing the personal video recorder
and the TiVo remote control, the TiVo Service and the TiVo Broadcast Center.
These activities included both hardware and software development. TiVo's
engineering staff is now focused on research and development in the following
three areas:
Performance engineering. TiVo intends to continue to devote considerable
engineering resources to improve TiVo's essential technologies. TiVo's
engineers and customer support personnel work together to quickly identify and
correct potential performance errors. We also continually work to identify,
develop and implement features that improve performance in areas such as video
and audio quality, speed, ease of use and additional features and functionality.
Platform engineering. The evolution of hardware technology that enables the
TiVo Service is a crucial element of TiVo's future success. Our hardware
engineers are working with consumer electronics manufacturers, component
suppliers, and data storage suppliers to reduce the manufacturing cost of the
personal video recorder and integrate TiVo functionality into other consumer
electronics goods. TiVo intends to integrate the TiVo Service into components
such as cable set-top boxes, televisions and other consumer electronics
products. We intend to work with a broad range of partners to develop our
technology platforms and establish TiVo as the prominent technology in the
personal television market.
Service engineering. TiVo intends to continue to develop the TiVo Service,
offering new features and programming. As part of this effort, we are currently
in the process of building software and video development tools that will
enable networks and other content providers to create specialized programming
for the TiVo Service.
16
Licensing. TiVo intends to use its patent portfolio to license its
technology to consumer electronics companies and service providers for the
purpose of creating an open standards platform for digital video recorders,
("DVR"), thus earning licensing revenue. For example, in October 2001, TiVo and
Sony Corporation of Japan signed a licensing agreement. The agreement gives
Sony Corporation access to the TiVo personal digital recording technology,
including recently patented hardware and software designs.
Engineering Professional Services. TiVo intends to offer engineering
development as engineering professional services to companies interested in
having DVR technology developed for their products. In February 2002, TiVo and
DIRECTV signed an agreement making TiVo the primary provider of DVR technology
for DIRECTV's next-generation integrated digital satellite receivers.
Patents and Intellectual Property
TiVo has adopted a proactive patent and trademark strategy designed to
protect all important aspects of its technology and intellectual property. We
have filed 131 patent applications (including foreign and domestic), of which
33 have been awarded, and twelve provisional patents. TiVo has also jointly
filed a patent application with Quantum. The patent applications that we have
filed are broad in nature and are tied to fundamental inventions rather than
small, unrelated features or applications. These patent applications cover
substantially all of TiVo's technology, including hardware, software, the TiVo
Service functionality and appearance, network architecture, manufacturing and
international patent rights. TiVo has also filed patent applications that cover
technologies it intends to incorporate in future versions of the TiVo Service
and hardware. Several of our early patent applications have been examined and
claims allowed by the U.S. Patent and Trademark Office (USPTO). Included in
these are a number that are fundamental to the operation of personal video
recorders, as well as forming a foundation for other important patent
applications currently under examination. We anticipate ongoing progress in
establishing a defensible and useful intellectual property portfolio. There can
be no assurance that current applications of our patents will ever be granted.
The USPTO issued patent number 6,233,389 to TiVo for a "Multimedia
Timewarping System," originally filed in July of 1998, that covers many of the
key inventions associated with personal video recording software and hardware
design.
This patent discloses all aspects of the design and construction of the TiVo
Receiver/Recorder. Key inventions in the patent include:
. a method for recording one program while playing back another or watching
a program as it is recording, often referred to as time-shifting the
program;
. a method for efficient and low-cost processing and synchronizing of the
various multimedia streams in a television signal such as video, audio
and closed-captioning, and
. a storage format that easily supports advanced TrickPlay/TM capabilities.
TrickPlayTM includes pausing the live TV broadcast, fast-forwarding,
rewinding, instant replays and slow motion. /
TiVo has been issued U.S. patent number 6,215,526, which describes a method
for embedding data within a television signal in such a way that it survives
analog-to-digital and digital-to-analog conversion during the transmission
process. TiVo owns design patents for its award winning remote control and the
design for the integrated DIRECTV Receiver with TiVo Service. These patents are
issued as Remote Control design patents: D424,061, D431,552, Remote Control
housing design patents: D424,577, D435,403 and DIRECTV Receiver with TiVo
Service bezel design patent: D434,043.
The TrickPlay/TM patent issued by the USPTO as patent number 6,327,418,
describes a method of controlling streaming media in a digital device. In
today's implementation of a TiVo DVR, the TrickPlayTM patent covers the
functions that enable TiVo subscribers to pause live TV as well as rewind, fast
forward, play, play faster, play slower, and play in reverse television signals
cached by the DVR. Storing, editing and manipulation of video are also among
the 64 claims supported by the TrickPlayTM patent. /
17
Combined with TiVo's Time Warp patent (USPTO No. 6,233,389) which enables
the simultaneous recording and playback of multiple streams as well as
efficient and low-cost processing, synchronization, and storage of multimedia
streams, TiVo believes the TrickPlay/TM patent ensures that TiVo's patent
portfolio covers the key functions that are essential to operate the TiVo DVR. /
The Home Networking patent issued as USPTO number 6,310,886 describes a
simple and reliable method for connecting TiVo DVRs and other streaming media
devices to a network in the home. This technology allows TiVo to extend the
ease of use of its current product and service to digital entertainment that
can be enjoyed throughout the home.
The Timewarp and TrickPlay/TM patents have also been examined and approved
under the terms of the Patent Convention Treaty, which provides for nominal
acceptance of the patent in countries that are signatories to the treaty, which
includes most countries in the world. TiVo is currently filing for acceptance
in key countries around the world. /
We have filed many trademark applications covering substantially all of our
trade dress, logos and slogans, including:
. Active Preview
. Can't Miss TV
. DIRECTIVO
. Instant Replay logo
. Ipreview
. Jump logo
. Life's too short for bad TV
. Overtime Scheduler
. Personal TV
. Personal Video Recorder
. Primetime Anytime
. Season Pass
. See it, want it, get it
. TiVo, TV Your Way
. Thumbs Down (logo and text)
. Thumbs Up (logo and text)
. TiVo Central
. TiVo (logo, name and character)
. TiVoMatic
. TiVolution
. TrickPlay
. What you want, when you want it
These applications are currently pending with the U.S. Patent and Trademark
Office. Additionally, we have international trademark applications pending for
several of these trademarks. We have secured the U.S. registration for the
names TiVo, TiVo Central, Can't Miss TV, What you want, when you want it,
TiVolution and the Jump Logo. We have licensed the use of our name and logo to
some of our strategic partners. See "Factors That May Affect Future Operating
Results--Our success depends on our ability to secure and protect patents,
trademarks and other proprietary rights."
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Recent Developments
Second Agreement with Acqua Wellington North American Equities Fund, Ltd.
On February 13, 2002, we entered into our second common stock purchase
agreement which, under certain circumstances, may allow us to sell to Acqua
Wellington North American Equities Fund, Ltd. up to $19.0 million of our common
stock during the fourteen month period ending April 13, 2003. We view this
purchase agreement as an auxiliary financing tool with the potential to provide
us with an efficient and flexible mechanism to raise cash to fund our working
capital needs, depending upon the market price of our common stock and certain
other conditions set forth in the purchase agreement.
The purchase agreement provides that any stock we sell pursuant to the
purchase agreement will be sold at a discount to the market price at the time
of the sale of between 3% to 5.4%, unless we agree otherwise with Acqua
Wellington. The amount and timing of each sale of common stock under the
purchase agreement will be at our discretion, subject to certain limitations
(see Item 8. Note 17). The shares of common stock which we may sell pursuant to
the purchase agreement are registered under the Securities Act of 1933 pursuant
to an effective Registration Statement on Form S-3 (File No. 333-53152).
Agreements with DIRECTV, Inc.
On February 15, 2002, we entered into a new product development agreement
and a services agreement with DIRECTV, Inc., with whom we jointly introduced
the first DIRECTV receiver with our digital video recording technology in
October of 2000. Under the terms of the new development agreement, DIRECTV has
agreed to pay us a technology development fee to develop a next-generation
advanced DIRECTV receiver based on our recently announced Series2 digital video
recording technology platform. Under this agreement, DIRECTV has assumed
primary responsibility for customer acquisition and support for all
next-generation DIRECTV receivers, as well as packaging and branding of
DIRECTV's digital video recording services. Provided that we meet our
obligations under the agreement, we will not be required to subsidize or to
make other payments to support the sale of the next-generation receivers.
DIRECTV will pay us per-account monthly fees to provide server support and
limited customer support to users of the next-generation receivers. In
addition, upon deployment of the next-generation receivers, our compensation
for monthly subscribers of current DIRECTV receivers with our digital recording
service will shift to a similar per-account monthly fee basis. The term of the
product development agreement is five years. Under the agreement, DIRECTV
additionally has the option to purchase a non-exclusive license of our digital
video recording technology. In connection with its exercise of this option,
DIRECTV would be required to pay us an upfront fee, per-unit royalties and
other fees.
Under the terms of the services agreement, DIRECTV has agreed to distribute,
under a revenue-sharing relationship, TiVo Service that enables advanced
automatic recording capabilities and the delivery of promotional video to the
receiver's hard-disk drive. In exchange for a license to use the software tools
that allow DIRECTV to distribute these services directly, DIRECTV has agreed to
pay us a fee. The license is granted to DIRECTV in exchange for the fee on an
annual basis and is renewable up to four times. The term of the services
agreement is three years.
On February 15, 2002, we and DIRECTV entered into an Amendment to Marketing
Agreement and Tax Agreement. The amendment provides that several terms of the
Marketing Agreement, including those relating to, among other things, the
billing system, customer service and customer data, be replaced by the terms
set forth in the development agreement. In conjunction with the execution of
the Development Agreement, the amendment also revises provisions relating to,
among other things, permanent revenue share for the TiVo stand-alone receiver,
bandwidth allocation, promotional activities, the subscriber billing system and
certain indemnification obligations set forth in the Marketing Agreement. The
Amendment also modifies our indemnity obligations under the Tax Agreement,
entered into with DIRECTV as of July 24, 2001, such that, following a specific
milestone date set forth in the Development Agreement, DIRECTV will have
responsibility for taxability determinations.
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Agreement with Best Buy
On March 3, 2002, we entered into an agreement with Best Buy, pursuant to
which Best Buy agreed that our digital video recorders will be the only
stand-alone digital video recorders with electronic program guide-based service
sold by Best Buy. Under the agreement, Best Buy will also be the exclusive
retail distributor of the TiVo-only branded Series2 digital video recorders.
The agreement does not place any limitations on the manufacture and
distribution by our partners of co-branded digital video recorders with the
TiVo Service. The agreement is effective until February 1, 2003, provided,
however, that either we or Best Buy may terminate the agreement upon 60 days
notice to the other party.
Employees
At March 18, 2002, we employed approximately 226 employees, including 27 in
service operations, 113 in research and development, 24 in sales and marketing
and 62 in general and administration. We also employ, from time to time, a
number of temporary and part-time employees as well as consultants on a
contract basis. At March 18, 2002, we employed 39 such persons. Our future
success will depend in part on our ability to attract, train, retain and
motivate highly qualified employees who are in great demand. We may not be
successful in attracting and retaining such personnel. Our employees are not
represented by a collective bargaining organization and we have never
experienced a work stoppage or strike. Our management considers employee
relations to be good.
Executive Officers and Key Employees:
As of March 18, 2002, our executive officers and key employees and their
ages were as follows:
Name Age Position
---- --- --------
Executive Officers
Michael Ramsay.... 52 Chairman of the Board and Chief Executive Officer
Morgan P. Guenther 48 President
David H. Courtney. 43 Executive Vice President Worldwide Operations and Administration
James Barton...... 43 Senior Vice President of Research and Development, Chief Technical Officer
Ta-Wei Chien...... 47 Senior Vice President, General Manager TiVo Technologies
Brodie Keast...... 46 Senior Vice President, General Manager TiVo Service
Key Employees
Susan Cashen...... 41 Vice President of Corporate Communications
Andrew Cresci..... 41 Vice President and General Manager of TiVo (UK)
Luther Kitahata... 37 Vice President of Software Engineering
Jeff Klugman...... 41 Vice President of Technology and Licensing Business
Howard Look....... 35 Vice President of TiVo Studios
Joe Miller........ 35 Vice President of Sales
Karrin Nicol...... 42 Vice President of Human Resources
Mark A. Roberts... 41 Vice President of Information Technology and Chief Information Officer
Matthew Zinn...... 37 Vice President, General Counsel and Chief Privacy Officer
Michael Ramsay is a co-founder of TiVo and has served as TiVo's Chairman of
the Board of Directors and Chief Executive Officer since our inception in
August 1997. From April 1996 to July 1997, Mr. Ramsay was the Senior Vice
President of the Silicon Desktop Group for Silicon Graphics, a manufacturer of
advanced graphics computers. From August 1994 to April 1996, Mr. Ramsay was
President of Silicon Studio, Inc., a wholly owned subsidiary of Silicon
Graphics, Inc. ("SGI") focused on enabling applications development for
emerging interactive media markets. From July 1991 to August 1994, Mr. Ramsay
served as the Senior Vice President and General Manager of Silicon Graphics'
Visual Systems Group. Mr. Ramsay also held the positions of vice
20
president and general manager for the Entry Systems Division of SGI. Prior to
1986, Mr. Ramsay held research & development and engineering management
positions at Hewlett-Packard and Convergent Technologies. Mr. Ramsay holds a
B.S. degree in Electrical Engineering from the University of Edinburgh,
Scotland.
Morgan P. Guenther has served as TiVo's President since November 2001. From
June 1999 to November 2001 he served as Vice President of Business Development.
From March 1998 to June 1999, Mr. Guenther was a partner of the law firm of
Paul, Hastings, Janofsky & Walker LLP. From 1990 to March 1998, Mr. Guenther
was a partner of the law firm of Farella Braun & Martel. Mr. Guenther also
serves on the board of directors of Tier Technologies, Inc., an information
technology consulting company. Mr. Guenther holds J.D. and B.A. degrees from
the University of Colorado and an M.B.A. degree from the University of San
Francisco.
David H. Courtney joined TiVo in March 1999 as Chief Financial Officer and
is currently Executive Vice President Worldwide Operations and Administration.
From May 1995 to July 1998, Mr. Courtney served as a Managing Director at J.P.
Morgan, an investment banking firm, where he was responsible for building and
expanding the firm's high technology investment banking business in the United
States. From 1986 to 1995, Mr. Courtney was a member of the high technology
investment banking group at Goldman, Sachs & Co., most recently serving as Vice
President. Mr. Courtney currently serves as a director of KQED Television, a
non-profit affiliate of the Public Broadcasting System in San Francisco,
California. Mr. Courtney holds a B.A. degree in Economics from Dartmouth
College and an M.B.A. degree from Stanford University.
James Barton is a co-founder of TiVo and has served as TiVo's Vice President
of Research and Development, Chief Technical Officer and Director since our
inception and is currently Senior Vice President of Research and Development,
Chief Technical Officer and Director. From June 1996 to August 1997, Mr. Barton
was President and Chief Executive Officer of Network Age Software, Inc., a
company that he founded to develop software products targeted at managed
electronic distribution. From November 1994 to May 1996, Mr. Barton served as
Chief Technical Officer of Interactive Digital Solutions Company, a joint
venture of Silicon Graphics and AT&T Network Systems created to develop
interactive television systems. From June 1993 to November 1994, Mr. Barton
served as Vice President and General Manager of the Media Systems Division of
SGI. From January 1990 to May 1991, Mr. Barton served as Vice President and
General Manager for the Systems Software Division of Silicon Graphics. Prior to
joining SGI, Mr. Barton held technical and management positions with
Hewlett-Packard and Bell Laboratories. Mr. Barton holds a B.S. degree in
Electrical Engineering and an M.S. degree in Computer Science from the
University of Colorado at Boulder.
Ta-Wei Chien has served as Vice President of Engineering and Operations
since February 1998 and is currently Senior Vice President, General Manager
TiVo Technologies. From December 1996 to February 1998, Mr. Chien served as
Vice President of Engineering in the Desktop Workstations group at SGI, where
he managed engineering projects for desktop workstations. From April 1991 to
December 1996, Mr. Chien was a director of digital media and VLSI engineering
at SGI. Mr. Chien holds a B.S. degree in Electrical Engineering from National
Taiwan University and an M.S. degree in Electrical Engineering from the
University of California, Los Angeles.
Susan Cashen joined TiVo in March 2000 as Vice President of Corporate
Communications. From November 1994 to March 2000, Ms. Cashen was employed at
Blanc & Otus, a leading technology public relations firm based in San
Francisco, California and most recently served as Senior Vice President and
Partner from March 1999 to March 2000. Prior to joining Blanc & Otus, Ms.
Cashen managed her own consulting practice. Ms. Cashen holds a B.A. degree in
Russian Studies from Hamilton College.
Andrew Cresci has served as Vice President and General Manager of TiVo (UK)
since November 2000. In August 1999 Mr. Cresci co-founded TapCast, a California
based wireless Internet portal. Prior to founding TapCast Mr. Cresci was
Director of Worldwide Marketing for the workstation division at SGI for eight
years. Mr. Cresci holds a B.S. degree in Electronics Engineering from the
University of Bath, England.
21
Luther Kitahata has served as Vice President of Software Engineering since
October 2000. He joined TiVo in 1998 as the Director of Software. Prior to
joining TiVo, Mr. Kitahata was part of the founding team at Navio
Communications (now Liberate Technologies) where he worked in both managerial
and engineering capacities from April of 1996 to January 1998. Prior to 1996,
Mr. Kitahata was founder and Director of Engineering of E-Motion, a leading
provider of content distribution and multimedia collaboration systems. Mr.
Kitahata holds an M.S. degree and a B.A. degree with honors in Computer Science
from Brown University.
Jeff Klugman has served as Vice President of Technology and Licensing since
December 2001. Prior to joining TiVo, Mr. Klugman was CEO of PointsBeyond.com,
an internet-portal start-up focused on outdoor activities and adventures. In
1999, Mr. Klugman was Vice President of Marketing and Business Development for
one of Quantum's business units. Mr. Klugman holds a B.S. degree in engineering
from Carnegie Mellon University and an M.B.A. degree from Stanford University.
Howard Look has served as Vice President of TiVo Studios since March 2000.
He joined TiVo in February 1998 as Director of Application Software. Prior to
joining TiVo, Mr. Look was Manager and the Director of Applied Engineering at
SGI from 1996 to 1998. Mr. Look holds a B.S degree in Computer Engineering from
Carnegie-Mellon University.
Joe Miller has served as Vice President of Sales since October 2000. From
June 1999 to October 2000, Mr. Miller served as Director of Channel Marketing
for TiVo. Prior to joining TiVo, Mr. Miller was employed with U.S. Satellite
Broadcasting from 1994 to 1999, most recently serving as General Manager of
Retail Sales. Prior to joining U.S. Satellite Broadcasting, Mr. Miller was
National Sales Manager for Cox Satellite Programming. Mr. Miller holds a B.A.
degree in Public Relations from Southwest Texas State University.
Karrin Nicol joined TiVo in July 1999 as Vice President of Human Resources.
From 1987 to 1999, Ms. Nicol was employed with at SGI, most recently as
Director of Human Resources. Prior to that, Ms. Nicol served in various
positions at Fairchild Semiconductor Corporation. Ms. Nicol holds a B.S. degree
in Food and Nutrition from California State University, Chico and a Masters in
Human Resources and Organizational Development from the University of San
Francisco.
Mark A. Roberts has served as Chief Information Officer since March 1999 and
Vice President of Information Technology since July 1999. Prior to joining
TiVo, he served as Vice President of Information Technology at Acuson
Corporation, a medical ultrasound company, from March 1996 to March 1999. From
July 1990 to March 1996, Mr. Roberts was Director of Information Systems at
SGI. Mr. Roberts holds a B.S. degree in Economics from Santa Clara University.
Matthew Zinn has served as Vice President, General Counsel and Chief Privacy
Officer since July 2000. From May 1998 to July 2000, Mr. Zinn was the Senior
Attorney, Broadband Law and Policy for the MediaOne Group, a leading global
communications company. From August 1995 to May 1998, Mr. Zinn served as
corporate counsel for Continental Cablevision, the third largest cable
television operator in the United States. From November 1993 to August 1995, he
was an associate with the Washington, D.C., law firm of Cole, Raywid &
Braverman, where he represented cable operators in federal, state and local
matters. Mr. Zinn holds a J.D. degree from the George Washington University
National Law Center and a B.A. degree in Political Science from the University
of Vermont.
ITEM 2. PROPERTIES
Our corporate headquarters, which houses our administrative, sales and
marketing, customer service and product development activities, is located in
Alviso, California, under a lease that expires in 2007. We believe that our
corporate facilities will be adequate to meet our office space needs for the
next several years as we currently utilize approximately 50% of the total
office space. We have subleased a portion of the idle space through August 2002
and we are actively searching for additional tenants. We believe that our
facilities are well maintained and are in good operating condition.
Additionally, we currently lease international office space in Berkshire,
United Kingdom. We believe that these facilities are adequate to meet our
office space needs for the next year.
22
ITEM 3. LEGAL PROCEEDINGS
Ezra Birnbaum. On March 15, 2001, Ezra Birnbaum, an individual resident in
the state of New York, filed, on behalf of himself and all others similarly
situated, a class action complaint against us in the Supreme Court of the State
of New York, Kings County, alleging violation of New York's consumer protection
act, breach of implied warranties of merchantability and fitness, breach of
contract and fraud. The complaint alleges that Mr. Birnbaum's personal video
recorder used with the TiVo subscription Service "does not function properly
because the picture freezes and preprogrammed channels are lost." He alleges,
among other things, that TiVo knew or should have known of these alleged
defects and that, TiVo, therefore misrepresented or failed to disclose material
information regarding its product to consumers. The complaint seeks repayment
of the amount spent to purchase our product to each member of the class of
purchasers, plus interest from the date of purchase, as well as unspecified
punitive damages, attorneys' and expert witness fees and other costs. The
complaint additionally seeks equitable relief, requesting that we be enjoined
from continuing the practices described in the complaint. On May 3, 2001, TiVo
answered the complaint. On August 2, 2001, Mr. Birnbaum served a motion for
class certification. On August 10, 2001, TiVo filed a motion for summary
judgment. On January 10, 2002, the Supreme Court of the State of New York
granted our motion for summary judgment and dismissed the complaint on all
counts. Our summary judgment win became conclusive on March 1, 2002.
IPO Litigation. On June 12, 2001, a securities class action lawsuit in
which we and certain of our officers and directors are named as defendants was
filed in the United States District Court for the Southern District of New
York. In addition to the TiVo defendants, this action, which is captioned
Wercberger v. TiVo et al., also names several of the underwriters involved in
our initial public offering as defendants. This class action is brought on
behalf of a purported class of purchasers of our common stock from September
30, 1999, the time of our initial public offering, through December 6, 2000.
The central allegation in this action is that the underwriters in our initial
public offering solicited and received undisclosed commissions from, and
entered into undisclosed arrangements with, certain investors who purchased our
common stock in the initial public offering and the after-market. The complaint
also alleges that the TiVo defendants violated the federal securities laws by
failing to disclose in the initial public offering prospectus that the
underwriters had engaged in these allegedly undisclosed arrangements. More than
300 issuers have been named in similar lawsuits. The TiVo defendants' time to
respond to the complaint has not yet expired, and it is likely that this
response will not be due for several months, after certain procedural issues
are resolved. At the appropriate time, the TiVo defendants intend to move to
dismiss the consolidated complaint for failure to state a claim. We believe
that the TiVo defendants have meritorious defenses and intend to defend this
action vigorously; however, we could be forced to incur material expenses in
the litigation, and in the event there is an adverse outcome, our business
could be harmed.
Alan Federbush and Mitchell Brink. On August 13, 2001, Alan Federbush, an
individual resident in the state of New York, and Mitchell Brink, an individual
resident in the state of Illinois, filed, on behalf of themselves and all
similarly situated purchasers of Sony or Philips digital television recorders
and the TiVo Service, a class action complaint against us in the Superior Court
of the State of California, Santa Clara County, alleging violation of
California's Consumers' Legal Remedies Act, California's Unfair Practices Act,
and fraudulent concealment. The complaint states that Mr. Federbush and Mr.
Brink each experienced problems with the modem contained in the digital
television recorders. The complaint alleges, among other things, that we knew
or had reason to know of these malfunctions and therefore misrepresented or
failed to disclose material information about the digital television recorders
to consumers. The complaint seeks an award of actual damages, as well as
unspecified punitive damages, interest, attorneys' fees and other costs. The
complaint additionally seeks broad equitable relief, requesting that we be
enjoined from continuing the practices described in the complaint and engaging
in false and misleading advertising regarding the digital television recorders.
We filed our answer to the complaint on October 19, 2001. Discovery, through
which we would seek to investigate the plaintiff's claims, has not commenced.
Based on the information available, we are unable to form a conclusion
regarding the amount, materiality or range of potential loss, if any, which
might result if the outcome of this matter were unfavorable. We believe we have
meritorious defenses and intend to defend this action vigorously; however, we
could be forced to incur material expenses in the litigation, and in the event
there is an adverse outcome, our business could be harmed.
23
Pause Technology LLC. On September 25, 2001, Pause Technology filed a
complaint against TiVo in the US District Court for the District of
Massachusetts alleging willful and deliberate infringement of US Reissue Patent
No. 36,801, entitled "Time Delayed Digital Video System Using Concurrent
Recording and Playback." Pause Technology seeks unspecified monetary damages as
well as an injunction against our operations. It also seeks attorneys' fees and
costs. TiVo's answer was filed on December 26, 2001. We believe we have
meritorious defenses and intend to defend this action vigorously; however, we
could be forced to incur material expenses in the litigation, and in the event
there is an adverse outcome, our business could be harmed.
Lawsuit filed by SONICblue Inc. On December 12, 2001, SONICblue
Incorporated filed a lawsuit against TiVo in the U.S. District Court for the
Northern District of California, alleging infringement of US Patent
No. 6,324,338 entitled "Video Data Recorder with Integrated Channel Guides."
SONICblue seeks unspecified monetary damages as well as an injunction against
our operations. TiVo's answer was filed on January 23, 2002. We believe that we
have meritorious defenses against this suit and intend to defend ourselves
vigorously. However, we could be forced to incur material expenses during this
litigation and, in the event we were to lose the lawsuit, our business could be
harmed.
Lawsuit filed against SONICblue Inc. On January 23, 2002, we filed a
separate lawsuit against SONICblue Incorporated and its wholly owned
subsidiary, ReplayTV, Inc., in the U.S. District Court for the Northern
District of California, alleging that we are the owner of United States Patent
No. 6,233,389, entitled "Multimedia Time Warping System," and alleging further
that SONICblue and ReplayTV have willfully and deliberately infringed the
patent by making, using, offering to sell and/or selling within the United
States digital video recording devices, software and/or personal television
services falling within the scope of the patent. We have requested that the
court enjoin SONICblue and ReplayTV from further infringement of the patent and
award us compensatory damages, treble damages and attorneys' fees and costs. We
could be forced to incur material expenses during this litigation and, in the
event we were to lose the lawsuit, our business could be harmed.
Indemnification of Sony Corporation Against Command Audio Corporation
Lawsuit. On February 5, 2002, Sony Corporation notified us that Command Audio
Corporation had filed a complaint against Sony Electronics, Inc. on February 2,
2002 in the United States District Court for the Northern District of
California. The complaint alleges that, in connection with its sale of personal
video recorders, Sony infringes upon two patents owned by Command Audio (United
States Patent Nos. 5,590,195 ("Information Dissemination Using Various
Transmission Modes") and 6,330,334 ("Method and System for Information
Dissemination Using Television Signals")). The complaint seeks injunctive,
relief, compensatory and treble damages and Command Audio's costs and expenses,
including reasonable attorneys' fees. Under the terms of our agreement with
Sony governing the distribution of certain personal video recorders that enable
the TiVo Service, we are required to indemnify Sony against any and all claims,
damages, liabilities, costs and expenses relating to claims that our technology
infringes upon intellectual property rights owned by third parties. We believe
Sony has meritorious defenses against this lawsuit; however, due to our
indemnification obligations, we could be forced to incur material expenses
during this litigation, and, if Sony were to lose this lawsuit, our business
could be harmed.
For further discussion of intellectual property risks facing TiVo, see
"Factors That May Affect Future Operating Results--Intellectual property claims
against us can be costly and could result in the loss of significant rights."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended January 31, 2002.
24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information for Common Equity
Our common stock is traded on the Nasdaq National Market under the symbol
"TIVO". As of March 18, 2002, we had 372 stockholders of record.
The following table shows the high and low per-share closing prices for our
common stock as reported by the National Association of Securities Dealers,
Inc., on any trading day during the respective period:
Fiscal Year 2002 High Low
---------------- ------ ------
Fourth Quarter ended January 31, 2002. $ 7.50 $ 4.45
Third Quarter ended October 31, 2001.. $ 7.06 $ 3.01
Second Quarter ended July 31, 2001.... $11.21 $ 4.16
First Quarter ended April 30, 2001.... $ 7.19 $ 4.00
One Month Ended January 31, 2001...... $ 9.13 $ 6.13
Calendar Year 2000
------------------
Fourth Quarter ended December 31, 2000 $19.94 $ 5.38
Third Quarter ended September 30, 2000 $33.75 $16.69
Second Quarter ended June 30, 2000.... $36.19 $15.88
First Quarter ended March 31, 2000.... $71.50 $30.50
Calendar Year 1999
------------------
Fourth Quarter ended December 31, 1999 $51.00 $25.13
Third Quarter ended September 30, 1999 $29.94 $29.94
On March 18, 2002, the closing price of our common stock was $5.36 per share.
Dividend Policy
On September 13, 2000, we closed the Investment Agreement with AOL for $200
million. Under the terms of the Investment Agreement between AOL and TiVo,
dated June 9, 2000 and the First Amendment to the Investment Agreement dated
September 11, 2000, between AOL and TiVo, we issued to AOL shares of Series A
redeemable convertible preferred stock with certain dividend and voting rights.
Dividends on the Series A redeemable convertible preferred stock are calculated
by multiplying the Non-Government Institutional Funds Simple Average Rate by
$30.00 per share times the number of shares of Series A redeemable convertible
preferred stock outstanding. Dividends are payable quarterly as declared by our
board of directors.
We expect to continue our current policy of paying no cash dividends to
holders of our common stock for the foreseeable future.
25
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the fiscal year ended
January 31, 2002, the one-month transition period ended January 31, 2001 and
calendar years ended December 31, 2000, December 31, 1999 and December 31, 1998
and for the period from August 4, 1997 (Inception) to December 31, 1997 have
been derived from our financial statements audited by Arthur Andersen LLP,
independent public accountants. These historical results are not necessarily
indicative of the results of operations to be expected for any future period.
The data set forth below (in thousands, except per share data) should be
read in conjunction with Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements included in Item 8. "Financial Statements and Supplementary Data."
One-Month Period from
Year Ended Ended Year Ended Year Ended Year Ended August 4, 1997
----------- ----------- ------------ ------------ ------------ (Inception) to
January 31, January 31, December 31, December 31, December 31, December 31,
2002 2001 2000 1999 1998 1997
----------- ----------- ------------ ------------ ------------ --------------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues............................ $ 19,397 $ 989 $ 3,571 $ 223 $ -- $ --
Costs and expenses
Cost of revenues................. 19,949 1,710 18,382 4,067 -- --
Research and development......... 26,859 2,507 24,279 9,727 5,614 356
Sales and marketing.............. 28,509 7,884 102,091 24,502 1,277 28
Sales and marketing--related
parties......................... 75,832 6,632 53,604 15,172 -- --
General and administrative....... 18,495 1,326 14,346 7,027 2,946 241
Stock-based compensation......... 1,247 175 3,115 1,530 -- --
Other operating expense, net..... -- -- -- 7,210 -- --
--------- -------- --------- -------- ------- ------
Loss from operations................ (151,494) (19,245) (212,246) (69,012) (9,837) (625)
Interest income.................. 2,163 672 7,928 2,913 136 49
Interest expense and other....... (4,324) (17) (522) (466) (20) (19)
--------- -------- --------- -------- ------- ------
Loss before taxes................... (153,655) (18,590) (204,840) (66,565) (9,721) (595)
Provision for income taxes.......... (1,000) -- -- -- -- --
--------- -------- --------- -------- ------- ------
Net loss............................ (154,655) (18,590) (204,840) (66,565) (9,721) (595)
Less: Series A redeemable
convertible preferred stock
dividend........................... (3,018) (423) (1,514) -- -- --
--------- -------- --------- -------- ------- ------
Net loss attributable to common
stockholders....................... $(157,673) $(19,013) $(206,354) $(66,565) $(9,721) $ (595)
========= ======== ========= ======== ======= ======
Net loss per share
Basic and diluted................ $ (3.67) $ (0.47) $ (5.55) $ (5.49) $ (3.25) $(0.20)
Weighted average shares.......... 42,956 40,850 37,175 12,129 2,990 2,917
As of As of As of As of As of
January 31, January 31, December 31, December 31, December 31,
----------- ----------- ------------ ------------ ------------
2002 2001 2000 1999 1999
----------- ----------- ------------ ------------ ------------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents............................... $ 52,327 $124,474 $106,096 $139,687 $2,248
Total assets............................................ 156,649 211,543 236,318 152,842 3,543
Current redeemable convertible preferred stock.......... 2 2 3 -- --
Long-term portion of obligations under capital lease.... 2 538 606 1,141 --
Redeemable common stock................................. -- -- 1 -- --
Total paid-in capital for current redeemable convertible
preferred stock and redeemable common stock............ 46,553 46,553 96,986 -- --
Total stockholders' equity (deficit).................... (32,221) 50,337 34,849 133,247 2,121
26
Quarterly Results of Operations
The following table represents certain unaudited statement of operations
data for our eight most recent quarters ended January 31, 2002. In management's
opinion, this unaudited information has been prepared on the same basis as the
audited annual financial statements and includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair representation of
the unaudited information for the quarters presented. This information should
be read in conjunction with our consolidated financial statements, including
the notes thereto, included elsewhere in this Annual Report. The results of
operations for any quarter are not necessarily indicative of results that may
be expected for any future period. Prior quarters have been reclassified in
order to conform to current quarter classifications.
Three Months Ended
--------------------------------------------------------------------------------------
April 30, July 31, October 31, January 31, April 30, July 31, October 31, January 31,
2000 2000 2000 2001 2001 2001 2001 2002
--------- -------- ----------- ----------- --------- -------- ----------- -----------
(unaudited, in thousands except per share data)
Revenues......................... $ 499 $ 869 $ 1,102 $ 2,166 $ 3,196 $ 4,106 $ 5,342 $ 6,753
Costs and expenses
Cost of revenues................. 4,994 4,295 4,149 5,661 5,497 4,415 5,207 4,830
Research and development......... 4,844 6,788 7,572 5,888 6,827 6,786 7,431 5,815
Sales and marketing.............. 8,479 16,422 34,638 46,905 13,020 5,756 7,084 2,649
Sales and marketing--related
parties......................... 3,342 9,293 24,283 21,093 23,488 16,146 11,239 24,959
General and administrative....... 2,978 3,720 3,876 4,483 4,507 4,288 5,214 4,486
Stock-based compensation......... 974 808 624 562 289 339 346 273
Other operating expense, net..... -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations............. (25,112) (40,457) (74,040) (82,426) (50,432) (33,624) (31,179) (36,259)
Interest income.................. 1,766 1,752 2,056 2,305 1,390 607 65 101
Interest expense and other....... (101) (276) (46) (86) (50) (45) (1,171) (1,415)
Interest expense--related parties -- -- -- -- -- (559) (553) (531)
-------- -------- -------- -------- -------- -------- -------- --------
Loss before taxes................ (23,447) (38,981) (72,030) (80,207) (49,092) (33,621) (32,838) (38,104)
Provision for income taxes....... -- -- -- -- -- -- (1,000) --
-------- -------- -------- -------- -------- -------- -------- --------
Net loss......................... (23,447) (38,981) (72,030) (80,207) (49,092) (33,621) (33,838) (38,104)
Less: Series A redeemable
convertible preferred stock
dividend........................ -- -- (665) (1,272) (1,092) (840) (658) (428)
-------- -------- -------- -------- -------- -------- -------- --------
Net loss attributable to common
stockholders.................... $(23,447) $(38,981) $(72,695) $(81,479) $(50,184) $(34,461) $(34,496) $(38,532)
======== ======== ======== ======== ======== ======== ======== ========
Net loss per share
Basic and diluted............. $ (0.66) $ (1.09) $ (1.89) $ (2.00) $ (1.20) $ (0.82) $ (0.81) $ (0.85)
Weighted average shares....... 35,462 35,865 38,461 40,774 41,787 42,095 42,668 45,276
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. Periodically when
we complete our obligations under our licencing and engineering professional
services agreements we will recognize revenue.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included in Item 8 of this Annual
Report on Form 10-K.
Overview
We were incorporated in August 1997 as a Delaware corporation and are
located in Alviso, California. On August 21, 2000, TiVo (UK) Ltd., a wholly
owned subsidiary of TiVo Inc., was incorporated in the United Kingdom. On
October 9, 2001 we formed a new subsidiary, TiVo International, Inc., also a
Delaware corporation. The TiVo Service is a subscription-based television
service that provides viewers with greater control, easier navigation and a
wider range of viewing options when watching television. The TiVo Service also
provides television content providers and advertisers with a new platform for
content delivery, interactive viewing options and in-home commerce. The TiVo
Service is enabled through a personal video recorder designed and developed by
TiVo.
We launched the personal video recorder and service into the retail channel
in the second half of calendar year 1999. We incurred losses of $204.8 million
in calendar year 2000, $18.6 million for the one-month transition period ended
January 31, 2001 and $154.7 million for the fiscal year ended January 31, 2002,
and we expect to continue to incur losses for the foreseeable future.
We currently generate revenues from the following sources: subscription
revenue, non-subscription revenue, licensing revenue and engineering
professional services revenue. Subscriptions to the TiVo Service are available
on a monthly or lifetime basis. The current price for a monthly subscription to
the TiVo Service is $9.95 and the price for a lifetime subscription is $249.00.
As of April 2, 2002, the price for a monthly subscription for stand-alone
recorders will increase to $12.95. A lifetime subscription allows access to the
TiVo Service for the life of the personal video recorder. Subscription fees are
paid by the viewer when activating the TiVo Service. Subscription revenues from
lifetime subscriptions are recognized ratably over a four-year period, our best
estimate of the useful life of the personal video recorder. Deferred revenue
relates to subscription fees collected, for which service has not yet been
provided. Since the TiVo Service is enabled through a personal video recorder
that is sold in retail channels like other consumer electronic devices, we
anticipate that our business will be seasonal and we expect to generate a
significant number of our annual new subscriptions during the holiday shopping
season.
Non-subscription revenue primarily includes charter advertising and
sponsorship revenue from consumer companies and media networks that have
provided content on the TiVo Service. Revenue is recognized as the advertising
and content is delivered. To date, our non-subscription revenue has not been
significant.
Licensing revenue consists of revenues generated from licensing our
technology to consumer electronics companies and service providers for the
purpose of creating an open standards platform design for digital video
recorders ("DVR"). At this time, TiVo has signed one licensing agreement.(see
Item B. Note 11).
Engineering professional services revenue includes revenues earned for
engineering services performed.
We have agreed to share a substantial portion of our subscription and other
fees with some of our strategic partners in order to promote the TiVo Service
and encourage the manufacture and distribution of the personal video recorders
that enable the TiVo Service. These agreements may require us to share
substantial portions of the subscription and other fees attributable to the
same subscriber with multiple partners. 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. Expenses
related to our
28
strategic partners in exchange for marketing services and who are also
stockholders are recognized as "sales and marketing--related parties expense."
Expenses related to our partners in exchange for marketing services who are not
our stockholders are recognized as "sales and marketing expense" (see Item 8.
Note 9 and Item 8. Note 13).
In the past, we have issued stock in exchange for services to our strategic
partners. For example, TiVo closed an Investment Agreement with AOL for $200
million. The AOL investment is part of a three-year strategic Production
Integration and Marketing Agreement between AOL and TiVo, in which TiVo was to
become an AOL TV programming partner offering AOL TV subscribers access to
features of the TiVo Service. In return for AOL's investment, TiVo issued to
AOL a combination of convertible redeemable preferred stock, a portion of
common stock subject to redemption, common stock and initial and performance
warrants (see Item 8. Note 9).
We have issued convertible notes in exchange for services to our strategic
partners. In August 2001, we closed a private placement of $51.8 million of
convertible debt, TiVo received cash proceeds of approximately $43.7 million
from noteholders and non-cash proceeds of $8.1 million in the form of
advertising and promotional services from Discovery Communications, Inc.
("Discovery") and the National Broadcasting Company, Inc. ("NBC"), who are
existing stockholders. Issuance costs were approximately $3.6 million,
resulting in net proceeds of approximately $40.1 million. Of the total proceeds
of $51.8 million, $8.1 million is designated for advertising and promotional
services. In addition, the Company paid $5.0 million in October 2001 to NBC for
advertising that ran for the period that began October 1, 2001 and ended
December 31, 2001 (see Item 8. Note 10).
During the fourth quarter of the fiscal year ended January 31, 2002, we sold
shares of our common stock for general corporate purposes. On January 10, 2002,
we sold to Acqua Wellington North American Equities Fund, Ltd. 2,147,239 shares
of our common stock at $6.52 per share, pursuant to a common stock purchase
agreement we entered into with Acqua Wellington on December 21, 2001. Our net
proceeds from this sale were approximately $13.8 million, after deducting our
estimated sales expenses.
In 2002, we expect to experience a transition period related to certain
sales of our Series2 platform, including those through Best Buy and directly by
TiVo. We consider these sales as incidental to our business and, as a result,
anticipate reporting such transactions as Other Operating Expense, net, during
the upcoming year.
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. Our discussion
and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates. We base our estimates on historical experience and
on other assumptions that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. We believe that our most critical accounting
policies are those described below. For a detailed discussion on the
application of these and other accounting policies, see Item 8. Note 2 in the
notes to the consolidated financial statements.
Revenue Recognition of Lifetime Subscriptions
Based on the guidance provided by Securities and Exchange Commission
("SEC"), Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements", we recognize revenue when persuasive
29
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the price is fixed or determinable, collectibility is reasonably
assured, and we have completed our service obligations and received customer
acceptance, or are otherwise released from our service obligation or customer
acceptance obligations.
Subscription revenues from lifetime subscriptions are recognized ratably
over a four-year period, our best estimate of the useful life of the personal
video recorder. If the useful life of the recorder was shorter or longer than
the estimated four-year period, revenues would be recognized earlier or later,
respectively, than our current policy. Our product is still relatively new and
as more user information is gathered, this estimated life could be revised.
Complex Agreements
TiVo has a number of related party transactions and commitments. Many of
these transactions are complex and involve multiple elements and types of
consideration, including cash, debt, equity, and services. The Company has
utilized its best estimate of the value of the various elements in accounting
for these transactions. Had alternative assumptions been used, the values
obtained may have been materially different.
The Company recognizes revenue under its technology license and engineering
professional services agreement with Sony Corporation in accordance with the
American Institute of Certified Public Accountant's Statement of Position,
97-2, "Software Revenue Recognition" ("SAP-97-2"). This agreement constitutes a
multiple-element arrangement in which vendor specific objective evidence
("VSOE") is required for all undelivered elements in order to recognize license
revenue. The Company has not established VSOE on undelivered elements of the
arrangement and must defer revenue related to this arrangement until all
elements have been delivered. The Company intends to enter into additional
technology licensing transactions in the future, and the timing of revenue
recognition related to these transactions will depend, in part, on whether the
Company can establish VSOE and on how these deals are structured. As such,
revenue recognition may not correspond to the timing of related cash flows or
TiVo's work effort.
Stock-Based Compensation
We have a history of issuing stock options to employees and directors as an
integral part of our compensation programs. Generally accepted accounting
principles allow alternative methods of accounting for these plans. We have
chosen to account for our stock option plans under APB opinion 25, which
requires that only the intrinsic value of stock option grants be recognized as
an expense on the statement of operations. Accordingly, no compensation expense
related to the time value of stock options is included in determining net loss
and net loss per share in the consolidated financial statements. The
alternative method of accounting for stock options is prescribed by Statement
of Financial Accounting Standards No. 123, and requires that both the intrinsic
value and time value of options be recognized as an expense for employee stock
option awards. Note 8 to the consolidated financial statements sets forth
calculations of pro forma net loss and net loss per share computed in
accordance with this alternative method. Had we used SFAS No. 123 to value our
employee stock option awards, our net loss and net loss per share would have
been greater for all periods presented.
Assumptions on Non-Cash Expenses
Several of our arrangements require TiVo to make estimations and assumptions
for the valuation of non-cash expenses. For example, under the AOL agreements
we calculate the estimated fair market value of the AOL Initial Common Stock
Warrants using the Black-Scholes option-pricing model. Several assumptions are
made in the model such as the term and risk-free rate of return. If the market
conditions at the time AOL earns the Initial Common Stock Warrants are
different then date on which the assumptions are based, the valuation of the
Initial Common Stock Warrants could significantly increase or decrease from the
estimated calculation and our expense would be different.
30
Valuation Allowance Against Deferred Tax Assets
We provided a valuation allowance of $179.4 million and $123.8 million
against our entire net deferred tax primarily consisting of net operating loss
carryforwards as of January 31, 2002 and 2001. The valuation allowance was
recorded given the losses we incurred through January 31, 2002 and our
uncertainties regarding future operating profitability and taxable income. If
we do not achieve profitability we will not fully realize the deferred tax
benefits.
As of January 31, 2002, the Company has the following contractual cash
obligation payments:
Less than
($'s in 000's) Total 1 year 1-3 years 4-5 years Over 5 years
- -------------- ------- --------- --------- --------- ------------
Contractual cash obligations
Long-term convertible debt............ $36,733 $ -- $ -- $36,733 $ --
Interest on long-term convertible debt 14,171 3,097 6,195 4,879 --
Capital lease obligations............. 553 553 -- -- --
Operating leases...................... 16,102 2,755 6,251 7,096 --
Total Contractual Cash Obligations.... $67,559 $6,405 $12,446 $48,748 $ --
Other commercial commitments as of January 31, 2002, expiration per period
are as follows:
Less than
($'s in 000's) Total 1 year 1-3 years 4-5 years Over 5 years
-------------- ------ --------- --------- --------- ------------
Other commercial commitments
Standby letters of credit... $3,913 $3,913 $-- $-- $--
Total commercial commitments $3,913 $3,913 $-- $-- $--
Results of Operations
On February 1, 2001, TiVo announced a fiscal year end change from December
31 of each year to January 31 of each year. TiVo believes that the change in
fiscal year will help align the seasonal patterns of demand in TiVo's business
with its reporting cycle and better align TiVo's promotional activities with
those of its retail, service and network partners. The following discussion of
historical operating results compares the year ended January 31, 2002 to the
previous fiscal year ended January 31, 2001. Additionally, the one-month
transition period ended January 31, 2001 and the twelve-month period ended
January 31, 2001 are compared to the same periods in the prior year.
To enhance comparability, the following table sets forth audited
Consolidated Statements of Operations fiscal year ended January 31, 2002, the
one-month transition period ended January 31, 2001 and unaudited Consolidated
Statements of Operations for the one-month transition period ended January 31,
2000 and for the twelve months ended January 31, 2001 and January 31, 2000. The
unaudited consolidated financial data for the periods presented have been
derived from our financial statements for the twelve months ended December 31,
2000 and 1999 audited by Arthur Andersen LLP, independent public accountants.
Certain unaudited consolidated financial information for the year ended January
31, 2000 has been reclassified in order to conform to current classifications.
31
TIVO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
One-Month One-Month
Year Ended Ended Ended Year Ended Year Ended
------------- ------------ ----------- ------------- ------------
January 31, January 31, January 31, January 31, January 31,
2002 2001 2000 2001 2000
------------- ------------ ----------- ------------- ------------
(unaudited) (unaudited) (unaudited)
Revenues
Revenues........................................... $ 19,297,000 $ 989,000 $ 134,000 $ 4,636,000 $ 357,000
Revenues--related parties.......................... 100,000 -- -- -- --
Total Revenues..................................... 19,397,000 989,000 134,000 4,636,000 357,000
Costs and expenses
Cost of revenues................................... 19,888,000 1,710,000 1,204,000 19,099,000 5,120,000
Cost of revenues--related parties.................. 61,000 -- -- -- --
Research and development........................... 26,859,000 2,507,000 1,694,000 25,092,000 10,906,000
Sales and marketing................................ 28,509,000 7,884,000 3,532,000 106,444,000 27,181,000
Sales and marketing--related parties............... 75,832,000 6,632,000 2,225,000 58,011,000 17,397,000
General and administrative......................... 18,495,000 1,326,000 614,000 15,057,000 7,359,000
Stock-based compensation........................... 1,247,000 175,000 321,000 2,968,000 1,851,000
Other operating expense, net....................... -- -- -- -- 7,209,000
------------- ------------ ----------- ------------- ------------
Loss from operations.............................. (151,494,000) (19,245,000) (9,456,000) (222,035,000) (76,666,000)
Interest income................................. 2,163,000 672,000 721,000 7,879,000 3,617,000
Interest expense and other...................... (2,681,000) (17,000) (29,000) (509,000) (495,000)
Interest expense--related parties............... (1,643,000) -- -- -- --
------------- ------------ ----------- ------------- ------------
Loss before taxes................................. (153,655,000) (18,590,000) (8,764,000) (214,665,000) (73,544,000)
Provision for income taxes...................... (1,000,000) -- -- -- --
------------- ------------ ----------- ------------- ------------
Net loss.......................................... (154,655,000) (18,590,000) (8,764,000) (214,665,000) (73,544,000)
Less: Series A redeemable convertible preferred
stock dividend................................... (3,018,000) (423,000) -- (1,937,000) --
------------- ------------ ----------- ------------- ------------
Net loss attributable to common stockholders.......... $(157,673,000) $(19,013,000) $(8,764,000) $(216,602,000) $(73,544,000)
============= ============ =========== ============= ============
Net loss per common share
Basic and diluted................................. $ (3.67) $ (0.47) $ (0.25) $ (5.75) $ (4.97)
============= ============ =========== ============= ============
Weighted average common shares outstanding--
Basic and diluted................................. 42,956,310 40,850,353 35,274,071 37,640,183 14,796,582
============= ============ =========== ============= ============
Year Ended January 31, 2002 Compared to the Year Ended January 31, 2001
Revenues. Revenues for the year ended January 31, 2002 were $19.4 million,
over 300% higher than prior fiscal year revenue of $4.6 million. The increase
is attributable to increased customer subscriptions to the TiVo Service. During
the year ended January 31, 2002, TiVo activated approximately 226,000 new
subscribers to the TiVo Service bringing the total installed subscriber base to
approximately 380,000 as of January 31, 2002, more than double the installed
base as of January 31, 2001. We anticipate fiscal year 2003 will have continued
subscriber growth as we begin to realize the impact of our revised business
model and new distribution agreements.
Revenues--related parties. Revenues--related parties for the year ended
January 31, 2002 were $100,000 compared to zero for the year ended January 31,
2001. Revenues--related parties consists of revenues received from our
partners, who are also stockholders, and were for engineering professional
services.
Cost of revenues. Cost of revenues consists primarily of telecommunication
and network expenses, employee salaries, call center and other expenses related
to providing the TiVo Service to subscribers. Cost of services for the year
ended January 31, 2002 was $19.9 million compared to $19.1 million for the year
ended January 31, 2001. This 4% increase was primarily attributable to service
center expenses resulting from the increase in number of activations. Total
salaries and benefits accounted for 6% of the total increase due to the
expansion of the scalable call center department. We have reduced our per-sub
cost of revenue over the prior
32
fiscal year. We expect to continue to control spending in our broadcast and
customer service operations, resulting in further reductions in our per-sub
cost of revenue as the subscriber base grows.
Cost of revenue--related parties. Cost of revenues--related parties
consists primarily of employee salaries and related expenses related to
providing engineering and design support to TiVo's related parties. Cost of
revenues--related parties for the year ended January 31, 2002 was $61,000
compared to zero for the prior year.
Research and development expenses. TiVo's research and development expenses
consist primarily of employee salaries and related expenses and consulting fees
relating to the design of the personal video recorder that enables the TiVo
Service. Research and development expenses for the year ended January 31, 2002
were $26.9 million, 7% higher than the prior fiscal year. The increase in
absolute dollars was a result of continued investments in the improvement and
addition of features and functionality of current products as well as the
design of new platforms. Approximately 19% of the total increase in expenses
was due to the hiring of additional engineers instead of using consultants. We
expect our research and development expenses to decline in fiscal year 2003 due
to agreements that include substantial non-recurring engineering payment from
our partners to TiVo.
Sales and marketing expenses. Sales and marketing expenses consist
primarily of employee salaries and related expenses, media advertising, public
relations activities, special promotions, trade shows and the production of
product related items, including collateral and videos. Sales and marketing
expenses for the year ended January 31, 2002 were $28.5 million compared to
$106.4 million for the year ended January 31, 2001. The 73% decrease in
expenses was attributable to reduced 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. This is due to the initiatives we have put in place with our
partners to maximize our joint marketing effectiveness with much lower levels
of cash investment by TiVo and by reducing our direct advertising expenses. We
believe our latest agreements with our partners allows us to continue to reduce
our sales and marketing expenses as our partners are more fully involved the
marketing and distribution programs and related costs required to drive the
demand for the TiVo Service. We expect our marketing expenses for fiscal year
2003 to be comparable to fiscal year 2002.
Sales and marketing--related parties. Sales and marketing--related parties
expense consist of cash and non-cash charges related primarily to agreements
with AOL, DIRECTV, Philips, Sony, Quantum, and Creative Artists Agency, LLC
("CAA") all of which hold stock in TiVo. Sales and marketing--related parties
expense for the year ended January 31, 2002 was $75.8 million compared to $58.0
million for the year ended January 31, 2001. The increase in sales and
marketing--related parties expense is primarily attributable to the activations
of subscribers to the TiVo Service and AOL media insertion orders.
Sales and marketing--related parties expense for the year ended January 31,
2002, consists of cash charges of $62.2 million and non-cash charges of $13.6
million. The non-cash portion is related to the amortization of warrants or
common stock issued for services to AOL and DIRECTV. The total amount of
warrant valuation and common stock issued for services as of January 31, 2002
was $44.4 million, of which $15.9 million has not yet been amortized. We
amortize the valuation of the warrants and common stock issued for services on
a straight-line basis over the period that the services are provided.
The cash portion of sales and marketing--related parties expense is
comprised of revenue share and manufacturing subsidy payments to Philips, Sony,
Quantum and DIRECTV. Also included are media insertion orders paid to NBC,
Discovery and AOL. Subsidies are formula based payments to our partners in
exchange for key activities and results. The formulas are periodically adjusted
based on our partners' manufacturing costs and selling prices. A portion of the
subsidy is payable after shipment and the balance is payable after the
subscription is activated. We have also agreed to share a portion of our
revenues with some of our strategic partners in order to promote the TiVo
Service and encourage the manufacture and distribution of the personal video
recorders that
33
enable the TiVo Service. Revenue share is calculated as an agreed upon
percentage of revenue for a specified group of TiVo subscribers. We have
negotiated deferred payment schedules of payables due as of March 31, 2001 with
certain partners in the amount of $15.6 million. In general, interest started
accruing from March 31, 2001 and beginning in October of 2001, we have made
payments including interest for the deferred amounts as well as have continued
to pay current payables on a timely basis. In our revised business model we
intend to sharply reduce our subsidy payments and have been working with our
partners to eliminate subsidy requirements.
General and administrative expenses. General and administrative expenses
consist primarily of employee salaries and related expenses for executive,
administrative, accounting, information systems, customer operations personnel,
facility costs and professional fees. General and administrative expenses for
the year ended January 31, 2002 increased 23% to $18.5 million compared to
$15.1 million for the year ended January 31, 2001. Salaries, employee benefits
and temporary expenses accounted for 77% of the total increase. Most of the
increase was due to headcount hired at the end of fiscal year ended January 31,
2001. For comparison purposes, the headcount related expense were only
partially reflected in fiscal year 2001. We expect to hold headcount flat to
slightly higher during fiscal year 2003.
Stock-based compensation. During calendar years 1999 and 2000, we granted
stock options with exercise prices that were less than the estimated fair value
of the underlying shares of common stock for accounting purposes on the date of
grant. As a result, stock-based compensation expense is being recognized over
the period that these stock options vest. The stock-based compensation expense
was approximately $1.2 million for the year ended January 31, 2002 and $3.0
million for the year ended January 31, 2001. We anticipate the unamortized
balance of $1.0 million will be fully amortized by June 2005.
Interest income. Interest income resulting from cash and cash equivalents
held in interest bearing accounts and short term investments was $2.1 million
for the year ended January 31, 2002 compared to $7.9 million for the year ended
January 31, 2001, as cash balances have declined combined with lower interest
rates prevailing in the U.S. market.
Interest expense and other. Interest expense and other was $2.7 million for
the year ended January 31, 2002. This includes the coupon interest expense of
$1.0 million and the amortization of the value of the warrants, the beneficial
conversion and the convertible debt financing expenses of $1.5 million related
to the convertible notes. Also included is the amortization of the value
assigned primarily to the Comdisco warrant for interest expense of $71,000. For
the year ended January 31, 2001, interest expense and other was $509,000.
Interest expense--related parties. Interest expense--related parties was
$1.6 million for the year ended January 31, 2002. This includes $1.2 million
for interest expense payable to our strategic partners according to negotiated
deferred payment schedules and notes payable--related parties.
Provision for income taxes. Income tax expense for the year ended January
31, 2002 was $1.0 million due to tax withheld by the government of Japan as
foreign source income tax from payments made by Sony Corporation under the
terms of the technology licensing agreement.
Series A redeemable convertible preferred stock dividend. Under the terms
of the Investment Agreement between AOL and TiVo, the Company is required to
pay dividends to the Series A redeemable convertible preferred stockholders.
The dividends payable for years ended January 31, 2002 and 2001 were $3.0
million and $1.9 million, respectively. The dividends are payable quarterly as
declared by our board of directors.
One-Month Period Ended January 31, 2001 Compared to the One-Month Period Ended
January 31, 2000
Revenues. Revenues for the one-month period ended January 31, 2001 were
$989,000, compared to $134,000 for the one-month period ended January 31, 2000.
The increase is attributable to increased customer
34
subscriptions to the TiVo Service. During the month of January 2001, TiVo
activated approximately 18,000 new subscribers to the TiVo Service compared to
approximately 5,000 subscribers activated during the month of January 2000.
Cost of revenues. Cost of revenues consists primarily of telecommunication
and network expenses, employee salaries, call center and other expenses related
to providing the TiVo Service to subscribers. Cost of revenues for the
one-month period ended January 31, 2001 was $1.7 million compared to $1.2
million for the one-month period ended January 31, 2000. This increase was
primarily attributable to increased salaries and benefits and service center
expenses. Total salaries and benefits accounted for 52% of the total increase
due to the expansion and staffing of the Broadcast Operations department.
Service center expenses accounted for 42% of the total increase due to the
expansion and staffing of the customer service center.
Research and development expenses. TiVo's research and development expenses
consist primarily of employee salaries and related expenses and consulting fees
relating to the design of the personal video recorder that enables the TiVo
Service. Research and development expenses for the one-month period ended
January 31, 2001 were $2.5 million compared to $1.7 million for the one-month
period ended January 31, 2000. Approximately 61% of the total increase in
expenses was due to the hiring of additional engineers to help support the
improvement and addition of features and functionality of current products as
well as the design of new platforms. Approximately 19% of the total increase
was related to prototype expenses.
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 one-month period ended January 31, 2001 were $7.9 million
compared to $3.5 million for the one-month period ended January 31, 2000. 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. Advertising expenses, including public relations
and trade shows, comprised over 63% of the total increase in sales and
marketing expenses. For the one-month period ended January 31, 2001, total
salaries expense was $776,000 compared to $385,000 for the one-month period
ended January 31, 2000.
Sales and marketing--related parties. Sales and marketing--related parties
expense consist of cash and non-cash charges related primarily to agreements
with AOL, DIRECTV, Philips, Sony, Quantum, and Creative Artists Agency, LLC
("CAA") all of which hold stock in TiVo. Sales and marketing--related parties
expense for the one-month period ended January 31, 2001 was $6.6 million
compared to $2.2 million for the one-month period ended January 31, 2000. The
increase in sales and marketing--related parties expense is primarily
attributable to the manufacturing and shipments of personal video recorders and
to the related activations of subscribers to the TiVo Service and AOL media
insertion orders.
Sales and marketing--related parties expense for the one-month period ended
January 31, 2001, consists of cash charges of $5.4 million and non-cash charges
of $1.2 million. The non-cash portion is related to the amortization of
warrants or common stock issued for services that we issued to AOL and DIRECTV.
We amortize the valuation of the warrants and common stock issued for services
on a straight-line basis over the period that the services are provided.
General and administrative expenses. General and administrative expenses
consist primarily of employee salaries and related expenses for executive,
administrative, accounting, information systems, customer operations personnel,
facility costs, and professional fees. General and administrative expenses for
the one-month period ended January 31, 2001 were $1.3 million compared to
$614,000 for the one-month period ended January 31, 2000. Over 51% of the
increase was primarily attributable to the hiring of additional personnel and
related expenses. Also contributing to the increase were consulting and
temporary expenses totaling 25% of the total increase.
35
Stock-based compensation. During calendar years 1999 and 2000, we granted
stock options with exercise prices that were less than the estimated fair value
of the underlying shares of common stock for accounting purposes on the date of
grant. As a result, stock-based compensation expense is being recognized over
the period that these stock options vest. The stock-based compensation expense
was approximately $175,000 for the one-month period ended January 31, 2001 and
$321,000 for the one-month period ended January 31, 2000.
Year Ended January 31, 2001 Compared to the Year Ended January 31, 2000
Revenues. Revenues for the year ended January 31, 2001 were $4.6 million,
compared to $357,000 for the year ended January 31, 2000. The increase is
attributable to increased customer subscriptions to the TiVo Service. During
the year ended January 2001, TiVo activated approximately 131,000 new
subscribers to the TiVo Service bringing the total installed subscriber base to
approximately 154,000 as of January 31, 2001. As of January 31, 2000, the total
subscriber base was approximately 23,000.
Cost of revenues. Cost of revenues consists primarily of telecommunication
and network expenses, employee salaries, call center and other expenses related
to providing the TiVo Service to subscribers. Cost of revenues for the year
ended January 31, 2001 was $19.1 million compared to $5.1 million for the year
ended January 31, 2000. This increase was primarily attributable to increased
telecommunications and network expenses due to the increase in number of
activations. During the year ended January 31, 2001, telecommunications and
network expense increased 46% or $6.4 million over prior year expenses. Total
salaries and benefits accounted for 18% of the total increase due to the
expansion and staffing of the broadcast operations department and customer
service departments.
Research and development expenses. TiVo's research and development expenses
consist primarily of employee salaries and related expenses and consulting fees
relating to the design of the personal video recorder that enables the TiVo
Service. Research and development expenses for the year ended January 31, 2001
were $25.1 million compared to $10.9 million for the year ended January 31,
2000. Approximately 50% of the total increase in expenses was due to the hiring
of additional engineers to help support the improvement and addition of
features and functionality of current products as well as the design of new
platforms. Approximately 23% of the total increase was related to research and
development consulting expenses.
Sales and marketing expenses. Sales and marketing expenses consist
primarily of employee salaries and related expenses, media advertising, public
relations activities, special promotions, trade shows and the production of
product related items, including collateral and videos. Sales and marketing
expenses for the year ended January 31, 2001 were $106.4 million compared to
$27.2 million for the year ended January 31, 2000. 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.
Advertising expenses, including public relations and trade shows, comprised
over 78% of the total increase in sales and marketing expenses from year to
year. For the year ended January 31, 2001, channel sales support was $5.9
million compared to $2.4 million for the year ended January 31, 2000. Channel
sales support accounted for 4% of the total increase.
Sales and marketing--related parties. Sales and marketing--related parties
expense consist of cash and non-cash charges related primarily to agreements
with AOL, DIRECTV, Philips, Sony, Quantum, and Creative Artists Agency, LLC
("CAA") all of which hold stock in TiVo. Sales and marketing--related parties
expense for the year ended January 31, 2001 was $58.0 million compared to $17.4
million for the year ended January 31, 2000. The increase in sales and
marketing--related parties expense is primarily attributable to the
manufacturing and shipments of personal video recorders and to the related
activations of subscribers to the TiVo Service and AOL media insertion orders.
36
Sales and marketing--related parties expense for the year ended January 31,
2001, consists of cash charges of $47.4 million and non-cash charges of $10.6
million. The non-cash portion is related to the amortization of warrants or
common stock issued for services to AOL, Quantum, DIRECTV and Creative Artists
Agency, LLC. The total amount of warrant valuation and common stock issued for
services as of January 31, 2001 was $44.4 million, of which $21.6 million has
not yet been amortized. We amortize the valuation of the warrants and common
stock issued for services on a straight-line basis over the period that the
services are provided.
General and administrative expenses. General and administrative expenses
consist primarily of employee salaries and related expenses for executive,
administrative, accounting, information systems, customer operations personnel,
facility costs, and professional fees. General and administrative expenses for
the year ended January 31, 2001 were $15.1 million compared to $7.4 million for
the year ended January 31, 2000. Approximately 31% of the increase was
primarily attributable to the hiring of additional personnel and related
expenses. Also contributing to the increase were accounting and legal expenses
totaling 17% of the total increase.
Stock-based compensation. During calendar years 1999 and 2000, we granted
stock options with exercise prices that were less than the estimated fair value
of the underlying shares of common stock for accounting purposes on the date of
grant. As a result, stock-based compensation expense is being recognized over
the period that these stock options vest. The stock-based compensation expense
was approximately $3.0 million for the year ended January 31, 2001 and $1.9
million for the year ended January 31, 2000.
Other operating expenses, net. Other operating expenses, net consists of
the revenues from the sale of personal video recorders sold directly by TiVo,
less the cost of the personal video recorders sold. For the year ended January
31, 2001, other operating expenses, net was zero compared to $7.2 million for
the year ended January 31, 2000. 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 $7.9 million
for the year ended January 31, 2001 compared to $3.6 million for the year ended
January 31, 2000, as cash balances have increased largely due to the AOL
investment in calendar year 2000.
Interest expense and other. Interest expense and other was $509,000 for the
year ended January 31, 2001. This includes amortization of the value assigned
primarily to the Comdisco warrant for interest expense of $164,000 and disposal
of an asset no longer used of approximately $227,000. For the year ended
January 31, 2000, interest expense and other was $495,000.
Liquidity and Capital Resources
From inception through January 31, 2002, we financed our operations and met
our capital expenditure requirements primarily from the proceeds of the private
sale of equity securities, the proceeds from our initial public offering and
the private placement of convertible debt with warrants. At January 31, 2002,
we had $52.3 million of cash and cash equivalents. We believe these funds
represent sufficient resources to fund operations, capital expenditures and
working capital needs through at least the next 12 months.
On August 28, 2001, we issued $51.8 million of convertible debt with
warrants in a private placement to accredited investors. Of the $40.1 million
net cash proceeds, the Company paid $5.0 million in October 2001 to NBC for
prepaid advertising.
37
Additionally, in October 2001, TiVo received an upfront cash fee payment
from Sony Corporation under the terms of the license agreement.
On January 10, 2002, we sold to Acqua Wellington North American Equities
Fund, Ltd. 2,147,239 shares of our common stock at $6.52 per share pursuant to
an effective Registration Statement on Form S-3 (File No. 333-53152). Our net
proceeds from this sale were approximately $13.8 million, after deducting the
estimated sale expenses payable by us.
During February 2002, we entered into a second common stock purchase
agreement which, under certain circumstances, may allow us to sell to Acqua
Wellington North American Equities Fund, Ltd. up to $19.0 million of our common
stock during the fourteen-month period ending April 13, 2003. We view this
purchase agreement as an auxiliary financing tool with the potential to provide
us with an efficient and flexible mechanism to raise cash to fund our working
capital needs.
The shares of common stock which we may sell pursuant to the purchase
agreement are registered under the Securities Act of 1933 pursuant to an
effective Registration Statement on Form S-3 (File No. 333-53152).
From time to time, we may present Acqua Wellington with draw down notices
over a draw down period consisting of two periods of ten consecutive trading
days each, unless we agree otherwise with Acqua Wellington. Each draw down
notice sets forth a threshold price and the dollar value of shares Acqua
Wellington is obligated to purchase during the draw down period. The threshold
price we choose, which cannot be less than $3.00 without the consent of Acqua
Wellington, establishes the maximum value of the stock we can obligate Acqua
Wellington to buy during the period and the discount that Acqua Wellington will
receive, unless we agree otherwise with Acqua Wellington. Once presented with a
draw down notice, Acqua Wellington is required to purchase a pro rata portion
of the shares on each trading day during the draw down period on which the
daily volume weighted average price for our common stock exceeds the threshold
price determined by us. The per share purchase price for the shares equals the
daily volume weighted average price of our common stock on each date during the
draw down period on which shares are purchased, less a discount ranging from 3%
to 5.4%, based on the threshold price, unless we agree otherwise with Acqua
Wellington. If the daily volume weighted average price of our common stock
falls below the threshold price on any trading day during a draw down period,
Acqua Wellington will not be obligated but still may purchase the pro rata
portion of shares of common stock allocated to that day at the threshold price
for the draw down period, less the discount. The number of shares Acqua
Wellington would be obligated to buy on any trading day during a draw down
period is arrived at by dividing that day's pro rata part of the total purchase
amount by that day's volume weighted average price, less Acqua Wellington's
discount. The total number of shares Acqua Wellington would be required to
purchase during a draw down period is the aggregate of the daily amounts.
The purchase agreement also provides that from time to time and at our
discretion we may grant Acqua Wellington the right to exercise one or more call
options to purchase additional shares of our common stock during each draw down
period for the amount that we specify, so long as the aggregate of all such
call option amounts and draw down amounts under the purchase agreement do not
exceed $19,000,000. Upon Acqua Wellington's exercise of the call option, we
will issue and sell the shares of our common stock subject to the call option
at a price equal to the greater of the daily volume weighted average price of
our common stock on the day Acqua Wellington notifies us of its election to
exercise its call option or the threshold price for the call option determined
by us and set forth in the draw down notice, less a discount ranging from 3% to
5.4%, based on the threshold price, unless we agree otherwise with Acqua
Wellington.
The purchase agreement further provides that if, during a draw down period
with Acqua Wellington, we enter into an agreement with a third party to issue
common stock or securities convertible into common stock, the principal purpose
of which is to raise capital, Acqua Wellington will have the option to purchase
shares of the draw down amount and any call option amounts requested by us at
the price otherwise applicable to the sale to Acqua Wellington, or at the third
party's price. Acqua Wellington may also decide not to purchase the shares
38
during that draw down period. If, between draw down pricing periods, we enter
into an agreement with a third party to issue common stock or securities
convertible into common stock, the principal purpose of which is to raise
capital, Acqua Wellington will have the option to purchase up to the draw down
amount that would be applicable based on the gross price per share to be paid
for the common stock in the other financing on the same terms and conditions
contemplated in the other financing, net of the third party's discount and
fees, or, if the applicable share price is below the minimum threshold price,
up to 20% of the total amount to be raised by us in the other financing.
Under the terms of the Investment Agreement between America Online, Inc.
("AOL") and TiVo, dated June 9, 2000, as amended, the Company holds $51.7
million in an interest bearing escrow account as restricted cash. If the AOL
TV/TiVo set-top box launch does not occur by December 31, 2001 or a later date
agreed to by both parties, and AOL has not committed a material breach of the
Commercial Agreement or if we have breached our obligations with respect to the
financial covenants, then AOL has a put option pursuant to which AOL could
require TiVo to repurchase up to 1.6 million shares of Series A redeemable
convertible preferred stock at a liquidation value of up to $48.0 million. We
currently record the $48.0 million on the consolidated balance sheets as
restricted cash of $48.0 million plus the interest income earned on restricted
cash. The set-top box was not launched by December 31, 2001 and we recently
modified our agreements with AOL so that AOL has 100 days from the agreed upon
launch date to exercise its put option (see Note 17). At this point, we have
not agreed with AOL on this agreed upon launch date as we believe that AOL does
not plan to deploy the AOL TV/TiVo set-top box as originally envisioned. We are
in discussions with AOL regarding modification of the terms of the current
agreements, including product definition, development funding, deployment,
launch date, and other commercial terms. There can be no assurances about the
outcome of these discussions. If the outcome includes exercise of the put
option, our cash and cash equivalents would increase by $3.7 million,
reflecting the deferred interest on the restricted cash, and the restricted
cash balance would be reduced to zero. We do not include restricted cash in our
calculations of working capital available for operations. As a result, we do
not expect that the preferred stock repurchase would have a material effect on
our business operations.
Additionally, under the terms of the AOL Investment Agreement, we must
maintain a positive net cash position in excess of $25.0 million, measured at
the end of each fiscal quarter. Net cash is defined as consolidated current
assets (excluding deferred tax assets and escrowed funds) minus consolidated
current liabilities (excluding deferred revenue, deferred interest income on
escrowed funds, sublessee prepaid rent and leasing obligations). We advise AOL
monthly, on an informational basis, of our net cash position. Per the
agreement, if we fall below the $25.0 million net cash position at the end of
our fiscal quarter, AOL has the right to exercise its put option. We was in
compliance with the net cash position requirement as of January 31, 2002.
The financial covenants shall terminate upon the earlier of the date of the
set-top box launch, so long as such set-top box launch occurs before the agreed
upon launch date, the expiration of the put option or the day following the
first anniversary of the agreed upon launch date.
Net cash used in operating activities was $120.8 million for the year ended
January 31, 2002. During this same period, we continued to provide the TiVo
Service, incurring a net loss of $154.6 million. Uses of cash from operating
activities included a decrease in accrued liabilities-related parties of $23.1
million, a decrease in accrued liabilities of $7.2 million, a decrease in
accounts payable of $15.0 million, a decrease in prepaid expenses of $3.5
million, an increase in prepaid expenses-related parties of $10.7 million, an
increase in notes payable-related parties of $2.2 million, an increase in
accounts receivable-related parties of $1.9 million and an increase in accounts
receivable of $351,000. These uses were offset by sources of cash provided from
operating activities consisting of an increase in long-term deferred revenue of
$11.4 million, an increase in deferred revenue-related parties of $11.4
million, and increase in deferred revenue of $6.6 million and an increase in
other long-term liabilities of $3.8 million.
Net cash used in investing activities for the year ended January 31, 2002
was $3.3 million for the acquisition of property and equipment.
39
Net cash provided by financing activities was $51.9 million for the year
ended January 31, 2002. Of this amount, $3.0 million was used for payment of
the Series A redeemable convertible preferred stock dividend and $796,000 was
used for payment on a capital lease. We obtained $43.7 million, less cash
financing expense of $3.6 million, of financing as proceeds from the issuance
of convertible notes payable on August 28, 2001. We obtained $14.0 million,
less cash financing expense of $175,000, for the sale of common stock to Acqua
Wellington North American Equities Fund, Ltd. on January 10, 2002. An
additional $1.2 million of financing was obtained as proceeds from the issuance
of common stock through our employee stock purchase plan, $503,000 from the
issuance of common stock for stock options exercised and $205,000 of financing
was obtained from the reduction of financing expenses related to the AOL
Investment Agreement.
We have commitments for future lease payments under facilities operating
leases of $16.1 million and obligations under capital leases of $553,000 as of
January 31, 2002. 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.
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.
The conversion price of our convertible notes will be reduced on August 23,
2002 if the conversion price is greater then the average closing price per
share of our commons stock for the 10 consecutive trading days preceding August
23, 2002. In addition, the conversion price on the notes may be reduced if we
issue common stock or common stock equivalents at an issuance price (or with
respect to common stock equivalents, such additional stock is issued with a
conversion or exercise price per share less than the conversion price of the
notes then in effect immediately prior to the issuance) that is lower than the
conversion price then in effect immediately prior to the issuance. A reduced
conversion price on the convertible notes would increase our interest expense
Our future capital requirements will depend on a variety of factors,
including market acceptance of the personal video recorder and the TiVo
Service, the resources we devote to developing, marketing, selling and
supporting our products and other factors. We expect to devote substantial
capital resources:
. to develop new or enhance existing services or products;
. to continue support of our customer call center;
. for advertising to educated consumers;
. to continue to support our existing efforts in the United Kingdom market;
and
. for general corporate purposes.
We believe that our cash and cash equivalents, 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.
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."
40
Factors That May Affect Future Operating Results
In addition to the other information included in this Annual Report on Form
10-K, the following factors should be considered in evaluating our business and
future prospects:
We have recognized very limited revenue, have incurred significant net
losses and may never achieve profitability.
We have recognized limited revenue, have incurred significant losses and
have had substantial negative cash flow. During the fiscal year ended January
31, 2002, the one-month transition period ended January 31, 2001 and the
calendar year ended December 31, 2000, we recognized revenues of $19.4 million,
$989,000 and $3.6 million, respectively. As of January 31, 2002, we had an
accumulated deficit of $459.9 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 our subscriber revenues and on our expenses. With increased
expenses, we will need to generate significant additional revenues to achieve
profitability. Consequently, we may never achieve profitability, and even if we
do, we may not sustain or increase profitability on a quarterly or annual basis
in the future.
Our limited operating history may make it difficult for us or investors to
evaluate trends and other factors that affect our business.
We were incorporated in August 1997 and have been obtaining subscribers only
since March 31, 1999. Prior to that time, our operations consisted primarily of
research and development efforts. As of January 31, 2002, only a limited number
of personal video recorders had been sold and we obtained only a limited number
of subscribers to the TiVo Service. As a result of our limited operating
history, our historical financial and operating information is of limited value
in evaluating our future operating results. In addition, any evaluation of our
business must be made in light of the risks and difficulties encountered by
companies offering products or services in new and rapidly evolving markets.
For example, it may be difficult to accurately predict our future revenues,
costs of revenues, expenses or results of operations. Personal television is a
new product category for consumers and it may be difficult to predict the
future growth rate, if any, or size of the market for our products and
services. We may be unable to accurately forecast customer behavior and
recognize or respond to emerging trends, changing preferences or competitive
factors facing us. As a result, we may be unable to make accurate financial
forecasts and adjust our spending in a timely manner to compensate for any
unexpected revenue shortfall. This inability could cause our net losses in a
given quarter to be greater than expected, which could cause the price of our
stock to decline.
If our marketing in the retail channel is not successful, consumers and
consumer electronics manufacturers may not accept the TiVo Service and products
that enable the TiVo Service.
Our success depends upon a continually successful retail marketing campaign
for the TiVo Service and related personal video recorders, which began in the
third quarter of calendar year 1999. We rely in part on our consumer
electronics partners to manufacture, market, sell and support the personal
video recorder that enables the TiVo Service. We also rely on the efforts of
AT&T Broadband, DIRECTV and BSkyB to market, sell and support the TiVo Service
to AT&T Broadband, DIRECTV and BSkyB subscribers. The ongoing marketing
campaign requires, among other things, that we:
. educate consumers on the benefits of the TiVo Service and related
personal video recorder, which will require an extensive marketing
campaign;
. commit a substantial amount of human and financial resources to achieve
continued, successful retail distribution; and
. coordinate our own sales, marketing and support activities with those of
AT&T Broadband, DIRECTV, AOL and other strategic partners.
41
We or our strategic partners may not achieve any or all of these objectives.
In addition, consumers may perceive the TiVo Service and related personal video
recorder as too expensive or complex and our marketing campaign may not
effectively attract new subscribers. Because of competitive offerings or
changing preferences, consumers may delay or decline the purchase of the TiVo
Service and related personal video recorder. All of these events would reduce
consumer demand and market acceptance, diminish our brand and impair our
ability to attract subscribers to the TiVo Service.
We have agreed to share a substantial portion of the revenue we generate
from subscription fees with some of our strategic partners. We may be unable to
generate enough revenue to cover these obligations.
We have agreed to share a substantial portion of our subscription and other
fees with some of our strategic partners in exchange for manufacturing,
distribution and marketing support and discounts on key components for personal
video recorders. Given how these amounts are calculated, we may be required to
share substantial portions of the subscription and other fees attributable to
the same subscriber with multiple partners. These agreements require us to
share a portion of our subscription fees whether or not we increase or decrease
the price of the TiVo Service. If we change our subscription fees in response
to competitive or other market factors, our operating results would be
adversely affected. Our decision to share subscription revenues is based on our
expectation that our partnerships will help us obtain subscribers, broaden
market acceptance of personal television and increase our future revenues. If
these expectations are not met, we may be unable to generate sufficient revenue
to cover our expenses and obligations.
We depend on a limited number of third parties to manufacture, distribute
and supply critical components and services for the personal video recorders
that enable the TiVo Service. We may be unable to operate our business if these
parties do not perform their obligations.
The TiVo Service is enabled through the use of a personal video recorder
made available by TiVo and a limited number of third parties. In addition, we
rely on sole suppliers for a number of key components for the personal video
recorders. We do not control the time and resources that these third parties
devote to our business. We cannot be sure that these parties will perform their
obligations as expected or that any revenue, cost savings or other benefits
will be derived from the efforts of these parties. If any of these parties
breaches or terminates its agreement with us or otherwise fails to perform
their obligations in a timely manner, we may be delayed or prevented from
commercializing our products and services. Because our relationships with these
parties are non-exclusive, they may also support products and services that
compete directly with us, or offer similar or greater support to our
competitors. Any of these events could require us to undertake unforeseen
additional responsibilities or devote additional resources to commercialize our
products and services. This outcome would harm our ability to compete
effectively and quickly achieve market acceptance and brand recognition.
In addition, we face the following risks in relying on these third parties:
If our manufacturing partnerships are not successful, we may be unable to
establish a market for our products and services. We have manufactured a
certain number of the personal video recorders that enable the TiVo Service
through a third-party contract manufacturer. We have also entered and
anticipate entering into agreements with consumer electronics partners to
manufacture and distribute the personal video recorders that enable the TiVo
Service. However, we have no minimum volume commitments from any manufacturer.
The ability of our manufacturing partners to reach sufficient production volume
of the personal video recorder to satisfy anticipated demand is subject to
delays and unforeseen problems such as defects, shortages of critical
components and cost overruns. Moreover, they will require substantial lead
times to manufacture anticipated quantities of the personal video recorders
that enable the TiVo Service. Delays, product shortages, 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
42
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. In
addition to our efforts, our manufacturing partners distribute the personal
video recorder that enables the TiVo Service. We rely on their sales forces,
marketing budgets and brand images to promote and support the personal video
recorder and the TiVo Service. We expect to continue to rely on our
manufacturing partners and other strategic partners to promote and support the
personal video recorder and other devices that enable the TiVo Service. The
loss of one or more of these partners could require us to undertake more of
these activities on our own. As a result, we would spend significant resources
to support personal video recorders and other devices that enable the TiVo
Service. We also expect to rely on AOL, AT&T Broadband, 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:
. NEC is the sole supplier of the CPU and application specific integrated
circuit, semiconductor devices;
. Broadcom is the sole supplier of the MPEG2 encoder and decoder
semiconductor devices;
. ATMEL is the sole supplier of the secure microcontroller semiconductor
device; and
. Tribune Media Services is the sole supplier of program guide data.
In addition to the above, we have several sole suppliers for key components
of our products currently under development.
We cannot be sure that alternative sources for key components and services
used in the personal video recorders and the TiVo Service will be available
when needed or, if available, that these components and services will be
available on favorable terms. If our agreements or our manufacturing partners'
agreements with Broadcom, ATMEL, NEC 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.
We have limited experience in overseeing manufacturing processes and
managing inventory and failure to do so effectively may result in supply
imbalances.
In fiscal year ending January 31, 2003, to transition to the Series2
platform, we will contract for the manufacture of certain Series2 personal
video recorders with contract manufacturers. We will sell these units through
Best Buy and AT&T Broadband, as well as through TiVo's own online sales
efforts. As part of this effort, we expect to maintain some inventory of the
Series2 units throughout the year. Overseeing manufacturing processes and
managing inventory are outside of TiVo's core business and our experience in
these areas is limited. If TiVo fails to effectively oversee manufacturing
process and manage inventory, TiVo may suffer from insufficient inventory to
meet consumer demand or excess inventory.
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
43
convince these consumers to pay an additional subscription fee to receive the
TiVo Service. The availability of competing services that do not require
subscription fees will harm our ability to effectively attract subscribers. In
addition, the personal video recorder that enables the TiVo Service can be used
to record programs and pause, rewind and fast forward through live or recorded
shows without an active subscription to the TiVo Service. If a significant
number of purchasers of the personal video recorders use these devices without
subscribing to the TiVo Service, our revenue growth will decline and we may not
achieve profitability.
Our business is expanding 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 expanded our operations.
We may need to adjust our headcount and infrastructure to allow us to pursue
market opportunities. This growth in our subscriber base has placed, and will
continue to place, a significant strain on our management, operational and
financial resources and systems. Specific risks we face as our business expands
include:
We need to attract and retain qualified personnel, and any failure to do so
may impair our ability to offer new products or grow our business. Our success
will depend on our ability to attract, retain and motivate managerial,
technical, marketing, financial, administrative and customer support personnel.
Competition for such employees is intense, especially for engineers in the San
Francisco Bay Area, and we may be unable to successfully attract, integrate or
retain sufficiently qualified personnel. If we are unable to hire, train,
retain and manage required personnel, we may be unable to successfully
introduce new products or otherwise implement our business strategy.
Any inability of our systems to accommodate our expected subscriber growth
may cause service interruptions or delay our introduction of new services. We
internally developed many of the systems we use to provide the TiVo Service and
perform other processing functions. The ability of these systems to scale as we
rapidly add new subscribers is unproven. We must continually improve these
systems to accommodate subscriber growth and add features and functionality to
the TiVo Service. Our inability to add software and hardware or to upgrade our
technology, systems or network infrastructure could adversely affect our
business, cause service interruptions or delay the introduction of new services.
We will need to provide acceptable customer support, and any inability to do
so will harm our brand and ability to generate and retain new subscribers. Our
ability to increase sales, retain current and future subscribers and strengthen
our brand will depend in part upon the quality of our customer support
operations. Some customers require significant support when installing the
personal video recorder and becoming acquainted with the features and
functionality of the TiVo Service. We have limited experience with widespread
deployment of our products and services to a diverse customer base, and we may
not have adequate personnel to provide the levels of support that our customers
require. In addition, we have entered into agreements with third parties to
provide this support and will rely on them for a substantial portion of our
customer support functions. Our failure to provide adequate customer support
for the TiVo Service and personal video recorder will damage our reputation in
the personal television and consumer electronics marketplace and strain our
relationships with customers and strategic partners. This could prevent us from
gaining new or retaining existing subscribers and could cause harm to our
reputation and brand.
We will need to improve our operational and financial systems to support our
expected growth, and any inability to do so will adversely impact our billing
and reporting. To manage the expected growth of our operations, we will need
to improve our operational and financial systems, procedures and controls. Our
current and planned systems, procedures and controls may not be adequate to
support our future operations and expected growth. For example, we replaced our
accounting and billing system at the beginning of August 2000. Delays or
problems associated with any improvement or expansion of our operational and
financial systems and controls could adversely impact our relationships with
subscribers and cause harm to our reputation and brand. Delays or problems
associated with any improvement or expansion of our operational and financial
systems and controls could also result in errors in our financial and other
reporting.
44
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;
. audience measurement research,
. revenues from programmers; and
. electronic 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:
Companies offering similar products and services. We are likely to face
intense direct competition from companies such as Microsoft, OpenTV, NDS,
EchoStar Communications Corp., CacheVision, Keen Personal Media, Inc., Moxi
Digital and SONICblue. 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
UltimateTV. 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
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relationships with our strategic partners. For example, DIRECTV enables its
subscribers to receive Microsoft's UltimateTV service. AOL Time Warner has made
an investment in Moxi Digital. 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 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.
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
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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 receive letters form third parties alleging that we
are infringing their intellectual property. If any of these third parties or
others were to bring suit against us, our business could be harmed because
intellectual property litigation may:
. be time-consuming and expensive;
. divert management's attention and resources away from our business;
. cause delays in product delivery and new service introduction;
. cause the cancellation of new products or services; or
. require us to pay significant royalties or licensing fees.
The emerging enhanced-television industry is highly litigious, particularly
in the area of on-screen program guides. Additionally, many patents covering
interactive television technologies have been granted but have not been
commercialized. For example, we are aware of at least seven patents for pausing
live television. A number of companies in the enhanced-television industry earn
substantial profits from technology licensing, and the introduction of new
technologies such as ours is likely to provoke lawsuits from such companies. A
successful claim of infringement against us, our inability to obtain an
acceptable license from the holder of the patent or other right or our
inability to design around an asserted patent or other right could cause our
manufacturing partners to cease manufacturing the personal video recorder, our
retailers to stop selling the product or us to cease providing our service, or
all of the above, which would eliminate our ability to generate revenues.
On January 18, 2000, StarSight Telecast Inc., a subsidiary of Gemstar
International Group Limited filed a lawsuit against us in the U.S. District
Court for the Northern District of California alleging willful and deliberate
violation of U.S. Patent Number 4,706,121, entitled "TV Schedule System and
Process," held by StarSight. The complaint alleged that we infringed the patent
by, among other things, making, using, selling, offering to sell
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and/or importing our TV schedule systems and processes without a license from
StarSight. Starsight seeks unspecified monetary damages and an injunction
against our operations. The suit also seeks attorneys' fees and costs. We
believe that we have meritorious defenses against the suit and intend to
vigorously defend ourselves. On February 25, 2000, we counterclaimed against
StarSight, Gemstar Development Corporation and Gemstar International Group
Limited seeking damages for federal antitrust violations and state unfair
business practices claims, as well as declaratory relief of non-infringement,
invalidity and unenforceability with respect to the patent. We could be forced
to incur material expenses during this litigation, and in the event we were to
lose this suit, our business would be harmed.
On September 25, 2001, Pause Technology filed a complaint against TiVo in
the US District Court for the District of Massachusetts alleging willful and
deliberate infringement of US Reissue Patent No. 36,801, entitled "Time Delayed
Digital Video System Using Concurrent Recording and Playback." Pause Technology
seeks unspecified monetary damages as well as an injunction against our
operations. It also seeks attorneys' fees and costs. TiVo's answer was filed on
December 26, 2001.We believe we have meritorious defenses and intend to defend
this action vigorously; however, we could be forced to incur material expenses
in the litigation, and in the event there is an adverse outcome, our business
could be harmed.
On December 12, 2001, SONICblue Incorporated filed a lawsuit against TiVo in
the U.S. District Court for the Northern District of California, alleging
infringement of US Patent No. 6,324,338 entitled "Video Data Recorder with
Integrated Channel Guides." SONICblue seeks unspecified monetary damages as
well as an injunction against our operations. TiVo's answer was filed on
January 23, 2002. We believe that we have meritorious defenses against this
suit and intend to vigorously defend ourselves. However, we could be forced to
incur material expenses during this litigation and, in the event we were to
lose the lawsuit, our business could be harmed.
On January 23, 2002, we filed a separate lawsuit against SONICblue
Incorporated and its wholly owned subsidiary, ReplayTV, Inc., in the U.S.
District Court for the Northern District of California, alleging that we are
the owner of United States Patent No. 6,233,389, entitled "Multimedia Time
Warping System," and alleging further that SONICblue and ReplayTV have
willfully and deliberately infringed the patent by making, using, offering to
sell and/or selling within the United States digital video recording devices,
software and/or personal television services falling within the scope of the
patent. We have requested that the court enjoin SONICblue and ReplayTV from
further infringement of the patent and award us compensatory damages, treble
damages and attorneys' fees and costs. We could be forced to incur material
expenses during this litigation and, in the event we were to lose the lawsuit,
our business could be harmed.
On February 5, 2002, Sony Corporation notified us that Command Audio
Corporation had filed a complaint against Sony Electronics, Inc. on February 2,
2002 in the United States District Court for the Northern District of
California. The complaint alleges that, in connection with its sale of personal
video recorders, Sony infringes upon two patents owned by Command Audio (United
States Patent Nos. 5,590,195 ("Information Dissemination Using Various
Transmission Modes") and 6,330,334 ("Method and System for Information
Dissemination Using Television Signals")). The complaint seeks injunctive
relief, compensatory and treble damages and Command Audio's costs and expenses,
including reasonable attorneys' fees. Under the terms of our agreement with
Sony governing the distribution of certain personal video recorders that enable
the TiVo Service, we are required to indemnify Sony against any and all claims,
damages, liabilities, costs and expenses relating to claims that our technology
infringes upon intellectual property rights owned by third parties. We believe
Sony has meritorious defenses against this lawsuit; however, due to our
indemnification obligations, we could be forced to incur material expenses
during this litigation, and, if Sony were to lose this lawsuit, our business
could 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
48
television networks called the Advanced Television Copyright Coalition. Some of
those articles have indicated that the coalition is prepared to support
litigation and to explore legislative solutions unless the members of the
personal television industry agree to obtain license agreements for use of the
companies' programming. We have received letters from Time Warner Inc. and Fox
Television stating that these entities believe our personal television service
exploits copyrighted networks and programs without the necessary licenses and
business arrangements. Lawsuits or other actions taken by these types of
organizations or companies could make it more difficult for us to introduce new
services, delay widespread consumer acceptance of our products and services,
restrict our use of some television content, increase our costs and adversely
affect our business.
Our success depends on our ability to secure and protect patents, trademarks
and other proprietary rights.
Our success and ability to compete are substantially dependent upon our
internally developed technology. We rely on patent, trademark and copyright
law, trade secret protection and confidentiality or license agreements with our
employees, customers, partners and others to protect our proprietary rights.
However, the steps we take to protect our proprietary rights may be inadequate.
We have filed patent applications and provisional patent applications covering
substantially all of the technology used to deliver the TiVo Service and its
features and functionality. To date, several of these patents have been
granted, and we cannot assure you that any additional patents will ever be
granted, that any issued patents will protect our intellectual property or that
third parties will not challenge any issued patents. In addition, other parties
may independently develop similar or competing technologies designed around any
patents that may be issued to us. Our failure to secure and protect our
proprietary rights could have a material adverse effect on our business.
Laws or regulations that govern the television industry and the delivery of
programming could expose us to legal action if we fail to comply or could
require us to change our business.
Personal television and the delivery of television programming through the
TiVo Service and a personal video recorder represents a new category in the
television and home entertainment industries. As such, it is difficult to
predict what laws or regulations will govern our business. Changes in the
regulatory climate, the enactment of new legislation or the enforcement or
interpretation of existing laws could expose us to additional costs and
expenses and could require changes to our business. For example, copyright laws
could be applied to restrict the capture of television programming, which would
adversely affect our business. It is unknown whether existing laws and
regulations will apply to the personal television market. Therefore, it is
difficult to anticipate the impact of current or future laws and regulations on
our business.
The Federal Communications Commission has broad jurisdiction over the
telecommunications and cable industries. The majority of FCC regulations,
while not directly affecting us, do affect many of the strategic partners on
whom we substantially rely for the marketing and distribution of the personal
video recorder and the TiVo Service. As such, the indirect effect of these
regulations may adversely affect our business. In addition, the FCC could
promulgate new regulations, or interpret existing regulations in a manner that
would cause us to incur significant compliance costs or force us to alter the
features or functionality of the TiVo Service.
We need to safeguard the security and privacy of our subscribers'
confidential data, and any inability to do so may harm our reputation and brand
and expose us to legal action.
The personal video recorder collects and stores viewer preferences and other
data that many of our subscribers consider confidential. Any compromise or
breach of the encryption and other security measures that we use to protect
this data could harm our reputation and expose us to potential liability.
Advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments could compromise or breach the
systems we use to protect our subscribers' confidential information. We may be
required to make significant expenditures to protect against security breaches
or to remedy problems caused by any breaches.
49
Uncertainty in the marketplace regarding the use of data from subscribers
could reduce demand for the TiVo Service and result in increased expenses.
Consumers may be concerned about the use of viewing information gathered by
the TiVo Service and personal video recorder. Currently, we gather anonymous
information about our subscribers' viewing choices while using the TiVo
Service, unless a subscriber affirmatively consents to the collection of
personally identifiable viewing information. This anonymous viewing information
does not identify the individual subscriber. Privacy concerns, however, could
create uncertainty in the marketplace for personal television and our products
and services. Changes in our privacy policy could reduce demand for the TiVo
Service, increase the cost of doing business as a result of litigation costs or
increased service delivery costs, or otherwise harm our reputation and business.
In the future, our revenues and operating results may fluctuate
significantly, which may adversely affect the market price of our common stock.
We expect our revenues and operating results to fluctuate significantly due
to a number of factors, many of which are outside of our control. Therefore,
you should not rely on period-to-period comparisons of results of operations as
an indication of our future performance. It is possible that in some future
periods our operating results may fall below the expectations of market
analysts and investors. In this event, the market price of our common stock
would likely fall.
Factors that may affect our quarterly operating results include:
. demand for personal video recorders and the TiVo Service;
. the timing and introduction of new services and features on the TiVo
Service;
. seasonality and other consumer and advertising trends;
. changes in revenue sharing arrangements with our strategic partners;
. entering into new or terminating existing strategic partnerships;
. changes in the subsidy payments we make to certain strategic partners;
. changes in our pricing policies, the pricing policies of our
competitors and general pricing trends in the consumer electronics
market;
. loss of subscribers to the TiVo Service; and
. general economic conditions.
Because our expenses precede associated revenues, unanticipated shortfalls
in revenue could adversely affect our results of operations for any given
period and cause the market price of our common stock to fall.
Seasonal trends may cause our quarterly operating results to fluctuate and
our inability to forecast these trends may adversely affect the market price of
our common stock.
Consumer electronic product sales have traditionally been much higher during
the holiday shopping season than during other times of the year. Although
predicting consumer demand for our products is very difficult, we have
experienced that sales of personal video recorders and new subscriptions to the
TiVo Service have been 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,
50
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 or at all. If we cannot raise necessary
additional capital on acceptable terms, we may not be able to develop or
enhance our products and services, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements.
If additional capital is raised through the issuance of equity securities,
the percentage ownership of our existing stockholders will decline,
stockholders may experience dilution in net book value per share, or these
equity securities may have rights, preferences or privileges senior to those of
the holders of our common stock. Any debt financing, if available, may involve
covenants limiting, or restricting our operations or future opportunities.
We have agreed to subsidize the cost of manufacturing personal video
recorders, which may adversely affect our operating results and ability to
achieve profitability.
We have entered into agreements with our consumer electronic manufacturing
partners to manufacture the personal video recorder that enables the TiVo
Service. Although we intend to reduce subsidy payments in the future, in
certain agreements we have agreed to pay our manufacturing partners a per-unit
subsidy for each personal video recorder that they manufacture and sell. The
amount of the payments can vary depending upon the manufacturing costs and
selling prices. In addition, in the event our manufacturing partners are unable
to manufacture the personal video recorders at the costs currently estimated or
if selling prices are less than anticipated, we may owe additional amounts to
them, which could adversely affect our operating results. We are obligated to
pay a portion of the subsidy when the personal video recorder is shipped, and
we will not receive any revenues related to the unit until the unit is sold and
the purchaser activates the TiVo Service. We may make additional subsidy
payments in the future to consumer electronic and other manufacturers in an
effort to maintain a commercially viable retail price for the personal video
recorders and other devices that enable the TiVo Service.
The lifetime subscriptions to the TiVo Service that we currently offer
commit us to providing services for an indefinite period. The revenue we
generate from these subscriptions may be insufficient to cover future costs.
We currently offer product lifetime subscriptions that commit us to provide
service for as long as the personal video recorder is in service. We receive
the lifetime subscription fee for the TiVo Service in advance and amortize it
as subscription revenue over four years, which is our estimate of the service
life of the personal video recorder. If these lifetime subscribers use the
personal video recorder for longer than anticipated, we will incur costs
without a corresponding revenue stream and therefore will be required to fund
ongoing costs of service from other sources.
If we lose key management personnel, we may not be able to successfully
operate our business.
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.
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If there is an adverse outcome in either class action litigation that has
been filed against TiVo, our business may be harmed.
On June 12, 2001, a securities class action lawsuit in which we and certain
of our officers and directors are named as defendants was filed in the United
States District Court for the Southern District of New York. In addition to the
TiVo defendants, this action, which is captioned Wercberger v. TiVo et al.,
also names several of the underwriters involved in our initial public offering
as defendants. This class action is brought on behalf of a purported class of
purchasers of our common stock from September 30, 1999, the time of our initial
public offering, through December 6, 2000. The central allegation in this
action is that the underwriters in our initial public offering solicited and
received undisclosed commissions from, and entered into undisclosed
arrangements with, certain investors who purchased our common stock in the
initial public offering and the after-market. The complaint also alleges that
the TiVo defendants violated the federal securities laws by failing to disclose
in the initial public offering prospectus that the underwriters had engaged in
these allegedly undisclosed arrangements. More than 300 issuers have been named
in similar lawsuits. The TiVo defendants' time to respond to the complaint has
not yet expired, and it is likely that this response will not be due for
several months, after certain procedural issues are resolved. At the
appropriate time, the TiVo defendants intend to move to dismiss the
consolidated complaint for failure to state a claim. We believe that the
defendants have meritorious defenses and intend to defend this action
vigorously; however, we could be forced to incur material expenses in the
litigation, and in the event there is an adverse outcome, our business could be
harmed.
On August 13, 2001, Alan Federbush, an individual resident in the state of
New York, and Mitchell Brink, an individual resident in the state of Illinois,
filed, on behalf of themselves and all similarly situated purchasers of Sony or
Philips digital television recorders and the TiVo Service, a class action
complaint against us in the Superior Court of the State of California, Santa
Clara County, alleging violation of California's Consumers' Legal Remedies Act,
California's Unfair Practices Act, and fraudulent concealment. The complaint
states that Mr. Federbush and Mr. Brink each experienced problems with the
modem contained in the digital television recorders. The complaint alleges,
among other things, that we knew or had reason to know of these malfunctions
and therefore misrepresented or failed to disclose material information about
the digital television recorders to consumers. The complaint seeks an award of
actual damages, as well as unspecified punitive damages, interest, attorneys'
fees and other costs. The complaint additionally seeks broad equitable relief,
requesting that we be enjoined from continuing the practices described in the
complaint and engaging in false and misleading advertising regarding the
digital television recorders. We filed our answer to the complaint on October
19, 2001. Discovery, through which we would seek to investigate the plaintiff's
claims, has not commenced. Based on the information available, we are unable to
form a conclusion regarding the amount, materiality or range of potential loss,
if any, which might result if the outcome of this matter were unfavorable. We
believe we have meritorious defenses and intend to defend this action
vigorously; however, we could be forced to incur material expenses in the
litigation, and in the event there is an adverse outcome, our business could be
harmed.
We expect to experience volatility in our stock price.
The market price of our common stock is highly volatile. Since our initial
public offering in September 1999 through March 18, 2002, our common stock has
closed between $71.50 per share and $3.01 per share, closing at $5.36 on March
18, 2002. The market price of our common stock may be subject to significant
fluctuations in response to, among other things, the factors discussed in this
section and the following factors:
. Changes in estimates of our financial performance or changes in
recommendations by securities analysts;
. Our failure to meet the expectations of securities analysts or investors;
. Release of new or enhanced products or introduction of new marketing
initiatives by us or our competitors;
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. Announcements by us or our competitors of the creation, developments
under or termination of significant strategic partnerships, joint
ventures, significant contracts or acquisitions;
. Fluctuations in the market prices generally for technology-related stocks;
. Fluctuations in general economic conditions;
. Fluctuations in interest rates;
. Market conditions affecting the television and home entertainment
industry;
. Fluctuations in operating results; and
. Additions or departures of key personnel.
The stock market has from time to time experienced extreme price and volume
fluctuations, which have particularly affected the market prices for emerging
companies, and which have often been unrelated to their operating performance.
These broad market fluctuations may adversely affect the market price of our
common stock.
Our Certificate of Incorporation, Bylaws, Rights Agreement and Delaware law
could discourage a third party from acquiring us and consequently decrease the
market value of our common stock.
We may become the subject of an unsolicited attempted takeover of our
company. Although an unsolicited takeover could be in the best interests of our
stockholders, certain provisions of Delaware law, our organizational documents
and our Rights Agreement could be impediments to such a takeover.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a business combination with
an interested stockholder for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. Our Amended and
Restated Certificate of Incorporation and Bylaws also require that any action
required or permitted to be taken by our stockholders must be effected at a
duly called annual or special meeting of the stockholders and may not be
effected by a consent in writing. In addition, special meetings of our
stockholders may be called only by our board of directors, the chairman of the
board or the chief executive officer. Our Amended and Restated Certificate of
Incorporation and Bylaws also provide that directors may be removed only for
cause by a vote of a majority of the stockholders and that vacancies on the
board of directors created either by resignation, death, disqualification,
removal or by an increase in the size of the board of directors may be filled
by a majority of the directors in office, although less than a quorum. Our
Amended and Restated Certificate of Incorporation also provides for a
classified board of directors and specifies that the authorized number of
directors may be changed only by resolution of the board of directors.
On January 9, 2001, our board of directors adopted a Rights Agreement. Each
share of our common stock has attached to it a right to purchase one
one-hundredth of a share of our Series B Junior Participating Preferred Stock
at a price of $60 per one one-hundredth of a preferred share in the event that
the rights become exercisable. The rights become exercisable upon the earlier
to occur of (i) ten days following a public announcement that a person or group
of affiliated or associated persons has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of our common stock, subject to
limited exceptions, or (ii) ten business days (or such later date as may be
determined by action of our board of directors prior to such time as any person
or group of affiliated persons becomes an acquiring person as described in the
preceding clause) following the commencement or announcement of an intention to
make a tender offer or exchange offer the consummation of which would result in
the beneficial ownership by a person or group of 15% or more of our common
stock, subject to limited exceptions.
53
These provisions of Delaware law, our Amended and Restated Certificate of
Incorporation and Bylaws and our Rights Agreement could make it more difficult
for us to be acquired by another company, even if our acquisition is in the
best interests of our stockholders. Any delay or prevention of a change of
control or change in management could cause the market price of our common
stock to decline.
The nature of some of our strategic relationships may restrict our ability
to operate freely in the future.
From time to time, we may engage in discussions with other parties
concerning strategic relationships, which may include equity investments by
such parties in our company. We currently have such relationships with a number
of our strategic partners, including AOL, DIRECTV, Sony and Philips. While we
believe that such relationships have enhanced our ability to finance and
develop our business model, the terms and conditions of such relationships may
place some restrictions on our freedom to operate in the future.
If the conversion price on the notes were reduced, it would result in
dilution to the existing holders of our common stock.
The conversion price on the notes will be reduced on August 23, 2002 if the
conversion price is greater than the average closing price per share of our
common stock for the 10 consecutive trading days preceding August 23, 2002. In
addition, the conversion price on the notes may be reduced if we issue common
stock or common stock equivalents at an issuance price (or with respect to
common stock equivalents, such additional common stock is issued with a
conversion or exercise price per share less than the conversion price of the
notes then in effect immediately prior to the issuance) that is lower than the
conversion price then in effect immediately prior to the issuance. If the
conversion price on the notes is reduced as a result of these adjustments,
holders of the notes will receive a greater number of shares of our common
stock in connection with the conversion of the notes, thereby resulting in
dilution to the existing holders of our common stock.
If shares of common stock are purchased in a transaction under the February
2002 common stock purchase agreement with Acqua Wellington North American
Equities Fund, Ltd., described above in Item 7 under the heading "Liquidity and
Capital Resources," existing common stockholders will experience immediate
dilution and, as a result, our stock price may go down.
We have entered into a common stock purchase agreement with Acqua Wellington
North American Equities Fund, Ltd. pursuant to which Acqua Wellington may
purchase shares of our common stock at a discount between 3.0% and 5.4%, unless
otherwise agreed to by us and Acqua Wellington. As a result, our existing
common stockholders will experience immediate dilution upon the purchase of any
shares of our common stock by Acqua Wellington. The purchase agreement with
Acqua Wellington provides that, at our request, Acqua Wellington will purchase
a certain dollar amount of shares, with the exact number of shares to be
determined based on the daily volume weighted average price of our common stock
over the draw down period for such purchase. As a result, if the per share
market price of our common stock declines over the draw-down period, Acqua
Wellington will receive a greater number of shares for its purchase price,
thereby resulting in further dilution to our stockholders and potential
downward pressure on the price of our stock.
Risks Pertaining to Arthur Andersen--Our access to capital markets and timely
financial reporting may be impaired if Arthur Andersen is unable to perform
required audit-related services.
On March 14, 2002, our independent public accountant, Arthur Andersen, was
indicted on federal obstruction of justice charges arising from the
government's investigation of Enron. Arthur Andersen has indicated that it
intends to contest vigorously the indictment. The Securities and Exchange
Commission has said that it will continue accepting financial statements
audited by Arthur Andersen, and interim financial statements reviewed by it, so
long as Arthur Andersen is able to make certain representations to its clients.
Our access to the capital markets and our ability to make timely Securities and
Exchange Commission filings could be impaired if
54
the Securities and Exchange Commission ceases accepting financial statements
audited by Arthur Andersen, if Arthur Andersen becomes unable to make the
require representations to us or if for any other reason Arthur Andersen is
unable to perform required audit-related services for us. As of the date
hereof, our Audit Committee has not made any determination of which independent
public accountant we will retain to perform our audit for the year ending
January 31, 2003.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio and conduct transactions in U.S. dollars. Our
investment portfolio only includes highly liquid instruments with original
maturities of less than one year.
We are subject to fluctuating interest rates that may impact, adversely or
otherwise, our results of operations or cash flows for our cash and cash
equivalents and our short-term investments.
The table below presents principal amounts and related weighted average
interest rates as of January 31, 2002 for our cash and cash equivalents. We had
no short-term investments at this time.
Cash and cash equivalents $52,327,000
Average interest rate. 3.57%
In future quarters the price of our stock may reduce the conversion price on
the convertible notes "Factors That May Affect Future Operating Results--If the
conversion price on the notes were reduced, it would result in dilution to the
existing holders of our common stock." In addition, a reduced conversion price
on the convertible notes would increase the beneficial conversion calculation,
thus increasing our interest expense.
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.
55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and notes thereto appear on
pages 58 to 91 of this Annual Report on Form 10-K. The unaudited quarterly
results of our consolidated operations for our two most recent fiscal years are
incorporated herein by reference under Item 6. "Selected Financial Data."
Index to Financial Statements
Report of Independent Public Accountants....... 57
Consolidated Balance Sheets.................... 58
Consolidated Statements of Operations.......... 59
Consolidated Statements of Stockholders' Equity 60
Consolidated Statements of Cash Flows.......... 63
Notes to Consolidated Financial Statements..... 65
56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of TiVo Inc.:
We have audited the accompanying consolidated balance sheets of TiVo Inc. (a
Delaware corporation) as of January 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year ended January 31, 2002, the one-month period ended January
31, 2001, and for each of the two years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TiVo Inc.
as of January 31, 2002 and 2001, and the results of its operations and its cash
flows for the year ended January 31, 2002, the one-month period ended January
31, 2001 and for each of the two years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
San Francisco, California
March 28, 2002
57
TIVO INC.
CONSOLIDATED BALANCE SHEETS
January 31, January 31,
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................................... $ 52,327,000 $124,474,000
Restricted cash............................................... 51,735,000 50,104,000
Accounts receivable, net of allowance for doubtful
accounts of $23,000 and $201,000............................. 2,185,000 1,834,000
Accounts receivable--related parties, net of allowance
for doubtful accounts of zero and $62,000.................... 6,687,000 4,816,000
Prepaid expenses and other.................................... 5,384,000 6,693,000
Prepaid expenses and other--related parties................... 7,541,000 1,698,000
------------ ------------
Total current assets........................................ 125,859,000 189,619,000
LONG-TERM ASSETS
Property and equipment, net of accumulated depreciation....... 18,146,000 21,924,000
Prepaid expenses and other.................................... 7,762,000 --
Prepaid expenses and other--related parties................... 4,882,000 --
------------ ------------
Total long-term assets...................................... 30,790,000 21,924,000
------------ ------------
Total assets............................................. $156,649,000 $211,543,000
============ ============
LIABILITIES, CURRENT REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND
STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
CURRENT LIABILITIES
Accounts payable.............................................. $ 7,003,000 $ 21,971,000
Accrued liabilities........................................... 12,618,000 19,863,000
Accrued liabilities--related parties.......................... 26,640,000 49,839,000
Deferred interest income on restricted cash................... 3,735,000 2,104,000
Notes payable--related parties................................ 2,262,000 --
Deferred revenue.............................................. 12,786,000 6,210,000
Deferred revenue--related parties............................. 11,427,000 --
Current portion of obligations under capital lease............ 536,000 796,000
------------ ------------
Total current liabilities................................... 77,007,000 100,783,000
CURRENT REDEEMABLE CONVERTIBLE PREFERRED STOCK
Series A Redeemable convertible preferred stock, par
value $0.001:
Issued and outstanding shares 1,600,000...................... $ 2,000 $ 2,000
Additional paid-in capital.................................... 46,553,000 46,553,000
------------ ------------
Total current redeemable convertible preferred stock........ 46,555,000 46,555,000
------------ ------------
Total current liabilities and current redeemable
convertible preferred stock............................ 123,562,000 147,338,000
LIABILITIES
LONG-TERM LIABILITIES
Long-term portion of obligations under capital lease.......... $ 2,000 $ 538,000
Convertible notes payable..................................... 24,280,000 --
Convertible notes payable--related parties.................... 12,453,000 --
Deferred revenue.............................................. 23,552,000 12,113,000
Other......................................................... 5,021,000 1,217,000
------------ ------------
Total long-term liabilities................................. 65,308,000 13,868,000
------------ ------------
Total liabilities and current redeemable
convertible preferred stock............................ $188,870,000 $161,206,000
============ ============
STOCKHOLDERS' EQUITY (DEFICIT)
Series A Convertible preferred stock, par value
$0.001: Authorized shares are 10,000,000 Issued and
outstanding shares are 1,111,861.............................. $ 1,000 $ 1,000
Common stock, par value $0.001: Authorized shares are
150,000,000 Issued and outstanding shares are
47,411,355 and 43,430,023..................................... 47,000 43,000
Additional paid-in capital..................................... 444,502,000 406,294,000
Deferred compensation.......................................... (1,099,000) (2,786,000)
Prepaid marketing expenses..................................... (14,183,000) (48,458,000)
Note receivable................................................ (1,568,000) (2,509,000)
Accumulated deficit............................................ (459,921,000) (302,248,000)
------------- -------------
Total stockholders' equity (deficit)......................... (32,221,000) 50,337,000
------------- -------------
Total liabilities, current redeemable convertible
preferred stock and stockholders' equity (deficit)...... $ 156,649,000 $ 211,543,000
============= =============
The accompanying notes are an integral part of these consolidated statements.
58
TIVO INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
One-Month One-Month
Year Ended Ended Ended Year Ended Year Ended
January 31, January 31, January 31, December 31, December 31,
2002 2001 2000 2000 1999
------------- ------------ ----------- ------------- ------------
(unaudited)
Revenues
Revenues................................ $ 19,297,000 $ 989,000 $ 134,000 $ 3,571,000 $ 223,000
Revenues--related parties............... 100,000 -- -- -- --
------------- ------------ ----------- ------------- ------------
Total revenues.............................. 19,397,000 989,000 134,000 3,571,000 223,000
Costs and expenses
Cost of revenues (excludes ($35,000),
$9,000, $16,000, $141,000 and
$116,000 of amortization of stock-
based compensation).................... 19,888,000 1,710,000 1,204,000 18,382,000 4,067,000
Cost of revenues--related parties....... 61,000 -- -- -- --
Research and development (excludes
$346,000, $37,000, $89,000,
$791,000 and $431,000 of
amortization of stock-based
compensation).......................... 26,859,000 2,507,000 1,694,000 24,279,000 9,727,000
Sales and marketing (excludes
$556,000, $60,000, $78,000,
$992,000 and $176,000 of
amortization of stock-based
compensation).......................... 28,509,000 7,884,000 3,532,000 102,091,000 24,502,000
Sales and marketing--related parties.... 75,832,000 6,632,000 2,225,000 53,604,000 15,172,000
General and administrative (excludes
$380,000, $69,000, $138,000,
$1,191,000 and $807,000 of
amortization of stock-based
compensation).......................... 18,495,000 1,326,000 614,000 14,346,000 7,027,000
Stock-based compensation................ 1,247,000 175,000 321,000 3,115,000 1,530,000
Other operating expense, net............ -- -- -- -- 7,210,000
------------- ------------ ----------- ------------- ------------
Loss from operations........................ (151,494,000) (19,245,000) (9,456,000) (212,246,000) (69,012,000)
Interest income......................... 2,163,000 672,000 721,000 7,928,000 2,913,000
Interest expense and other.............. (2,681,000) (17,000) (29,000) (522,000) (466,000)
Interest expense--related parties....... (1,643,000) -- -- -- --
------------- ------------ ----------- ------------- ------------
Loss before taxes........................... (153,655,000) (18,590,000) (8,764,000) (204,840,000) (66,565,000)
Provision for income taxes.................. (1,000,000) -- -- -- --
------------- ------------ ----------- ------------- ------------
Net loss.................................... (154,655,000) (18,590,000) (8,764,000) (204,840,000) (66,565,000)
Less: Series A redeemable convertible
preferred stock dividend................... (3,018,000) (423,000) -- (1,514,000) --
------------- ------------ ----------- ------------- ------------
Net loss attributable to common
stockholders............................... $(157,673,000) $(19,013,000) $(8,764,000) $(206,354,000) $(66,565,000)
============= ============ =========== ============= ============
Net loss per common share basic and
diluted.................................... $ (3.67) $ (0.47) $ (0.25) $ (5.55) $ (5.49)
============= ============ =========== ============= ============
Weighted average common shares
outstanding--basic and diluted............. 42,956,310 40,850,353 35,274,071 37,175,493 12,128,560
============= ============ =========== ============= ============
The accompanying notes are an integral part of these consolidated statements.
59
TIVO INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible
Preferred Stock Common Stock Additional
-------------------------- ------------------- Paid-In Deferred
Shares Amount Shares Amount Capital Compensation
----------- ------------- ---------- ------- ------------ ------------
BALANCE, DECEMBER 31, 1998.................. 11,174,427 $ 12,242,000 5,216,937 $ 5,000 $ 190,000 $ --
Issuance of Series D preferred stock at
$3.68 per share for cash................. 1,358,695 4,973,000 -- -- -- --
Issuance of Series E preferred stock at
$7.40 per share for cash................. 270,270 1,982,000 -- -- -- --
Issuance of Series F preferred stock at
$7.40 per share for cash................. 405,405 2,960,000 -- -- -- --
Issuance of Series G preferred stock at
$7.40 per share for cash................. 1,013,513 7,431,000 -- -- -- --
Issuance of Series H preferred stock at
$7.40 per share for cash................. 1,351,351 9,992,000 -- -- -- --
Issuance of Series I preferred stock at
$10.41 per share for cash................ 3,121,994 31,494,000 -- -- -- --
Issuance of Series J preferred stock at
$10.41 per share for cash................ 3,123,789 31,740,000 -- -- -- --
Conversion of preferred stock to
common stock............................. (21,819,444) (102,814,000) 21,819,444 22,000 102,792,000 --
Issuance of preferred stock warrants for
services................................. -- -- -- -- 12,828,000 --
Issuance of common stock through
initial public offering, net of issuance
costs.................................... -- -- 6,166,875 6,000 90,249,000 --
Issuance of common stock for marketing
services................................. -- -- 1,852,329 2,000 12,038,000 --
Issuance of common stock for marketing
services and note receivable............. -- -- 1,128,867 1,000 7,336,000 --
Issuance of common stock warrants for
services................................. -- -- -- -- 498,000 --
Exercise of stock options for common
stock.................................... -- -- 525,064 1,000 1,191,000 --
Exercise of warrants for common stock..... -- -- 1,125,234 1,000 (1,000) --
Common stock exchanged for services....... -- -- 137,983 -- 605,000 --
Common stock repurchases.................. -- -- (226,342) -- (28,000) --
Amortization of prepaid marketing
expenses................................. -- -- -- -- -- --
Amortization of warrants for services..... -- -- -- -- 25,000 --
Recognition of deferred compensation...... -- -- -- -- 7,700,000 (7,700,000)
Stock-based compensation expense.......... -- -- -- -- -- 1,530,000
Net loss.................................. -- -- -- -- -- --
----------- ------------- ---------- ------- ------------ -----------
Prepaid
Marketing Note Retained
Expense Receivable Deficit Total
------------ ----------- ------------ ------------
BALANCE, DECEMBER 31, 1998.................. $ -- $ -- $(10,316,000) $ 2,121,000
Issuance of Series D preferred stock at
$3.68 per share for cash................. -- -- -- 4,973,000
Issuance of Series E preferred stock at
$7.40 per share for cash................. -- -- -- 1,982,000
Issuance of Series F preferred stock at
$7.40 per share for cash................. -- -- -- 2,960,000
Issuance of Series G preferred stock at
$7.40 per share for cash................. -- -- -- 7,431,000
Issuance of Series H preferred stock at
$7.40 per share for cash................. -- -- -- 9,992,000
Issuance of Series I preferred stock at
$10.41 per share for cash................ -- -- -- 31,494,000
Issuance of Series J preferred stock at
$10.41 per share for cash................ -- -- -- 31,740,000
Conversion of preferred stock to
common stock............................. -- -- -- --
Issuance of preferred stock warrants for
services................................. (12,454,000) -- -- 374,000
Issuance of common stock through
initial public offering, net of issuance
costs.................................... -- -- -- 90,255,000
Issuance of common stock for marketing
services................................. (12,040,000) -- -- --
Issuance of common stock for marketing
services and note receivable............. (4,515,000) (2,822,000) -- --
Issuance of common stock warrants for
services................................. -- -- -- 498,000
Exercise of stock options for common
stock.................................... -- -- -- 1,192,000
Exercise of warrants for common stock..... -- -- -- --
Common stock exchanged for services....... -- -- -- 605,000
Common stock repurchases.................. -- -- -- (28,000)
Amortization of prepaid marketing
expenses................................. 12,668,000 -- -- 12,668,000
Amortization of warrants for services..... -- -- -- 25,000
Recognition of deferred compensation...... -- -- -- --
Stock-based compensation expense.......... -- -- -- 1,530,000
Net loss.................................. -- -- (66,565,000) (66,565,000)
------------ ----------- ------------ ------------
60
TIVO INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
Convertible
Preferred Stock Common Stock Additional Prepaid
---------------- ------------------- Paid-In Deferred Marketing
Shares Amount Shares Amount Capital Compensation Expense
--------- ------ ---------- ------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999....................... -- $ -- 37,746,391 $38,000 $235,423,000 $(6,170,000) $(16,341,000)
Series A redeemable convertible preferred
stock dividend, $0.56 per share............... -- -- -- -- -- -- --
Issuance of common stock for cash and
prepaid marketing............................. -- -- 4,327,833 4,000 99,996,000 -- (8,500,000)
Issuance costs for common stock................ -- -- -- -- (3,050,000) -- --
Recognition of marketing expenses.............. -- -- -- -- -- -- 3,888,000
Issuance of warrants for marketing expenses.... -- -- -- -- 246,000 -- --
Issuance of common stock warrants for
prepaid marketing expenses.................... -- -- -- -- 15,364,000 -- (15,364,000)
Issuance of common stock--employee stock
purchase plan................................. -- -- 177,907 -- 2,185,000 -- --
Exercise of stock options for common stock..... -- -- 395,465 -- 1,110,000 -- --
Common stock repurchases....................... -- -- (50,066) -- (4,000) -- --
Reversal of deferred compensation.............. -- -- -- -- (83,000) 83,000 --
Stock-based compensation expense............... -- -- -- -- -- 3,115,000 --
Amortization of prepaid marketing expenses..... -- -- -- -- -- -- 7,160,000
Amortization of note receivable................ -- -- -- -- -- -- --
Amortization of warrants....................... -- -- -- -- (36,000) -- 1,607,000
Net loss....................................... -- -- -- -- -- -- --
--------- ------ ---------- ------- ------------ ----------- ------------
BALANCE, DECEMBER 31, 2000....................... -- $ -- 42,597,530 $42,000 $351,151,000 $(2,972,000) $(27,550,000)
Series A redeemable convertible preferred
stock dividend declared, $0.16 per share...... -- -- -- -- -- -- --
Removal of redemption feature--Series A
convertible preferred stock................... 1,111,861 1,000 -- -- 32,351,000 -- --
Removal of redemption feature--common
stock......................................... -- -- 806,889 1,000 18,082,000 -- --
Exercise of stock options for common stock..... -- -- 25,604 -- 21,000 -- --
Issuance of common stock warrants for
marketing expenses............................ -- -- -- -- 76,000 -- --
Repricing of common stock warrants for
prepaid marketing expenses and other
consideration................................. -- -- -- -- 4,874,000 -- (4,874,000)
Recognition of prepaid marketing expenses...... -- -- -- -- -- -- (18,502,000)
Amortization of value of warrants.............. -- -- -- -- -- -- 453,000
Amortization of prepaid marketing expenses..... -- -- -- -- -- -- 627,000
Recognition of marketing expenses.............. -- -- -- -- -- -- 1,388,000
Reversal of deferred compensation.............. -- -- -- -- (11,000) 11,000 --
Recognition of stock-based compensation
expense....................................... -- -- -- -- -- 175,000 --
Amortization of note receivable................ -- -- -- -- -- -- --
Issuance costs for convertible preferred stock
and common stock.............................. -- -- -- -- (250,000) -- --
Net loss....................................... -- -- -- -- -- -- --
--------- ------ ---------- ------- ------------ ----------- ------------
Note Retained
Receivable Deficit Total
----------- ------------- -------------
BALANCE, DECEMBER 31, 1999....................... $(2,822,000) $ (76,881,000) $(133,247,000)
Series A redeemable convertible preferred
stock dividend, $0.56 per share............... -- (1,514,000) (1,514,000)
Issuance of common stock for cash and
prepaid marketing............................. -- -- 91,500,000
Issuance costs for common stock................ -- -- (3,050,000)
Recognition of marketing expenses.............. -- -- 3,888,000
Issuance of warrants for marketing expenses.... -- -- 246,000
Issuance of common stock warrants for
prepaid marketing expenses.................... -- -- --
Issuance of common stock--employee stock
purchase plan................................. -- -- 2,185,000
Exercise of stock options for common stock..... -- -- 1,110,000
Common stock repurchases....................... -- -- (4,000)
Reversal of deferred compensation.............. -- -- --
Stock-based compensation expense............... -- -- 3,115,000
Amortization of prepaid marketing expenses..... -- -- 7,160,000
Amortization of note receivable................ 235,000 -- 235,000
Amortization of warrants....................... -- -- 1,571,000
Net loss....................................... -- (204,840,000) (204,840,000)
----------- ------------- -------------
BALANCE, DECEMBER 31, 2000....................... $(2,587,000) $(283,235,000) $ 34,849,000
Series A redeemable convertible preferred
stock dividend declared, $0.16 per share...... -- (423,000) (423,000)
Removal of redemption feature--Series A
convertible preferred stock................... -- -- 32,352,000
Removal of redemption feature--common
stock......................................... -- -- 18,083,000
Exercise of stock options for common stock..... -- -- 21,000
Issuance of common stock warrants for
marketing expenses............................ -- -- 76,000
Repricing of common stock warrants for
prepaid marketing expenses and other
consideration................................. -- -- --
Recognition of prepaid marketing expenses...... (18,502,000)
Amortization of value of warrants.............. -- -- 453,000
Amortization of prepaid marketing expenses..... -- -- 627,000
Recognition of marketing expenses.............. -- -- 1,388,000
Reversal of deferred compensation.............. -- -- --
Recognition of stock-based compensation
expense....................................... -- -- 175,000
Amortization of note receivable................ 78,000 -- 78,000
Issuance costs for convertible preferred stock
and common stock.............................. -- -- (250,000)
Net loss....................................... -- (18,590,000) (18,590,000)
----------- ------------- -------------
61
TIVO INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
Convertible
Preferred Stock Common Stock Additional Prepaid
---------------- ------------------- Paid-In Deferred Marketing
Shares Amount Shares Amount Capital Compensation Expense
--------- ------ ---------- ------- ------------ ------------ ------------
BALANCE, JANUARY 31, 2001........................ 1,111,861 $1,000 43,430,023 $43,000 $406,294,000 $(2,786,000) $(48,458,000)
Series A redeemable convertible preferred
stock dividend declared, $1.11 per share...... -- -- -- -- -- -- --
Issuance of common stock for cash, net of
issuance costs................................ -- -- 2,147,239 2,000 13,823,000 -- --
Adjustment to reduce financing expenses
accrued in prior year......................... -- -- -- -- 205,000 -- --
Recognition of marketing expenses--related
party......................................... -- -- -- -- -- -- 21,726,000
Issuance of common stock warrants for
marketing expenses............................ -- -- -- -- 85,000 -- --
Issuance of common stock--employee stock
purchase plan................................. -- -- 313,482 -- 1,206,000 -- --
Exercise of stock options for common stock..... -- -- 202,073 -- 503,000 -- --
Common stock repurchases....................... -- -- (57,608) -- (61,000) -- --
Reversal of deferred compensation.............. -- -- -- -- (440,000) 440,000 --
Recognition of stock-based compensation
expense....................................... -- -- -- -- -- 1,247,000 --
Amortization of prepaid marketing expenses..... -- -- -- -- -- -- 5,351,000
Amortization of note receivable................ -- -- -- -- -- -- --
Amortization of value of warrants--related
parties....................................... -- -- -- -- -- -- 7,198,000
Conversion of notes payable.................... -- -- 1,376,146 2,000 6,169,000 -- --
Issuance costs for common stock issued for
conversion of notes payable................... -- -- -- -- (1,764,000) -- --
Issuance of warrants to convertible
noteholders................................... -- -- -- -- 9,608,000 -- --
Issuance of warrants to investment bankers for
convertible notes payable..................... -- -- -- -- 552,000 -- --
Amount of beneficial conversion of convertible
notes payable................................. -- -- -- -- 8,322,000 -- --
Net loss....................................... -- -- -- -- -- -- --
--------- ------ ---------- ------- ------------ ----------- ------------
BALANCE, JANUARY 31, 2002........................ 1,111,861 $1,000 47,411,355 $47,000 $444,502,000 $(1,099,000) $(14,183,000)
========= ====== ========== ======= ============ =========== ============
Note Retained
Receivable Deficit Total
----------- ------------- -------------
BALANCE, JANUARY 31, 2001........................ $(2,509,000) $(302,248,000) $ 50,337,000
Series A redeemable convertible preferred
stock dividend declared, $1.11 per share...... -- (3,018,000) (3,018,000)
Issuance of common stock for cash, net of
issuance costs................................ -- -- 13,825,000
Adjustment to reduce financing expenses
accrued in prior year......................... -- -- 205,000
Recognition of marketing expenses--related
party......................................... -- -- 21,726,000
Issuance of common stock warrants for
marketing expenses............................ -- -- 85,000
Issuance of common stock--employee stock
purchase plan................................. -- -- 1,206,000
Exercise of stock options for common stock..... -- -- 503,000
Common stock repurchases....................... -- -- (61,000)
Reversal of deferred compensation.............. -- -- --
Recognition of stock-based compensation
expense....................................... -- -- 1,247,000
Amortization of prepaid marketing expenses..... -- -- 5,351,000
Amortization of note receivable................ 941,000 -- 941,000
Amortization of value of warrants--related
parties....................................... -- -- 7,198,000
Conversion of notes payable.................... -- -- 6,171,000
Issuance costs for common stock issued for
conversion of notes payable................... -- -- (1,764,000)
Issuance of warrants to convertible
noteholders................................... -- -- 9,608,000
Issuance of warrants to investment bankers for
convertible notes payable..................... -- -- 552,000
Amount of beneficial conversion of convertible
notes payable................................. -- -- 8,322,000
Net loss....................................... -- (154,655,000) (154,655,000)
----------- ------------- -------------
BALANCE, JANUARY 31, 2002........................ $(1,568,000) $(459,921,000) $ (32,221,000)
=========== ============= =============
The accompanying notes are an integral part of these statements.
62
TIVO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
One-Month One-Month
Year Ended Ended Ended Year Ended
January 31, January 31, January 31, December 31,
2002 2001 2000 2000
------------- ------------ ------------ -------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................ $(154,655,000) $(18,590,000) $ (8,764,000) $(204,840,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 7,040,000 506,000 104,000 3,476,000
Issuance of preferred stock warrants for services.............. -- -- -- --
Issuance of common stock warrants for services................. 85,000 76,000 -- 246,000
Common stock exchanged for services............................ -- -- -- --
Amortization of discount on debt............................... 762,000 -- -- --
Amortization of prepaid marketing expenses..................... 5,351,000 627,000 186,000 7,160,000
Amortization of deferred financing costs--issuance cost........ 283,000 -- -- --
Amortization of deferred financing costs--warrants............. 44,000 -- -- --
Amortization of beneficial conversion.......................... 414,000 -- -- --
Marketing costs paid in debt................................... 8,100,000 -- -- --
Amortization of warrants issued for services................... 7,198,000 453,000 115,000 1,571,000
Recognition of prepaid marketing expense....................... 21,726,000 1,388,000 -- 3,888,000
Stock-based compensation expense............................... 1,247,000 175,000 322,000 3,115,000
Amortization of note receivable................................ 941,000 78,000 -- 235,000
Changes in assets and liabilities:
Accounts receivable........................................... (351,000) 264,000 (63,000) (1,909,000)
Accounts receivable--related parties.......................... (1,871,000) (623,000) 100,000 (4,045,000)
Prepaid expenses and other.................................... 3,479,000 (17,800,000) (1,552,000) (6,504,000)
Prepaid expenses and other--related parties................... (5,843,000) -- -- --
Prepaid expenses and other--related parties, long-term........ (4,882,000) -- -- --
Accounts payable.............................................. (14,968,000) 1,953,000 1,780,000 11,586,000
Accrued liabilities........................................... (7,245,000) (127,000) 1,058,000 15,212,000
Accrued liabilities--related parties.......................... (23,199,000) 5,992,000 2,072,000 41,498,000
Notes payable--related parties, short-term.................... 2,262,000 -- -- --
Deferred revenue.............................................. 6,576,000 850,000 520,000 3,089,000
Deferred revenue--related parties............................. 11,427,000 -- -- --
Long-term deferred revenue.................................... 11,439,000 1,100,000 -- 11,013,000
Other long-term liabilities................................... 3,804,000 30,000 -- 1,187,000
------------- ------------ ------------ -------------
Net cash used in operating activities....................... (120,836,000) (23,648,000) (4,122,000) (114,022,000)
------------- ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment, net...................... (3,262,000) (758,000) (1,639,000) (21,087,000)
Sale (purchase) of short-term investments, net.................. -- -- 3,530,000 6,168,000
------------- ------------ ------------ -------------
Net cash provided by (used in) investing activities......... (3,262,000) (758,000) 1,891,000 (14,919,000)
------------- ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock.......................... 14,000,000 -- -- 100,000,000
Payment of issuance costs for common stock...................... (175,000) -- -- --
Cash proceeds from issuance of convertible notes payable........ 36,750,000 -- -- --
Cash proceeds from issuance of convertible notes payable--
related party.................................................. 6,900,000 -- -- --
Payment of issuance costs for convertible notes payable......... (3,563,000) -- -- --
Proceeds from issuance of convertible preferred stock, net of
issuance costs................................................. -- -- -- --
Proceeds from issuance of common stock through initial public
offering, net of issuance costs................................ -- -- -- --
Payment of issuance costs for redeemable convertible preferred
stock, redeemable common stock and common stock................ -- (250,000) -- (6,606,000)
Proceeds from release of restricted cash........................ -- 43,500,000 -- --
Proceeds from issuance of common stock--employee stock
purchase plan.................................................. 1,206,000 -- -- 2,185,000
Proceeds from exercise of common stock options.................. 503,000 21,000 14,000 1,110,000
Series A redeemable convertible preferred stock dividend........ (3,018,000) (423,000) -- (1,514,000)
Repurchase of common stock...................................... (61,000) -- -- (4,000)
Reduction of financing expenses from prior year 205,000 -- -- --
Net (payments) borrowings under capital lease................... (796,000) (64,000) 188,000 (367,000)
Decrease in bank overdraft...................................... -- -- -- --
------------- ------------ ------------ -------------
Net cash provided by financing activities................... 51,951,000 42,784,000 202,000 95,350,000
------------- ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................................... (72,147,000) 18,378,000 (2,029,000) (33,591,000)
------------- ------------ ------------ -------------
CASH AND CASH EQUIVALENTS:
Balance at beginning of period.................................. 124,474,000 106,096,000 139,687,000 139,687,000
------------- ------------ ------------ -------------
Balance at end of period........................................ $ 52,327,000 $124,474,000 $137,658,000 $ 106,096,000
============= ============ ============ =============
Year Ended
December 31,
1999
------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................ $(66,565,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 661,000
Issuance of preferred stock warrants for services.............. 374,000
Issuance of common stock warrants for services................. 498,000
Common stock exchanged for services............................ 605,000
Amortization of discount on debt............................... --
Amortization of prepaid marketing expenses..................... 12,668,000
Amortization of deferred financing costs--issuance cost........ --
Amortization of deferred financing costs--warrants............. --
Amortization of beneficial conversion.......................... --
Marketing costs paid in debt................................... --
Amortization of warrants issued for services................... 110,000
Recognition of prepaid marketing expense....................... --
Stock-based compensation expense............................... 1,530,000
Amortization of note receivable................................ --
Changes in assets and liabilities:
Accounts receivable........................................... (337,000)
Accounts receivable--related parties.......................... --
Prepaid expenses and other.................................... (2,335,000)
Prepaid expenses and other--related parties................... --
Prepaid expenses and other--related parties, long-term........ --
Accounts payable.............................................. 8,127,000
Accrued liabilities........................................... 4,103,000
Accrued liabilities--related parties.......................... 2,349,000
Notes payable--related parties, short-term.................... --
Deferred revenue.............................................. 2,271,000
Deferred revenue--related parties............................. --
Long-term deferred revenue.................................... --
Other long-term liabilities................................... --
------------
Net cash used in operating activities....................... (35,941,000)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment, net...................... (3,930,000)
Sale (purchase) of short-term investments, net.................. (6,004,000)
------------
Net cash provided by (used in) investing activities......... (9,934,000)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock.......................... --
Payment of issuance costs for common stock...................... --
Cash proceeds from issuance of convertible notes payable........ --
Cash proceeds from issuance of convertible notes payable--
related party.................................................. --
Payment of issuance costs for convertible notes payable......... --
Proceeds from issuance of convertible preferred stock, net of
issuance costs................................................. 90,572,000
Proceeds from issuance of common stock through initial public
offering, net of issuance costs................................ 90,255,000
Payment of issuance costs for redeemable convertible preferred
stock, redeemable common stock and common stock................ --
Proceeds from release of restricted cash........................ --
Proceeds from issuance of common stock--employee stock
purchase plan.................................................. --
Proceeds from exercise of common stock options.................. 1,192,000
Series A redeemable convertible preferred stock dividend........ --
Repurchase of common stock...................................... (28,000)
Reduction of financing expenses from prior year --
Net (payments) borrowings under capital lease................... 1,765,000
Decrease in bank overdraft...................................... (442,000)
------------
Net cash provided by financing activities................... 183,314,000
------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................................... 137,439,000
------------
CASH AND CASH EQUIVALENTS:
Balance at beginning of period.................................. 2,248,000
------------
Balance at end of period........................................ $139,687,000
============
63
TIVO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
One-Month One-Month
Year Ended Ended Ended Year Ended Year Ended
January 31, January 31, January 31, December 31, December 31,
2002 2001 2000 2000 1999
----------- ------------ ----------- ------------ ------------
(unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
AND NON-CASH OPERATING INFORMATION
Cash paid for interest..................................... $(1,075,000) $ (11,000) $(11,000) $ (117,000) $ (41,000)
Cash paid for interest-related parties..................... (1,643,000) -- -- -- --
(Recognition) reversal of deferred stock-based
compensation.............................................. 440,000 10,000 63,000 83,000 (7,700,000)
SUPPLEMENTAL DISCLOSURE OF RESTRICTED
CASH AND OTHER NON-CASH FINANCING
INFORMATION
Restricted cash received from issuance of Series A
redeemable convertible preferred stock.................... -- -- -- 81,356,000 --
Restricted cash received from issuance of redeemable
common stock.............................................. -- -- -- 18,644,000 --
Restricted cash used for prepaid marketing expenses........ -- -- -- (8,500,000) --
Restricted cash released to cash in connection with Second
Amendment to AOL Investment Agreement..................... -- (43,500,000) -- -- --
Deferred interest income on restricted cash................ 1,631,000 438,000 -- 1,666,000 --
Discount on issuance of convertible notes payable.......... 9,608,000 -- -- -- --
Beneficial conversion related to convertible notes
payable................................................... (8,322,000) -- -- -- --
Conversion of non-cash financing expenses and beneficial
conversion related to converted notes payable............. 1,270,000 -- -- -- --
Issuance of warrants--non-cash financing expenses.......... (552,000) -- -- -- --
Issuance of common stock warrants for prepaid marketing
expenses.................................................. -- -- -- (15,364,000) --
Issuance of Series A convertible preferred stock for
Series A redeemable preferred stock and releas of
restricted cash........................................... -- (33,356,000) -- -- --
Issuance of common stock for redeemable common stock
and release of restricted cash............................ -- (18,644,000) -- -- --
Incremental value of re-priced common stock warrants....... -- 4,874,000 -- -- --
Stock issued for a note receivable......................... -- -- -- -- 2,822,000
Equipment acquired under capital lease..................... -- -- -- 367,000 1,978,000
The accompanying notes are an integral part of these consolidated statements.
64
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
TiVo Inc. (the "Company" or "TiVo") was incorporated in August 1997 as a
Delaware corporation and is located in Alviso, California. On August 21, 2000,
TiVo (UK) Ltd., a wholly owned subsidiary of TiVo Inc., was incorporated in the
United Kingdom. On October 9, 2001 the Company formed a new subsidiary TiVo
International, Inc., also a Delaware corporation. The Company has developed a
subscription-based personal television service (the "TiVo Service") that
provides viewers with the ability to pause, rewind and play back live or
recorded television broadcasts, as well as to search for, watch and record
programs. The TiVo Service also provides television listings, daily suggestions
and special viewing packages. The TiVo Service relies on three key components:
the personal video recorder, the TiVo remote control and the TiVo Broadcast
Center. The Company conducts its operations through one reportable segment.
The Company continues to be subject to certain risks, including the
uncertainty of availability of additional financing; dependence on third
parties for manufacturing, marketing and sales support; the uncertainty of the
market for personal television; dependence on key management; limited
manufacturing, marketing and sales experience; and the uncertainty of future
profitability and positive cash flow. TiVo has incurred significant losses and
has had substantial negative cash flow. As of January 31, 2002, TiVo had an
accumulated deficit of $459.9 million. The Company believes that its cash and
cash equivalents, will be sufficient to fund its operations for at least the
next 12 months.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All inter-company accounts and transactions have been
eliminated in consolidation.
Change of Year End
On February 1, 2001, the Company announced a fiscal year end change from
December 31 to January 31. The consolidated financial statements display data
as of and for the fiscal year ended January 31, 2002, the one-month transition
periods ended January 31, 2001 and 2000, and calendar years ended December 31,
2000 and 1999, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior years' financial
information to conform with the current period presentation.
Cash and Cash Equivalents
The Company classifies financial instruments as cash equivalents if the
original maturity of such instruments is three months or less.
65
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Restricted Cash
Restricted cash represents funds restricted under the terms of the
Investment Agreement between America Online, Inc. ("AOL") and TiVo, dated
June 9, 2000 and the First Amendment to the Investment Agreement dated
September 11, 2000 (the "Investment Agreement"). (see Note 9).
Accounts Receivable--Related Parties
Accounts Receivable--related parties consist of amounts owed to the Company
from the Company's strategic partners such as DIRECTV, Inc. ("DIRECTV"),
Philips Business Electronics B.V. ("Philips"), Quantum Corporation ("Quantum")
and Sony Corporation of America ("Sony"). These receivables are comprised of
subscription revenue collected from subscribers on the Company's behalf, volume
discounts and amounts owed for reimbursement of a portion of the Company's
development costs.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives as follows:
Furniture and fixtures....... 3-5 years
Computer and office equipment 3-5 years
Lab equipment................ 3 years
Leasehold improvements....... 7 years or the life of the lease
Capitalized software......... 1-5 years
Maintenance and repair expenditures are expensed as incurred.
Other Long-Term Liabilities
Other long-term liabilities consist primarily of rent of $4.1 million
resulting from the recognition of a rent liability and related expense for the
Company's vacant facility. The Company estimated given the current real estate
market conditions that it would take approximately 12 months to sublease the
vacant facility in Alviso, California and that the sublease income would be
significantly lower than the current monthly rent payment.
Revenue and Deferred Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is
fixed or determinable, collectibility is reasonably assured, and the Company
has completed its service obligations and received customer acceptance, or are
otherwise released from its service obligation or customer acceptance
obligations.
Monthly and annual subscription fees are recognized over the period
benefited. Subscription revenues from lifetime subscriptions are recognized
ratably over a four-year period, the Company's best estimate of the useful life
of the personal video recorder. If the estimated useful life of the recorder
was shorter or longer than the estimated four-year period, revenues would be
recognized earlier or later, respectively, than the Company's current policy.
The deferred revenue balance consists of subscription fees collected, for which
service has not yet been provided.
66
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-subscription revenue and engineering professional services revenue are
generally recognized upon performance of the services.
The Company recognizes revenue under its technology license and engineering
professional services agreement with Sony Corporation in accordance with the
American Institute of Certified Public Accountant's Statement of Position,
97-2, "Software Revenue Recognition" ("SAP-97-2"). This agreement constitutes a
multiple-element arrangement in which vendor specific objective evidence
("VSOE") is required for all undelivered elements in order to recognize license
revenue. The Company has not established VSOE on undelivered elements of the
arrangement and must defer revenue related to this arrangement until all
elements have been delivered. The Company intends to enter into additional
technology licensing transactions in the future, and the timing of revenue
recognition related to these transactions will depend, in part, on whether the
Company can establish VSOE and on how these deals are structured. As such,
revenue recognition may not correspond to the timing of related cash flows or
TiVo's work effort.
Research and Development
Research and development expenses consist primarily of employee salaries and
related expenses and consulting fees relating to the development of the TiVo
Service platform development and products that enable the TiVo Service.
Research and development costs are expensed as incurred.
Sales and Marketing--Related Parties Expense
Sales and marketing--related parties expense consists of cash and non-cash
charges related to the Company's agreements with DIRECTV, Philips, Quantum,
Sony, AOL and Creative Artists Agency, LLC ("CAA"), all of which hold stock in
the Company.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
were $41.9 million for the year ended January 31, 2002 including expenses
related to a portion of the AOL, NBC and Discovery media insertion orders which
are classified as sales and marketing--related parties expense. Advertising
expenses were $3.2 million for the one-month transition period ended January
31, 2001, $58.4 million for the year ended December 31, 2000 and $30,000 for
the year ended December 31, 1999.
Stock-Based Compensation and Stock Exchanged for Services
The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options. Under APB 25,
when the exercise price of employee stock options is less than the market price
of the underlying stock on the date of grant, compensation expense is recorded
for the difference between fair value and 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 Interpretation No. 28, under which value assigned to options vesting in
future periods is ratably amortized beginning upon issuance of the option
rather than at the vesting date. The Company has recorded stock-based
compensation expenses of $1.2 million for the year ended January 31, 2002. The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
67
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Other Operating Expense, Net
Prior to the transition of manufacturing and distribution responsibility to
Philips in the fourth quarter of 1999, the Company sold personal video
recorders directly to consumers. The Company's direct sales of personal video
recorders of $13.5 million, less the cost of the personal video recorders sold
of $20.7 million for the year ended December 31, 1999 were classified as other
operating expense, net. Other operating expense, net is considered incidental
to the Company's business and was recognized upon shipment to the customer. The
Company records a provision for estimated warranty costs and returns at the
time of sale.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets or liabilities of a change in tax rates is recognized in the period in
which the rate change occurs. Valuation allowances have been established when
necessary to reduce deferred tax assets to the amounts expected to be recovered.
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 attributable to common stock by the weighted
average number of common shares outstanding. Shares used in the computation of
the fiscal year ended January 31, 2002, net loss per share amount exclude
options and warrants to purchase common stock, Series A convertible preferred
stock and Series A redeemable convertible preferred stock (see Note 7), common
shares issuable upon conversion of Convertible Notes Payable (see Note 10), and
any unvested, repurchasable common stock issued under the employee stock option
plans (see Note 8).
68
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Diluted net loss per common share is calculated by dividing net loss
attributable to common stock by the weighted average number of common shares
and dilutive common share equivalents outstanding. The net loss attributable to
common stock is calculated by deducting the Series A redeemable convertible
preferred stock dividend from the net loss. Diluted net loss per share does not
include the effect of the following antidilutive common share equivalents:
January 31, January 31, December 31, December 31,
----------- ----------- ------------ ------------
2002 2001 2000 1999
----------- ----------- ------------ ------------
Series A redeemable convertible preferred
stock.................................... 1,600,000 1,600,000 2,711,861 --
Series A convertible preferred stock....... 1,111,861 1,111,861 -- --
Redeemable common stock.................... -- -- 806,889 --
Repurchasable common stock, related parties -- 1,128,867 1,128,867 1,128,867
Repurchasable common stock................. 627,880 1,060,849 1,103,736 1,364,366
Number of common shares issuable for
convertible notes payable................ 8,119,266 -- -- --
Options to purchase common stock........... 10,634,966 7,397,307 7,425,698 4,346,522
Warrants to purchase common stock.......... 8,539,812 2,694,861 2,649,380 --
---------- ---------- ---------- ---------
Total............................... 30,633,785 14,993,745 15,826,431 6,839,755
========== ========== ========== =========
Comprehensive Income
The Company has no material components of other comprehensive income or loss
and, accordingly, the Comprehensive Loss is the same as the net loss for all
periods presented
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, and accounts payable approximate fair value due to the
short-term maturity of these instruments.
Business Concentrations and Credit Risk
Financial instruments that subject the Company to concentrations of credit
risk consist primarily of cash. The Company maintains cash with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The majority of the Company's
customers are concentrated in the United States. The Company is subject to a
minimal amount of credit risk related to these customers as subscription
revenue is primarily obtained through credit card sales. The reserves for
doubtful accounts at January 31, 2002 were $23,000 and zero for accounts
receivable and accounts receivable--related parties, respectively. The Company
does not consider credit risk associated with accounts receivable--related
parties (DIRECTV, Philips, Sony, AOL and Quantum) to be significant.
69
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
January 31,
-------------------------
2002 2001
------------ -----------
Furniture and fixtures....... $ 3,462,000 $ 3,397,000
Computer and office equipment 12,584,000 11,049,000
Lab equipment................ 1,140,000 1,125,000
Leasehold improvements....... 5,669,000 6,060,000
Capitalized software......... 7,144,000 5,106,000
------------ -----------
Total property and equipment. 29,999,000 26,737,000
Accumulated depreciation..... (11,853,000) (4,813,000)
------------ -----------
Property and equipment, net.. $ 18,146,000 $21,924,000
============ ===========
Equipment under capital leases was $2.3 million at January 31, 2002 and
2001. Depreciation and amortization expense was $7.0 million, $501,000, $3.6
million and $661,000 for the fiscal year ended January 31, 2002, the one-month
transition period ended January 31, 2001 and 2000, and for the calendar years
ended December 31, 2000 and December 31, 1999, respectively.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
January 31,
-----------------------
2002 2001
----------- -----------
Marketing and promotions......... $ 5,393,000 $14,843,000
Compensation and vacation........ 2,771,000 1,506,000
Legal and accounting............. 1,038,000 713,000
Accrued facilities expenses...... 1,019,000 --
Convertible debt interest expense 887,000 --
Prepaid rent from tenant......... 671,000 669,000
Employee stock purchase plan..... 332,000 629,000
Consulting and outside services.. 507,000 575,000
Telecommunications and utilities. -- 691,000
Other............................ -- 237,000
----------- -----------
$12,618,000 $19,863,000
=========== ===========
5. LEGAL MATTERS
In September 1999, TiVo received letters from Time Warner, Inc. and Fox
Television stating that TiVo's personal television service exploits these
companies' copyrights without the necessary licenses. The Company believes that
the TiVo Service does not infringe on these copyrights and believes that there
will not be an adverse impact as a result of these letters.
On January 18, 2000, StarSight Telecast Inc., a subsidiary of Gemstar
International Group Limited filed a lawsuit against us in the U.S. District
Court for the Northern District of California alleging willful and deliberate
violation of U.S. Patent Number 4,706,121, entitled "TV Schedule System and
Process," held by StarSight. The
70
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
complaint alleged that we infringed the patent by, among other things, making,
using, selling, offering to sell and/or importing our TV schedule systems and
processes without a license from StarSight. StarSight seeks unspecified
monetary damages and an injunction against our operations. The suit also seeks
attorneys' fees and costs. On February 25, 2000, we counterclaimed against
StarSight, Gemstar Development Corporation and Gemstar International Group
Limited seeking damages for federal antitrust violations and state unfair
business practices claims, as well as declaratory relief of non-infringement,
invalidity and unenforceability with respect to the patent.
On June 12, 2001, a securities class action lawsuit in which the Company and
certain of its officers and directors are named as defendants was filed in the
United States District Court for the Southern District of New York. In addition
to the Company defendants, this action, which is captioned Wercberger v. TiVo
et al., also names several of the underwriters involved in the Company's
initial public offering as defendants. This class action is brought on behalf
of a purported class of purchasers of the Company's common stock from
September 30, 1999, the time of its initial public offering, through December
6, 2000. The central allegation in this action is that the underwriters in the
Company's initial public offering solicited and received undisclosed
commissions from, and entered into undisclosed arrangements with, certain
investors who purchased the Company's common stock in the initial public
offering and the after-market. The complaint also alleges that the Company
defendants violated the federal securities laws by failing to disclose in the
initial public offering prospectus that the underwriters had engaged in these
allegedly undisclosed arrangements. More than 300 issuers have been named in
similar lawsuits. The Company defendants' time to respond to the complaint has
not yet expired, and it is likely that this response will not be due for
several months, after certain procedural issues are resolved. At the
appropriate time, the Company defendants intend to move to dismiss the
consolidated complaint for failure to state a claim.
On August 13, 2001, Alan Federbush, an individual resident in the state of
New York, and Mitchell Brink, an individual resident in the state of Illinois,
filed, on behalf of themselves and all similarly situated purchasers of Sony or
Philips digital television recorders and the TiVo Service, a class action
complaint against us in the Superior Court of the State of California, Santa
Clara County, alleging violation of California's Consumers' Legal Remedies Act,
California's Unfair Practices Act, and fraudulent concealment. The complaint
states that Mr. Federbush and Mr. Brink each experienced problems with the
modem contained in the digital television recorders. The complaint alleges,
among other things, that the Company knew or had reason to know of these
malfunctions and therefore misrepresented or failed to disclose material
information about the digital television recorders to consumers. The complaint
seeks an award of actual damages, as well as unspecified punitive damages,
interest, attorneys' fees and other costs. The complaint additionally seeks
broad equitable relief, requesting that the Company be enjoined from continuing
the practices described in the complaint and engaging in false and misleading
advertising regarding the digital television recorders. The Company filed its
answer to the complaint on October 19, 2001. Discovery, through which the
Company would seek to investigate the plaintiff's claims, has not commenced.
Based on the information available, the Company is unable to form a conclusion
regarding the amount, materiality or range of potential loss, if any, which
might result if the outcome of this matter were unfavorable.
On September 25, 2001, Pause Technology filed a complaint against TiVo in
the US District Court for the District of Massachusetts alleging willful and
deliberate infringement of US Reissue Patent No. 36,801, entitled "Time Delayed
Digital Video System Using Concurrent Recording and Playback." Pause Technology
seeks unspecified monetary damages as well as an injunction against our
operations. It also seeks attorneys' fees and costs. TiVo's answer was filed on
December 26, 2001.
On December 12, 2001, SONICblue Incorporated filed a lawsuit against TiVo in
the U.S. District Court for the Northern District of California, alleging
infringement of US Patent No. 6,324,338 entitled "Video Data Recorder with
Integrated Channel Guides." SONICblue seeks unspecified monetary damages as
well as an injunction against our operations. TiVo's answer was filed on
January 23, 2002.
71
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On January 23, 2002, we filed a separate lawsuit against SONICblue
Incorporated and its wholly owned subsidiary, ReplayTV, Inc., in the U.S.
District Court for the Northern District of California, alleging that we are
the owner of United States Patent No. 6,233,389, entitled "Multimedia Time
Warping System," and alleging further that SONICblue and ReplayTV have
willfully and deliberately infringed the patent by making, using, offering to
sell and/or selling within the United States digital video recording devices,
software and/or personal television services falling within the scope of the
patent. We have requested that the court enjoin SONICblue and ReplayTV from
further infringement of the patent and award us compensatory damages, treble
damages and attorneys' fees and costs.
On February 5, 2002, Sony Corporation notified us that Command Audio
Corporation had filed a complaint against Sony Electronics, Inc. on February 2,
2002 in the United States District Court for the Northern District of
California. The complaint alleges that, in connection with its sale of personal
video recorders, Sony infringes upon two patents owned by Command Audio (United
States Patent Nos. 5,590,195 ("Information Dissemination Using Various
Transmission Modes") and 6,330,334 ("Method and System for Information
Dissemination Using Television Signals")). The complaint seeks injunctive
relief, compensatory and treble damages and Command Audio's costs and expenses,
including reasonable attorneys' fees. Under the terms of our agreement with
Sony governing the distribution of certain personal video recorders that enable
the TiVo Service, we are required to indemnify Sony against any and all claims,
damages, liabilities, costs and expenses relating to claims that our technology
infringes upon intellectual property rights owned by third parties.
The Company believes it has meritorious defenses and intend to defend all of
the above actions vigorously; however, the Company could be forced to incur
material expenses in the litigation, and in the event there is an adverse
outcome, the Company's business could be harmed.
6. INCOME TAXES
Under the Sony license agreements, the Company incurred $1.0 million in
withholding taxes to the government of Japan. This payment of this withholding
tax generates a deferred tax asset. However, as the Company's ability to
realize the benefits of this deferred tax asset is uncertain, a full valuation
allowance has been provided. The $1.0 million has been accounted for as a
provision for income tax. There was no provision or benefit for income taxes
for the one-month transition period ended January 31, 2001, or for the calendar
years ended December 31, 2000 and 1999. Significant components of deferred tax
assets were as follows as of January 31, 2002:
Net operating loss carryforwards....... $ 142,822,000
Tax credit carryforwards............... 6,432,000
Temporary differences..................
Deferred revenue.................... 15,973,000
Deferred marketing.................. 11,006,000
Other............................... 3,157,000
-------------
Total Temporary differences..... 30,136,000
Gross deferred tax assets........... 179,390,000
Valuation allowance.................... (179,390,000)
-------------
Net deferred tax assets............. $ --
=============
As of January 31, 2002, the Company had a tax net operating loss (NOL)
carryforward of approximately $370.1 million for federal and $231.2 million for
California purposes. The federal NOL and tax credits expires beginning in 2017,
and the California NOL and tax credits expires beginning in 2005. A significant
change in
72
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ownership of the Company may limit the Company's ability to utilize these NOL
carryforwards. SFAS No. 109 requires that the tax benefit of such NOL be
recorded as an asset. A valuation allowance for the entire amount has been
provided because of uncertainties about the Company's ability to realize the
value of the deferred tax assets.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK, COMMON STOCK AND
STOCKHOLDERS' EQUITY
Common Stock
During the year ended January 31, 2002, the Company issued 2,147,239 shares
of common stock as a result of the sale of common stock to Acqua Wellington
North American Equities Fund, Ltd. Additionally, the Company issued 202,073
shares of common stock as a result of the exercise of stock options.
Convertible Preferred Stock
At the Annual Meeting of Stockholders held on July 26, 2000, the proposal to
amend and restate the Company's Amended and Restated Certificate of
Incorporation to increase the number of authorized shares of preferred stock
from 2 million shares to 10 million shares was approved.
On January 30, 2001, pursuant to the terms of the Second Amendment to the
Investment Agreement, the redemption feature was removed from 1,111,861 shares
of convertible preferred stock subject to redemption. These shares are now
classified as convertible preferred stock.
Redeemable Convertible Preferred Stock
In September 2000, the Company issued 2,711,861 shares of Series A
redeemable convertible preferred stock for $30.00 per share to AOL in exchange
for $81.4 million, before issuance costs of $2.4 million. See Note 9 for a
description of Series A redeemable convertible preferred stock issued to AOL.
On January 30, 2001, pursuant to the terms of the Second Amendment to the
Investment Agreement, the redemption feature was removed from 1,111,861 shares
of convertible preferred stock subject to redemption. These shares are now
classified as convertible preferred stock. As of January 31, 2002 there were
1,600,000 shares of current redeemable convertible preferred stock outstanding.
73
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the activity related to redeemable
convertible preferred stock and common stock subject to redemption for the
fiscal year ended January 31, 2002, one-month transition period ended January
31, 2001 and the calendar year ended December 31, 2000:
Redeemable
Convertible Redeemable
Preferred Stock Common Stock
------------------- ----------------- Additional
Shares Amount Shares Amount Paid-In Capital Total
---------- ------- -------- ------- --------------- ------------
BALANCE, DECEMBER 31, 1999................................ -- $ -- -- $ -- $ -- $ --
---------- ------- -------- ------- ------------ ------------
Issuance of Series A redeemable convertible preferred
stock................................................. 2,711,861 3,000 -- -- 81,353,000 81,356,000
Issuance of common stock subject to redemption......... -- -- 806,889 1,000 18,643,000 18,644,000
Issuance costs......................................... -- -- -- -- (3,010,000) (3,010,000)
---------- ------- -------- ------- ------------ ------------
BALANCE, DECEMBER 31, 2000................................ 2,711,861 3,000 806,889 1,000 96,986,000 96,990,000
Removal of redemption feature--Series A convertible
preferred stock....................................... (1,111,861) (1,000) -- -- (33,355,000) (33,356,000)
Removal of redemption feature--common stock............ -- -- (806,889) (1,000) (18,643,000) (18,644,000)
Issuance costs......................................... -- -- -- -- 1,565,000 1,565,000
---------- ------- -------- ------- ------------ ------------
BALANCE, JANUARY 31, 2001................................. 1,600,000 2,000 -- -- 46,553,000 46,555,000
Series A redeemable convertible preferred stock........ -- -- -- -- -- --
Issuance costs......................................... -- -- -- -- -- --
---------- ------- -------- ------- ------------ ------------
BALANCE, JANUARY 31, 2002................................. 1,600,000 $ 2,000 -- $ -- $ 46,553,000 $ 46,555,000
========== ======= ======== ======= ============ ============
Warrants
See Note 9 for a description of AOL Initial Common Stock Warrants A and B
and Performance Warrants A and B.
See Note 10 for a description of the Convertible Notes Payable.
See Note 13 for a description of common stock warrants issued to DIRECTV
under the Warrant and Registration Rights Agreement.
See Note 13 for a description of Series C and Series D preferred stock
warrants issued to Quantum under a hard disk drive supply agreement.
8. EQUITY INCENTIVE PLANS
1997 Equity Incentive Plan
Under the terms of the Company's 1997 Equity Incentive Plan, adopted in 1997
and amended and restated in 1999 (the "1997 Plan"), options to purchase shares
of the Company's common stock may be granted to employees and other individuals
at a price equal to the fair market value of the common stock at the date of
grant. The options vest 25 percent after the first year of service, and the
remaining 75 percent vest ratably over the next 36 months. Options expire 10
years after the grant date. The terms of the 1997 Plan allowed individuals to
exercise their options prior to full vesting. In the event that the individual
terminates their employment or service to the Company before becoming fully
vested, the Company has the right to repurchase the unvested shares at the
original option price. The number of shares authorized for option grants under
the 1997 Plan is 4,000,000. As of January 31, 2002, options to purchase 564,485
shares of common stock remain outstanding and exercisable.
74
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999 Equity Incentive Plan
In April 1999, the Company's stockholders approved the 1999 Equity Incentive
Plan (the "1999 Plan"). Amendments to the 1999 Plan were adopted in July 1999.
The 1999 Plan allows the grant of options to purchase shares of the Company's
common stock to employees and other individuals at a price equal to the fair
market value of the common stock at the date of grant. The options vest 25
percent after the first year of service, and the remaining 75 percent vest
ratably over the next 36 months. Options expire 10 years after the grant date.
The terms of the 1999 Plan allow individuals to exercise options granted prior
to August 8, 2001 prior to full vesting and options granted subsequent to
August 8, 2001 as the options vest. In the event that the individual terminates
their employment or service to the Company before becoming fully vested, the
Company has the right to repurchase any exercised, unvested shares at the
original option price. The number of shares authorized for option grants under
the 1999 Plan is 16,200,000 subject to an annual increase of the greater of 7%
of outstanding shares or 4,000,000 shares, up to a maximum of 40,000,000
shares. As of January 31, 2002, options to purchase 9,860,481 shares of common
stock remain outstanding, of which 7,895,412 are exercisable.
1999 Non-Employee Directors' Stock Option Plan
In July 1999, the Company adopted the 1999 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"). The Directors' Plan provides for the
automatic grant of options to purchase shares of the Company's common stock to
non-employee directors at a price equal to the fair market value of the stock
at the date of the grant. The options vest monthly over two years from the date
of grant. The option term is ten years after the grant date but terminates
three months after a director's service terminates. The number of shares
authorized for option grants under the Directors' Plan is 800,000, subject to
an annual increase of 100,000 shares. Options to purchase 210,000 shares of
common stock are outstanding and exercisable as of January 31, 2002.
1999 Employee Stock Purchase Plan
In July 1999, the Company adopted the 1999 Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan"). The Employee Stock Purchase Plan provides a
means for employees to purchase TiVo common stock through payroll deductions of
up to 15 percent of their base compensation. The Company offers the common
stock purchase rights to eligible employees, generally all full-time employees
who have been employed for at least 10 days. This plan allows for common stock
purchase rights to be granted to employees of TiVo at a price equal to the
lower of 85% of the fair market value on the first day of the offering period
or on the common stock purchase date. Under the purchase plan, the board may
specify offerings up to 27 months. The number of shares reserved for issuance
under this plan is 800,000 subject to an annual increase by the lesser of (i) 5
percent of the outstanding shares of common stock on a diluted basis, (ii)
500,000 shares, or (iii) a smaller number as determined by the board of
directors. During the fiscal year ended January 31, 2002, the board approved a
200,000 share increase to the Employee Stock Purchase Plan reserve. There were
313,482 shares of common stock issued as a result of purchases under this plan
during the year ended January 31, 2002. There were zero shares issued as a
result of purchases under this plan during the one-month transition period
ended January 31, 2001. There were 177,907 and zero shares issued as a result
of purchases under this plan during the calendar years ended December 31, 2000
and December 31, 1999 respectively. As of January 31, 2002, there were 308,611
shares available for future purchases.
The Company accounts for stock options under APB Opinion No. 25, under
which, for the period from August 4, 1997 (Inception) to December 31, 1997 and
for the year ended December 31, 1998, no compensation cost was recognized when
the awards were granted to employees or directors. The Company has recorded
adjustments reducing deferred compensation of approximately ($440,000),
($10,000), ($83,000) and deferred compensation of $7.7 million as a
contra-equity account for the fiscal year ended January 31, 2002, the
75
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
one-month transition period ended January 31, 2001, the calendar year ended
December 31, 2000 and December 31, 1999, respectively. The Company has recorded
stock-based compensation expense of $1.2 million, $175,000, $3.1 million and
$1.5 million for the fiscal year ended January 31, 2002, the one-month
transition period ended January 31, 2001 and calendar years ended December 31,
2000 and December 31, 1999, respectively. Had compensation expense for the
stock options been determined consistently with SFAS No. 123, the effect on the
Company's net loss and basic and diluted loss per share would have been changed
to the following pro forma amounts:
One-Month
Year Ended ended Year Ended Year Ended
January 31, January 31, December 31, December 31,
------------- ------------ ------------- ------------
2002 2001 2000 1999
------------- ------------ ------------- ------------
Net loss, as reported........................ $(157,673,000) $(19,013,000) $(206,354,000) $(66,565,000)
Pro forma effect of SFAS No. 123............. (13,118,000) (1,065,000) (6,983,000) (4,100,000)
------------- ------------ ------------- ------------
Net loss, pro forma.......................... $(170,791,000) $(20,078,000) $(213,337,000) $(70,665,000)
============= ============ ============= ============
Basic and diluted loss per share, as reported $ (3.67) $ (0.47) $ (5.55) $ (5.49)
Basic and diluted loss per share, pro forma.. $ (3.98) $ (0.49) $ (5.74) $ (5.83)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants: weighted average risk-free interest rates of
between 3.48% and 6.54%; expected dividend yield of zero percent; expected
lives of four years for the options; and expected volatility of 50%-70%.
A summary of the status of the 1997 Equity Incentive Plan, the 1999 Equity
Incentive Plan and the 1999 Non-Employee Directors' Plan is presented in the
table and narrative below:
Range of Weighted Average
Shares Exercise Prices Exercise Price
---------- --------------- ----------------
Outstanding at December 31, 1998 1,235,000 $ .27
---------- ------
Granted...................... 4,307,087 $1.00-$39.94 8.46
Exercised.................... (525,064) 2.29
Canceled..................... (670,502) 5.25
---------- ------
Outstanding at December 31, 1999 4,346,521 $ 7.37
---------- ------
Granted...................... 3,949,850 $5.50-$35.31 19.11
Exercised.................... (395,466) 2.78
Canceled..................... (475,207) 12.48
---------- ------
Outstanding at December 31, 2000 7,425,698 $13.48
---------- ------
Granted...................... 42,500 $6.38-$7.13 6.60
Exercised.................... (25,604) .81
Canceled..................... (45,287) 10.02
---------- ------
Outstanding at January 31, 2001. 7,397,307 $13.51
---------- ------
Granted...................... 4,726,000 $3.00-$8.61 5.06
Exercised.................... (202,073) 2.49
Canceled..................... (1,286,268) 14.44
---------- ------
Outstanding at January 31, 2002. 10,634,966 $ 9.86
---------- ------
76
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair market values of options granted during the fiscal
year ended January 31, 2002, the one-month transition period ended January 31,
2001 and calendar years ended December 31, 2000 and December 31, 1999 are
$5.08, $6.60, $19.28 and $10.15, respectively. Of the options outstanding at
January 31, 2002, January 31, 2001, December 31, 2000 and December 31,1999,
6,534,516, 3,769,222, 3,607,194 and 1,270,888 are vested, respectively. The
Company repurchased 57,608, zero, 50,066 and 226,342 unvested shares issued
upon early exercise of options during the fiscal year ended January 31, 2002,
the one-month transition period ended January 31, 2001 and calendar years ended
December 31, 2000 and 1999, respectively, upon the optionees' terminating
employment with the Company.
The following table contains information concerning outstanding stock
options as of January 31, 2002:
Range Weighted Average
Number of Options Outstanding of Exercise Prices Remaining Contractual Life
- ----------------------------- ------------------ --------------------------
320,723 $0.04-$0.75 6.60 years
2,815,531 $1.00-$5.50 9.20 years
3,311,871 $5.60-$7.13 8.93 years
1,009,908 $8.50-$9.50 7.89 years
474,376 $10.50-$15.88 8.11 years
577,727 $16.00-$19.88 8.51 years
1,723,497 $20.00-$27.56 8.32 years
401,333 $30.00-$39.94 7.96 years
-------
10,634,966
==========
9. AOL RELATIONSHIP
On September 13, 2000, the Company closed an Investment Agreement with AOL
for $200 million. Under the terms of the Investment Agreement, the Company
issued 2,711,861 shares of Series A redeemable convertible preferred stock at
$30.00 per share, 5,134,722 shares of common stock at $23.11 per share (of
which 806,889 common shares were subject to redemption as of December 31,
2000), two initial warrants to purchase an aggregate of 2,603,903 shares of the
Company's common stock and two performance warrants to purchase an aggregate of
up to 5,207,806 shares of common stock. As of January 31, 2002 and January 31,
2001, 1,600,000 shares of current Series A Preferred stock that are subject to
redemption under the terms of the Investment Agreement are shown as current
redeemable preferred stock on the Company's consolidated financial statements.
The two performance warrants are contingent upon future performance and have
not been issued. The AOL investment was part of a three-year Commercial
Agreement, which contemplated that TiVo would become an AOL TV programming
partner, offering AOL TV subscribers access to features of TiVo's Personal TV
Service.
On January 30, 2001, the Company entered into the Second Amendment to the
Investment Agreement with AOL, dated as of June 9, 2000, as amended by the
First Amendment to the Investment Agreement, dated as of September 11, 2000.
The Second Amendment provided for, among other things, an amendment to the
Escrow Agreement, dated as of September 11, 2000, by and between the Company
and AOL.
At this point, the Company believes that AOL does not plan to deploy the AOL
TV/TiVo set-top box product as originally envisioned. The Company and AOL are
currently in discussions concerning options for bringing the combined
technology to market. There can be no assurances about the outcome of these
discussions.
77
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Restricted Cash
The First Amendment to the Escrow Agreement, dated as of January 30, 2001,
authorized the release to the Company of $43.5 million in restricted funds
previously held in escrow pursuant to the Escrow Agreement leaving a remaining
balance plus interest in restricted cash of $51.5 million. Of this amount,
$48.0 was earmarked to be used to subsidize the production of the jointly
developed AOL TV/TiVo set-top box. TiVo has since changed its business model
and intends to sharply reduce subsidy payments. As a result, the commitment of
capital for subsidies no longer fits the Company's business model. AOL and the
Company are engaged in discussions regarding the modification of the terms of
the agreements. As of January 31, 2002 the restricted cash balance consists of
$48.0 million restricted funds with interest earned on restricted cash of
$3.7 million.
Under the terms of the current AOL arrangement, if the AOL TV/TiVo set-top
box launch does not occur by December 31, 2001 or a later date agreed to by
both parties, and AOL has not committed a material breach of the Commercial
Agreement or if the Company has breached its obligations with respect to the
financial covenants, then AOL has a put option pursuant to which AOL could
require the Company to repurchase up to 1.6 million shares of the current
Series A redeemable convertible preferred stock at a liquidation value of up to
$48.0 million. The Company currently records the $48.0 million on the
consolidated balance sheets as restricted cash of $48.0 million plus the
interest income earned on restricted cash. The set-top box was not launched by
December 31, 2001 and the Company recently modified its agreements with AOL so
that AOL has 100 days from the agreed upon launch date to exercise its put
option. (See Note 17). At this point, the Company has not agreed with AOL on
this agreed upon launch date and the Company believes that AOL does not plan to
deploy that AOL TV/TiVo set-top box as originally envisioned. The Company is in
discussions with AOL regarding modification of the terms of the current
agreements, including product definition, development funding, deployment,
launch date, and other commercial terms. There can be no assurances about the
outcome of these discussions. If the outcome includes exercise of the put
option, the Company's cash and cash equivalents would increase by $3.7 million,
reflecting the deferred interest on the restricted cash, and the restricted
cash balance would be reduced to zero. The Company does not include restricted
cash in its calculation of working capital available for operations. As a
result, the Company does not expect that the preferred stock repurchase would
have a material effect on its business operations.
Current Series A Redeemable Convertible Preferred Stock
In September 2000, the Company issued 2,711,861 shares of Series A
redeemable convertible preferred stock at $30.00 per share to AOL in exchange
for $81.4 million, before issuance costs of $2.4 million. In January 2001,
under the terms of the Second Amendment, 1,111,861 shares of Series A
redeemable convertible preferred had their redemption feature removed. As of
January 31, 2001 and October 31, 2001, each of the 1,600,000 shares of the
current Series A redeemable convertible preferred stock is initially
convertible into one share of common stock, subject to adjustment for stock
splits, dividends, combinations, reclassifications or similar transactions, as
provided in the Company's Amended and Restated Certificate of Incorporation.
The current Series A redeemable convertible preferred stock is convertible upon
AOL's option or is mandatorily convertible if the price of the Company's common
stock exceeds $30.00 per share for 18 trading days in any 20 consecutive
trading day period.
Put Option
Under the terms of the First Amendment to the Investment Agreement, if the
set-top box launch of the Integrated Product does not occur by December 31,
2001 or a later date agreed upon by both parties and AOL has
78
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
not committed a material breach of the Commercial Agreement or the Company has
breached its obligations with respect to the financial covenants, then AOL
would have a put option pursuant to which AOL could require the Company to
repurchase from AOL the number of shares of Series A redeemable convertible
preferred stock which have an initial liquidation value of $91.5 million. If
all the shares of Series A redeemable convertible preferred stock have an
aggregate initial liquidation value of less than $91.5 million, then AOL could
require the Company to repurchase the number of shares of common stock having a
value equal to the difference between that aggregate initial liquidation value
and $91.5 million. In the event that the set-top box launch occurred after
December 31, 2001 or the agreed upon launch date but prior to the exercise of
the put option, the put option would immediately expire.
The Second Amendment to the Investment Agreement modified the terms of AOL's
put option with respect to the current Series A redeemable convertible
preferred stock held by AOL. Under the Second Amendment, the Company could be
required to repurchase up to 1.6 million shares of current Series A redeemable
convertible preferred stock at a liquidation value of up to $48.0 million,
which was equal to the amount of the funds remaining in the restricted cash
account, following AOL's release of $43.5 million of restricted cash in January
2001, excluding any interest earned on such funds. The set-top box was not
launched by December 31, 2001 and the Company recently modified its agreements
with AOL so that AOL has 100 days from the agreed upon launch date to provide
written notice to the Company if it intends to exercise its put option (see
Note 17). At this point, the Company has not agreed with AOL on this agreed
upon launch date and the Company believes that AOL does not plan to deploy the
AOL TV/TiVo set-top box as originally envisioned. The Company is in discussion
with AOL regarding modification of the terms of the current agreements,
including product definition, development funding , deployment, launch date,
and other commercial terms. There can be no assurances about the outcome of
these discussions
Series A Redeemable Convertible Preferred Stock Dividend
Under the terms of the Investment Agreement between AOL and the Company, the
Company issued Series A redeemable convertible preferred stock, with certain
dividend and voting rights. Dividends on the Series A convertible preferred
stock are calculated by multiplying the Non-Government Institutional Funds
Simple Average Rate by $30.00 per share times the number of shares of Series A
convertible preferred stock outstanding. Dividends are payable quarterly as
declared by the Company's Board of Directors. Dividends for the year ended
January 31, 2002 were $3.0 million and for the one-month transition period
ended January 31, 2001 were $423,000. Dividends were $1.5 million and zero for
the calendar years ended December 31, 2000 and December 31, 1999, respectively.
As of January 31, 2002, dividends payable were $620,000.
Initial Common Stock Warrants A and B
In January 2001, the Second Amendment to the AOL Investment Agreement
provided for the reduction in the exercise price of the two initial warrants.
The Company issued amended warrants to AOL, which reduced the per share
exercise price of AOL's warrant to purchase 2,308,475 shares of common stock
from $23.11 to $7.29, and reduced the per share exercise price of AOL's warrant
to purchase 295,428 shares of common stock from $30.00 to $7.29. The initial
warrants are vested immediately and exercisable as follows:
. Initial Warrant A--AOL was issued warrants to purchase 2,308,475 shares
of common stock at $7.29 per share. The Company is expensing the
estimated incremental fair value of the repriced warrants of $4.2 million
over the remaining term of the Commercial Agreement (original term of 3
years). The estimated fair value of the warrants was determined using the
Black-Scholes option-pricing model. The principal assumptions used in the
computation are: 9-month remaining life of the warrant; fair market
79
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
value at the date of issuance of $7.13 per share; a risk-free rate of
return of 6.05%; dividend yield of zero percent; and a volatility of 70%.
. Initial Warrant B--AOL was issued warrants to purchase 295,428 shares of
common stock at $7.29 per share. The Company is expensing the estimated
incremental fair value of the repriced warrants of $720,000 over the
remaining term of the Commercial Agreement (original term of 3 years).
The estimated fair value of the warrants was determined using the
Black-Scholes option-pricing model. The principal assumptions used in the
computation are: 33-month remaining life of the warrant; fair market
value at the date of issuance of $7.13 per share; a risk-free rate of
return of 6.05%; dividend yield of zero percent; and a volatility of 70%.
The Initial Warrant A expired on December 31, 2001. Initial Warrant B
expires December 31, 2003. The estimated incremental fair value of the warrants
of $4.9 million was recorded as prepaid marketing expense (contra-equity) of
which $1.9 million has been amortized as of January 31, 2002.
Performance Warrants
In conjunction with AOL's investment in September 2000, the Company issued
two performance warrants to AOL to purchase common stock. If AOL meets certain
performance criteria, it may exercise these two performance warrants to
purchase common stock. The warrants are exercisable as follows:
. Performance Warrant A--AOL was issued warrants to purchase up to
2,603,903 shares of common stock at the exercise price described below.
Performance Warrant A may be exercised within six months following the
execution of the Launch Commitment. The Launch Commitment is a binding
contractual commitment to market the Integrated Service to 1,500,000
activated users on Time Warner cable systems.
. Performance Warrant B--AOL was issued warrants to purchase up to
2,603,903 shares of common stock at the exercise price described below.
Performance Warrant B may be exercised within the six-month period
following the date on which AOL notifies the Company that 1,500,000
activated users of the Integrated Service exist at one time.
Performance Warrants A and B shall be valued at the date that AOL meets the
performance criteria. The exercise price for each performance warrant is equal
to 90% of the average of the last reported trading prices of the Common Stock
on the Nasdaq for the ten consecutive trading days preceding the date of AOL's
Notice of Exercise.
Performance Warrant A shall be valued at the date that TiVo receives a
written binding contractual commitment from AOL for the set- top box launch to
occur on cable television systems owned or controlled by Time Warner or its
affiliates in markets where TiVo has the potential to acquire at least 1.5
million activated users in the aggregate on such cable systems. Performance
Warrant B shall be valued at the date that it is probable that AOL will meet
the performance criteria of notifying the Company that 1,500,000 activated
users of the Integrated Service exist at one time.
80
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
If the Company were to value the performance warrants as of January 31,
2002, it would record the estimated value of the performance warrants of $3.8
million as prepaid marketing expense (contra-equity). If market conditions at
the time that AOL earns the performance warrants are different than those at
January 31, 2002 than the valuation of the warrants could significantly
increase or decrease from the following calculated valuation:
. Performance Warrant A--AOL would be issued warrants to purchase up to
2,603,903 shares of common stock at $6.45 per share. Performance Warrant
A would be valued when it is earned by AOL. The Company would expense the
estimated fair value of the warrants of $1.9 million over 3 years, the
term of the Commercial Agreement. The estimated fair value of the
warrants would be determined using the Black-Scholes option- pricing
model. The principal assumptions that would be used in the computation
are: 6-month term; fair market value at the date of issuance of $6.07 per
share; a risk-free rate of return of 1.83%; dividend yield of zero
percent; and a volatility of 50%.
. Performance Warrant B--AOL would be issued warrants to purchase up to
2,603,903 shares of common stock at $6.45 per share. Performance Warrant
B would be valued when it is probable of being earned by AOL. The Company
would expense the estimated fair value of the warrants of $1.9 million
over 3 years, the term of the Commercial Agreement. The estimated fair
value of the warrants would be determined using the Black-Scholes
option-pricing model. The principal assumptions that would be used in the
computation are: 6-month term; fair market value at the date of issuance
of $6.07 per share; a risk-free rate of return of 1.83%; dividend yield
of zero percent; and a volatility of 50%.
Additionally, Performance Warrants A and B would also become exercisable
immediately upon the occurrence of either a material breach of the Commercial
Agreement by the Company or if the Company enters into a definitive agreement
for a change of control of the Company. The performance warrants would expire
on the earlier of September 11, 2003 or in the event that AOL commits a
material breach of the Commercial Agreement.
Since these warrants are contingent on AOL's performance or probable
performance and the criteria have not been met at this time, the Company has
not recorded nor valued the performance warrants at this time in the financial
statements. If market conditions at the time that AOL earns the performance
warrants are different than those at January 31, 2002 than the valuation of the
warrants could significantly increase or decrease from the above amount.
Financial Covenants
Under the terms of the AOL Investment Agreement, the Company must maintain a
positive net cash position in excess of $25.0 million, measured at the end of
each fiscal quarter. Net cash is defined as consolidated current assets
(excluding deferred tax assets and escrowed funds) minus consolidated current
liabilities (excluding deferred revenue, deferred interest income on escrowed
funds, sublessee prepaid rent and leasing obligations). The Company advises AOL
monthly, on an informational basis, of the Company's net cash position. Per the
agreement, if the Company falls below the $25.0 million net cash position at
the end of the Company's fiscal quarter, AOL has the right to exercise its put
option. The Company was in compliance with the net cash position requirement as
of January 31, 2002.
The financial covenants shall terminate upon the earlier of the date of the
set-top box launch, so long as such set-top box launch occurs before the agreed
upon launch date, the expiration of the put option or the day following the
first anniversary of the agreed upon launch date.
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TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. CONVERTIBLE NOTES PAYABLE
On August 28, 2001, the Company closed a private placement of $51.8 million
of convertible notes payable and received cash proceeds, net of issuance costs
of approximately $40.1 million from accredited investors. TiVo received cash
proceeds of approximately $36.8 million from non-related party noteholders and
$6.9 million from existing stockholders for a total of $43.7 million. In
addition, the Company received non-cash proceeds of $8.1 million in the form of
advertising and promotional services from Discovery Communications, Inc.
("Discovery") and the National Broadcasting Company, Inc. ("NBC"), who are
existing shareholders. Issuance costs were approximately $3.6 million,
resulting in net cash proceeds of approximately $40.1 million. Of the total
proceeds of $51.8 million, $8.1 million was designated for advertising and
promotional services. As part of the transaction, the Company paid $5.0 million
in October 2001 to NBC for advertising that ran during the period beginning
October 1, 2001 and ended December 31, 2001.
The Company issued the notes under an indenture, dated August 28, 2001, with
the Bank of New York, as trustee. The Company filed a registration statement
with the Securities and Exchange Commission relating to the resale of the
notes, warrants and underlying common stock, which the Commission declared
effective on November 2, 2001. On November 4, 2001, pursuant to the terms of
the indenture, the conversion price of the notes was adjusted to $5.45 per
share.
The effects of recording these transactions in the Company's consolidated
financial statements were as follows:
. Cash and cash equivalents increased by $40.1 million for the net cash
proceeds from the offering. The $40.1 million is the gross proceeds from
issuance of the securities offered of $51.8 million, less the cash
issuance costs of $3.6 million and non-cash advertising and promotional
services consideration of $8.1 million.
. Prepaid expenses and other increased by $12.5 million for cash and
non-cash financing costs of $3.6 million and $552,000, respectively, and
the value of beneficial conversion of $8.3 million.
. Prepaid expenses and other--related parties increased by $13.1 million
for prepaid advertising. The non-cash proceeds from issuance of
convertible debt of $8.1 million was expensed advertising and promotional
services. In addition, the Company paid $5.0 million in October 2001, to
NBC for advertising that was expensed during the year ended January 31,
2002.
. Convertible notes payable, long-term increased by $30.2 million as a
result of the carrying value of the convertible notes payable which is
the face value of the notes less the discount on convertible notes
payable represented by the value of the warrants issued to noteholders.
. Convertible notes payable--related parties, long-term increased by $12.3
million as a result of the carrying value of the convertible notes
payable which is the face value of the notes less the discount on
convertible notes payable represented by the value of the warrants issued
to existing stockholders.
. Additional paid-in capital increased by $18.5 million for the value of
the warrants issued to noteholders, the warrants issued to investment
bankers for non-cash financing costs and the value of the beneficial
conversion.
. Amortization of cash financing expenses was $282,000 for the year ended
January 31, 2002.
. Amortization of non-cash financing expenses was $44,000 for the year
ended January 31, 2002.
. Amortization of the beneficial conversion was $414,000 for the year ended
January 31, 2002.
. Amortization of the discount on convertible notes payable was $762,000
for the year ended January 31, 2002.
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TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The private placement consisted of the following securities:
. $51,750,000 of 7% Convertible Senior Notes due 2006. The notes are
convertible at any time, unless earlier redeemed pursuant to their terms,
into TiVo common stock at a conversion price of $5.45 per share, the
average of the per share closing prices of the Company's common stock for
the ten consecutive trading days preceding November 4, 2001. A beneficial
conversion amount of $8.3 million was recorded a deferred financing
charge and will be amortized as additional interest expense over the life
of the debt or until the notes are converted to stock.
. Warrants to purchase TiVo common stock. Warrants were issued to
noteholders to purchase a total of approximately 2.5 million shares of
TiVo common stock, at an exercise price of $7.85 per share. The warrants
expire in 2006. The estimated fair value of the warrants of $5.6 million
was determined using the Black-Scholes option-pricing model. The
principal assumptions used in the Black-Scholes computation were: 5-year
term; fair market value at the date of issuance of $7.85 per share; a
risk-free rate of return of 4.42%; dividend yield of zero percent; and a
volatility of 50%.
. Additional Warrants. As part of the private placement, TiVo issued two
additional sets of warrants. The first set of warrants, which expire
after one year from date of issuance, unless earlier terminated, gives
warrantholders the right to purchase a total of approximately 3.8 million
shares of TiVo common stock at an exercise price of $6.73 per share. The
second set of warrants, which expire after five years from date of
issuance, unless earlier terminated, gives warrantholders the right to
purchase a total of approximately 1.3 million shares of TiVo common stock
at an exercise price of $7.85 per share. These five-year terminable
warrants may only be exercised if the one-year warrants have been
exercised. The estimated fair value of the warrants of $4.0 million was
determined using the Black-Scholes option-pricing model. The principal
assumptions for the one-year warrants were: 1-year term; fair market
value at the date of issuance of $6.73 per share; a risk-free rate of
return of 4.42%; dividend yield of zero percent; and a volatility of 50%.
The principal assumptions used in the Black-Scholes computation for the
five-year terminable warrants were: 5-year term; fair market value at the
date of issuance of $7.85 per share; a risk-free rate of return of 4.42%;
dividend yield of zero percent; and a volatility of 50%.
The total value of the warrants issued to convertible noteholders in the
private placement was $9.6 million and has been recorded as a discount on
the convertible notes payable. This discount will be amortized to interest
expense and accreted to the carrying value of the convertible notes payable
over the five-year life of the notes payable or until the notes are
converted to common stock.
11. SONY RELATIONSHIP
On October 12, 2001, the Company entered into a technology licensing
agreement with Sony Corporation, ("Sony Corporation"), a Japanese corporation,
pursuant to which the Company granted a non-exclusive license of its personal
digital recording technology to Sony Corporation and its affiliates for use in
Sony devices and services and a commitment to provide specific upgrades in the
future. TiVo also granted Sony Corporation a license to sublicense certain
technology to third parties in Japan under certain circumstances. In
consideration for the licenses granted under the agreement, Sony Corporation
paid the Company an upfront fee. The fee was recorded as deferred
revenue-related parties, short-term until all upgrades are delivered or the
contract has expired. The Company expects the revenue to be recognized in
fiscal year 2003. Under the terms of the agreement, Sony Corporation has agreed
to pay royalties to the Company in certain circumstances in connection with the
deployment of Sony video recording devices incorporating TiVo's personal
digital recording technology. The license agreement expires after seven years
unless earlier terminated under the terms of the agreement. Upon expiration, or
in the event of termination for certain breaches under the agreement, certain
of the licenses granted will continue, provided that Sony Corporation continues
to pay any required royalties and fees.
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TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In anticipation of the licensing arrangement, TiVo had formed a new
subsidiary, TiVo International, Inc., on October 9, 2001. The capital stock of
TiVo International consists of 1,000 shares of common stock, all of which are
issued and outstanding and owned by TiVo, and 40 shares of preferred stock, one
of which is issued and outstanding and owned by Sony Corporation. Pursuant to
an Intellectual Property Assignment Agreement, dated October 12, 2001, the
Company assigned to TiVo International all international and foreign
intellectual property rights in the Company's personal digital recording
technology. Concurrent with the execution of the assignment agreement, TiVo
also entered into an Intellectual Property License and Cooperation Agreement,
pursuant to which TiVo International granted a license under such international
and foreign rights back to TiVo.
Concurrent with the execution of the license agreement between TiVo Inc. and
Sony Corporation, TiVo International entered into a license agreement with Sony
Corporation, pursuant to which it granted a non- exclusive license under the
international and foreign intellectual property rights assigned to TiVo
International under the Assignment Agreement. TiVo International also granted
Sony Corporation a license to sublicense such rights to third parties in Japan
under certain circumstances. In consideration for the licenses granted under
this agreement, Sony Corporation paid an upfront fee to TiVo International.
Under the terms of the agreement, Sony Corporation is also required to pay
royalties to TiVo International in connection with Sony video recording devices
incorporating the Company's personal digital recording technology. Sony
Corporation will also be required to pay TiVo International fees and royalties
in connection with its grant of a sublicense. The license agreement expires
after seven years unless earlier terminated under the terms of the agreement.
Upon expiration or in the event of termination for certain breaches under the
agreement, certain of the licenses granted will continue, provided that Sony
Corporation continues to pay the required royalties and fees.
12. AT&T BROADBAND MARKETING RELATIONSHIP
On November 7, 2001, the Company entered into a marketing relationship with
AT&T Broadband, pursuant to which AT&T Broadband will market the TiVo digital
video recorder and the TiVo Service to its cable customers in the Boston,
Denver and Silicon Valley areas. AT&T Broadband cable customers are being
offered the opportunity to purchase a newly designed TiVo digital video
recorder for $299.99 and subscribe to the TiVo Service at a monthly rate of
$12.95 or a one-time payment of $249 for a lifetime subscription to the TiVo
Service.
For each AT&T Broadband cable subscriber who activates the TiVo Service
under this arrangement, TiVo will remit to AT&T Broadband a portion of the
subscription fee for the activation. The Company will also share with AT&T
Broadband a portion of the revenues received from the advertising and
promotional activities on the TiVo digital video recorders deployed to AT&T
Broadband customers under the terms of the arrangement. The amount paid to AT&T
Broadband as of January 31, 2002 was $10,000.
13. MARKETING AND MANUFACTURING AGREEMENTS
Quantum Agreement
In November 1998, the Company entered into a hard disk supply agreement with
Quantum to allow the Company or certain third-party manufacturers (the buyer)
to purchase up to an agreed-upon number of hard disk drives used in the
personal video recorder and other devices that enable the TiVo Service. Under
the terms of the agreement, the Company is entitled to a discounted purchase
price if certain milestones are met. TiVo has agreed to share with Quantum a
portion of the TiVo Service subscription fees it receives from the personal
video recorders and other devices equipped with these hard disk drives. For the
year ended January 31, 2002, the Company expensed $970,000 as sales and
marketing--related parties expense.
84
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DIRECTV Agreement
The Company entered into an agreement with DIRECTV to promote and offer
support for the TiVo Service and products that enable the TiVo Service (the
"DIRECTV Agreement"). Under the DIRECTV Agreement, DIRECTV provides a variety
of marketing and sales support to promote TiVo and the TiVo Service,
collaborate on certain product development efforts and make a portion of the
bandwidth capacity of DIRECTV's satellite network available to TiVo.
In April 1999, the Company issued 1,852,329 shares of common stock in
exchange for marketing services under the DIRECTV Agreement. The shares were
non-forfeitable and were valued at an estimated fair value of $6.50 per share.
The Company recorded prepaid marketing expenses classified as a contra-equity
account related to the issuance of these shares of common stock of $12.0
million. These prepaid marketing expenses are expensed as the marketing
services are provided over the two-year service period. The Company expensed
$3.8 million, $502,000, $6.0 million and $1.7 million during the fiscal year
ended January 31, 2002, the one-month transition period ended January 31, 2001
and calendar years ended December 31, 2000 and 1999, respectively.
Additionally, in April 1999, the Company issued 1,128,867 shares of common
stock in exchange for a $2.8 million promissory note due at the end of a
three-year service period which began October 2000. The shares were valued at
an estimated fair value of $6.50 per share. The $4.5 million of estimated fair
value in excess of the balance of the note was recorded as a prepaid marketing
expense contra-equity account. This $4.5 million prepaid marketing expense is
amortized into sales and marketing--related parties expense as the bandwidth
services are provided over the three-year service period. DIRECTV may repay the
note either by providing bandwidth capacity at no additional charge or by
paying in cash. At the end of the three-year service period, if specified
milestones are not achieved, TiVo will have the right to repurchase some or all
of these shares at $.001 per share. Amortization of the prepaid marketing
expense and the note receivable began in calendar year 2000. For the fiscal
year ended January 31, 2002, the one-month transition period ended January 31,
2001 and calendar year ended December 31, 2000, $941,000, $78,000 and $235,000
had been amortized, respectively, for providing bandwidth as repayment of the
note receivable as sales and marketing--related parties expense. Also, $1.5
million, $125,000 and $376,000 had been amortized for prepaid marketing expense
as sales and marketing--related parties expense for the fiscal year ended
January 31, 2002, the one-month transition period ended January 31, 2001 and
calendar year ended December 31, 2000, respectively.
In addition to the equity consideration for DIRECTV's marketing services
described above, DIRECTV receives a percentage of TiVo's subscription revenues
attributable to DIRECTV/TiVo subscribers. These amounts are expensed as earned
and included in sales and marketing--related parties expense.
On October 6, 2000 TiVo and DIRECTV signed a Warrant and Registration Rights
Agreement. Under the terms of this agreement, DIRECTV has the right to purchase
shares of TiVo common stock for each sale of the DIRECTV receiver with TiVo
recorder. The strike price is calculated as the average daily closing price of
a share of common stock of the Company as reported on the Nasdaq for the five
trading days of the month in which the warrants were earned. As of January 31,
2002, DIRECTV had earned the right to receive common stock warrants to purchase
155,941 shares at exercises prices ranging from $4.58-$12.88. The fair value of
each warrant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for grants:
weighted average risk-free interest rates of between 3.99% and 5.85%; expected
dividend yield of zero percent; expected lives of two years for the warrants;
and expected volatility of 70%. The value of warrants of $173,000, $76,000 and
$121,000 was expensed as sales and marketing--related parties expense for
calendar year ended December 31, 2000, the one-month transition period ended
January 31, 2001 and fiscal year ended January 31, 2002, respectively.
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TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the fourth quarter of 2000, TiVo, Philips, Sony, Hughes and DIRECTV
signed nine-month Marketing Agreements to encourage the sales of the DIRECTV
receiver with TiVo Service. Under the terms of these agreements, TiVo
recognizes a sales and marketing--related parties expense on each sale of a
DIRECTV receiver with TiVo Service to a consumer from an authorized DIRECTV
dealer. All payments to dealers are made through DIRECTV. As of January 31,
2002, $17.2 million had been recognized as sales and marketing--related parties
expense.
On September 28, 2001, the Company entered into a letter agreement with
DIRECTV, which modified the terms of the then-existing buy-down contribution
arrangement pursuant to which TiVo and DIRECTV contribute an amount of money to
DIRECTV dealers selling DIRECTV receivers with TiVo Service. The letter
agreement also modified the terms of the revenue-sharing arrangement with
DIRECTV, and thereby effectively eliminated the Company's obligation to issue
warrants to DIRECTV under the Warrant and Registration Rights Agreement, dated
October 6, 2000, between TiVo and DIRECTV, other than those warrants which had
accrued under the Warrant and Registration Rights Agreement prior to July 7,
2001. The letter agreement additionally provides for the delivery of certain
marketing assets to us by DIRECTV and amends certain portions of the Marketing
Agreement with DIRECTV, dated April 13, 1999. The letter agreement fixed the
allocation of the buy-down contribution payments and the rates of the revenue
share through January 31, 2002. On January 7, 2002, TiVo entered into another
letter agreement with DIRECTV, which amended and supplemented the September 28,
2001 letter agreement, extending the buy-down contribution arrangement beyond
January 31, 2002 and setting forth additional buy-down contribution allocations
and revenue share rates for such subsequent period.
Subsequent to fiscal year ended January 31, 2002 the Company entered into
new agreements with DIRECTV (see Note 17).
Philips Agreement
On March 31, 1999, the Company entered into an agreement with Philips for
the manufacture, marketing and distribution of personal video recorders that
enable the TiVo Service. Subject to certain limitations, this agreement granted
Philips the right to manufacture, market and sell personal video recorders that
enable the TiVo Service in North America. Philips was also granted the right to
manufacture, market and sell personal video recorders in North America that
incorporates both DIRECTV's satellite receiver and the TiVo Service. The
Company also granted Philips a limited license to TiVo technology for the
purpose of manufacturing personal video recorders that enable the TiVo Service.
The Company has agreed to pay Philips a subsidy on each personal video
recorder manufactured and sold by Philips under this agreement. A portion of
the subsidy amount paid to Philips is due when the personal video recorder is
shipped. The remaining portion is due when the subscriber activates the TiVo
Service. The Company will record the subsidy as sales and marketing--related
parties expense. In addition to these amounts, the Company agreed to pay
Philips a fixed amount per month for each Philips-branded personal video
recorder that has an active subscription to the TiVo Service. As of December
31, 1999, the Company incurred $2.2 million as sales and marketing--related
parties expense. TiVo paid this entire amount as of December 31, 2000. For the
fiscal year ended January 31, 2002, the one-month transition period ended
January 31, 2001 and calendar year ended December 31, 2000, $9.2 million, $1.5
million and $16.7 million had been recognized as sales and marketing--related
parties expense, respectively. Of these amounts, as of March 18, 2002, $21.7
million had been paid.
As part of a general reorganization of its U.S. consumer electronics
business, Philips ceased manufacturing TiVo personal video recorders in fiscal
year ending January 31, 2002. TiVo and Philips have had discussions
86
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
concerning the potential Philips production of digital video recorder products
based on TiVo's Series2 hardware platform. However, no agreement has been
reached and there can be no assurance that Philips will continue to actively
manufacture digital recorders that enable the TiVo Service.
Sony Agreement
On August 6, 1999, the Company entered into a Letter of Intent with Sony for
the manufacture, marketing and distribution of personal video recorders that
enable the TiVo Service. Subject to certain limitations, this agreement grants
Sony the right to manufacture, market and sell personal video recorders that
enable the TiVo Service in North America. Sony was also granted the right to
manufacture, market and sell personal video recorders in North America that
incorporates both DIRECTV's satellite receiver and the TiVo Service. The
Company also granted Sony a limited to TiVo technology for the purpose of
developing and manufacturing personal video recorders and other devices that
enable the TiVo Service.
The Company has agreed to pay Sony a subsidy on each personal video recorder
manufactured and sold by Sony under this agreement. The amount of the subsidy
is periodically adjusted based on Sony's manufacturing costs and selling
prices. The subsidy amount paid to Sony is due when the personal video recorder
is shipped. The Company records the subsidy as sales and marketing--related
parties expense upon shipment. In addition to these amounts, the Company has
agreed to pay Sony a calculated amount per month for each Sony-branded personal
video recorder that has an active subscription to the TiVo Service. For the
fiscal year ended January 31, 2002, the one-month transition period ended
January 31, 2001 and the calendar year ended December 31, 2000, $4.0 million,
$737,000 and $20.5 million had been recognized as sales and marketing--related
parties expense, respectively. Of these amounts, as of March 18, 2002, the
entire obligation had been paid.
TiVo and Sony have had discussions concerning potential Sony production of
digital video recorder products based on TiVo's Series2 hardware platform.
However, at this time, no agreement has been reached.
Thomson Multimedia S.A.
On May 31, 2000, the Company entered into a Letter of Intent with Thomson
Multimedia S.A. for the manufacture, marketing and distribution of personal
video recorders that enable the TiVo Service. Subject to certain limitations,
this agreement grants Thomson the right to manufacture, market and sell
personal video recorders that enable the TiVo Service in the United Kingdom and
Ireland. TiVo provides the TiVo Service in cooperation with Sky Broadcasting
and other operators of TV broadcast services in the United Kingdom. The Company
also agreed to pay Thomson a calculated amount per month for each sale of a
Thomson manufactured personal video recorder. For both the fiscal year ended
January 31, 2002 and the one-month transition period ended January 31, 2001
zero had been recognized as sales and marketing expense. For calendar year
ended December 31, 2000, $4.0 million had been recognized as sales and
marketing expense. At March 18, 2002, the entire obligation had been paid.
Hughes Network Systems
On August 31, 2000 the Company entered into a Technology License Agreement
with Hughes Network Systems for the manufacture and distribution of personal
video recorders that enable the TiVo Service. Subject to certain limitations,
the agreement grants Hughes the right to manufacture and sell personal video
recorders that enable the TiVo Service in the United States. Hughes was also
granted the right to manufacture and sell personal
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TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
video recorders in the United States that incorporate both DIRECTV's satellite
receiver and the TiVo Service. The Company also granted Hughes a license to
TiVo technology for the purpose manufacturing personal video recorders and
other devices that enable the TiVo Service.
Creative Artists Agency Agreement
In July 1999, the Company entered into an agreement with Creative Artists
Agency, LLC, ("CAA"), for the marketing and promotional support of the personal
video recorder. CAA was issued warrants to purchase 192,123 shares of Series I
preferred stock for $10.41 per share. The Company expensed the estimated fair
value of the warrants of $1.4 million over one year. The estimated fair value
of the warrants was determined using the Black-Scholes option pricing model.
The principal assumptions used in the computation are: one year term; deemed
fair value at the date of issuance of $8.50 per share; a risk-free rate of
return of 5.07%; dividend yield of zero percent; and a volatility of 50%. As a
result of CAA's exercise of these warrants, upon the closing of the initial
public offering, TiVo issued 67,122 shares of preferred stock. The 67,122
shares of preferred stock were converted to common stock on a one-for-one basis
upon the closing of the initial public offering.
14. COMMITMENTS AND CONTINGENCIES
Facilities Leases
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. Monthly rent is approximately $236,000 with built-in base rent
escalations periodically throughout the lease term. Rent expense is recognised
using the straight-line method.
In April 2001, the Company entered into a lease for its UK office with
Thomas Lawrence & Sons (Bracknell) Limited for Prince Leopold House in Windsor,
Berkshire. The lease has a five-year term. Monthly rent is approximately $8,000.
Rent expense under operating leases was approximately $7.3 million,
$217,000, $2.4 million and $1.0 million for the fiscal year ended January 31,
2002, the one-month transition period ended January 31, 2001 and calendar years
ended December 31, 2000 and 1999, respectively. In November 2001, the Company
decided to vacate a portion of its corporate office. The Company is actively
looking for a tenant for the space. As a result of the decision to vacate the
space, an accrual and an expense were recorded reflecting the Company's best
estimate of loss under the agreement.
Equipment Lease Line
In March 1999, the Company entered into an equipment lease line for $2.5
million over the 12 months following the date of the lease. The annual interest
rate is 7.25%, and the line is repayable over 36 months. The lessor received a
warrant for 60,814 shares of the Company's Series B preferred stock at an
exercise price of $1.26 per share. The Company expenses the estimated fair
value of the warrants of $304,000 over the life of the lease. The estimated
fair value of the warrants was determined using the Black-Scholes option
pricing model. The principal assumptions used in the computation are: ten year
term, deemed fair value at the date of issuance of $5.50 per share, a risk-free
rate of return of 5.07%, dividend yield of zero percent and a volatility of
50%. As of January 31, 2002, $2.3 million of the available lease line has been
used and has been accounted for as a capital lease. The current portion of the
capital lease obligation, net of interest expense, at January 31, 2002, January
31, 2001, December 31, 2000 and 1999 is $536,000, $796,000, $792,000 and
$624,000, respectively. The unused equipment lease line expired February 2000.
88
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments as of January 31, 2002, by calendar year are
as follows:
Equipment
Year Facilities Leases Lease Line Total
---- ----------------- ---------- -----------
2002............... $ 2,755,000 $551,000 $ 3,306,000
2003............... 3,081,000 2,000 3,083,000
2004............... 3,170,000 -- 3,170,000
2005 and thereafter 7,097,000 -- 7,097,000
----------- -------- -----------
Total....... $16,103,000 $553,000 $16,656,000
=========== ======== ===========
Convertible Debt
In April 1999, the Company entered into a secured convertible debenture
purchase agreement with certain stockholders, which terminated on December 31,
1999. Under the terms of the agreement, TiVo could borrow up to $3.0 million at
an interest rate of 4.67% per annum. The debentures delivered by TiVo for any
loan made under this agreement were convertible into common stock on a
one-for-one basis and secured by substantially all of the Company's assets
other than intellectual property.
In conjunction with the agreement, TiVo issued warrants to purchase 81,522
shares of common stock at an exercise price of $2.50 per share. Deferred
financing costs of $341,000 were recorded using the estimated fair value of the
warrants at the date of issuance. The estimated fair value of the warrants was
determined using the Black-Scholes option pricing model. The principal
assumptions used in the computation were: five year term; deemed fair value at
the date of issuance of $5.50 per share; a risk free rate of return of 5.07%;
dividend yield of zero percent; and a volatility of 50%. During the year ended
December 31, 1999, the entire value of the warrants of $341,000 was expensed.
The Company issued 81,522 shares of common stock as a result of the exercise of
the warrants upon the closing of the initial public offering of the Company's
common stock.
15. RETIREMENT PLAN
In December 1997, the Company established a 401(k) Retirement Plan (the
"Retirement Plan") available to employees who meet the plan's eligibility
requirements. Participants may elect to contribute a percentage of their
compensation to the Retirement Plan up to a statutory limit. Participants are
fully vested in their contributions. The Company may make discretionary
contributions to the Retirement Plan as a percentage of participant
contributions, subject to established limits. The Company has not made any
contributions to the Retirement Plan through January 31, 2002.
16. ADOPTION OF STOCKHOLDER RIGHTS PLAN
On January 9, 2001, TiVo's Board of Directors declared a dividend
distribution of one Preferred Share Purchase Right ("Right") on each
outstanding share of TiVo common stock ("the Rights Plan"). Subject to limited
exceptions, the Rights will be exercisable if a person or group acquires 15% or
more of the Company's common stock or announces a tender offer for 15% or more
of the common stock, ("Acquiring Person"). Under certain circumstances, each
Right will entitle stockholders to buy one one-hundredth of a share of newly
created Series B Junior Participating Preferred Stock of TiVo at an exercise
price of $60.00 per Right. The TiVo Board will be entitled to redeem the Rights
at $.01 per Right at any time before a person has acquired 15% or more of the
outstanding common stock.
The Rights are intended to enable all TiVo stockholders to realize the
long-term value of their investment in the Company. They do not prevent a
takeover, but should encourage anyone seeking to acquire TiVo to negotiate with
the Board of Directors prior to attempting a takeover. The Rights Plan will
expire in January 2011.
89
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Rights are not being distributed in response to any specific effort to
acquire control of TiVo. The Rights are designed to assure that all TiVo
stockholders receive fair and equal treatment in the event of any proposed
takeover of TiVo and to guard against partial tender offers, open market
accumulations and other abusive tactics to gain control of TiVo without paying
all stockholders a control premium.
If a person becomes an Acquiring Person, each Right will entitle its holder
to purchase, at the Right's then-current exercise price, a number of common
shares of TiVo having a market value at that time of twice the Right's exercise
price. Rights held by the Acquiring Person will become void and will not be
exercisable to purchase shares at the bargain purchase price. If TiVo is
acquired in a merger or other business combination transaction which has not
been approved by the Board of Directors, each Right will entitle its holder to
purchase, at the Right's then-current exercise price, a number of the acquiring
company's common shares having a market value at that time of twice the Right's
exercise price.
The dividend distribution to establish the new Rights Plan was paid to
stockholders of record on January 31, 2001. The Rights will expire in January
2011. The Rights distribution is not taxable to stockholders.
17. SUBSEQUENT EVENTS
Second Agreement with Acqua Wellington North American Equities Fund, Ltd.
On February 13, 2002, the Company entered into a second common stock
purchase agreement which, under certain circumstances, may allow TiVo to sell
to Acqua Wellington North American Equities Fund, Ltd. up to $19.0 million of
the Company's common stock over the fourteen-month period ending on April 13,
2003. The Company views this purchase agreement as an auxiliary financing tool
with the potential to provide TiVo with an efficient and flexible mechanism to
raise cash to fund working capital needs, depending upon the market price of
the Company's common stock and certain other conditions set forth in the
purchase agreement.
The purchase agreement provides that any stock the Company sells pursuant to
the purchase agreement will be sold at a discount to the market price at the
time of the sale of between 3% to 5.4%, unless TiVo agrees otherwise with Acqua
Wellington. The amount and timing of each sale of common stock under the
purchase agreement will be at the Company's discretion, subject to certain
potential limitations.
From time to time, the Company may present Acqua Wellington with draw down
notices over a draw down period consisting of two periods of ten consecutive
trading days each, unless the Company agrees otherwise with Acqua Wellington.
Each draw down notice sets forth a threshold price and the dollar value of
shares Acqua Wellington is obligated to purchase during the draw down period.
The threshold price the Company chooses, which cannot be less than $3.00
without the consent of Acqua Wellington, establishes the maximum value of the
stock the Company can obligate Acqua Wellington to buy during the period and
the discount that Acqua Wellington will receive, unless the Company agrees
otherwise with Acqua Wellington. Once presented with a draw down notice, Acqua
Wellington is required to purchase a pro rata portion of the shares on each
trading day during the draw down period on which the daily volume weighted
average price for the Company's common stock exceeds the threshold price
determined by TiVo. The per share purchase price for the shares equals the
daily volume weighted average price of the Company's common stock on each date
during the draw down period on which shares are purchased, less a discount
ranging from 3% to 5.4%, based on the threshold price, unless the Company
agrees otherwise with Acqua Wellington. If the daily volume weighted average
price of the Company's common stock falls below the threshold price on any
trading day during a draw down period, Acqua Wellington will not be obligated
but still may purchase the pro rata portion of shares of common stock allocated
to that day at the threshold price for the draw down period, less the discount.
The number of shares Acqua Wellington would
90
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be obligated to buy on any trading day during a draw down period is arrived at
by dividing that day's pro rata part of the total purchase amount by that day's
volume weighted average price, less Acqua Wellington's discount. The total
number of shares Acqua Wellington would be required to purchase during a draw
down period is the aggregate of the daily amounts.
The purchase agreement also provides that from time to time and at the
Company's discretion it may grant Acqua Wellington the right to exercise one or
more call options to purchase additional shares of the Company's common stock
during each draw down period for the amount that it specifies, so long as the
aggregate of all such call option amounts and draw down amounts under the
purchase agreement do not exceed $19,000,000. Upon Acqua Wellington's exercise
of the call option, the Company will issue and sell the shares of its common
stock subject to the call option at a price equal to the greater of the daily
volume weighted average price of the Company's common stock on the day Acqua
Wellington notifies the Company of its election to exercise its call option or
the threshold price for the call option determined by the Company and set forth
in the draw down notice, less a discount ranging from 3% to 5.4%, based on the
threshold price, unless the Company agrees otherwise with Acqua Wellington.
The purchase agreement further provides that if, during a draw down period
with Acqua Wellington, the Company enters into an agreement with a third party
to issue common stock or securities convertible into common stock, the
principal purpose of which is to raise capital, Acqua Wellington will have the
option to purchase shares of the draw down amount and any call option amounts
requested by the Company at the price otherwise applicable to the sale to Acqua
Wellington, or at the third party's price. Acqua Wellington may also decide not
to purchase the shares during that draw down period. If, between draw down
pricing periods, the Company enters into an agreement with a third party to
issue common stock or securities convertible into common stock, the principal
purpose of which is to raise capital, Acqua Wellington will have the option to
purchase up to the draw down amount that would be applicable based on the gross
price per share to be paid for the common stock in the other financing on the
same terms and conditions contemplated in the other financing, net of the third
party's discount and fees, or, if the applicable share price is below the
minimum threshold price, up to 20% of the total amount to be raised by the
Company the other financing.
The shares of common stock which it may sell pursuant to the purchase
agreement are registered under the Securities Act of 1933 pursuant to an
effective Registration Statement on Form S-3 (File No. 333-53152).
Agreements with DIRECTV, Inc.
On February 15, 2002, the Company entered into a new product development
agreement and a services agreement with DIRECTV, Inc., with whom it jointly
introduced the first DIRECTV receiver with the Company's digital video
recording technology in October of 2000. Under the terms of the new development
agreement, DIRECTV has agreed to pay TiVo a technology development fee to
develop a next-generation advanced DIRECTV receiver based on the Company's
recently announced Series2 digital video recording technology platform. Under
this agreement, DIRECTV has assumed primary responsibility for customer
acquisition and support for all next-generation DIRECTV receivers, as well as
packaging and branding of DIRECTV's digital video recording services. Provided
that the Company meets its obligations under the agreement, TiVo will not be
required to subsidize or to make other payments to support the sale of current
or next-generation receivers. DIRECTV will pay TiVo per-account monthly fees to
provide server support and limited customer support to users of the
next-generation receivers. In addition, upon deployment of the next-generation
receivers, the Company's compensation for monthly subscribers of current
DIRECTV receivers with its digital recording service will shift to a similar
per-account monthly fee basis. The term of the product development agreement is
five years. Under the agreement, DIRECTV additionally has the option to
purchase a non-exclusive license of the Company's digital video recording
technology. In connection with its exercise of this option, DIRECTV would be
required to pay TiVo an upfront fee, per-unit royalties and other fees.
91
TIVO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the terms of the services agreement, DIRECTV has agreed to distribute,
under a revenue-sharing relationship, TiVo Service that enable advanced
automatic recording capabilities and the delivery of promotional video to the
receiver's hard-disk drive. In exchange for the Company's license to use the
software tools that allow DIRECTV to distribute these services directly,
DIRECTV has agreed to pay TiVo a fee. The license is granted to DIRECTV in
exchange for the fee on an annual basis and is renewable up to four times. The
term of the services agreement is three years.
On February 15, 2002, TiVo and DIRECTV entered into an Amendment to
Marketing Agreement and Tax Agreement. The amendment provides that several
terms of the Marketing Agreement, including those relating to, among other
things, the billing system, customer service and customer data, be replaced by
the terms set forth in the Development Agreement. In conjunction with the
execution of the Development Agreement, the amendment also revises provisions
relating to, among other things, permanent revenue share for the TiVo
stand-alone receiver, bandwidth allocation, promotional activities, the
subscriber billing system and certain indemnification obligations set forth in
the Marketing Agreement. The Amendment also modifies the Company's indemnity
obligations under the Tax Agreement, entered into with DIRECTV as of July 24,
2001, such that, following a specific milestone date set forth in the
Development Agreement, DIRECTV will have responsibility for taxability
determinations.
Agreement with Best Buy
On March 3, 2002, TiVo entered into an agreement with Best Buy, pursuant to
which Best Buy agreed that TiVo digital video recorders will be the only
stand-alone digital video recorders with electronic program guide-based service
sold by Best Buy. Under the agreement, Best Buy will be the exclusive retail
distributor of the TiVo-only branded Series 2 digital video recorders. The
agreement does not place any limitations on the manufacture and distribution by
the Company's partners of co-branded digital video recorders with the TiVo
Service. The agreement is effective until February 1, 2003, provided, however,
that either TiVo or Best Buy may terminate the agreement upon 60 days notice to
the other party.
Third Amendment to the AOL Investment Agreement
On March 28, 2002, TiVo and AOL entered into the Third Amendment, ("Third
Amendment"), to the Investment Agreement, dated as of June 9, 2000, as amended
by the First Amendment, dated as of September 11, 2000, and the Second
Amendment, dated as of January 30, 2001 (collectively, the "Investment
Agreement"). The Third Amendment amends the provision setting forth the length
of time AOL has to exercise its put option in the event the AOL TV/TiVo set-top
box launch has not occurred by the agreed upon launch date, extending the
exercise period from 90 days to 100 days following the agreed upon launch date.
At this point, we have not agreed with AOL on this agreed upon launch date as
we believe that AOL does not plan to deploy the AOL TV/TiVo set-top box as
originally envisioned. We are in discussions with AOL regarding modification of
the terms of the current agreements, including product definition, development
funding, deployment, launch date, and other commercial terms. There can be no
assurances about the outcome of these discussions.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
92
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Certain information required by Part III has been omitted from this Annual
Report on Form 10-K. This information is instead incorporated by reference to
our definitive proxy statement (the "Proxy Statement"), which will be filed
with the Securities and Exchange Commission in connection with our 2002 Annual
Meeting of Stockholders.
Identification of Executive Officers
Information regarding our directors is incorporated by reference from our
Proxy Statement. The information identifying our current executive officers is
found under the caption "Executive Officers and Key Employees" in Part I
hereof, and is also incorporated by reference into this Item 10.
The information concerning TiVo's executive officers is incorporated by
reference from our Proxy Statement.
Identification of Directors
The information concerning the Company's directors and nominees is
incorporated by reference from our Proxy Statement.
Compliance with Section 16(a) of the Exchange Act
The information concerning compliance with Section 16(a) of the Exchange Act
is incorporated by reference from the section entitled "Compliance with Section
16(a) of the Exchange Act" in the Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from our
Proxy Statement under the heading "Executive Compensation and Other
Information."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from our
Proxy Statement under the headings "Proposal No. 1 Election of Directors" and
"Security Ownership of Certain Beneficial Owners and Management."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from our
Proxy Statement under the heading "Certain Relationships and Related
Transactions."
93
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,AND REPORTS ON FORM 8-K
(a) 1. INDEX TO FINANCIAL STATEMENTS
See Item 8.
(a) 3. EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 of the
registrant's Quarterly Report on Form 10-Q filed on November 14, 2000).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 of the registrant's
Quarterly Report on Form 10-Q filed on November 15, 1999).
4.1 Indenture, dated August 28, 2001, between TiVo Inc. and The Bank of New York, as trustee
(incorporated by reference to Exhibit 4.1 of registrant's Current Report on Form 8-K filed on
August 30, 2001).
4.2 Form of 7% Convertible Senior Note (incorporated by reference to Exhibit 4.1 of registrant's
Quarterly Report on Form 10-Q filed on September 14, 2001).
4.3 Warrant Agreement, dated August 28, 2001 between TiVo Inc. and The Bank of New York, as
trustee (incorporated by reference to Exhibit 4.2 of registrant's Current Report on Form 8-K filed
on August 30, 2001).
4.4 Form of Five-Year Warrant (incorporated by reference to Exhibit 4.2 of registrant's Quarterly
Report on Form 10-Q filed on September 14, 2001).
4.5 Warrant Agreement, dated August 28, 2001 between TiVo Inc. and The Bank of New York, as
trustee (incorporated by reference to Exhibit 4.3 of registrant's Current Report on Form 8-K filed
on August 30, 2001).
4.6 Form of One-Year Warrant (incorporated by reference to Exhibit 4.3 of registrant's Quarterly
Report on Form 10-Q filed on September 14, 2001).
4.7 Warrant Agreement, dated August 28, 2001 between TiVo Inc. and The Bank of New York, as
trustee (incorporated by reference to Exhibit 4.4 of registrant's Current Report on Form 8-K filed
on August 30, 2001).
4.8 Form of Five-Year Terminable Warrant (incorporated by reference to Exhibit 4.4 of registrant's
Quarterly Report on Form 10-Q filed on September 14, 2001).
4.9+ Warrant and Registration Rights Agreement, dated as of October 6, 2000, by and between
DIRECTV, Inc. (incorporated by reference to Exhibit 4.1 of the registrant's Annual Report on
Form 10-K filed on April 2, 2001).
4.10 Stockholders and Registration Rights Agreement, dated as of June 9, 2000, between TiVo and
America Online, Inc. (incorporated by reference to Exhibit 4.4 of the registrant's Quarterly Report
on Form 10-Q filed on August 14, 2000).
4.11 Ninth Amended and Restated Investor Rights Agreement by and among TiVo andcertain investors,
dated as of August 6, 1999 (incorporated by reference to Exhibit 4.3 of the registrant's
Registration Statement on Form S-1 (SEC File No. 333-83515)).
4.12 Certificate of Designations of the Series B Junior Participating Preferred Stock of TiVo
(incorporated by reference to Exhibit 4.1 of the registrant's Current Report on Form 8-K/A filed
on January 19, 2001).
94
Exhibit
Number Description
- ------ -----------
4.13 Certificate of Correction to the Certificate of Designations of the Series B Junior Participating
Preferred Stock of TiVo (incorporated by reference to Exhibit 4.2 of the registrant's Current
Report on Form 8-K/A filed on January 19, 2001).
4.14 Registration Rights Agreement, dated as of August 28, 2001, by and among TiVo Inc. and the
purchasers listed on Schedule A thereto (incorporated by reference to Exhibit 99.3 of the
registrant's Current Report on Form 8-K filed on August 30, 2001).
10.1++ Vendor Agreement, dated as of March 3, 2002, between TiVo Inc. and Best Buy Co., Inc. (filed
herewith).
10.2++ Development Agreement, dated as of February 15, 2002, between TiVo Inc. and DIRECTV, Inc.
(filed herewith).
10.3++ Services Agreement, dated as of February 15, 2002, between TiVo Inc. and DIRECTV, Inc. (filed
herewith).
10.4++ Letter Agreement, dated as of September 28, 2001, between TiVo Inc. and DIRECTV, Inc. (filed
herewith).
10.5++ Letter Agreement, dated as of January 7, 2002, between TiVo Inc. and DIRECTV, Inc. (filed
herewith).
10.6++ Amendment to Marketing Agreement and Tax Agreement, dated as of February 15, 2002, between
TiVo Inc. and DIRECTV, Inc. (filed herewith).
10.7++ TiVo Inc. Technology License Agreement, dated as of October 12, 2001, between TiVo Inc. and
Sony Corporation (filed herewith).
10.8++ TiVo International, Inc. Technology License Agreement, dated as of October 12, 2001, between
TiVo International, Inc. and Sony Corporation (filed herewith).
10.9++ Addendum to TiVo/NBC Agreement, dated as of August 8, 2001, between TiVo Inc. and National
Broadcasting Company, Inc. (filed herewith).
10.10 Common Stock Purchase Agreement, dated as of December 21, 2001, between TiVo and Acqua
Wellington North American Equities Fund, Ltd. (incorporated by reference to Exhibit 10.1 of the
registrant's Current Report on Form 8-K filed on December 21, 2001).
10.11 Common Stock Purchase Agreement, dated as of February 13, 2002, between TiVo and Acqua
Wellington North American Equities Fund, Ltd. (incorporated by reference to Exhibit 10.1 of the
registrant's Current Report on Form 8-K filed on February 14, 2002).
10.12 Amendment No. 1 to Common Stock Purchase Agreement, dated as of March 1, 2002, between
TiVo Inc. and Acqua Wellington North American Equities Fund, Ltd. (filed herewith).
10.13 Rights Agreement, dated as of January 16, 2001, between TiVo and Wells Fargo Shareowner
Services, as Rights Agent (incorporated by reference to Exhibit 10.1 of the registrant's Current
Report on Form 8-K/A filed on January 19, 2001).
10.14 First Amendment to Rights Agreement, dated as of February 20, 2001, between TiVo Inc. and
Wells Fargo Shareowner Services, as Rights Agent (incorporated by reference to Exhibit 10. of the
registrant's Current Report on Form 8-K filed on February 28, 2001).
10.15 Investment Agreement, dated as of June 9, 2000, between TiVo Inc. and America Online, Inc.
(incorporated by reference to Exhibit 10.25 of the registrant's Quarterly Report on Form 10-Q filed
on August 14, 2000).
10.16 First Amendment to Investment Agreement, dated as of September 11, 2000, between TiVo Inc.
and America Online, Inc. (incorporated by reference to Exhibit 10.27 of the registrant's Quarterly
Report on Form 10-Q filed on November 14, 2000).
95
Exhibit
Number Description
- ------ -----------
10.17 Second Amendment to Investment Agreement, dated as of January 30, 2001, between TiVo Inc.
and America Online, Inc. (incorporated by reference to Exhibit 10.1 of the registrant's Current
Report on Form 8-K filed on March 15, 2001).
10.18 Third Amendment to Investment Agreement, dated as of March 28, 2002, between TiVo Inc. and
America Online, Inc. (filed herewith).
10.19+ Product Integration and Marketing Agreement, dated as of June 9, 2000, between TiVo Inc. and
America Online, Inc. (incorporated by reference to Exhibit 10.26 of the registrant's Quarterly
Report on Form 10-Q filed on August 14, 2000).
10.20 Escrow Agreement, dated as of September 11, 2000, among TiVo Inc., America Online, Inc. and
U.S. Trust Company, National Association (incorporated by reference to Exhibit 10.28 of the
registrant's Quarterly Report on Form 10-Q filed on November 14, 2000).
10.21 First Amendment to Escrow Agreement, dated as of January 30, 2001, between TiVo Inc. and
America Online, Inc. (incorporated by reference to Exhibit 10.2 of the registrant's Current Report
on Form 8-K filed on March 15, 2001).
10.22 Amended and Restated Warrant No. VW-A-1 to Purchase Shares of Common Stock issued to
America Online, Inc. (incorporated by reference to Exhibit 10.3 of the registrant's Current Report
on Form 8-K filed on March 15, 2001).
10.23 Amended and Restated Warrant No. VW-B-1 to Purchase Shares of Common Stock issued to
America Online, Inc. (incorporated by reference to Exhibit 10.4 of the registrant's Current Report
on Form 8-K filed on March 15, 2001).
10.24 Form of Indemnification Agreement between TiVo and its officers and directors (incorporated by
reference to Exhibit 10.1 of the registrant's Registration Statement on Form S-1 (SEC File
No. 333-83515)).
10.25 TiVo's 1999 Equity Incentive Plan and related documents (incorporated by reference to Exhibit
10.2 of the registrant's Registration Statement on Form S-1 (SEC File No. 333-83515)).
10.26 TiVo's Amended and Restated 1997 Equity Incentive Plan and related documents (incorporated by
reference to Exhibit 10.3 of the registrant's Registration Statement on Form S-1 (SEC File
No. 333-83515)).
10.27 TiVo's 1999 Employee Stock Purchase Plan and related documents (incorporated by reference to
Exhibit 10.4 of the registrant's Registration Statement on Form S-1 (SEC File No. 333-83515)).
10.28 TiVo's 1999 Non-Employee Directors' Stock Option Plan and related documents (incorporated by
reference to Exhibit 10.5 of the registrant's Annual Report on Form 10-K filed on March 30, 2000).
10.29+ Hard Disk Drive Supply Agreement between Quantum Corporation and TiVo, dated November 6,
1998 (incorporated by by reference to Exhibit 10.6 of the registrant's Registration Statement on
Form S-1 (SEC File No. 333-83515)).
10.30 First Amendment to Hard Disk Supply Agreement between Quantum and TiVo, dated June 25,
1999 (incorporated by reference to Exhibit 10.20 of the registrant's Registration Statement on
Form S-1 (SEC File No. 333-83515)).
10.31+ Warrant Purchase and Equity Rights Agreement between Quantum Corporation and TiVo, dated
November 6, 1998 and related documents (incorporated by reference to Exhibit 10.16 of the
registrant's Registration Statement on Form S-1 (SEC File No. 333-83515)).
10.32+ Master Agreement between Philips Business Electronics B.V. and TiVo, dated March 31, 1999
(incorporated by reference to Exhibit 10.7 of the registrant's Registration Statement on Form S-1
(SEC File No. 333-83515)).
96
Exhibit
Number Description
- ------ -----------
10.33+ Marketing Agreement between DIRECTV, Inc. and TiVo, dated April 13, 1999 (incorporated by
reference to Exhibit 10.8 of the registrant's Registration Statement on Form S-1 (SEC File
No. 333-83515)).
10.34+ Agreement between NBC Multimedia, Inc. and TiVo, dated April 16, 1999 (incorporated by
reference to Exhibit 10.9 of the registrant's Registration Statement on Form S-1 (SEC File
No. 333-83515)).
10.35 Sublease Agreement between Verity, Inc. and TiVo, dated February 23, 1998 (incorporated by
reference to Exhibit 10.10 of the registrant's Registration Statement on Form S-1 (SEC File
No. 333-83515)).
10.36 Amendment to Sublease Agreement between Verity, Inc. and TiVo, dated November 1998
(incorporated by reference to Exhibit 10.11 of the registrant's Registration Statement on Form S-1
(SEC File No. 333-83515)).
10.37 Second Amendment to Sublease Agreement between Verity, Inc. and TiVo, dated March 1999
(incorporated by reference to Exhibit 10.12 of the registrant's Registration Statement on Form S-1
(SEC File No. 333-83515)).
10.38 Consent of Landlord to Sublease between Verity, Inc. and TiVo, dated February 23, 1998
(incorporated by reference to Exhibit 10.13 of the registrant's Registration Statement on Form S-1
(SEC File No. 333-83515)).
10.39 Master Lease Agreement between Comdisco, Inc. and TiVo, dated February 12, 1999
(incorporated by reference to Exhibit 10.15 of the registrant's Registration Statement on Form S-1
(SEC File No. 333-83515)).
10.40 Warrant to Purchase Shares of Series A Preferred Stock issued to Randy Komisar, dated March 18,
1998 (incorporated by reference to Exhibit 10.17 of the registrant's Registration Statement on
Form S-1 (SEC File No. 333-83515)).
10.41 Warrant Agreement between Comdisco, Inc. and TiVo, dated February 12, 1999 (incorporated by
reference to Exhibit 10.18 of the registrant's Registration Statement on Form S-1 (SEC File
No. 333-83515)).
10.42 Secured Convertible Debenture Purchase Agreement between TiVo and certain of its investors,
dated April 8, 1999, and related documents (incorporated by reference to Exhibit 10.19 of the
registrant's Registration Statement on Form S-1 (SEC File No. 333-83515)).
10.43 TiVo's 401(k) Plan, effective December 1, 1997 (incorporated by reference to Exhibit 10.21 of the
registrant's Registration Statement on Form S-1 (SEC File No. 333-83515)).
10.44+ Tribune Media Services Television Listing Agreement between Tribune Media Services and TiVo,
dated June 1, 1998 (incorporated by reference to Exhibit 10.22 of the registrant's Registration
Statement on Form S-1 (SEC File No. 333-83515)).
10.45+ Amendment to the Data License Agreement between Teleworld Inc., and Tribune Media Services,
Inc. between Tribune Media Services and TiVo, dated November 10, 1998 (incorporated by
reference to Exhibit 10.23 of the registrant's Registration Statement on Form S-1 (SEC File
No. 333-83515)).
10.46 Lease Agreement between WIX/NSJ Real Estate Limited Partnership and TiVo, dated October 6,
1999 (incorporated by reference to Exhibit 10.24 of the Quarterly Report on Form 10-Q filed on
November 15, 1999).
23.1 Consent of Independent Public Accountants (filed herewith).
24.1 Power of Attorney (included in Part IV of this Form 10-K).
97
Exhibit
Number Description
- ------ -----------
99.1 Letter from TiVo Inc. to the Securities and Exchange Commission (filed herewith).
99.5 Form of Stock Option Grant used in connection with an option granted outside of TiVo's stock
option plans and related documents (incorporated by reference to Exhibit 99.5 of the registrant's
Registration Statement on Form S-1 (SEC File No. 333-83515)).
- --------
+ Confidential treatment granted as to portions of this exhibit.
++ Confidential treatment has been requested as to portions of this exhibit.
(b) Reports on Form 8-K
The registrant filed the following reports on Form 8-K during the quarter
ended January 31, 2002:
. Current Report on Form 8-K on November 13, 2001, regarding the
announcement of a Marketing arrangement with AT&T Broadband and the
conversion price of the convertible senior notes due 2006 was adjusted to
$5.45.
. Current Report on Form 8-K on November 26, 2001, regarding the
announcement of the registrant's earnings for the third quarter ended
October 31, 2001, commercial agreements with Sony and AT&T Broadband and
executive appointments and promotions.
. Current Report on Form 8-K on December 21, 2001, regarding the disclosure
of a common stock purchase agreement with Acqua Wellington North American
Equities Fund, Ltd. for the sale of up to $14.0 million of the
registrant's common stock at a discount to the market price.
. Current Report on Form 8-K on January 9, 2002, regarding the announcement
of our newest product, the TiVo Series2 digital video recorder, and
strategic relationships with RealNetworks, Inc., Jellyvision and Radiance
Technologies, Inc. to deliver new entertainment services for the TiVo
Series2 digital video recorder.
. Current Report on Form 8-K on January 10, 2002, regarding the
registrant's price to sale to Acqua Wellington North American Equities
Fund, Ltd., of 2,147,239 shares of the registrant's common stock at $6.52
per share.
The registrant subsequently filed the following:
. Current Report on Form 8-K on February 13, 2002, regarding the
announcement of the registrant's filing of a lawsuit against SONICblue
Incorporated and its wholly owned subsidiary, ReplayTV, Inc.
. Current Report on Form 8-K on February 14, 2002, regarding the
registrant's announcement of a common stock purchase agreement with Acqua
Wellington North American Equities Fund, Ltd. for the sale of up to $19.0
million of the registrant's common stock at a discount to the market
price.
. Current Report on Form 8-K on February 22, 2002, regarding the
announcement of agreements with DIRECTV, Inc. and the indemnification of
Sony against Command Audio Lawsuit.
. Current Report on Form 8-K on March 13, 2002, regarding the announcement
of the registrant's earnings for the fourth quarter and year ended
January 31, 2002, agreements with America Online, Inc. and the summary
judgment win in the Ezra Birnbaum litigation.
Trademark Acknowledgments
"Can't Miss TV", Jump logo, TiVo, TiVo Central, TiVolution and "What you
want, when you want it" are registered trademarks of TiVo Inc.
"Active Preview", "DIRECTIVO", Instant Replay logo, "Ipreview", "Life's too
short for bad TV", "Overtime Scheduler", "Personal TV", "Personal Video
Recorder", "Primetime Anytime",
98
"Season Pass", "See it, want it, get it", "Thumbs Down" (logo and text),
"Thumbs Up" (logo and text), "TiVo" (logo and character), "TiVomatic",
"TiVolution", "TrickPlay" are trademarks of the registrant. All other
trademarks or trade names appearing in this report are the property of their
respective owners.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TIVO INC.
Date: April 3, 2002
By: /s/ MICHAEL RAMSAY
----------------------------------
Michael Ramsay
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael Ramsay and David H. Courtney and each or
any one of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitutes or substitute, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ MICHAEL RAMSAY Chief Executive Officer and April 3, 2002
- ----------------------------- Chairman of the Board
Michael Ramsay (Principal Executive
Officer)
/s/ DAVID H. COURTNEY Executive Vice President, April 3, 2002
- ----------------------------- Worldwide Operations and
David H. Courtney Administration (Principal
Financial and Accounting
Officer)
/s/ JAMES BARTON Senior Vice President of April 3, 2002
- ----------------------------- Research and Development,
James Barton Chief Technical Officer and
Director
/s/ GEOFFREY Y. YANG Director April 3, 2002
- -----------------------------
Geoffrey Y. Yang
/s/ STEWART ALSOP Director April 3, 2002
- -----------------------------
Stewart Alsop
/s/ RANDY KOMISAR Director April 3, 2002
- -----------------------------
Randy Komisar
/s/ MICHAEL HOMER Director April 3, 2002
- -----------------------------
Michael Homer
- ----------------------------- Director April 3, 2002
Larry N. Chapman
/s/ JOHN S. HENDRICKS Director April 3, 2002
- -----------------------------
John S. Hendricks
- ----------------------------- Director April 3, 2002
David Zaslav
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