-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VtlCRk/2EGadoEZ9n8XyyiJ0W1KELp5lLOIq4pLWeb8aYThmMtGInY7vewPqFARp nJZajNM8pMeqQZnY50/Rbw== /in/edgar/work/20000814/0001012870-00-004400/0001012870-00-004400.txt : 20000921 0001012870-00-004400.hdr.sgml : 20000921 ACCESSION NUMBER: 0001012870-00-004400 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIVO INC CENTRAL INDEX KEY: 0001088825 STANDARD INDUSTRIAL CLASSIFICATION: [4841 ] IRS NUMBER: 770453167 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27141 FILM NUMBER: 698829 BUSINESS ADDRESS: STREET 1: C/O COOLEY GODWARD LLP STREET 2: FIVE PALO ALTO SQUARE 3000 EL CAMINO REA CITY: PALO ALTO STATE: CA ZIP: 94306-2155 BUSINESS PHONE: 4087476080 MAIL ADDRESS: STREET 1: 894 ROSS DRIVE STREET 2: SUITE 100 CITY: SUNNYVALE STATE: CA ZIP: 94089 10-Q 1 0001.txt FORM 10-Q DATED 6/30/2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q X Quarterly report pursuant to Section 13 or 15(d) of the Securities - ---- Exchange Act of 1934. For the quarterly period ended June 30, 2000. Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ________________ to __________________ Commission file number 000-27141 TIVO INC. (Exact name of registrant as specified in its charter) Delaware 77-0463167 - ----------------------------------- ---------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2160 Gold Street, PO Box 2160, Alviso, CA 95002 - ------------------------------------------ ---------------- (Address of principal executive offices) (Zip Code) (408) 519-9100 --------------------------------------------------------- (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of outstanding shares of the registrant's Common Stock, $0.001 par value, was 38,078,948 as of August 9, 2000. TABLE OF CONTENTS PART I : FINANCIAL INFORMATION........................................................................... 3 Item 1. Financial Statements......................................................................... 3 Balance Sheets............................................................................... 3 Statements of Operations..................................................................... 4 Statements of Stockholders' Equity........................................................... 5 Statements of Cash Flows..................................................................... 6 Notes to Financial Statements................................................................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................ 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk.................................... 24 PART II : OTHER INFORMATION.............................................................................. 25 Item 1. Legal Proceedings............................................................................ 25 Item 2. Changes in Securities and Use of Proceeds.................................................... 25 Item 3. Defaults Upon Senior Securities.............................................................. 25 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 25 Item 5. Other Information............................................................................ 25 Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-k............................. 27 Signatures............................................................................................ 29
2 PART I: Financial Information ITEM 1. FINANCIAL STATEMENTS TIVO INC. BALANCE SHEETS
June 30, December 31, 2000 1999 -------------------- -------------------- ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 95,832,000 $ 139,687,000 Short-term investments.................................... -- 6,168,000 Accounts receivable....................................... 76,000 127,000 Accounts receivable from related parties.................. 2,762,000 210,000 Prepaid expenses and other................................ 5,120,000 2,589,000 -------------------- -------------------- Total current assets.................................... 103,790,000 148,781,000 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,976,000 and $831,000 as of June 30, 2000 and December 31, 1999, respectively.................................. 17,043,000 4,061,000 -------------------- -------------------- Total assets................................... $ 120,833,000 $ 152,842,000 =================== ==================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts payable.......................................... $ 9,365,000 $ 8,432,000 Accrued liabilities....................................... 3,814,000 4,778,000 Accrued marketing-related parties......................... 11,600,000 2,349,000 Deferred revenue.......................................... 5,823,000 2,271,000 Current portion of obligations under capital lease........ 764,000 624,000 -------------------- -------------------- Total current liabilities............................... 31,366,000 18,454,000 Long-term portion of obligations under capital lease...... 1,009,000 1,141,000 Other long-term liabilities............................... 1,367,000 -- -------------------- -------------------- Total long-term liabilities............................. 2,376,000 1,141,000 -------------------- -------------------- Total liabilities.............................. 33,742,000 19,595,000 -------------------- -------------------- STOCKHOLDERS' EQUITY Common stock, par value $0.001: Authorized shares at June 30, 2000 and December 31, 1999 are 75,000,000................................. Issued and outstanding shares at June 30, 2000 and December 31, 1999 are 37,977,270 and 37,746,391, respectively........................................ $ 38,000 $ 38,000 Additional paid-in capital................................ 236,545,000 235,423,000 Deferred compensation..................................... (4,587,000) (6,170,000) Prepaid marketing expenses................................ (11,711,000) (16,341,000) Note receivable........................................... (2,822,000) (2,822,000) Retained deficit.......................................... (130,372,000) (76,881,000) -------------------- -------------------- Total stockholders' equity..................... 87,091,000 133,247,000 -------------------- -------------------- Total liabilities and stockholders' equity..... $ 120,833,000 $ 152,842,000 ==================== ====================
The accompanying notes are an integral part of these statements. 3 TIVO INC. STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended June 30, June 30, ---------------------------------- ------------------------------------ 2000 1999 2000 1999 --------------- ---------------- ----------------- -------------- Revenues................................. $ 719,000 $ 8,000 $ 1,143,000 $ 8,000 Costs and expenses Cost of services...................... 4,988,000 636,000 9,156,000 1,325,000 Research and development.............. 5,679,000 1,859,000 10,357,000 3,455,000 Sales and marketing................... 11,384,000 1,847,000 20,564,000 4,015,000 Sales and marketing-related parties... 5,349,000 382,000 9,896,000 382,000 General and administrative............ 3,631,000 1,057,000 6,322,000 2,182,000 Stock-based compensation.............. 919,000 187,000 1,888,000 187,000 Other operating expense, net.......... -- 201,000 -- 189,000 -------------- ---------------- ----------------- -------------- Loss from operations................ (31,231,000) (6,161,000) (57,040,000) (11,727,000) Interest income................. 1,907,000 224,000 3,731,000 277,000 Interest expense and other...... (112,000) (176,000) (182,000) (178,000) -------------- ---------------- ----------------- -------------- Net loss............................ $ (29,436,000) $ (6,113,000) $ (53,491,000) $ (11,628,000) ============== ================ ================= ============== Net loss per share Basic and diluted................... $ (0.82) $ (1.15) $ (1.50) $ (2.67) ============== ================ ================= ============== Weighted average common shares outstanding Basic and diluted..................... 35,742,878 5,311,611 35,548,160 4,356,323 ============== ================ ================= ==============
The accompanying notes are an integral part of these statements. 4 TIVO INC. STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Prepaid ----------------------- Paid-In Deferred Marketing Shares Amount Capital Compensation Expense ---------- ---------- ------------ --------------- ------------- BALANCE, DECEMBER 31, 1999................. 37,746,391 $38,000 $235,423,000 $(6,170,000) $(16,341,000) Exercise of stock options................ 60,712 -- 49,000 -- -- Common stock repurchases................. (20,834) -- (1,000) -- -- Recognition of deferred compensation........................... -- -- 365,000 (365,000) -- Stock-based compensation expense......... -- -- -- 969,000 -- Amortization of prepaid marketing expenses............................... -- -- -- -- 2,513,000 Net loss................................. -- -- -- -- -- ----------- --------- ------------- ------------- ------------- BALANCE, MARCH 31, 2000.................... 37,786,269 38,000 235,836,000 (5,566,000) (13,828,000) Issuance of common stock warrants for services........................... -- -- 193,000 -- -- Issuance of common stock - employee stock purchase plan........... 83,967 -- 1,142,000 -- -- Exercise of stock options................ 118,640 -- 97,000 -- -- Common stock repurchases................. (11,606) -- 8,000 -- -- Recognition of deferred compensation........................... -- -- (60,000) 60,000 -- Stock-based compensation expense......... -- -- -- 919,000 -- Amortization of prepaid marketing expenses............................... -- -- -- -- 2,117,000 Amortization of warrants................. -- -- (671,000) -- -- Net loss................................. -- -- -- -- -- ----------- --------- ------------- ------------- ------------- BALANCE, JUNE 30, 2000..................... 37,977,270 $38,000 $236,545,000 $(4,587,000) $(11,711,000) =========== ========= ============= ============= ============= Note Retained Receivable Deficit Total ------------ -------------- ------------- BALANCE, DECEMBER 31, 1999................. $(2,822,000) $(76,881,000) $133,247,000 Exercise of stock options................ -- -- 49,000 Common stock repurchases................. -- -- (1,000) Recognition of deferred compensation........................... -- -- -- Stock-based compensation expense......... -- -- 969,000 Amortization of prepaid marketing expenses............................... -- -- 2,513,000 Net loss................................. -- (24,055,000) (24,055,000) ------------ -------------- --------------- BALANCE, MARCH 31, 2000.................... (2,822,000) (100,936,000) 112,722,000 Issuance of common stock warrants for services........................... -- -- 193,000 Issuance of common stock - employee stock purchase plan........... -- -- 1,142,000 Exercise of stock options................ -- -- 97,000 Common stock repurchases................. -- -- 8,000 Recognition of deferred compensation........................... -- -- -- Stock-based compensation expense......... -- -- 919,000 Amortization of prepaid marketing expenses............................... -- -- 2,117,000 Amortization of warrants................. -- -- (671,000) Net loss................................. -- (29,436,000) (29,436,000) ------------ -------------- --------------- BALANCE, JUNE 30, 2000..................... $(2,822,000) $(130,372,000) $87,091,000 ============ ============== ===============
The accompanying notes are an integral part of these statements. 5 TIVO INC. STATEMENTS OF CASH FLOWS
Six Months Ended June 30, ----------------------------------- 2000 1999 ----------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss................................................... $ (53,491,000) $ (11,628,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... 1,145,000 182,000 Stock exchanged for services........................... -- 337,000 Issuance of warrants for services...................... 193,000 176,000 Amortization of prepaid marketing expenses............. 4,630,000 276,000 Amortization of warrants for services.................. (671,000) -- Stock-based compensation expense....................... 1,888,000 187,000 Changes in current assets and liabilities: Accounts receivable.................................... (2,501,000) (502,000) Inventories............................................ -- (1,083,000) Prepaid expenses and other............................. (2,531,000) (705,000) Accounts payable....................................... 933,000 383,000 Accrued liabilities.................................... (964,000) 1,535,000 Accrued marketing-related parties ..................... 9,251,000 -- Deferred rent and security deposit..................... 1,367,000 -- Deferred revenue....................................... 3,552,000 142,000 Net cash used in operating activities ................... (37,199,000) (10,700,000) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment, net................. (14,120,000) (162,000) Sale or (purchase) of short-term investments, net.......... 6,168,000 (7,459,000) ---------------- -------------- Net cash used in investing activities.................... (7,952,000) (7,621,000) ---------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of convertible preferred stock, net of issuance costs........................................... -- 27,339,000 Proceeds from issuance of common stock and exercise of stock options.................................................. 1,288,000 172,000 Repurchase of common stock................................. 8,000 (18,000) Increase in bank overdraft................................. -- 547,000 ---------------- -------------- Net cash provided by financing activities................ 1,296,000 28,040,000 ---------------- -------------- NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (43,855,000) 9,719,000 ---------------- -------------- CASH AND CASH EQUIVALENTS: Balance at beginning of period............................. 139,687,000 2,248,000 ---------------- -------------- Balance at end of period................................... $ 95,832,000 $ 11,967,000 ================ ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest..................................... $ 58,000 $ 2,000 Stock issued for a note receivable......................... -- 2,822,000 Equipment acquired under capital lease..................... 367,000 670,000 Deferred stock-based compensation.......................... 305,000 2,815,000
The accompanying notes are an integral part of these statements. 6 TIVO INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS TiVo Inc. (the "Company" or "TiVo") was incorporated in August 1997 as a Delaware corporation with facilities in San Jose, California. The Company has developed a subscription-based personal television service (the "TiVo Service") that provides viewers with the ability to pause, rewind and play back live or recorded television broadcasts, as well as to search for, watch and record programs. The TiVo Service also provides television listings, daily suggestions and special viewing packages. The TiVo Service relies on three key components: the personal video recorder, the TiVo remote control and the TiVo Broadcast Center. The Company conducts its operations through one reportable segment. The Company continues to be subject to certain risks, including the uncertainty of availability of additional financing; dependence on third parties for manufacturing, marketing and sales support; the uncertainty of the market for personal television; dependence on key management; limited manufacturing, marketing and sales experience and the uncertainty of future profitability. Unaudited Interim Financial Statements The accompanying balance sheet as of June 30, 2000 and the accompanying statements of operations, statements of stockholder's equity and statements of cash flows for the three months and six months ended June 30, 1999 and 2000 included herein have been prepared by the Company and are unaudited. The information furnished in the unaudited financial statements referred to above includes all normal adjustments that are, in the opinion of management, necessary for a fair presentation of such financial statements. The results of operations for the three months and six months ended June 30, 2000 are not necessarily indicative of results for the entire fiscal year or future periods. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and cash equivalents The Company classifies financial instruments as cash equivalents if the original maturity of such instruments is three months or less. Short-term investments Short-term investments consist of commercial paper investments and certificates of deposit with original maturities at the date of purchase ranging between three and twelve months. The Company classifies these investments as held to maturity and records the instruments at amortized cost, which approximates fair value due to the short maturities. Deferred rent Deferred rent of $475,000 included in other long-term liabilities is being amortized on a straight-line basis over 7 years, the life of the related lease. Net Loss Per Common Share Net loss per share is calculated in accordance with SFAS No. 128, "Earnings Per Share," and SEC Staff Accounting Bulletin No. 98 (SAB No. 98). Under the provisions of SFAS No. 128 and SAB No. 98, basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding. Shares used in the computation of all net loss per share amounts do not include repurchasable common stock issued to DIRECTV and unvested, repurchasable common stock issued under the employee stock option plans. 7 Diluted net loss per common share is calculated by dividing net loss by the weighted average number of common shares and dilutive common share equivalents outstanding. Diluted net loss per share does not include the effect of the antidilutive common share equivalents. Stock-Based Compensation and Stock Exchanged for Services The Company has elected to follow Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock options. Under APB 25, when the exercise price of employee stock options is less than the market price of the underlying stock on the date of grant, compensation expense is recorded for the difference between fair value and the exercise price. Expense associated with stock-based compensation is being amortized on an accelerated basis over the vesting period of the individual award, generally four years. The method of amortization is in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 28, under which value assigned to options vesting in future periods is ratably amortized beginning upon issuance of the option rather than at the vesting date. The Company has recorded stock-based compensation expense of $1,888,000 for the six months ended June 30, 2000. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The value of warrants, options or stock exchanged for services is expensed over the period benefited. The warrants and options are valued using the Black-Scholes option pricing model. To calculate the expense, the Company uses either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Revenue Recognition Subscription revenues represent revenues from customer subscriptions to the TiVo Service. Subscriptions to the TiVo Service are available on a monthly, annual or lifetime basis. Subscription fees are generally charged to customers' credit cards and are generally billed in advance on a monthly basis. A lifetime subscription covers the life of the particular personal video recorder purchased. Revenues from subscriptions are recognized ratably over the subscription period. Subscription revenues from lifetime subscriptions are recognized ratably over a four-year period, the best estimate of the useful life of the personal video recorder. Deferred revenue relates to subscription fees collected but for which service has not yet been provided. Sales and Marketing--Related Parties Sales and marketing--related parties consists of cash and non-cash charges related to the Company's agreements with DIRECTV, Inc. ("DIRECTV"), Philips Business Electronics B.V. ("Philips"), Quantum Corporation ("Quantum"), Sony Corporation of America ("Sony") and Creative Artists Agency, LLC ("CAA"), all of which hold stock in the Company. Other Operating Expense, Net Prior to the transition of manufacturing and distribution responsibility to Philips in the fourth quarter of 1999, the Company sold personal video recorders directly to consumers. The Company's direct sales of personal video recorders, less the cost of the personal video recorders sold is classified as other operating expense, net. Other operating expense, net is considered incidental to the Company's business and is recognized upon shipment to the customer. The Company records a provision for estimated warranty costs and returns at the time of sale. Reclassifications Certain prior year amounts have been reclassified for consistency with current year financial statement presentation. 8 3. COMMITMENTS AND CONTINGENCIES Facilities Leases The Company leased office space in Sunnyvale, CA under operating leases that expired June 30, 2000. In October 1999, the company entered into an office lease with WIX/NSJ Real Estate Limited Partnership for two buildings totaling approximately 127,000 sq. ft located in Alviso, CA. The lease began on March 10, 2000 and has a seven- year term. Future minimum lease payments under this lease are $19.8 million as of June 30, 2000. In March 2000, the Company entered into an office lease with Embassy Group Associates for approximately 1,400 sq. ft. located in Beverly Hills, CA. The lease began on March 1, 2000 and has a twenty-six month term. Future minimum lease payments under this lease are $58,000 as of June 30, 2000. Rent expense for the three months ended June 30, 1999 and 2000 was $246,000 and $670,000, respectively. Rent expense for the six months ended June 30, 1999 and 2000 was $469,000 and $1,191,000, respectively. Equipment Lease Line As of June 30, 2000, $2.3 million of an available lease line had been used and has been accounted for as a capital lease. The unused equipment lease line expired February 2000. The future minimum lease payments under capitalized equipment leases are $1.9 million as of June 30, 2000. America Online, Inc. ("AOL") Proposed Agreement On June 14, 2000 America Online, Inc. ("AOL") and TiVo announced a three-year strategic agreement in which TiVo will become an AOLTV programming partner, offering AOLTV subscribers access to features of TiVo's Personal TV Service. Under the agreement, AOL and TiVo will work together to develop a dual- purpose AOLTV-branded set-top box and TiVo will become the exclusive provider of personal TV features on these set-top boxes. As part of the agreement, AOL will make an investment in TiVo of up to $200 million and receive warrants to purchase a significant number of additional TiVo shares. The agreement is subject to TiVo stockholder and the Justice Department review and approval. 4. SUBSEQUENT EVENTS On July 26, 2000, at TiVo's Annual Meeting of Stockholders, the following proposals were approved: (1) Election of the following as directors to hold office until the 2003 Annual Meeting of Stockholders: Michael Ramsay, Geoffrey Yang and Randy Komisar. (2) Ratification of Arthur Andersen LLP as independent auditors of the Company for its fiscal year ending December 31, 2000. (3) Issuance of securities exceeding 20% of the Company's Common Stock to America Online, Inc. (4) An amendment and restatement of the Company's Amended and Restated Certificate of incorporation to increase the number of authorized shares of Common Stock from 75 million shares to 150 million shares and the number of authorized shares of Preferred Stock from 2 million shares to 10 million shares and make certain other changes. Both TiVo stockholders and the Justice Department have approved the AOL agreement. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains trend analysis and other forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements containing the words "believes," "anticipates," "expects," and words of similar import. Such forward-looking statements will have known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The Company assumes no obligation to update any forward-looking statements contained herein. Actual results could differ materially from those set forth in such forward-looking statements as a result of the "Factors That May Affect Future Operating Results" and other risks detailed in the Company's reports filed with the Securities and Exchange Commission. Results of Operations Revenues. Revenues for the three months and six months ended June 30, 2000 were $719,000 and $1.1 million compared to $8,000 for prior year comparable periods. The increase is attributable to customer subscriptions to the TiVo Service, which began in March 1999. As of June 30, 2000, we had approximately 48,000 subscribers. Additionally, other revenues comprised of Charter Advertising Revenue and Charter Sponsorship Revenue. were recognized in June 2000. Cost of services. Cost of services consists primarily of employee salaries, telephone expenses, call center and other expenses related to providing the TiVo Service to subscribers. Cost of services for the three and six months ended June 30, 2000 were $5.0 million and $9.2 million compared to $636,000 and $1.3 million for the same periods ended June 30, 1999. The increases were primarily attributable to the variable costs, such as telephone charges that increased with the increase of subscribers. Additionally, costs increased due to creating and distributing TiVo Takes, original programming content, as part of the TiVo Service. Research and development expenses. The Company's research and development expenses consist primarily of employee salaries and related expenses, consulting fees and prototype expenses relating to the design of the personal video recorder that enables the TiVo Service. Research and development expenses for the three and six months ended June 30, 2000 were $5.7 million and $10.4 million. Prior year research and development expenses were $1.9 million and $3.5 million for the three and six months ended June 30, 1999. The increases were primarily attributable to the hiring of additional engineering personnel and costs related to the improvement and addition of features and functionality of current products as well as the design of new platforms. Sales and marketing expenses. Sales and marketing expenses consist primarily of employee salaries and related expenses, media advertising, public relations activities, special promotions, trade shows and the production of product related items, including collateral and videos. Sales and marketing expenses for the three and six months ended June 30, 2000 were $11.4 million and $20.6 million compared to $1.8 million and $4.0 million from respective prior year periods. The increases were primarily attributable to an increase in expenditures for advertising, public relations and trade shows in connection with the continued retail marketing campaign of the TiVo Service and the personal video recorder that enables the TiVo Service. We expect our marketing expenses to continue to increase significantly in connection with the continued retail marketing campaign for the TiVo Service and the personal video recorder that enables the TiVo Service. Sales and marketing--related parties. Sales and marketing--related parties consist of cash and non-cash charges related primarily to agreements with DIRECTV, Philips, Quantum, Sony and Creative Artists Agency, LLC, all of which hold stock in the Company. Sales and marketing--related parties for the three and six months ended June 30, 2000 were $5.3 million and $9.9 million compared to $382,000 for the three and six months ended June 30, 1999. The increases in sales and 10 marketing--related parties expenses is attributable to the ongoing amortization of deferred marketing charges, the manufacturing and shipment of personal video recorders and the related activations of subscribers to the TiVo Service. General and administrative expenses. General and administrative expenses consist primarily of employee salaries and related expenses for executive, administrative, accounting, information systems, customer operations personnel, facility costs and professional fees. General and administrative expenses for the three and six months ended June 30, 2000 were $3.6 million and $6.3 million compared to $1.1 million and $2.2 million for the prior year comparable periods. The increases were primarily attributable to increased travel and legal expenses related. Also expenses related to the preparation of our first Annual Report were included in year 2000. Stock-based compensation. During 1999 and 2000, we granted stock options with exercise prices that were less than the estimated fair value of the underlying shares of common stock on the date of grant. As a result, stock-based compensation expense is being recognized over the period that these stock options vest. The stock-based compensation expense was approximately $919,000 and $1.9 million for the three and six months ended June 30, 2000. For the three and six months ended June 30, 1999, stock-based compensation was $187,000. The increases are due to increased numbers of employees and the expense being amortized on an accelerated basis over the vesting periods of the individual awards, usually 4 years. Other operating expenses, net. Other operating expenses, net consists of the revenues from the sale of personal video recorders manufactured and sold by TiVo, less the cost of the personal video recorders sold. For the three and six months ended June 30, 2000, other operating expenses, net was zero compared to $201,000 and $189,000 for the three and six months ended June 30, 1999. We transitioned manufacturing and selling personal video recorders in the fourth quarter of 1999 to Philips. The revenues and costs resulting from the sale of personal video recorders were not expected to be recurring and were therefore considered incidental to our business and as such were classified as other operating expense, net. Interest income. Interest income resulting from cash and cash equivalents held in interest bearing accounts and short term investments was $1.9 million and $3.7 million for the three and six months ended June 30, 2000 compared to $224,000 and $277,000 for prior year periods. The increases are a result of increased cash balances due to the capital raised during 1999. Interest expense and other. Interest expense and other was $112,000 and $182,000 for the three and six months ended June 30, 2000. Interest expense accounted for $34,000 and $69,000 of the total respective amounts. Other consists of a gain on a sale of an asset and amortization of the value assigned to the Comdisco warrants. For prior year periods, interest expense and other was $176,000 and $178,000 respectively. 11 Quarterly Results of Operations The following table represents certain unaudited statements of operations data for our eight most recent quarters ended June 30, 2000. In management's opinion, this unaudited information has been prepared on the same basis as the audited annual financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair representation of the unaudited information for the quarters presented. This information should be read in conjunction with our financial statements, including notes thereto, included elsewhere in this Form 10-Q. The results of operations for any quarter are not necessarily indicative of results that may be expected for any future period. At December 31, 1999, the three months ended March 31, 1999, June 30, 1999 and September 30, 1999 were reclassified in order to conform to 1998 and the quarter ended December 31, 1999 classifications.
Three Months Ended ------------------------------------------------------------------------------------------------------ September December 31, March 31, June 30, September December 31, March 31, June 30, 30, 1998 1998 1999 1999 30, 1999 1999 2000 2000 ------------------------------------------------------------------------------------------------------ (unaudited, in thousands) Revenues..................... $ -- $ -- $ -- $ 8 $ 33 $ 182 $ 424 $ 719 Costs and expenses Cost of services............. -- -- (689) (636) (749) (1,993) (4,168) (4,988) Research and development................ (1,659) (2,146) (1,596) (1,859) (2,327) (3,945) (4,678) (5,679) Sales and marketing.................. (354) (567) (2,168) (1,847) (5,323) (15,164) (9,180) (11,384) Sales and marketing--related parties.................... -- -- -- (382) (4,946) (9,844) (4,547) (5,349) General and administrative... (706) (1,337) (1,125) (1,057) (1,757) (3,088) (2,691) (3,631) Stock-based compensation..... -- -- -- (187) (501) (842) (969) (919) Other operating expense, net........................ -- -- 12 (201) (4,808) (2,213) -- -- ----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- Loss from operations......... (2,719) (4,050) (5,566) (6,161) (20,378) (36,907) (25,809) (31,231) Interest income.............. 46 55 53 224 614 2,022 1,824 1,907 Interest expense and other... (7) -- (2) (176) (281) (7) (70) (112) ----------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- Net loss..................... $(2,680) $(3,995) $(5,515) $(6,113) $(20,045) $(34,892) $(24,055) $(29,436) =========== =========== ========== ========== ========== ========== ========== ==========
The TiVo Service is enabled through a personal video recorder that is sold in retail channels like other consumer electronic devices. As a result, we anticipate that our business will be seasonal and we expect to generate a significant number of our annual new subscribers during the holiday shopping season. We also expect to generate a portion of future revenues from television advertising, which tends to be seasonal and cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. Liquidity and Capital Resources From inception through June 30, 2000, we financed our operations and met our capital expenditure requirements primarily from the proceeds of the private sale of equity securities and the proceeds from our initial public offering. At June 30, 2000, we had $95.8 million of cash and cash equivalents. As of June 30, 1999, we had $12.0 million of cash and cash equivalents along with $7.6 million of short-term investments. The expansion of our business will require significant additional capital to fund operations, capital expenditures and working capital needs. Accordingly, we may choose to raise additional capital through debt or equity financing prior to the end of 2000. Net cash used in operating activities was $37.2 million for the six months ended June 30, 2000. During the six months ended June 30, 2000, we incurred a net loss of $53.5 million, of which $5.9 million is related to non- cash charges. Uses of cash from operating activities also included an increase in prepaid expenses and other of $2.5 million, an increase in accounts receivable of $2.5 million and a decrease in accrued liabilities of $964,000. These uses were offset by sources of cash provided from operating activities 12 consisting of an increase in accrued marketing--related parties of $9.3 million, an increase in deferred revenue of $3.6 million, an increase in accounts payable of $933,000, an increase in rental deposit received from tenant of $891,000 and an increase in deferred rent of $475,000. Net cash used by investing activities was $8.0 million for the six months ended June 30, 2000. Net cash provided in investing activities during the six months ended June 30, 2000 included $6.2 million from the sale of short-term investments offset by $14.1 million used for the acquisition of property and equipment. Net cash provided by financing activities of $1.3 million for the six months ended June 30, 2000 was from the proceeds of issuance of common stock. Net cash used in operating activities was $10.7 million for the six months ended June 30, 1999. Net cash used during this period was primarily a result of the research and development, sales and marketing and general and administrative expenses to support the development of the TiVo Service and the personal video recorder that enables the TiVo Service incurring a loss of $11.6 million. Net cash used in investing activities was $7.6 million for the six months ended June 30, 1999. Net cash used during this period included $7.5 million from the purchase of short-term investments with proceeds primarily from the sale of preferred stock in 1999. Net cash provided by financing activities was $28.0 million for the six months ended June 30, 1999. This financing was received primarily from the issuance of $27.3 million of Series D, E, F, G and H preferred stock to several investors, including Vulcan Ventures, Showtime, DIRECTV, NBC and Philips, respectively. Additionally, the bank overdraft increased to $989,000 as of June 30, 1999. We have commitments for future lease payments under our facilities' operating leases of $19.9 million and obligations under capital leases of $1.9 million as of June 30, 2000. The obligations under the capital lease relate to equipment leased under a total available lease line of $2.5 million, which expired in February 2000. Our future capital requirements will depend on a variety of factors, including market acceptance of the personal video recorder and the TiVo Service, the resources we devote to developing, marketing, selling and supporting our products and other factors. We expect to devote substantial capital resources: . to subsidize the sale of personal video recorders; . to advertise our brand and market our product; . to hire and expand our engineering, sales and marketing and customer support organizations; . to expand into the European market; . to acquire new computer hardware to support increased service operations; 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. Beyond one year, we may need to raise additional funds in order to: . fund anticipated growth, including significant increases in personnel, office facilities and computer systems; 13 . develop new or enhance existing services or products; . expand into new markets and respond to competitive pressures; or . acquire or invest in complementary businesses, technologies, services or products. In addition, in order to meet long-term liquidity needs, we may need to raise additional funds, establish a credit facility or seek other financing arrangements. Additional funding may not be available on favorable terms or at all. See "Factors That May Affect Future Operating Results-If we are unable to raise additional capital on acceptable terms, our ability to effectively manage growth and build a strong brand could be harmed." Impact of Inflation We believe that inflation has not had a significant impact on our operating results. Year 2000 Issue As of June 30, 2000, we have not experienced any material Year 2000 related disruptions in our operations. While we believe most Year 2000 problems should have become evident on January 1, 2000, additional Year 2000 related problems may only become evident after that date. Our phased program to inventory, assess, remediate, test, implement and develop contingency plans for all mission-critical applications and products potentially affected by the Year 2000 issue ("Y2K Program") was described in our 1999 Form 10-K. This program was substantially completed prior to the calendar year end. Our total incremental spending over the life of the Y2K Program was approximately $35,000. Factors that May Affect Future Operating Results In addition to the other information included in this Report, the following factors should be considered in evaluating our business and future prospects: We have recognized very limited revenue, have incurred significant net losses and may never achieve profitability. We have recognized limited revenues, have incurred significant losses and have had substantial negative cash flow. During the three months ended June 30, 2000, we recognized subscription revenues of $706,000. As of June 30, 2000, we had an accumulated deficit of $130.3 million. We expect to incur significant operating expenses over the next several years in connection with the continued development and expansion of our business. As a result, we expect to continue to incur losses for the foreseeable future. The size of these net losses depends in part on the growth in our subscriber base and on our expenses. With increased expenses, we will need to generate significant additional revenues to achieve profitability. Consequently, we may never achieve profitability, and even if we do, we may not sustain or increase profitability on a quarterly or annual basis in the future. Our limited operating history may make it difficult for us or investors to evaluate trends and other factors that affect our business. We were incorporated in August 1997 and have been obtaining subscribers and selling personal video recorders only since March 31, 1999. Prior to that time, our operations consisted primarily of research and development efforts. As of June 30, 2000, only a limited number of personal video recorders had been sold and we obtained only a limited number of subscribers to the TiVo Service. As a result of our limited operating history, our historical financial and operating information is of limited value in evaluating our future operating results. In addition, any evaluation of our business must be made in light of the risks and difficulties encountered by companies offering products or services in new and rapidly evolving markets. For example, it may be difficult to accurately predict our future revenues, costs of revenues, expenses or results of operations. Personal television is a new product category for consumers and it may be difficult to predict the future growth 14 rate, if any, or size of the market for our products and services. We may be unable to accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors facing us. As a result, we may be unable to make accurate financial forecasts and adjust our spending in a timely manner to compensate for any unexpected revenue shortfall. This inability could cause our net losses in a given quarter to be greater than expected, which could cause the price of our stock to decline. If our marketing in the retail channel is not successful, consumers and consumer electronics manufacturers may not accept the TiVo Service and products that enable the TiVo Service. Our success depends upon a continually successful retail marketing campaign for the TiVo Service and related personal video recorders, which began in the third quarter of 1999. We will rely principally on our consumer electronics partners, such as Philips and Sony, to manufacture, market, sell and support the personal video recorder that enables the TiVo Service. We also will rely on the efforts of DIRECTV to market, sell and support the TiVo Service to DIRECTV subscribers. The ongoing marketing campaign requires, among other things, that we: . educate consumers on the benefits of the TiVo Service and related personal video recorder, which will require an extensive marketing campaign; . commit a substantial amount of human and financial resources to achieve continued, successful retail distribution; and . coordinate our own sales, marketing and support activities with those of Philips, DIRECTV, Sony and other strategic partners. We or our strategic partners may not achieve any or all of these objectives. In addition, consumers may perceive the TiVo Service and related personal video recorder as too expensive or complex and our marketing campaign may not effectively attract new subscribers. Because of competitive offerings or changing preferences, consumers may delay or decline the purchase of the TiVo Service and related personal video recorder. All of these events would reduce consumer demand and market acceptance, diminish our brand and impair our ability to attract subscribers to the TiVo Service. We have agreed to share a substantial portion of the revenue we generate from subscription fees with some of our strategic partners. We may be unable to generate enough revenue to cover these obligations. We have agreed to share a substantial portion of our subscription and other fees with some of our strategic partners in exchange for manufacturing, distribution and marketing support and discounts on key components for personal video recorders. Given how these amounts are calculated, we may be required to share substantial portions of the subscription and other fees attributable to the same subscriber with multiple partners. These agreements require us to share a portion of our subscription fees whether or not we reduce the price of the TiVo Service. If we reduce our subscription fees in response to competitive or other market factors, our operating results would be adversely affected. Our decision to share subscription revenues is based on our expectation that our partnerships will help us obtain subscribers, broaden market acceptance of personal television and increase our future revenues. If these expectations are not met, we may be unable to generate sufficient revenue to cover our expenses and obligations. We depend on a limited number of third parties to manufacture, distribute and supply critical components and services for the personal video recorders that enable the TiVo Service. We may be unable to operate our business if these parties do not perform their obligations. The TiVo Service is enabled through the use of a personal video recorder made available by a limited number of third parties. In addition, we rely on sole suppliers for a number of key components for the personal video recorders. We do not control the time and resources that these third parties devote to our business. We cannot be sure that these parties will perform their obligations as expected or that any revenue, cost savings or other benefits will be derived from the efforts of 15 these parties. If any of these parties breaches or terminates its agreement with us or otherwise fails to perform their obligations in a timely manner, we may be delayed or prevented from commercializing our products and services. Because our relationships with these parties are non-exclusive, they may also support products and services that compete directly with us, or offer similar or greater support to our competitors. Any of these events could require us to undertake unforeseen additional responsibilities or devote additional resources to commercialize our products and services. This outcome would harm our ability to compete effectively and quickly achieve market acceptance and brand recognition. In addition, we face the following risks in relying on these third parties: If our manufacturing partnerships are not successful, we may be unable to establish a market for our products and services. We initially manufactured the personal video recorders that enable the TiVo Service through a third-party contract manufacturer. We have entered into agreements with Philips and Sony to manufacture and distribute the personal video recorders that enable the TiVo Service. We have transitioned manufacturing of the personal video recorder from our third-party contract manufacturer to Philips, who assumed manufacturing responsibility in the fourth quarter of 1999. However, we have no minimum volume commitments from Philips, Sony or any other manufacturer. The ability of our manufacturing partners to provide sufficient production volume of the personal video recorder to satisfy demand, is subject to delays and unforeseen problems such as defects, shortages of critical components and cost overruns. Moreover, they will require substantial lead times to manufacture anticipated quantities of the personal video recorders that enable the TiVo Service. Delays and other problems could impair the retail distribution and brand image and make it difficult for us to attract subscribers. In addition, the loss of a manufacturing partner would require us to identify and contract with alternative sources of manufacturing, which we may be unable to do and which could prove time-consuming and expensive. Although we expect to continue to contract with additional consumer electronics companies for the manufacture of personal video recorders in the future, we may be unable to establish additional relationships on acceptable terms. If our corporate partners fail to perform their obligations, we may be unable to effectively market and distribute our products and services. Our manufacturing partners distribute the personal video recorder that enables the TiVo Service. We rely on their sales forces, marketing budgets and brand images to promote and support the personal video recorder and the TiVo Service. We expect to continue to rely on our manufacturing partners and other strategic partners to promote and support the personal video recorder and other devices that enable the TiVo Service. The loss of one or more of these partners could require us to undertake more of these activities on our own. As a result, we would spend significant resources to support personal video recorders and other devices that enable the TiVo Service. We also expect to rely on DIRECTV and other partners to provide marketing support for the TiVo Service. The failure of one or more of these partners to provide anticipated marketing support will require us to divert more of our limited resources to marketing the TiVo Service. If we are unable to provide adequate marketing support for the personal video recorder and the TiVo Service, our ability to attract subscribers to the TiVo Service will be limited. We are dependent on single suppliers for several key components and services. If these suppliers fail to perform their obligations, we may be unable to find alternative suppliers or deliver our products and services to our customers on time. We currently rely on sole suppliers for a number of the key components and services used in the personal video recorders and the TiVo Service. For example: . Quantum is the sole supplier of the hard disk drives; . NEC is the sole supplier of the application specific integrated circuit, a semiconductor device; . Sony is the sole supplier of the MPEG2 encoder semiconductor device; and . Tribune Media Services is the sole supplier of program guide data. In addition to the above, we have several sole suppliers for key components of our products currently under development. 16 We cannot be sure that alternative sources for key components and services used in the personal video recorders and the TiVo Service will be available when needed or, if available, that these components and services will be available on favorable terms. If our agreements or our manufacturing partners' agreements with Quantum, NEC, Sony or Tribune Media Services were to terminate or expire, or if we or our manufacturing partners were unable to obtain sufficient quantities of these components or required program guide data, our search for alternate suppliers could result in significant delays, added expense or disruption in product availability. Our ability to generate revenues from subscription fees is unproven and may fail. We expect to generate a substantial portion of our revenues from subscription fees for the TiVo Service. Many of our potential customers already pay monthly fees for cable or satellite television services. We must convince these consumers to pay an additional subscription fee to receive the TiVo Service. The availability of competing services that do not require subscription fees will harm our ability to effectively attract subscribers. In addition, the personal video recorder that enables the TiVo Service can be used to record programs and pause, rewind and fast forward through live or recorded shows without an active subscription to the TiVo Service. If a significant number of purchasers of our personal video recorders use these devices without subscribing to the TiVo Service, our revenue growth will decline and we may not achieve profitability. Our business is expanding rapidly and our failure to manage growth could disrupt our business and impair our ability to generate revenues. Since we began our business in August 1997, we have significantly expanded our operations. We anticipate continued expansion in our headcount, facilities and infrastructure to support potential growth in our subscriber base and to allow us to pursue market opportunities. This expansion has placed, and will continue to place, a significant strain on our management, operational and financial resources and systems. Specific risks we face as our business expands include: We need to attract and retain qualified personnel, and any failure to do so may impair our ability to offer new products or grow our business. Our success will depend on our ability to attract, retain and motivate managerial, technical, marketing, financial, administrative and customer support personnel. Competition for such employees is intense, especially for engineers in the San Francisco Bay Area, and we may be unable to successfully attract, integrate or retain sufficiently qualified personnel. If we are unable to hire, train, retain and manage required personnel, we may be unable to successfully introduce new products or otherwise implement our business strategy. Any inability of our systems to accommodate our expected subscriber growth may cause service interruptions or delay our introduction of new services. We internally developed many of the systems we use to provide the TiVo Service and perform other processing functions. The ability of these systems to scale as we rapidly add new subscribers is unproven. We must continually improve these systems to accommodate subscriber growth and add features and functionality to the TiVo Service. Our inability to add software and hardware or to upgrade our technology, systems or network infrastructure could adversely affect our business, cause service interruptions or delay the introduction of new services. We will need to provide acceptable customer support, and any inability to do so will harm our brand and ability to generate and retain new subscribers. Our ability to increase sales, retain current and future subscribers and strengthen our brand will depend in part upon the quality of our customer support operations. Some customers require significant support when installing the personal video recorder and becoming acquainted with the features and functionality of the TiVo Service. We have limited experience with widespread deployment of our products and services to a diverse customer base, and we may not have adequate personnel to provide the levels of support that our customers require. In addition, we have entered into agreements with third parties to provide this support and will rely on them for a substantial portion of our customer support functions. Our failure to provide adequate customer support for the TiVo Service and personal video recorder will damage our reputation in the personal television and consumer electronics marketplace and strain our relationships with customers and strategic partners. This could prevent us from gaining new or retaining existing subscribers and could cause harm to our reputation and brand. 17 We will need to improve our operational and financial systems to support our expected growth, and any inability to do so will adversely impact our billing and reporting. To manage the expected growth of our operations and personnel, we will need to improve our operational and financial systems, procedures and controls. Our current and planned systems, procedures and controls may not be adequate to support our future operations and expected growth. For example, we 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. If we are unable to create multiple revenue streams, we may not be able to cover our expenses or meet our obligations to strategic partners and other third parties. Although our initial success will depend on building a significant customer base and generating subscription fees from the TiVo Service, our long- term success will depend on securing additional revenue streams such as: . advertising; . revenues from networks; and . electronic commerce or couch commerce. In order to derive substantial revenues from these activities, we will need to attract and retain a large and growing base of subscribers to the TiVo Service. We also will need to work closely with television advertisers, cable and satellite network operators, electronic commerce companies and consumer electronics manufacturers to develop products and services in these areas. We may not be able to effectively work with these parties to develop products that generate revenues that are sufficient to justify their costs. In addition, we are currently obligated to share a portion of these revenues with several of our strategic partners. Any inability to attract and retain a large and growing group of subscribers and strategic partners will seriously harm our ability to support new services and develop new revenue streams. It will take a substantial amount of time and resources to achieve broad market acceptance of the TiVo Service and products that enable the TiVo Service and we cannot be sure that these efforts will generate a broad enough subscriber base to sustain our business. Personal television products and services represent a new, untested consumer electronics category. The TiVo Service is in an early stage of development and many consumers are not aware of its benefits. As a result, it is uncertain whether the market will demand and accept the TiVo Service and products that enable the TiVo Service. Retailers, consumers and potential partners may perceive little or no benefit from personal television products and services. Likewise, consumers may not value, and may be unwilling to pay for the TiVo Service and products that enable the TiVo Service. To develop this market and obtain subscribers to the TiVo Service, we will need to devote a substantial amount of time and resources to educate consumers and promote our products. We may fail to obtain subscribers, encourage the development of new devices that enable the TiVo Service and develop and offer new content and services. We cannot be sure that a broad base of consumers will ultimately subscribe to the TiVo Service or purchase the products that enable the TiVo Service. We face intense competition from a number of sources, which may impair our revenues and ability to generate subscribers. The personal television market is new and rapidly evolving and we expect competition from a number of sources, including: Internet-related companies and companies offering similar products and services. We are likely to face intense direct competition from companies such as WebTV Networks Inc., ReplayTV, Inc. and X-TV. These companies offer, or 18 have announced their intention to offer, products with one or more of the TiVo Service's functions or features and, in some instances, combine these features with Internet browsing or traditional broadcast, cable or satellite television programming. Many of these companies have greater brand recognition and market presence and substantially greater financial, marketing and distribution resources than we do. For example, Microsoft Corporation controls and provides financial backing to WebTV. Some of these companies also have established relationships with third party consumer electronic manufacturers, network operators and programmers, which could make it difficult for us to establish relationships and enter into agreements with these third parties. Some of these competitors also have relationships with our strategic partners. For example, DIRECTV recently formed an alliance with America Online. Faced with this competition, we may be unable to expand our market share and attract an increasing number of subscribers to the TiVo Service. Established competitors in the consumer electronics market. We compete with consumer electronic products in the television and home entertainment industry. The television and home entertainment industry is characterized by rapid technological innovation, a small number of dominant manufacturers and intense price competition. As a new product category, personal television enters a market that is crowded with several established products and services. The competition for consumer spending in the television and home entertainment market is intense, and our products and services will compete with: . satellite television systems; . video on demand services; . digital video disc players; and . laser disc players. Most of these technologies or devices have established markets, a broad subscriber base and proven consumer acceptance. In addition, many of the manufacturers and distributors of these competing devices have substantially greater brand recognition, market presence, distribution channels, advertising and marketing budgets and promotional and other strategic partners. Faced with this competition, we may be unable to effectively differentiate the personal video recorder or the TiVo Service from these devices. Established competition for advertising budgets. Personal television, in general, and TiVo, specifically, also compete with traditional advertising media such as print, radio and television for a share of advertisers' total advertising budgets. If advertisers do not perceive personal television as an effective advertising medium, they may be reluctant to devote a significant portion of their advertising budget to promotions on the TiVo Service. If we are unable to introduce new products or services, or if our new products and services are unsuccessful, the growth in our subscriber base and revenues may suffer. To attract and retain subscribers and generate revenues, we must continue to add functionality and content and introduce products and services which embody new technologies and, in some instances, new industry standards. This challenge will require hardware and software improvements, as well as new collaborations with programmers, advertisers, network operators, hardware manufacturers and other strategic partners. These activities require significant time and resources and may require us to develop and promote new ways of generating revenue with established companies in the television industry. These companies include television advertisers, cable and satellite network operators, electronic commerce companies and consumer electronics manufacturers. In each of these examples, a small number of large companies dominate a major portion of the market and may be reluctant to work with us to develop new products and services for personal television. If we are unable to further develop and improve the TiVo Service or expand our operations in a cost-effective or timely manner, our ability to attract and retain subscribers and generate revenue will suffer. 19 If we do not successfully establish strong brand identity in the personal television market, we may be unable to achieve widespread acceptance of our products. We believe that establishing and strengthening the TiVo brand is critical to achieving widespread acceptance of our products and services and to establishing key strategic partnerships. The importance of brand recognition will increase as current and potential competitors enter the personal television market with competing products and services. Our ability to promote and position our brand depends largely on the success of our marketing efforts and our ability to provide high quality services and customer support. These activities are expensive and we may not generate a corresponding increase in subscribers or revenues to justify these costs. If we fail to establish and maintain our brand, or if our brand value is damaged or diluted, we may be unable to attract subscribers and effectively compete in the personal television market. Product defects, system failures or interruptions to the TiVo Service may have a negative impact on our revenues, damage our reputation and decrease our ability to attract new subscribers. Our ability to provide uninterrupted service and high quality customer support depends on the efficient and uninterrupted operation of our computer and communications systems. Our computer hardware and other operating systems for the TiVo Service are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. These types of interruptions in the TiVo Service may reduce our revenues and profits. Our business also will be harmed if consumers believe our service is unreliable. In addition to placing increased burdens on our engineering staff, service outages will create a flood of customer questions and complaints that must be responded to by our customer support personnel. Any frequent or persistent system failures could irreparably damage our reputation and brand. We have detected and may continue to detect errors and product defects. These problems can affect system uptime, result in significant warranty and repair problems, which could cause customer service and customer relations problems. Correcting errors in our software requires significant time and resources, which could delay product releases and affect market acceptance of the TiVo Service. Any delivery by us of products or upgrades with undetected material product defects or software errors could harm our credibility and market acceptance of the personal video recorders and the TiVo Service. Intellectual property claims against us can be costly and could result in the loss of significant rights. From time to time, we may be subject to intellectual property litigation, which could: . be time-consuming and expensive; . divert management's attention and resources away from our business; . cause delays in product delivery and new service introduction; . cause the cancellation of new products or services; or . require us to pay significant royalties or licensing fees. The emerging enhanced-television industry is highly litigious, particularly in the area of on-screen program guides. Additionally, many patents covering interactive television technologies have been granted but have not been commercialized. For example, we are aware of at least seven patents for pausing live television. A number of companies in the enhanced-television industry earn substantial profits from technology licensing, and the introduction of new technologies such as ours is likely to provoke lawsuits from such companies. A successful claim of infringement against us, our inability to obtain an acceptable license from the holder of the patent or other right or our inability to design around an asserted patent 20 or other right could cause our manufacturing partners to cease manufacturing the personal video recorder or us to cease providing our service, or both, which would eliminate our ability to generate revenues. On January 6, 2000 PhoneTel Communications, Inc. filed a lawsuit against us in the U.S. District Court for the Northern District of Texas alleging that the TiVo Service violates a patent held by PhoneTel. The lawsuit seeks unspecified monetary damages as well as an injunction against our operations. It also seeks attorneys' fees and costs. On April 17, 2000, this suit was voluntarily dismissed by PhoneTel. If this suit is re-filed by PhoneTel, TiVo believes that it has meritorious defenses against the claims and intends to vigorously defend itself against such claims made by PhoneTel. In the event the suit is re-filed, TiVo could be forced to incur material expenses and in the event we were to lose such a suit our business would be harmed. On January 18, 2000, StarSight Telecast Inc., a subsidiary of Gemstar International Group Limited filed a lawsuit against us in the U.S. District Court for the Northern District of California alleging that the TiVo Service violates a patent held by StarSight. This lawsuit also seeks unspecified monetary damages and an injunction against our operations. The suit also seeks attorneys' fees and costs. To defend this lawsuit, we could be forced to incur material expenses. Additionally, in the event that we were to lose this lawsuit our business would be harmed. In addition, we are aware that some media companies may attempt to form organizations to develop standards and practices in the personal television industry. These organizations or individual media companies may attempt to require companies in the personal television industry to obtain copyright or other licenses. A number of articles have appeared in the press regarding the formation of a consortium of broadcast and cable television networks called the Advanced Television Copyright Coalition. Some of those articles have indicated that the coalition is prepared to support litigation and to explore legislative solutions unless the members of the personal television industry agree to obtain license agreements for use of the companies' programming. We have received letters from Time Warner Inc. and Fox Television stating that these entities believe our personal television service exploits copyrighted networks and programs without the necessary licenses and business arrangements. Lawsuits or other actions taken by these types of organizations or companies could make it more difficult for us to introduce new services, delay widespread consumer acceptance of our products and services, restrict our use of some television content, increase our costs and adversely affect our business. Our success depends on our ability to secure and protect patents, trademarks and other proprietary rights. Our success and ability to compete are substantially dependent upon our internally developed technology. We rely on patent, trademark and copyright law, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our proprietary rights. However, the steps we take to protect our proprietary rights may be inadequate. We have filed patent applications and provisional patent applications covering substantially all of the technology used to deliver the TiVo Service and its features and functionality. To date, none of these patents has been granted, and we cannot assure you that any patents will ever be granted, that any issued patents will protect our intellectual property or that third parties will not challenge any issued patents. In addition, other parties may independently develop similar or competing technologies designed around any patents that may be issued to us. Our failure to secure and protect our proprietary rights could have a material adverse effect on our business. Laws or regulations that govern the television industry and the delivery of programming could expose us to legal action if we fail to comply or could require us to change our business. Personal television and the delivery of television programming through the TiVo Service and a personal video recorder represents a new category in the television and home entertainment industries. As such, it is difficult to predict what laws or regulations will govern our business. Changes in the regulatory climate or the enforcement or interpretation of existing laws could expose us to additional costs and expenses and could require changes to our business. For example, copyright laws could be applied to restrict the capture of television programming, which would adversely affect our business. It is unknown whether existing laws and regulations will apply to the personal television market. Therefore, it is difficult to anticipate the impact of current or future laws and regulations on our business. 21 The Federal Communications Commission has broad jurisdiction over the telecommunications and cable industries. The majority of FCC regulations, while not directly affecting us, do affect many of the strategic partners on whom we substantially rely for the marketing and distribution of the personal video recorder and the TiVo Service. As such, the indirect effect of these regulations may adversely affect our business. In addition, the FCC could promulgate new regulations, or interpret existing regulations in a manner that would cause us to incur significant compliance costs or force us to alter the features or functionality of the TiVo Service. We need to safeguard the security and privacy of our subscribers' confidential data, and any inability to do so may harm our reputation and brand and expose us to legal action. The personal video recorder collects and stores viewer preferences and other data that many of our subscribers consider confidential. Any compromise or breach of the encryption and other security measures that we use to protect this data could harm our reputation and expose us to potential liability. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments could compromise or breach the systems we use to protect our subscribers' confidential information. We may be required to make significant expenditures to protect against security breaches or to remedy problems caused by any breaches. Uncertainty in the marketplace regarding the use of data from subscribers could reduce demand for the TiVo Service and result in increased expenses. Consumers may be concerned about the use of personal information gathered by the TiVo Service and personal video recorder. Under our current policy, we do not access this data or release it to third parties. Privacy concerns, however, could create uncertainty in the marketplace for personal television and our products and services. Changes in our privacy policy could reduce demand for the TiVo Service, increase the cost of doing business as a result of litigation costs or increased service delivery costs, or otherwise harm our reputation and business. We would lose revenues and incur significant costs if our systems or those of our key partners or suppliers are not year 2000 compliant. Many computer programs have been written using two digits rather than four to define the applicable year. This posed a problem at the end of the century because these computer programs do not properly recognize the year. Although there was no interruption of our systems or other problems related to Year 2000 issues at the turn of the year, there may still be Year 2000 related problems during the year caused by systems that have not yet been triggered by the Year 2000 date. This could result in major system failures or miscalculations that would disrupt our business. We completed our year 2000 assessment in September 1999 and completed interface testing and remediation in December 1999. We are not aware of any year 2000 issues, at this time, that would have a material effect on our business. Our assessment, however, may not have identified material non-compliance issues with the TiVo Service or the personal video recorder, our information technology systems or the systems of our partners or suppliers. If present, we may not be able to successfully resolve these issues, or it may be costly to do so. In addition, we cannot assure you that governmental agencies, utility companies, third-party service providers and others outside of our control will be year 2000 compliant. Such entities' failure to be year 2000 compliant throughout the year 2000 could result in a systemic failure beyond our control. For example, a prolonged telecommunications or electrical failure, due to equipment being shut down if maintenance is not performed by a specific date during the year 2000, could prevent us from delivering upgrades and regular downloads to the personal video recorders that enable the TiVo Service and could adversely impact the functionality of the personal video recorder. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Issue." In the future, our revenues and operating results may fluctuate significantly, which may adversely affect the market price of our common stock. 22 We expect our revenues and operating results to fluctuate significantly due to a number of factors, many of which are outside of our control. Therefore, you should not rely on period-to-period comparisons of results of operations as an indication of our future performance. It is possible that in some future periods our operating results may fall below the expectations of market analysts and investors. In this event, the market price of our common stock would likely fall. Factors that may affect our quarterly operating results include: . demand for personal video recorders and the TiVo Service; . the timing and introduction of new services and features on the TiVo Service; . seasonality and other consumer and advertising trends; . changes in revenue sharing arrangements with our strategic partners; . entering into new or terminating existing strategic partnerships; . changes in the subsidy payments we make to certain strategic partners; . changes in our pricing policies, the pricing policies of our competitors and general pricing trends in the consumer electronics market; . loss of subscribers to the TiVo Service; and . general economic conditions. Because our expenses precede associated revenues, unanticipated shortfalls in revenue could adversely affect our results of operations for any given period and cause the market price of our common stock to fall. Seasonal trends may cause our quarterly operating results to fluctuate and our inability to forecast these trends may adversely affect the market price of our common stock. Consumer electronic product sales have traditionally been much higher during the holiday shopping season than during other times of the year. Although predicting consumer demand for our products is very difficult, we believe that sales of personal video recorders and new subscriptions to the TiVo Service will be disproportionately high during the holiday shopping season when compared to other times of the year. If we are unable to accurately forecast and respond to consumer demand for our products, our reputation and brand will suffer and the market price of our common stock would likely fall. We expect that a portion of our future revenues will come from targeted commercials and other forms of television advertising enabled by the TiVo Service. Expenditures by advertisers tend to be seasonal and cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. A decline in the economic prospects of advertisers or the economy in general could alter current or prospective advertisers' spending priorities or increase the time it takes to close a sale with our advertisers, which could cause our revenues from advertisements to decline significantly in any given period. If we are unable to raise additional capital on acceptable terms, our ability to effectively manage growth and build a strong brand could be harmed. We expect that our existing capital resources will be sufficient to meet our cash requirements through at least the next 12 months. However, as we continue to grow our business, we may need to raise additional capital, which may not be available on acceptable terms. If we cannot raise necessary additional capital on acceptable terms, we may not be able to develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. 23 If additional capital is raised through the issuance of equity securities, the percentage ownership of our existing stockholders will decline, stockholders may experience dilution in net book value per share, or these equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. Any debt financing, if available, may involve covenants limiting, or restricting our operations or future opportunities. We have agreed to subsidize the cost of manufacturing personal video recorders, which may adversely affect our operating results and ability to achieve profitability. We have agreements with our consumer electronic manufacturing partners to manufacture the personal video recorder that enables the TiVo Service. We have agreed to pay our manufacturing partners a per-unit subsidy for each personal video recorder that they manufacture and sell. A portion of the subsidy amount is paid when the personal video recorder is shipped. The remaining portion is due when the subscriber activates the TiVo Service. The amount of the payments can vary depending upon the manufacturing costs and selling prices. In addition, in the event our manufacturing partners are unable to manufacture the personal video recorders at the costs currently estimated or if selling prices are less than anticipated, we may owe additional amounts to them, which could adversely affect our operating results. We are obligated to pay a portion of the subsidy when the personal video recorder is shipped, and we will not receive any revenues related to the unit until the unit is sold and the purchaser activates the TiVo Service. We may make additional subsidy payments in the future to consumer electronic and other manufacturers in an effort to maintain a commercially viable retail price for the personal video recorders and other devices that enable the TiVo Service. The lifetime subscriptions to the TiVo Service that we currently offer commit us to providing services for an indefinite period. The revenue we generate from these subscriptions may be insufficient to cover future costs. We currently offer lifetime subscriptions that commit us to provide service for as long as the subscription to the TiVo Service is active for the personal video recorder. We receive the lifetime subscription fee for the TiVo Service in advance and amortize it as subscription revenue over four years, which is our estimate of the service life of the personal video recorder. If these lifetime subscribers use the personal video recorder for longer than anticipated, we will incur costs without a corresponding revenue stream and therefore will be required to fund ongoing costs of service from other sources. If we lose key management personnel, we may not be able to successfully operate our business. Our future performance will be substantially dependent on the continued services of our senior management and other key personnel. The loss of any members of our executive management team and our inability to hire additional executive management could harm our business and results of operations. In addition, we do not have employment agreements with, or key man insurance policies for, any of our key personnel. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio and conduct all transactions in U.S. dollars. Our investment portfolio only includes highly liquid instruments with original maturities of less than one year. We are subject to fluctuating interest rates that may impact, adversely or otherwise, our results of operations or cash flows for our cash and cash equivalents and our short-term investments. Although payments under the operating lease for our facility are tied to market indices, we are not exposed to material interest rate risk associated with the operating lease. Our capital lease obligations are not subject to changes in the interest rate and, therefore, are not exposed to interest rate risk. 24 PART II: Other Information Item 1. Legal Proceedings In January 2000, StarSight Telecast, Inc. filed a patent infringement suit against TiVo in the U.S. District Court of California, San Jose Division. TiVo's legal counsel is currently researching the patents, which were referenced in the complaint. On January 6, 2000, a suit was filed against TiVo by PhoneTel Communications, Inc. ("PhoneTel") in the U.S. District Court for the Northern District of Texas alleging willful and deliberate violation of a patent held by PhoneTel. The suit sought unspecified monetary damages as well as an injunction against TiVo's operations. The suit also sought attorneys' fees and costs. On April 17, 2000, this suit was voluntarily dismissed by PhoneTel. While the suit could be re-filed by PhoneTel, TiVo believes that it has meritorious defenses against the claims and intends to vigorously defend itself against such claims made by PhoneTel. In the event the suit is re-filed, TiVo could be forced to incur material expenses and in the event it were to lose such a suit its business would be harmed. Item 2. Changes in Securities and Use of Proceeds TiVo's Registration Statement on Form S-1 (Registration No. 333-83515) under the Securities Act of 1933, as amended, for the initial public offering became effective on September 29, 1999. TiVo has used and expects to continue to use the net offering proceeds from its initial public offering for working capital and general corporate purposes, including advertising and promotion of the TiVo Service and the TiVo brand, product development, expansion of its sales, marketing and service capabilities and facilities. The use of proceeds does not represent a material change in the use of proceeds as described in TiVo's prospectus dated September 29, 1999 comprising part of TiVo's Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission (SEC File No. 333- 83515). TiVo has not declared or paid any cash dividends on its capital stock and does not anticipate paying any cash dividends in the foreseeable future. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information On June 14, 2000 America Online, Inc. ("AOL") and TiVo announced a three-year strategic agreement in which TiVo will become an AOLTV programming partner, offering AOLTV subscribers access to features of TiVo's Personal TV Service. Under the agreement, AOL and TiVo will work together to develop a dual- purpose AOLTV-branded set-top box and TiVo will become the exclusive provider of personal TV features on these set-top boxes. As part of the agreement, America Online will make an investment in TiVo of up to $200 million and receive warrants to purchase a significant number of additional TiVo shares. The agreement has been approved by TiVo stockholders and the Justice Department. 25 On July 26, 2000, at TiVo's Annual Meeting of Stockholders, the following proposals regarding America Online, Inc. were approved: (1) issuance of securities exceeding 20% of the Company's Common Stock to America Online, Inc. and (2) an amendment and restatement of the Company's Amended and Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock from 75 million shares to 150 million shares and the number of authorized shares of Preferred Stock from 2 million shares to 10 million shares and make certain other changes. 26 Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Exhibits EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.2* Amended and Restated Certificate of Incorporation. 3.4* Amended and Restated Bylaws. 4.3* Ninth Amended and Restated Investor Rights Agreement between TiVo and certain investors, dated as of August 6, 1999. 4.4 Stockholder and Registration Rights Agreement by and between TiVo Inc. and America Online, Inc., dated as of June 9, 2000. 10.1* Form of Indemnification Agreement between TiVo and its officers and directors. 10.2* TiVo's 1999 Equity Incentive Plan and related documents. 10.3* TiVo's Amended and Restated 1997 Equity Incentive Plan and related documents. 10.4* TiVo's 1999 Employee Stock Purchase Plan and related documents. 10.5**** TiVo's 1999 Non-Employee Directors' Stock Option Plan and related documents. 10.6*+ Hard Disk Drive Supply Agreement between Quantum Corporation and TiVo, dated November 6, 1998. 10.7*+ Master Agreement between Philips Business Electronics B.V. and TiVo, dated March 31, 1999. 10.8*+ Marketing Agreement between DIRECTV, Inc. and TiVo, dated April 13, 1999. 10.9*+ Agreement between NBC Multimedia, Inc. and TiVo, dated April 16, 1999. 10.10* Sublease Agreement between Verity, Inc. and TiVo, dated February 23, 1998. 10.11* Amendment to Sublease Agreement between Verity, Inc. and TiVo, dated November 1998. 10.12* Second Amendment to Sublease Agreement between Verity, Inc. and TiVo, dated March 1999. 10.13* Consent of Landlord to Sublease between Verity, Inc. and TiVo, dated February 23, 1998. 10.15* Master Lease Agreement between Comdisco, Inc. and TiVo, dated February 12, 1999. 10.16*+ Warrant Purchase and Equity Rights Agreement between Quantum Corporation and TiVo, dated November 6, 1998 and related documents. 10.17* Warrant to Purchase Shares of Series A Preferred Stock issued to Randy Komisar, dated March 18, 1998. 10.18* Warrant Agreement between Comdisco, Inc. and TiVo, dated February 12, 1999. 10.19* Secured Convertible Debenture Purchase Agreement between TiVo and certain of its investors, dated April 8, 1999, and related documents. 10.20* First Amendment to Hard Disk Supply Agreement between Quantum and TiVo, dated June 25, 1999. 10.21* TiVo's 401(k) Plan, effective December 1, 1997. 10.22*+ Tribune Media Services Television Listing Agreement between Tribune Media Services and TiVo, dated June 1, 1998. 10.23*+ Amendment to the Data License Agreement between Teleworld Inc., and Tribune Media Services, Inc. between Tribune Media Services and TiVo, dated November 10, 1998. 10.24** Lease Agreement between WIX/NSJ Real Estate Limited Partnership and TiVo, dated October 6, 1999. 10.25 Investment Agreement between America Online, Inc. and TiVo dated June 9, 2000. 10.26+++ Product Integration and Marketing Agreement between America Online, Inc. and TiVo, dated June 9, 2000. 99.5*** Form of Stock Option Grant used in connection with an option granted outside of TiVo's stock option plans and related documents 27.1++ Financial Data Schedule. 27 ----------------------- * Incorporated by reference to the same numbered exhibit previously filed with TiVo's Registration Statement on Form S-1 (SEC File No. 333-83515), originally filed on July 22, 1999. ** Incorporated by reference to the same numbered exhibit previously filed with TiVo's Quarterly report on Form 10-Q filed on November 15, 1999. *** Incorporated by reference to the same numbered exhibit previously filed with TiVo's Registration Statement on Form S-8 (SEC File No. 333-94629), filed on January 13, 2000. **** Incorporated by reference to the same numbered exhibit previously filed with TiVo's Annual report on Form 10-K filed on March 30, 2000. + Confidential treatment granted as to portions of this exhibit. ++ Submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q submitted to the Securities and Exchange Commission. +++ Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Such portions have been filed separately with the Commission. Reports on Form 8-K TiVo did not file any reports on Form 8-K during the quarter ended June 30, 2000. Trademark Acknowledgments "Active Preview", "Can't Miss TV", "DIRECTIVO", Instant Replay logo, "Ipreview", Jump logo, "Life's too short for bad TV", "Network Showcase", "Personal TV", "Personal Video Recorder", "Primetime Anytime", "Season Pass", "See it, want it, get it", "The New Face of Television", "The way TV is meant to be", "Thumbs Down" (logo and text), "Thumbs Up" (logo and text), "TiVo Central", "TiVo" (logo, name and character), "TiVolution", "What you want, when you want it", and "You run the shows" are trademarks of TiVo Inc. All other trademarks or trade names appearing in this report are the property of their respective owners. 28 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. TIVO INC. Date: Aug 14, 2000 By: /s/ Michael Ramsay -------------------------------------- Michael Ramsay Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) Date: Aug 14, 2000 By: /s/ David H. Courtney ------------------------------------- David H. Courtney Chief Financial Officer and Sr. Vice President of Finance and Administration (Principal Financial and Accounting Officer) 29 EX-4.4 2 0002.txt STOCKHOLDER AND REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.4 - -------------------------------------------------------------------------------- STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENT by and between TIVO INC. and AMERICA ONLINE, INC. dated as of June 9, 2000 - --------------------------------------------------------------------------------
TABLE OF CONTENTS Page ---- RECITALS.............................................................. 1 ARTICLE I DEFINITIONS.................................................. 1 SECTION 1.1 Certain Defined Terms............................... 1 SECTION 1.2 Other Definitional Provisions....................... 9 ARTICLE II CORPORATE GOVERNANCE OF THE COMPANY......................... 9 SECTION 2.1 Board Representation/Observation.................... 9 SECTION 2.2 Available Information............................... 11 SECTION 2.3 Access.............................................. 12 SECTION 2.4 Voting of Shares.................................... 12 SECTION 2.5 Termination of Rights and Obligations............... 13 SECTION 2.6 Other Approval Rights............................... 13 SECTION 2.7 Ownership Restrictions.............................. 13 ARTICLE III TRANSFERS.................................................. 13 SECTION 3.1 Transfer Restrictions............................... 13 SECTION 3.2 Transferees......................................... 14 SECTION 3.3 Right of First Offer................................ 14 SECTION 3.4 Termination of Rights and Obligations............... 15 ARTICLE IV EQUITY PURCHASE RIGHTS...................................... 16 SECTION 4.1 Unregistered Securities Offerings................... 16 SECTION 4.2 Other Issuances of Common Stock..................... 17 SECTION 4.3 Issuances of Convertible Securities................. 18 SECTION 4.4 No Restrictions..................................... 19 SECTION 4.5 Termination of Equity Purchase Rights............... 20 ARTICLE V REGISTRATION RIGHTS.......................................... 20 SECTION 5.1 Registration on Request............................. 20 SECTION 5.2 Incidental Registrations............................ 24 SECTION 5.3 Additional Registration Rights...................... 25 ARTICLE VI REGISTRATION PROCEDURES..................................... 25 SECTION 6.1 Registration Procedures............................. 25 SECTION 6.2 Information Supplied................................ 29 SECTION 6.3 Restrictions on Disposition......................... 29 SECTION 6.4 Indemnification..................................... 29 SECTION 6.5 Required Reports.................................... 33 SECTION 6.6 Holdback Agreement.................................. 33
Page ---- SECTION 6.7 No Inconsistent Agreement........................... 33 ARTICLE VII STANDSTILL................................................. 34 SECTION 7.1 Acquisition of Additional Voting Securities......... 34 ARTICLE VIII RIGHT OF NOTIFICATION AND FORBEARANCE..................... 35 SECTION 8.1 Right of Notification............................... 35 SECTION 8.2 Forbearance......................................... 36 SECTION 8.3 Other Rights........................................ 36 ARTICLE IX MISCELLANEOUS............................................... 36 SECTION 9.1 Termination......................................... 36 SECTION 9.2 Amendments and Waivers.............................. 37 SECTION 9.3 Successors, Assigns and Transferees................. 37 SECTION 9.4 Notices............................................. 37 SECTION 9.5 Further Assurances.................................. 37 SECTION 9.6 Entire Agreement.................................... 37 SECTION 9.7 Delays or Omissions................................. 38 SECTION 9.8 Governing Law; Jurisdiction; Waiver of Jury Trial... 38 SECTION 9.9 Severability........................................ 38 SECTION 9.10 Enforcement........................................ 38 SECTION 9.11 Titles and Subtitles............................... 38 SECTION 9.12 Counterparts; Facsimile Signatures................. 38
STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENT THIS STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENT (this "Agreement") --------- is entered into as of June 9, 2000, among TiVo Inc., a Delaware corporation (the "Company"), and America Online, Inc., a Delaware corporation ( "AOL"). ------- --- RECITALS -------- WHEREAS, the Company and AOL have entered into a Definitive Product Integration and Marketing Relationship Agreement, dated as of the date hereof (the "Commercial Agreement") pursuant to which the Company and AOL will work -------------------- together to jointly develop a branded interactive television service; WHEREAS, the Company and AOL have entered into a Investment Agreement, dated as of the date hereof (the "Investment Agreement"), pursuant to which the -------------------- Company has agreed to sell to AOL and AOL has agreed to purchase from the Company shares of its Common Stock (the "Shares") and, in certain circumstances, ------ its Series A Convertible Preferred Stock, par value $0.001 per share (the "Preferred Shares"), upon the terms provided in the Investment Agreement and in - ----------------- the amended and restated certificate of incorporation of the Company in the form attached to the Investment Agreement as Exhibit A, and (ii) warrants to purchase shares of Common Stock, upon the terms provided in the Investment Agreement and in the forms of warrants attached as Exhibits B, C, D and E to the Investment Agreement (the "Warrants"). -------- WHEREAS, the parties hereto desire to enter into certain arrangements relating to the Company and AOL's interest in the Company. NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual promises hereinafter set forth, the parties hereto agree as follows: ARTICLE I DEFINITIONS ----------- SECTION1.1 Certain Defined Terms. As used herein, the following --------------------- terms shall have the following meanings: "Acquisition Proposal" means any offer or proposal for any merger, -------------------- consolidation, purchase of substantial assets of the Company (including securities), tender, exchange or other offer for any Equity Securities or other business combination involving the Company or any of its Subsidiaries. "Acquisition Proposal Notice" has the meaning assigned to such term in --------------------------- Section 8.1(a). "Acquisition Restrictions" has the meaning assigned to such term in ------------------------ Section 7.1(a). "Adverse Effect" has the meaning ascribed to such term in Section -------------- 5.1(g). "Adverse Market Effect" has the meaning ascribed to such term in --------------------- Section 5.1(h). "Affiliate" means, with respect to any Person, any other Person that --------- directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with, such specified Person. "AOL Offer Notice" has the meaning assigned to such term in Section ---------------- 3.3(a). "AOL Offered Securities" has the meaning assigned to such term in ---------------------- Section 3.3(a). "AOL Observer" has the meaning ascribed to such term in Section 2.1. ------------ "AOL Participation Securities" has the meaning assigned to such term ---------------------------- in Section 4.3(a). "AOL Representative" has the meaning ascribed to such term in Section ------------------ 2.1. "AOL Unregistered Shares" has the meaning assigned to such term in ----------------------- Section 4.1(a). "Arbitrating Investment Banker" has the meaning assigned to such term ----------------------------- in the definition of Fair Market Value contained in this Section 1.1. "beneficial owner" or "beneficially own" has the meaning given such ---------------- ---------------- term in Rule 13d-3 under the Exchange Act and a Person's beneficial ownership of either Common Stock or Preferred Shares or other Voting Securities of the Company shall be calculated in accordance with the provisions of such Rule; provided that, for purposes of determining beneficial ownership, a Person shall - -------- be deemed to be the beneficial owner of any security which may be acquired by such Person whether within sixty (60) days or thereafter, upon the conversion, exchange or exercise of any warrants, options, rights or other securities. "Business Day" means any day that is not a Saturday, a Sunday or other ------------ day on which banks are required or authorized by law to be closed in The City of New York. "Bylaws" means the Amended and Restated Bylaws of the Company, as in ------ effect on the date hereof and as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof, the terms of the Certificate and the terms of this Agreement. "Capital Stock" means, with respect to any Person at any time, any and ------------- all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of capital stock, partnership interests (whether general or limited) or equivalent ownership interests in or issued by such Person and, with respect to the Company, includes any and all shares of Common Stock, the Preferred Shares and any other shares of preferred stock of the Company. "Certificate" means the Amended and Restated Certificate of ----------- Incorporation of the Company as in effect on the date hereof and as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof and the terms of this Agreement. "Change of Control" means: ----------------- (a) any Person is or becomes the beneficial owner, directly or indirectly (whether by merger, consolidation, purchase of securities or otherwise), of more than 50% of the total voting power of all the outstanding Voting Securities of the Company (or its successor by merger, consolidation or purchase of all or substantially all of its assets) (for the purposes of this clause, such person shall be deemed to beneficially own any Voting Securities of the Company held by an entity, if such Person beneficially owns, directly or indirectly, more than 50% of the total voting power of the Voting Securities of such entity). (b) during any period of two (2) consecutive years, individuals who at the beginning of such period constituted the Company Board (together with any new Directors whose election by such Company Board or whose nomination for election by the stockholders of the Company, as the case may be, was approved by a vote of at least a majority of the Directors then still in office who were either Directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Company Board then in office; (c) the Transfer, lease or other disposition, in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any Third Party; or (d) the adoption by the stockholders of the Company of a plan or proposal for the liquidation or dissolution of the Company. "Claims" has the meaning assigned to such term in Section 6.4(a). ------ "Closing" has the meaning assigned to such term in the Investment ------- Agreement. "Commercial Agreement" has the meaning assigned to such term in the -------------------- Recitals. "Common Stock" means the common shares, par value $0.001 per share, of ------------ the Company and any securities issued in respect thereof, or in substitution therefor, in connection with any stock split, dividend, spin-off or combination, or any reclassification, recapitalization, merger, consolidation, exchange or other similar reorganization or business combination. "Company Board" means the Board of Directors of the Company. ------------- "Company Offering" has the meaning assigned to such term in Section ---------------- 5.1(h). "control" (including the terms "controlled by" and "under common ------- ------------- ------------ control with"), with respect to the relationship between or among two or more - ------------ Persons, means the possession, directly or indirectly, of the power to direct or cause the direction of the affairs or management of a Person, whether through the ownership of voting securities, as trustee or executor, by contract or otherwise. "Delay Notice" has the meaning assigned to such term in Section ------------ 5.1(h). "Demand Party" has the meaning assigned to such term in Section ------------ 5.1(a). "Director" means a member of the Company Board. -------- "Equity Securities" means any and all shares of Capital Stock of the ----------------- Company, securities of the Company convertible into, or exchangeable or exercisable for, such shares, and options, warrants or other rights to acquire such shares (including the Warrants). "Exchange Act" means the Securities Exchange Act of 1934, as amended, ------------ and the rules and regulations promulgated thereunder. "Fair Market Value" means, as of any date, (A) with respect to the ----------------- securities of any Person, either (x) the average of the closing reported sale prices of such securities on the principal national securities exchange or automated quotation service on which such security is then listed or quoted for the ten consecutive trading days immediately prior to the date as of which Market Value is being determined, or (y) if such securities are not publicly traded, then the fair market value of such securities as mutually agreed in good faith between the Company and AOL or, failing such agreement, as determined by a nationally recognized investment banking firm selected by mutual agreement of an investment banking firm selected by AOL and an investment banking firm selected by the Company (the "Arbitrating Investment Banker"), and (B) with respect to ----------------------------- any other assets, the fair market value of such assets as determined by the Arbitrating Investment Banker in accordance with the procedures set forth in clause (y) above. "GAAP" means generally accepted accounting principles, as in effect in ---- the United States of America from time to time. "Group" has the meaning assigned to such term in Section 13(d)(3) of ----- the Exchange Act. "Holder" means AOL and any Affiliates of AOL as well as any Transferee ------ of AOL or any of its Affiliates entitled to the rights under Articles V and VI of this Agreement. "Incentive Issuances" means the issuance or grant of any option to ------------------- purchase Common Stock or shares of Common Stock (including upon the exercise of options) in the ordinary course of business under any employee stock option, employee stock purchase or other equity-based employee incentive plan, which plan was approved by the Company Board prior to such grant or issuance. "Indemnified Parties" has the meaning assigned to such term in Section ------------------- 6.4(a). "Information Delay Notice" has the meaning assigned to such term in ------------------------ Section 5.1(h). "Investment Agreement" has the meaning assigned to such term in the -------------------- Recitals. "Law" has the meaning assigned to such term in the Investment --- Agreement. "Managing Underwriters" has the meaning assigned to such term in --------------------- Section 5.1(f). "Material Breach of the Commercial Agreement" means a "Material ------------------------------------------- Breach" as defined in the Commercial Agreement. "NASD" means the National Association of Securities Dealers, Inc. ---- "Nasdaq" means the Nasdaq National Market tier of The Nasdaq Stock ------ Market. "NYSE" means The New York Stock Exchange, Inc. ---- "Other Issuance Shares" has the meaning assigned to such term in --------------------- Section 4.2(a). "Other Share Issuance" has the meaning assigned to such term in -------------------- Section 4.2(a). "Ownership Percentage" means, at any time, the ratio, expressed as a -------------------- percentage, (i) of the total shares of Common Stock beneficially owned by AOL and its Affiliates to (ii) the total number of outstanding shares of Common Stock, in each case (x) including (A) all shares issuable upon conversion of the Preferred Shares, if any, and (B) all shares issuable upon exercise of all the Warrants (regardless of whether they are exercisable at such time), but (y) excluding all shares issuable upon the conversion or exercise of Participation Securities or any other convertible or exercisable securities of the Company. "Participation Offering" has the meaning assigned to such term in ---------------------- Section 4.3(a). "Participation Offering Notice" has the meaning assigned to such term ----------------------------- in Section 4.3(b). "Participation Securities" has the meaning assigned to such term in ------------------------ Section 4.3(a). "Person" means any individual, corporation, limited liability company, ------ limited or general partnership, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivisions thereof or any Group comprised of two or more of the foregoing. "Preferred Shares" has the meaning assigned to such term in the ---------------- Recitals. "Pro Rata Portion" means: ---------------- (a) for purposes of Section 4.1, on any issuance date for Unregistered Shares, the number or amount of Unregistered Shares equal to the product of (i) the total number or amount of Unregistered Shares to be issued by the Company on the applicable date multiplied by (ii) the fraction determined by dividing (A) the number of shares of Common Stock beneficially owned by AOL and its Affiliates (including the shares of Common Stock issuable upon conversion of the Preferred Shares, but excluding any shares of Common Stock issuable pursuant to the Warrants or Participation Securities held by AOL on such date) by (B) the total number of shares of Common Stock outstanding on such date; (b) for purposes of Section 4.2, on any issuance date for an Other Share Issuance, the number or amount of Other Issuance Shares included in such Other Share Issuance equal to the product of (i) the total number or amount of Other Issuance Shares issued by the Company on the applicable date multiplied by (ii) the fraction determined by dividing (A) the number of shares of Common Stock beneficially owned by AOL and its Affiliates (including the shares of Common Stock issuable upon conversion of the Preferred Shares, but excluding any shares of Common Stock issuable pursuant to the Warrants or Participation Securities held by AOL on such date) by (B) the total number of shares of Common Stock outstanding on such date; or (c) for purposes of Section 4.3, on any issuance date for Participation Securities, the number or amount of Participation Securities equal to the product of (i) the total number or amount of Participation Convertible Securities to be issued by the Company multiplied by (ii) the fraction determined by dividing (A) the number of shares of Common Stock beneficially owned by AOL and its Affiliates on such date (including the shares of Common Stock issuable upon conversion of the Preferred Shares, exercise of the Warrants, and exercise or conversion of Participation Securities previously issued and outstanding) by (B) the total number of shares of Common Stock outstanding on such date (including the shares of Common Stock issuable upon conversion of the Preferred Shares, exercise of the Warrants, and exercise or conversion of Participation Securities previously issued and outstanding). "Registrable Securities" means any Preferred Shares and any Common ---------------------- Stock (including the Warrant Shares) held by any Holder. For purposes of this Agreement, any required calculation of the amount of, or percentage of, Registrable Securities shall be based on the number of shares of Common Stock which are Registrable Securities, including shares issuable upon the conversion, exchange or exercise of any security convertible, exchangeable or exercisable into Common Stock (including the Warrants and the Preferred Shares). As to any particular Registrable Securities, once issued, such Registrable Securities shall cease to be Registrable Securities when: (i) a registration statement with respect to the sale by the Holder of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement; (ii) such securities shall have been distributed to the public pursuant to Rule 144; or (iii) such securities shall have ceased to be outstanding. "Registration Expenses" means any and all expenses incident to --------------------- performance of or compliance with Articles V and VI of this Agreement, including: (i) all SEC and NYSE or other securities exchange, Nasdaq or NASD registration and filing fees; (ii) all fees and expenses of complying with securities or blue sky laws (including the reasonable fees and disbursements of counsel for the underwriters in connection with blue sky qualifications of the Registrable Securities); (iii) all printing, messenger and delivery expenses; (iv) all fees and expenses incurred in connection with the listing of the Registrable Securities on Nasdaq or any other securities exchange pursuant to this Agreement and all rating agency fees; (v) the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits and/or "cold comfort" letters required by or incident to such performance and compliance; (vi) any reasonable fees and disbursements of underwriters and their counsel customarily paid by the issuers or sellers of securities, and the reasonable fees and expenses of special experts retained in connection with the requested registration, but excluding underwriting discounts and commissions; and (vii) all expenses incurred in connection with any road shows. "Rule 144" means Rule 144 (or any successor provision) promulgated -------- under the Securities Act. "Schedule 13D" means the Statement on Schedule 13D filed by AOL ------------ pursuant to Rule 13d-1 under the Exchange Act relating to AOL's interest in the Company's Capital Stock, and any amendments thereto. "SEC" means the U.S. Securities and Exchange Commission or any other --- federal agency then administering the Securities Act or the Exchange Act and other federal securities laws. "Securities Act" means the Securities Act of 1933, as amended, and the -------------- rules and regulations promulgated thereunder. "Set Top Box Launch" has the meaning assigned to such term in the ------------------ Investment Agreement. "Shares" has the meaning assigned to such term in the Recitals. ------ "Standstill Period" means the period commencing on the date hereof and ----------------- continuing until the earlier of: (i) the eighth anniversary of the date hereof; or (ii) the first date on which AOL does not own in excess of 10% of the outstanding shares of Common Stock. "Subsidiary" means (i) any corporation of which a majority of the ---------- securities entitled to vote generally in the election of directors thereof, at the time as of which any determination is being made, are owned by another entity, either directly or indirectly, and (ii) any joint venture, general or limited partnership, limited liability company or other legal entity in which an entity is the record or beneficial owner, directly or indirectly, of a majority of the voting interests or the general partner. "Third Party" means any Person who is not an Affiliate of AOL, ----------- including any Group, other than a Group which includes AOL or any of its Affiliates as members. "Transaction Agreements" means the, collectively, this Agreement, the ---------------------- Investment Agreement, the Warrants, the Voting Agreement (as defined in the Investment Agreement), the Escrow Agreement (as defined in the Investment Agreement), the Restated Certificate (as defined in the Investment Agreement) and the Commercial Agreement. "Transaction Delay Notice" has the meaning assigned to such term in ------------------------ Section 5.1(h). "Transfer" means, directly or indirectly, to sell, transfer, assign, -------- pledge, encumber, hypothecate or similarly dispose of, either voluntarily or involuntarily, or to enter into any contract with respect to the sale, transfer, assignment, pledge, encumbrance, hypothecation or similar disposition of, any Equity Securities beneficially owned by a Person. "Transferee" means any Person to whom AOL or any Transferee thereof ---------- Transfers Equity Securities of the Company. "Unregistered Offering" has the meaning assigned to such term in --------------------- Section 4.1(a). "Unregistered Offering Notice" has the meaning assigned to such term ---------------------------- in Section 4.1(b). "Unregistered Shares" has the meaning assigned to such term in Section ------------------- 4.1(a). "Voting Securities" means, at any time, shares of any class of Equity ----------------- Securities which are then entitled to vote generally in the election of Directors. "Warrants" has the meaning assigned to such term in the Recitals. -------- "Warrant Shares" means the shares of Common Stock or other Equity -------------- Securities purchasable pursuant to the Warrants, as adjusted from time to time in accordance with the terms of such Warrants and this Agreement, whether such Warrant is exercisable or not. SECTION 1.2 Other Definitional Provisions. (a) The words "hereof," ----------------------------- "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Article and Section references are to this Agreement unless otherwise specified. (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. ARTICLE II CORPORATE GOVERNANCE OF THE COMPANY ----------------------------------- SECTION 2.1 Board Representation/Observation. (a) Subject to -------------------------------- Sections 2.5 and 2.1(c), AOL will be entitled to designate one person for election to the Company Board (the "AOL Representative"). The Company agrees to ------------------ take all such action as may be required under applicable Law: (i) so that, effective as of the Closing, the Company Board will include the AOL Representative, and the AOL Representative shall be a member of the class of Directors having a term extending until the 2003 annual meeting of shareholders of the Company; (ii) to include the AOL Representative in the slate of nominees for the class of Directors in which the AOL Representative is designated recommended by the Company Board for election by the stockholders of the Company; and (iii) to use its best efforts to cause the election of the AOL Representative to the Company Board, including nominating such individual to be elected as a Director of the Company Board. (b) In the event that a vacancy is created on the Company Board at any time by the death, disability, retirement, resignation or removal (with or without cause) of any AOL Representative, the Company and the remaining Directors will cause the vacancy created thereby to be filled by a new designee of AOL as soon as possible, who is designated in the manner specified in this Section 2.1, and the Company hereby agrees to take, or cause to be taken, at any time and from time to time, all actions necessary to accomplish the same. Unless requested by AOL, the Company agrees not to take any action to cause the removal of any AOL Representative without cause. (c) AOL shall have the right, exercisable at any time by written notice to the Company, to appoint one observer (the "AOL Observer") to attend ------------ all regular and special meetings of the Board of Directors. Upon delivery to the Company of the notice designating an AOL Observer, AOL shall cause the AOL Representative, if any, to resign as a member of the Company Board; provided that the person serving as the AOL Representative shall -------- be permitted to serve as the AOL Observer. Upon the removal of any AOL Observer, AOL shall have the right, at its sole discretion, subject to Section 2.6, to appoint an AOL Representative in accordance with Section 2.1(a) or a replacement AOL Observer in accordance with this Section 2.1(c); provided that (i) after -------- replacing an AOL Representative with an AOL Observer, AOL shall be permitted to freely replace such AOL Observer with an AOL Representative on one occasion, and (ii) thereafter, if AOL desires to replace such AOL Representative with an AOL Observer, AOL and the Company shall consult in good faith regarding AOL's desire to designate an AOL Representative and such AOL Representative shall be subject to the reasonable discretion of the Company. The AOL Observer shall be entitled to receive the same notice of any such meeting and all other information and materials (financial and otherwise) as and at the same time received by the Directors, and shall have the right to participate therein, but shall not have the right to vote on any matter or to be counted for purposes of determining whether a quorum is present thereat. In addition, the AOL Observer shall have the right to receive copies of any action proposed to be taken by written consent of the Board of Director without a meeting. (d) The Company shall reimburse each AOL Representative or AOL Observer, as the case may be, for his or her reasonable out-of-pocket expenses incurred by him or her for the purpose of attending meetings of the Company Board or committees thereof. The AOL Representative or AOL Observer shall also be entitled to the same benefits (including coverage under insurance policies) as other non-employee Directors. (e) Notwithstanding that any AOL Representative may be a member of the Company Board or an AOL Observer may be entitled to observe Company Board meetings, AOL and its Affiliates may, and, to the greatest extent permitted by the General Corporation Law of the State of Delaware, any individual serving as an AOL Representative or an AOL Observer may in his own right or as a director, officer, employee or shareholder of any other Person, carry on any activity, pursue any business opportunity or enter into any agreement, arrangement or understanding whatsoever. SECTION 2.2 Available Information. (a) So long as AOL and its --------------------- Affiliates collectively own Common Stock and Preferred Shares representing 85% of the shares of Common Stock issued to it at the Closing or receivable upon conversion of the Preferred Shares as of the Closing, the Company will deliver, or will cause to be delivered, the following to AOL: (i) to the extent prepared by the Company, as soon as practical after the preparation thereof, a consolidated balance sheet of the Company and its Subsidiaries as of the end of each month, consolidated statements of income and cash flows of the Company and its Subsidiaries, for each month and for the current fiscal year of the Company to date, a comparison of such statements to the corresponding periods of the prior fiscal year and to the Company's business plan then in effect; and (ii) an annual budget, a business plan and financial forecasts for the Company for the next fiscal year of the Company, no later than thirty (30) days before the beginning of the Company's next fiscal year, in such manner and form as approved by the Company Board, which shall include at least a projection of income and a projected cash flow statement for each fiscal quarter in such fiscal year and a projected balance sheet as of the end of each fiscal quarter in such fiscal year. Any material changes in such business plan shall be delivered to the AOL Representative, the AOL Observer or AOL, as the case may be, as promptly as practicable after such changes have been approved by the Company Board. (b) The Company will promptly deliver to AOL when available such number of copies of each annual report on Form 10-K and quarterly report on Form 10-Q of the Company, as filed with the SEC, as AOL shall reasonably request. In the event an annual report on Form 10-K or quarterly report on Form 10-Q is unavailable, the Company may, in lieu of the requirements of the preceding sentence, deliver, or cause to be delivered, the following to the AOL Representative, the AOL Observer or AOL, as the case may be: (i) as soon as practicable after the end of each fiscal year of the Company, and in any event within ninety (90) days thereafter, a consolidated balance sheet of the Company and its Subsidiaries as of the end of such fiscal year, and consolidated statements of income and cash flows of the Company and its Subsidiaries for such year, prepared in accordance with GAAP and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and followed promptly thereafter (to the extent not available) such financial statements accompanied by the opinion of independent public accountants of recognized national standing selected by the Company, and a Company-prepared comparison to the Company's business plan for such year as approved by the Company Board; and (ii) as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a consolidated balance sheet of the Company and its Subsidiaries as of the end of each such quarterly period, and consolidated statements of income and cash flows of the Company and its Subsidiaries for such period and for the current fiscal year to date, prepared in accordance with GAAP and setting forth in comparative form the figures for the corresponding periods of the previous fiscal year and to the Company's business plan then in effect and approved by the Company Board, subject to changes resulting from normal year-end audit adjustments, all in reasonable detail and certified by the principal financial or accounting officer of the Company, except that such financial statements need not contain the notes required by GAAP. SECTION 2.3 Access. So long as AOL and its Affiliates collectively ------ own Common Stock and Preferred Shares representing 85% of the shares of Common Stock issued to it at the Closing or receivable upon conversion of the Preferred Shares as of the Closing, the company will afford AOL the opportunity to discuss the Company's business, affairs, finances, prospects and accounts with the Company's Chief Executive Officer on a quarterly basis and the Company's Chief Financial Officer on a monthly basis, and at such other times and with such other officers, attorneys and accountants of the Company as the Company shall approve (such approval not to be unreasonably withheld). SECTION 2.4 Voting of Shares. (a) Voting of Shares by AOL. Subject ---------------- ----------------------- to the final sentence of this Section 2.4 and to Section 2.5, AOL shall be entitled to vote, or cause to be voted, that number of Voting Securities it owns representing up to 19.9% of the voting power of all the outstanding Voting Securities of the Company on any matter submitted to a vote of stockholders (or for which action in lieu of a vote is solicited by the Company) in AOL's sole discretion. Subject to the final sentence of this Section 2.4 and to Section 2.5, AOL agrees to vote or cause to be voted all of the Voting Securities that it at any time owns representing in excess of 19.9% of the total voting power of all the outstanding Voting Securities on any matter submitted to a vote of stockholders (or for which action in lieu of a vote is solicited by the Company) in accordance with the recommendation of the Company Board. Notwithstanding the foregoing, AOL shall not be limited or restricted in any manner in voting any number of Voting Securities and shall not be subject to any voting obligation with respect to any Voting Securities in respect of any of the following: (i) any amendment to the Company's Certificate that is adverse in a discriminatory manner to AOL; or (ii) any Acquisition Proposal if the Company has materially breached any of its obligations under Section 6.2 or Section 6.3 of the Investment Agreement or Section 7.1(e), Section 7.1(f) or Article VIII of this Agreement. (b) Voting of Shares by New Investors. In the event that prior to the --------------------------------- Closing (as defined in the Investment Agreement), the Company issues any voting securities in a transaction that is not an underwritten offering, then the Company shall require as a condition of such issuance that the purchasers of such securities enter into a voting agreement similar to the Voting Agreement to vote in favor of the transactions contemplated by the Investment Agreement. SECTION 2.5 Termination of Rights and Obligations. The provisions -------------------------------------- of Section 2.1 and Section 2.4 shall terminate upon expiration of the Standstill Period. SECTION 2.6 Other Approval Rights. If the Company at any time after ---------------------- the date hereof grants to any other holders of Equity Securities any rights to consent to or approve any corporate action, transaction, or other event or development concerning the Company or its business, this Agreement shall be deemed amended to provide to AOL substantially equivalent rights of consent or approval. SECTION 2.7 Ownership Restrictions. The Company shall not adopt, ----------------------- enter into or enforce any restriction on AOL's ability to acquire ownership (beneficial or otherwise) of any securities of the Company, pursuant to a shareholder rights plan or otherwise, except (i) as expressly provided herein and in the other Transaction Agreements or (ii) pursuant to a customary shareholder rights plan that expressly provides that no adverse effect on AOL will occur (including, without limitation, the separation or exercisability of the rights issued pursuant to such plan or the designation of AOL or its affiliates as an "acquiring person" or the like) under such plan by reason of or due to (x) AOL acquiring beneficial ownership of up to 30% of all the outstanding shares of Common Stock, (y) any acquisition of beneficial or record ownership by AOL or its Affiliates of securities of the Company pursuant to the terms of any of the Transaction Agreements (including, without limitation, Article I of the Investment Agreement, Articles IV or VII hereof, the conversion, antidilution, adjustment, dividend or redemption provisions of the Preferred Shares, the exercise, adjustment or antidilution provisions of the Warrants or otherwise) or (z) any action taken by the Company (including, without limitation, repurchases of securities or dividends on equity securities). ARTICLE III TRANSFERS --------- SECTION 3.1 Transfer Restrictions. (a) Subject to Sections 3.1(b) --------------------- and 3.4, neither AOL nor any of its Affiliates will transfer any of their Equity Securities to any Person without the Company's prior consent. (b) Notwithstanding the foregoing, and subject to Sections 3.3 (including Sections 3.3(d)) and 3.4, AOL and its Affiliates may Transfer all or, from time to time, any portion of their Equity Securities: (i) if, after giving effect to the Transfer, the Transferee will not, to AOL's knowledge, beneficially own or have the right to acquire in excess of 5% of the outstanding Capital Stock of the Company; (ii) in response to a Third Party Acquisition Proposal that has been recommended or approved by the Company Board; (iii) to Persons who are eligible to report their ownership of Equity Securities on Schedule 13G under Section 13(g) of the Exchange Act or any successor provision; (iv) pursuant to a bona fide underwritten public offering or Rule 144; provided that, (A) in the case of an underwritten offering, the -------- underwriters have been requested to inquire, and (B) in the case of a sale pursuant to Rule 144 that is not executed on any securities exchange or in the over-the-counter market, AOL or its representatives have inquired, whether any purchaser in such transaction will beneficially own, after giving effect to such transaction, in excess of 5% of the outstanding Capital Stock of the Company; (v) upon or following a Change of Control of the Company; or (vi) to any Affiliate of AOL; provided that such Affiliate shall agree in -------- writing to be bound by the terms of this Agreement in accordance with Section 9.4; provided further that in the event such Transferee -------- ------- ceases to be an Affiliate of AOL, such Transferee shall Transfer any Equity Securities then held by it to AOL or another Affiliate of AOL. SECTION 3.2 Transferees. Except as set forth in Section 3.1(vi), no ----------- Transferee of AOL or its Affiliates will be obligated, or entitled to rights, under this Agreement. SECTION 3.3 Right of First Offer. Subject to Sections 3.3(d) and -------------------- 3.4, AOL agrees not to Transfer any of its Equity Securities except as set forth below: (a) Notice. Prior to any Transfer of Equity Securities by AOL, AOL ------ shall deliver to the Company written notice (the "AOL Offer Notice"), which ---------------- notice shall state the number of Equity Securities proposed to be Transferred(the "AOL Offered Securities") and ---------------------- the proposed purchase price therefor. (b) Exercise. For a period of ten (10) days following receipt of the -------- AOL Offer Notice, the Company shall have the option, but not the obligation, to purchase all, but not less than all, of the AOL Offered Securities for a purchase price per share in cash equal to the purchase price per share set forth in the AOL Offer Notice and on the same terms and conditions as applicable to the proposed Transfer. In the event the Company elects to purchase all of the AOL Offered Securities, the Company shall provide written notice to AOL no later than ten (10) days following receipt by the Company of the AOL Offer Notice. Any purchase by the Company of AOL Offered Securities under this Section 3.3 shall occur as soon as practicable following the Company's election to exercise its rights under this Section 3.3, but in any event within twenty (20) days following such election. At the closing of such purchase, AOL shall deliver a certificate or certificates to the Company, duly endorsed for transfer or accompanied by stock powers duly executed, in either case executed in blank or in favor of the Company against payment of the aggregate purchase price therefor by wire transfer of immediately available funds. In the event the Company fails to elect to purchase all the AOL Offered Securities by delivery of a notice to such effect pursuant to Section 3.3(a), then the Company shall be deemed to have elected not to purchase the AOL Offered Securities pursuant to this Section 3.3. (c) Completion of Transfer. In the event the Company elects not to ---------------------- purchase the AOL Offered Securities pursuant to this Section 3.3, AOL may, within one hundred twenty (120) days following the expiration of the 10-day period set forth in Section 3.3(b), Transfer the AOL Offered Securities at a price not lower, and on other terms no less favorable to AOL, than those set forth in the AOL Offer Notice; provided that, if the consideration to be -------- received by AOL consists in whole or in part of consideration other than cash, the portion of the price received by AOL for the Transfer of the Offered Securities consisting of such non-cash consideration shall deemed to be the Fair Market Value of such non-cash consideration as of the date AOL enters into a binding agreement with respect to the Transfer of the Offered Securities or, if no such agreement is entered into, the date of the consummation of the Transfer of the Offered Securities (it being understood that in connection with any determination of Fair Market Value which involves an Arbitrating Investment Banker, the fees and expenses of such Arbitrating Investment Banker shall be paid by AOL if it is determined that the total price to be paid to AOL for the Offered Securities is less than that set forth in the AOL Offer Notice and otherwise shall be paid by the Company). If the AOL Offered Securities are not so Transferred within such 120-day period, such securities shall again become subject to all of the terms and conditions of the Agreement and may not thereafter be Transferred except in the manner and on the terms herein provided. (d) Exceptions to the Right of First Offer. This Section 3.3 shall -------------------------------------- not apply to Transfers of Equity Securities by AOL made in accordance with paragraphs (ii), (iv), (v) or (vi) of Section 3.1(b). SECTION 3.4 Termination of Rights and Obligations. The provisions of ------------------------------------- this Article III shall terminate upon expiration of the Standstill Period. ARTICLE IV EQUITY PURCHASE RIGHTS ---------------------- SECTION 4.1 Unregistered Securities Offerings. (a) Grant of Right. --------------------------------- -------------- Subject to Section 4.5 and the other terms and conditions of this Section 4.1, the Company hereby grants to AOL the right to subscribe for and purchase its Pro Rata Portion (or any lesser amount as AOL may elect) of any shares of Common Stock (the "Unregistered Shares") that the Company may, from time to time, ------------------- propose to issue (excluding Incentive Issuances) pursuant to an offering of Common Stock for cash consideration that is not registered with the SEC (each an "Unregistered Offering"). The number or amount of Unregistered Shares which AOL --------------------- may subscribe for or purchase pursuant to this Section 4.1 shall be referred to as the "AOL Unregistered Shares." ----------------------- (b) Notice. The Company shall deliver to AOL written notice (an ------ "Unregistered Offering Notice") of each proposed Unregistered Offering, which - ----------------------------- shall set forth the material terms and conditions of the proposed Unregistered Offering that are known to the Company at the time such notice is given, including, to the extent available, the name of any proposed purchaser(s), the names of any underwriters, placement agents, initial purchasers or similar participants in such offering, the proposed manner of disposition, the number and amount of Unregistered Shares proposed to be issued and the proposed purchase price per share (or range of purchase prices). In addition, the Company shall have the continuing obligation to (i) promptly provide (and, if available to the Company prior to the time AOL must notify the Company whether it desires to participate in such Unregistered Offering pursuant to Section 4.1(c), prior to such time) to AOL any additional material information regarding the terms of such Unregistered Offering (including changes in such terms) that becomes available to the Company, including as a result of discussions with underwriters, private placement agents, initial purchasers or similar participants in such offering and (ii) promptly provide to AOL any other information available to the Company concerning such Unregistered Offering that AOL shall reasonably request. Each Unregistered Offering Notice must be received by AOL at least fifteen (15) days prior to the proposed Unregistered Offering. (c) Exercise. At any time during the 10-day period following receipt -------- of an Unregistered Offering Notice, AOL may elect to purchase any or all of the AOL Unregistered Shares at the purchase price and upon the other terms and conditions upon which shares of Common Stock are actually issued in the Unregistered Offering by delivering a written notice to such effect to the Company. If (i) AOL elects to purchase AOL Unregistered Shares and after such election the price at which Unregistered Shares are issued is greater than 133% of the price specified in the Unregistered Offering Notice (or the last written notice delivered to AOL regarding such issuance of Unregistered Shares), then AOL shall be entitled to withdraw its election to purchase AOL Unregistered Shares or (ii) if AOL fails to elect to purchase AOL Unregistered Shares during such 10-day period and after such 10-day period the price at which Unregistered Shares are issued is less than 67% of the price specified in the Unregistered Offering Notice (or the last written notice delivered to AOL regarding such issuance of Unregistered Shares), then AOL shall be released from its obligations under Article VII of this Agreement for a period of sixty (60) days following the consummation of such Unregistered Offering (or, if later, the cessation of any restrictions under applicable Law or the rules of Nasdaq or any stock exchange on AOL's ability to purchase Common Stock) in order to allow AOL to purchase the number of shares of Common Stock that it could have purchased in such Unregistered Offering. Except as provided in the following sentence, such purchase shall be consummated concurrently with the consummation of the Unregistered Offering. The closing of any purchase of AOL Unregistered Shares by AOL may be extended beyond the closing of the transaction described in the Unregistered Offering Notice to the extent necessary to obtain required governmental approvals and other necessary approvals and the Company and AOL shall use their respective reasonable best efforts to obtain such approvals. (d) Completion of the Unregistered Offering. The Company shall not --------------------------------------- complete any Unregistered Offering unless it has complied with the provisions of this Section 4.1. If the Company fails to complete any Unregistered Offering within thirty (30) days following the exercise by AOL of its rights to participate in such Unregistered Offering pursuant to this Section 4.1, AOL shall thereafter be entitled to withdraw or change its election to purchase AOL Unregistered Shares and the Company shall continue to comply with this Section 4.1 until such time as the Company shall deliver to AOL a written notice that the Company is terminating such Unregistered Offering. Upon any termination of an Unregistered Offering without any shares of Common Stock having been issued, the Company shall have no obligation to issue or sell shares of Common Stock to AOL, but shall be obligated to comply with this Section 4.1 for any subsequent Unregistered Offering. (e) Warrants. Immediately following each Unregistered Offering (or -------- the sixty-day period specified in clause (ii) of the second sentence of Section 4.1(c), if applicable), the number of Warrant Shares shall be increased, to the extent AOL actually purchases AOL Unregistered Shares, in the aggregate by a number of shares of Common Stock equal to (x) a fraction, the numerator of which is the number of AOL Unregistered Shares which AOL actually purchased in connection with such Unregistered Offering and the denominator of which is the number of AOL Unregistered Shares which AOL was entitled to purchase in connection with such Unregistered Offering, multiplied by (y) that number of shares of Common Stock necessary to restore AOL's Ownership Percentage to the Ownership Percentage in effect immediately prior to such Unregistered Offering. Any such increase in the number of Warrant Shares shall be allocated proportionally among all Warrants unexercised at such time. Upon presentation of the Warrants to the Company by AOL, the Company shall issue to AOL new Warrants reflecting the increased number of shares of Common Stock subject thereto. The Company shall at all time cause to be reserved for issuance the aggregate number of Warrant Shares issuable pursuant to the Warrants. SECTION 4.2 Other Issuances of Common Stock. (a) Release from ------------------------------- ------------ Standstill. Subject to Section 4.5, in the event the Company issues shares of - ---------- Common Stock other than pursuant to an Unregistered Offering or an Incentive Issuance (an "Other Share Issuance"), AOL will be released from its obligations -------------------- under Article VII of this Agreement for a period of sixty (60) days following its receipt of the notice described in the next sentence (or, if later, the cessation of any restrictions under applicable Law or the rules of Nasdaq or any stock exchange on AOL's ability to purchase Common Stock) in order to allow AOL to purchase a number of shares of Common Stock equal to its Pro Rata Portion of the total number of shares of Common Stock (the "Other Issuance Shares") issued --------------------- in such Other Share Issuance. Upon the closing of any Other Share Issuance, the Company shall notify AOL in writing of such fact and shall specify the number of shares of Common Stock issued in such Other Share Issuance. (b) Warrants. Immediately following the expiration of the 60-day -------- period referred to in Section 4.2(a), the number of Warrant Shares shall be increased, to the extent AOL actually purchases Other Issuance Shares, in the aggregate by a number of shares of Common Stock equal to (x) a fraction, the numerator of which is the number of Other Issuance Shares which AOL actually purchased in connection with such Other Share Issuance and the denominator of which is the number of Other Issuance Shares which AOL was entitled to purchase in connection with such Other Share Issuance multiplied by (y) that number of shares of Common Stock necessary to restore AOL's Ownership Percentage to the Ownership Percentage in effect immediately prior to such Other Share Issuance. Any such increase in the number of Warrant Shares shall be allocated proportionally among all Warrants unexercised at such time. Upon presentation of the Warrants to the Company by AOL, the Company shall issue to AOL new Warrants reflecting the increased number of shares of Common Stock subject thereto. The Company shall at all time cause to be reserved for issuance the aggregate number of Warrant Shares issuable pursuant to the Warrants. SECTION 4.3 Issuances of Convertible Securities. (a) Grant of ----------------------------------- -------- Right. Subject to Section 4.5 and the other terms of this Section 4.3, the Company hereby grants to AOL the right to subscribe for and purchase its Pro Rata Portion (or any lesser amount as AOL may elect) of any securities exercisable for or convertible into Common Stock (the "Participation ------------- Securities") that the Company may, from time to time, propose to issue - ---------- (excluding Incentive Issuances) (each a "Participation Offering"). The number ---------------------- or amount of Participation Convertible Securities which AOL may subscribe for and purchase pursuant to this Section 4.3 shall be referred to as the "AOL --- Participation Securities." - ------------------------ (b) Notice. The Company shall deliver to AOL written notice (a ------ "Participation Offering Notice") of each proposed Participation Offering, which - ------------------------------ shall set forth the material terms and conditions of the proposed Participation Offering that are known to the Company at the time such notice is given, including, to the extent available, the name of any proposed purchaser(s), the names of any underwriters, placement agents, initial purchasers or similar participants in such offering, the proposed manner of disposition, the number and amount of Participation Securities proposed to be issued, a description of the conversion or exchange features of the Participation Securities and the proposed purchase price per security (or range of purchase prices) (including a description of any non-cash consideration sufficiently detailed to permit valuation thereof). In addition, the Company shall have the continuing obligation to (i) promptly provide (and, if available to the Company prior to the time AOL must notify the Company whether it desires to participate in such Participation Offering pursuant to Section 4.3(c), prior to such time) to AOL any additional material information regarding the terms of such Participation Offering (including changes in such terms) that becomes available to the Company, including as a result of discussions with underwriters, private placement agents, initial purchasers or similar participants in such offering and (ii) promptly provide to AOL any other information available to the Company concerning such Participation Offering that AOL shall reasonably request. Each Participation Offering Notice must be received by AOL at least fifteen (15) days prior to the proposed Participation Offering. (c) Exercise. At any time during the 10-day period following receipt -------- of a Participation Offering Notice, AOL may elect to purchase any or all of the AOL Participation Securities at the purchase (or if the purchase price includes consideration other than cash, the amount in cash equal to the fair value of such other consideration) and upon the other terms and conditions upon which the Participation Securities are actually issued by delivering a written notice to such effect to the Company. If (i) AOL elects to purchase AOL Participation Securities and after such election the price at which Participation Securities are issued is greater than 133% of the price specified in the Participation Offering Notice (or the last written notice delivered to AOL regarding such issuance of Participation Securities Shares), then AOL shall be entitled to withdraw its election to purchase AOL Participation Securities or (ii) if AOL fails to elect to purchase AOL Participation Securities during such 10-day period and after such 10-day period the price at which Participation Securities are issued is less than 67% of the price specified in the Participation Offering Notice (or the last written notice delivered to AOL regarding such issuance of Participation Securities), then AOL shall be released from its obligations under Article VII of this Agreement for a period of sixty (60) days in order to allow AOL to purchase the number of shares of Common Stock that would be issuable upon conversion of the all Participation Securities it could have purchased in such Participation Offering. Except as provided in the following sentence, such purchase shall be consummated concurrently with the consummation of the Participation Offering. The closing of any purchase of AOL Participation Securities by AOL may be extended beyond the closing of the transaction described in the Participation Notice to the extent necessary to obtain required governmental approvals and other necessary approvals and the Company and AOL shall use their respective reasonable best efforts to obtain such approvals. (d) Completion of the Participation Offering. The Company shall not ---------------------------------------- complete any Participation Offering unless it has complied with the provisions of this Section 4.3. If the Company fails to complete any Participation Offering within thirty (30) days following the exercise by AOL of its rights to participate in such Participation Offering pursuant to this Section 4.3, AOL shall thereafter be entitled to withdraw or change its election to purchase AOL Participation Securities and the Company shall continue to comply with this Section 4.3 until such time as the Company shall deliver to AOL a written notice that the Company is terminating such Participation Offering. Upon any termination of an Participation Offering without any Participation Securities having been issued, the Company shall have no obligation to issue or sell any AOL Participation Securities to AOL, but shall be obligated to comply with this Section 4.3 for any subsequent Participation Offering. SECTION 4.4 No Restrictions. The Company shall not enter into or --------------- permit to become effective any restrictions on AOL's rights under this Article IV, whether pursuant to a contract, provision of the Certificate or Bylaws or otherwise. The Company represents to AOL that it has, and for each purchase of securities pursuant to this Article IV it will, approve the acquisition of securities by AOL for purposes of Section 203 of the General Corporation Law of the State of Delaware. SECTION 4.5 Termination of Equity Purchase Rights. AOL's equity ------------------------------------- purchase rights under this Article IV will expire upon the earlier of (i) December 31, 2001 or (ii) the Set Top Box Launch. ARTICLE V REGISTRATION RIGHTS ------------------- SECTION 5.1 Registration on Request. ----------------------- (a) Request. Subject to Section 5.1(b), at any time after the date ------- hereof, AOL (or any other Holder; provided that no Transferee of AOL or any of -------- its Affiliates or of any Transferee may request a registration pursuant to this Section 5.1 unless the right to make such a request was transferred to such Transferee pursuant to Section 9.3) (individually or collectively, as the case may be, the "Demand Party") may request in writing that the Company effect the ------------ registration under the Securities Act of an underwritten offering of all or part of such Demand Party's Registrable Securities, specifying the number of Registrable Securities proposed to be sold. Subject to the other provisions of this Section 5.1, the Company shall promptly give written notice of such requested registration to all other Holders, and thereupon will, as expeditiously as possible, use its efforts to best effect the registration under the Securities Act of: (i) the Registrable Securities which the Company has been so requested to register by the Demand Party; and (ii) all other Registrable Securities which the Company has been requested to register by any other Holder thereof by written request given to the Company within thirty (30) days after the giving of such written notice by the Company (which request shall specify the amount of such Registrable Securities), all to the extent necessary to permit the disposition of the Registrable Securities so to be registered. (b) Limits on Registration Requests. Notwithstanding Section 5.1(a): ------------------------------- (i) in no event will the Company be required to effect more than four (4) registrations pursuant to this Section 5.1; (ii) following the nine month anniversary of the Closing, upon the request of AOL, the Company will be required to effect up to two (2) registrations pursuant to Section 5.1(a); (iii) except as set forth in paragraph (ii) above, the Company will not be required to effect a registration pursuant to Section 5.1(a) until the earliest of: (A) the second anniversary of the date hereof; (B) the termination of the Commercial Agreement pursuant to the mutual agreement of the Company and AOL; (C) the occurrence of a Material Breach of the Commercial Agreement by the Company, so long as such Material Breach has not been cured prior to the Demand Party's request for a registration pursuant to Section 5.1(a); or (D) the expiration of the Commercial Agreement in accordance with its terms; and (iv) if AOL commits a Material Breach of the Commercial Agreement, the Company will not be obligated to file a registration statement relating to any request under this Section 5.1 prior to the earlier of (x) the expiration of a period of twelve (12) months from the date such Material Breach occurred and (y) the date such Material Breach has been cured. Nothing in this Section 5.1 shall operate to limit the right of any Holder to (i) request the registration of Common Stock issuable upon the exercise or conversion of any Warrants or Preferred Shares held by such Holder notwithstanding the fact that at the time of request such Holder does not hold the Common Stock underlying such Warrants or Preferred Shares or (ii) request the registration at one time of both Preferred Shares convertible into Common Stock and the Common Stock underlying any such Preferred Shares. (c) Registration Statement Form. The Company shall select the --------------------------- registration statement form for any registration pursuant to this Section 5.1. (d) Expenses. In connection with registrations pursuant to this -------- Section 5.1: (i) each Holder will pay its own underwriting fees and discounts, if any, and the fees and expenses of its legal, accounting and other advisors with respect to the sale of its Registrable Securities; and (ii) the Company will pay all other Registration Expenses; provided that -------- the Company shall not be required to pay for expenses of any registration proceeding begun pursuant to this Section 5.1 (other than SEC registration fees which the Company is able to apply to a subsequent registration statement), the request of which has been subsequently withdrawn by the Demand Party, unless (a) the withdrawal is based upon material adverse information or developments concerning the Company of which the Demand Party was not aware at the time of such request, (b) the Holders of a majority of the Registrable Securities agree to forfeit their right to one requested registration pursuant to Section 5.1 (in which event such right shall be forfeited by all Holders), (c) the Company has exercised its right to postpone such registration pursuant to Section 5.1(h), (d) any event of the kinds described in Section 6.1(f) occurs or (e) the requested registration is not timely completed due to the Company's failure to comply with any of its obligations hereunder or other actions or omissions of the Company. (e) Effective Registration Statement. A registration requested -------------------------------- pursuant to this Section 5.1 will not be deemed to have been effected: (i) unless a registration statement with respect thereto has become effective and remained effective in compliance with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement until the earlier of (x) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition thereof set forth in such registration statement or (y) one-hundred- eighty (180) days after the effective date of such registration statement; (ii) if after it has become effective, the registration statement is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or authority and does not thereafter become effective and remain effective for the period specified in paragraph (i) above; or (iii) if the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such registration are not satisfied or waived, other than by reason of a failure on the part of the Demand Party or other Holders. (f) Underwriters. The managing underwriters for any registration ------------ under this Section 5.1 shall each be a nationally recognized investment banking firm and shall be selected by the Company; provided, that such underwriter(s) -------- shall be reasonably satisfactory to AOL (the "Managing Underwriters"). --------------------- (g) Priority in Requested Registrations. If the Managing Underwriter ----------------------------------- of a requested registration pursuant to this Section 5.1 advises the Company in writing that, in its opinion, the number of securities to be included in such registration would be likely to have a material adverse effect on the price, timing or distribution of the securities to be offered in such offering as contemplated by the Holders (an "Adverse Effect"), then the Company shall -------------- include in such registration: (i) first, 100% of the Registrable Securities ----- requested to be included by the Demand Party and all other Holders of Registrable Securities, if any (reduced, if necessary, pro rata in proportion to the respective number of shares proposed to be included by each); (b) second, after inclusion of all the Registrable Securities proposed to be ------ included in such registration by the Demand Party and the other Holders, to the extent of the amount of Equity Securities requested to be included by the Company in such registration which, in the opinion of such Managing Underwriter, can be sold without having the material adverse effect referred to above, such Equity Securities requested to be included by the Company; and (c) third, after inclusion of all the Registrable Securities proposed to be ----- included in such registration by the Demand Party and the other Holders and all the Equity Securities proposed to be included by the Company, to the extent of the amount of Equity Securities requested to be included by the other stockholders of the Company in such registration which, in the opinion of such Managing Underwriter, can be sold without having the material adverse effect referred to above, such Equity Securities requested to be included by other stockholders of the Company. If the Managing Underwriter of any underwritten offering shall advise the Holders participating in a registration pursuant to this Section 5.1 that the Registrable Securities covered by the registration statement cannot be sold in such offering within a price range acceptable to the Demand Party, then the Demand Party shall have the right to notify the Company that it has determined that the registration statement be abandoned or withdrawn, in which event the Company shall abandon or withdraw such registration statement and such requested and withdrawn registration shall not be deemed to have been effected pursuant to Section 5.1(b)(i). (h) Postponements in Requested Registrations. ---------------------------------------- (i) If, upon receipt of a registration request pursuant to Section 5.1(a), the Company is advised in writing by the Managing Underwriter that, in such firm's opinion, a registration at the time and on the terms requested would materially adversely affect any public offering of Common Stock by the Company (other than in connection with employee benefit and similar plans) (a "Company Offering") with respect to ---------------- which the Company has commenced preparations for a registration prior to the receipt of a registration request pursuant to Section 5.1(a) or the Company Board has concluded in good faith based on the written advice of an investment banking firm of national reputation that the completion of the distribution with respect to the offering contemplated by the registration request pursuant to Section 5.1(a) would have a long-term material adverse effect on the trading market for the Common Stock (an "Adverse Market Effect"), and, in either --------------------- case, the Company furnishes the Holders with a certificate signed by the Chief Executive Officer or Chief Financial Officer of the Company to such effect (and attaching the written advice of such Managing Underwriter or investment banking firm) (the "Transaction Delay ----------------- Notice") promptly after such request, the Company shall not be ------ required to effect a registration pursuant to Section 5.1(a) until the earliest of (A) sixty (60) days after the completion of such Company Offering, (B) promptly after the abandonment of such Company Offering, (C) promptly after a determination by the Company Board that no Adverse Market Effect would occur or (D) ninety (90) days after the date of the Transaction Delay Notice. (ii) If upon receipt of a registration request pursuant to Section 5.1(a) or while a registration request pursuant to Section 5.1(a) is pending, the Company Board determines in its good faith reasonable judgment after consultation with its principal outside securities counsel that the filing of a registration statement would require disclosure of material information which the Company has a bona fide business purpose for preserving as confidential and the Company provides the Holders written notice (the "Information Delay Notice" and, together ------------------------ with the Transaction Delay Notice, the "Delay Notice") thereof ------------ promptly after the Company makes such determination, which shall be made promptly after the receipt of any request, the Company shall not be required to comply with its obligations under Section 5.1(a) until the earlier of (A) the date upon which such material information is disclosed to the public or ceases to be material or (B) ninety (90) days after the Holders' receipt of such notice. (iii) Notwithstanding the foregoing provisions of this Section 5.1(h), the Company shall be entitled to serve (x) only one (1) Delay Notice with respect to any registration requested pursuant to Section 5.1(a) and (y) only two (2) Delay Notices in the aggregate. SECTION 5.2 Incidental Registrations. (a) If the Company at any ------------------------ time after the date hereof proposes to register Equity Securities under the Securities Act (other than a registration on Form S-4 or S-8, or any successor or other forms promulgated for similar purposes), whether or not for sale for its own account, in a manner which would permit registration of Registrable Securities for sale to the public under the Securities Act, it will, at each such time, give prompt written notice to all Holders of its intention to do so and of such Holders' rights under this Agreement. Upon the written request of any such Holder made within thirty (30) days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such Holder), the Company will use its best efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the Holders thereof; provided that: -------- (i) if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to proceed with the proposed registration of the securities to be sold by it, the Company may, at its election, give written notice of such determination to each Holder and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith); and (ii) if such registration involves an underwritten offering, all Holders requesting to be included in the Company's registration must sell their Registrable Securities to the underwriters selected by the Company on the same terms and conditions as apply to the Company, with such differences, including any with respect to indemnification and liability insurance, as may be customary or appropriate in combined primary and secondary offerings. If a registration requested pursuant to this Section 5.2 involves an underwritten public offering, any Holder requesting to be included in such registration may elect, in writing prior to the effective date of the registration statement filed in connection with such registration, not to register all or any part of such securities in connection with such registration. Nothing in this Section shall operate to limit the right of any Holder to request the registration of Common Stock issuable upon conversion, exchange or exercise of securities, including Warrants or Preferred Shares, held by such Holder notwithstanding the fact that at the time of request such Holder does not hold the Common Stock underlying such securities. The registrations provided for in this Section 5.2 are in addition to, and not in lieu of, registrations made upon the request of any Demand Party in accordance with Section 5.1. (b) Expenses. In connection with each registration of Registrable -------- Securities requested pursuant to this Section 5.2: (i) each Holder will pay its own underwriting fees and discounts, if any, and the fees and expenses of its legal, accounting and other advisors with respect to the sale of its Registrable Securities; and (ii) the Company will pay all other Registration Expenses. (c) Priority in Incidental Registrations. If a registration pursuant ------------------------------------ to this Section 5.2 involves an underwritten offering and the managing underwriter advises the Company in writing that, in its opinion, the number of Registrable Securities requested to be included in such registration would be likely to have a material adverse effect on the price, timing or distribution of the securities to be offered in such offering as contemplated by the Company (other than the Registrable Securities), then the Company shall include in such registration (i) first, 100% of the securities proposed to be included by the ----- Company, if any, and the Holders (reduced, if necessary, pro rata in proportion to the respective number of shares proposed to be included by each; provided -------- that in no event shall the securities to be issued by the Company be reduced to less than 75% of the total number of securities to be included in the offering) and (b) second, to the extent of the amount of Equity Securities requested to be ------ included by other stockholders of the Company in such registration which, in the opinion of such managing underwriter, can be sold without having the material adverse effect referred to above, such Equity Securities requested to be included by other stockholders of the Company. SECTION 5.3 Additional Registration Rights. If the Company at any ------------------------------ time after the date hereof grants to any other holders of Common Stock (or securities that are convertible, exchangeable or exercisable into Common Stock) any rights to request the Company to effect the registration under the Securities Act of any such shares of Common Stock (or any such securities) on terms more favorable to such holders than the terms set forth in this Article V or Article VI, the terms of this Article V or Article VI, as the case may be, will be deemed amended or supplemented to the extent necessary to provide the Holders such more favorable rights and benefits. ARTICLE VI REGISTRATION PROCEDURES ----------------------- SECTION 6.1 Registration Procedures. If and whenever the Company is ----------------------- required to use its best efforts to effect or cause the registration of any Registrable Securities under the Securities Act as provided in this Agreement, the Company will, as expeditiously as possible: (a) prepare and, in any event within thirty (30) days after the receipt of a request for registration, file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective within ninety (90) days of the initial filing; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period not in excess of one-hundred-eighty (180) days and to comply with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement; provided, however, that before -------- ------- filing a registration statement or prospectus, or any amendments or supplements thereto in accordance with Sections 6.1(a) or (b), the Company will furnish to AOL copies of all documents proposed to be filed, which documents will be subject to the prompt and reasonable review and comment by the Holders and their counsel; provided further that, except for any section of the prospectus, or any -------- ------- amendment or supplement thereto, relating to the Holders of Registrable Securities and the plan of distribution of the Registrable Securities, the content of such registration or any supplement or amendment thereto shall be within the reasonable discretion of the Company; (c) furnish to each seller of such Registrable Securities such number of copies of such registration statement and of each amendment and supplement thereto (in each case including all exhibits filed therewith, including any documents incorporated by reference), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and summary prospectus), in conformity with the requirements of the Securities and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities by such seller; (d) use its best efforts to register or qualify such Registrable Securities covered by such registration in such jurisdictions as each seller shall reasonably request, and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction where, but for the requirements of this subsection (d), it would not be obligated to be so qualified, to subject itself to taxation in any such jurisdiction or to consent to general service of process in any such jurisdiction; (e) use its commercially reasonable efforts to cause such Registrable Securities covered by such registration statement to be registered with or approved by such other governmental authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities; (f) notify each seller of any such Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the Company's becoming aware that the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of an amended or supplemental prospectus as may be necessary so that, as thereafter delivered to the sellers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (g) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable (but not more than eighteen (18) months) after the effective date of the registration statement, an earnings statement which shall satisfy the provisions of Section 11(a) of the Securities Act; (h) use its best efforts to list all Registrable Securities covered by such registration statement on Nasdaq or any other national securities exchange on which Registrable Securities of the same class covered by such registration statement are then listed and, if no such Registrable Securities are so listed, on Nasdaq or any national securities exchange on which the Common Stock is then listed; (i) enter into such customary agreements (including an underwriting agreement in customary form), which may include indemnification provisions in favor of underwriters and other Persons in addition to, or in substitution for the provisions of Section 6.4 hereof, and take such other actions as sellers of a majority of shares of such Registrable Securities or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities; (j) obtain a "cold comfort" letter or letters from the Company's independent public accounts in customary form and covering matters of the type customarily covered by "cold comfort" letters as the seller or sellers of a majority of shares of such Registrable Securities shall reasonably request; (k) make available for inspection by any seller of such Registrable Securities covered by such registration statement, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by any such seller or any such underwriter, all pertinent financial and other records, pertinent corporate documents and properties of the Company, and cause all of the Company's officers, directors and employees to supply all information requested by any such seller, underwriter, attorney, accountant or agent reasonably necessary to facilitate the disposition of such securities or to establish by any such person that it conducted due diligence or a reasonable investigation of the Company in connection with such registration and disposition; (l) notify the Holders of Registrable Securities included in such registration statement and the managing underwriter or agent, immediately, and confirm the notice in writing: (i) when the registration statement, or any post-effective amendment to the registration statement, shall have become effective, or any supplement to the prospectus or any amendment to the prospectus shall have been filed; (ii) of the receipt of any comments from the SEC; (iii) of any request of the SEC to amend the registration statement or amend or supplement the prospectus or for additional information; and (iv) of the issuance by the SEC of any stop order suspending the effectiveness of the registration statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the registration statement for offering or sale in any jurisdiction, or of the institution or threatening of any proceedings for any of such purposes; (m) use its best efforts to prevent the issuance of any stop order suspending the effectiveness of the registration statement or of any order preventing or suspending the use of any preliminary prospectus and, if any such order is issued, to obtain the withdrawal of any such order at the earliest possible moment; (n) if requested by the managing underwriter or agent or any Holder of Registrable Securities covered by the registration statement, promptly incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriter or agent or such Holder reasonably requests to be included therein, including, with respect to the number of Registrable Securities being sold by such Holder to such underwriter or agent, the purchase price being paid therefor by such underwriter or agent and with respect to any other terms of the underwritten offering of the Registrable Securities to be sold in such offering; and make all required filings of such prospectus supplement or post-effective amendment as soon as practicable after being notified of the matters incorporated in such prospectus supplement or post-effective amendment; (o) cooperate with the Holders of Registrable Securities covered by the registration statement and the managing underwriter or agent, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing securities to be sold under the registration statement, and enable such securities to be in such denominations and registered in such names as the managing underwriter or agent, if any, or such Holders may request; (p) use its best efforts to obtain for delivery to the Holders of Registrable Securities being registered and to the underwriter or agent an opinion or opinions from counsel for the Company in customary form and in form, substance and scope reasonably satisfactory to such Holders, underwriters or agents and their counsel; (q) cooperate with each seller of Registrable Securities and each underwriter or agent participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the NASD or Nasdaq or any other securities exchange or self regulatory organization; and (r) subject to and consistent with the best judgment of the underwriters, use its commercially reasonable efforts (taking into account the interests of the Company) to make available the executive officers of the Company to participate with the Holders and any underwriters in any "road shows" or other selling efforts that may be reasonably requested by the Holders in connection with the methods of distribution for the Registrable Securities. SECTION 6.2 Information Supplied. The Company may require each -------------------- seller of Registrable Securities as to which any registration is being effected to furnish it with such information regarding such seller and pertinent to the disclosure requirements relating to the registration and the distribution of such securities as the Company may from time to time reasonably request in writing. SECTION 6.3 Restrictions on Disposition. Each Holder agrees that, --------------------------- upon receipt of any notice from the Company of the happening of any event of the kind described in Section 6.1(f), such Holder will forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 6.1(f), and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in Section 6.1(b) shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6.1(f) and to and including the date when each seller of Registrable Securities covered by such registration statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 6.1(f). SECTION 6.4 Indemnification. (a) Indemnification by the Company. --------------- ------------------------------ In the event of any registration of any securities of the Company under the Securities Act pursuant to Article V, the Company shall indemnify, to the extent permitted by law, the seller of any Registrable Securities covered by such registration statement, each Affiliate of such seller and their respective directors, officers, employees and stockholders or members or general and limited partners (and any director, officer, Affiliate, employee, stockholder and controlling Person of any of the foregoing), each Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such seller or any such underwriter within the meaning of the Securities Act (collectively, the "Indemnified Parties"), against any and all ------------------- losses, claims, damages or liabilities, joint or several, actions or proceedings (whether commenced or threatened) in respect thereof ("Claims") and expenses ------ (including reasonable attorney's fees and reasonable expenses of investigation) to which such Indemnified Party may become subject under the Securities Act, common law or otherwise, insofar as such Claims or expenses arise out of, relate to or are based upon: (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary, final or summary prospectus contained therein, or any amendment or supplement thereto; or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading. (b) Limits on Indemnification by the Company. Notwithstanding the ---------------------------------------- foregoing, the Company shall not be liable to any Indemnified Party in any such case to the extent, but only to the extent: (i) that any such Claim or expense arises out of, relates to or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or amendment or supplement thereto or in any such preliminary, final or summary prospectus in reliance upon and in conformity with written information regarding the seller of Registrable Securities furnished to the Company through an instrument duly executed by or on behalf of such seller specifically stating that it is for use in the preparation thereof; and (ii) that the foregoing indemnity with respect to any untrue statement contained in or omitted from a registration statement or the prospectus shall not inure to the benefit of any party (or any person controlling such party) who is obligated to deliver a prospectus in transactions in a security as to which a registration statement has been filed pursuant to the Securities Act and from whom the person asserting any such Claims purchased any of the Registrable Securities to the extent that it is finally judicially determined that such Claims resulted solely from the fact that such party sold Registrable Securities to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the registration statement or the prospectus, as amended or supplemented, and (x) the Company shall have previously and timely furnished sufficient copies of the registration statement or prospectus, as so amended or supplemented, to such party in accordance with this Agreement and (y) the registration statement or prospectus, as so amended or supplemented, would have corrected such untrue statement or omission of a material fact. (c) Survival of the Company's Indemnification Obligation. The ---------------------------------------------------- indemnity provided by this Section 6.4 will remain in full force and effect regardless of any investigation made by or on behalf of any Indemnified Party and shall survive the Transfer of securities by any seller. (d) Indemnification by the Prospective Sellers. The Company may ------------------------------------------ require, as a condition to including any Registrable Securities in any registration statement filed in accordance with Sections 5.1 or 5.2 herein, that it shall have received an undertaking reasonably satisfactory to it from the prospective seller of such Registrable Securities or any underwriter to indemnify (in the same manner and to the same extent as set forth in Section 6.4(a)) the Company and all other prospective sellers or any underwriter, as the case may be, with respect to any untrue statement or alleged untrue statement in or omission or alleged omission from such registration statement, any preliminary, final or summary prospectus contained therein, or any amendment or supplement thereto, if such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by or on behalf of such seller or underwriter specifically stating that it is for use in the preparation of such registration statement, preliminary, final or summary prospectus or amendment or supplement, or a document incorporated by reference into any of the foregoing. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any of the prospective sellers, or any of their respective Affiliates, directors, officers or controlling Persons and shall survive the Transfer of securities by any seller. In no event shall the liability of any seller of Registrable Securities hereunder be greater in amount than the dollar amount of the proceeds actually received by such seller upon the sale of the Registrable Securities giving rise to such indemnification obligation. (e) Notice and Defense of Action. Promptly after receipt by an ---------------------------- indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Section 6.4, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action or proceeding; provided, however, that -------- ------- the failure of the indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under Section 6.4, except to the extent that the indemnifying party is materially prejudiced by such failure to give notice. In case any such action or proceeding is brought against an indemnified party, unless in such indemnified party's reasonable judgment (after consultation with legal counsel) a conflict of interest between such indemnified and indemnifying parties may exist in respect of such action or proceeding, the indemnifying party will be entitled to participate in and to assume the defense thereof (at its expense), jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; provided, however, -------- that in the event that (i) the indemnifying party declines or fails to assume the defense of the action or proceeding or to employ counsel reasonably satisfactory to the indemnified party, in either case within a 30-day period, (ii) if the indemnifying party is not vigorously defending such action or proceeding or (iii) the named parties to any proceeding (including impleaded parties) include both such indemnified party and the indemnifying party, and such indemnified party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party, then such indemnified party may employ counsel to represent or defend it in any such action or proceeding and the indemnifying party shall pay the reasonable fees and disbursements of such counsel or other representative as incurred; provided, -------- however, that the indemnifying party shall not be required to pay the fees and - ------- disbursements of more than one counsel for all indemnified parties (together with appropriate local counsel) in any jurisdiction in any single action or proceeding. (f) Settlement. No indemnifying party will settle any action or ---------- proceeding or consent to the entry of any judgment without the prior written consent of the indemnified party, unless such settlement or judgment (i) includes as an unconditional term thereof the giving by the claimant or plaintiff of a release to such indemnified party from all liability in respect of such action or proceeding and (ii) does not involve the imposition of equitable remedies or the imposition of any obligations on such indemnified party and does not otherwise adversely affect such indemnified party, other than as a result of the imposition of financial obligations for which such indemnified party will be indemnified hereunder. No indemnified party will settle any action or proceeding or consent to the entry of any judgment without the prior written consent of the indemnifying party, unless such settlement or judgment (i) includes as an unconditional term thereof a release of such indemnifying party from all liability in respect of such action or proceeding or (ii) the indemnifying party fails to assume and maintain the defense of the applicable action or proceeding pursuant to this Section 6.4(c). (g) Contribution. ------------ (i) If the indemnification provided for in this Section 6.4 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any Claim or expenses referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party, to the extent permitted by applicable law, shall contribute to the amount paid or payable by such indemnified party as a result of such Claim or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions which resulted in such Claim or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by agreement of the indemnifying party and indemnified party or, failing that, by a court of law, by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party under this Section 6.4(g) as a result of the Claim and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any action or proceeding. (ii) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6.4(g) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in Section 6.4(g)(i). No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (h) Other Indemnification Obligations. Indemnification similar to --------------------------------- that specified in this Section 6.4 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any Law or with any governmental authority other than as required by the Securities Act. (i) Additional Liabilities. The obligations of the parties under ---------------------- this Section 6.4 shall be in addition to any liability which any party may otherwise have to any other party. SECTION 6.5 Required Reports. The Company covenants that it will ---------------- file the reports required to be filed by it under the Securities Act and the Exchange Act (or, if the Company is not required to file such reports, it will, upon the request of any Holder, make publicly available such information), and it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell shares of Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144, as such Rule may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Holder, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. SECTION 6.6 Holdback Agreement. If any registration under Section ------------------ 5.1 or under Section 5.2 in which a Holder participates is in connection with an underwritten public offering, each Holder agrees not to effect any public sale or distribution, including any sale pursuant to Rule 144 under the Securities Act, of any Equity Securities of the Company (in each case, other than as part of such underwritten public offering), within seven (7) days before, or one hundred eighty (180) days (or such lesser period as the managing underwriters may permit) after, the effective date of any such registration pursuant to Sections 5.1 or 5.2, and the Company hereby also so agrees, and agrees to use reasonable efforts to cause each other holder of any equity security of the Company purchased from the Company (at any time other than in a public offering), to agree to similar limitations of like duration. SECTION 6.7 No Inconsistent Agreement. The Company represents and ------------------------- warrants that it will not enter into, or cause or permit any of its Subsidiaries to enter into, any agreement which conflicts with or limits or prohibits the exercise of the rights granted to the Holders of Registrable Securities in this Agreement. ARTICLE VII STANDSTILL ---------- SECTION 7.1 Acquisition of Additional Voting Securities. (a) ------------------------------------------- Subject to Section 7.1(c) and Sections 4.1, 4.2 and 4.3, during the Standstill Period, AOL hereby agrees that it may not, and that it will not permit its controlled Affiliates to, without the prior approval of the Company Board (excluding, for purposes of such approval, the AOL Representative): (i) acquire or agree to acquire the beneficial ownership of any additional Equity Securities of the Company or any voting rights with respect to the Capital Stock of the Company; provided that the foregoing -------- restrictions shall not apply to any acquisition or proposed acquisition of beneficial ownership of any additional Voting Securities of the Company: (x) which is by way of stock dividends, stock reclassifications or other distributions or offerings made available on a pro rata basis to holders of Equity Securities of the Company generally; or (y) involves Equity Securities acquired from the Company (including upon exercise of the Warrants, conversion of Preferred Shares and Participation Securities or pursuant to Article IV) or otherwise in accordance with the provisions of this Agreement and the other Transaction Agreements; (ii) make, or in any way participate in, any "solicitation" of "proxies" (as such terms are defined or used in Regulation 14A under the Exchange Act) to vote any Voting Securities of the Company or seek to influence any Person with respect to the voting of any Voting Securities of the Company or publicly announce its intention to do so; (iii) make any public announcement with respect to, or submit any offer or purchase proposal that is required under applicable law to be made public by the Company for, any Acquisition Proposal; (iv) act, either independently or in concert with others, in connection with any Acquisition Proposal, or form or join a Group; provided that -------- this Section 7.1(a)(iv) shall not restrict AOL from acting independently to submit an Acquisition Proposal that is not prohibited under paragraph (iii) of this Section 7.1(a); or (v) make any demand, request or proposal to amend, waive or terminate any provision of this Section 7.1 (collectively, the "Acquisition Restrictions"). ------------------------ (b) Nothing contained in this Section 7.1 shall be construed to limit or restrict any action taken in good faith by the AOL Representative or AOL Observer in his or her capacity as a Director or observer on the Company Board. (c) The Acquisition Restrictions will cease to apply from and after such time as (i) the Company materially breaches any of its obligations under Section 7.1(e) or Article VIII of this Agreement, (ii) the Company materially breaches its obligations under Sections 6.2 or 6.3 of the Investment Agreement or (iii) the Company or any representative of the Company delivers confidential information to any Third Party who has expressed an interest in making, or has made, an Acquisition Proposal and such Third Party has not entered into a "standstill" agreement or other agreement containing restrictions similar to those contained in this Section 7.1 with the Company. (d) Notwithstanding the Acquisition Restrictions, AOL shall be permitted to file one or more amendments to its Schedule 13D and any other similar or successor forms required to be filed with the SEC to reflect any proposals or announcements it is not prohibited from making, or other actions it is not prohibited from taking, pursuant to this Section 7.1. (e) In the event (i) the Company or any representative of the Company solicits an Acquisition Proposal or any interest in making an Acquisition Proposal from any Third Party or (ii) the Company receives an unsolicited Acquisition Proposal which it determines to consider, then AOL shall be notified promptly, but in any event, within five (5) Business Days of such event and will be released from the Acquisition Restrictions to the extent required in order to submit an Acquisition Proposal to the Company and participate in the process developed by the Company for consideration of Acquisition Proposals (if any), so long as AOL agrees to be bound by the same rules (if any) as are applicable to other Third Parties participating in such process; provided, however, in no -------- ------- event will AOL be required to agree to any rules governing the conduct of any Third Party that are in any way more restrictive to AOL than its obligations contained in this Section 7.1. (f) If the Company or any representative of the Company at any time delivers confidential information to any Third Party who has expressed an interest in making, or has made, an Acquisition Proposal and such Third Party has entered into a "standstill" agreement with the Company which contains terms that are more favorable to such Third Party than AOL's obligations under this Section 7.1, then the Acquisition Restrictions and the other provisions of this Section 7.1 shall be deemed amended or supplemented to the extent necessary to provide AOL with the benefit of such more favorable terms. ARTICLE VIII RIGHT OF NOTIFICATION AND FORBEARANCE ------------------------------------- SECTION 8.1 Right of Notification. (a) During the Standstill --------------------- Period, the Company will notify AOL in writing within five (5) Business Days of (i) its receipt of a bona fide Acquisition Proposal from a Third Party, (ii) the determination by the Company Board to solicit any Acquisition Proposal from a Third Party, and (iii) the determination by the Company Board to provide confidential information to, or enter into negotiations or discussions with, a Third Party who has expressed an interest (which Third Party in the case of clause (iii) has included a potential price or price range which the Company Board has determined warrants exploration) in making, or has made, an Acquisition Proposal (each, an "Acquisition Proposal Notice"). --------------------------- (b) Within two (2) Business Days of receipt of any Acquisition Proposal Notice, AOL may provide a list of at least fifteen (15) entities, each of which AOL in good faith deems to be (i) capable of completing an acquisition of the Company and (ii) either (w) a television or film media company, (x) a video service operator, (y) an Internet service provider or (z) a company providing interactive video services or enabling platform technologies. (c) Within one (1) Business Day of the Company's receipt of such list, the Company will specify whether or not the Third Party making such Acquisition Proposal or expressing interest in making an Acquisition Proposal is or is an Affiliate of one of the entities set forth on such list. SECTION 8.2 Forbearance. During the Standstill Period, the Company ----------- shall not enter into any agreement, letter of intent or similar document (whether binding or not) with respect to any Acquisition Proposal prior to the expiration of a five (5) Business Day period following delivery of an Acquisition Proposal Notice under paragraph (ii) or (iii) of Section 8.1(a), relating to such Acquisition Proposal. SECTION 8.3 Other Rights. If the Company at any time after the date ------------ hereof grants to any Person(s) any rights of notification or forbearance with terms that are more favorable to such Person(s) than the terms set forth in this Article VIII, the terms of this Article VIII will be deemed amended or supplemented to the extent necessary to provide AOL such more favorable terms. ARTICLE IX MISCELLANEOUS ------------- SECTION 9.1 Termination. (a) Except as specifically set forth ----------- herein, the provisions of this Agreement shall terminate as follows: (i) by mutual agreement of the parties; (ii) at such time as no Holder holds any Registrable Securities; or (iii) upon the termination of the Investment Agreement prior to the closing of the issuance of the Shares, Preferred Shares (if any) and Warrants thereunder. (b) Nothing herein shall relieve any party from any liability for the breach of any of the agreements set forth in this Agreement. SECTION 9.2 Amendments and Waivers. Except as otherwise provided ---------------------- herein, no modification, amendment or waiver of any provision of this Agreement shall be effective against any party hereto unless such modification, amendment or waiver is approved in writing by such party. The failure of any party to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of such party thereafter to enforce each and every provision of this Agreement in accordance with its terms. SECTION 9.3 Successors, Assigns and Transferees. This Agreement ----------------------------------- shall bind and inure to the benefit of and be enforceable by the parties hereto and their respective successors, permitted assigns and Transferees. Except as expressly provided herein, this Agreement may not be assigned without the prior written consent of the other party, except that (i) AOL may assign its rights and obligations hereunder to any of its Affiliates and (ii) AOL (or any Transferee of Equity Securities) may assign any or all of its rights under Articles V and VI to any Transferee of Equity Securities. SECTION 9.4 Notices. (a) All notices required or permitted ------- hereunder shall be in writing and shall be deemed effectively given (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient or, if not, then on the next Business Day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid or (iv) one (1) Business Day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. (b) All communications shall be sent as follows: (i) to the Company and AOL, to their respective addresses specified in Section 7.10 of the Investment Agreement; (ii) to any other Holder, to the address of such Holder as shown in the stock record books of the Company; or (iii) to such other address for any party as it may specify by like notice. SECTION 9.5 Further Assurances. At any time or from time to time ------------------ after the date hereof, the parties agree to cooperate with each other, and at the request of any other party, to execute and deliver any further instruments or documents and to take all such further action as the other party may reasonably request in order to evidence or effectuate the consummation of the transactions contemplated hereby and to otherwise carry out the intent of the parties hereunder. SECTION 9.6 Entire Agreement. Except as otherwise expressly set ---------------- forth herein, this document and the other Transaction Agreements embody the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, that may have related to the subject matter hereof in any way. SECTION 9.7 Delays or Omissions. It is agreed that no delay or ------------------- omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the part of any party hereto of any breach, default or noncompliance under this Agreement or any waiver on such party's part of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law, or otherwise afforded to any party, shall be cumulative and not alternative. SECTION 9.8 Governing Law; Jurisdiction; Waiver of Jury Trial. This ------------------------------------------------- Agreement shall be governed in all respects by the laws of the State of New York, except, in the case of the Company and with respect to Section 2.1, to the extent that the General Corporation Law of the State of Delaware is applicable. Any suit, action or proceeding with respect to this Agreement may be brought in any court or before any similar authority in a court of competent jurisdiction in the State of New York, and the parties hereto hereby submit to the non- exclusive jurisdiction of such courts for the purpose of such suit, proceeding or judgment. Each of the parties hereto hereby irrevocably and unconditionally waives trial by jury in any legal action or proceeding in relation to this Agreement and for any counterclaim therein. SECTION 9.9 Severability. In case any provision of this Agreement ------------ shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 9.10 Enforcement. Each party hereto acknowledges that money ----------- damages would not be an adequate remedy in the event that any of the covenants or agreements in this Agreement are not performed in accordance with its terms, and it is therefore agreed that in addition to and without limiting any other remedy or right it may have, the non-breaching party will have the right to an injunction, temporary restraining order or other equitable relief in any court of competent jurisdiction enjoining any such breach and enforcing specifically the terms and provisions hereof. SECTION 9.11 Titles and Subtitles. The titles of the sections and -------------------- subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. SECTION 9.12 Counterparts; Facsimile Signatures. This Agreement may ---------------------------------- be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. This Agreement may be executed by facsimile signature(s). [Remainder of page intentionally left blank.] IN WITNESS WHEREOF, the parties hereto have executed the STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof. TIVO INC. By: /s/ Michael Ramsay ------------------------------- Name: Michael Ramsay Title: Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) AMERICA ONLINE, INC. By:/s/ David M. Colburn ------------------------------- Name: David M. Colburn Title: President, Business Affairs EX-10.25 3 0003.txt INVESTMENT AGREEMENT TIVO INC. INVESTMENT AGREEMENT This Investment Agreement (the "Agreement") is entered into as of June 9, 2000, by and between TiVo Inc., a Delaware corporation (the "Company"), and America Online, Inc., a Delaware Corporation (the "Purchaser"), relating to, among other things, the Company's common stock, par value $0.001 per share (the "Common Stock"), and the Company's Series A Convertible Preferred Stock, par value $0.001 per share (the "Preferred Stock"). Recitals Whereas, the Company desires to sell to the Purchaser and the Purchaser desires to purchase from the Company, Common Stock and, depending on the trading price of the Common Stock, Preferred Stock (collectively, the "Shares") on the terms and conditions set forth in this Agreement (the "Share Purchase"); Whereas, in connection with the sale and issuance of the Shares, the Company desires to issue to the Purchaser the Warrants (as defined herein) to purchase shares of Common Stock; Whereas, simultaneously herewith, the Company and the Purchaser are entering into (i) a Stockholders and Registration Rights Agreement (the "Stockholders Agreement") which will provide for certain rights and obligations of the parties related to, among other things, the Purchaser's equity interests in the Company, and (ii) a Product Integration and Marketing Agreement (the "Commercial Agreement"), pursuant to which the Company and the Purchaser will work together to jointly develop a branded interactive television service; Whereas, simultaneously herewith, certain stockholders of the Company collectively owning in excess of a majority of the outstanding shares of Common Stock are entering into a Voting Agreement (the "Voting Agreement") with the Purchaser, pursuant to which such stockholders agree to vote their shares of Common Stock in favor of certain of the transactions contemplated hereby and by the Related Agreements (as defined herein); Now, Therefore, in consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants hereinafter set forth and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Agreement To Sell And Purchase. 1.1 Authorization of Shares. Subject to receipt of the Company Stockholder Approval (as defined below), the Company has authorized (i) the sale and issuance to the Purchaser of the Shares and the Warrants, (ii) the issuance of the shares of Common Stock to be issued upon conversion of the Preferred Shares (the "Conversion Shares") and (iii) the issuance of the Warrant Shares (as defined herein) to be issued upon exercise of the Warrants. The Shares, Conversion Shares and Warrant Shares shall have the rights, preferences, privileges and 1. restrictions set forth in the Amended and Restated Certificate of Incorporation of the Company in the form attached hereto as Exhibit A (the "Restated Certificate"). 1.2 Sale and Purchase. (a) Common Stock. Subject to Section 1.2(c) and the other terms and conditions of this Agreement, the Company agrees to issue and sell to the Purchaser and the Purchaser agrees to purchase at the Closing (as defined below) that number of shares of Common Stock, which when multiplied by the Common Stock Price (as defined below) is as near as possible to two hundred million dollars ($200,000,000) (the "Common Shares"). Subject to Section 1.2(b), the per share purchase price for the Common Shares shall be equal to the higher of (i) $23.00, or (ii) the average closing price of the Common Stock on the Nasdaq National Market System for the 10 consecutive full trading days ending on the Determination Date (as defined below) (the "Closing Average"), subject to a maximum per share purchase price of thirty-five dollars ($35) (the "Common Stock Price"). If the Closing Average is less than ten dollars ($10) per share, the Purchaser will have the right to terminate this Agreement and the transactions contemplated hereby, subject to the Company's rights under Section 1.2(b), at any time during the four Business Day period commencing on the Determination Date, exercisable by the Purchaser's delivery of written notice to such effect to the Company during such four Business Day period; provided that such notice and the Purchaser's termination of this Agreement may be withdrawn at any time during such four Business Day period. For purposes hereof, "Determination Date" means the trading day immediately preceding the date on which all the conditions to Closing (other than conditions that, by their terms, cannot be satisfied until the Closing) set forth in Section 5 hereof shall have been satisfied or waived. (b) Adjustment of Common Stock Price. If the Purchaser exercises its termination right pursuant to Section 1.2(a), the Company shall have the right, exercisable during the three Business Day period following the date of the Purchaser's notice of termination by delivery of written notice to the Purchaser during such three Business Day period, to adjust the Common Stock Price to be ten dollars ($10) per share. If the Company makes an election to adjust the terms of the transaction as contemplated by the preceding sentence within such three Business Day period, (i) no termination of this Agreement shall be deemed to have occurred pursuant to Section 1.2(a) and (ii) this Agreement shall remain in effect in accordance with its terms, except that all references in this Agreement to the Common Stock Price shall be deemed to refer to the Common Stock Price as adjusted pursuant to this Section 1.2(b). (c) Restructuring of Share Purchase if Common Stock Price Is Less Than Thirty Dollars. In the event that the Common Stock Price is less than thirty dollars ($30) per share, the number of shares of Common Stock to be purchased by the Purchaser shall be reduced and, subject to the terms and conditions of this Agreement, the Company shall issue to the Purchaser shares of Preferred Stock in accordance with this Section 1.2(c). For purposes of this Section 1.2(c), the term "Adjustment Price" shall mean (i) if the Closing Average is equal to or greater than ten dollars ($10) per share, the Common Stock Price or (ii) if the Closing Average is less than $10, the Closing Average. (i) Decrease in Number of Common Shares Purchased. The number of Common Shares that the Company shall issue to the Purchaser shall be reduced to a 2. number equal to 6,666,667 shares multiplied by a fraction, the numerator of which is the Adjustment Price and the denominator of which is thirty dollars ($30). (ii) Sale of Preferred Stock to the Purchaser. The Company agrees to issue to the Purchaser and the Purchaser agrees to purchase in accordance with the terms hereof that number of shares of Preferred Stock having an aggregate initial liquidation value equal to (x) two hundred million dollars ($200,000,000) less (y) the aggregate number of Common Shares purchased multiplied by the Adjustment Price (the "Preferred Shares"). If, as of the Closing Date, the sum of (1) the aggregate initial liquidation value of the Preferred Shares to be purchased pursuant to the preceding sentence, (2) the value of the Common Shares to be purchased (calculated as the product of the number of Common Shares to be purchased and the Common Stock Price) and (3) the value of the Common Stock previously owned by the Purchaser (calculated as the product of the number of such shares and the amount paid therefor), exceeds 25% of the sum of (1) the aggregate initial liquidation value of Preferred Shares to be purchased, (2) the value of Common Shares to be purchased (calculated as the product of the number of Common Shares to be purchased and the Common Stock Price) and (3) the value of all the shares of Common Stock outstanding on the Closing Date prior to the transactions contemplated hereby (calculated as the product of the number of such shares and the Closing Average) (such excess above 25%, the "Excess Equity Value"), then the number of shares of Preferred Stock to be purchased by the Purchaser shall be reduced by a number of shares as would have an aggregate initial liquidation value equal to the Excess Equity Value (the "Excess Preferred Shares"). 1.3 Warrants. Upon the closing of the Share Purchase, in accordance with this Section 1.3, the Company shall issue to the Purchaser warrants (the "Warrants") to purchase in the aggregate a number of shares of Common Stock which, when combined with the number of shares of Common Stock owned by the Purchaser as of the Closing Date and the number of shares of Common Stock that would be issuable as of the Closing pursuant to the Preferred Shares to be issued pursuant to Section 1.2(c)(ii), if any, would constitute (after issuance) 30% of all the issued and outstanding capital stock of the Company as of the Closing Date, rounded to the nearest whole share (the "Warrant Shares"). The Warrant Shares shall be allocated among different forms of warrants as follows: (i) a warrant to purchase the lesser of (i) 33 1/3% of all the Warrant Shares and (ii) 2,941,402 Warrant Shares shall be issued in the form of Exhibit B hereto; (ii) a warrant to purchase the lesser of (i) 33 1/3% of all the Warrant Shares and (ii) 2,941,401 Warrant Shares shall be issued in the form of Exhibit C hereto; and (iii) (A) if the Closing Average is equal to or greater than thirty dollars ($30), a warrant to purchase the remaining Warrant Shares after the allocation set forth in clauses (i) and (ii) above (the "Vested Warrant Shares") in the form of Exhibit D hereto, having a per share exercise price equal to the Common Stock Price or (B) if the Closing Average is less than thirty dollars ($30), (1) a warrant to purchase a number of Warrant Shares equal to the number of Vested Warrant Shares multiplied by a fraction, the numerator of which is the Adjustment Price and the denominator of which is thirty dollars ($30) in the form of Exhibit D hereto, having a per share exercise price equal to the Common Stock Price, and (2) a warrant to purchase the 3. remaining Vested Warrant Shares after the allocation set forth in the preceding clause (1) in the form of Exhibit E hereto, having a per share exercise price equal to the lesser of (x) thirty dollars ($30) and (y) three times the Closing Average; provided that a portion of any Warrant to be issued pursuant to this Section 1.3(iii)(B)(2) shall be mandatorily exercisable in accordance with its terms with respect to a number of Vested Warrant Shares equal to the number of shares of Common Stock, if any, that would have been issuable upon conversion of the Excess Preferred Shares (if they were issued) as of the Closing Date, subject to a maximum of all the Vested Warrant Shares subject to such Warrant. The Purchaser shall not be obligated to pay any additional consideration for the issuance of the Warrants and, in addition to the terms set forth above, the terms of each of the Warrants shall be as set forth in Exhibits B, C, D and, if applicable, E. 1.4 Use and Escrow of Certain Funds. (a) The Company and the Purchaser agree that (i) sixty percent (60%) of the proceeds received by the Company in the Share Purchase and forty percent (40%) of the proceeds received by the Company upon the exercise of any of the Warrants shall be retained by the Company without any restriction whatsoever on the use thereof and (ii) an amount in cash equal to forty percent (40%) of any proceeds received by the Company in the Share Purchase and sixty percent (60%) of the proceeds received by the Company upon the exercise of any of the Warrants shall be deposited into an interest-bearing escrow account (the "Escrow Account") with an escrow agent to be selected by mutual agreement of the Company and the Purchaser pursuant to an escrow agreement in the form of Exhibit F hereto, with such changes and additions as shall be requested by the escrow agent or the L/C Bank (as defined below) and reasonably acceptable to the Company and the Purchaser (the "Escrow Agreement"). At any time that this Agreement provides for the Escrowed Funds to be released from the Escrow Account, both parties agree to take any action required under the Escrow Agreement to cause the release of the Escrowed Funds. Such proceeds shall be allocated in such manner until such time as the aggregate amount of proceeds retained by the Company pursuant to clause (i) above equals one hundred million dollars ($100,000,000), after which time an amount in cash equal to all such proceeds shall be deposited into the Escrow Account until such time as all such deposited funds (but excluding any interest earned on such funds) equal one hundred million dollars ($100,000,000), after which time all further proceeds shall be retained by the Company. All amounts deposited into the Escrow Account, together with all interest earned on amounts in the Escrow Account (all such funds and interest, the "Escrowed Funds"), shall be held as a trust fund and shall not be subject to any lien, attachment, trustee process or any other judicial process of any creditor of any party hereto, and shall be held and distributed in accordance with the terms, at the times and to the parties in accordance with the terms hereof and the Escrow Agreement. Upon release to the Company in accordance with this Section 1.4 and the terms of the Escrow Agreement, one hundred million dollars ($100,000,000) of the Escrowed Funds shall be designated as "Earmarked Funds" and used exclusively in accordance with Section 8.2 of the Commercial Agreement and any additional Escrowed Funds shall be released to the Company and may be used by the Company for any purpose whatsoever. If, upon the release of the Escrowed Funds to the Company in accordance with the terms of the Escrow Agreement, the amount of Escrowed Funds (excluding any interest earned while in the Escrow Account) is less than one hundred million dollars ($100,000,000) at such time, then 60% of the proceeds from the exercise of any 4. of the Warrants (up to the difference between one hundred million dollars ($100,000,000) and such amount of Escrowed Funds) shall also be designated as "Earmarked Funds" and used exclusively in accordance with Section 8.2 of the Commercial Agreement. (b) If (i) the bona fide commercial release and deployment ("Set Top Box Launch") of the Integrated Product (as defined in the Commercial Agreement) has not occurred by December 31, 2001, and (ii) the Purchaser has not committed a Material Breach (as defined in the Commercial Agreement) of the Commercial Agreement that has not been cured or waived at such time, then the Purchaser shall have the option to require the Company, exercisable by written notice to such effect to the Company (a "Put Notice"), to repurchase that number of Preferred Shares having an initial liquidation value equal to one hundred million dollars ($100,000,000) (the "Put Amount") and, if all the Preferred Shares have an aggregate initial liquidation value of less than the Put Amount, then the Purchaser may also require the Company to repurchase a number of shares of Common Stock having a value (calculated as the product of the number of shares of Common Stock and the Common Stock Price) equal to the difference between the aggregate initial liquidation value of the Preferred Shares and the Put Amount. Subject to Section 1.4(c), the aggregate purchase price for the repurchase of Shares pursuant to this Section 1.4(b) shall be deemed paid by the release to the Purchaser of all the Escrowed Funds (including all interest included therein); provided that amount of the interest earned on funds deposited into the Escrow Account to be released to the Purchaser shall be reduced by the amount of dividends actually paid in cash or Common Stock to the Purchaser on the Preferred Shares, subject to a maximum equal to the amount of all such interest. The closing of such repurchase shall occur as soon as practicable following delivery of the Purchaser's notice of exercise, subject to the receipt of necessary governmental approvals. The Company agrees to use its best efforts to obtain all such governmental approvals and take all such other actions as shall be required to consummate such repurchase. At such closing, the Purchaser shall deliver to the Company certificates representing the Shares to be repurchased and the Company shall deliver to the Purchaser and the escrow agent under the Escrow Agreement any notice of release or other instrument reasonably requested by either of them to effectuate the release of the Escrowed Funds (including all interest earned thereon, subject to the proviso in the second sentence of this section) in accordance with the terms of the Escrow Agreement and this Section 1.4(b). (c) Within thirty (30) days after the execution and delivery of this Agreement, the Company and the Purchaser shall establish with a financial institution selected by the Purchaser (the "L/C Bank") an irrevocable letter of credit in an amount equal to the amount of Escrowed Funds (as changed from time to time) for the benefit of the Purchaser substantially in the form attached hereto as Exhibit G (the "Letter of Credit"), which Letter of Credit shall be available for drawing by the Purchaser pursuant to this Section 1.4(c) and shall be secured by a first priority security interest in the Escrowed Funds as collateral for the Company's repayment of any amounts drawn on the Letter of Credit. The terms of the Letter of Credit shall include, without limitation, (i) a draw down period that shall expire no earlier than the 180th day after December 31, 2001 and (ii) the right of the Purchaser to draw upon the Letter of Credit as provided under this Section 1.4(c) without action or authorization on the part of the Company. In the event that, for any reason, all or any portion of the Escrowed Funds are not released to the Purchaser in accordance with Section 1.4(b) and the terms of the Escrow Agreement within thirty (30) days of the Purchaser's Put Notice, then the Purchaser shall have the right to draw on 5. the Letter of Credit in an amount equal to the total amount of Escrowed Funds at the time of Purchaser's Put Notice less the amounts of any Escrowed Funds actually received by the Purchaser, and the Purchaser shall receive such funds at the closing contemplated by Section 1.4(b). The costs of the Letter of Credit shall be divided equally between the Company and the Purchaser; provided that the Company shall not be required to pay more than four hundred thousand dollars ($400,000) of such costs. (d) If the Set Top Box Launch occurs prior to December 31, 2001, the Company shall be entitled to receive from the escrow under the Escrow Agreement all Escrowed Funds. One hundred million dollars ($100,000,000) of the Escrowed Funds released to the Company shall be designated as Earmarked Funds and used exclusively in accordance with Section 8.2 of the Commercial Agreement and any additional Escrowed Funds shall be released to the Company and may be used by the Company for any purpose whatsoever. If, upon the release of the Escrowed Funds to the Company in accordance with the foregoing and the terms of the Escrow Agreement, the amount of Escrowed Funds (excluding any interest earned thereon) is less than one hundred million dollars ($100,000,000) at such time, then 60% of the proceeds from the exercise of any of the Warrants (up to the difference between one hundred million dollars ($100,000,000) and such amount of Escrowed Funds) shall also be designated as Earmarked Funds and used exclusively in accordance with Section 8.2 of the Commercial Agreement. 1.5 Adjustments. To the extent not actually adjusted pursuant to the adjustment provisions for the Preferred Stock in the Restated Certificate or in the terms of each applicable Warrant, the applicable purchase price, conversion price and exercise price with respect to the purchase of the Shares, the conversion of the Preferred Stock and the exercise of the Warrants and the number and nature of the securities to be received upon the conversion of the Preferred Stock and the exercise of the Warrants shall be adjusted to reflect any stock splits, cash or noncash dividends, recapitalizations, mergers, combinations, distributions, issuances, reclassifications, exchanges, substitutions or other similar events with respect to the capital stock of the Company, or sales of capital stock below the applicable purchase price with respect to the Shares, in each case, to provide the Purchaser with such terms and rights, economic and otherwise, that the Purchaser would have received if such event occurred after the Closing. SECTION 2. Closing, Delivery and Payment. 2.1 Closing. The closing of the sale and purchase of the Shares and Warrants by the Purchaser under this Agreement (the "Closing") shall take place five (5) days following the Determination Date, unless the Purchaser shall have delivered to the Company a notice exercising its termination right pursuant to Section 1.2(a) and the Company shall have exercised its right to adjust the terms of the transactions contemplated hereby pursuant to Section 1.2(b), in which case the Closing shall occur ten (10) Business Days following the Determination Date (or, if any such day is not a Business Day, on the next succeeding Business Day), at the offices of Cooley Godward LLP, 3175 Hanover Street, Palo Alto, California 94304 or at such other time or place as the Company and the Purchaser may mutually agree (the "Closing Date"). 2.2 Delivery. At the Closing, subject to the terms and conditions hereof, the Company shall deliver to the Purchaser (i) certificates registered in the name of the Purchaser 6. representing the Shares to be purchased by the Purchaser in accordance with Section 1, free and clear of all liens, claims, encumbrances (other than those arising pursuant to this Agreement and the Related Agreements), and (ii) the Warrants in the form of the applicable exhibits attached hereto, for the Warrants to be issued to the Purchaser in accordance with Section 1, free and clear of all liens, claims and encumbrances (other than those arising pursuant to this Agreement and the Related Agreements), in each case duly executed by an authorized officer of the Company and registered in the name of the Purchaser. At the Closing, subject to the terms and conditions hereof, the Purchaser shall deliver to the Company the purchase price for the Shares by check or wire transfer of immediately available funds. SECTION 3. Representations and Warranties of the Company. Except as expressly set forth on a Schedule of Exceptions delivered by the Company to the Purchaser simultaneously herewith, the Company hereby represents and warrants to the Purchaser as of the date of this Agreement and the Closing Date as follows: 3.1 Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has all requisite corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement and the Stockholders Agreement, the Commercial Agreement, the Warrants and the Escrow Agreement, (collectively, the "Related Agreements"), to give affect to the Restated Certificate, to issue and sell the Shares, the Warrants, the Warrant Shares and the Conversion Shares, to carry out the provisions of this Agreement, the Related Agreements and the Restated Certificate, and to carry on its business as presently conducted and as presently proposed to be conducted. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so could not reasonably be expected, individually or in the aggregate, to have a material adverse effect on the Company or its business, assets, financial condition, prospects, liabilities or results of operations (a "Material Adverse Effect"). The Company does not, directly or indirectly, own or control any interest in any corporation, joint venture, limited partnership or similar entity. Attached hereto as Exhibit H is a complete and correct copy of the by-laws of the Company, as amended to the date of this Agreement (the "By-laws"). 3.2 Capitalization; Voting Rights. The authorized capital stock of the Company as of May 31, 2000 consists of seventy-five million (75,000,000) shares of Common Stock (par value $.001 per share), of which (i) 37,977,220 shares were issued and outstanding and (ii) 6,141,409 shares were reserved for future issuance to employees and non-employee directors pursuant to outstanding stock options issued pursuant to the Company Option Plans (as defined below) and (iii) 25,000 shares were reserved for future issuance pursuant to the Outstanding Warrants (as defined below), and two million (2,000,000) shares of Preferred Stock (par value $.001 per share), of which no shares have been issued. The Company has not issued any shares of its capital stock between May 31, 2000 and the date of this Agreement, except pursuant to the exercise of options. All issued and outstanding shares of the Company's Common Stock: (a) have been duly authorized and validly issued, (b) are fully paid and nonassessable, (c) were issued without violation of any preemptive or preferential right, and (d) were issued in 7. compliance with all applicable state and federal laws concerning the issuance of securities. The rights, preferences, privileges and restrictions of the Shares are as stated in the Restated Certificate. The Company will reserve an adequate number of shares of Common Stock for issuance upon conversion of the Preferred Shares and exercise of the Warrants. Except as may be granted pursuant to the Related Agreements, stock awards and options to purchase shares of Common Stock granted pursuant to the Company's 1997 Equity Incentive Plan, 1999 Equity Incentive Plan and 1999 Non-Employee Directors' Stock Option Plan (the "Company Option Plans") issued pursuant to the 1999 Employee Stock Purchase Plan (the "Purchase Plan") and outstanding warrants to purchase shares of the Company's Common Stock (the "Outstanding Warrants"), there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or shareholder agreements, or agreements of any kind for the purchase or acquisition from the Company of any of its securities or the designation of any board member by any series of Preferred Stock or by holders of Common Stock. The Company has reserved 12,800,000 shares of Common Stock for issuance to employees, officers or directors of, or consultants or advisors to the Company pursuant to the Company Option Plans, of which 3,677,766 remain available for future grant and has reserved 600,000 shares of Common Stock for issuance to employees pursuant to the Purchase Plan, of which 516,033 shares remain available for future issuance. When issued in compliance with the provisions of this Agreement and the Restated Certificate, the Shares, the Warrant Shares and the Conversion Shares will be duly authorized, validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Shares and the Conversion Shares may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. Except as contained in the Related Agreements and the Restated Certificate, or as set forth in Section 3.2 of the Schedule of Exceptions, the Company is not aware of any written agreement or other understandings relating to the voting of its securities. Except as expressly provided in this Agreement or the Related Agreements, (x) there are no outstanding obligations of the Company to repurchase, redeem or otherwise acquire any securities of the Company and (y) there are no other subscriptions, options, calls, warrants or other rights (including registration rights, whether demand or piggyback registration rights), agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of the Company to which the Company or any of its subsidiaries is a party. Except as set forth in Section 3.2 of the Schedule of Exceptions, the consummation of the transactions contemplated by this Agreement and the Related Agreements will not trigger the anti-dilution provisions or other price or conversion adjustment mechanisms of any outstanding subscriptions, options, calls, warrants, commitments, contracts, preemptive rights, rights of first refusal, demands, conversion rights or other agreements or arrangements of any character or nature whatsoever under which the Company is or may be obligated to issue or acquire shares of any of its capital stock. The sale of the Shares and the issuance of the Conversion Shares in accordance with the terms of the Restated Certificate and the issuance of the Warrant Shares in accordance with the terms of the Warrants is not and will not be subject to any preemptive rights, rights of first refusal, subscription or similar rights that have not been properly waived. 3.3 Authorization; Binding Obligations. (a) All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement and the 8. Related Agreements, the performance of all obligations of the Company hereunder and thereunder as of the Closing and the authorization, sale, issuance and delivery of the Shares pursuant hereto and the Conversion Shares pursuant to the Restated Certificate has been taken, except for the approval by the stockholders of the Company (i) by a majority of the votes cast of the issuance of the Shares, the Warrant Shares and the Conversion Shares and (ii) by the holders of a majority of all the outstanding shares of Common Stock of the adoption of the Restated Certificate (together, the "Company Stockholder Approval"). The Company Stockholder Approval is the only vote of the holders of any class or series of the Company's securities necessary to adopt this Agreement and any of the Related Agreements and approve the transactions contemplated hereby and thereby. Each of the Agreement and the Related Agreements, are valid and binding obligations of the Company enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; (b) general principles of equity that restrict the availability of equitable remedies; and (c) to the extent that the enforceability of the indemnification provisions in Section 6.4 of the Stockholders Agreement may be limited by applicable laws. The issuance and sale of the Shares and the Warrants, the subsequent exercise of the Warrants and the issuance of shares of Common Stock in connection therewith and the subsequent conversion of the Preferred Shares into Conversion Shares are not and will not be subject to any preemptive rights or rights of first refusal. (b) Other than filings which may be necessary pursuant to the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or filings required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") or applicable state securities laws, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any public body or authority is necessary for the consummation by the Company of the transactions contemplated by this Agreement. 3.4 SEC Filings. (a) The Company has made available to the Purchaser accurate and complete copies (including exhibits thereto) of (i) its registration statement on Form S-1 (Reg. No. 333-83515 that was declared effective by the SEC on September 29, 1999, (ii) its quarterly report on Form 10-Q for the quarter ended September 30, 1999, (iii) its annual report on Form 10-K for the fiscal year ended December 31, 1999, as amended by Form 10-K/A filed April 28, 2000 (the "Form 10-K"), (iv) its quarterly report on Form 10-Q for the quarter ended March 31, 2000 and (v) all other forms, reports, schedules, statements and other documents required to be filed by the Company on a form other than Form D or Form S-8 with the SEC prior to the Closing (collectively, with all exhibits and schedules thereof and documents incorporated by reference therein, the "Company SEC Documents"). (b) Without limiting the foregoing, there are no contracts or other documents of the Company which are required to be filed as exhibits to the Company SEC Document which have not been so filed. (c) As of the time it was filed with the SEC (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing): (i) each of the 9. Company SEC Documents complied or will comply in all material respects with the applicable requirements of the Securities Act or the Exchange Act (as the case may be) and the rules and regulations promulgated thereunder; and (ii) none of the Company SEC Documents contained or will contain any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 3.5 Financial Statements. The financial statements contained in the Company SEC Documents: (i) comply as to form in all material respects with the published rules and regulations of the SEC applicable thereto; (ii) were prepared in accordance with U.S. generally accepted accounting principles applied on a consistent basis throughout the periods covered, except as may be indicated in the notes to such financial statements and (in the case of unaudited statements) as permitted by Form 10-Q of the SEC, and except that unaudited financial statements may not contain footnotes and are subject to normal and recurring year-end audit adjustments (which will not, individually or in the aggregate, be material); and (iii) fairly present the consolidated financial position of the Company as of the respective dates thereof and the consolidated results of operations and cash flows of the Company for the periods covered thereby. 3.6 Undisclosed Liabilities. Except for liabilities included or reserved for in the audited balance sheet of the Company for the year ended December 31, 1999, included in the Form 10-K or the unaudited consolidated balance sheet of the Company included in its Quarterly Report on Form 10-Q (the "Form 10-Q") for the quarter ended March 31, 2000 (the "Balance Sheet"), each as filed with the SEC, at March 31, 2000, the Company did not have, and since such date it has not incurred, liabilities or any other obligations whatsoever that are material (individually or in the aggregate) to the Company, except current liabilities incurred in the ordinary course of business consistent with past practice subsequent to March 31, 2000. 3.7 Contracts; Action. (a) Except as set forth in Section 3.7(a) of the Schedule of Exceptions or as disclosed in the Form 10-K, there are no contracts, agreements, understandings or proposed transactions between the Company and any of its officers, directors or affiliates or any family member or affiliate thereof that would be required to be disclosed pursuant to Item 404 of Regulation S-K of the SEC. (b) For purposes of this Agreement, the term "Contracts" shall mean (i) all "material contracts" within the meaning of Item 601 of Regulation S-K of the SEC, (ii) contracts with distributors or suppliers or for services involving revenues or expenditures in excess of $800,000 annually, (iii) all contracts involving revenues or expenditures in excess of $250,000 annually containing non-competition provisions that purport to bind affiliates of the Company, (iv) all contracts restricting the payment of dividends upon, or the redemption or conversion of, the Shares, (v) those contracts identified in Section 3.7(b)(v) of the Schedule of Exceptions, and (vi) contracts under which the Company or any subsidiary has granted or received exclusive rights relating to the TiVo Channel (as defined in the Commercial Agreement). Except as set forth in Section 3.7(b) of the Schedule of Exceptions, the Company is not, nor to the Company's knowledge is any other party to any Contract, in material default under, or in material breach or 10. material violation of, any Contract and, to the knowledge of the Company, no event has occurred which, with the giving of notice or passage of time or both would constitute a material default by the Company or any other party under any Contract. Other than Contracts which have terminated or expired in accordance with their terms, each of the Contracts is in full force and effect and (assuming due execution and delivery by the counterparties thereto) is a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms (subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing). (c) Section 3.7 of the Schedule of Exceptions contains a list of all Contracts. 3.8 Obligations to Related Parties. Except as set forth in the Form 10-K, there are no, and since January 1, 1999 there have not been any, (i) obligations to or transactions with the Company's officers, directors, stockholders or employees or any family member or affiliate thereof of a type required to be disclosed pursuant to Item 402 of Regulation S-K of the SEC or (ii) obligations of or transactions with the Company's officers, directors, stockholders or employees or any family member or affiliate thereof of a type required to be disclosed pursuant to Item 404 of Regulation S-K of the SEC. 3.9 Absence of Certain Changes. Since December 31, 1999, (i) no event, change or circumstance has occurred which would have, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, and (ii) the Company has carried on its business in the ordinary course consistent with past practices. 3.10 Legal Proceedings. Other than as disclosed in the Company SEC Documents filed and publicly available prior to the date hereof, there is no Action (as hereinafter defined), before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened against or affecting the Company, which is required to be disclosed in any Company SEC Document or which could have a Material Adverse Effect, or which might materially and adversely affect the consummation of the transactions contemplated by this Agreement or the Related Agreements. All summaries or descriptions of legal or governmental proceedings or contingencies contained in the Company SEC Documents are current and accurate in all material respects with respect to such matters. 3.11 Compliance with Laws. The Company is not in violation of any law, ordinance, governmental rule or regulation or court order, judgement or decree to which it is subject, other than violations (if any) that individually or in the aggregate will not have a Material Adverse Effect. Other than as disclosed in the Company SEC Documents filed and publicly available prior to the date hereof, the Company possesses such certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies the absence of which would have a Material Adverse Effect, and the Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect. 11. 3.12 Properties. Except as otherwise stated in the Company SEC Documents filed and publicly available prior to the date hereof, the Company has good and marketable title, free and clear of all liens, encumbrances or claims to all of its material real and personal property, except liens, encumbrances and equities which are not material in the aggregate and do not materially affect the value of such property or interfere with the conduct of the business of the Company and, except as otherwise stated in the Company SEC Documents filed and publicly available prior to the date hereof, the Company has valid and binding leases to all of the real and personal property described in the Company SEC Documents as under lease to it with such exceptions as are not material and do not interfere with the conduct of the business of the Company. 3.13 Compliance with Other Instruments. The Company is not in violation or default of (i) any term of its Restated Certificate or Bylaws, or (ii) any provision of any mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order, writ or any statute, rule or regulation applicable to the Company which in the case of clause (ii) could reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect or which could have a Material Adverse Effect, or which might materially and adversely affect the consummation of the transactions contemplated by this Agreement or the Related Agreements. The execution, delivery, and performance of and compliance with this Agreement, and the Related Agreements, and the issuance and sale of the Shares and the Warrants pursuant hereto and of the Conversion Shares pursuant to the Restated Certificate and the Warrant Shares pursuant to the Warrants, will not result in any such violation, or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 3.14 Offering Valid. Assuming the accuracy of the representations and warranties of the Purchaser contained in Section 4 hereof, the offer, sale and issuance of the Shares, the Warrants, the Warrant Shares and the Conversion Shares will be exempt from the registration requirements of the Securities Act and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of the Shares to any person or persons or take any other action so as to bring the sale of such Shares by the Company within the registration provisions of the Securities Act or any state securities laws. 3.15 Taxes. The Company has filed all necessary material federal, state and foreign income and franchise tax returns and has paid all material taxes shown as due thereon, and the Company has no knowledge of any material tax deficiency which has been or might be asserted against the Company. 3.16 Employee Benefits. (a) General. The Company is not a party to and does not participate in or have any liability or contingent liability with respect to any "employee welfare benefit plan" or 12. "employee pension benefit plan" as those terms are respectively defined in sections 3(1) and 3(2) of ERISA, or any "multiemployer plan" (as defined in section 3(37) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), except for the TeleWorld 401(k) Plan (hereinafter the "Plan") or as disclosed in Section 3.16 of the Schedule of Exceptions. (b) Compliance with Laws; Liabilities. As to the Plan: (i) The Plan complies and has been administered in form and in operation in all material respects with all requirements of law applicable thereto (including but not limited to ERISA and the Code), and there has been no notice issued by any Governmental Authority questioning or challenging such compliance. "Governmental Authority" shall mean any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; or (c) governmental or quasi-governmental authority of any nature (including any governmental division, department, agency, commission, instrumentality, official, organization, unit, body or entity and any court or other tribunal). (ii) The Plan complies in form and in operation in all material respects with all applicable requirements of sections 401(a) and 501(a) of the Code and the Company has received a favorable determination letter regarding its qualification; there have been no amendments to such plans except amendments (A) which are the subject of a determination letter issued with respect thereto by the Internal Revenue Service or (B) with respect to which the remedial amendment period (within the meaning of Treasury Regulation (S) 1.401(b)-1) has not expired; and to the knowledge of the Company no event has occurred which will or could give rise to disqualification of any such plan under such sections or to a tax under section 511 of the Code. (iii) None of the assets of the Plan is invested in employer securities or employer real property. (iv) To the knowledge of the Company, there have been no "prohibited transactions" (as described in section 406 of ERISA or section 4975 of the Code) with respect to the Plan. (v) To the knowledge of the Company, there has been no act or omission which has given rise to or may give rise to fines, penalties, taxes, or related charges under sections 502(c), 502(i), 502(l) or 4071 of ERISA or Chapters 43, 47, or 68 of the Code for which the Company may be liable. (vi) There are no actions, suits, or claims (other than routine claims for benefits) pending or, to the knowledge of the Company, threatened involving the Plan or the assets thereof, and no facts exist which could give rise to any such actions, suits, or claims (other than routine claims for benefits). (vii) The Plan is not subject to Title IV of ERISA. (viii) There has been no act or omission that would impair the right or ability of the Company to unilaterally amend or terminate the Plan. 13. (c) With respect to each employee benefit plan, agreement, program, policy or other arrangement, whether or not subject to ERISA, maintained by the Company (including, but not limited to the Plan) (a "Company Plan"), the Company has delivered to the Purchaser a current, accurate and complete copy thereof and, to the extent applicable: (i) any related trust agreement or other funding instrument; (ii) the most recent determination letter, if applicable; (iii) any summary plan description; and (iv) for the two most recent years (A) the Form 5500 and attached schedules, (B) audited financial statements and (C) actuarial valuation reports. (d) No Company Plan exists that could result in the payment to any present or former employee of the Company of any money or other property or accelerate or provide any other rights or benefits to any present or former employee of the Company as a result of the transaction contemplated by this Agreement. There is no contract, plan or arrangement (written or otherwise) covering any employee or former employee of the Company that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to the terms of Section 280G of the Code. 3.17 Executive Committee of the Board of Directors. The Company represents and warrants that (a) no officer, director or employee of any of the Company's corporate partners or corporate investors is a member of the Executive Committee of the Company's Board of Directors, (b) no current member of the of the Executive Committee of the Company's Board of Directors has been designated by any of the Company's corporate partners or corporate investors and (c) that it does not intend to designate or appoint, nor has it agreed to any contract or other instrument providing for the designation or appointment of, any officer, director or employee of any of the Company's corporate partners or corporate investors to the Executive Committee of the Company's Board of Directors. 3.18 Board Approval; Section 203 of DGCL; California Takeover Law; Rights Plans. The Board of Directors of the Company has, prior to the execution hereof and prior to the execution of any of the Related Agreements, approved the execution and delivery by the Company of this Agreement and each of the Related Agreements to which it is a party, and the execution and delivery by the parties thereto of the Voting Agreement and the consummation of the transactions contemplated by this Agreement and each of the Related Agreements. Such approval is sufficient to render inapplicable to this Agreement, the Related Agreements and the Voting Agreement and the transactions contemplated hereby and thereby (collectively, the "Investment") the provisions of Section 203 of the Delaware General Corporation Law. No takeover statute or similar statute or regulation of the State of California is applicable to this Agreement, the Related Agreements or the Voting Agreement or the Investment. Except as expressly provided in the Stockholders Agreement and Section 3.18 of the Schedule of Exceptions, no provision in the certificate of incorporation, bylaws or other governing instruments of the Company or the terms of any rights plan or preferred stock of the Company, would directly or indirectly restrict or impair the ability of the Purchaser to vote, or otherwise to exercise the rights of a stockholder with respect to, securities of the Company that may be acquired or controlled by the Purchaser or permit any stockholder to acquire securities of the Company on a basis not available to the Purchaser. 3.19 Patents and Trademarks. Section 3.19 of the Schedule of Exceptions sets forth a list of all patents, patent applications, registered copyrights and trademarks of the Company 14. existing as of the date hereof. The Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, information and other proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted, and such conduct of its business does not, to the Company's knowledge, infringe upon the rights of others, except as set forth in Section 3.19 to the Schedule of Exceptions. There are no outstanding options, licenses or agreements with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any third party which are necessary to the operation of the Company's products, other than such licenses or agreements arising from the purchase of "off the shelf" or standard products. Except as set forth in Section 3.19 of the Schedule of Exceptions, the Company has not received any communications alleging that the Company has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights, trade secrets, confidential information or other proprietary rights of any other person or entity. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement or any of the Related Agreements, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any employee is now obligated. The Company does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by the Company, except for inventions, trade secrets or proprietary information that have been assigned to the Company. To the Company's knowledge, none of the Company's officers or employees have used nor are such officers or employees making use of any confidential information or trade secrets of others without authorization, including those of any former employer of such officer or employee. The Company is not aware of any violation by a third party of any of the Company's patents, licenses, trademarks, trade names, service marks, copyrights, trade secrets, confidential information or other proprietary rights. 3.20 Brokers. No broker, investment banker, financial advisor or other person other than Credit Suisse First Boston Corporation is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement or the Related Agreements based upon arrangements made by or on behalf of the Company. The fees and expenses of Credit Suisse First Boston Corporation will be paid by the Company. 3.21 Disclosure. Neither this Agreement (including all Exhibits and Schedules hereto) nor any of the Related Agreements or any other agreements or instruments contemplated to be executed and delivered by the Company in connection with this Agreement, taken together with the Company SEC Documents, contain any untrue statement of material fact; and none of such documents omits to state any material fact necessary to make any of the representations, warranties or other statements or information contained therein not misleading. 15. SECTION 4. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Company as follows (such representations and warranties do not lessen or obviate the representations and warranties of the Company set forth in this Agreement): 4.1 Requisite Power and Authority. The Purchaser has all necessary corporate power under all applicable provisions of law to execute and deliver this Agreement and the Related Agreements and to carry out their provisions. All action on the Purchaser's part required for the lawful execution and delivery of this Agreement and the Related Agreements have been or will be effectively taken prior to the Closing. Upon their execution and delivery, this Agreement and the Related Agreements will be valid and binding obligations of the Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, (b) general principles of equity that restrict the availability of equitable remedies, and (c) to the extent that the enforceability of the indemnification provisions of Section 6.4 of the Stockholders Agreement may be limited by applicable laws. 4.2 Investment Representations. The Purchaser understands that neither the Shares nor the Conversion Shares have been registered under the Securities Act. The Purchaser also understands that the Shares are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon the Purchaser's representations contained in the Agreement. The Purchaser hereby represents and warrants as follows: (a) Purchaser Bears Economic Risk. The Purchaser is capable of evaluating the merits and risks of its investment in the Company and by reason of its, or of its management's, business or financial experience, the Purchaser has the capacity to protect its own interests in connection with the transactions contemplated in this Agreement, and the Related Agreements. The Purchaser may bear the economic risk of this investment indefinitely unless the Shares (or the Conversion Shares) are registered pursuant to the Securities Act, or an exemption from registration is available. The Purchaser also understands that there is no assurance that any exemption from registration under the Securities Act will be available and that, even if available, such exemption may not allow the Purchaser to transfer all or any portion of the Shares or the Conversion Shares under the circumstances, in the amounts or at the times the Purchaser might propose. (b) Acquisition for Own Account. The Purchaser is acquiring the Shares and the Conversion Shares for the Purchaser's own account for investment only, and not with a view towards their distribution. (c) Accredited Investor. The Purchaser is an accredited investor within the meaning of Regulation D under the Securities Act. (d) Company Information. The Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with directors, officers and management of the Company. The Purchaser has also had the opportunity to ask questions of 16. and receive answers from, the Company and its management regarding the terms and conditions of this investment. (e) Rule 144. The Purchaser acknowledges and agrees that the Shares, and, if issued, the Conversion Shares may be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. The Purchaser has been advised or is aware of the provisions of Rule 144 promulgated under the Securities Act, as in effect from time to time, which permits limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things: the availability of certain current public information about the Company, the resale occurring following the required holding period under Rule 144 and the number of shares being sold during any three-month period not exceeding specified limitations. (f) Residence. The office or offices of the Purchaser in which its investment decision was made is located at 22000 AOL Way, Dulles, Virginia, 20166-9323. 4.3 Transfer Restrictions. The Purchaser acknowledges and agrees that the Shares and, if issued, the Conversion Shares are subject to restrictions on transfer as set forth in the Stockholders Agreement. SECTION 5. Conditions to Closing. 5.1 Conditions to Purchaser's Obligations. The Purchaser's obligations to purchase the Shares at the Closing are subject to the satisfaction, at or prior to such Closing, of the following conditions, unless otherwise waived: (a) Representations and Warranties True; Performance of Obligations. The representations and warranties made by the Company in Section 3 hereof that are qualified by materiality or Material Adverse Effect shall be true and correct and those not so qualified shall be true and correct in all material respects in each case as of the Closing Date with the same force and effect as if they had been made as of such Closing Date, and the Company shall have performed and complied with all agreements, obligations and conditions herein required to be performed or complied with by it on or prior to such Closing. (b) Legal Investment. On the Closing Date, the sale and issuance of the Shares and the Warrants and the proposed issuance of the Conversion Shares and the Warrant Shares shall be legally permitted by all laws and regulations to which the Purchaser and the Company are subject, and there shall not be in effect any statute, law, rule, regulation, order, judgment or decree in effect which has the effect of rendering the consummation of any of the transactions contemplated by this Agreement or the Related Agreements unlawful (c) Consents, Permits, and Waivers. The Company shall have obtained any and all consents, authorizations, approvals, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Agreement and the Related Agreements (except for such as may be properly obtained subsequent to such Closing). 17. (d) Filing of Restated Certificate. The Restated Certificate shall have been accepted for filing by the Secretary of State of the State of Delaware and shall be in full force and effect as of the Closing Date. (e) Corporate Documents. The Company shall have delivered to the Purchaser or its counsel, copies of all corporate documents of the Company as the Purchaser shall reasonably request. (f) Compliance Certificate. The Company shall have delivered to the Purchaser a Compliance Certificate, executed by the President of the Company, dated the date of such Closing, to the effect that the conditions specified in subsections (a), (c) and (d) of this Section 5.1 have been satisfied. (g) Other Agreements. Each of the Commercial Agreement, the Stockholders Agreement and the Escrow Agreement shall have been executed and delivered by the parties thereto, shall be in full force and effect, except for failures to be in full force and effect due to the actions or omissions of the Purchaser, and shall not have been breached by the Company, and the Purchaser and the Company shall have agreed on and finalized the Specifications, the Milestone Schedule and the Acceptance Criteria (as each such term is defined in the Commercial Agreement) pursuant to Sections 3.1(c) and 3.1(e) of the Commercial Agreement. (h) Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Closing hereby and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Purchaser and its special counsel, and the Purchaser and its special counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request. (i) Secretary's Certificate. The Purchaser shall have received from the Company's Secretary, a certificate having attached thereto (i) the Company's Restated Certificate, (ii) the Company's Bylaws as in effect at the time of the Closing, (iii) resolutions approved by the Board of Directors of the Company authorizing the transactions contemplated hereby, and (iv) good standing certificates (including tax good standing) with respect to the Company from the applicable authority(ies) in Delaware and any other jurisdiction in which the Company is qualified to do business, dated a recent date before the Closing. (j) HSR Compliance. Any waiting period applicable to the purchase of the Shares under the HSR Act shall have terminated or expired. (k) Legal Opinion. The Purchaser shall have received from Cooley Godward LLP, legal counsel to the Company, an opinion addressed to the Purchaser, dated as of the Closing Date, in form and substance reasonably satisfactory to counsel for the Purchaser, and subject to customary exceptions and qualifications (including without limitation a qualification regarding interpretation in accordance with California law), to the effect that: (i) the Company (A) has been duly incorporated and is validly existing in good standing under the laws of the State of Delaware, (B) to the best knowledge of 18. such counsel, is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the owning or leasing of properties or the conduct of business makes such qualification necessary, except where the failure to so qualify would not have a Material Adverse Effect, and (C) has full corporate power and authority to carry on its business as described in the Company SEC Documents and to own and operate its properties. The Company has full corporate power and authority to enter into and perform this Agreement, the Stockholders Agreement, the Commercial Agreement and the Warrants, and to issue, sell and deliver the Shares, the Warrants, the Warrant Shares and the Conversion Shares. All legally required corporate proceedings in connection with the authorization and issuance of the Shares, the Warrants, the Warrant Shares and the Conversion Shares and the sale of the Shares, the Warrants, the Warrant Shares by the Company in accordance with the terms of this Agreement (including but not limited to all required Board of Directors and stockholder approvals) have been taken or have been obtained; (ii) this Agreement, the Stockholders Agreement and the Warrants have been duly executed and delivered by the Company and are legal, valid and binding agreements of the Company enforceable in accordance with their terms, except as rights to indemnification thereunder may be limited and subject to laws regarding creditor rights and general equitable principles; (iii) other than in connection with any securities laws (with respect to which counsel need express no opinion other than as provided in (vi) below), all consents, approvals, permits, orders or authorizations of, and all qualifications, registrations, designations or declarations with, any federal, Delaware corporate or California state governmental authority required on the part of the Company in connection with the execution and delivery of this Agreement, the Stockholders Agreement and the Warrants and consummation of the transactions occurring at the Closing hereunder and thereunder have been obtained and are effective, and such counsel is not aware of any proceedings, or written threat of any proceedings, that question the validity thereof; (iv) all the outstanding shares of the Company's Common Stock have been, and the Shares, the Warrant Shares and the Conversion Shares, upon issuance and delivery and payment therefor in the manner herein described, will be, duly authorized, validly issued, fully paid and nonassessable. No preemptive rights to subscribe for or to purchase, and no restriction upon the voting or transfer of, the Shares, the Warrants Shares or the Conversion Shares exist pursuant to the Restated Certificate or Bylaws, or, to the best of such counsel's knowledge, pursuant to any agreement or other instrument to which the Company is a party or by which it may be bound; (v) to the best of such counsel's knowledge there are no legal or governmental proceedings pending or overtly threatened against the Company required to be disclosed in the Company SEC Documents which are not so disclosed; (vi) the offer and sale of the Shares, the Warrants, the Warrant Shares and the Conversion Shares is exempt from the registration requirements of the Securities Act, subject to the timely filing of a Form D pursuant to Securities Exchange Commission Regulation D; and 19. (vii) the execution and delivery of this Agreement, the Related Agreements by the Company, and the issuance and sale of the Shares, the Warrants, the Warrant Shares and the Conversion Shares and the consummation of the transactions contemplated by this Agreement, the Stockholders Agreement and the Warrants by the Company will not conflict with or constitute a breach of or a default (with the passage of time or otherwise) under (i) the Restated Certificate or Bylaws of the Company, (ii) any Delaware corporate or California statute, law or regulation to which the Company or any of its properties may be subject, or any judgment, decree or order, known to such counsel, of any court or governmental agency or authority entered in any proceeding to which the Company was or is now a party or by which it is bound, except for any conflict, breach or default that would not have a Material Adverse Effect or (iii) any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Company is a party or by which the Company is bound or to which any of the property or assets of the Company is subject which has been identified in a certificate of the Chief Financial Officer of the Company as material to the Company, except for any conflict, breach or default that would not have a Material Adverse Effect. (viii) As of the Closing Date, the Restated Certificate will be in full force and effect. (l) Board Representative. A representative of the Purchaser shall have been appointed, at the option of the Purchaser, as either a member of or an observer to the board of directors of the Company in accordance with Section 2.1 of the Stockholders Agreement. 5.2 Conditions to Obligations of the Company. The Company's obligation to issue and sell the Shares at the Closing is subject to the satisfaction, on or prior to such Closing, of the following conditions, unless otherwise waived: (a) Representations and Warranties True. The representations and warranties made by the Purchaser in Section 4 hereof shall be true and correct in all material respects at the date of such Closing, with the same force and effect as if they had been made on and as of said date. (b) Performance of Obligations. The Purchaser shall have performed and complied with all agreements and conditions herein required to be performed or complied with by the Purchaser on or before such Closing. (c) Filing of Restated Certificate. The Restated Certificate shall have been accepted for filing with the Secretary of State of the State of Delaware and shall be in full force and effect as of such Closing Date. (d) Other Agreements. Each of the Commercial Agreement, the Stockholders Agreement and the Escrow Agreement shall have been executed and delivered by the parties thereto, shall be in full force and effect, except for failures to be in full force and effect due to the actions or omissions of the Company, and shall not have been breached by the Purchaser. (e) HSR Compliance. Any waiting period applicable to the purchase of the Shares under the HSR Act shall have terminated or expired. 20. 5.3 Conditions to Obligations of both the Company and the Purchaser. (a) Stockholder Approval. The Company Stockholder Approval shall have been obtained. SECTION 6. ADDITIONAL COVENANTS. 6.1 HSR Compliance; Other Approvals. (a) The Company and the Purchaser shall, promptly after the date of this Agreement, prepare and file the notifications required under the HSR Act for the issuance and sale of the Shares, the Warrants, the Warrant Shares and the Conversion Shares. The Company and the Purchaser shall respond as promptly as practicable to (i) any inquiries or requests received from the Federal Trade Commission or the Department of Justice for additional information or documentation and (ii) any inquiries or requests received from any state attorney general or other governmental body in connection with antitrust or related matters. Each of the Company and the Purchaser shall promptly inform the other party of any communication to or from the Federal Trade Commission, the Department of Justice or any other governmental body. The Company and the Purchaser will consult and cooperate with one another, and will consider in good faith the views of one another, in connection with any analysis, appearance, presentation, memorandum, brief, argument, opinion or proposal made or submitted in connection with any legal proceeding under or relating to the HSR Act or any other federal or state antitrust or fair trade law. (b) Each of the parties hereto shall use their commercially reasonable efforts to give such notices and obtain all other authorizations, consents, orders and approvals of all governmental authorities and other third parties that may be or become necessary or desirable for its execution and delivery of, and the performance of its obligations pursuant to, this Agreement and the Related Agreements and will cooperate fully with the other party hereto in promptly seeking to obtain all such authorizations, consents, orders and approvals. 6.2 Competing Proposals . (a) Notification Regarding Competing Strategic Relationships. Prior to receipt of the Company Stockholder Approval, the Company will notify the Purchaser in writing within five Business Days of: (i) the Company's receipt of a bona fide proposal from a third party for a strategic relationship that would be preclusive of any of the transactions contemplated by this Agreement (a "Competing Strategic Relationship"); (ii) the determination by the Company's Board of Directors to solicit any Competing Strategic Relationship; or (iii) the determination by the Company's Board of Directors to provide confidential information to, or enter into discussions or negotiations with, any third party concerning any Competing Strategic Relationship. 21. Such notice shall disclose the identity of the party making or involved in such proposal for a Competing Strategic Relationship and the material terms of any such proposed Competing Strategic Relationship. (b) Acquisition and Competing Strategic Relationship Proposals. Prior to the Closing, the Company shall, and shall cause its nonstockholder affiliates and the officers, directors and employees of the Company and its subsidiaries to, and shall instruct its stockholder affiliates and the representatives and agents of the Company and its subsidiaries (including, without limitation, any investment banker, attorney or accountant retained by the Company or any of its subsidiaries) to, immediately cease and terminate any existing activities, discussions or negotiations, if any, with any parties conducted heretofore with respect to any (i) Competing Strategic Relationship or (ii) acquisition or exchange of all or any material portion of the assets of, or more than 15% of the equity interest in, the Company (by direct purchase from the Company, tender or exchange offer or otherwise) or any business combination, merger or similar transaction (including an exchange of stock or assets) with or involving the Company (an "Acquisition Transaction"), other than the transactions contemplated hereby. Except as set forth in this Section 6.2(b), prior to the Closing, the Company shall not, and shall cause its nonstockholder affiliates and the officers, directors and employees of the Company and its subsidiaries not to, and shall instruct its stockholder affiliates and the representatives and agents of the Company and its subsidiaries (including, without limitation, any investment banker, attorney or accountant retained by the Company or any of its subsidiaries) not to, directly or indirectly, knowingly encourage, solicit, participate in or initiate discussions or negotiations with, or provide any information or data (other than the Company's standard public information package) to, any corporation, partnership, person or other entity or group (other than Purchaser, any affiliate or associate of Purchaser or any designees of Purchaser) with respect to any inquiries or the making of any offer or proposal (including, without limitation, any offer or proposal to the stockholders of the Company) concerning an Acquisition Transaction (an "Acquisition Proposal") or a Competing Strategic Relationship (a "Competing Strategic Relationship Proposal") or otherwise knowingly facilitate any effort or attempt to make or implement an Acquisition Proposal or a Competing Strategic Relationship Proposal; provided, however, that (x) prior to ----------------- the receipt of the Company Stockholder Approval, the Company may furnish information and access, but only in response to a request for information or access, to any person or entity making a bona fide written Acquisition Proposal to the board of directors of the Company after the date hereof which was not knowingly encouraged, solicited or initiated by the Company or any of its affiliates or any director, employee, representative or agent of the Company or any of its subsidiaries (including, without limitation, any investment banker, attorney or accountant retained by the Company or any of its subsidiaries) on or after the date hereof and may participate in discussions and negotiate with such person or entity concerning any such Acquisition Proposal and (y) after the Company Stockholders Meeting, the Board of Directors of the Company may authorize the Company, to enter into a binding written agreement concerning a Superior Proposal (as defined below), if and only if, in any such case under clause (x) or (y) above, (i) the board of directors of the Company determines in good faith, (A) taking into account the written, reasoned advice of outside counsel to the Company to the effect that failing to provide such information or access or to participate in such discussions or negotiations or so to authorize, as the case may be, is reasonably likely to constitute a breach of such board's fiduciary duties under applicable law, (B) taking into account the written advice of financial advisors to the Company to such effect, that such Acquisition Proposal, if accepted, is reasonably 22. likely to be consummated, taking into account all legal, financial and regulatory aspects of the proposal and the person or entity making the proposal and would, if consummated, result in a transaction more favorable to the Company's stockholders from a financial point of view than the transaction contemplated by this Agreement (any such more favorable Acquisition Proposal as to which both of the determinations referred to in subclauses (A) and (B) of this clause (i) have been made being referred to in this Agreement as a "Superior Proposal"), and (ii) the board of directors of the Company receives from the person or entity making such bona fide written Acquisition Proposal an executed confidentiality agreement the terms of which are (without regard to the terms of such Acquisition Proposal) (A) no less favorable to the Company, and (B) no less restrictive to the person or entity making such bona fide written Acquisition Proposal than those contained in the Stockholders Agreement. Nothing in this Agreement shall prohibit the Board of Directors of the Company from, to the extent applicable, complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal. 6.3 Stockholder Approval. As promptly as practicable following the date hereof, the Company shall take all action necessary to obtain the Company Stockholder Approval, including, without limitation, preparing, filing with the SEC and mailing to its stockholders a proxy statement or statements with respect thereto, and duly calling, giving notice of, convening and holding a meeting or meetings of its stockholders for such purpose (the "Company Stockholders Meeting"). Notwithstanding that any of the other conditions to the Closing may not be satisfied, the Company will use its best efforts to cause the Company Stockholders Meeting to occur as soon as reasonably possible after the date hereof. The Board shall recommend that its stockholders provide the Company Stockholder Approval, and may not withdraw or modify such recommendation prior to the taking of the votes to be taken at the Company Stockholders Meeting. 6.4 Ordinary Course of Business. (a) Except as otherwise contemplated by the terms of this Agreement, during the period from the date of this Agreement to the Closing Date (the "Pre- Closing Period"), each of the Company and its subsidiaries shall use commercially reasonable efforts to preserve intact its current business organizations, keep available the services of its officers and employees and preserve its relationships with customers, suppliers, licensors, licensees, advertisers, distributors and others having business dealings with it to the end that its goodwill and ongoing businesses shall be unimpaired. (b) Without limiting the generality of the foregoing, during the Pre- Closing Period, each of the Company and its subsidiaries shall not, without the prior consent of Purchaser: (i) (A) remove the chief executive officer or president (or, if there are no officers with such titles, the officers whose responsibility is executive oversight of the Company's and its subsidiaries' operations) or any executive vice president, or appoint any person to fill a vacancy in any such office, or (B) approve any new, or modify any existing material executive officer and director compensation plans or agreements; 23. (ii) change the number of directors or the composition or structure of the Company's Board of Directors; (iii) except as contemplated by the Restated Certificate, increase or decrease the total number of authorized or issued shares of Preferred Stock; (iv) take any action which would require the approval of the holders of the Preferred Stock pursuant to Article III, Section D.2(b) of the Restated Certificate, if the Preferred Stock were issued; (v) redeem, acquire or otherwise purchase any shares of Common Stock or preferred stock of the Company, except pursuant to Company Plans or agreements entered into in the ordinary course with employees of the Company; (vi) sell a subsidiary's securities to any third party (other than the Company or any other wholly owned subsidiary of the Company); (vii) sell or transfer any of the Company's or its subsidiaries' technology or other Intellectual Property, to any other person, other than in the ordinary course of business; or (viii) enter into any arrangement or contract to do any of the foregoing. 6.5 Efforts. Each party hereto agrees to use commercially reasonable efforts to take any and all actions required in order to consummate the transactions contemplated in this Agreement and the Related Agreements. 6.6 Notification of Certain Matters. During the Pre-Closing Period, the Company shall give prompt notice to the Purchaser of the occurrence or non- occurrence of any event known to the Company the occurrence or non-occurrence of which would reasonably be expected to cause any representation or warranty contained in Section 3 to be untrue in any material respect, the failure of the Company to comply with or satisfy any covenant or agreement under this Agreement, or the failure to be satisfied of any of the conditions set forth in Section 5. 6.7 Reservation of Shares. From and after the Closing, the Company shall at all times reserve and keep available for issuance such number of its authorized but unissued shares of Common Stock as shall be sufficient to permit the exercise in full of all the Warrants and the conversion in full of all the Preferred Stock. 6.8 Restated Certificate. Upon receipt of the Company Stockholder Approval, the Company shall take all such action to file the Restated Certificate with the Secretary of State of the State of Delaware and all such other action to cause the Restated Certificate to be accepted for filing and effective. SECTION 7. MISCELLANEOUS. 7.1 Termination. This Agreement may be terminated by (i) mutual agreement of the parties hereto, (ii) by the Purchaser pursuant to Section 1.2(a), subject to the Company's rights 24. under Section 1.2(b), (iii) by the Purchaser or the Company in the event the Closing has not occurred by February 28, 2001; provided, that the termination right pursuant to this clause (iii) may not be exercised by a party whose nonperformance has delayed the Closing or (iv) by either party in the event the Commercial Agreement is terminated prior to the Closing. Upon termination of this Agreement pursuant to this Section 7.1 (and subject to Section 1.2(b)), this Agreement (except for Section 7.9) shall be void and of no further force and effect and no party shall have any liability to any other party under this Agreement, except that nothing herein shall relieve any party from any liability for the breach of any of the representations, warranties, covenants and agreements set forth in this Agreement. 7.2 Definitions. For purposes of this Agreement: "affiliate" means any person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person; "Business Day" means any day that is not a Saturday, a Sunday or other day on which banks are required or authorized by law to be closed in The City of New York; "knowledge" of any person means knowledge of a particular fact or matter of which such person (or if such person is not an individual, any of its directors or officers) is actually aware or of which a prudent person (or if such person is not an individual, its directors or officers acting prudently) would be aware after reasonable inquiry; and "person" means any individual, corporation, partnership, association, trust, unincorporated organization, limited liability company, or other entity or a group (as defined in Section 13(d)(3) of the Exchange Act of 1934, as amended) of the foregoing. 7.3 Governing Law. This Agreement shall be governed in all respects by the laws of the State of New York as such laws are applied to agreements to be performed entirely in New York. 7.4 Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by the Purchaser and each closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 7.5 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Shares or the Warrants from time to time. 7.6 Entire Agreement. This Agreement, the Exhibits and Schedules hereto, the Related Agreements and the other documents delivered pursuant hereto and thereto constitute the full and entire understanding and agreement between the parties with regard to the subjects 25. hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 7.7 Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 7.8 Amendment and Waiver. (a) This Agreement may be amended or modified only upon the written consent of the Company and the Purchaser. (b) The obligations of the Company and the rights of the holders of the Shares, the Warrants, the Warrant Shares and the Conversion Shares under this Agreement may be waived only with the written consent of the Purchaser. 7.9 Delays or Omissions. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement, the Related Agreements or the Restated Certificate, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the Purchaser' part of any breach, default or noncompliance under this Agreement, the Related Agreements or under the Restated Certificate or any waiver on such party's part of any provisions or conditions of this Agreement, the Related Agreements, or the Restated Certificate must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, the Related Agreements, the Restated Certificate, by law, or otherwise afforded to any party, shall be cumulative and not alternative. 7.10 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next Business Day; (c) five (5) Business Days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) Business Day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent in each case to the respective address specified below: (a) If to the Purchaser, to: America Online, Inc. 22000 AOL Way Dulles, VA 20166-9323 Attn: General Counsel Fax: (703) 265-1495 E-mail: PTCapp@aol.com 26. With a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017-3954 Attn: David J. Sorkin, Esq. Fax: (212) 455-2502 E-mail: D_Sorkin@stblaw.com (b) If to the Company, to TiVo Inc. 2160 Gold Street Alviso, CA 95002 Attn: Chief Financial Officer Fax: (408) 519-5333 E-mail: dave@tivo.com With a copy to: Latham & Watkins 135 Commonwealth Drive Menlo Park, CA 94025 Attn: Alan Mendelson, Esq. Fax: (650) 463-2600 E-mail: alan.mendelson@lw.com or at such other address as the Company or the Purchaser may designate by ten (10) days advance written notice to the other parties hereto. 7.11 Expenses. Each Party shall pay its own costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. 7.12 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 7.13 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 7.14 Broker's Fees. Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 7.13 being untrue. 27. 7.15 Pronouns. All pronouns contained herein, and any variations thereof, shall be deemed to refer to the masculine, feminine or neutral, singular or plural, as to the identity of the parties hereto may require. 7.16 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH QUALIFICATION IS UNLAWFUL. PRIOR TO ACCEPTANCE OF SUCH CONSIDERATION BY THE COMPANY, THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION FROM SUCH QUALIFICATION BEING AVAILABLE. 28. In Witness Whereof, the parties hereto have executed this Investment Agreement as of the date set forth in the first paragraph hereof. Company: Tivo Inc. By: /s/ Michael Ramsay ---------------------------------- Michael Ramsay, President -------------- and Chief Executive Officer SIGNATURE PAGE TO INVESTMENT AGREEMENT 29. In Witness Whereof, the parties hereto have executed this Investment Agreement as of the date set forth in the first paragraph hereof. Purchaser: America Online, Inc. By: /s/ David M. Colburn ---------------------------------- Name: David M. Colburn -------------------------------- Title: President, Business Affairs ------------------------------- SIGNATURE PAGE TO INVESTMENT AGREEMENT 30. EX-10.26 4 0004.txt PRODUCT INTEGRATION AND MARKETING AGREEMENT EXHIBIT 10.26 ============= PRODUCT INTEGRATION AND MARKETING AGREEMENT ------------------------------------------- This Product Integration and Marketing Agreement (the "Agreement") is made and entered into as of this 9 day of June, 2000 (the "Effective Date") by and --- between America Online, Inc., a Delaware corporation ("AOL"), and TiVo, Inc., a Delaware corporation ("TiVo") (each a "Party" and, collectively, the "Parties"). R E C I T A L S WHEREAS, TiVo has developed and continues to develop hardware, software and data systems that provide feature-rich personal digital video recorder functionality for television programming; WHEREAS, AOL and TiVo desire to cooperate to develop a version of AOL's "AOL TV" service that is bundled with and installed on a TiVo personal digital video recorder, that includes a "TiVo Channel" to permit access to enhanced TiVo functionality and certain other features and functions described in the Specifications (as defined below); WHEREAS, AOL and TiVo desire to cooperate to develop equipment and software required for the provision of such integrated AOL TV/TiVo device; WHEREAS, AOL and TiVo will work together to design, develop, test, launch, market, sell and support the Integrated Product, in accordance with the terms of this Agreement; WHEREAS, AOL and TiVo, have entered a short-form Product Integration and Marketing Relationship Agreement, dated August 6, 1999 (the "Preliminary Agreement"), under which the Development Activities have begun; and WHEREAS, AOL and TiVo intend that this Agreement replace and supersede the Preliminary Agreement. A G R E E M E N T NOW, THEREFORE, in consideration of the foregoing and mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, AOL and TiVo, intending to be legally bound, agree as follows: 1. Certain Definitions. Capitalized terms used but not defined in the Agreement will be as defined in Schedule 1 attached hereto. 2. Definitive Agreement. This Agreement replaces and supersedes the Preliminary Agreement in its entirety. The Preliminary Agreement is hereby terminated and has no further force or effect. 3. Obligations related to the Development and Delivery of the Integrated Product. 3.1 Joint Responsibilities. Joint responsibilities of the Parties ---------------------- hereunder shall include, without limitation, the following: (a) AOL and TiVo will jointly coordinate the development of the Specifications to ensure compatibility and integration between the AOL TV Service, the TiVo Channel, the Liberate Browser and the Developed Hardware, and to allow each Party to implement its respective services - ------------------------- * * * Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as * * *. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission. 1 on the Developed Hardware. TiVo will be responsible for the design of the TiVo Channel and the DVR Functionality, and AOL will be responsible for the design of the AOL TV Service. (b) AOL and TiVo will meet on a weekly basis during the term of this Agreement in order to refine the Specifications to reflect the optimal level of integration between the AOL TV Service, the TiVo Channel and the Integrated Service. (c) Each Party shall use good faith efforts to finalize and mutually agree upon the Specifications (Schedule 12), the Milestone Schedule (Schedule 2), the Acceptance Criteria (Schedule 4) and the Description of Provisioning Support (Schedule 7) within thirty (30) days of the Effective Date. (d) * * * will provide to * * * that (1) will allow * * * to with * * * reasonable assistance, enable the operation of the * * * through the * * * (2) will allow * * * to * * * (including all * * * and * * * related thereto); (3) are made * * * to * * * by * * * and (4) the Parties agree shall be provided to * * *. For the avoidance of doubt, unless mutually agreed to by the Parties, * * * will not * * * and/or * * * that utilize the * * * of the * * * that are not part of the * * * will have the right to use the * * * described above solely to enable the * * * and that do not * * * as it exists at the time * * * proposes such new * * * unless otherwise agreed to by the Parties. (e) TiVo and AOL jointly will be responsible for the integration of the AOL TV Software on to the combination of the Liberate Browser, the TiVo Software and the Developed Hardware. Notwithstanding the foregoing, AOL will be responsible for the operation of the AOL TV Software in accordance with Section 3.3, provided that TiVo will remain responsible for integration of the Integrated Product in accordance with Section 3.2(a). (f) AOL and TiVo jointly will select third party relationships for the manufacture of all Developed Hardware. TiVo will provide to any such Manufacturer, under commercially reasonable terms and conditions, a royalty-free license to use the TiVo Software and a reference design for development and manufacture of the Integrated Product. AOL will contract with such Manufacturer for the manufacture of the Integrated Product and shall be responsible for the day-to-day management of all such third party Manufacturing relationships. TiVo agrees to provide reasonable assistance to such Manufacturer as may be necessary or appropriate to further the intent of the Parties hereunder, in a manner consistent with TiVo's favorable relationships with its own Manufacturers. (g) AOL and TiVo jointly and in good faith will explore the possibility of collaborating on future versions of the Integrated Product and the Integrated Service * * *. (h) Following the closing of the merger between AOL and Time Warner, Inc., AOL and TiVo jointly will explore possible relationships to provide TiVo * * * for use in conjunction with the DVR Functionality, TiVo Channel and other TiVo services on terms to be mutually agreed upon. (i) AOL and TiVo will jointly explore the possibility of providing TiVo with assistance in the development and deployment of TiVo's e-commerce capabilities through access to AOL's transaction processing architecture and interfaces (e.g., QuickCheckout integration, APIs and other software). Such assistance will be provided to TiVo, if agreed to by the Parties, on terms to be mutually agreed upon, taking into consideration AOL's costs to provide such assistance. - ------------------------- * * * Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as * * *. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission. 2 3.2 Obligations of TiVo. ------------------- (a) Development. In order to create the Integrated Product and to achieve ----------- the integration of the TiVo Software, the Robust DVR Functionality and the Basic DVR Functionality with the AOL TV Service in accordance with this Agreement, TiVo will undertake the Development Activities set forth in this Section 3.2. The Development Activities will be performed in conjunction with the development of the Developed Hardware (as described in the Minimum Specifications set forth in Schedule 3). The Parties will use all commercially reasonable efforts to release the commercial version of the Integrated Product as soon as practicable * * *. TiVo and AOL will work together to ensure that the design and implementation of the Developed Hardware is capable of supporting the AOL TV Service and the TiVo Channel in accordance with the Specifications. * * * (subject to the terms and conditions of this Agreement) TiVo agrees to perform the following development services in accordance with applicable milestones set forth in the Milestone Schedule and in any case by * * *: (i) TiVo will deliver to AOL the Integrated Product (including, without limitation, Provisioning Support as described herein). (ii) TiVo will implement suitable graphics APIs to support the Liberate Browser to enable on-screen Web-based graphics for the AOL TV Service, as set forth in the Specifications. (iii) TiVo has contracted with Liberate to provide for porting of the Liberate Browser to the Integrated Product, preserving all Liberate Browser functionality set forth in the Specifications. TiVo shall ensure that the port of the Liberate Browser is executed in such a way that the AOL TV Software and the Integrated Service will function as specified in the Specifications without degradation and without requiring modifications (except as otherwise mutually agreed to by the TiVo, AOL and Liberate). TiVo shall actively and diligently enforce Liberate's obligations under the TiVo- Liberate contract * * * TiVo will provide to AOL status reports on the Liberate development effort, including reports of errors and limitations in the Liberate Browser. (iv) TiVo will work with Liberate to test and verify the port of the Liberate Browser, to package the ported Liberate Browser into TiVo distribution formats, as set forth in the Specifications, and to run alpha and beta programs with the ported Liberate Browser leveraging TiVo's then-existing beta community as necessary. (v) TiVo will integrate the TiVo Software and the Liberate Browser with the Developed Hardware in accordance with the Specifications. (vi) TiVo shall permit AOL to review and consult with TiVo as to the design specifications, engineering schematics and other technical aspects of the Developed Hardware, and shall in good faith consider any changes to same proposed by AOL. (vii) AOL acknowledges and agrees that TiVo is not required to make any changes or modifications to the style, look and feel of the TiVo Channel existing as of the Effective Date. Notwithstanding the foregoing, the Parties agree that the screens displayed on the * * * shall carry * * * that shall include, among other things, * * * from * * * and * * * in a manner consistent with other versions of * * * and other * * * as mutually agreed to by the Parties, provided as part of the * * *. The * * * will be similar to * * * which comprises approximately * * * In addition, TiVo and AOL will collaborate to - ------------------------- * * * Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 3 establish consistency between the style, look and feel of the TiVo Channel, the AOL TV Service and the AOL Style Guidelines. (viii) TiVo will implement changes to the TiVo Platform required to permit access to the AOL TV Service in accordance with the Specifications. (ix) To the extent that AOL recommends changes to the TiVo Software or the TiVo Channel (other than any changes required hereunder), * * *. (x) TiVo will develop documentation necessary for testing, operation, and use of the Integrated Product which documentation shall be sufficient to enable AOL's software engineers to apply * * * with * * * to enable * * * and * * * through * * * (hereinafter "TiVo Documentation"), and will deliver such TiVo Documentation, in both print and machine readable format, to AOL. TiVo Documentation shall include release dates and version numbers to facilitate its use with the Integrated Products. Such TiVo Documentation shall be deemed TiVo Confidential Information. (xi) TiVo will provide AOL with periodic oral and written reports of its progress in the development of the Integrated Product. (xii) TiVo will provide the TiVo System Software and the Liberate Ported TiVo Software to AOL, * * * (with the exception of * * * that is provided * * * and * * * for * * * to which AOL * * * in performance of its obligations under this Agreement), and all documentation related thereto produced by or available to TiVo, so that AOL can integrate such software with the AOL TV Software. (xiii) TiVo will use best efforts to provide a fully functional (in accordance with the Specifications) working hardware and software prototype of the Integrated Product for * * * provided that TiVo shall not be responsible for the functionality of the AOL TV Software or the AOL TV Service (excluding the EPG Data and the Basic DVR Functionality) used in such prototype. (b) Change Requests. The Parties may, from time to time, agree to changes --------------- (consisting of additions, modifications, deletions or other revisions) to the Minimum Specifications, to the Specifications or to the Development Activities. Each change request must be reflected in a written document signed by both Parties that includes a detailed description of the specific change, along with any modified specifications and desired completion date(s) ("Change Request"). Each Change Request duly authorized in writing by the Parties shall constitute a formal amendment to this Agreement, and shall be deemed incorporated into and shall become part of this Agreement. A Change Request shall have no effect on the rights and obligations of TiVo or AOL with respect to products delivered or Services provided before the effective date of the Change Request. In addition, in connection with any duly authorized Change Request, TiVo shall provide * * * to * * * to AOL as reasonably requested by AOL or as needed to * * * TiVo shall clearly identify * * * from * * * of * * * supplied to AOL hereunder. TiVo will place a priority on Change Requests in terms of resource allocation. Unless otherwise agreed in a Change Request, TiVo will pay all costs of a Change Request. (c) Approval. -------- - ------------------------- * * * Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 4 (i) Acceptance Testing. AOL will test the Integrated Product, in ------------------ accordance with standard diagnostic practices, to determine whether or not it meets the Acceptance Criteria that will be mutually agreed to within * * * days of the Effective Date. TiVo will provide * * * as AOL conducts acceptance tests (including alpha and beta level testing) of the Integrated Product, in accordance with the Acceptance Criteria. (ii) Test Units. TiVo shall provide (directly or indirectly ---------- through a Manufacturer) and AOL shall purchase up to * * * total (such total to include the number of development units purchased pursuant to Section 3.2(c)(iii) below) units of the various test versions of the Integrated Product and shall participate in the alpha, beta and other testing of the Integrated Product conducted by AOL. Such participation shall be pursuant to the various test plans and procedures established by AOL. (iii) Development Units. The pre-release version of the Integrated ----------------- Product shall be subject to Acceptance by AOL based on satisfaction of such tests as the Parties will mutually and reasonably construct in order to determine whether the Integrated Product operates in substantial compliance with the Acceptance Criteria set forth in Schedule 4. TiVo shall provide (directly or indirectly through a Manufacturer) and AOL shall purchase up to * * * total (such total to include the number of test units purchased pursuant to Section 3.2(c)(ii) above) units of the Integrated Product solely for AOL's own internal use in performing such tests. For each production run of development units delivered to AOL, TiVo shall provide documentation containing lists and descriptions of known errors and limitations for such production run. AOL shall test the Integrated Product within * * * days of receipt, in order to determine whether it is in substantial compliance with the Acceptance Criteria. Within such period, AOL shall provide TiVo with written Acceptance of the Integrated Product or a statement identifying any failure of the Integrated Product to substantially comply with the Acceptance Criteria in sufficient detail for TiVo to recreate such non-compliance. In the event AOL identifies such a failure and rejects the Integrated Product, TiVo shall have * * * days from TiVo's receipt of notice of such rejection to repair the failure and resubmit the units of the repaired Integrated Product to AOL for testing. AOL shall then have * * * days after receipt of the resubmitted product to determine whether such version passes Acceptance testing. The process shall be repeated until the Integrated Product passes Acceptance testing or, if it fails to pass after * * * rounds of Acceptance testing and such failure is not due solely to the AOL TV Software or the AOL TV Service (excluding the EPG Data and the Basic DVR Functionality), TiVo shall have * * * as set forth in Section * * *. (iv) Cooperation by TiVo. TiVo shall cooperate in all testing ------------------- undertaken pursuant to this Section 3.2(c) to the extent reasonably requested by AOL. TiVo shall use its commercially reasonable efforts to diagnose any failure of Integrated Product to comply with the Specifications and the Acceptance Criteria set forth in Schedule 4 prior to and during any testing. TiVo also shall use its commercially reasonable efforts to promptly correct any such failure diagnosed by TiVo or reported to TiVo in writing. TiVo's use of commercially reasonable efforts to diagnose and correct such failures shall not supersede the rights and remedies of the Parties set forth in Subsection 3.2(c)(iii) above. (v) Review of Documentation. AOL shall also be entitled to ----------------------- evaluate whether the TiVo Documentation is consistent with Section 3.2(a)(x). All required documentation shall be provided to AOL, in the form mutually agreed to by the Parties, prior to and as a condition of AOL's Acceptance of Integrated Product. - ------------------------- * * * Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 5 (vi) No Effect on TiVo's Other Obligations. AOL's inspection or ------------------------------------- failure to inspect, and AOL's Acceptance of the Integrated Product shall in no way relieve TiVo of its obligations under this Section 3.2 and Section 5.2 of Schedule 5 of this Agreement. Notwithstanding the foregoing, if AOL does not test the Integrated Product in accordance with Section 3.2(c)(ii) within the time frames set forth therein, the Integrated Product shall be deemed "accepted" by AOL. (d) Support of AOL. TiVo will provide for the sole and exclusive benefit -------------- of AOL support of the Integrated Product in accordance with the support level provisions of Schedule 6, at no cost to AOL or any End User. Subject to the provisions of Section 10.1, such support does not extend to any third parties, including without limitation any End- Users, and specifically excludes any obligation to provide corrections for errors in the operation of the AOL TV Software and/or AOL TV Service, if such errors are attributable to the AOL TV Software or AOL TV Service in the form provided by AOL. (e) Provisioning Support. The TiVo Platform shall include service -------------------- provisioning support required to remotely update, manage and maintain the Integrated Product, including the software thereof, in a multiple service, closed loop bit and information management system, as set forth in Schedule 7 attached hereto (the "Provisioning Support"). Such Provisioning Support also shall include without limitation, service testing and certification, reliable distribution of service software to receiver populations, operational reporting and data acquisition, measurement and backhaul, as set forth in Schedule 7. The Integrated Product shall operate substantially in accordance with the specifications for maximum downtime, service interruption and degradation as set forth in the Specifications; provided that in no event shall TiVo be responsible for any downtime, service interruption or degradation attributable to the AOL communications network, AOL TV Service, AOL TV Software or any manufacturing defect in the Integrated Product. (f) TiVo Channel. Except as otherwise provided herein, TiVo shall, at its ------------ expense, be responsible for programming, operation and management of the TiVo Channel. Notwithstanding the foregoing, TiVo may, * * *, discontinue the TiVo Channel (or any portion(s) thereof) * * *, provided that in the event of a discontinuance of the TiVo Channel, AOL's obligations to TiVo hereunder shall terminate except AOL's obligations to TiVo set forth in Sections * * *, and * * *. In addition, AOL may continue to offer * * * to all current and future End Users of the AOL TV Service using the Integrated Product and may develop, implement and/or offer * * *; provided that AOL shall not use or incorporate any technology owned or provided by TiVo, except to the extent necessary to implement * * * and to provide required Provisioning Support, and provided that any such use remains subject to the restrictions in Section 4 of Schedule 5. (g) Marketing Assistance. TiVo will assist AOL to market and distribute -------------------- the Integrated Product and promote the Integrated Service in accordance with the AOL marketing and distribution plan set forth in Schedule 8 attached hereto (the "Marketing Plan"). TiVo's assistance shall be in the form of provision of all necessary TiVo logos and trademarks for inclusion in the AOL marketing and promotional materials. (h) * * * (i) * * * - ------------------------- * * * Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 6 3.3 Obligations of AOL. ------------------ (a) AOL's Assistance. AOL shall, at its expense and upon request by TiVo, ---------------- furnish TiVo with materials in AOL's possession and control, except source code, that are reasonably related to TiVo's development and testing of the Integrated Product (collectively, "AOL Materials"). AOL shall provide the relevant AOL Materials to TiVo as soon as practical after the Effective Date and promptly upon the release of any new versions of such AOL Materials. AOL shall provide TiVo reasonable technical assistance to enable TiVo to port the Liberate Browser functionality to the Integrated Product as set forth in Section 3.2(a) including, without limitation, providing TiVo with access to current and future software releases, in object code form, of the AOL TV Software and AOL Deliverables. (b) Network Access. AOL will utilize its communications network to -------------- deliver the necessary data required to enable the functionality of the Integrated Service and the Robust DVR Functionality to all Integrated Products. * * * for the delivery of this data. (c) Availability of Integrated Product. AOL's decision to not ---------------------------------- commercially release and deploy the Integrated Product by * * * (provided that TiVo has not committed a Material Breach that has not been cured or waived at such time and the that Integrated Product has been Accepted by AOL as provided herein) * * * subject, however, to AOL's decision to deploy or continue to provide the AOL Interactive TV Service as set forth in Section 3.3(d). (d) AOL TV Service. Except as otherwise provided herein, AOL shall, at -------------- its expense, be responsible for programming, operation and management of the AOL TV Service. Subject to the provisions of this Agreement, AOL shall determine, in its sole and absolute discretion, the nature and type of content and services that will be made available on the AOL TV Service. AOL shall have no obligation to consult with or otherwise notify TiVo regarding any decisions relating to the nature and type of content and services that will be available on the AOL TV Service. Notwithstanding the foregoing, AOL may, at any time and in its sole and absolute discretion, discontinue the AOL Interactive TV Service without any liability whatsoever to TiVo. AOL shall use reasonable commercial efforts to provide TiVo with a minimum of * * * written notice prior to discontinuing the AOL Interactive TV Service. If AOL publicly announces that it will discontinue its efforts in providing interactive television (including the AOL TV service, any successor service thereto, and any other interactive television service) (herein, the "AOL Interactive TV Service") then TiVo may request from AOL confirmation of such announcement and, upon receipt of such confirmation in writing from AOL by TiVo, * * * to TiVo for use * * *, however, * * * will not affect any "Escrowed Funds" as defined in the Investment Agreement. (e) End User Interface. AOL will consult with TiVo in developing design ------------------ guidelines of the End User interface of the Integrated Product (the "User Interface") that will be compatible with the Specifications, including the placement of TiVo buttons on the AOL TV Main Menu and AOL TV EPG layout and button placement, subject to AOL's final approval of same, as set forth in Section 5.1. (f) AOL Deliverables. AOL shall, at its expense, provide to TiVo the AOL ---------------- TV Software, in object code form only, which conforms in all material respects to the applicable Specifications and AOL - ------------------------- * * * Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 7 TV documentation (collectively, the "AOL Deliverables"). Such AOL Deliverables shall be delivered to TiVo no later than the dates specified in the Milestone Schedule in order for TiVo to meet its obligations set forth in this Agreement. (g) Documentation. AOL will develop documentation for the Integrated ------------- Product instructing End-Users how to subscribe to and use the AOL TV Service ("Subscriber Documentation"). TiVo will assist AOL in developing Subscriber Documentation related to the DVR Functionality. AOL shall * * *, design and reproduction of all such Subscriber Documentation, unless otherwise provided in the Marketing Plan. (h) Marketing and Distribution. AOL, with TiVo's reasonable assistance, -------------------------- shall market and distribute the Integrated Product in accordance with the Marketing Plan. 3.4 Liberate License. TiVo has secured a license from Liberate to use the ---------------- Liberate Browser in the manner required to integrate the Liberate Browser, the TiVo TV Software and the AOL TV Software into the Integrated Product, manufacture, market and distribute the Integrated Product and offer the Integrated Service as contemplated in this Agreement. TiVo has delivered to AOL a copy of the TiVo-Liberate agreement and all schedules, exhibits, attachments and amendments thereto. AOL shall provide commercially reasonable assistance to TiVo to cause Liberate to perform its obligations required to implement the Integrated Product and offer the Integrated Service within the timeframes set forth in the Milestone Schedule. TiVo shall use reasonable commercial efforts (i) to keep AOL appraised of Liberate's performance or any non-performance; (ii) to provide AOL with notice of status and issues meetings relating to the same; and (iii) to provide AOL the opportunity to participate in any such meetings. 3.5 Program Managers; Dedication of Resources. AOL and TiVo each shall ----------------------------------------- designate a program manager ("Program Manager") who shall be the principal point of contact between them for all matters relating to this Agreement. The initial Program Manager for AOL shall be Lin Jenner and the initial Program Manager for TiVo shall be Allen Bourgoyne. AOL and TiVo may designate new Program Managers and other personnel responsible for particular tasks related to this Agreement by written notice to the other Party. 3.6 TiVo Responsibility for Performance. TiVo acknowledges and agrees that it ----------------------------------- is solely responsible for performance of its obligations to develop the Integrated Product so that it conforms in all material respects to the applicable Specifications, as warranted by TiVo in Section 5 of Schedule 5, on schedule in accordance with the Milestone Schedule. Notwithstanding the foregoing, TiVo shall not be in breach of the foregoing obligation to the extent TiVo fails to perform such obligation because (i) TiVo received the AOL TV Software, which conforms in all material respects to the applicable Specifications, later than the date specified in the Milestone Schedule; (ii) the Specifications are finalized in a form mutually agreed to by the Parties later than the date specified in the Milestone Schedule; (iii) the Liberate Browser, in the form eventually accepted by TiVo and used in the Integrated Product is made available to TiVo later than the date specified in the Milestone Schedule; and (iv) of other failures or delays resulting from the acts or omissions of AOL or Liberate. If a milestone date specified in the Milestone Schedule is missed due to the fault of AOL or Liberate, the Milestone Schedule will be adjusted equitably to account for the delay, to the extent such fault caused the delay. 3.7 Milestone Schedule. The Parties will meet at least monthly to review each ------------------ Party's respective performance and the overall status of the project in accordance with the Milestone Schedule. If either Party, or the project as a whole, is not on schedule, the Parties agree to work together to resolve the delay. Notwithstanding the foregoing, nothing in this Section 3.7 shall be construed to alter the rights and obligations on either Party with respect to any delay of either Party under this Agreement. - ------------------------- * * * Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 8 4. The Integrated Product. 4.1 Hard Drive Allocation. AOL will allocate to TiVo * * * on the Hard --------------------- Drive of each Developed Hardware containing the Integrated Service for the purpose of providing the TiVo Channel (the "TiVo Hard Drive Allocation"). * * * The Hard Drive storage area required to enable the Basic DVR Functionality is estimated to be approximately * * * TiVo's space requirement for the software needed to enable the Basic DVR Functionality of the Integrated Service shall not be considered to be part of the TiVo Hard Drive Allocation, unless the storage requirement for such software exceeds * * *, in which case the storage area required in excess of * * * shall be at the expense of TiVo's * * * allocation. * * * allocated to the TiVo Channel and services may be increased to accommodate additional TiVo Channel offerings in the future as mutually agreed by the Parties. * * * 4.2 Integrated Service EPG. The Integrated Service will utilize the AOL TV ---------------------- EPG, * * *. During the term of this Agreement and subject to the terms and conditions set forth herein, TiVo and AOL will cooperate in good faith to establish processes and procedures required or appropriate to incorporate TiVo and AOL fields and data into the AOL TV EPG and to efficiently deliver such AOL TV EPG to the Integrated Product for use by the AOL TV Service and the TiVo Channel in accordance with the Specifications. Notwithstanding the foregoing and for the avoidance of doubt, AOL shall not have access to * * * for use with * * * in support of * * * 4.3 Hardware Costs. AOL will have the right, at its option, to use the -------------- TiVo remote control hardware to be provided with the Integrated Product to run the Integrated Service and TiVo will provide assistance to allow AOL to map the buttons and features of such remote to the Integrated Service. AOL will pay the actual reasonable cost of (a) all alpha and beta versions of the TiVo Platform in excess of the number of units described in Section 3.2(c)(ii) and (iii) * * * necessary for the testing of such hardware as provided for in Section 3.2(c) above, (b) reasonable engineering and tooling costs of changes to the TiVo remote control requested by AOL, and (c) reasonable engineering costs of causing AOL's own remote control and/or keyboard to function with the Integrated Product. 5. The Integrated Service. 5.1 AOL Linking to the TiVo Channel. As part of the Integrated Service, ------------------------------- TiVo shall provide the Initial Robust DVR Functionality, as described in Schedule 10 attached hereto for use solely with the TiVo Channel. AOL will provide TiVo with a menu box or button linked to the TiVo Channel that is * * *. AOL shall determine the look, feel and user interface of the AOL TV Main Menu. Such linkable button shall be viewable by End Users when initiating any session or interaction with the Integrated Service. In addition, AOL will provide TiVo with a similar linkable button on the AOL TV EPG and other areas of the Integrated Service where appropriate as agreed to by the Parties. The buttons will link to the TiVo Channel, which will contain TiVo-branded DVR content and services. The TiVo Channel will also be accessible through a TiVo-branded, multi-color button contained at the top center of each remote control for the Integrated Service and through a similar key * * *. TiVo shall make provision for automatic updates of, and shall regularly update, subject to telephone access via the AOL communications network to the Integrated Product as controlled by the End User, the program, schedule and related data used by the Robust DVR Functionality to ensure that the program and schedule information contained in the TiVo Channel is reasonably current. AOL will host provisioning for updates to the EPG Data to facilitate the receipt and integration of such updates. - ------------------------- * * * Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 9 5.2 Extended or Additional Services. Although the initial Robust DVR ------------------------------- Functionality will be based on the features and functionality described in Schedule 10 as of the Effective Date (the "Initial Robust DVR Functionality"), the Parties acknowledge that enhanced or additional features may be offered in subsequent versions of the TiVo Software. TiVo may desire from time to time to offer enhanced or additional services as part of the Robust DVR Functionality including, without limitation, enhanced services for which TiVo may require End Users to pay a fee, which enhanced or additional services shall not include the updates and upgrades discussed in Section 5.3 below or the services provided by the Basic DVR Functionality (the "New Services"). Such New Services may be developed by TiVo internally (such as * * *) or developed in conjunction with third parties and offered as part of the TiVo Channel (such as * * *). Nothing herein shall restrict TiVo's right to develop and offer enhanced or additional DVR Functionality on TiVo platforms other than the Developed Hardware. Any current, enhanced or new services offered by TiVo through the Integrated Product for which it charges an End User an additional fee shall be deemed a New Service. * * * 5.3 TiVo Software Updates and Upgrades. AOL will have editorial approval ---------------------------------- rights with respect to changes in content, advertising and minor upgrades and updates to the Initial Robust DVR Functionality, such approval not to be unreasonably withheld or delayed. To the extent that TiVo makes generally available to its subscribers updates and upgrades to the TiVo Software, TiVo shall offer such updates and upgrades to AOL solely for use in the Integrated Product. AOL, in its discretion, may elect to test such updates and upgrades, with reasonable assistance provided by TiVo, and, if AOL so desires, AOL, with reasonable assistance from TiVo, may integrate such updates and upgrades into the Integrated Product and distribute such AOL-approved updates or upgrades to End Users. If AOL elects not to incorporate a particular upgrade, TiVo shall continue to support the version of the TiVo Software used in the Integrated Product in accordance with Section 3.2 and Schedules 6 and 7 hereof. Notwithstanding the foregoing, AOL shall promptly incorporate any upgrade or update provided by TiVo to remedy any infringement or potential infringement of the TiVo Software (in the form then-currently used by AOL) as further described in Subsection 8.3 of Schedule 5. 5.4 * * * 6. Exclusivity 6.1 Subject only to the exceptions set forth in this Section 6.1 and as provided in Section 6.2 with regard to platforms not in AOL's control and MSOs, * * *. With respect to Sections 6.1(a) and 6.1(c) below, the Exclusivity shall terminate, at - ------------------------- * * * Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 10 AOL's option, following thirty (30) days' written notice to TiVo of the occurrence of the respective condition(s) specified in Section 6.1(a) or 6.1(c), as the case may be, and the failure of TiVo to correct such condition(s) during such thirty (30) day period. With respect to Section 6.1(b), AOL, at its option, may terminate the Exclusivity immediately upon written notice to TiVo. The Exclusivity shall terminate in the following cases: (a) If because of TiVo's or TiVo contracted third parties' failure to perform or Material Breach (with the exception of Liberate and as opposed to delays caused by AOL or AOL contracted third parties), the Shipment Release of the Developed Hardware supporting the Integrated Service does not occur by * * * the Exclusivity shall terminate. (b) * * * (c) If the AOL TV Service is offered on a hardware/software platform as to which TiVo is unable to port its service in a "Reasonable" time frame, the Exclusivity shall terminate as to that platform. Until * * * "Reasonable" time frame shall mean the last to occur of * * * from authorization to begin work and the receipt by TiVo of all necessary hardware and software specifications and/or source code, or * * * prior to the projected date upon which the platform will first be available for public distribution with AOL TV Service enabled. After * * * "Reasonable" time frame shall mean the last to occur of * * * from authorization to begin work and the receipt by TiVo of all necessary hardware and software specifications and/or source code, or * * * to the projected date upon which the platform will first be available for public distribution with AOL TV Service enabled. In all cases, TiVo's porting schedule will reflect commensurate penalties for failure to deliver as promised. 6.2 If AOL desires to distribute AOL TV on a platform not in AOL's control or in conjunction with an MSO (e.g., Cox, Comcast, Time-Warner Cable and MediaOne), then * * *. The Parties mutually agree that following the closing of the merger between AOL and Time Warner, Inc. (the "Closing"), * * *. 7. Development Costs; Royalties 7.1 Development Costs. * * * will be responsible for * * * in ----------------- relation to the development of the Specifications, the Integrated Product and the Integrated Service in order to enable delivery of the Integrated Service by the milestone date specified in the Milestone Schedule; particularly, * * * will remain responsible for the costs related to its obligations under * * * above. 7.2 Integrated Service Revenues. AOL will collect and, subject to the --------------------------- limitations set forth below, retain revenues generated from sales of the Developed Hardware and from subscription to and use of the Integrated Service. AOL shall pay to TiVo all revenues collected by AOL that are generated from any - ------------------------- * * * Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 11 New Services for which TiVo charges an additional fee. TiVo will retain all advertising, promotion, audience measurement (subject to the provisions of Subsection 5.4) and other revenues generated by the TiVo Channel that are collected by TiVo. 7.3 Taxes. Neither Party shall be required to reimburse the other Party for any taxes, including, without limitation, ad valorem personal property taxes, state and local privilege, franchise and excise taxes based on gross revenue, and taxes based on or measured by such Party's net income. 8. Distribution, Marketing and Promotion. 8.1 Distribution. During the term of this Agreement (following completion ------------ of the Development Activities and Acceptance), AOL will distribute the Integrated Products in accordance with the Marketing Plan. The schedule for such distribution set forth in the Marketing Plan will be reasonable taking into account the schedule for the Development Activities and manufacturing and distribution lead times, but in no event later than * * *. Following completion of the Development Activities and Acceptance of the Developed Hardware and subject to an applicable commercially reasonable and royalty-free license agreement, TiVo will deliver all the software required to operate the Integrated Product and enable the Integrated Service to AOL's Manufacturers for distribution by inclusion in the Integrated Product. AOL and TiVo agree that it is the intent of both Parties to * * * of the Integrated Service and will cooperate to explore additional distribution relationships with third party hardware manufacturers, service providers, retailers, etc. 8.2 Subsidy Payments. Pursuant to the Investment Agreement, dated as of ---------------- the date hereof, between TiVo and AOL (the "Investment Agreement"), AOL and TiVo have agreed that TiVo will deposit certain funds totaling up to * * * (the "Earmarked Funds") into an escrow account pursuant to a form of escrow agreement attached as an exhibit to the Investment Agreement (the "Investment Escrow Agreement"). TiVo agrees that, upon and after the release of the Earmarked Funds from escrow in accordance with the terms of the Investment Escrow Agreement, the Earmarked Funds will be segregated from TiVo's other cash balances and used by TiVo (a) * * * (as defined below) or (b) if agreed in writing by AOL and TiVo, * * * of the Integrated Product in amounts and on terms set forth in such written agreement, and (c) for no other purpose. In order to * * * the production and * * * TiVo shall make a payment of * * * for each unit of Developed Hardware produced and shipped, such payment to be made to (x) the Manufacturer or Manufacturers; or (y) to such other party as determined by AOL (each such payment, a "* * *"). * * * TiVo promptly shall provide to AOL all such information as AOL shall reasonably requests concerning TiVo's use of the Earmarked Funds and * * * relating to TiVo's compliance with this Section 8.2. 8.3 Hardware Branding and Packaging. The Integrated Service as enabled in ------------------------------- the Developed Hardware will be branded * * * in a manner as is mutually agreed by the Parties * * *. All of the Robust DVR Functionality and TiVo Channels, except for the Live TV Guide accessible from the TiVo Channel, which will be an AOL TV EPG as noted above, will be * * *, as mutually agreed by the Parties. 8.4 Ad Sales Representation. Subject to mutually agreed upon terms and ----------------------- performance requirements and milestones, AOL will serve as TiVo's representative for sales of advertising inventory (e.g., ads, promotions, links) to be offered within the TiVo Channel and upon TiVo's reasonable approval of such advertisements, TiVo agrees to run such advertisements on the TiVo Channel as arranged by AOL. TiVo will retain all advertising and commerce revenues from the TiVo Channel, net of AOL's selling expenses (as to which the Parties mutually will agree) and * * * commission. All advertising will be subject to AOL's standard advertising policies and, with respect to advertising placed by AOL on the Integrated - ------------------------- * * * Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 12 Service, such advertising will not include the promotion of personal television services that are competitive to TiVo in any material respect. 8.5 Marketing Materials and On Screen Promotion. ------------------------------------------- AOL will include materials promoting the TiVo Channel in the packaging of the Integrated Product, including without limitation promotional inserts and TiVo Channel user manuals inside such packaging and a promotional presence on the outside of such box and on any appropriate retail signage. AOL will provide all such promotional materials in accordance with Section 3.3(f), which materials will be subject to the reasonable approval of TiVo. 9. Payment and Related Terms. 9.1 Books and Records. ----------------- (a) Maintenance of Records. Each Party shall maintain complete, ---------------------- clear and accurate records of all expenses, revenues, fees, transactions and related documentation (including agreements) in connection with the performance of this Agreement ("Records"). (b) Records on Disputed Amounts. Each Party shall provide the other --------------------------- Party with supporting documentation concerning any disputed invoice within thirty (30) days of receipt of written notice of a dispute. Each Party shall also be entitled to audit the other Party's books and records in accordance with Section 9.1(c) below in order to verify any amounts in dispute. (c) Audit Rights. For the sole purpose of ensuring compliance with ------------ this Agreement, each Party shall have the right to direct an independent certified public accounting firm subject to strict confidentiality restrictions to conduct a reasonable and necessary copying and inspection of portions of the Records of the other Party which are directly related to the amounts payable to TiVo hereunder. Any such audit may be conducted after five (5) business day's prior written notice, subject to the following. Such audits shall not be made more frequently than once every twelve months. Any such audit shall be at the auditing Party's expense, unless an audit discloses that the other Party overcharged or underpaid, as applicable, the auditing Party by at least * * * for the period of the audit, in which case the audited Party shall reimburse the auditing Party for the reasonable costs of the audit. In the event of any dispute or disagreement regarding such payments, either Party may refer the matter to the Management Committee as set forth in Section 16 of Schedule 5 (Management Committee/Arbitration). Notwithstanding the foregoing, neither Party may audit the other Party for the period from sixty (60) days prior to the end of its fiscal year to thirty (30) days following the end of such fiscal year. 9.2 Disputed Amounts. AOL shall not be obligated to make payments ---------------- required hereunder to the extent and for the duration that such payments are in dispute in good faith; provided, however, that in the event of such dispute, AOL shall be required to make payments required hereunder on any undisputed portion of any properly rendered invoice for which payment is due. Each Party shall be deemed to have acknowledged and accepted the validity of any claim if it does not notify the other Party that it disputes such claim and specifies with particularity its reasons therefor within thirty (30) days from the date it receives notice thereof. 10. Customer Support. 10.1 Support Responsibilities. AOL will be responsible for providing ------------------------ * * * customer support to End Users of the Integrated Service. Tier one support includes (i) initial contact with the user to define - ---------------------- * * * Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 13 the problem, if any, and (ii) the provision of answers to any questions about product functionality, to the extent reasonable possible. Tier two support is a higher level of support that reflects a knowledge base of principally all known issues that may arise related to the TiVo Channel and DVR Functionality. AOL will provide a toll-free telephone number to TiVo for referral of End Users having support issues. In addition, TiVo shall provide such training and materials to AOL's customer service and telemarketing representatives as is reasonably required to enable AOL to provide tier one and tier two support of the TiVo Channel, the Robust DVR Functionality and the Basic DVR Functionality, and the Integrated Product. To this end, TiVo agrees to provide AOL sufficient product and service information to reasonably support such training efforts. TiVo shall also provide AOL with * * * at which TiVo's designated technical support personnel responsible for the Integrated Product can be reached by AOL's designated support personnel, * * * to answer AOL's questions with respect to the Integrated Product that could not be handled by AOL's tier one and tier two support contacts. AOL agrees that AOL will only contact TiVo's designated support personnel outside of TiVo's standard customer service hours in the event of a major service interruption or other problem that results in a significant increase in immediate call volume to AOL's call centers. AOL shall provide TiVo with * * * at which technical support personnel responsible for the AOL TV Software and the AOL TV Service can be reached by TiVo * * * for referral of customers with questions with respect to the AOL TV Software and the AOL TV Service. TiVo will provide service engineering support to AOL as it relates to the TiVo Channel, the Robust DVR Functionality and the Basic DVR Functionality, in accordance with Schedule 11. TiVo's obligations to support the Basic DVR Functionality contained in the Integrated Product shall survive the expiration or termination of this Agreement. 10.2 Support Materials. Prior to the first commercial release of the ----------------- Integrated Product, the Parties will mutually agree on customer support information materials so as to clearly indicate the appropriate customer service contact for particular problems and questions related to the integration and user interface of the Integrated Product. 10.3 Liberate Browser Support. As part of * * * * * * will provide for ------------------------ maintaining the port of the Liberate Browser, including upgrades, on the Developed Hardware during the term. During the Term, as between * * * * * * will bear the cost of such maintenance. 11. Term and Termination. 11.1 Term. Subject to the right of extension, as provided below, the ---- term of this Agreement shall commence on the Effective Date and shall terminate on the * * * anniversary of the Effective Date (the "Initial Term"). The Agreement may be extended by mutual agreement of the Parties, except that, if the Subsidy Payments have not exhausted the Earmarked Funds by the end of the Initial Term, AOL may extend the term of the Agreement for successive * * * renewal periods until such time as the Earmarked Funds shall be exhausted. The Initial Term, together with any extensions thereto, shall be referred to herein as the "Term." 11.2 Termination for Material Breach. Either Party may terminate this ------------------------------- Agreement immediately by giving written notice to the other Party for the occurrence of any Material Breach by such other Party. For the purposes of this Agreement, "Material Breach" shall mean a Party's material default in the performance or observance of any material covenant, agreement or condition set forth herein, which default remains uncured for a period of thirty (30) days (or other applicable cure period as may be specified herein) from the date that the other Party provides notice to the defaulting Party of such default, including, without limitation, any of the following: (a) a Party's uncured material breach of any of Sections * * * of the Agreement; or - ---------------------------- * * * Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 14 (b) a Party's uncured material breach of any provision of * * * or (c) * * * 11.3 * * * 11.4 Termination by * * *. * * * may terminate this Agreement immediately upon -------------------- notice to * * * if the Parties fail to mutually agree upon * * * of the Effective Date. 11.5 Termination for Insolvency. Either Party may terminate this Agreement -------------------------- effective immediately upon giving notice to the other Party, (i) upon the institution by or against such other Party of insolvency, receivership or bankruptcy proceedings or any other proceedings for the settlement of its debts and such proceeding is not dismissed within sixty (60) days of its being filed; (ii) upon such other Party making an assignment for the benefit of creditors; or (iii) upon such other Party's dissolution or liquidation. 11.6 Cancellation of * * *. If at any time during the term hereof * * * --------------------- announces the discontinuation of its efforts in providing * * * (including * * * any successor service thereto, and any other * * *, and does discontinue such efforts, * * * may terminate this Agreement * * * upon thirty (30) days' prior written notice. Notwithstanding the foregoing, in the event of such discontinuance, all Earmarked Funds shall be immediately * * *. 11.7 * * * 11.8 Effect of Termination or Expiration. ----------------------------------- (a) If this Agreement is terminated pursuant to Section * * * or Section * * * each Party, at the option of such Party, shall return to the other Party all of such other Party's Confidential Information or destroy all of such other Party's Confidential Information, including all copies of, and notes and compilations related thereto, and shall certify in writing to the other Party that such obligations have been completed. (b) If this Agreement expires or is terminated (i) by * * * pursuant to Section * * * or Section * * *, or (ii) by * * * pursuant to Section * * *, the Parties agree that within thirty (30) days of the date of such termination or expiration of this Agreement, * * * shall discontinue * * * provided that * * * shall retain * * * necessary to * * * (c) If this Agreement is terminated by * * * pursuant to Section * * * Section * * * or Section * * *, the Parties agree that * * * may * * * the * * * in accordance with the terms hereof. (d) Unless this Agreement is terminated pursuant to Section * * * Section * * * or Section * * * (i) the termination of this Agreement shall not affect the right of * * * including without limitation * * * and (ii) accordingly, * * * (e) * * * 11.9 Survival. Notwithstanding the termination, cancellation or expiration of -------- this Agreement for any reason, the provisions of Sections * * * of this Agreement and Sections * * * through * * * and * * * of Schedule * * * shall survive such termination, cancellation or expiration indefinitely and the provisions of Section * * * of this Agreement and Section * * * of Schedule * * * shall survive such termination, cancellation or expiration solely to the extent necessary * * * set forth in Section * * * of this Agreement. - -------------------------- * * * Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 15 12. Standard Terms. The Standard Terms & Conditions set forth on Schedule 5 attached hereto are hereby made a part of this Agreement. [Signatures contained on following page] 16 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized officers and representatives as of the day and year first written above. AMERICA ONLINE, INC. TIVO, INC. By: /s/ David M. Colburn By: /s/ Michael Ramsay ------------------------------- ------------------------------ Name: David M. Colburn Name: Michael Ramsay ----------------------------- ---------------------------- Title: President, Business Affairs Title: Chief Executive Officer and ---------------------------- --------------------------- Chairman of the Board of Directors (Principal Executive Officer) 17 EX-27.1 5 0005.txt FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 95,832 0 2,838 0 0 103,790 17,043 1,976 120,833 31,366 2,376 0 0 38 217,425 120,833 1,143 1,143 0 9,156 49,027 0 182 (53,491) 0 (53,491) 0 0 0 (53,491) ($1.50) ($1.50)
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