<PAGE>
As filed with the Securities and Exchange Commission on February 2, 2000
Registration No. 333-93545
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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NETPLIANCE, INC.
(Exact name of registrant as specified in its charter)
Delaware 73775 77-0463167
_______________________ ___________________ _______________________
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification
organization) Code Number)
7600A North Capital of Texas Highway
Austin, Texas 78731
(512) 493-8300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
James E. Cahill
Vice President and General Counsel
Netpliance, Inc.
7600A North Capital of Texas Highway
Austin, Texas 78731
(512) 493-8300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Ross Clayton Mulford Paul R. Tobias
J. William Wilson Wilson Sonsini Goodrich &
Hughes & Luce, L.L.P. Rosati
111 Congress Avenue, Suite 900 8911 Capital of Texas Highway
Austin, Texas 78701 Austin, Texas 78759
(512) 482-6800 (512) 338-5400
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 145 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Aggregate Amount of
Seurities to be Registeredc Offering Price(1) Registration Fee
- --------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.01 par
value (2) $100,000,000 $26,400
</TABLE>
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(1) Estimated solely for the purposes of computing the amount of registration
fee in accordance with Rule 457(o) under the Securirites Act of 1933, as
amended.
(2) Includes shares of Common Stock, $0.01 par value issuable upon exercise
of the underwriters' overallotment option.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to such Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by US federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- February 2, 2000
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- --------------------------------------------------------------------------------
Prospectus
, 2000
[NETPLIANCE LOGO APPEARS HERE]
Shares of Common Stock
- --------------------------------------------------------------
Netpliance, Inc.: The Offering:
. We are offering
. We are pioneering shares of
a new model for our common stock.
delivering the
Internet
experience to
consumers by
developing service
offerings and
infrastructure
designed to enable
Internet
appliances.
. The underwriters have
an option to purchase
an additional
shares from
us to cover over-
allotments.
. This is our initial
public offering, and
no public market
currently exists for
our shares.
Proposed Symbol &
Market:
. We have applied
for listing on the
Nasdaq National
Market under the
symbol NPLI.
. Closing: , 2000
----------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
-----------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Netpliance:
-----------------------------------------------------------------
</TABLE>
This investment involves risk. See "Risk Factors"
beginning on Page 4.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Chase H&Q
Robertson Stephens
DLJdirect Inc.
<PAGE>
[ARTWORK]
A diagram illustrates the elements of the i-opener network, starting at the
top with a picture of the i-opener Internet appliance on the left and pictures
of a cellular phone and PDA on the right. Two curved lines connect the i-opener
appliance and the circle to a cloud labeled "Internet" with the words "i-opener
Nationwide Service" above it. Below the cloud is a rectangle with pictures of
four computer servers in it. Arrows point to each of four rectangles depicting
the following pages of the i-opener portal: the WebGuide content portal, the e-
mail "Mailbox" page, the Web Mall and a box describing the i-opener network
functions "update, backup, metrics."
Illustration of the i-opener portal homepage with circles representing
buttons that link to "Mail," "Shopping," "Weather," "Finance," "Entertainment,"
"Sports," "News" and "Webguide."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................................................. 1
Risk Factors........................................................ 4
Forward-Looking Statements.......................................... 12
Use of Proceeds..................................................... 13
Dividend Policy..................................................... 13
Capitalization...................................................... 14
Dilution............................................................ 15
Selected Financial Data............................................. 16
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 17
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business.............................................................. 21
Management............................................................ 29
Related-Party Transactions............................................ 37
Principal Stockholders................................................ 39
Description of Capital Stock.......................................... 41
Shares Eligible for Future Sale....................................... 44
Underwriting.......................................................... 46
Legal Matters......................................................... 48
Experts............................................................... 48
Where You Can Find Additional Information............................. 48
Index to Financial Statements......................................... F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the risks discussed
under "Risk Factors."
Netpliance, Inc.
We are pioneering a new model for delivering the Internet experience to
consumers by developing service offerings and infrastructure designed to enable
Internet appliances. In November 1999 we launched our i-opener service, an all-
in-one Internet experience integrating an Internet appliance, access, and
consumer portal. Our approach avoids the technological complexities generally
associated with using personal computers, or PCs, and traditional Web browsers
to access the Internet. We believe our solution provides a simple, seamless and
relevant experience that appeals to both new and existing Internet users.
Our i-opener service consists of the following three integrated elements:
. i-opener Internet Appliance--our i-opener Internet appliance arrives
preconfigured to a new user and ready to access the Internet. A user
simply plugs the i-opener Internet appliance into an electric outlet,
connects a phone line and is ready to enjoy the Internet. The sleek
profile and attractive design of the i-opener Internet appliance makes it
suitable to be placed in high traffic areas of the home such as the
living room or kitchen, enabling our i-opener service to become a
prominent source of current news and information.
. i-opener Access--our i-opener Internet appliance comes prepackaged with
Internet access delivered over a nationwide dial-up network. Future plans
include broadband delivery over digital subscriber lines and cable. Our
network architecture enables us to cache and download content to Internet
appliances connected to our service, providing users instant access to
this content. Additionally, our network allows us to manage the user's i-
opener experience remotely by updating content and delivering upgrades
and new applications to our users automatically, without user
intervention.
. i-opener Consumer Portal--our portal provides an entrance point to the
Internet for our users and links them directly to consumer content and e-
commerce sites tailored to their likely interests and needs based on age
and geographic location. In the future we intend to tailor content to
personal preferences. Our portal provides users access to our instant
channels, e-mail, Web Guide and Web Mall.
Our business plan is to derive the primary portion of our future revenue
from monthly subscriptions to our i-opener service. In the future, we may also
derive revenue from e-commerce, content and advertisements featured on our i-
opener consumer portal, as well as from manufacturers of other Internet
appliances licensing our technology. Our objective is to establish our i-opener
service as the leader in the new market of delivering simplified Internet
services and network hosted applications through Internet appliances. We intend
to consistently upgrade and customize our i-opener portal and add new features
to ensure user satisfaction. Our infrastructure, operating system and network
are designed to support additional devices such as cellular and wireless
telephones and other handheld communication devices. We also believe our
installed base of devices, and our ability to remotely upgrade and deliver data
and software to our user base through our network, will allow us to host new
and emerging Web-based applications and services.
In December 1999 we entered into an agreement with GO.com, an affiliate of
The Walt Disney Company. GO.com has agreed to serve as our content provider for
our children, family, sports, news and entertainment related categories for the
cached instant channels on our i-opener portal. Also in December 1999, we
entered into a non-binding letter of intent with U S WEST regarding joint
sales, marketing and distribution of our i-opener service through dial-up and
digital subscriber line Internet access. Affiliates of each of U S WEST and
GO.com invested in our Series D preferred stock.
We were incorporated in Texas in January 1999, and we began offering our i-
opener service in November 1999. We have virtually no operating history and
have not proven our ability to generate revenues. As of December 31, 1999, we
had an accumulated deficit of $23.5 million and only $25,716 in revenues from
inception through December 31, 1999. We will be reincorporated in Delaware
prior to the closing of this offering. Our principal executive offices are
located at 7600A North Capital of Texas Highway, Austin, Texas 78731 and our
telephone number is (512) 493-8300. Our Web site address is www.netpliance.com.
Information contained on our Web site should not be considered a part of this
prospectus.
1
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered.............................. shares
Common stock to be outstanding after the offering. shares
Use of proceeds................................... We plan to use the
proceeds from this
offering for working
capital, general corporate
purposes and other
operating expenses,
including sales and
marketing, subsidies for
the purchase price of our
i-opener Internet
appliance and further
development of our
services. See "Use of
Proceeds."
Nasdaq National Market symbol..................... NPLI
</TABLE>
The number of shares of common stock to be outstanding after the offering is
based on:
.6,302,357 shares of common stock outstanding as of February 1, 2000;
. 9,849,810 shares of common stock issuable upon conversion of our
preferred stock outstanding as of February 1, 2000; and
. 155,678 shares of common stock that we expect to issue upon the
exercise of warrants that will expire upon the closing of this
offering.
The above number excludes:
. 1,779,394 shares of common stock issuable upon exercise of
outstanding options under our stock option plan as of February 1,
2000 at a weighted average exercise price of $5.29 per share;
. 720,606 shares reserved for future issuance under our stock option
plan as of February 1, 2000; and
. 200,000 shares of common stock issuable upon the exercise of an
outstanding common stock purchase warrant that does not expire upon
the closing of this offering.
See "Capitalization."
Generally, unless otherwise indicated, all information in this prospectus:
. assumes a for stock split;
. gives effect to the conversion of all preferred stock into common
stock and the exercise of warrants to purchase 155,678 shares of
common stock;
. gives effect to our reincorporation into Delaware prior to the
closing of this offering; and
. assumes no exercise of the underwriters' over-allotment option.
We have applied to register the trademarks Netpliance(TM) and i-opener(TM).
Every other trademark, trade name or service mark appearing in this prospectus
belongs to its owner.
2
<PAGE>
Summary Historical and Pro Forma Financial Information
(In thousands, except per share data)
The following table summarizes our historical financial information. This
table does not present all of our financial information. You should read this
information together with our financial statements and the notes to those
statements beginning on page F-1 of this prospectus, and the information under
"Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
From January 12, 1999
(inception) through
December 31, 1999
<S> <C>
Statement of Operations Data:
Subscription revenue...................................... $ 26
Operating expenses........................................ 23,733
----------
Loss from operations...................................... (23,707)
Other income, net....................................... 165
----------
Net loss.................................................. $ (23,542)
==========
Weighted average common shares outstanding................ 5,196,140
Loss per common share--basic and diluted.................. $ (4.53)
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1999
---------------------------
Pro Pro Forma
Actual Forma As Adjusted
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................... $ 9,563 $36,664
Working capital..................................... 11,170 38,271
Total assets........................................ 20,543 47,624
Non-current portion of capital lease obligations.... 636 636
Total stockholders' equity.......................... 15,015 42,116
</TABLE>
The table above summarizes our balance sheet data:
. on an actual basis as of December 31, 1999;
. on a pro forma basis to reflect the conversion of all shares of
preferred stock outstanding as of December 31, 1999 into common
stock, issuance and conversion into common stock of 1,430,000 shares
of Series D preferred stock and the issuance and exercise of warrants
to purchase 155,678 shares of common stock; and
. on a pro forma as adjusted basis to reflect the pro forma
transactions described above and the sale of shares of
common stock offered by this prospectus at an initial offering price
of $ per share after deducting estimated underwriting
discounts and commissions and estimated offering expenses.
3
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider carefully the following risks and the other information in this
prospectus before investing in our common stock. Each of the following risks
could seriously harm our business and results of operations. The trading price
of our common stock could decline due to any of these risks, and you may lose
all or part of your investment.
Risks Related to Our Business
We cannot predict our future results because we have virtually no operating
history.
We were incorporated in January 1999, and we began offering our i-opener
service in November 1999. Given our limited operating history, it will be
difficult for you to evaluate our performance. You should consider the
uncertainties that we may encounter as an early stage company in a new and
rapidly evolving market. These uncertainties include:
.market acceptance of Internet appliances;
.consumer demand for, and acceptance of, our i-opener service;
.our ability to create user-friendly applications and a portal that appeals
to consumers;
. our ability to contract with content providers who will furnish useful
and entertaining information to our users;
.our ability to support a large number of users;
.our ability to anticipate and adapt to a developing market and to rapidly
changing technologies;
.our unproven and evolving business model; and
. our need to expand significantly our internal resources to support growth
of our product and service offerings.
If we are not able to address successfully some or all of these
uncertainties, we may not be able to expand our business, compete effectively
or achieve profitability.
Our ability to generate revenues is unproven and we may never achieve
profitability.
We expect to generate revenues from user fees for our i-opener service and
from other sources such as application services, e-commerce, sponsorships and
advertising. Many of our potential customers have never purchased Internet
service for personal use, used the Internet and e-mail or engaged in e-commerce
transactions. We must convince these potential users to sign up for our service
and continue to pay a user fee for our i-opener service. Other potential users
already pay a monthly fee for Internet access and/or e-mail service, and we
must convince these consumers to pay our user fee in addition to their existing
fee or to switch from their existing service to our service. In addition,
certain online service providers in the Internet industry offer Internet access
at little or no cost to the user, which may cause us to lose existing and
potential users. Our inability to convince potential users to pay fees for a
significant period of time would prevent us from achieving profitability.
We currently price our i-opener Internet appliance below our cost and expect
to continue to subsidize the purchase price of our appliance for the
foreseeable future. At current pricing levels, a new customer must pay monthly
fees for our service for a significant period of time before we recover the
purchase price subsidy on that customer's appliance. Any reduction in user fee
levels due to competitive or other factors could increase significantly the
period of time necessary to recoup our purchase price subsidy. Due to our
pricing structure and the short period of time we have been offering our i-
opener service, we have experienced significant operating losses to date. If we
are unable to achieve sufficient revenues from user fees and other sources to
cover the subsidies of appliance purchases, we may never become profitable and
our business model could fail.
4
<PAGE>
We are not profitable and expect to incur future losses and negative cash flow
that could cause our stock price to fall.
As of December 31, 1999 we had an accumulated deficit of $23.5 million. We
expect to continue to spend significant and increasing amounts to subsidize the
purchase price of our i-opener Internet appliance. We also expect that sales
and marketing, research and development, and general and administrative
expenses will increase significantly. From inception through December 31, 1999,
we generated only $25,716 in revenues. We will need to generate and sustain
dramatically greater revenues from sales of our services if we are to achieve
profitability. If we are unable to achieve dramatically greater revenues, our
losses will likely continue indefinitely and we may never generate profits. If
this occurs, the market price of our common stock could suffer.
Our market share and revenues will suffer if we are not able to compete
successfully for users.
The markets for Internet appliances, consumer portals and Internet access
service are intensely competitive, evolving and subject to rapid technological
change. These markets are characterized by an increasing number of entrants. We
compete for users, and consequently for potential e-commerce and advertising
revenue, directly or indirectly, with the following categories of companies:
. online service providers, such as AOL, EarthLink and Microsoft;
. software platform providers such as Aether Systems and Liberate
Technologies;
. Internet portals, such as Excite@Home, Lycos and Yahoo!;
. manufacturers of other stand alone Internet appliances, such as InfoGear
and WebTV;
. manufacturers of portable Internet appliances, such as Hewlett Packard
and Palm, and cellular telephone and pager manufacturers; and
. manufacturers of personal computers, such as Apple, Compaq, Dell,
Gateway, Hewlett Packard and IBM.
Virtually all of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a substantially larger
installed base of customers than we do. In addition, many of our competitors
have nationally known brands and have extensive knowledge of our industry.
Moreover, our current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address consumer needs or to combine
hardware product and service offerings. We expect the intensity of competition
in this market to increase in the future. Increased competition is likely to
result in price reductions, reduced or negative margins and difficulty in
gaining market share. Any of these effects could seriously harm our business.
We rely on a single third-party to manufacture our Internet appliance. If the
manufacturer fails to deliver our products in a reliable, timely and cost-
efficient manner, our business will suffer.
We depend on our relationship with Quanta Computer, Incorporated, a
manufacturer based in Taiwan, for the production and delivery of our i-opener
Internet appliance. Since we do not have direct control over Quanta's
workmanship and the quality of its service, we cannot assure you that we will
be able to provide consistently reliable products for our users. If Quanta does
not produce our products on a timely basis or delivers products of unacceptable
quality, that do not meet specifications or are otherwise flawed, we may have
to delay product delivery, recall or replace unacceptable products. As a
result, we could lose existing and potential users.
If Quanta is unable to manufacture our i-opener Internet appliance due to
natural disasters, political turmoil or other reasons, or if Quanta refuses to
provide its manufacturing services on a timely basis and on
5
<PAGE>
commercially acceptable price terms and alternative providers of these services
are not available on acceptable terms, our operating expenses could increase
significantly, reducing the likelihood of our becoming profitable.
If our brand does not achieve the broad recognition necessary to expand and
maintain our user base, our revenues may not grow and our financial performance
may suffer.
We believe that broad recognition and a favorable consumer perception of our
products and services is essential to our future success. Our success in
promoting and maintaining our brand, or any other brand that we may use in the
future, will depend largely on:
. the success of our brand-enhancement strategy, including mass marketing
and multi-media advertising, promotional programs and public relations
activities;
. the quality and ease-of-use of our services and applications; and
. our success in providing high-quality content accessible from our
Internet portal.
If we are unsuccessful in establishing or maintaining a favorable image of
our products and services, we may not be able to expand our user base. In
addition, in order to attract and retain users and to promote and maintain our
brand or future brands, we expect to increase substantially our marketing
expenditures. If we incur expenses in promoting and maintaining our brands
without a corresponding increase in revenue and income, our financial results
could be seriously harmed.
If we are unsuccessful in obtaining compelling content, or in developing or
maintaining relationships with content providers, we may be unable to attract
and retain users.
We rely on third parties to provide our cached content, including news,
weather and relevant local information, on our i-opener portal. In addition,
some content provided via links to third-party sites is provided without the
contractual agreement of the third party. Our inability to establish or
maintain any or all of the relationships with our content providers could put
our delivery of quality services in jeopardy. The inability to obtain any of
this content could result in delays in the development or delivery of our
services and the loss of existing or potential users. Alternatively, contracts
or exclusive arrangements with content providers could result in diminished
demand for our service, if the content is not appealing to users, inferior in
quality or less desirable than content available from other portals or content
providers.
We will not be able to support increased numbers of users if our network
infrastructure is unable to expand to accommodate increased usage.
If our network systems cannot be expanded to manage increased demand, or if
our systems fail to perform, we could experience:
.unanticipated disruptions and reduced quality of service;
.decreased user service and satisfaction; or
.delays in the introduction of new applications and services.
Any of these results could impair our reputation, damage our brand and result
in decreased revenues.
If the number of users of our service increases substantially, we will need
to expand significantly and upgrade our technology, transaction processing
systems and network infrastructure. We do not know whether we will be able to
project accurately the rate or timing of any such increases in usage, or expand
and upgrade our systems and infrastructure to accommodate such increases in a
timely manner. In the event we do not have the required systems and
infrastructure to accommodate increased usage of our services, we will have to
contract for additional capacity. We cannot assure you that we will be able to
contract for additional capacity on terms acceptable to us, if at all.
6
<PAGE>
Our systems may fail and consequently our business may suffer.
Our ability to facilitate transactions successfully and provide high-quality
customer service also depends on the efficient and uninterrupted operation of
our computer and communications hardware systems. Our systems and operations
also are vulnerable to damage or interruption from human error, natural
disasters, power loss, telecommunication failures, break-ins, sabotage,
computer viruses, intentional acts of vandalism and similar events. While we
currently maintain redundant servers to provide limited service during system
disruptions, we do not have fully redundant systems, a formal disaster recovery
plan or alternative providers of hosting services. In addition, we do not carry
any business interruption insurance to compensate us for any losses that may
occur. Any system failure that causes an interruption in service or decreases
the responsiveness of our services could impair our reputation, damage our
brand name and consequently reduce our revenues.
We are dependent upon our telecommunications carrier to provide Internet access
to our users; if they fail to provide quality service, we may be unable to
retain users.
Since we do not have direct control over the reliability of our carrier's
network or the quality of its service, we cannot assure you that we will be
able to provide consistently reliable Internet access for our users. If the
quality of service provided by our telecommunications carrier does not meet our
clients' expectations, we may lose users because of dissatisfaction with our
service.
We will not be able to expand our business if we fail to attract and retain key
personnel.
Our future success depends on our continuing ability to attract, hire, train
and retain a substantial number of highly skilled personnel and on the
continued service and performance of our senior management and other key
personnel, especially our Chief Executive Officer and Chairman of the Board.
The loss of the services of our executive officers or other key employees could
adversely affect our business. In addition, we will need to add a significant
number of new technical support and operations personnel to develop and
maintain the operations of our services. In particular we need to hire and
retain a Chief Financial Officer. Our facilities are located in Austin, Texas,
which has a high demand for technical and other personnel and a relatively low
unemployment rate. Competition for qualified personnel in this area is intense,
and we may fail to attract or retain the employees necessary to execute our
business model successfully.
Rapid technological change could render our products and services obsolete.
The Internet and the e-commerce industries are characterized by rapid
technological innovation, sudden changes in user and customer requirements and
preferences, frequent new product and service introductions and the emergence
of new industry standards and practices. Each of these characteristics could
render our services, products, intellectual property and systems obsolete. The
rapid evolution of our market will require that we improve continually the
performance, features and reliability of our products and services,
particularly in response to competitive offerings. Our success also will
depend, in part, on our ability:
. to develop or license new products, services and technology that address
the varied needs of our customers and prospective customers; and
. to respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
If we are unable, for technical, financial, legal or other reasons, to adapt
in a timely manner to changing market conditions or user preferences, we could
lose users, which would cause a decrease in our revenue.
We may be unable to obtain the additional capital required to grow our
business, which could seriously harm our business. If we raise additional
funds, you may suffer substantial dilution.
We expect that the net proceeds from this offering and cash on hand will
meet our working capital and capital expenditure needs for at least the next 12
months. After that time, we may need to raise additional funds, and we cannot
be certain that we will be able to obtain additional financing on favorable
terms, if at all.
7
<PAGE>
Our future capital requirements will depend upon several factors, including the
rate of market acceptance of our products and services, our ability to expand
our user base, our level of expenditures for sales and marketing and the cost
of product and service upgrades. If our capital requirements vary materially
from those currently planned, we may require additional financing sooner than
anticipated. If we cannot raise funds on acceptable terms, we may not be able
to develop our products and services, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, any of which
could have a material adverse effect on our ability to grow our business.
Further, if we issue equity securities, you will experience dilution of your
ownership percentage, and the new equity securities may have rights,
preferences or privileges senior to those of our common stock.
We may not be able to compete effectively if we are not able to protect our
intellectual property.
We rely on a combination of trademark, trade secret and copyright law and
contractual restrictions to protect our intellectual property. We have applied
to register several trademarks, including Netpliance and i-opener, in the
United States. We have not yet attempted to register other marks that may
become important to us in the future, and none of our marks has been registered
in any other country. We have several United States patent applications
currently pending. If we are not successful in obtaining the patent protection
we seek, our competitors may be able to replicate our technology and compete
more effectively against us. The legal protections described above would afford
only limited protection. Unauthorized parties may attempt to copy aspects of
our products, services, or otherwise attempt to obtain and use our intellectual
property. Enforcement of trademark rights against unauthorized use,
particularly over the Internet and in other countries, may be impractical or
impossible and could generate confusion and diminish the value of those rights.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets and to determine the validity and scope of the
proprietary rights of others. Any litigation could result in substantial costs
and diversion of our resources and could seriously harm our business and
operating results. In addition, our inability to protect our intellectual
property may harm our business and financial prospects. Also, if we cannot
protect our domain names and prevent others from using similar domain names or
trademarks, we may not be able to establish a strong brand and our business and
financial results could suffer.
Our products and services employ technology that may infringe on the
proprietary rights of others, and we may be liable to others for significant
damages.
We believe there is an increasing amount of litigation in the Internet
industry regarding intellectual property rights. It is possible that third
parties may in the future claim that we or our products or services infringe
upon their intellectual property rights. We expect that developers and
providers of Internet appliances and similar devices, and providers of Internet
access and content services, will be subject to an increasing number of
infringement claims as the number of products, services and competitors in our
market grows. Any claim, with or without merit, could consume management time,
result in costly litigation, cause delays in implementation of our products or
services or require us to enter into royalty or licensing agreements. Royalty
or licensing agreements, if required and available, may be on terms
unacceptable to us or detrimental to our business. Moreover, a successful claim
of product infringement against us or our failure or inability to license the
infringed or similar technology on commercially reasonable terms could
seriously harm our business.
We may incur potential product liability for our i-opener Internet appliance
and for products sold over the Internet.
To date, we have had limited experience in selling our i-opener Internet
appliance. In addition, we have had limited experience in selling products over
the Internet and developing relationships with manufacturers or suppliers of
those products. We plan to enter into relationships with manufacturers or
suppliers to offer their products directly through our Internet service. Such a
strategy involves numerous risks and uncertainties. Although our agreements
with manufacturers and suppliers may sometimes contain provisions intended to
limit our exposure to liability claims, these limitations may not prevent our
exposure to all potential claims. Liability claims could require us to spend
significant time and money in litigation or to pay significant damages. As a
result, any such claims, whether or not successful, could seriously damage our
reputation and our business.
8
<PAGE>
Risks Related to Our Industry
The market for Internet appliances is new and may not develop as we anticipate.
Because the Internet appliance market is new and evolving, the potential
size of this market opportunity and the timing of its development are
uncertain. Broad acceptance of Internet appliances will depend on many factors.
These factors include:
. the willingness of large numbers of consumers to use devices other than
personal computers to access the Internet; and
. the development of content and applications that are accessible from
Internet appliances.
If the market for Internet appliances does not develop or develops more
slowly than we anticipate, our revenues will not grow as quickly as we
anticipate, if at all.
If Internet use does not continue to increase, we may not be able to expand our
business and increase our revenues.
Use of the Internet has grown dramatically, but we cannot assure you that
Internet use will continue to grow at the same rate, or at all. Substantially
all of our revenue is dependent on the continued growth in use of the Internet.
A decrease in the demand for Internet services or a reduction in the
anticipated growth for such services may prevent us from expanding our business
and increasing our revenue.
We could face liability for content retrieved through our Internet portal.
As a distributor of Internet content, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based upon the nature and content of the materials that we distribute.
Although we carry general liability insurance, our insurance may not cover
claims of this type or may not be adequate to indemnify us for all liability
that we may suffer. Any of these claims, particularly those resulting in
liability that is not covered by insurance or is in excess of insurance
coverage, could occupy significant amounts of our management's time and
attention, harm our reputation and negatively affect our business.
We could be exposed to liability or increased costs if new case law is decided,
or new government regulation is enacted, regarding the Internet.
The law relating to our business and operations is evolving and no clear
legal precedents have been established. The adoption of any new Internet laws
and regulations or the application of existing laws and regulations to the
Internet and e-commerce may decrease the growth in the use of the Internet. For
example, tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in e-commerce, and new state tax
regulations may subject us to additional state sales or other taxes. These
results could decrease the demand for our products and services or increase the
cost of doing business, either of which would reduce our revenue or
profitability.
In addition, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
If we were alleged to have violated federal, state or foreign civil or criminal
law, even if we could successfully defend such claims, it could occupy
significant amounts of management's time, harm our business reputation and
negatively affect our operating results and financial condition.
Concerns regarding the security of transmission of confidential information
over the Internet may reduce consumer confidence in our product and service
offerings and negatively impact our business.
The secure transmission of confidential information over the Internet is
essential to maintaining user confidence in our Internet service. Substantial
or ongoing security breaches on our system or other Internet-
9
<PAGE>
based systems could significantly damage user confidence and harm our business.
A party that is able to circumvent our security systems could steal proprietary
information or cause interruptions in our operations. Security breaches also
could damage our reputation and expose us to a risk of loss or litigation and
possible liability. Our insurance policies carry low coverage limits, which may
not be adequate to reimburse us for losses caused by security breaches. While
we attempt to protect against and remedy security breaches, we cannot guarantee
that our security measures will prevent security breaches. We also face risks
associated with security breaches affecting third parties conducting business
over the Internet. Any publicized security problems relating to third parties
could heighten concern regarding security and privacy on the Internet, inhibit
the growth of the Internet and, therefore, our Internet service as a means of
conducting commercial transactions.
Risks Related to this Offering
You may not be able to sell your stock for the same price or a price higher
than you paid when you want to sell it if a public market does not exist for
our stock.
An active public market for our common stock may not develop or be sustained
after this offering. The market price for our common stock will vary from the
initial offering price. The market price of our common stock may fluctuate
significantly in response to a number of factors, some of which are beyond our
control, including:
.variations in quarterly operating results;
.changes in estimates of our financial performance by securities analysts;
.changes in market valuations of comparable Internet-related companies;
. announcements by us or our competitors of new products, services,
significant contracts, acquisitions, strategic relationships, joint
ventures or capital commitments;
. our inability to locate or maintain suppliers of our manufactured
products at prices that will allow us to attain profitability;
.product or design flaws, product recalls or similar occurrences;
.loss of a major content provider;
. network outages;
.loss of our telecommunications provider;
.additions or departures of key personnel;
.sales of common stock in the future; and
. fluctuations in stock market prices and volume, which are particularly
common among highly volatile Internet-related securities.
We will determine the initial public offering price of the shares of our
common stock through negotiations with the underwriters, and this price may not
be indicative of the price that will prevail in the trading market.
Future sales by current stockholders may depress our stock price.
The market price of our common stock could decline as a result of sales of a
large number of shares in the market after this offering or the perception that
such sales could occur. These factors also could make it more difficult for us
to raise funds through future offerings of common stock.
There will be shares of common stock outstanding immediately
after this offering. The shares sold in this offering will
immediately be transferable without restriction in the public
10
<PAGE>
market, unless these shares are held by affiliates. shares will become
eligible for sale 90 days after the date of this prospectus. Also, an
additional shares will become eligible for sale within 180 days
after the date of this prospectus. The holders of the remaining
shares are subject to agreements with the underwriters or us that restrict
their ability to transfer their stock for 180 days after the date of this
prospectus without consent of the underwriters or us. After these agreements
expire, of those shares will be eligible for immediate sale in the
public market subject to restrictions pursuant to Rule 144. See "Shares
Eligible for Future Sale."
Our stockholders could be adversely affected if our management and larger
stockholders use their influence in a manner adverse to our stockholders'
interests.
On completion of this offering, our executive officers, directors and 5%
stockholders will beneficially own, in the aggregate, approximately % of our
outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent someone from acquiring or merging
with us. These stockholders may use their influence to approve or take actions
which are adverse to your interests. See "Principal Stockholders."
You will experience immediate and substantial dilution.
The initial public offering price is expected to be substantially higher
than the book value per share of the outstanding common stock immediately after
the offering. Accordingly, if you purchase common stock in the offering, you
will incur immediate dilution in the book value per share of the common stock
from the price you pay for the common stock. This dilution will be
approximately $ per share, at the initial public offering price of $ .
In addition, we have issued options to acquire common stock at prices
significantly below the assumed initial public offering price. To the extent
outstanding options are ultimately exercised, there will be further dilution to
investors. For a discussion regarding dilution in this offering, see
"Dilution."
If our management does not effectively use the proceeds from this offering, we
may not be able to successfully operate and grow our business.
The net proceeds of this offering will be available for working capital,
general corporate purposes and other operating expenses. We believe we need to
retain flexibility to respond to factors affecting our business in determining
the amount, if any, of these expenditures among our several priorities.
Accordingly, our management will retain broad discretion as to the allocation
of the proceeds of this offering and may use such proceeds in a manner with
which you may not agree. See "Use of Proceeds."
Provisions in our charter documents and Delaware law may deter takeover efforts
that could be beneficial to stockholder value.
Upon the closing of this offering, certain provisions of our certificate of
incorporation and bylaws, and the anti-takeover statute in Delaware law, may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. See "Description of Capital Stock-- Delaware Anti-Takeover
Statute and Charter and Bylaw Provisions" for a description of these provisions
and their effects.
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<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, without limitation, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipate," "believe," "estimate" and similar expressions are generally
intended to identify forward-looking statements. Because these forward-looking
statements involve risks and uncertainties, there are important factors that
could cause actual results to differ materially from those expressed or implied
by these forward-looking statements, including our plans, objectives,
expectations and intentions and other factors discussed under "Risk Factors."
12
<PAGE>
USE OF PROCEEDS
We expect to receive net proceeds of approximately $ million from the
sale of shares of our common stock in this offering, at an assumed
initial public offering price of $ per share. We will receive an
additional $ million from the sale of shares if the
underwriters' over-allotment option is exercised in full.
We plan to use the net proceeds of this offering for working capital,
general corporate purposes and other operating expenses including:
.sales and marketing;
.subsidies for the purchase price of our i-opener Internet appliance; and
.further development of our services.
The amounts and timing of these expenditures will vary depending on a number
of factors, including competitive and technological developments and the rate
of growth, if any, of our business.
We will retain broad discretion in the allocation of net proceeds of this
offering. Pending the uses described above, we will invest the net proceeds in
short-term, interest bearing, investment-grade securities, certificates of
deposit or direct or guaranteed U.S. government obligations, such as Treasury
bills.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business and do not anticipate paying any cash dividends in the
foreseeable future.
13
<PAGE>
CAPITALIZATION
The table below sets forth our capitalization:
.on an actual basis as of December 31, 1999;
. on a pro forma basis to reflect the conversion of all shares of preferred
stock outstanding as of December 31, 1999 into common stock, issuance and
conversion into common stock of 1,430,000 shares of Series D preferred
stock and the issuance and exercise of warrants to purchase 155,678
shares of common stock; and
. on a pro forma as adjusted basis to reflect the pro forma transactions
described above and the sale of shares of common stock offered
by this prospectus at an initial offering price of $ per share after
deducting estimated underwriting discounts and commissions and estimated
offering expenses.
The capitalization information is qualified by, and you should read it in
conjunction with, "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the more
detailed financial statements and related notes and the information appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
(In thousands, except share
data)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 9,563 $ 36,664 $
======== ======== =======
Noncurrent portion of capital lease
obligations................................... $ 636 $ 636 $
Stockholders' equity:
Preferred stock, par value $0.01; 5,000,000
shares authorized; 841,981 shares issued and
outstanding actual; no shares issued and
outstanding pro forma; and no shares issued
and outstanding pro forma as adjusted....... 29,672 -- --
Deposit received on Series D preferred stock
issuance.................................... 2,000 -- --
Common stock, par value $0.01; 250,000,000
shares authorized, 6,302,357 shares issued
and outstanding actual; 16,307,845 shares
issued and outstanding pro forma; and
shares issued and outstanding pro
forma as adjusted .......................... 63 163
Additional paid-in capital................... 9,305 67,978
Deferred stock option compensation........... (1,662) (1,662)
Notes receivable from stockholders........... (821) (821)
Accumulated deficit.......................... (23,542) (23,542)
-------- -------- -------
Total stockholders' equity................... 15,015 42,116
-------- -------- -------
Total capitalization........................... $ 15,651 $ 42,752 $
======== ======== =======
</TABLE>
Outstanding shares in this table excludes:
. 1,779,394 shares of common stock issuable upon the exercise of stock
options outstanding as of February 1, 2000 under our stock option plan at
a weighted average exercise price of $5.29 per share;
. 720,606 shares of common stock available for issuance as of February 1,
2000 under our stock option plan; and
. 200,000 shares of common stock issuable upon exercise of an outstanding
common stock purchase warrant that does not expire upon the closing of
this offering.
14
<PAGE>
DILUTION
Our pro forma net tangible book value of our common stock on December 31,
1999, giving effect to the conversion of all shares of preferred stock
outstanding as of December 31, 1999 into common stock and the exercise of
warrants to purchase 81,878 shares of common stock outstanding as of
December 31, 1999, was approximately $15.4 million, or approximately $1.04 per
share. Pro forma net tangible book value per share represents our total
tangible assets less total liabilities, divided by the pro forma number of
shares of our common stock outstanding of 14,804,045, after giving effect to
the conversion of the preferred stock outstanding as of December 31, 1999 into
common stock and the exercise of warrants to purchase 81,878 shares of common
stock outstanding as of December 31, 1999. After giving effect to the issuance
and conversion into common stock of 1,430,000 shares of Series D preferred
stock and the issuance and exercise of warrants to purchase 73,800 shares of
common stock after December 31, 1999, the pro forma net tangible book value of
Netpliance as of December 31, 1999 would have been $44.0 million or $2.70 per
share.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
our common stock immediately afterwards. Assuming our sale of shares
of common stock offered by this prospectus at an assumed initial public
offering price of $ per share, and after deducting estimated underwriting
discounts and commissions and estimated offering expenses, our pro forma net
tangible book value at December 31, 1999 would have been approximately $
million,or approximately $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to, existing
stockholders and an immediate dilution in pro forma net tangible book value of
$ to existing stockholders and an immediate dilution in pro forma net
tangible book value of $ to the investors purchasing shares of common stock
in this offering. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
Pro forma net tangible book value per share as of December 31,
1999......................................................... $ 1.04
Increase per share attributable to new investors..............
------
Adjusted pro forma net tangible book value per share after this
offering....................................................... $
-------
Dilution in pro forma net tangible book value per share to
investors purchasing in this offering.......................... $
=======
</TABLE>
The following table sets forth, as of December 31, 1999, the differences
between existing stockholders and the new investors with respect to the number
of shares of common stock purchased from us, the total consideration paid and
the average price per share paid. We have assumed an initial public offering
price of $ per share, and we have not deducted estimated underwriting
discounts and commissions and estimated offering expenses in our calculations.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 16,152,167 % $65,537,372 % $ 4.06
Existing warrant holders.. 155,678 1,997,268 12.83
Purchasers in this
offering.................
---------- --- ----------- --- ------
Total................... 100% $ 100% $
========== === =========== === ======
</TABLE>
The foregoing discussion and tables assume no exercise of any outstanding
stock options. To the extent that any shares reserved for issuance under our
stock plan are issued, there will be further dilution to new investors. See
"Capitalization" and "Management--1999 Stock Option Plan."
15
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except share data)
The following selected financial data should be read in conjunction with our
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus. The statement of operations data below for the period from
January 12, 1999 (inception) to December 31, 1999, and the balance sheet data
as of December 31, 1999, are derived from and are qualified by reference to the
audited financial statements included elsewhere in this prospectus. Our
historical results are not necessarily indicative of results to be expected for
future periods.
<TABLE>
<CAPTION>
Period from
January 12, 1999
(Inception) to
December 31, 1999
<S> <C>
Statement of Operations Data:
Subscription revenue........................................ $ 26
-----------
Operating expenses:
Cost of services............................................ 1,137
Research and development.................................... 6,457
Sales and marketing......................................... 12,515
General and administrative.................................. 3,624
-----------
Total operating expenses................................... 23,733
-----------
Loss from operations........................................ (23,707)
Interest income............................................. 305
Interest expense............................................ (140)
-----------
Net loss.................................................... $ (23,542)
===========
Loss per common share:
Weighted average common shares outstanding(1)............... 5,196,140
Basic and diluted(1)........................................ $ (4.53)
Unaudited pro forma loss per common share:
Weighted average shares(1) outstanding...................... 10,393,766
Basic and diluted(1)........................................ $ (2.27)
<CAPTION>
As of
December 31, 1999
<S> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $ 9,563
Working capital............................................. 11,170
Total assets................................................ 20,543
Non-current portion of capital lease obligations............ 636
Total stockholders' equity.................................. 15,015
</TABLE>
- ---------------------
(1) See Note 3 to the Financial Statements for an explanation of the
determination of the weighted average shares used to compute basic and
diluted net loss per share and unaudited pro forma basic and diluted net
loss per share.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and operations should be
read in conjunction with the consolidated financial statements and the related
notes included elsewhere in this prospectus. This discussion contains forward-
looking statements that involve risks and uncertainties. Our actual results may
differ materially from those anticipated in these forward-looking statements as
a result of many factors, including but not limited to, those described under
"Risk Factors" and elsewhere in this prospectus.
Overview
We are pioneering a new model for delivering the Internet experience to
consumers by developing service offerings and infrastructure designed to enable
Internet appliances. In November 1999, we launched our i-opener service, an
all-in-one Internet experience that integrates an Internet appliance, access
and a portal. By seamlessly combining these elements over our network platform,
we deliver the Internet, software applications and relevant content directly to
our users.
We have a limited operating history and have generated only $25,716 in
revenues from inception through December 31, 1999. We expect to incur
significant operating expenses over the next several years in connection with
the continued development and expansion of our business. In particular, we
expect our sales and marketing expenses to increase as we continue to establish
our brand. In addition, we subsidize the purchase price of our i-opener
Internet appliance. As our user base increases, we anticipate a corresponding
increase in total expenditures for these subsidies. We have experienced
operating losses since inception as a result of efforts to develop and market
our i-opener service. We expect that we will continue to incur net losses as we
continue to expend significant resources on sales and marketing and develop
additional products and service offerings. As of December 31, 1999, we had an
accumulated deficit of $23.5 million.
We currently generate revenues from monthly user fees for our i-opener
service. We charge our users $21.95 per month for our standard service. We also
offer a limited-access service plan for $9.95 per month and a service plan to
access the Internet through a traditional PC combined with our standard service
at $26.95 per month. We expect that most of our fees will come from our
standard service. We offer the i-opener Internet appliance at a price below our
cost, as an incentive for new customers to subscribe to the i-opener service.
The cost of the i-opener Internet appliance and accessories, net of sales
proceeds, is classified in sales and marketing expenses at the time of sale, as
the loss represents customer acquisition costs.
In the future we may generate revenue from sources in addition to user fees,
such as:
. application services;
.e-commerce;
.sponsorships and advertising; and
.licensing arrangements with other appliance manufacturers.
To date, we have funded our activities primarily through private equity
offerings, which have included sales of our common stock and preferred stock.
Results of Operations
Period ended December 31, 1999
Subscription revenues. Subscription revenues consist primarily of monthly
subscription fees paid by businesses and consumers for our i-opener service.
Subscription revenues totaled $25,716 for the period ended December 31, 1999.
This revenue is attributable to customers who used our i-opener service
primarily during the month of December. As of December 31, 1999, we had
approximately 3,700 subscribers.
17
<PAGE>
Cost of services. Cost of services consists primarily of employee salaries
and expenses related to providing the i-opener service to subscribers, content
and telecommunications network charges paid to third parties and depreciation
on equipment used to provide the i-opener service. Cost of services totaled
$1.1 million for the period ended December 31, 1999.
Research and development expenses. Our research and development expenses
consist primarily of employee salaries and related expenses and consulting fees
relating to the design of the i-opener service, as well as the development of
our technology to manage and deliver content and applications to various
Internet appliances. Research and development expenses were approximately $6.5
million for the period ended December 31, 1999.
Sales and marketing expenses. Sales and marketing expenses consist primarily
of employee salaries for marketing and business development sales personnel,
and costs of our marketing efforts to generate demand and consumer awareness of
our i-opener service. These costs include development of media advertising,
public relations events, promotions and trade shows. Also included in sales and
marketing expenses is $0.9 million related to the grant to U S WEST of an
immediately exercisable warrant to purchase 200,000 shares of common stock at
an exercise price of $20.00 per share. The expense represents the estimated
fair value of the warrant on the date of grant.
Sales and marketing expenses also include losses realized on the sale of the
i-opener Internet appliances and related accessories totaling $1.57 million. We
include this loss in sales and marketing expenses, as the loss primarily
represents customer acquisition costs. Sales and marketing expenses were
approximately $12.5 million for the period ended December 31, 1999.
General and administrative expenses. General and administrative expenses
consist primarily of employee salaries and related expenses for the executive,
administrative, finance and information systems departments, and facility
costs, professional fees and recruiting. General and administrative expenses
were approximately $3.6 million for the period ended December 31, 1999.
Included in general and administrative expenses for the period ended December
31, 1999 is $34,267 of stock compensation expense related to stock options
granted during the period with exercise prices that were less than the
estimated fair value of the underlying shares of common stock on the date of
grant. Additional deferred stock compensation totaled approximately $1.7
million as of December 31, 1999. This amount is amortized over the vesting
periods of the applicable options.
Liquidity and Capital Resources
From inception in January 1999 through December 31, 1999, we financed our
operations and met our capital expenditure requirements primarily from proceeds
of the private sale of equity securities totaling approximately $37.6 million.
At December 31, 1999, we had $9.6 million in cash and cash equivalents. The
expansion of our business will require significant additional capital to fund
operating losses, capital expenditures and working capital needs.
Net cash used by operating activities was approximately $25.1 million for
the period ended December 31, 1999. Cash used in operating activities consisted
primarily of net operating losses due to research and development, sales and
marketing, and general and administrative costs.
Net cash used by investing activities was approximately $1.9 million for the
period ended December 31, 1999. Cash used in investing activities consists of
the purchase of property and equipment.
Net cash provided by financing activities was approximately $36.6 million
for the period ended December 31, 1999, including $37.6 million of proceeds
raised from the private sale of equity securities during the period.
18
<PAGE>
We have commitments under facility and other operating leases of $1.3
million and obligations under capital leases of $1.9 million as of December 31,
1999. The obligations under capital leases relate to equipment leased under
leasing facilities with three different vendors. Each of these expires in the
year 2001.
We also have a commitment to the manufacturer of our i-opener Internet
appliance to purchase an agreed number of units before February 28, 2000. We
are also committed to make deposits for material acquisitions required to build
units according to our forecasts through June 2000. Our remaining commitment
approximates $5.7 million.
Our future capital requirements will depend on a variety of factors,
including market acceptance of Internet appliances and our i-opener service,
the resources we devote to develop, market, sell and support our current and
future product offerings, and other factors. We expect to devote substantial
capital resources:
.for our sales and marketing efforts;
.to subsidize the purchase price of our i-opener Internet appliance;
.to hire and expand our engineering, sales and marketing and customer
support organizations;
.to further develop our service offerings; and
.for general corporate purposes.
We believe that our cash and cash equivalents, the net proceeds received
subsequent to December 31, 1999 related to our issuance of Series D preferred
stock and the net proceeds from this offering will be sufficient to fund our
operations for at least the next 12 months. Despite our expectations, we may
need to raise additional capital before that time. We may need to raise
additional funds in order:
.to fund anticipated growth, including significant increases in personnel,
facilities and computer systems;
.to develop new or enhance existing services and products, including our
network infrastructure;
.to subsidize the purchase price of our i-opener Internet appliance; 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.
Year 2000
We have designed our network and our service for use in the year 2000 and
beyond and believe our network and service are year 2000 ready.
To date, we have not experienced any material year 2000 problem relating to
any of our internal systems or services. Our internal operations and business
are also dependent upon the computer-controlled systems of third parties such
as our suppliers, customers and other service providers. We believe that,
absent a systemic failure outside our control, such as a prolonged loss of
electrical or telecommunications service, year 2000 problems at third parties
will not have a material impact on our operations. The failure of our internal
systems or the systems of third parties to be year 2000 ready could temporarily
prevent us from providing service to our customers, issuing invoices and
developing products and services and could require us to devote significant
resources to correct such problems. The costs associated with remediating any
year 2000 problems have not been material to date. Although we do not
anticipate that these costs will be material in the future, we cannot assure
you that these costs will not be material.
19
<PAGE>
Disclosure About Market Risk
All of our current contracts are denominated in United States dollars and we
do not currently invest in derivative financial instruments. However, we invest
our excess cash balances in short-term, interest bearing, investment-grade
securities, certificates of deposit or direct or guaranteed U.S. government
obligations, such as Treasury bills, that are subject to market risk. We
believe the effect on our financial position, results of operations and cash
flows of any reasonably likely changes in interest rates would not be material.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. We will adopt SFAS No. 133 as required
by SFAS No. 137, "Deferral of the Effective Date of the FASB Statement No.
133," in fiscal year 2001. We do not expect the adoption of SFAS No. 133 to
have an impact on our financial condition or results of operations.
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BUSINESS
Overview
We are pioneering a new model for delivering the Internet experience to
consumers by developing service offerings and infrastructure designed to enable
Internet appliances. In November 1999 we launched our i-opener service, an all-
in-one Internet experience integrating an Internet appliance, access, and
consumer portal. Our approach avoids the technological complexities generally
associated with using personal computers, or PCs, and traditional Web browsers
to access the Internet. We believe our solution provides a simple, seamless and
relevant experience that appeals to both new and existing Internet users.
Our objective is to establish our i-opener service as the leader in the new
market of delivering simplified Internet services and network hosted
applications through Internet appliances. We intend to consistently upgrade and
customize the functionality of our i-opener portal and add new features to
ensure user satisfaction. Our infrastructure, operating system and network are
designed to support additional devices such as cellular and wireless telephones
and other handheld communication devices. We also believe our installed base of
devices, and our ability to remotely upgrade and deliver software to our user
base through our network, will allow us to host new and emerging Web-based
applications and services.
Industry Overview
Growth of the Internet
The Internet is an increasingly significant global mass medium for
conducting business, collecting and exchanging information, facilitating
communication and providing entertainment. International Data Corporation, or
IDC, estimates that the number of Internet users worldwide will grow from
approximately 142 million at the end of 1998 to approximately 502 million by
the end of 2003, representing a compound annual growth rate of 29%. We expect
growth in Internet usage to translate into growth in demand for devices to
access the Internet and growth in revenues for online service providers.
According to Forrester Research, the market for consumer Internet access in the
United States will increase from approximately $5 billion in 1997 to $22
billion in 2002.
The rapid acceptance of the Internet has created an opportunity for e-
commerce. A growing number of Internet users are conducting e-commerce
transactions such as trading securities, buying goods, purchasing airline
tickets and paying bills. According to IDC, the percentage of Internet users
buying goods and services on the Internet will increase from approximately 22%
in 1998 to approximately 36% in 2003, and the total value of goods and services
purchased directly on the Internet will increase from approximately $27.0
billion in 1998 to approximately $842.7 billion in 2003.
Advertisers and direct marketers are increasingly using the Internet to
locate customers, advertise and facilitate transactions. The Internet allows
marketers to interact more effectively with customers and to more easily obtain
relevant data about buying patterns, preferences and demands. The value of
Internet advertising is enhanced by the ability of advertisers to obtain
specific user information and target promotions and advertisements effectively.
According to Forrester Research, the total worldwide dollar value of Internet
advertising will increase from $3.3 billion in 1999 to $24.1 billion in 2003.
Need for Simplified Internet Accessibility
Today, the Internet is primarily accessed through PCs, which we believe many
consumers find relatively complex and expensive. PC-based devices present many
challenges for consumers such as costly hardware, large components, limited
mobility, complex system configuration and time consuming boot-up and Internet
dial-up sequences. While the PC remains an important access device, we believe
users are increasingly looking to access the Internet with less complicated
devices. Information appliances such as stand alone Internet devices, TV set-
top boxes, Web-enabled telephones, Web-enabled personal digital assistants and
Web-enabled
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<PAGE>
video game consoles are being introduced to the market to address the
disadvantages of PCs. IDC estimates that the worldwide market for information
appliances will grow from approximately $2 billion in 1998 to approximately $15
billion in 2002, representing a compound annual growth rate of 62% and an
installed base of over 150 million units.
Internet content and the number of Web pages available to consumers are
increasing dramatically. According to IDC, the number of Web pages will
increase from approximately 925 million at the end of 1998 to over 13 billion
by the end of 2003, representing a compound annual growth rate of 70%. We
believe the proliferation of content is making it increasingly difficult and
time-consuming for users to navigate the Internet and to locate useful and
relevant information.
Market Opportunity for a Simplified Internet Solution
With the growth of the Internet and the proliferation of Web sites and
content, we believe that many consumers will seek a simple way to get on-line
and access relevant content. We believe that a comprehensive yet easy-to-use
method for Internet access will be appealing to consumers. Ultimately, we
believe that there is a significant market opportunity to develop a platform to
manage the delivery of Internet content and services to users employing all
types of other Internet appliances, including cellular telephones, TV set-top
boxes and Web-enabled personal digital assistants. In addition, we believe that
aggregating information on a large number of consumers through one platform
will provide an opportunity to effectively target advertisements and market
products and services over the Internet.
The Netpliance Solution
We provide a simple, seamless and relevant Internet experience through our
i-opener service that brings the Internet into the everyday lives of our users.
We believe, our i-opener service offers our existing and potential content
providers, advertisers and on-line retailers a new and exciting way to reach
users.
[CHART]
A diagram illustrates the elements of the i-opener network, starting at the top
with a picture of the i-opener Internet appliance on the left and a circle
representing other types of access devices on the right with the words
"cellular phone, PDA, Game Console and Set-TopBox" inside the circle. Two
curved lines connect the i-opener appliance and the circle to a cloud labeled
"Internet" with the words "i-opener Nationwide Service" above it. Below the
cloud is a rectangle with pictures of four computer servers in it. Arrows point
to each of four rectangles depicting the following pages of the i-opener
portal: the WebGuide content portal, the e-mail "Mailbox" page, the Web Mall
and a box describing the i-opener network functions "update, backup, metrics."
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<PAGE>
Key benefits of our i-opener service for our users include the following:
Simple Set-Up. Our i-opener service offers users a new level of simplicity.
A new user simply plugs the i-opener Internet appliance into an electric
outlet, connects a phone line and is ready to enjoy the Internet. Software and
configurations are stored on our network so complications related to set-up are
eliminated.
Ease-of-Use. Our i-opener service hides the complexities of system
configurations, software maintenance and the dial-up process to access the
Internet and e-mail. We periodically update software remotely and manage the
user interface over our network. In addition, our portal has as a user-friendly
graphical interface with intuitive features and instructions, allowing even
novice users to navigate the Internet effectively.
Relevant Content. Our consumer portal organizes Internet content so that
users have immediate access to relevant information. Our portal provides an
entrance point to the Internet for our users that links them directly to
content and e-commerce sites tailored to their likely interests and needs based
on age and geographic location. Additionally, we are able to filter undesirable
content such as pornograhic and hate sites. Users are able to enjoy our portal
and cached content without the clutter of banner and other advertisements.
Cached Content. Our i-opener portal content is automatically updated and
stored in the memory of our i-opener Internet appliance. This content can be
immediately accessed in an offline mode, avoiding the need for a constant
connection to the network. The i-opener automatically establishes an Internet
connection on a scheduled basis when the phone line is not in use and downloads
or caches the content relevant to users, such as e-mail, local weather, top
news stories, sports scores and stock market news.
e-Mail Notification. The i-opener Internet appliance is equipped with an e-
mail waiting light that informs a user when there is an e-mail message without
requiring the user to go online to check an e-mail account. The user can access
e-mail messages without connecting to the Internet.
Appealing Design. The sleek profile and attractive design of our i-opener
Internet appliance makes it suitable to be placed in high traffic areas of the
home such as the kitchen, the living room, or any convenient location for
accessing information and e-mail. Because of the increased contact with our i-
opener Internet appliance, we believe our i-opener service will become a
prominent source of communication, news and relevant information for our users.
Key benefits of our i-opener service for businesses include the following:
Co-Branding Relationships. We believe our service will provide an attractive
platform for businesses to develop Internet-based services for either their
customers or employees. For example, an on-line brokerage could subsidize the
cost of the i-opener Internet appliance and co-brand a service to a prospective
or existing customer in order to encourage on-line trading through a dedicated
channel, better control the quality of the customer's on-line experience and to
increase customer retention and loyalty. An on-line grocer may develop a co-
branded service with us that has Internet-based grocery lists that can be sent
to the grocer at the touch of a button. A direct marketing company might
provide a customized i-opener service to its employees to assist in order
processing, inventory control, product promotion and employee communication.
Sponsorship and Advertising Platform. The i-opener service will enable
sponsorship opportunities whereby content providers may pay to provide content
on our channels in order to drive users to their Web sites and to enhance their
brand awareness. In addition, we believe our platform will enable marketers to
deliver targeted promotions and advertisements to our user base.
e-Commerce Opportunities. Through strategic placement within our portal we
believe we can provide e-commerce marketers with the ability to reach potential
customers in a simplified and targeted manner. We
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<PAGE>
intend to showcase a limited number of high quality merchants on our Web Mall,
which is an easy-to-use, intuitive interface for buying and selling a wide
variety of goods and services. In addition, merchants will be able to sponsor a
transaction key on our keyboard that will directly connect users to their
service.
Software and Service Platform. We have designed our software and service
infrastructure to enable us to license our platform to other information
appliance manufacturers. We expect that our infrastructure will provide the
user interface and manage the delivery of content and services for a large
number of users employing many different devices and will enable manufacturers
to focus on their competencies.
Our Strategy
Our objective is to establish our i-opener service as the leader in the new
market of delivering Internet services and applications to Internet appliances.
Establishing and maintaining a market leadership position should enable us to
develop new sources of revenue and grow our business. To achieve this
objective, we intend to:
Build a Premier Brand. We are aggressively marketing i-opener as a consumer
service. We believe that establishing brand awareness is critical to attracting
and retaining users, content providers, e-commerce companies and advertisers,
and to developing co-branding relationships. Our strategy is to promote our i-
opener service as a simple, relevant Internet experience through an Internet
appliance. We plan to dedicate substantial resources to promote our brand
through a variety of marketing vehicles, including advertising, retail points
of presence, promotional events, conferences and sponsorship relationships with
leading on-line and offline consumer brands.
Enhance Distribution and Develop Co-Branding Relationships. We plan to
increase our user base and market share by supplementing our direct-to-consumer
distribution method by establishing distribution relationships with consumer
on-line retailers. We also plan to offer a platform for businesses to develop
Internet-based services for their customers or employees.
Enhance Our Consumer Portal. We will continue to develop our relationships
with content providers to aggregate more high-quality and relevant content for
our users. We currently plan to offer a significant number of additional
applications during 2000, such as enhanced e-mail, instant messaging, calendar,
portfolio, chat, music, audio and video streaming. We intend to consistently
upgrade and customize our portal to ensure that our users can continue to
access content in a simple manner.
Develop Multiple Revenue Sources. We believe that there will be significant
opportunities to develop multiple sources of revenue. We believe that an
established user base will enable us to develop sponsorship relationships with
content providers who will pay to distribute content through our channels or
offer links through our i-opener portal. We also plan to generate e-commerce
revenues through relationships with established on-line retailers in our i-
opener Web Mall.
Develop Application Hosting Services. We believe our installed base of
devices and ability to simultaneously upgrade and deliver software to our
entire user base remotely through our network will allow us to host new and
emerging Web-based applications and services. For example, in the future a user
may be able to rent the use of tax preparation software on a per user basis
instead of purchasing and installing the software. In addition, users may be
able to rent secure personal space on our network for personal files and data.
Extend Our Platform to New Technologies. Our infrastructure, operating
system and network are also able to support additional devices such as cellular
and wireless telephones and other handheld communications devices. In the
future, we plan to make our platform compatible with emerging access
technologies such as broadband, wireless and home radio frequency to continue
to provide an enhanced user experience and make the Internet more accessible
and conducive to consumers.
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<PAGE>
Strategic Relationships
GO.com. In December 1999 we entered into an agreement with GO.com, an
affiliate of The Walt Disney Company. GO.com has agreed to serve as our content
provider for our children, family, sports, news and entertainment related
categories for the cached instant channels on our i-opener portal. The
agreement also provides certain co-branding and revenue sharing arrangements.
In January 2000, an affiliate of The Walt Disney Company purchased shares of
our Series D preferred stock.
U S WEST. In December 1999 we entered into a non-binding letter of intent
with U S WEST regarding joint sales, marketing and distribution of our i-opener
service to its customers and the use of U S WEST's dial-up and DSL network. We
currently anticipate entering into a definitive and binding agreement with
respect to these matters with U S WEST in the first quarter of 2000. An
affiliate of U S WEST purchased shares of our Series D preferred stock and a
warrant to purchase common stock.
Technology, Products and Services
We deliver a simplified Internet access experience to our users through
technology we have developed or licensed, which allows us to conceal the
traditional complexities of system configuration, software maintenance,
connection interactions and intricacies of e-mail and Internet
information/content access. This technology includes:
Customized Downstream Caching. We have developed a set of processes and
technology that continuously filters and prioritizes data feeds from third
parties such that we can send this data and cache it locally in our i-opener
Internet appliances.
System Maintenance and Upgrades. Our architecture is server-based, and
maintenance and system configuration is handled by the server with our updating
technology, which can detect the software configuration on a given appliance
and automatically deliver new software upgrades and perform maintenance.
Scalability and Adaptability. Our architecture allows us to support and
enable a large number of appliances on our network, including those designed by
third parties. The architecture's flexibility makes it easily adaptable to new
appliances such as Web-enabled phones, set-top boxes and personal digital
assistants.
Building from our technology, we developed our i-opener service, which
includes our Internet appliance portal and our service offerings.
The i-opener Internet appliance is a sleek, consumer-friendly access
appliance, consisting of a 10" color, LCD flat panel display and full-sized
keyboard that is designed for placement in any room in the home. Our i-opener
Internet appliance comes in two colors, turns on instantly and has helpful
features like an e-mail waiting light and on-line indicator. Additionally, our
keyboard has "hot keys" to provide quick access to certain content.
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The following table provides a description of the features and benefits of
our current service offering:
<TABLE>
<CAPTION>
Service Features Benefits
------- -------- --------
<S> <C> <C>
Automatically Linked . Requires no initial dial- . No need to install or
Internet Access up and set-up configure Internet access
configuration software
. Shares the phone line . No second phone line
needed
. Hides dial-up process at . No noise and delay of
each access traditional dial-up
Internet access process
. Unlimited access to the i- . No need for purchaser to
opener service and the subscribe for third party
Internet Internet access service
e-Mail Service . Downloads e-mail messages . Allows reading and
at regular intervals and drafting of e-mail without
when the user connects to tying up the phone line
the Internet
. e-Mail notification light . Alerts users to new e-mail
on the i-opener Internet
appliance
Content Customization and . Types users by geographic . Delivers relevant
Filtering location for purposes of information to users such
content delivery as local telephone
directory and local
weather and events
. Configures to filter . Protects i-opener users
undesirable content from specific sites such
as pornographic and hate
sites
Instant Channels and Web . Web Guide.Entertainment . Web Guide links consumers
Guide to destinations on the
Internet
. Web Mall.Sports . Our Web Mall provides an
intuitive user interface
for on-line shoppers
. Weather.News . The most popular
information is filtered
and organized for instant
and access
. Finance
Cached Information . Relevant Internet content . Users can immediately
such as e-mail, i-opener access cached content
instant news, sports, without tying up their
weather, finance and phone line
entertainment channels is
delivered periodically
from the Internet and
stored locally
. Users have immediate
access to fresh
information without having
to search the Internet
Software and Application . Seamless and immediately . Frees consumers from
Updates enabled software and complex system and
system maintenance updates software configurations
are handled remotely
without user intervention
. Protects consumers against
software obsolesence
</TABLE>
We continually seek new ways to enhance our i-opener service, and are
currently designing new products and services, many of which we anticipate
introducing in 2000. We believe these new products and services will enrich
the i-opener experience for our users and help attract new users and
merchants.
Sales and Marketing
We are building a team of sales and marketing professionals whose efforts
are focused on establishing the i-opener brand, educating consumers about the
features and benefits of our i-opener service and promoting the benefits of
our Internet service platform to businesses. We plan to pursue an aggressive
advertising and promotional campaign designed to raise awareness of our i-
opener brand among both first-time and experienced Internet users. We believe
that we will be most effective by using traditional media, such as television,
national newspapers and magazines, and radio. Additionally, we plan to promote
our brand through retail points of presence, promotional events and
conferences.
Consumers can purchase our i-opener service through our Web site,
www.netpliance.com, over the telephone, 1-888-iopener, through our mall-based
retail kiosks and through selected consumer electronics retailers. Our Web
site is user-friendly and simplifies the purchase of our i-opener service by
explaining our services and providing color pictures. In addition, we provide
on-line customer service that we believe reduces
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phone calls for customer service and technical support. The i-opener Internet
appliance currently sells for $299 and an optional Canon Bubble Jet printer may
be purchased for $100. We offer a 30-day money back guarantee on the purchase
price of the i-opener Internet appliance.
We believe that businesses will be attracted to our i-opener service by the
opportunity to develop co-branded Internet-based services for their customers
or employees. Through a co-branded service, businesses will be able to provide
their customers with direct and simplified access to their products and
services. Our marketing targets include businesses that want to expand or
initiate their use of the Internet to attract new customers or solidify
existing relationships, and businesses seeking to enhance communications with
employees. Currently, our specific targets include financial services providers
and on-line retailers focused on consumer goods that require frequent purchases
such as groceries, pharmaceuticals and pet supplies.
Network
We provide Internet access to our users over a redundant network throughout
the United States that includes local dial-up access and toll-free inbound
access as a default when users are unable to dial-up locally. The network is
monitored and maintained twenty-four hours a day, seven days a week by our
personnel in a Network Operations Control Center (NOCC) located at our
facilities. We interconnect the national network and our NOCC, through a local
area network, with our production and back-office systems that provide the
intelligence for our portal. Our production facilities manage the content feeds
and applications for our portal and perform the update, back-up and logging of
our users' relevant data. Production systems are co-located at a third-party
telecommunications facility, where we lease both rack space and managed
bandwidth. Our back-office systems employ Portal Software for billing and to
manage the internal information on our users.
The costs associated with our network infrastructure are a major component
of our cost of service. Our strategy of purchasing telecommunications capacity
from third-party wholesale providers will allow us to expand the geographic
scope of our service, and accommodate user growth without building our own
network. Additionally, we believe that our strategy of using wholesale
providers will enable us to change providers or technologies as cost or
performance improvements become available. As a result, we believe we can be
flexible in responding to user demand for higher-speed access and other types
of improved service such as DSL, cable modems, high-speed wireless access and
other broadband technologies.
Direct Fulfillment Model
We outsource the production of our i-opener Internet appliances to Quanta, a
leading manufacturer of portable computers that is located in Taiwan. Quanta
has strategic alliances with key component providers and utilizes state-of-the-
art information tools and strong inventory management practices to achieve
rapid inventory turnover and maintain reduced inventory levels. Quanta's
manufacturing methods provide rapid pass-through of material cost decreases in
its products.
We utilize an integrated distribution and delivery system that allows us to
minimize inventory and shipping costs as well as delivery time. Upon sale of an
i-opener Internet appliance, a customer's order is recorded in our automated
system and routed to Quanta for processing, assembly and delivery. Quanta then
coordinates drop-shipment through Federal Express. We believe the average time
from placing of an order to delivery is approximately three to five days.
Competition
We compete for users, and consequently for potential e-commerce and
advertising revenue, directly or indirectly, with the following categories of
companies:
. online service providers, such as AOL, EarthLink and Microsoft;
. software platform providers such as Aether Systems and Liberate
Technologies.
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. Internet portals, such as Excite@Home, Lycos and Yahoo!; and
. manufacturers of other stand alone Internet appliances, such as InfoGear
and WebTV;
. manufacturers of portable Internet appliances, such as Hewlett Packard
and Palm, and cellular telephone and pager manufacturers;
. manufacturers of personal computers, such as Apple, Compaq, Dell,
Gateway, Hewlett Packard and IBM;
However, we believe our i-opener service offers advantages over our
competition. Unlike companies that are Internet service providers only, we are
not limited to the PC-user market. We believe our i-opener service is more
convenient and practical than the TV-related Internet boxes. Most of the
companies that are producing Internet appliances, screenphones, and inexpensive
or free PCs do not offer Internet access, tailored content portals or
applications. By providing only the equipment, these companies cannot capture
the wealth of user data and ensure user loyalty. Our model is based on creating
long-term loyalty of our users.
Patent Applications and Intellectual Property
We have filed patent applications for several inventions that are key
enablers to our service offerings. We believe these inventions will
differentiate us in the marketplace. Our pending patent applications include:
. a method for immediate personalization of devices, allowing us to
customize devices before they reach the customer. A variation of the
method allows us to perform the personalization remotely and
transparently during the installation of the device.
. a method for updating user and device profile information remotely and
transparently from the server to the device. This method allows for
transparent and reliable connect and reconfiguration of the device.
. a method for downloading cached content based on incremental changes to
the content and individual preferences. Content is predicted based on
user preferences and updated adaptively based on user behavior.
. a simplified address book scheme that allows specific users to edit a
user's address book remotely and to pre-configure an address book for
immediate use.
If we are not successful in obtaining the patent protection we seek, our
competitors may be able to replicate our technology and more effectively
compete with us.
Employees
As of February 1, 2000, we had a total of 128 full-time employees 57 in
research and development, 40 in sales and marketing, 11 in network operations
and 20 in general administration. Our future success depends in part, on our
continuing ability to attract, train and retain highly qualified technical,
sales, marketing and managerial personnel. We have not experienced any work
stoppages, and we believe that our relations with our employees are good.
Facilities
Our headquarters are located in a leased facility in Austin, Texas,
consisting of approximately 30,000 square feet under a two-year lease which
expires in May 2001. This facility houses all functions of the organization and
includes our network operations control center. We believe the facilities we
have under lease are sufficient to meet our needs for at least the next six
months.
Legal Proceedings
We are not currently involved in any material litigation matters.
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MANAGEMENT
The following table sets forth, as of February 1, 2000, the name, age and
position of each of our directors, executive officers and certain other key
employees:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
John F. McHale *(1).......... 43 Chairman of the Board and Co-founder
Kent A. Savage *(1).......... 38 President, CEO, Director and Co-founder
Ann M. Bacon................. 42 Vice President of Corporate Communications and
Retail Sales
James E. Cahill.............. 33 Vice President and General Counsel
Craig Cantrell............... 40 Vice President of Client Development
William C. Cobb.............. 44 Vice President and General Manager of Consumer
Sales
Greg A. Cummings............. 39 Vice President of Product Management and User
Experience
Thomas E. Gaunt.............. 40 Vice President of Business Sales
M. David Hampton............. 32 Treasurer and Controller
Kenneth A. Kalinoski......... 38 Vice President of Development and Co-founder
Marc Willebeek-LeMair........ 37 Chief Technology Officer and Chief Architect
Michael R. Corboy (2)........ 69 Director
Kevin Denuccio............... 40 Director
David S. Lundeen (3)......... 38 Director
James M. Mansour (3)......... 40 Director
Steven G. Papermaster........ 41 Director
Joseph R. Zell............... 40 Director
Paul S. Zito (2)(3).......... 44 Director and Secretary
</TABLE>
- ---------------------
* Denotes executive officer
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
John F. McHale was a Co-founder of Netpliance and has served as our Chairman
of the Board since our inception in January 1999. From January 1996 to April
1998, Mr. McHale served as President, Chief Executive Officer and Chairman of
NetSpeed, Inc. From January 1985 to November 1995, Mr. McHale was President,
Chief Executive Officer and Chairman of NetWorth, Inc. Mr. McHale also serves
as the Chairman of Panja Corporation.
Kent A. Savage was a Co-founder of Netpliance and has served as our
President, Chief Executive Officer and Director since our inception in January
1999. From April 1998 to December 1998, Mr. Savage served as Director and
General Manager of Broadband Operations for Cisco Systems, Inc. From April 1996
to April 1998, Mr. Savage served as Vice President of Sales and Marketing for
NetSpeed, Inc. From November 1993 to April 1996, Mr. Savage served as Vice
President of Sales and Marketing for Connectware, Inc.
Ann M. Bacon has served as our Vice President of Corporate Communications
and Retail Sales since June 1999. From April 1994 to May 1999, Ms. Bacon served
as Manager, Director and General Manager for the Handheld Division of Compaq
Computer Corporation.
James E. Cahill has served as our Vice President and General Counsel since
November 1999. From September 1993 to October 1999, Mr. Cahill served as an
attorney with Hughes & Luce, L.L.P.
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Craig Cantrell has served as our Vice President of Client Development since
June 1999. From April 1998 to May 1999, Mr. Cantrell served as Senior Manager
for the broadband customer premise equipment organization of Cisco Systems,
Inc. From June 1996 to April 1998, Mr. Cantrell served as a Director of
Engineering for NetSpeed, Inc. From September 1989 to June 1996, Mr. Cantrell
served as Engineering Manager for Interphase Corporation.
William C. Cobb will serve as our Vice President and General Manager of
Consumer Sales starting February 2000. From July 1997 to February 2000, Mr.
Cobb served as Senior Vice President and Chief Marketing Officer for the Tricon
Restaurants International division of Tricon Global Restaurants, Inc. From
August 1995 to July 1997, Mr. Cobb served as Senior Vice President and Chief
Marketing Officer for the Pizza Hut division of PepsiCo, Inc. From September
1990 to September 1995, Mr. Cobb served as Vice President of Marketing for the
Pepsi-Cola division of PepsiCo, Inc.
Greg A. Cummings has served as our Vice President of Product Management and
User Experience since April 1999. From March 1998 to March 1999, Mr. Cummings
served as Research and Development Manager for Hewlett-Packard. From April 1996
to March 1998, Mr. Cummings served as Senior Products Manager and Director of
Product and Program Management for Hitachi Ltd. From June 1992 to April 1996,
Mr. Cummings served as Program Manager of personal computer development for
Dell Computer Corporation.
Thomas E. Gaunt has served as our Vice President of Business Sales since
July 1999. From June 1996 to June 1999, Mr. Gaunt served as a Director at
Inprise Corporation. From June 1994 to April 1996, Mr. Gaunt served as
President of Double Impact Multimedia, which filed for Chapter 11 bankruptcy
and was subsequently liquidated.
M. David Hampton has served as our Treasurer since December 1999 and
Controller since February 1999. From February 1994 to January 1999, Mr. Hampton
served as a Financial Analyst in the Consumer Desktop Division of Dell Computer
Corporation.
Kenneth A. Kalinoski was a Co-founder of Netpliance and has served as our
Vice President of Development since January 1999. From February 1998 to January
1999, Mr. Kalinoski served as Program Director for IBM PC Company Systems
Solutions and Product Licensing. From March 1995 to January 1998, Mr. Kalinoski
served as Program Director of the IBM Multimedia Server Development Group. From
February 1993 to February 1995 he served as the Program Director of IBM UNIX
AIX Worldwide Development and Support.
Marc Willebeek-LeMair has served as our Chief Technology Officer and Chief
Architect since March 1999. From December 1998 to February 1999, Mr. Willebeek-
LeMair served as Senior Manager at the T.J. Watson Research Center of IBM. From
January 1998 to November 1998, Mr. Willebeek-LeMair served as Technical Staff
to the Vice President of Strategy of IBM. From May 1993 to December 1997, Mr.
Willebeek-LeMair served as Manager of Multimedia Networking for IBM.
Michael R. Corboy has served as our Director since February 1999. Since
January 1992, Mr. Corboy has served as President of Corboy Investment Company.
Kevin Denuccio has served as our Director since April 1999. From August 1995
to April 1999, Mr. Denuccio has served as Vice President of Sales of Cisco
Systems, Inc. From July 1993 to July 1995, Mr. Denuccio served as President and
Chief Executive Officer of Bell Atlantic Network Integration.
David S. Lundeen has served as our Director since October 1999. Since
February 1999, Mr. Lundeen has been managing general partner of Watershed
Capital. From June 1995 to August 1998, Mr. Lundeen served as Executive Vice
President and Chief Financial Officer of BSG Corporation. From February 1990 to
April 1995, Mr. Lundeen served as director of the Merger and Acquisition Group
and President of the Technology Division of Blockbuster Entertainment
Corporation. He also serves as a director of How2.com, Inc and Perficient, Inc.
James M. Mansour has served as our Director since February 1999. Since May
1998, Mr. Mansour has served as President of Telephone Management, Inc. From
March 1991 to April 1998, he served as President of NationalTel, Inc. He
currently serves as a director of GT Group Telecom, Inc.
30
<PAGE>
Steven G. Papermaster has served as our Director since February 1999. Since
May 1996, Mr. Papermaster has served as the Chairman of Powershift Group.
Since January 1999, he has also served as CEO of Agillion, Inc. From 1987 to
1997, he was CEO of BSG Corporation. Mr. Papermaster also serves as a director
of Perficient, Inc. and Vignette Corporation.
Joseph R. Zell has served as our Director since January 2000. Since March
1997, Mr. Zell has served as President of the !nterprise Networking Services
Division of U S WEST Communications, Inc. From April 1996 to April 1997, he
served as President of the Carrier Division of U S WEST. From April 1995 to
April 1996 he served as Vice President of Market and Innovation for U S WEST
Communications, Inc. From April 1994 to March 1995, he served as Executive
Director of Applications and Services Development for the !nterprise
Networking Services Division of U S WEST. Mr. Zell also serves as a director
of USinternetworking, Inc.
Paul S. Zito has served as our Director since January 1999 and Secretary
since February 1999. From April 1996 until April 1998 Mr. Zito served as Chief
Operating Officer, Secretary, and Treasurer of NetSpeed, Inc. From 1993 to
March 1996 Mr. Zito served as Chief Financial Officer and Director of
NetWorth, Inc.
Board Representation
Our Board of Directors currently consists of nine members, two of whom are
our founders and seven of whom are outside directors. David S. Lundeen was
nominated to our Board of Directors by Watershed Capital I, L.P., which, as
holder of Series B and Series C preferred stock, has the right to nominate one
director. Watershed Capital's director nomination rights will terminate at the
closing of this Offering. In its purchase of our Series D preferred stock, U S
WEST will have the right to nominate one director to our Board of Directors.
See "Description of Securities."
Joseph R. Zell was nominated to our Board of Directors by U S WEST which,
as holder of Series D preferred stock, has the right to nominate one director.
Also in connection with U S WEST's purchase of Series D preferred stock, John
F. McHale, our Chairman of the Board, and Kent A. Savage, our President and
CEO, signed a voting agreement in which they agreed to vote their shares in
favor of the nominee of U S WEST.
There are no family relationships among any of the directors, officers or
key employees of Netpliance.
Board Composition
Our Board of Directors consists of nine members. Each director is elected
for a period of one year at our annual meeting of stockholders and serves
until the next annual meeting of stockholders or until a successor is duly
elected and qualified.
Directors Compensation
Our directors may receive such compensation for their services as may be
approved by the Board of Directors from time to time, including a fixed sum
and expenses for attendance at each meeting of the Board of Directors or a
committee of the Board of Directors. To date, no cash compensation has been
paid to any member of the Board of Directors for his service. We have extended
the opportunity to each of our directors to purchase 30,000 shares of our
common stock at the time they joined our Board of Directors at the then fair
market value. Each of our directors, except for Joseph R. Zell, purchased
those shares. David S. Lundeen subsequently transferred his shares to
Watershed Capital I, L.P.
Board Committees
Effective upon the closing of this offering, the following committees of
the Board of Directors shall be established:
Executive Committee. The executive committee has broad discretionary
authority to take most actions that may be taken by the Board of Directors,
including acting upon recommendations of other committees of
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<PAGE>
the Board of Directors, declaring a dividend and authorizing the issuance of
stock. Actions the executive committee is not authorized to take include
amending our certificate of incorporation or bylaws, adopting an agreement of
merger or consolidation or appointing members to committees of our Board of
Directors. The executive committee typically meets once per month and reports
to the Board of Directors on a quarterly basis. The executive committee
consists of Messrs. McHale and Savage.
Audit Committee. The audit committee is responsible for, among other things,
making recommendations to the Board of Directors regarding the engagement of
our independent public accountants, reviewing with the independent public
accountants the plans and results of the audit engagement, approving
professional services provided by the independent public accountants, and
reviewing the adequacy of our internal accounting controls. The audit committee
consists of Messrs. Lundeen, Mansour and Zito.
Compensation Committee. The compensation committee is responsible for
determining salaries and incentives compensation for our directors, officers,
employees and consultants and administering our stock option plan. The
compensation committee consists of Messrs. Corboy and Zito. The compensation
committee establishes the salary of the Chief Executive Officer by considering
the salaries of executive officers in similar positions with comparably sized
companies in our industry and in related industries, the experience and
contribution of the individual and our financial performance. Mr. Savage's
employment agreement requires that his salary not be less than $195,000 per
year.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves on the board of directors or
compensation committee of any entity that has one or more executive officers
who is a member of our Board of Directors or Compensation Committee.
The members of our compensation committee are Messrs. Corboy and Zito.
Except for Mr. Zito's service as our secretary, none of the members of our
compensation committee is currently or has been an officer or employee. Prior
to the formation of the compensation committee, all decisions regarding
compensation for directors, officers, employees and consultants, or concerning
administration of stock and incentive plans, were made by the Board of
Directors.
Executive Compensation
The following table sets forth information concerning compensation awarded
to, earned by or paid to our Chief Executive Officer during the year ended
December 31, 1999. No other executive officer has earned in excess of $100,000
since inception. This executive is referred to as the Named Executive Officer
elsewhere in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term All Other
Compensation Compensation Awards Compensation
Name and Principal ---------------- ------------------------- ------------
Position Salary Bonus Shares Underlying Options
<S> <C> <C> <C> <C>
Kent Savage, President
and Chief Executive
Officer............... $176,154 $21,095 -- --
</TABLE>
Option Grants in Last Fiscal Year
There were no options or stock appreciation rights granted to the Named
Executive Officer from inception through December 31, 1999.
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<PAGE>
1999 Stock Option Plan
The following is a summary description of the Netpliance, Inc. Amended and
Restated 1999 Stock Option and Restricted Stock Plan. You may refer to the
exhibits that are part of the registration statement for a copy of the stock
option plan.
Types of Awards. The stock option plan provides for grants of incentive
stock options, within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended, non-qualified stock options and restricted stock.
Share Reserve. We have reserved 2,500,000 shares for issuance under the
stock option plan. If stock awards granted under the stock option plan expire
or otherwise terminate before the recipients of the awards purchase the shares
subject to the options, the shares not acquired again become available for
issuance under the stock option plan.
Administration. Our compensation committee administers the stock option
plan. The compensation committee has the authority to construe, interpret and
amend the stock option plan as well as to determine:
.the grant recipients;
.the grant dates;
.the number of shares subject to the award;
.the exercisability of the award;
.the exercise price, subject to the limits regarding incentive stock
options described below;
.the type of consideration; and
.the other terms of the award.
Eligibility. The compensation committee may grant incentive stock options to
our employees or employees of any parent or subsidiary of ours that are
intended to qualify under Section 422 of the Internal Revenue Code. The
compensation committee may grant nonstatutory stock options, stock bonuses and
restricted stock purchase awards to our employees, directors, and consultants
or affiliates.
. A stock option is a contractual right to purchase a specified number of
our shares at a specified price, or exercise price, for a specified
period of time.
. An incentive stock option is a stock option that has met the requirements
of Section 422 of the Internal Revenue Code. No taxable income is
recognized by an optionee upon the grant or exercise of an incentive
stock option. If no disposition of the shares is made by the optionee
within two years after the date of grant or within one year after the
issuance of the shares to the optionee, then upon the optionee's resale
of the shares, any amount realized in excess of the option exercise price
will be treated as long-term capital gain and any loss sustained will be
long-term capital loss. If the shares are disposed of before either of
the holding periods described above, there has been a disqualifying
disposition, and the difference between the exercise price and the fair
market value of the shares on the exercise date will be taxed at ordinary
income rates. The difference between the fair market value on date of
exercise and the exercise price is an item of adjustment for purposes of
the alternative minimum tax unless there is a disqualifying disposition
in the year of exercise.
. A nonstatutory stock option is a stock option not intended to qualify as
an incentive stock option. No income is recognized by an optionee on the
date of grant. An optionee generally will recognize ordinary income on
the date of exercise equal to the difference between exercise price and
the fair market value of the shares on the date of exercise. If the
optionee is also an employee at the time of grant, any income recognized
upon exercise of a nonstatutory stock option will constitute wages for
which withholding will be required.
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<PAGE>
. A restricted stock purchase award is an offer to purchase shares at a
price either at or near the fair market value of the shares. A stock
bonus is a grant of shares at no cost to the recipient. However, we may
reacquire the shares under either type of award at the original purchase
price, if any, if the recipient's service to us and our affiliates is
terminated before the shares vest. At the time either award vests, the
recipient will generally recognize income equal to the difference between
the fair market value of the stock at the time of vesting and the amount
paid for the stock, if any.
The compensation committee may not grant an incentive stock option to any
person who, at the time of the grant, owns, or is deemed to own, stock
possessing more than 10% of the total combined voting power of Netpliance or
any affiliate of Netpliance, unless the exercise price is at least 110% of the
fair market value of the stock on the grant date and the option term is five
years or less. In addition, the board may not grant an employee an incentive
stock option under the stock option plan that exceeds the $100,000 per year
limitation set forth in Section 422(d) of the Internal Revenue Code. To
calculate the $100,000 per year limitation, we determine the aggregate number
of shares under all incentive stock options granted to the employee that will
become exercisable for the first time during a calendar year. For this purpose,
we include incentive stock options granted under the stock option plan as well
as under any other stock plans that our affiliates or we maintain. We then
determine the aggregate fair market value of such stock as of the grant date of
the option. Taking the options into account in the order in which they were
granted, we treat only the options covering the first $100,000 worth of stock
as incentive stock options. We treat any options covering stock in excess of
$100,000 as nonstatutory stock options.
Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations for compensation paid to the chief
executive officer or the four highest compensated officers in a taxable year to
the extent that the compensation exceeds $1,000,000. Unless our stock option
plan is modified, Section 162(m) will not apply to any compensation paid
pursuant to the plan until the first stockholder meeting that occurs during the
fourth calendar year after this offering.
Option Terms. The compensation committee determines the exercise price for
any options, provided that incentive stock options are required to have an
exercise price of 100% or more of the fair market value of a share of our
common stock on the grant date. The maximum option term is 10 years. The board
may provide for exercise periods of any length in individual option grants.
However, generally an option terminates three months after the optionholder's
service to Netpliance and its affiliates terminates. If such termination is due
to the optionholder's death or disability, the exercise period generally is
extended to 12 months.
No option granted under the plan is transferable or assignable by an
optionee, voluntarily or by operation of law, other than by will or the laws of
descent and distribution. Each option is exercisable during the optionee's
lifetime, only by him or her.
Terms of Other Stock Awards. The compensation committee determines the
purchase price of other stock awards but it may not be less than the fair
market value of our common stock on the grant date. The compensation committee
may award stock bonuses in consideration of past services without a purchase
payment. Shares sold or awarded under the stock option plan may, but need not
be, restricted and subject to a repurchase option in favor of Netpliance in
accordance with a vesting schedule that the Board of Directors determines. The
board, however, may accelerate the vesting of such restricted stock.
Other Provisions. Transactions not involving receipt of consideration by
Netpliance, such as a merger, consolidation, reorganization, stock dividend, or
stock split, may change the class and number of shares subject to the stock
option plan and to outstanding awards. In that event, the compensation
committee will appropriately adjust the stock option plan as to the class and
the maximum number of shares subject to the stock option plan. It also will
adjust outstanding awards as to the class, number of shares and price per share
subject to such awards.
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<PAGE>
Upon a change in control of Netpliance, the surviving entity may either
assume or replace outstanding awards under the stock option plan unless
specifically provided for in a particular option grant.
Awards Granted. As of February 1, 2000, we had issued options to purchase
1,779,394 shares at a weighted average exercise price of $5.29, and 720,606
shares remained available for future grant. As of February 1, 2000, the board
had granted no shares as stock awards under the stock option plan.
2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan was adopted by the Board of Directors
in February 2000 and we expect that the purchase plan will be approved by the
stockholders in February 2000, and will become effective on the date of this
offering. A total of shares of common stock has been reserved for issuance
under the purchase plan. The amount reserved under the purchase plan will
automatically increase at the end of each fiscal year by the lesser of
shares or % of the outstanding shares on such date or a lesser amount as
determined by the Board.
The purchase plan, which is intended to qualify under Section 423 of the
Code, contains successive six-month offering periods. The offering periods
generally start on the first trading day on or after January 1 and July 1 of
each year.
Employees are eligible to participate in the purchase plan if they are
employed by us for at least 20 hours per week and more than five months in any
calendar year, although any employee who would own stock constituting 5% or
more of the total combined voting power or value of all classes of our stock
may not participate in the purchase plan. The purchase plan permits
participants to purchase common stock through payroll deductions of up to 15%
of the participant's base compensation, up to a maximum aggregate deduction of
$25,000 for all offering periods ending within any calendar year.
Amounts deducted and accumulated under the purchase plan are used to
purchase shares of common stock at the end of each offering period. The price
of stock purchased under the purchase plan is 85% of the lower of the fair
market value of the common stock at the beginning of the offering period or end
of the offering period. Participants may end their participation at any time
during an offering period and will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with
Netpliance.
Rights granted under the purchase plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the purchase plan. The purchase plan provides that, in the event
of a corporate transaction as described in Section 424(a) of the Code, our
Board of Directors may approve assumption of the purchase plan by a successor
corporation that becomes the employer of a significant number of participating
employees. The Board of Directors has the authority to amend or terminate the
purchase plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the purchase plan.
401(k) Plan
We maintain the Netpliance, Inc. 401(k) Retirement Plan for eligible
employees. In order to be a participant in the 401(k) plan, an employee must
have attained age 21. A participant may contribute up to 20% of his or her
total annual compensation to the 401(k) plan, or up to a statutorily prescribed
annual limit, if less. The annual limit for 1999 is $10,000. Each participant
is fully vested in his or her deferred salary contributions. Participant
contributions are held and invested by the 401(k) plan's trustee. We may make
discretionary contributions as a percentage of participant contributions,
subject to established limits. To date, we have not made any contributions to
the 401(k) plan on behalf of the participants. The 401(k) plan is intended to
qualify under Section 401 of the Internal Revenue Code, so that contributions
by us or our employees to the 401(k) plan, and income earned on the 401(k) plan
contributions, are not taxable to employees until withdrawn from the 401(k)
plan, and so that our contributions, if any, will be deductible by us when
made.
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<PAGE>
Employment Agreements
Agreement with Kent A. Savage. Under a two-year employment agreement dated
February 1, 1999, Kent A. Savage became Chief Executive Officer and President
of Netpliance at a base salary of $195,000. Mr. Savage is eligible for an
annual discretionary bonus of up to $40,000. Mr. Savage may terminate the
employment agreement for any reason upon 30 days notice to us. If Mr. Savage's
employment is terminated during the first year of his employment for any reason
other than failure to perform his duties or misconduct, then we are obligated
to continue paying Mr. Savage's salary and benefits for six months. In
addition, Mr. Savage also agreed not to compete with Netpliance and not to
solicit our customers or employees for 18 months following the termination of
his employment, with limited exceptions.
Agreement with Kenneth A. Kalinoski. Under a two-year employment agreement
dated February 1, 1999, Ken Kalinoski became our Vice President of Development
at a base salary of $150,000. Mr. Kalinoski is eligible for an annual
discretionary bonus of up to $22,500. In addition, Mr. Kalinoski's employment
agreement provided for the transfer of his intellectual property rights to an
internet device and application to Netpliance. Mr. Kalinoski may terminate his
employment agreement for any reason upon 30 days notice to us. If Mr.
Kalinoski's employment is terminated during the first year of his employment
for any reason other than failure to perform his duties or misconduct, then we
are obligated to continue paying Mr. Kalinoski's salary and benefits for six
months. Under his employment agreement, Mr. Kalinoski agreed not to compete
with Netpliance and not to solicit our customers or employees for 18 months
after the termination of his employment, with limited exceptions.
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<PAGE>
RELATED PARTY TRANSACTIONS
Private Placement Financings
The following sets forth certain transactions between Netpliance and our
directors, executive officers and 5% stockholders and their affiliates. We
believe that each of the transactions described below was on terms no less
favorable to Netpliance than could have been obtained from unaffiliated third
parties. Shares held by all affiliated persons and entities have been
aggregated. All share numbers reflect the number of shares purchased by the
respective party on an as-converted basis. See "Principal Stockholders" for
more detail on shares held by these purchasers. The following table summarizes
the shares of common stock and preferred stock purchased by our directors,
executive officers, and 5% stockholders.
<TABLE>
<CAPTION>
Common Common Common Common
equivalent equivalent equivalent equivalent
shares of shares of shares of shares of
Directors, Executive Shares of Series A Series B Series C Series D
Officers and 5% common preferred preferred preferred preferred
Stockholders: stock stock stock stock stock
-------------------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
John F. McHale.......... 369,547 5,357,140 -- 333,340 --
Kent A. Savage.......... 1,987,733 -- -- -- --
Paul S. Zito............ 73,855 33,340 -- -- --
James M. Mansour........ 306,731 41,670 -- -- --
Steven G. Papermaster... 320,928 -- -- -- --
Michael R. Corboy....... 72,767 -- -- -- --
Kevin Denuccio.......... 60,000 -- -- -- --
Kenneth A. Kalinoski.... 1,533,956 -- -- -- --
David S. Lundeen........ 30,000 -- -- -- --
Watershed Capital I,
L.P. .................. -- -- 1,166,660 333,340 --
U S WEST Internet
Ventures, Inc. ........ 200,000(1) -- -- -- 700,000
</TABLE>
- ---------------------
(1) Includes a warrant to purchase 200,000 shares of common stock for $20 per
share purchased by U S WEST Internet Ventures, Inc. for $5,000 in December
1999.
On January 19, 1999 we sold 4,800,000 shares of common stock to our founders
for an aggregate purchase price of $240,000. From February through August 1999
we issued an aggregate of 2,692,377 shares of common stock to employees and
other investors for an aggregate purchase price of $5,921,193.
In January 1999, one of our founders entered into an agreement with us under
which he purchased 350,000 shares of Series A preferred stock for an aggregate
purchase price of $2,000,000 and received rights to purchase additional shares
of Series A preferred stock. These rights were exercised in May and July 1999
for the purchase of an aggregate of 185,714 shares of Series A preferred stock
for an aggregate purchase price of $7,800,000. We have extended the opportunity
to each of our directors to purchase 30,000 shares of our common stock at the
time they joined our Board of Directors at the then fair market value. Each of
our directors, except for Joseph R. Zell, purchased these shares. David S.
Lundeen subsequently transferred his shares to Watershed Capital I, L.P.
Between September 1999 and January 2000 we sold shares of preferred stock in
the following rounds of financings:
. in September 1999, we sold an aggregate of 122,933 shares of Series A
preferred stock for an aggregate purchase price of $7,375,980.
. on October 1, 1999, we sold 116,666 shares of Series B preferred stock
for an aggregate purchase price of $7,000,000 and entered into an
agreement giving us the right to sell, at any time prior to December 31,
1999, an additional 66,668 shares of Series C preferred stock to the
purchaser of the
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<PAGE>
Series B preferred stock and to one of the holders of Series A preferred
stock. We exercised this right and issued the Series C preferred stock on
December 3, 1999 for an aggregate purchase price of $6,000,000.
. In December 1999, several investors, including U S WEST Internet
Ventures, Inc., entered into irrevocable commitments to purchase an
aggregate of 1,430,000 shares of Series D preferred stock for an
aggregate purchase price of $28.6 million. The Series D preferred stock
financing closed on January 5, 2000. In December 1999, we also granted to
U S WEST Internet Ventures, Inc. a warrant to purchase 200,000 shares of
our common stock at a price of $20.00 per share.
Shares of Series A, Series B and Series C preferred stock are convertible
to common stock on a ten-for-one basis, and shares of Series D preferred stock
are convertible to common stock on a one-for-one basis. All outstanding shares
of our preferred stock will automatically convert upon the closing of the
offering.
Executive Officer and Stockholder Loans
We loaned $97,298 to Kent Savage, our President, Chief Executive Officer
and a member of our Board of Directors. The loan bears interest at seven
percent per annum and is due and payable on January 18, 2004. It is secured by
a pledge of 1,945,960 shares of our common stock owned by Mr. Savage.
We loaned $71,351 to Ken Kalinoski, our Vice President of Development. The
loan bears interest at seven percent per annum and is due and payable on
January 18, 2004. It is secured by a pledge of 1,427,020 shares of our common
stock owned by Mr. Kalinoski.
Sublease Agreement with Powershift Ventures, LLC
In June 1999 we entered into a sublease agreement with Powershift Ventures,
LLC, which is owned by Steven G. Papermaster, a member of our Board of
Directors. This sublease is for 30,000 square feet of office space in the
office building known as Building A of Lakewood on the Park in Austin, Texas
on substantially the same terms as between Powershift Ventures and Motorola,
Inc., the landlord. The sublease will terminate in February 28, 2001, and the
base rent is $44,625 per month.
Stock Options Granted to Executive Officers
For information regarding the grant of stock options to executive officers
and directors, see "Management--Director Compensation" and "--Executive
Compensation."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following sets forth certain information concerning the beneficial
ownership of our outstanding common stock and preferred stock as of February 1,
2000, after giving pro forma effect to the preferred stock conversion and
assuming the exercise of warrants to purchase common stock which expire upon
the closing of this offering, and as adjusted to reflect the sale of the common
stock offered by us in this offering, for:
. each person known by us to beneficially own at least 5% of the common
stock;
. each of our directors;
. each executive officer as designated in the "Management" section; and
. all directors and executive officers named in the "Management" section as
a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to the
securities.
Unless otherwise indicated below, the address for each listed director and
executive officer is Netpliance, Inc., 7600A North Capital of Texas Highway,
Austin, Texas 78731. Except as indicated by footnote, the persons named in the
table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them. The number of shares of
common stock outstanding used in calculating the percentage for each listed
person includes the shares of common stock underlying options held by that
person that are exercisable within 60 days of January 14, 2000 but excludes
shares of common stock underlying options held by any other person. Percentage
of beneficial ownership is based on 16,507,845 shares of common stock
outstanding as of February 1, 2000, assuming the conversion of the preferred
stock and the exercise of warrants to purchase common stock outstanding as of
February 1, 2000, and shares of common stock outstanding after
completion of this offering.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Beneficially Owned
Shares -----------------------
Beneficially Before After
Owned(1) Offering(1) Offering(1)
<S> <C> <C> <C>
Named Executive Officers and Directors
John F. McHale........................... 5,169,365 31.3% %
Kent A. Savage........................... 1,987,733 12.0
Paul S. Zito (2)......................... 452,195 2.7
James M. Mansour (3)..................... 348,401 2.1
Steven G. Papermaster.................... 302,428 1.8
Michael R. Corboy........................ 72,767 *
Kevin Denuccio........................... 60,000 *
David S. Lundeen (4)..................... 1,530,000 9.3
Joseph R. Zell (5)....................... 900,000 5.5
5% Stockholders
Kenneth A. Kalinoski..................... 1,518,456 9.2
Watershed Capital I, L.P. (6)............ 1,530,000 9.3
U S WEST Internet Ventures, Inc. (7)..... 900,000 5.5
All executive officers and directors as a
group
(9 persons).............................. 10,822,889 65.6
</TABLE>
- ---------------------
* Less than 1%.
(1) Does not include shares issuable upon exercise of outstanding options
granted to employees under our 1999 Stock Option and Restricted Stock Plan.
We have reserved 2,500,000 shares of our common stock
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<PAGE>
for issuance to directors, executive officers, and employees under the plan,
of which we have issued options to purchase 1,625,794 shares of common stock
at a weighted average exercise price of $4.19 per share to date.
(2) These shares are held for the benefit of Mr. Zito by Z Start I, L.P.
(3) These shares are held for the benefit of Mr. Mansour by JMM PHLP, Ltd.
(4) David S. Lundeen was appointed to our Board of Directors by Watershed
Capital I, L.P. and is managing general partner of Watershed. Includes
1,530,000 shares held by Watershed. Mr. Lundeen disclaims beneficial
ownership of the shares held by Watershed. Mr. Lundeen's address is 650
Castro Street, Suite 2000, Mountain View, California 94041.
(5) Joseph R. Zell was appointed to our Board of Directors by U S WEST Internet
Ventures, Inc. and is President--!nterprise Networking Services of U S
WEST. Includes 700,000 shares held by U S WEST and a warrant to purchase
200,000 shares of common stock held by U S WEST that is currently
exercisable. Mr. Zell disclaims beneficial ownership of these securities
held by U S WEST. Mr. Zell's address is 1999 Broadway, Denver, Colorado
80202.
(6) Watershed's address is 650 Castro Street, Suite 2000, Mountain View,
California 94041.
(7) Includes shares issuable upon exercise of a warrant to purchase 200,000
shares of common stock held by U S WEST that is currently exercisable. U S
WEST's address is 1999 Broadway, Denver, Colorado 80202.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our certificate of incorporation will
authorize the issuance of up to 250,000,000 shares of common stock, par value
$0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per
share, the rights and preferences of which may be established from time to time
by our board of directors.
The following summary of provisions of the common stock and preferred stock
does not purport to be complete and is subject to and qualified in its entirety
by, the provisions of our certificate of incorporation and bylaws, which are
included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.
Common Stock
Upon the closing of this offering, all shares of Series A, Series B and
Series C preferred stock will automatically convert on a ten-for-one basis, and
all shares of Series D preferred stock will automatically convert on a one-to-
one basis, into common stock. Each holder of common stock is entitled to one
vote for each share on all matters to be voted upon by the stockholders and
there are no cumulative voting rights. Subject to preferences that may be
applicable to any preferred stock outstanding at the time, holders of common
stock are entitled to receive ratable dividends, if any, as may be declared
from time to time by the board of directors out of funds legally available for
that purpose. In the event of a liquidation, dissolution or winding up of
Netpliance, holders of common stock would be entitled to share in our assets
remaining after the payment of liabilities and liquidation preferences on any
outstanding preferred stock. Holders of common stock have no preemptive or
conversion rights or other subscription rights and there are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are, and shares of common stock offered by us in this offering,
when issued and paid for, will be, validly issued, fully paid and
nonassessable.
Upon the closing of this offering, there will be outstanding a warrant to
purchase 200,000 shares of our common stock at $20.00 per share, which is
immediately exercisable and expires December 31, 2003.
Preferred Stock
Upon the closing of this offering, all outstanding shares of preferred stock
will convert into shares of common stock. Upon the closing of this offering,
the board of directors will be authorized, subject to Delaware law, without
stockholder approval, from time to time to issue up to an aggregate of
5,000,000 shares of preferred stock in one or more series. The board of
directors can fix the rights, preferences and privileges of the shares of each
series and any qualifications, limitations or restrictions. Issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of our outstanding voting
stock. We have no present plans to issue any shares of preferred stock.
Rights Agreements
On October 1, 1999, we and the purchasers of our Series B preferred stock
entered into an investors rights agreement. On December 3, 1999, the investors
rights agreement was amended and restated to provide for our issuance of the
Series C preferred stock. Under the terms of the amended and restated investors
rights agreement, holders of 1,500,000 shares (on an as-converted basis) of our
Series B preferred stock and Series C preferred stock were granted registration
rights with respect to the registration under the Securities Act of the shares
of common stock issuable upon conversion of their respective shares of our
preferred stock. These rights include rights to require us to include their
common stock in future registration statements we file with the SEC and, in
some cases, demand registration rights. Some holders may also require us to
register their common
41
<PAGE>
stock once we are eligible to use a short-form registration statement. However,
holders of these shares have agreed not to exercise their registration rights
until 180 days after the effective date of this prospectus. Registration of
shares of common stock upon the exercise of demand registration rights would
result in the covered shares becoming freely tradable without restriction under
the Securities Act immediately upon the effectiveness of the registration under
which these shares were registered.
On January 5, 2000, we and the purchasers of our Series D preferred stock
entered into an investors rights agreement. Under the terms of the rights
agreement, holders of 1,430,000 shares (on an as-converted basis) of our Series
D preferred stock were granted registration rights with respect to the
registration under the Securities Act of the shares of common stock issuable
upon conversion of their respective shares of Series D preferred stock. These
rights include rights to require us to include their common stock in future
registration statements we file with the SEC and, in some cases, demand
registration rights. Some holders may also require us to register their common
stock once we are eligible to use a short-form registration statement. However,
holders of these shares have agreed not to exercise their registration rights
until 180 days after the effective date of this prospectus. Registration of
shares of common stock upon the exercise of demand registration rights would
result in the covered shares becoming freely tradable without restriction under
the Securities Act immediately upon the effectiveness of the registration under
which these shares were registered.
Delaware Anti-Takeover Statute and Charter and Bylaw Provisions
Under Delaware law, we may not engage in a "business combination," which
includes a merger or sale of more than 10% of our assets, with any "interested
stockholder," namely a stockholder who owns 15% or more of our outstanding
voting stock, as well as affiliates and associates of the stockholder, for
three years following the time that stockholder became an interested
stockholder unless:
. the transaction in which the stockholder became an interested stockholder
is approved by our board of directors prior to the time the interested
stockholder attained that status;
. upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of Netpliance outstanding at the time the
transaction commenced, excluding those shares owned by persons who are
directors and also officers; or
. at or after the time the stockholder became an interested stockholder the
business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders by the affirmative vote
of at least two-thirds of the outstanding voting stock which is not owned
by the interested stockholder.
Upon the closing of this offering, certain provisions of our certificate of
incorporation and bylaws may also discourage, delay or prevent a merger or
acquisition that a stockholder may consider favorable.
Such provisions could include:
. authorizing the issuance of "blank check" preferred stock;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
42
<PAGE>
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
Netpliance. These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in our control or our management.
Limitation of Liability and Indemnification Matters
We have adopted provisions in our certificate of incorporation that
eliminate the personal liability of our directors for monetary damages arising
from a breach of their fiduciary duties in certain circumstances to the fullest
extent permitted by law. Such limitation of liability does not affect the
availability of equitable remedies, such as injunctive relief or rescission. We
are aware that, in the opinion of the Securities and Exchange Commission,
indemnification against liabilities arising out of breaches of the federal
securities laws is against
public policy and, therefore, is unenforceable. Accordingly, if a claim for
such indemnification is submitted to Netpliance, we reserve the right to submit
the issue of enforceability of any provision for indemnification, which is or
may be by its terms applicable in the circumstances, to a court of competent
jurisdiction and, if it does so, will be governed by the final adjudication of
such issue.
Our certificate of incorporation also provides that we may indemnify our
directors, and have the power to indemnify our officers, employees and agents,
to the fullest extent permitted under the Delaware law.
We also intend to enter into Indemnity Agreements with our officers and
directors.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C. has been appointed as the transfer
agent and registrar for our common stock.
Listing
We have applied for listing of our common stock on the Nasdaq National
Market under the trading symbol NPLI.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and we cannot provide any assurances that a significant public market
for our common stock will develop or be sustained after this offering. Future
sales of substantial amounts of common stock, including shares issued upon
exercise of outstanding options and warrants, in the public market, or the
possibility of such sales occurring, could adversely affect prevailing market
prices for our common stock and impair our future ability to raise capital
through an offering of equity securities.
After this offering, we will have outstanding shares of common
stock, assuming no exercise of outstanding options. Of these shares, the
shares to be sold in this offering, or shares if the
underwriters' over-allotment option is exercised in full, will be freely
tradable in the public market without restriction under the Securities Act,
unless such shares are held by our "affiliates," as that term is defined in
Rule 144 under the Securities Act.
The remaining shares outstanding upon completion of this offering
will be "restricted securities" as that term is defined under Rule 144. We
issued and sold the restricted shares in private transactions in reliance on
exemptions from registration under the Securities Act. Restricted shares may be
sold in the public market only if they are registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities
Act, as summarized below.
All of the shares outstanding prior to the offering will become available
for sale in the public market, subject to public availability of information
regarding us and volume and manner restrictions on those sales, after those
shares have been outstanding for one year. These shares will be available for
sale in the public market as follows:
<TABLE>
<CAPTION>
Number
of Shares Date
<C> <S>
Upon the closing of this offering, subject to restrictions under
Rule 144.
90 days after the date of this offering, subject to restrictions
under Rule 144.
180 days after the date of this prospectus pursuant to agreements
between the stockholders and the underwriters or Netpliance,
provided that Donaldson, Lufkin & Jenrette can waive this
restriction at any time. All of these shares will also be subject to
sales volume restrictions under Rule 144 under the Securities Act.
Upon expiration of applicable one-year holding periods under Rule
144, which will expire between 90 days after the date of this
offering and , 2001, subject to restrictions under Rule
144.
</TABLE>
Pursuant to the "lock-up" agreements of our directors, executive officers,
stockholders and optionees with the underwriters, the holders of
shares have agreed not to offer, sell, pledge or otherwise dispose of, directly
or indirectly, or announce their intention to do the same, any of our common
stock or any security convertible into, or exchangeable or exercisable for our
common stock for a period of 180 days from the date of this offering. However,
the restrictions described in this paragraph do not apply to:
. transfers as a bona fide gift or gifts;
. transfers by an individual, either during his or her lifetime or on death
by will or intestacy, to his or her immediate family or to a trust the
beneficiaries of which are exclusively the holder of the securities
and/or a member of his or her immediate family;
. distributions to limited partners or stockholders;
. transfers of our common stock purchased on the open market after this
offering; and
. with respect to some stockholders, transfers to affiliates.
44
<PAGE>
The underwriters may choose to release some or all of these shares from the
restrictions prior to the expiration of the 180-day lock-up period, although we
believe they have no current intention of doing so.
We also have entered into an agreement with the underwriters that we will
not offer, sell or otherwise dispose of common stock for a period of 180 days
from the date of this offering. On the date of the expiration of the lock-up
agreements, all of the restricted shares will be eligible for immediate sale,
of which shares will be subject to the volume, manner of sale and other
limitations under Rule 144.
Following the expiration of the lock-up periods, some shares issued upon
exercise of options that we granted prior to the date of this offering will
also be available for sale in the public market pursuant to Rule 701 under the
Securities Act. Rule 701 permits resales of such shares in reliance upon Rule
144 under the Securities Act but without compliance with the restrictions,
including the holding-period requirement, imposed under Rule 144. In general,
under Rule 144 as in effect at the closing of this offering, beginning 90 days
after the date of this prospectus, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year,
including the holding period of any prior owner who is not an affiliate, would
be entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of:
. 1% of the then-outstanding shares of common stock; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner who is not an affiliate, is entitled to sell these shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
We intend to file, within 90 days after the effective date of this offering,
a registration statement on Form S-8 to register approximately million
shares of common stock reserved for issuance under our stock option plan. The
registration statement will become effective automatically upon filing. Shares
issued under our stock option plan after the filing of a registration statement
on Form S-8 may be sold in the public market, subject to the Rule 144
limitations applicable to affiliates, the above-referenced lock-up agreements
and vesting restrictions imposed by us. Accordingly, subject to the exercise of
such options, shares registered under such registration statement will be
available for sale in the public market immediately after the 180-day lock-up
period expires.
In addition, following this offering, the holders of shares of
common stock will, under some circumstances, have rights to require us to
register their shares for future sale.
45
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 2000, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC,
FleetBoston Robertson Stephens Inc. and DLJdirect Inc., have severally agreed
to purchase from Netpliance the respective number of shares of common stock set
forth opposite their names below:
<TABLE>
<CAPTION>
Number
Underwriters of Shares
------------ ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................
Hambrecht & Quist LLC..............................................
FleetBoston Robertson Stephens Inc. ...............................
DLJdirect Inc......................................................
---
Total..............................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of legal matters
concerning the offering and to conditions precedent that must be satisfied by
us including the effectiveness of the registration statement, the continuing
correctness of our representations, the receipt of a "comfort letter" from our
accountants, the listing of the common stock for quotation on the Nasdaq
National Market and no occurrence of an event that would have a material
adverse effect on us. The underwriters are obligated to purchase and accept
delivery of all of the shares of common stock offered hereby, other than those
shares covered by the over-allotment option described below, if any are
purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to dealers, including the
underwriters, at such price less a concession not in excess of $ per share.
The underwriters may allow, and such dealers may re-allow, to other dealers a
concession not in excess of $ per share. After the initial offering of the
common stock, the public offering price and other selling terms may be changed
by the representatives at any time without notice. The underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
An electronic prospectus will be available on the Web site maintained by
DLJdirect Inc., one of the underwriters and an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation. Other than the prospectus in electronic
format, the information on this Web site relating to the offering is not part
of this prospectus and has not been approved or endorsed by Netpliance or the
underwriters, and should not be relied on by prospective investors.
Netpliance has granted to the underwriters an option, exercisable for 30
days after the date of this prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of additional shares of common stock at
the initial public offering price less underwriting discounts and commission.
The underwriters may exercise the option solely to cover over-allotments, if
any, made in connection with the offering. To the extent that the underwriters
exercise the option, each underwriter will become obligated, subject to
conditions contained in the underwriting agreement, to purchase its pro rata
portion of such additional shares based on the underwriters' percentage
underwriting commitment as indicated in the above table.
Netpliance has agreed to indemnify the underwriters against liabilities
which may arise in connection with the offering, including liabilities under
the Securities Act of 1933, or to contribute to payments that the underwriters
may be required to make.
Each of Netpliance's executive officers, directors, and certain of its
stockholders and option holders has agreed not to:
. offer, pledge, sell, contract to sell, grant, purchase any option or
contract to sell, grant any option, right or warrant to purchase, lend,
or otherwise transfer or dispose of directly or indirectly any shares of
common stock or any securities convertible into or exercisable or
exchangeable for common stock, or
46
<PAGE>
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock, whether any such transaction described above is to be
settled by delivery of common stock or other securities, in cash or
otherwise
for a period of 180 days after the date of this prospectus. Donaldson, Lufkin &
Jenrette Securities Corporation may choose to release some or all of these
shares from such restrictions prior to the expiration of the 180-day lock-up
period, although it has no current intention of doing so.
In addition, during such 180-day period, Netpliance has also agreed not to
file any registration statement with respect to, and each of its executive
officers, directors and stockholders of Netpliance have agreed not to make any
demand for, or exercise any right with respect to, the registration of any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation.
At our request, the underwriters have reserved up to five percent of the
shares offered by this prospectus for sale at the initial public offering price
to our employees, officers and directors and other individuals associated with
us and members of their families. The number of shares of common stock
available for sale to the general public will be reduced to the extent these
individuals and entities purchase these reserved shares. Any reserved shares
not purchased or confirmed for purchase will be offered by the underwriters to
the general public on the same basis as the other shares offered by this
prospectus.
We have applied to list our common stock for quotation in the Nasdaq
National Market under the symbol "NPLI".
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price of the shares of common stock
offered will be determined by negotiation among Netpliance and the
underwriters. The factors considered in determining the initial public offering
price included:
. the history of and the prospects for the industry in which Netpliance
competes;
. the past and present operations of Netpliance;
. the historical results of operations of Netpliance;
. the prospects for future earnings of Netpliance;
. the recent market prices of securities of generally comparable companies;
and
. the general condition of the securities markets at the time of the
offering.
Other than in the United States, no action has been taken by Netpliance or
the underwriters that would permit a public offering of the shares of common
stock offered in any jurisdiction where action for the purpose is required. The
shares of common stock offered may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering material or
advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about and observe any restrictions
relating to the offering and the distribution of this prospectus. This
prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any shares of common stock offered in any jurisdiction in which such an
offer or a solicitation is unlawful.
DLJ Capital Corporation, DLJ Fund Investment Partners II, L.P., DLJ Private
Equity Employees Fund, L.P. and DLJ Private Equity Partners Fund, L.P., each of
which are affiliates of Donaldson, Lufkin & Jenrette Securities Corporation,
are stockholders of Netpliance. Donaldson, Lufkin & Jenrette Securities
Corporation and its affiliates and employees own an aggregate of less than one
percent of the issued and outstanding shares of our common stock.
47
<PAGE>
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot the offering, creating a
syndicate short position. The underwriters may bid for and stabilize the price
of the common stock. In addition, the underwriting syndicate may reclaim
selling concessions from syndicate members and selected dealers if they
repurchase previously distributed common stock in syndicate covering
transactions, in stabilizing covering transactions or otherwise. These
activities may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Hughes & Luce, L.L.P., Austin, Texas. As of the date of this prospectus, a
partner of Hughes & Luce, L.L.P. beneficially owns an aggregate of 47,679
shares of our common stock. Certain legal matters will be passed upon for the
underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Austin, Texas.
EXPERTS
The financial statements of Netpliance, Inc. as of December 31, 1999 and for
the period from January 12, 1999 (inception) to December 31, 1999 have been
included herein and in the registration statement in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
A registration statement on Form S-1, including amendments thereto, relating
to the common stock offered by this prospectus has been filed by us with the
SEC. This prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the registration statement
and the exhibits and schedules thereto. For further information with respect to
us and the common stock offered by this prospectus, reference is made to the
registration statement, exhibits and schedules. A copy of the registration
statement may be inspected by anyone without charge at the public reference
facilities maintained by the SEC at 450 Fifth Street, NW, Judiciary Plaza,
Washington, D.C. 20549, and copies of all or any part thereof maybe obtained
from the SEC upon payment of the fees prescribed by the SEC. The SEC maintains
a Web site that contains reports, proxy and information statements and other
information filed electronically with the SEC. The address of the site is
http://www.sec.gov.
Upon completion of this offering, Netpliance will become subject to the
information and periodic reporting requirements of the Securities and Exchange
Act and, accordingly, will file periodic reports, proxy statements and other
information with the SEC. Such periodic reports, proxy statements and other
information will be available for inspection at the SEC's public reference
room, and their Web site referred to above.
48
<PAGE>
NETPLIANCE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report............................................... F-2
Balance Sheet.............................................................. F-3
Statement of Operations.................................................... F-4
Statement of Stockholders' Equity.......................................... F-5
Statement of Cash Flows.................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Netpliance, Inc.:
We have audited the accompanying balance sheet of Netpliance, Inc. as of
December 31, 1999 and the related statements of operations, stockholders'
equity and cash flows for the period from January 12, 1999 (inception) through
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Netpliance, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for the
period from January 12, 1999 (inception) through December 31, 1999 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Austin, Texas
January 12, 2000
F-2
<PAGE>
NETPLIANCE, INC.
BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Pro forma
December 31, (Unaudited)
Assets 1999 (note 2(l))
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 9,563,362 $ 9,563,362
Prepaid expenses.................................. 5,984,595 5,984,595
Other current assets.............................. 514,036 514,036
------------ ------------
Total current assets............................. 16,061,993 16,061,993
------------ ------------
Property and equipment, net........................ 3,102,629 3,102,629
Deferred offering costs............................ 482,513 482,513
Other noncurrent assets............................ 896,364 896,364
------------ ------------
$ 20,543,499 $ 20,543,499
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable............................ $ 1,909,487 $ 1,909,487
Accrued liabilities............................... 2,028,087 2,028,087
Current portion of capital lease obligations...... 954,221 954,221
------------ ------------
Total current liabilities........................ 4,891,795 4,891,795
Non-current portion of capital lease obligations... 636,302 636,302
------------ ------------
Total liabilities................................ 5,528,097 5,528,097
------------ ------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.01 par value;
5,000,000 shares authorized:
Series A convertible preferred stock, 658,647
shares issued and outstanding as of December 31,
1999, liquidation preference of $3,760,874, no
shares issued or outstanding pro forma
(unaudited)..................................... 16,925,598 --
Series B convertible preferred stock, 116,666
shares issued and outstanding as of December 31,
1999, liquidation preference of $6,999,960, no
shares issued or outstanding pro forma
(unaudited)..................................... 6,767,900 --
Series C convertible preferred stock, 66,668
shares issued and outstanding as of December 31,
1999, liquidation preference of $6,000,120, no
shares issued or outstanding pro forma
(unaudited)..................................... 5,979,387 --
Deposit received on Series D preferred stock
issuance......................................... 2,000,000 --
Common stock, $0.01 par value; 50,000,000 shares
authorized; 6,302,357 shares (14,822,167 shares
pro forma) issued and outstanding................ 63,024 148,822
Additional paid-in capital........................ 9,305,722 40,892,809
Deferred stock option compensation................ (1,662,400) (1,662,400)
Stockholder notes receivable...................... (821,449) (821,449)
Accumulated deficit............................... (23,542,380) (23,542,380)
------------ ------------
Total stockholders' equity....................... 15,015,402 15,015,402
------------ ------------
$ 20,543,499 $ 20,543,499
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
NETPLIANCE, INC.
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 12, 1999 (INCEPTION)
THROUGH DECEMBER 31, 1999
<TABLE>
<S> <C>
Subscription revenue.............................................. $ 25,716
Operating expenses:
Cost of services................................................. 1,136,746
Research and development......................................... 6,457,133
Sales and marketing.............................................. 12,514,908
General and administrative....................................... 3,624,152
------------
Loss from operations............................................. (23,707,223)
Interest income................................................... 304,761
Interest expense.................................................. (139,918)
------------
Net loss......................................................... $(23,542,380)
============
Weighted average common shares outstanding....................... 5,196,140
============
Loss per common share--basic and diluted......................... $ (4.53)
============
Weighted average shares outstanding--pro forma .................. 10,393,766
============
Pro forma loss per common share--basic and diluted (unaudited)... $ (2.27)
============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
NETPLIANCE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM JANUARY 12, 1999 (INCEPTION)
THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
Deposit
received
Series A Series B Series C on
Preferred Preferred Preferred Series D Common
Stock Stock Stock preferred Stock Additional
------------------- ------------------ ----------------- stock ------------------- paid-in
Shares Amount Shares Amount Shares Amount issuance Shares Amount capital
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
inception...... -- $ -- -- $ -- -- $ -- $ -- -- $ -- $ --
Issuance of
common stock... -- -- -- -- -- -- -- 7,623,377 76,234 6,748,471
Repurchase of
common stock... -- -- -- -- -- -- -- (1,327,020) (13,270) (53,081)
Exercise of
common stock
options........ -- -- -- -- -- -- -- 6,000 60 3,360
Issuance of
Series A
preferred
stock, net of
issuance costs. 658,647 16,925,598 -- -- -- -- -- -- -- --
Issuance of
Series B
preferred
stock, net of
issuance costs. -- -- 116,666 6,767,900 -- -- -- -- -- --
Issuance of
Series C
preferred
stock, net of
issuance costs. -- -- -- -- 66,668 5,979,387 -- -- -- --
Deposit received
on Series D
preferred stock
issuance....... -- -- -- -- -- -- 2,000,000 -- -- --
Deferred stock
option
compensation... -- -- -- -- -- -- -- -- -- 1,696,666
Amortization of
deferred
stock option
compensation... -- -- -- -- -- -- -- -- -- --
Issuance of
warrants to
purchase shares
of common
stock.......... -- -- -- -- -- -- -- -- -- 910,306
Net loss........ -- -- -- -- -- -- -- -- -- --
------- ----------- ------- ---------- ------ ---------- ---------- ---------- ------- ----------
Balances at
December 31,
1999........... 658,647 $16,925,598 116,666 $6,767,900 66,668 $5,979,387 $2,000,000 6,302,357 $63,024 $9,305,722
======= =========== ======= ========== ====== ========== ========== ========== ======= ==========
<CAPTION>
Deferred Total
stock Stockholder Accum- stock-
option notes ulated holders'
compensation receivable deficit equity
<S> <C> <C> <C> <C>
Balances at
inception...... $ -- $ -- $ -- $ --
Issuance of
common stock... -- (892,800) -- 5,931,905
Repurchase of
common stock... -- 71,351 -- 5,000
Exercise of
common stock
options........ -- -- -- 3,420
Issuance of
Series A
preferred
stock, net of
issuance costs. -- -- -- 16,925,598
Issuance of
Series B
preferred
stock, net of
issuance costs. -- -- -- 6,767,900
Issuance of
Series C
preferred
stock, net of
issuance costs. -- -- -- 5,979,387
Deposit received
on Series D
preferred stock
issuance....... -- -- -- 2,000,000
Deferred stock
option
compensation... (1,696,666) -- -- --
Amortization of
deferred
stock option
compensation... 34,266 -- -- 34,266
Issuance of
warrants to
purchase shares
of common
stock.......... -- -- -- 910,306
Net loss........ -- -- (23,542,380) (23,542,380)
------------- ----------- ------------- -------------
Balances at
December 31,
1999........... $(1,662,400) $(821,449) $(23,542,380) $ 15,015,402
============= =========== ============= =============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
NETPLIANCE, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 12, 1999 (INCEPTION)
THROUGH DECEMBER 31, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss........................................................ $(23,542,380)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 752,315
Noncash compensation expense................................... 1,148,023
Changes in operating assets and liabilities:
Prepaid expenses ............................................. (6,040,865)
Other current assets.......................................... (514,036)
Other assets.................................................. (434,038)
Accounts payable and accrued liabilities...................... 3,491,961
------------
Net cash used in operating activities........................... (25,139,020)
------------
Cash flows used in investing activities:
Purchases of property and equipment............................. (1,859,487)
------------
Cash flows from financing activities:
Increase in restricted cash related to capital leases........... (445,231)
Principal payments on capital lease obligations................. (348,664)
Principal payments on note payable.............................. (220,546)
Proceeds from issuance of common stock.......................... 5,936,905
Proceeds from exercise of stock options......................... 3,420
Proceeds from issuance of preferred stock, net.................. 29,672,885
Deposit received on Series D preferred stock issuance........... 2,000,000
Payment of deferred offering costs.............................. (36,900)
------------
Net cash provided by financing activities........................ 36,561,869
------------
Increase in cash and cash equivalents since inception............ $ 9,563,362
============
Supplemental disclosure:
Interest paid during period..................................... $ 139,918
============
Supplemental disclosure of noncash investing and financing
activities:
Acquisition of computer equipment through capital leases........ $ 1,939,187
============
Issuance of common stock for notes receivable................... $ 821,449
============
Accrual of deferred offering costs.............................. $ 445,613
============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) Incorporation and Nature of Business
Netpliance, Inc. ("Netpliance" or the "Company") was incorporated in the
State of Texas in January 1999 as Shbang! Inc. In May 1999, the Company's name
was changed to Netpliance, Inc.
The Company has experienced operating losses since inception as a result of
efforts to develop and market its i-opener Internet appliance and build its
network infrastructure to support the Internet service offering for customers.
The Company expects that it will continue to incur net losses as it continues
to expend significant resources on sales and marketing. There can be no
assurance that the Company will achieve or sustain profitability or positive
cash flow from its operations.
To date, the Company has funded its activities primarily through private
equity offerings, which have included sales of its common stock and preferred
stock. The Company expects to seek additional funding through private or public
equity offerings until such time as it achieves positive cash flow from
operations; however, there can be no assurance that such financing will be
available or that positive operating cash flows will be achieved.
(2) Summary of Significant Accounting Policies
(a) Cash Equivalents
For purposes of the statement of cash flows, the Company considers all short
term, highly liquid investments with an original maturity of three months or
less at the date of acquisition to be cash equivalents. At December 31, 1999,
the Company's cash equivalents principally consisted of repurchase agreements
and money market funds.
(b) Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, which are
generally three years for computer and computer related equipment and five to
seven years for non-computer furniture and equipment. Leasehold improvements
are depreciated using the straight-line method over the shorter of their
estimated lives or the term of the lease, which is currently two years.
The Company leases certain of its data communication and other equipment
under capital lease agreements. The assets and liabilities under capital lease
are recorded at the lesser of the present value of aggregate future minimum
lease payments or the fair value of the assets under lease. Assets under
capital lease are depreciated over the lesser of their estimated useful lives
of three to five years or the term of the lease.
(c) Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents and accounts
payable, are carried at historical cost which approximate their fair value
because of the short-term maturity of these instruments.
(d) Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the
F-7
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount of fair market
value less costs to sell.
(e) Revenue Recognition
Subscription revenues represent amounts earned from customer subscriptions
for Internet service and are recognized ratably over the applicable period.
Subscriptions to the Internet service are available on a monthly and annual
basis and are generally charged to customers' credit cards in advance on a
monthly basis.
(f) Advertising and Customer Acquisition Costs
Advertising costs are included in sales and marketing. Production costs are
expensed as incurred and communication costs are expensed the first time the ad
is run. Advertising costs approximated $5.7 million from January 12, 1999
(inception) through December 31, 1999. At December 31, 1999, the Company had
prepaid $3.15 million of advertising costs for television commercials that have
not yet run. This amount is included in prepaid expenses and will be expensed
the first time the commercial is run.
The Company subcontracts the manufacturing and assembly of its i-opener
Internet appliance, which is shipped directly to the customer. The Company
offers its i-opener Internet appliance and accessories at a price below cost,
as an incentive for new customers to subscribe to its Internet service. The
Company includes the loss generated from the sale of the units and accessories
in sales and marketing expenses, as the loss primarily represents customer
acquisition costs. The loss on the sale of i-opener Internet appliances and
related accessories for the period ended December 31, 1999 approximated $1.57
million on sales proceeds of approximately $1.3 million. The Company records a
provision for estimated warranty costs and sales returns at the time of sale
which is recorded as sales and marketing expense. To date, the Company's
warranty costs have not been significant. The sales return allowance was
$110,000 at December 31, 1999.
(g) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(h) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(i) Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, in
F-8
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
accounting for its fixed plan stock options. As such, compensation expense is
recorded on the date of grant only if the current fair value of the underlying
stock exceeds the exercise price. The disclosure option of SFAS
No. 123, "Accounting for Stock-Based Compensation," requires that companies
which do not choose to account for stock-based compensation as prescribed by
this Statement shall disclose the pro forma effects on earnings and earnings
per share as if SFAS No. 123 had been adopted.
(j) Comprehensive Income
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in the financial
statements. Comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to owners. To
date, no elements of comprehensive income exist other than net loss.
(k) Segments
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company has determined that it did not have any separately reportable
business segments for the period ended December 31, 1999.
(l) Unaudited Pro Forma Balance Sheet
The Board of Directors authorized the Company to file a Registration
Statement with the Securities and Exchange Commission permitting the Company to
sell shares of common stock in an initial public offering ("IPO"). The
Registration Statement was filed on December 23, 1999. If the IPO is
consummated as presently anticipated, all shares of Series A, Series B, and
Series C preferred stock will automatically convert into shares of common stock
at a ten-for-one conversion ratio. The unaudited pro forma balance sheet
reflects the conversion of the preferred stock as though it occurred as of
December 31, 1999.
(3) Net Loss Per Share
Historical
Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, "Earnings Per Share." In accordance with SFAS No. 128 and SEC Staff
Accounting Bulletin No. 98, basic loss per share is computed using the weighted
average number of common shares outstanding during the period. Diluted loss per
share is equivalent to basic loss per share because outstanding stock options,
warrants and convertible preferred stock are anti-dilutive. Potentially
dilutive securities that were excluded from the calculation of loss per share
because their effect was antidilutive were options to purchase 1,239,250 shares
of common stock, warrants to purchase 281,878 shares of common stock and shares
of preferred stock convertible into 8,419,810 shares of common stock.
Pro Forma Net Loss Per Share (Unaudited)
The following table sets forth the computation of the unaudited pro forma
basic and diluted loss per share for the period, assuming the conversion of the
Series A, B and C preferred stock into shares of the Company's
F-9
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
common stock effective upon the closing of the Company's initial public
offering as if such conversion occurred at the date of issuance:
<TABLE>
<S> <C>
Numerator:
Net loss..................................................... $(23,542,380)
Denominator:
Weighted average common shares outstanding................... 5,196,140
Conversion of Series A preferred stock....................... 4,843,991
Conversion of Series B preferred stock....................... 300,754
Conversion of Series C preferred stock....................... 52,881
------------
Shares used in pro forma calculation......................... 10,393,766
------------
Pro forma basic and diluted loss per share................... $ (2.27)
============
</TABLE>
(4) Property and Equipment
Property and equipment at December 31, 1999 consists of:
<TABLE>
<S> <C>
Computer equipment.............................................. $2,482,568
Furniture and fixtures.......................................... 221,822
Leasehold improvements.......................................... 74,897
Office and other equipment...................................... 159,805
Software........................................................ 859,582
----------
3,798,674
Less accumulated depreciation and amortization.................. (696,045)
----------
Net property and equipment...................................... $3,102,629
==========
</TABLE>
The Company's depreciation expense for the period from January 12, 1999
(inception) through December 31, 1999 totaled $696,045. Included in property
and equipment and accumulated depreciation at December 31, 1999 are $1,939,187
and $473,240, respectively, related to equipment on capital lease. Amortization
of assets leased under capital lease arrangements is included in depreciation
expense.
Terms of one of the Company's equipment leases calls for a letter of credit
in an amount equal to 25% of the value of the equipment. The Company has
pledged a certificate of deposit (included in other noncurrent assets at
December 31, 1999) in the amount of $445,231 as collateral for the letter of
credit issued by a financial institution.
(5) Accrued Liabilities
Accrued liabilities at December 31, 1999 consists of the following:
<TABLE>
<S> <C>
Payroll and employee benefits................................... $ 460,376
Professional services........................................... 545,000
Marketing and promotions........................................ 242,752
Other........................................................... 779,959
----------
$2,028,087
==========
</TABLE>
F-10
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(6) Notes Receivable
From January 12, 1999 (inception) through December 31, 1999, the Company
issued shares of its common stock in exchange for promissory notes to five
employees of the Company. The aggregate amount of the notes totaled $892,800.
In conjunction with the resignation of one of the Company's founders, one of
the notes was forgiven as part of the consideration for the repurchase of the
founder's shares. At December 31, 1999, the remaining four notes receivable
from employees were outstanding and aggregated $821,449. The notes are secured
by the common stock, bear interest at 7% and mature from January 18, 2004
through November 8, 2004. The notes have been reflected as a reduction of
stockholders' equity on the accompanying balance sheet.
(7) Capital Stock
Common Stock
In March 1999, the Company repurchased approximately 1.3 million shares of
its common stock from one of its original founders in exchange for cash of
approximately $250,000 and a $220,546 note payable. The note payable bore
interest at 7% per annum and was paid in December 1999. The repurchased shares
were subsequently reissued to other stockholders. As the founder's shares were
issued in exchange for a note receivable that was never paid, the subsequent
repurchase of the shares, together with certain other costs related to the
founder's separation from the Company, was accounted for as compensation
expense. Such expense aggregated $472,000, and is included in general and
administrative expenses for the period ended December 31, 1999.
Convertible Preferred Stock
From inception through December 31, 1999, the Company issued 658,647 shares
of Series A preferred stock ("Series A") at prices ranging form $5.71 to $60
per share, 116,666 shares of Series B preferred stock ("Series B") at $60 per
share and 66,668 shares of Series C preferred stock ("Series C") at $90 per
share. Net proceeds to the Company approximated $16.9 million, $6.8 million and
$6.0 million for the issuance of Series A, Series B and Series C, respectively.
The Series A is convertible at the option of the holder into ten shares of
common stock for each share of Series A. Additionally, each share of Series A
automatically converts into ten shares of common stock upon the Company's
consummation of a public offering of its common stock or a consolidation or
merger of the Company with or into any other corporation or the sale or other
transfer of all or substantially all of the assets of the Company.
Series B and Series C may be converted at the option of the holder into
shares of common stock at a rate equal to the product of the number of shares
of preferred stock and the initial purchase price for such shares, divided by
the Conversion Price, as defined. The initial Conversion Price per share is $6
and $9 for Series B and Series C, respectively. Additionally, each share of
Series B and Series C automatically converts at the Conversion Price into
shares of common stock upon the Company's consummation of an initial firm
underwritten public offering of its common stock raising gross proceeds to the
Company of $15 million or more at an offering price per share greater than or
equal to 150% of the initial Conversion Price, upon a consolidation or merger
of the Company with or into any other corporation or the sale or other transfer
of all or substantially all of the assets of the Company.
In the event of any liquidation or dissolution or winding up of the Company,
voluntary or involuntary, the holders of each series of preferred stock shall
be entitled to receive, subject to rights of any other class of stock
F-11
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
which ranks senior to the applicable series of preferred stock but before any
distribution is made on any class of stock ranking junior to the applicable
series of preferred stock, a liquidation preference plus any declared and
unpaid dividends. At December 31, 1999, the Series A, B and C carried a
liquidation preference equal to $5.71, $60 and $90 per share, respectively.
During the time the preferred stock is outstanding, the Company may not
declare or pay any dividends on any share of common stock unless a dividend
(including previously accrued, but unpaid dividends) is paid with respect to
all outstanding shares of the preferred stock. The holders of the preferred
stock will be entitled to receive dividends on each share of common stock into
which the preferred stock is then convertible. Any accrued dividends on the
preferred stock are payable upon the conversion of the preferred stock or
liquidation of the Company. No dividends had been declared or paid as of
December 31, 1999.
On December 22, 1999, the Company entered into an irrevocable agreement to
sell 1,430,000 shares of Series D Convertible Preferred Stock ("Series D") for
$20 per share in a private placement. On January 5, 2000, the Company
consummated the Series D offering and issued the Series D. Net proceeds to the
Company approximated $27.1 million. The holders of Series D are entitled to the
same voting and dividend rights as Series B and Series C and have a liquidation
preference equal to the original purchase price of $20 per share and in
preference to the Series A, Series B and Series C. The Series D may be
converted at the option of the holder into shares of common stock at an initial
conversion ratio of one-for-one. In December 1999, a purchaser of Series D paid
$2 million for its shares in advance of the Company issuing the shares.
The Company has entered into a shareholder agreement with three of its
founders (the "Agreement"). Among other provisions, the Agreement provides the
Company the right of first refusal to repurchase the founders' shares of common
and preferred stock upon their voluntary or involuntary transfer of the shares.
This Agreement will terminate upon the closing of this offering.
(8) Stock Options and Warrants
Stock Option Plan
In January 1999, the Company established the Shbang! Inc. Stock Option and
Restricted Stock Plan (the "Plan"). The Plan provides for the grant to
employees of the Company of incentive stock options to purchase shares of the
Company's common stock. The Plan also provides for the grant to certain
employees, officers, directors and consultants of the Company of non-qualified
options to purchase shares of the Company's common stock. The authorized number
of available options is 1,500,000. The Plan is administered by a committee
appointed by the Board of Directors which determines the terms of the options
granted, including the exercise price, the number of shares subject to option,
and the option vesting period. Options generally have a maximum term of ten
years and vest in equal annual increments over a four year period beginning one
year from the date of grant. As of December 31, 1999, there were 260,750
options available for grant under the Plan.
Pro forma information assuming the Company had accounted for its employee
stock options granted under the fair value method prescribed by SFAS 123 is
presented below. The per share weighted-average fair value of stock options
granted through December 31, 1999 was $0.99 on the date of grant using a
minimum value option pricing model (0% volatility). The fair value of options
was estimated using a risk-free interest rate of 6.2%, a dividend yield of 0%
and a weighted average expected life of 4 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's historical and pro forma net loss and net loss per share for the
F-12
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
period from January 12, 1999 (inception) through December 31, 1999 are as
follows:
<TABLE>
<S> <C>
Net loss (in thousands):
As reported..................................................... $(23,542)
Pro forma....................................................... $(24,946)
Basic and diluted net loss per share:
As reported..................................................... $ (4.53)
Pro forma....................................................... $ (4.80)
</TABLE>
A summary of changes in common stock options is as follows:
<TABLE>
<CAPTION>
Weighted
average
exercise price
Shares per share
<S> <C> <C>
Options granted....................................... 1,448,750 $2.79
Options exercised..................................... (6,000) 0.57
Options forfeited..................................... (203,500) 1.02
--------- -----
Options outstanding at December 31, 1999.............. 1,239,250 $3.09
========= =====
</TABLE>
Ten thousand options with an exercise price of $7.65 were exercisable as of
December 31, 1999.
At December 31, 1999, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $.57 to $7.65 and 9.6
years, respectively. A summary of outstanding stock options as of December 31,
1999 follows:
<TABLE>
<CAPTION>
Number Contractual Exercise
of options life price
<S> <C> <C>
426,500 9.3 $0.57
371,500 9.6 $3.57
193,500 9.7 $4.20
175,750 9.9 $5.10
72,000 10.0 $7.65
--------- -----
1,239,250 $3.09
========= =====
</TABLE>
The Company had $532,470 of deferred stock option compensation as of
December 31, 1999 and recognized stock-based compensation expense of $26,474
during the period ended December 31, 1999 as a result of granting stock options
with exercise prices below the estimated fair value of the Company's common
stock at the date of grant. Deferred stock option compensation has been
recorded as a component of stockholders' equity and is being amortized as a
charge to general and administrative expense over the vesting period of the
applicable options.
On December 21, 1999, the Company granted an option to purchase 323,044
shares of common stock at $7.65 per share to a consultant who is expected to
become an officer of the Company. The Company recorded $1,129,930 of deferred
stock compensation as of December 31, 1999 and recognized $7,793 of stock-based
compensation expense for the period then ended, which has been recorded in
general and administrative expense. The fair value of the option was computed
using the Black-Scholes model using an assumed volatility of 50%, a risk-free
interest rate of 6.2%, a weighted-average expected life of four years, and a
dividend rate of 0%.
F-13
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
Warrants
On October 1, 1999 and December 3, 1999, the Company issued 71,878 and
10,000 warrants, respectively, to a third party in connection with the private
placement of the Company's preferred stock. The warrants enable the holder to
purchase shares of the Company's common stock at $6 and $9 per share,
respectively. The warrants' fair value on the date of grant was estimated to be
$39,685. Additionally, subsequent to December 31, 1999, in connection with the
Series D offering, the Company issued warrants to purchase 73,800 shares of the
Company's common stock at $20 per share.
On December 22, 1999 the Company entered into a nonbinding Memorandum of
Understanding ("MOU") with U S WEST !nterprise Networking Services ("U S WEST")
to form a strategic alliance for the distribution of the i-opener Internet
appliance. As consideration for signing the MOU, the Company granted to US West
for $5,000 an immediately exercisable warrant to purchase 200,000 shares of the
Company's common stock at $20 per share. The exercise price of the warrant is
subject to adjustment under certain conditions, and expires on December 31,
2003. The fair value of the warrant on the measurement date was $893,210, which
has been recognized as sales and marketing expense as there were no remaining
performance obligations on behalf of the warrant holder. The fair value of the
warrant was estimated using the Black-Scholes model using an assumed volatility
of 50%, a risk-free interest rate of 6%, a weighted-average expected life of
one year, and a dividend rate of 0%.
Under the terms of the MOU it is anticipated that the Company will issue to
U S WEST incentive warrants to purchase up to 500,000 shares of the Company's
common stock at $20 per share upon the signing of a binding agreement. It is
anticipated that the number of shares to be issued under the incentive warrants
will be subject to adjustment based on the number of users of the i-opener
activated by U S WEST. When and if it becomes probable that the performance
criteria will be achieved, the Company will record the then fair value of the
earned warrants as a charge to sales and marketing expense.
(9) Income Taxes
As a result of net operating losses, the Company has not recorded a
provision for income taxes. The components of the deferred tax assets
(liabilities) and related valuation allowance at December 31, 1999 are as
follows:
<TABLE>
<S> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards........................... $ 4,650,000
Start-up costs capitalized for tax purposes................ 3,655,000
Tax credits (research)..................................... 229,000
Property and equipment, principally due to differences in
depreciation.............................................. 187,000
Stock option compensation expense.......................... 357,000
Other...................................................... 128,000
-----------
Total deferred tax assets.................................... 9,206,000
Less: valuation allowance.................................... (9,206,000)
-----------
Net deferred tax assets...................................... $ --
===========
</TABLE>
In assessing the potential realization of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the Company attaining future taxable income during the
periods in which those temporary differences become deductible. Due to the
uncertainty surrounding the realization of the
F-14
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
benefits of its tax attributes, including net operating loss carryforwards, in
future tax returns, the Company has provided a 100% valuation allowance on its
deferred tax assets.
At December 31, 1999, the Company had net operating losses for federal
income tax purposes of approximately $12,061,000 and research tax credits of
approximately $229,000. The net operating loss carryforwards plus tax credit
carryforwards will expire at various dates beginning in 2019, if not utilized.
(10) Commitments and Contingencies
Leases
The Company leases its office space and certain equipment under non-
cancelable operating leases expiring in various years through 2002. The Company
also leases equipment, primarily computer equipment, under capital leases.
Total rent expense for all operating leases from January 12, 1999 (inception)
through December 31, 1999 was $720,756. Minimum lease commitments under non-
cancelable leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating Capital
<S> <C> <C>
Years ended December 31:
2000...................................................... $ 921,672 $1,151,928
2001...................................................... 340,361 763,603
2002...................................................... 1,645 --
---------- ----------
Total lease payments...................................... $1,263,678 1,915,531
==========
Interest at rates ranging from 9% to 18%.................. 325,008
----------
Obligations under capital leases at December 31, 1999..... $1,590,523
==========
</TABLE>
The Company's lease for its office space is with a related party. The lease
calls for base payments of $44,625 plus common area costs and terminates in
2001. Total rent expense on this lease for the period ended December 31, 1999
approximated $479,000.
The Company is involved in certain legal proceedings as a part of its normal
course of business. Management does not believe that the ultimate resolution of
these matters will have a material impact on the Company's results of
operations or financial position.
Significant Contracts
In May 1999, the Company entered into an agreement with QNX Software Systems
Ltd. to purchase licenses for copies of the operating system software utilized
in the i-opener Internet appliance. The agreement called for a prepayment of
$500,000 and a subsequent payment of $247,000 on May 1, 2000 for the initial
copies of the software. The unamortized portion of the initial prepayment has
been included in prepaid expenses at December 31, 1999. Amounts are expensed as
sales and marketing expense as the units are shipped.
In June 1999, the Company signed an agreement with GTE for GTE to provide
the nationwide telecommunications network that will enable the Company to
provide its customers with Internet access. The term of the agreement is 36
months and calls for monthly payments based on actual usage billings during the
first six months. The contract includes minimum monthly payments of $82,500 for
months seven to nine, $165,500 for months 10 to 12 and $250,000 for months 13
to 36. Amounts are expensed as incurred based on the greater of the actual
billings or the minimum monthly payment as cost of services.
F-15
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
In June 1999, the Company signed an agreement under which GTE Communications
Corporation agreed to provide help-desk services for Internet service
customers. The term of the agreement is 24 months and calls for a per minute
charge to the Company for service. The agreement also obligates the Company to
pay for a minimum of 250,000 and 500,000 minutes per month for the first and
second years, respectively. Amounts are expensed as incurred based on the
greater of the actual billings or the minimum monthly payment as cost of
services.
In September 1999, the Company entered into an agreement with Quanta
Computer for Quanta to manufacture the i-opener Internet appliance. The initial
term of the agreement is for three years expiring on August 15, 2002, and is
renewable at the Company's option for one year periods. As part of the
agreement, Quanta has granted to Netpliance six months exclusivity on products
covered under the agreement. In December 1999, the Company prepaid Quanta $2.3
million as a deposit for production of an agreed number of units. This amount
has been included in prepaid expenses at December 31, 1999. The Company is
committed to purchase from Quanta an agreed number of units by the end of
February 2000. The Company's remaining commitment approximates $5.7 million.
(11) Employee Benefit Plan
The Company has a savings plan (the "Plan") that qualifies as a deferred
salary arrangement under section 401 (k) of the Internal Revenue Code. Under
the Plan, participating employees may defer a portion of their pretax earnings,
up to the Internal Revenue Service annual contribution limit. The Company
currently is not making any matching contributions to the Plan.
F-16
<PAGE>
Inside of Back Cover:
[ARTWORK]
Advertisement for the i-opener Internet appliance showing a pair of glasses
with tape around the nose and a price tag of $299, with a caption below that
reads:
"Now it's affordable for everyone to become a webhead. Introducing the
i-opener. The simple, convenient way to access the internet and e-mail
without a computer. Being a webhead has never been easier."
Call 1.800.iopener or visit www.netpliance.com
The i-opener Internet appliance is depicted to the right with the i-opener
logo below.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 2000
[NETPLIANCE LOGO APPEARS HERE]
Shares of Common Stock
------------------
PROSPECTUS
------------------
Donaldson, Lufkin & Jenrette
Chase H&Q
Robertson Stephens
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Netpliance
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 2000, (25 days after the date of this prospectus), all dealers
that effect transactions in these shares of common stock may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses to be incurred by the Registrant
in connection with the issuance and distribution of the securities being
registered.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.............. $26,400
National Association of Securities Dealers, Inc. Filing Fee...... 10,500
Printing and Mailing Expenses.................................... *
Accounting Fees and Expenses..................................... *
Legal Fees and Expenses.......................................... *
Blue Sky Fees and Expenses....................................... 5,000
Registrar and Transfer Agent Fees................................ *
Miscellaneous Expenses........................................... *
-------
Total............................................................ *
=======
</TABLE>
- ---------------------
* To follow.
All of the above fees and expenses, except the Securities and Exchange
Commission registration fee and the National Association of Securities Dealers,
Inc. filing fee, represent estimates only.
Item 14. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person, including any
officer or director, who is, or is threatened to be made, party to any
threatened, pending or completed legal action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of such corporation), by reason of the fact that such person was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation. The indemnity may include expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such officer, director, employee or agent acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests and, for criminal proceedings, had no reasonable cause to believe
that his conduct was unlawful. A Delaware corporation may indemnify officers
and directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director actually and
reasonably incurred.
The Certificate of Incorporation of the Registrant provides that no director
of the Registrant will be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, except to the
extent such exemption from liability or limitation thereof is not permitted
under the DGCL as currently in effect or as the same may hereafter be amended.
Pursuant to Section 102(b)(7) of the DGCL the Certificate of Incorporation of
the Registrant eliminates such liability, except for liabilities related to
breach of duty of loyalty, actions not in good faith and certain other
liabilities.
The Registrant has a directors' and officers' liability insurance policy.
The Bylaws of the Registrant provide for indemnification of the officers and
directors of the Company to the fullest extent permitted by the applicable law.
In addition, the Company will enter into an indemnification agreement with each
of its directors, pursuant to which they will be entitled to advances for the
costs of defending actions against them in addition to that provided by the
indemnification provisions in the Certificate of Incorporation or the Company's
officers' and directors' insurance policy.
II-1
<PAGE>
The form of Underwriting Agreement attached hereto as Exhibit 1.1, which
provides for, among other things, the Registrant's sale to the Underwriters of
the securities being registered herein, will obligate the Underwriters to
indemnify the Registrant and Registrant's officers and directors against
certain liabilities under the Securities Act of 1933.
Item 15. Recent Sales of Unregistered Securities
Since our formation, we have issued and sold the following securities (as
adjusted for a -for- stock split effective immediately prior to the
effectiveness of this Registration Statement).
(a) In January 1999, we issued 1,000 shares of common stock at $0.50 per
share in order to initially capitalize the Registrant as required by state law.
(b) Also in January 1999, we issued 4,800,000 shares of common stock at
$0.05 per share, for an aggregate purchase price of $240,000, to our founders.
1,327,020 of these shares were subsequently redeemed and reissued to investors
in April 1999 as described in (d) below.
(c) Also in January 1999, we issued an aggregate of 350,000 shares of Series
A preferred stock at $5.71 per share for an aggregate purchase price of
$2,000,000 to one of our founders.
(d) From February 1999 through April 1999, we issued an aggregate of
1,477,022 shares of Common Stock at $0.57 per share for an aggregate purchase
price of $841,902 to 21 investors.
(e) In May and July 1999, we issued an aggregate of 185,714 shares of Series
A preferred stock at $42.00 per share for an aggregate purchase price of
$7,800,000 to one of our founders.
(f) In July 1999, we issued 40,000 shares of common stock at $3.57 per share
for an aggregate purchase price of $142,800 to one investor in connection with
his employment with us.
(g) In July and August 1999, we issued an aggregate of 1,175,355 shares of
common stock at $4.20 per share for an aggregate purchase price of $4,936,491
to 24 investors. Also in July 1999, we issued shares upon exercise of an option
to purchase 6,000 shares of our common stock at $0.57 per share issued in
February 1999 to a consultant of Netpliance.
(h) In September 1999, we issued 122,933 shares of Series A preferred stock
at $60.00 per share for an aggregate purchase price of $7,375,980 to 30
investors.
(i) In October 1999, we issued 116,666 shares of Series B preferred stock at
$60.00 per share for an aggregate purchase price of $7,000,000 to one investor
and entered into an agreement to put, prior to December 31, 1999, 66,668 shares
of Series C preferred stock at $90.00 per share to that investor and one of our
founders. We also issued 30,000 shares of common stock to the director
nominated by the Series B preferred stock purchaser at a purchase price of
$5.10 per share in October 1999.
(j) In November 1999, we issued 100,000 shares of common stock at $5.10 for
an aggregate purchase price of $510,000 to one investor in connection with his
employment with us.
(k) In December 1999, we issued an aggregate of 66,668 shares of Series C
preferred stock to the investor in Series B preferred stock and one of our
founders pursuant to the October agreement, at $90.00 per share, for an
aggregate purchase price of $6,000,000.
(l) On December 22, 1999, we entered into irrevocable commitments to sell an
aggregate of 1,430,000 shares of Series D preferred stock for an aggregate
purchase price of $28,600,000 to eight investors and granted a warrant to
purchase 200,000 shares of our common stock to one of those investors. In
January 2000, we issued the 1,430,000 shares of Series D preferred stock and
30,000 shares of common stock.
II-2
<PAGE>
From January 12, 1999 to February 1, 2000, we granted options to purchase an
aggregate of 1,779,394 shares of common stock to our directors, executive
officers, employees and consultants pursuant to our stock option plan at a
weighted average exercise price of $5.29.
None of the foregoing transactions involved any public offering, and we
believe that each transaction was exempt from the registration requirements of
the Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients in
each such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about
Netpliance, Inc.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <C> <S>
1.1 * Form of Underwriting Agreement among Netpliance and the
Underwriters.
3.1 Certificate of Incorporation of Netpliance.
3.2 ** Bylaws of Netpliance.
4.1 Specimen Certificate for Common Stock.
5 * Opinion of Hughes & Luce, L.L.P. as to the validity of the shares
of Common Stock of Netpliance being registered.
10.1 + Internetworking Agreement by and between GTE Internetworking
Incorporated and Netpliance dated as of May 30, 1999, as amended.
10.2 +** OEM Purchase Agreement by and between Netpliance and Quanta
Computer dated as of August 15, 1999.
10.3 ** Sublease Agreement by and between Netpliance and Powershift
Venures, L.L.C. dated June 15, 1999.
10.4 * Netpliance's Amended and Restated 1999 Stock Option and Restricted
Stock Plan.
10.5 * Netpliance's Employee Stock Purchase Plan.
10.6 ** Amended and Restated Rights Agreement among Netpliance and
Watershed Capital I, L.P. and John F. McHale dated as of December
3, 1999.
10.7 ** Employment Agreement by and between Netpliance and Kent A. Savage
dated February 1, 1999.
10.8 ** Employment Agreement by and between Netpliance and Kenneth A.
Kalinoski dated February 1, 1999.
10.9 Form of Indemnity Agreement between Netpliance and its Directors
and Officers.
10.10 * Series D Rights Agreement among Netpliance and the purchaser of
Series D preferred stock dated January 5, 2000.
10.11 Voting Agreement among Netpliance, U S WEST Internet Ventures,
Inc., John F. McHale and Kent A. Savage dated December 22, 1999.
21 There are no principal subsidiaries of Netpliance, Inc.
23.1 Consent of KPMG LLP.
23.2 * Consent of Hughes & Luce, L.L.P.
24 Power of Attorney (included in this Registration Statement).
27.1 ** Financial Data Schedule.
</TABLE>
- ---------------------
* To be filed by amendment.
** Previously filed
+ Confidential treatment requested as to certain portions of this Exhibit.
(b) Financial Statements filed as part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.
II-3
<PAGE>
Item 17. Undertakings
(a) The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under Item 14 or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) for the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Austin, State of Texas,
on February 1, 2000.
NETPLIANCE, INC.
/s/ Kent A. Savage
By: _________________________________
Kent A. Savage
President and Chief Executive
Officer
/s/ M. David Hampton
By: _________________________________
M. David Hampton
Treasurer and Controller
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board February 1, 2000
____________________________________
John F. McHale
/s/ Kent A. Savage President and Chief February 1, 2000
____________________________________ Executive Officer and
Kent A. Savage Director (Principal
Executive Officer)
/s/ M. David Hampton Treasurer and Controller February 1, 2000
____________________________________ (Principal Accounting
M. David Hampton Officer)
* Director and Secretary February 1, 2000
____________________________________
Paul S. Zito
* Director February 1, 2000
____________________________________
Michael R. Corboy
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director February 1, 2000
____________________________________
David S. Lundeen
* Director February 1, 2000
____________________________________
James M. Mansour
* Director February 1, 2000
____________________________________
Steven G. Papermaster
* Director February 1, 2000
____________________________________
Kevin Denuccio
* Director February 1, 2000
____________________________________
Joseph R. Zell
/s/ Kent A. Savage
* By __________________________
Kent A. Savage
Attorney-in-Fact
Pursuant to Power of Attorney
</TABLE>
II-6
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number
<C> <S>
1.1 * Form of Underwriting Agreement among Netpliance and the Underwriters.
3.1 Certificate of Incorporation of the Company.
3.2** Bylaws of the Company.
4.1 Specimen Certificate for Common Stock.
5 * Opinion of Hughes & Luce, L.L.P. as to the validity of the shares of
Common Stock of the Company being registered.
10.1 + Internetworking Agreement by and between GTE Internetworking
Incorporated and Netpliance dated as of May 30, 1999.
10.2 +** OEM Purchase Agreement by and between Netpliance and Quanta Computer
dated as of August 15, 1999.
10.3** Sublease Agreement by and between Netpliance and Powershift Ventures,
L.L.C. dated June 15, 1999.
10.4 * Netpliance's Amended and Restated 1999 Stock Option and Restricted
Stock Plan.
10.5 * Netpliance's Employee Stock Purchase Plan.
10.6** Amended and Restated Rights Agreement among the Company and Watershed
Capital I, L.P. and John F. McHale dated as of December 3, 1999.
10.7** Employment Agreement by and between Netpliance and Kent A. Savage
dated
February 1, 1999.
10.8** Employment Agreement by and between Netpliance and Kenneth A.
Kalinoski dated February 1, 1999.
10.9 Form of Indemnity Agreement between the company and its Directors and
Officers.
10.10* Series D Rights Agreement among Netpliance and the purchaser of
Series D preferred stock dated January 5, 2000.
10.11 Voting Agreement among Netpliance, U S WEST Internet Ventures, Inc.,
John F. McHale and Kent A. Savage dated December 22, 1999.
21 There are no principal subsidiaries of Netpliance, Inc.
23.1 Consent of KPMG LLP.
23.2 * Consent of Hughes & Luce, L.L.P. (included in the opinion filed
herewith as Exhibit 5).
24 Power of Attorney (included in this Registration Statement).
27.1** Financial Data Schedule.
</TABLE>
- ---------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested as to certain portions of this Exhibit.
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
NETPLIANCE, INC.
ARTICLE I
The name of the corporation is Netpliance, Inc. (the "Corporation").
ARTICLE II
The name of the Corporation's registered agent and the address of its
registered office in the State of Delaware is The Corporation Trust Company,
1209 Orange Street, Wilmington, New Castle County, Delaware 19801.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware ("GCL").
ARTICLE IV
The total number of shares of capital stock which the Corporation shall
have the authority to issue is two hundred fifty-five million (255,000,000)
shares divided into two classes, of which one hundred million (250,000,000)
shares shall be Common Stock with a par value of $0.01 per share and five
million (5,000,000) shares shall be designated as Preferred Stock with a par
value of $0.01 per share.
A. Preferred Stock. The board of directors is expressly authorized to
---------------
provide for the issue of all or any shares of the Preferred Stock, in one or
more series, and to fix for each such series such designations, powers,
preferences and rights and such qualifications, limitations or restrictions
thereof, as shall be stated and expressed in the resolution or resolutions
adopted by the board of directors providing for the issue of such series (a
"Preferred Stock Designation") and as may be permitted by the GCL. The number of
authorized shares of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to vote generally in the
election of directors (the "Voting Stock"), voting together as single class,
without a separate vote of the holders of the Preferred Stock, or any series
thereof, unless a vote of any such holders is required pursuant to any Preferred
Stock Designation.
B. Common Stock. Except as otherwise required by law or as otherwise
------------
provided in any Preferred Stock Designation, the holders of the Common Stock
shall exclusively possess all
1
<PAGE>
voting rights and powers and the holders of the Common Stock shall have one vote
for each share of Common Stock held of record.
ARTICLE V
The board of directors is expressly authorized to adopt, amend or repeal
the by-laws of the Corporation. Any by-laws made by the directors under the
powers conferred hereby may be amended or repealed by the directors or by the
stockholders. Notwithstanding the foregoing and anything contained in this
Certificate of Incorporation to the contrary, the by-laws shall not be amended
or repealed by the stockholders, and no provision inconsistent therewith shall
be adopted by the stockholders, without the affirmative vote of the holders of
at least 80% of the Voting Stock.
ARTICLE VI
The business and affairs of the Corporation shall be managed by or under
the direction of the board of directors. The board of directors may exercise
all such authority and powers of the Corporation and do all such lawful acts and
things as are not by statute or this Certificate of Incorporation directed or
required to be exercised or done by the shareholders. Directors need not be
elected by written ballot unless the Bylaws of the otherwise provide.
A. Number of Directors
The number of directors constituting the initial board of directors is one
(1). The number of directors of the Corporation shall be fixed from time to
time by action of not less than a majority of the members of the board of
directors then in office, though less than a quorum, but in no event shall be
less than one (1) nor more than fifteen (15).
B. Vacancies
Subject to the rights, if any, of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the board of directors
resulting from death, resignation, disqualification or removal may be filled
only by a majority vote of the directors then in office (and not by the
stockholders), though less than a quorum, and directors so chosen shall hold
office for a term expiring at the next annual meeting of stockholders and until
such director's successor shall have been duly elected and qualified.
C. Removal
Subject to the rights, if any, of any series of Preferred Stock then
outstanding, any director, or the entire board of directors, may be removed from
office at any time, with or without cause and only by the affirmative vote of
the holders of at least 80% of the shares of Voting Stock.
2
<PAGE>
ARTICLE VII
Nominations of persons for election to the board of directors may be made
at an annual meeting of stockholders or special meeting of stockholders called
by the board of directors for the purpose of electing directors (i) by or at the
direction of the board of directors or (ii) by any stockholder of the
Corporation entitled to vote for the election of directors at such meeting who
complies with the notice procedures set forth in this Article VII. Such
nominations, other than those made by or at the direction of the board of
directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice must be delivered to
or mailed and received at the principal executive offices of the Corporation not
less than 90 days nor more than 120 days prior to the scheduled date of the
meeting, regardless of any postponement, deferral or adjournment of that meeting
to a later date; provided, however, that if less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so delivered or received not
later than the close of business on the 10th day following the earlier of (i)
the day on which such notice of the date of the meeting was mailed or (ii) the
day on which such public disclosure was made.
A stockholder's notice to the Secretary shall set forth: (i) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director (a) the name, age, business address and residence address of such
person, (b) the principal occupation or employment of such person, (c) the class
and number of shares of the Corporation that are beneficially owned by such
person on the date of such stockholder's notice and (d) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, or any successor statute thereto (the "Exchange Act") (including,
without limitation, such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (ii) as to the
stockholder giving notice (a) the name and address, as such information appears
on the Corporation's books, of such stockholder and any other stockholders known
by such stockholder to be supporting such nominee(s), (b) the class and number
of shares of the Corporation which are beneficially owned by such stockholder
and each other stockholder known by such stockholder to be supporting such
nominee(s) on the date of such stockholders notice, (c) a representation that
the stockholder is a holder of record of stock of the Corporation entitled to
vote at such meeting and intends to appear in person or by proxy at the meeting
to nominate the person or persons specified in the notice; and (iii) a
description of all arrangements or understandings between the stockholder and
each nominee and other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder.
Subject to the rights, if any, of the holders of any series of Preferred
Stock then outstanding, no person shall be eligible for election as a director
of the Corporation unless nominated in accordance with the procedures set forth
in this Article VII. The chairperson of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Article VII and if the
chairperson should so determine, the chairperson shall so declare to the meeting
and the defective nomination shall be disregarded.
3
<PAGE>
ARTICLE VIII
Except as provided in a Preferred Stock Designation with respect to a
series of Preferred Stock, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of the stockholders of the Corporation and may not be effected
by consent in writing of the stockholders. At an annual meeting of
stockholders, only such business shall be conducted, and only such proposals
shall be acted upon, as shall have been properly brought before the annual
meeting of stockholders (a) by or at the direction of the board of directors or
(b) by a stockholder of the Corporation who complies with the procedures set
forth in this Article VIII. For business or a proposal to be properly brought
before an annual meeting of stockholders by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the Corporation not less than 90 days nor
more than 120 days prior to the scheduled date of the annual meeting, regardless
of any postponement, deferral or adjournment of that meeting to a later date;
provided, however, that if less than 70 days' notice or prior public disclosure
of the date of the annual meeting is given or made to stockholders, notice by
the stockholder to be timely must be so delivered or mailed and received not
later than the close of business on the 10th day following the earlier of (i)
the day on which such notice of the date of the meeting was mailed or (ii) the
day on which such public disclosure was made.
A stockholder's notice to the Secretary shall set forth as to each matter
the stockholder proposes to bring before an annual meeting of stockholders (i) a
description, in 500 words or less, of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as such information appears on the
Corporation's books, of the stockholder proposing such business and any other
stockholders known by such stockholder to be supporting such proposal, (iii) the
class and number of shares of the Corporation which are beneficially owned by
such stockholder and each other stockholder known by such stockholder to be
supporting such proposal on the date of such stockholder's notice, (iv) a
description, in 500 words or less, of any interest of the stockholder in such
proposal and (v) a representation that the stockholder is a holder of record of
stock of the Corporation and intends to appear in person or by proxy at the
meeting to present the proposal specified in the notice.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that the business was not properly brought before the
meeting in accordance with the procedures prescribed by this Article VIII, and
if he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing, nothing in this Article VIII shall be interpreted
or construed to require the inclusion of information about any such proposal in
any proxy statement distributed by, at the direction of, or on behalf of, the
board of directors.
4
<PAGE>
ARTICLE IX
A. Right to Indemnification
Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the face that he or she is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans (hereafter an "Indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director, officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the GCL, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
such law permitted the Corporation to provide prior to such amendment) against
all expense, liability and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid in settlement) reasonably
incurred or suffered by such Indemnitee in connection therewith and such
indemnification shall continue as to an Indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
Indemnitee's heirs, executors and administrators; provided, however, that,
-------- -------
except as provided in paragraph (B) hereof with respect to proceedings to
enforce rights to indemnification and payment of expenses, the Corporation shall
indemnify any such Indemnitee in connection with a proceeding (or part thereof)
initiated by such Indemnitee only if such proceeding (or part thereof) was
authorized by the board of directors of the Corporation. The right to
indemnification conferred in this Article shall be a contract right and shall
include the right to be paid by the Corporation the expenses (including
attorneys' fees) incurred in defending any such proceeding in advance of its
final disposition; provided, however, that, if the GCL requires, the payment of
-------- -------
such expenses incurred by an Indemnitee in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such Indemnitee, including, without limitation, service to an employee benefit
plan) in advance of the final disposition of a proceeding, shall be made only
upon delivery to the Corporation of an undertaking, by or on behalf of such
Indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such Indemnitee is not entitled to be indemnified such expenses
under this section or otherwise.
B. Right of Indemnitee to Bring Suit.
If a claim under paragraph (A) of this Article is not paid in full by the
Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for expenses incurred in defending a
proceeding in advance of its final disposition, in which case the applicable
period shall be twenty days, the Indemnitee may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit or in a suit brought by the
Corporation to recover payments by the Corporation of expenses incurred by an
Indemnitee in defending, in his or her capacity as a
5
<PAGE>
director or officer, a proceeding in advance of its final disposition, the
Indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such claim. In any action brought by the Indemnitee to enforce a right
to indemnification hereunder (other than an action brought to enforce a claim
for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any, has been provided to the
Corporation) or by the Corporation to recover payments by the Corporation of
expenses incurred by an Indemnitee in defending, in his or her capacity as a
director or officer, a proceeding in advance of its final disposition, the
burden of proving that the Indemnitee is not entitled to be indemnified under
this Article or otherwise shall be on the Corporation. Neither the failure of
the Corporation (including its board of directors, independent legal counsel, or
its stockholders) to have made a determination prior to the commencement of such
action that indemnification of the Indemnitee is proper in the circumstances
because the Indemnitee has met the applicable standard of conduct set forth in
the GCL, nor an actual determination by the Corporation (including its board of
directors, independent legal counsel, or its stockholders) that the Indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the Indemnitee has not met the applicable standard of conduct or, in the case of
such an action brought by the Indemnitee, be a defense to the action.
C. Non-Exclusivity of Rights.
The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
Article shall not be exclusive of any other right which any person may have or
hereafter acquire under any statute, this Certificate of Incorporation, by-law,
agreement, vote of stockholders or disinterested directors or otherwise.
D. Insurance.
The Corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee or agent of the Corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Corporation would have the power
to indemnify such person against such expense, liability or loss under the GCL.
E. Indemnification of Employees and Agents of the Corporation.
The Corporation may, to the extent authorized from time to time by the
board of directors, grant rights to indemnification, and to be paid by the
Corporation the expenses incurred in defending any proceeding in advance of Its
final disposition, to any employee or agent of the Corporation to the fullest
extent of the provisions of this Article with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation.
ARTICLE X
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability
6
<PAGE>
(i) for any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the GCL, or (iv) for any transaction from which the director derived any
improper personal benefit. If the GCL is amended to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the GCL, as so amended. Any repeal or modification
of this provision shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
ARTICLE XI
Subject to the rights of the holders of any series of Preferred Stock,
special meetings of the stockholders, unless otherwise prescribed by statute,
may be called at any time only by the Chairman of the Board of the Corporation
or the board of directors pursuant to a resolution adopted by a majority of the
entire board of directors, which constitutes the total number of directors which
the Corporation would have if there were no vacancies on the board of directors.
ARTICLE XII
The Corporation reserves the right to amend, add, alter, change repeal or
adopt any provision contained in the Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation. In addition to any
affirmative vote required by applicable law or any other provision of the
Certificate of Incorporation or specified in any agreement, and in addition to
any voting rights granted to or held by the holders or any series of Preferred
Stock, the affirmative vote of the holders of not less than 80% of the Voting
Stock shall be required to amend, add, alter, change, repeal or adopt any
provisions inconsistent with Articles IV, VI, VII, VIII, IX, XI and XII of the
Certificate of Incorporation.
ARTICLE XIII
The incorporator is J. William Wilson, whose mailing address is c/o Hughes
& Luce L.L.P., 111 Congress Avenue, Suite 900, Austin, Texas 78701.
IN WITNESS WHEREOF, the undersigned incorporator of the Corporation hereby
certifies that the facts herein stated are true, and accordingly has signed this
instrument this __th day of ___________, _____.
----------------------------------
J. William Wilson
Incorporator
7
<PAGE>
Exhibit 4.1
NETPLIANCE, INC.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM
TEN ENT
JT TEN
as tenants in common
as tenants by the entireties
as joint tenants with right of survivorship and not as tenants
in common
UNIF GIFT MIN ACTD
Custodian
(cust)
(Minor)
under Uniform Gifts to Minors Act
(State)
Additional abbreviations may also be used though not in the above list.
For Valued Received,
hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF
ASSIGNEE
Shares of the Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint Attorney to transfer the said stock on the
books of the within-named Corporation, with full power of substitution in the
premises.
Dated
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION
OR EN-LARGEMENT OR ANY CHANGE WHATEER.
X (SIGNATURE)
X (SIGNATURE)
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
SIGNATURE(S) GUARANTEED BY:
<PAGE>
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
C
NETPLIANCE, INC.
COMMON STOCK
THIS CERTIFICATE IS TRANSFERABLE IN
NEW YORK, NY AND RIDGEFIELD PARK, NJ
CUSIP 64115K 10 3
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF THE PAR VALUE OF $0.01
PER SHARE, OF NETPLIANCE, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this certificate properly
endorsed.
This certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the seal of the Corporation and the signatures of its duly authorized
officers.
Dated:
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SECRETARY
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
Page 1
<PAGE>
Exhibit 10.1
Master Agreement
GTE Internetworking Services
___________________________
I N T E R N E T W O R K I N G Rev. February 19, 1998
POWERED BY BBN
This Master Agreement between GTE Internet Incorporated ("us") and the Customer
Identified below ("you") includes the attached Service Schedules and service
Quotations (collectively "Schedules") together with any additional Schedules
mutually agreed in writing in the future.
1. Services. We will provide you the Internetworking services ("Services")
specified in the Schedule(s). Our commencement of providing any of the Services
shall constitute our acceptance of this Master Agreement.
2. Prices. Prices are stated in the Schedules and are guaranteed for the Term
stated in the Schedules. If any of the Services are on a month-to-month basis,
we will give you at least 30 days notice of a price change. In addition, you
are responsible for applicable taxes, tariffs, telecommunications, surcharges or
other governmental charges due on account of the Services.
3. Payment. Unless otherwise stated in a Schedule, we will invoice you
monthly. You agree to pay within 30 days from receipt of invoice. For overdue
invoices, you will pay interest of 1.5% for each month or part of a month (or
the maximum allowed by law, whichever is less).
4. Our Responsibility. We are responsible for providing the Services by
qualified personnel in a professional manner. WE DISCLAIM ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR
A PARTICULAR PURPOSE.
5. Your Responsibility. You are responsible for the manner in which you use
the Services, including the maintenance and security of your data, computer
network and other facilities; your choice of equipment, software and online
content; and all other matters related to how you use the Services. Unless
expressly permitted by a Schedule or separate reseller agreement with us, you
shall not resell Services, or access to Services, directly or indirectly to
third parties.
6. Indemnification. We will indemnify you for damages, costs and attorneys
fees you incur from any claim that our design of the Services infringes any U.S.
patent, copyright, trademark, trade secret or other intellectual property right.
You will indemnify us for damages, costs and attorneys fees we incur from any
claim arising from your manner of using of the Services, your combination of the
Services with other products or services not provided by us, or your
modification of the Services. The indemnifying party shall conduct the defense
and shall have control of the litigation; the other party shall give prompt
notice of claims and shall cooperate in defending against the claim. THE
PARTIES DISCLAIM THE IMPLIED WARRANTY OF NON-INFRINGEMENT, RELYING INSTEAD ON
THE TERMS OF THIS SECTION.
7. IP Addresses. Upon expiration, cancellation or termination of the Agreement
or applicable Schedule, you shall relinquish any IP addresses or address blocks
to you by us.
8. Acknowledgment. You agree that we may include your name in listings of our
customers.
9. Compliance with Laws. You shall not use or permit your end users to use the
Services in ways that violate laws of our acceptable use policy which is
published on our web site at http://www.bbn.com/zup, infringe the rights of
others, or interfere with users of our network or other networks. For example,
you shall not distribute chain letters or unsolicited bulk electronic mail
("spamming"); propagate computer worms or viruses; use a false identity; attempt
to gain unauthorized entry to any site or network; distribute child pornography,
obscenity or defamatory material over the Internet; or infringe copyrights,
trademarks or other intellectual property rights. You further agree to comply
with U.S. export laws concerning the transmission of technical data and other
regulated materials via the services.
10. Termination. Either party may terminate or cancel this Agreement if the
other fails to cure a material breach of the Agreement within 30 days after
receiving written notice of the breach. We reserve the right, but assume no
obligation, to suspend performance immediately if you are more than 30 days
overdue in payments or if, in our reasonable judgment, you have violated Section
9.
11. Limitation of Liability. EXCEPT FOR (A) INDEMNIFICATIONS PURSUANT TO
SECTION 6, (B) BREACH OF ANY CONFIDENTIALITY OBLIGATIONS STATED IN A SERVICE
SCHEDULE, AND (C) BREACHES BY YOU OF LICENSE TERMS APPLICABLE TO GTE-PROVIDED
SOFTWARE. NEITHER PARTY (NOR ITS SUPPLIERS OR CUSTOMERS) SHALL BE LIABLE TO THE
OTHER PARTY FOR PUNITIVE, SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES
INCLUDING WITHOUT LIMITATION, LOST PROFITS OR LOSS OR DAMAGE TO DATA ARISING OUT
OF THE USE OR INABILITY TO USE SERVICES, EVEN IF THE PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES.
12. Limitation of Damages. OUR AGGREGATE LIABILITY TO YOU RELATING TO OR
ARISING OUT OF THIS AGREEMENT, WHETHER IN CONTRACT, TORT OR OTHERWISE, SHALL NOT
EXCEED (a) THE TOTAL AMOUNTS PAID BY YOU TO US FOR THE SERVICE IN QUESTION
DURING THE ONE-YEAR PERIOD IMMEDIATELY PRECEDING THE EVENT WHICH GAVE RISE TO
YOUR CLAIMS OR (b) $100,000, WHICHEVER IS LESS.
13. Miscellaneous. The terms and conditions of this Agreement supersede all
previous agreements, proposals or representations related to the Services.
Except for assignments to GTE affiliates, neither party may assign this
Agreement without prior written consent of the other party. This Agreement
shall be governed by the substantive laws of the Commonwealth of Massachusetts.
Any changes to this Agreement, or any additional or different terms in your
purchase orders, acknowledgments or other documents, will not be effective
unless expressly agreed to in writing by us.
Please sign below to indicate your understanding and acceptance
of the terms of this Agreement.
Company (Type or Print Full Customer Name:____________________________________
Signature:____________________________________________ Date:__________________
Print Name:__________________________________________Title:___________________
<PAGE>
GTE Service Schedule
___________________________ DiaLinx Service
I N T E R N E T W O R K I N G
POWERED BY BBN (Global Access by U.S. Based Customers)
Version 2T - January, 1999
This Service Schedule is part of and is governed by the Master Agreement for
Internetworking Services ("Master Agreement"). The terms and conditions of the
Master Agreement are incorporated herein by reference.
1. Covered Services. We will provide you with the DiaLinx(TM) Basic Services
and Enhanced Services ("DiaLinx Service") indicated in the applicable GTE
Internetworking Service Quotation ("Quotation") which is attached hereto or
which we may provide to you in the future for additional DiaLinx Service. The
term of the Service Period is one year or longer, as selected by you, and the
corresponding fees are described in the Quotation. Our commencement of
providing DiaLinx Services to you under the Quotation shall constitute our
acceptance of the Agreement in respect of such DiaLinx Service.
2. Service Description. DiaLinx Service provides you with dial-up Internet
access service. Further details of the DiaLinx Service are set forth in the
applicable Service Description. Service Descriptions are available from your
GTE sales representative.
3. Renewal. We encourage you to contact us, via email to: [email protected]
-------------------
prior to the expiration of the then-current Service Period to renew the DiaLinx
Service for an additional term of one (1) year or greater. If the Service
Period expires before it has been renewed in writing, then we may continue to
provide you with the DiaLinx Service on a month-to-month basis, at our then-
current undiscounted list prices, until the Service Period has been renewed in
writing.
4. Minimum Customer Commitment. You agree to the Minimum Customer
Commitment(s) for each period as set forth in the Quotation. You agree that you
are obligated to pay the greater of your actual usage or the Minimum Customer
Commitment for the applicable period.
5. Third Party Access. Subject to the terms and conditions of this Service
Schedule, you have the non-exclusive right to authorize access to DiaLinx
Services to your employees and/or to any third party (including the right to
sell such DiaLinx Service). You agree that if you offer DiaLinx Service other
than to your bona fide employees, you will do so only pursuant to a binding
agreement incorporating terms substantially similar to those stated in Section
14 (Mandatory Flow-down Terms) of this Service Schedule.
6. Responsibility for End Users. You agree to be responsible for all billing
and collection from end users and that you will pay us on a timely basis,
regardless of whether you collect payment from end users. You agree to be
responsible for all communications to and business relations with end users.
You shall be responsible for providing all technical and business support
related to DiaLinx Service access for end users, including but not limited to
responding to inquiries and questions, hot-line support, problem resolution,
providing system configuration, installation and support, as applicable and
other such services and shall maintain an organization which is highly trained
and qualified to provide such support. You are responsible for authenticating
and authorizing access by your end users to DiaLinx Service. Unless you have
purchased optional RADIUS hosting services from us, you shall install, operate,
and maintain a dedicated RADIUS server meeting the RADIUS specifications
published in Internet RFC 2138 and 2139 and all published derivative RFSs. Our
RADIUS server will prompt each end user for the end user's identification and
password, and poll your RADIUS server for access information. Unless otherwise
provided for in the Quotation, we will support only one authentication realm
(e.g. companyname.com).
7. Equipment and Telephone Service. You are solely responsible for obtaining
and providing the telephone services and user modems necessary to access DiaLinx
Service. In no event will we be responsible for end user telephone charges.
8. Network Access Availability. ACCESS TO THE DIALINX NETWORK CANNOT BE
GUARANTEED TO YOU OR YOUR END USERS. END USERS MAY BE UNABLE TO ACCESS THE
DIALINX SERVICE AT ANY TIME AND DISCONNECTIONS MAY OCCUR FROM TIME TO TIME. YOU
AGREE THAT WE WILL NOT BE LIABLE FOR ANY DAMAGES THAT YOU OR YOUR END USERS MAY
INCUR ARISING OUT OF THE USE OR INABILITY TO USE THE DIALINX SERVICE. THIS
DISCLAIMER IS IN ADDITION TO, NOT INSTEAD OF, THE DISCLAIMER, LIMITATION OF
LIABILITY AND LIMITATION OF DAMAGES CONTAINED IN THE MASTER AGREEMENT.
9. Regulatory Charges. We shall flow through to you any local exchange carrier
(LEC) price changes (i) that are attributable to changes in Federal or state
regulation, or (ii) for Federally regulated services that are treated as
exogenous regulatory cost changes by the Federal Communications Commission (the
"FCC") under its price caps regulations as defined in the FCC Rules. 47 C.F.R.
Section 61.45. For purposes of this paragraph, price changes attributable to
changes in regulation include, but are not necessarily limited to, price changes
reflecting total or partial elimination of any enhanced services provider
exemption from payment of interexchange access charges or any regulatory
decision which results in application of multiple Subscriber Line Charges to
ISDN Primary Rate interface circuits or channelized T1 circuits.
10. Compliance with Laws and Content Responsibility. You shall not use or
permit the DiaLinx Service to be used (i) in violation of any applicable export
laws (including without limitation any U.S. export laws); (ii) in violation of
any applicable national, state, or local laws or regulations, including without
limitation any laws governing the import of the DiaLinx Service, or governing
the content which may be available via the DiaLinx Service; (iii) in violation
of our acceptable use policy which is published on our web site at
http://www.bbn.com/sup/; or (iv) in ways that infringe the rights of others, or
- -----------------------
interfere with other users of our network or other networks. For example, you
shall not distribute chain letter or unsolicited bulk electronic mail
("spamming"); propagate computer worms or viruses; use a false identity; attempt
to gain unauthorized entry to any site or network; distribute child pornography,
obscenity or defamatory material over the Internet; or infringe copyrights,
trademarks or other intellectual property rights. We reserve the right to
suspend or terminate the DiaLinx Service (or any portion thereof) without notice
in the event that we believe that your use (or any of your end user's use) of
the DiaLinx Service may be in violation of this section. You acknowledge that
we have no control over or liability for the actions of local jurisdictions
which may restrict or block the DiaLinx Service.
11. Currency and Taxes. All payments shall be in U.S. Dollars. You are
responsible for the payment of all taxes (including without limitation
applicable VAT or withholding taxes but excluding taxes based solely on our net
income), import duties, or other applicable telecommunications or regulatory
fees (collectively, "Taxes"). You shall not deduct any such Taxes from the
amounts owed to us. In the
<PAGE>
GTE Service Schedule
___________________________ DiaLinx Service
I N T E R N E T W O R K I N G
POWERED BY BBN (Global Access by U.S. Based Customers)
Version 2T - January, 1999
event you are required to withhold Taxes from any payment due to us, then the
amount of such payment shall be automatically increased to totally offset such
Taxes, so that the amount actually remitted to us, net of all Taxes, equals the
amount invoiced or otherwise due.
12. Disputes. Any dispute arising out of or in connection with the DiaLinx
Service in a country other than the United States, shall be referred to and
finally resolved by arbitration in accordance with the Rules of the
International Chamber of Commerce then in force; provided, however, that either
party may, at its sole discretion, seek injunctive relief in the courts of any
jurisdiction as may be necessary and appropriate to protect its proprietary or
confidential information. The language used in the arbitral proceedings, and
the governing language of this agreement, shall be English. Unless otherwise
mutually agreed upon in writing by the parties, the site of the arbitration
shall be Boston, Massachusetts, U.S.A. Judgment upon the award of the
arbitration may be entered in any court having jurisdiction thereof.
13. Governing Law. The governing law in any dispute shall be the substantive
law of the Commonwealth of Massachusetts, U.S.A. without regard to conflicts of
law. The parties expressly agree that the U.N. Convention on Contracts for the
International Sale of Goods shall not apply to the Agreement.
14. Local Access Numbers. We expect the DiaLinx network to change over time in
order to meet the needs of our customers. We reserve the right to add to,
delete or change the dial-in access numbers associated with a specified service
category from time to time. You will be notified of changes to the DiaLinx
network or access numbers via periodic e-mail updates.
We may periodically add additional dial up access service categories as the
DiaLinx network evolves. These additional services and respective prices will
be made available on an ongoing basis, via e-mail updates notifying you of the
additional service. Use of such additional services by you or your end users
will be deemed your acceptance of the updated service and pricing. For a
current list of services, pricing, and dial up access numbers associated with
each service, please consult our Web page as listed in your DiaLinx Service
Description or contact your GTE Internetworking representative.
15. Mandatory Flow-down Terms. You agree to include terms substantially
similar to the following minimum terms in legally binding agreements with end
users who are not your bona fide employees. For the purpose of this section,
"Network Services Supplier" shall mean us. "Company" shall mean you. "User"
shall mean the non-employee end user, and "Network" shall mean the dial-up
network operated and maintained by us; and "Services" shall mean the DiaLinx
Service:
No Right of Resale. User may not resell or redistribute any Services.
- ------------------
Content Responsibility. User understands that neither Company nor its Network
- ----------------------
Services Supplier is responsible for the content of the transmissions which may
pass through the Network. User agrees that it will NOT use the Services in ways
that violate laws, infringe the rights of others, or interfere with the users,
services, or equipment of other networks. For example, you shall not distribute
unsolicited advertising, chain letters, or commercial electronic mail
("spamming"); propagate computer worms or viruses; attempt to gain unauthorized
entry to other computers, data or networks; distribute child pornography,
obscenity, or defamatory material over the Internet; or infringe copyrights,
trademarks, or other intellectual property rights.
Warranty and Liability Limitations. COMPANY DOES NOT WARRANT THAT THE SERVICES
- ----------------------------------
WILL BE AVAILABLE ON A SPECIFIED DATE OR TIME OR THAT THE NETWORK WILL HAVE THE
CAPACITY TO MEET THE DEMAND OF END USERS DURING SPECIFIC HOURS. USER MAY BE
UNABLE TO ACCESS THE NETWORK AT ANY TIME, AND DISCONNECTION FROM THE NETWORK MAY
OCCUR FROM TIME TO TIME. NEITHER COMPANY NOR ITS NETWORK SERVICES SUPPLIER WILL
BE LIABLE FOR UNAUTHORIZED ACCESS TO COMPANY'S OR USER'S TRANSMISSION FACILITIES
OR PREMISES EQUIPMENT OR FOR UNAUTHORIZED ACCESS TO OR ALTERATION, THEFT OR
DESTRUCTION OF USER'S DATA FILES, PROGRAMS, PROCEDURES OR INFORMATION THROUGH
ACCIDENT, FRAUDULENT MEANS OR DEVICES, OR ANY OTHER METHOD, REGARDLESS OF
WHETHER SUCH DAMAGE OCCURS AS A RESULT OF COMPANY'S OR ITS NETWORK SERVICE
SUPPLIER'S NEGLIGENCE. IN NO EVENT WILL COMPANY OR ITS NETWORK SERVICES
SUPPLIERS BE LIABLE FOR ANY DAMAGES, INCLUDING BUT NOT LIMITED TO LOSS OF DATA,
LOSS OF REVENUE OR PROFITS, OR FOR ANY OTHER SPECIAL, INCIDENTAL, INDIRECT OR
CONSEQUENTIAL DAMAGES, ARISING OUT OF OR IN CONNECTION WITH THE USE OF OR
INABILITY TO USE SERVICES OR PRODUCTS PROVIDED HEREUNDER.
Please sign below to indicate your understanding and acceptance of the terms
of this Service Schedule.
Company (Type or Print Full Customer Name:____________________________________
Signature:____________________________________________ Date:__________________
Print Name:__________________________________________Title:___________________
<PAGE>
GTE Quotation
___________________________ DiaLinx Services (Version 2.1)
I N T E R N E T W O R K I N G
POWERED BY BBN
Quotation for DiaLinx Service - Netpliance
- --------------------------------------------------------------------------------
[*]
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
[*]
[*] CONFIDENTAL TREATMENT REQUESTED-continued
<PAGE>
GTE Quotation
___________________________ DiaLinx Services (Version 2.1)
I N T E R N E T W O R K I N G
POWERED BY BBN
All Network connect time is rounded up to the next highest minute and billed in
one minute increments. Invoices are issued monthly and due net thirty (30)
days. All pricing is listed as U.S. dollars.
7. Basic Services - Recurring Fees:
-------------------------------
7.1 Network Access: You will be charged for Network Access, which, for
--------------
each calendar month, shall be the greater of either (A) or (B) for
each pricing realm:
(A) Access charges due in accordance with Section 6, above;
OR
(B) Minimum Monthly Customer Commitment, as set in Section 5 forth
above.
7.2 Service Level Assurance: GTEI will provide nationwide 24 hour busy
-----------------------
free dial of >95% per month, as measured by Inverse Network
Technology. Should GTEI fail to meet this metric consistently through
a calendar quarter, GTEI will issue a 1% credit on each subsequent
monthly bill for each 1% below the 95% threshold."
GTEI will adhere to the escalation procedures as stated in the
document "Working with Customer Care: An Authorized Technical
Contracts Guide". Including the ability to escalate open issues to the
effected departments VP's within 24 hrs through the assigned
XPressLane contact.
8. Enhanced Services - One Time and Recurring Fees: In addition to the fees
-----------------------------------------------
for Basic Services under section 7, you will be charged for optional
Enhanced Services as set forth below:
None Selected.
Please sign below to indicate your understanding and acceptance of the terms
of this Quotation.
Company (Type or Print Full Customer Name:____________________________________
Signature:____________________________________________ Date:__________________
Print Name:__________________________________________Title:___________________
<PAGE>
GTE
COMMUNICATIONS
CORPORATION
AMENDMENT NO. 1
TO
MASTER AGREEMENT FOR INTERNETWORKING SERVICES
The Master Agreement for Internetworking Services (Agreement), including the
Service Schedule - DiaLinx Service (DiaLinx Schedule) between GTE Communications
Corporation (We) and NetPliance (You) is hereby modified as set forth below. To
the extent that there are any conflicts between the terms of this Amendment No.
1 and the terms of the Agreement, including the DiaLinx Schedule, this Amendment
No. 1 shall control.
Agreement
- ---------
1. Section 10 Termination. The last sentence in Section 10 is deleted and
replaced with the following provisions: "We reserve the right, but assume
no obligation, to suspend performance if you are more than 30 days overdue
in payments or if, in our reasonable judgment, you have violated Section 9,
provided, however, we will not suspend performance unless you have failed
to cure such delinquency or violation within 5 business days after
receiving written notification from us, identifying the amount overdue
and/or explaining the basis of your Section 9 violation. Notwithstanding
the foregoing, we reserve the right to suspend performance immediately for
Section 9 violations if required to do so by law enforcement or regulatory
authorities."
DiaLinx Schedule
- ----------------
1. Section 4 Minimum Customer Commitment & Billing.
Add as new last sentence. Cancellation Charge. After a Service
-------------------
Quote is accepted by GTE, Customer may cancel all or a portion of the
Services described therein if Customer provides written notification
thereof to GTE at least 60 days prior to the effective date of
cancellation. In such case, Customer shall pay to GTE all charges for
Service provided through the effective date of such cancellation plus a
cancellation charge determined as follows: (i) if such cancellation
becomes effective prior to completion of the first year of the initial
term, then the cancellation charge shall be an amount equal to the balance
of the monthly charges for Service (then in effect at the time of
cancellation) for such canceled Service that otherwise would have become
due for the unexpired portion of the first year of such term plus fifty
percent (50%) of the balance of such monthly charges for Service for the
remainder of such term beyond the first year; (ii) if cancellation becomes
effective after completion of the first year of the initial term, before
any renewal of this Agreement occurs, then the cancellation charge shall be
an amount equal to fifty percent (50%) of the balance of the
<PAGE>
monthly charges for Service (then in effect at the time of cancellation)
for such canceled Service that otherwise would have become due for the
unexpired portion of the initial term; and (iii) if such cancellation
becomes effective prior to completion of any renewal term, then the
cancellation charge shall be an amount equal to the balance of the monthly
charges for Service (then in effect at the time of cancellation) for such
canceled Service that otherwise would have become due for the unexpired
portion of the renewal term. In the event monthly charges for Service are
not fixed, monthly charges for Service shall be the average charges for
usage of Services over the three calendar months prior to GTE's receipt of
notice of cancellation.
2. Section 8 Network Access Availability. The third sentence in Section 8,
beginning in line 5, is modified by adding the following provision after
-----
the word "damages" in the third sentence thereof: ("Except as set forth in
---------------------------------------------------------------------------
the attached Service Quotation").
---------------------------------
3. Section 9 Regulatory Changes. The following provision is added after the
end of the first sentence of this Section: "If allowed by the applicable
Federal or State regulations, and if such price changes are wholly in the
control of us, we will provide you with 30 days advance written notice
before imposing any such price changes."
4. Section 10 Compliance with Laws and Content Responsibility. The third
sentence in Section 10, beginning in line 16, is deleted and replaced with
the following provisions: "We reserve the right to suspend or terminate
the DiaLinx Service (or any portion thereof) in the event that we believe
that your use (or any of your end user's use) of the DiaLinx Service may be
in violation of this section, provided, however, we will not suspend or
terminate the DiaLinx Service unless you have failed to cure a violation
within 5 business days after receiving written notification from us,
explaining the basis of your violation. Notwithstanding the foregoing, we
reserve the right to suspend or terminate the DiaLinx Service immediately
for violations of this section if required to do so by law enforcement or
regulatory authorities."
Each individual executing this Amendment No. 1 for and on behalf of a party
represents that he or she if fully authorized to do so.
GTE Communications Corporation NetPliance
By: By:
---------------------------- -----------------------------
Name: Name:
-------------------------- ---------------------------
Title: Title:
------------------------- --------------------------
<PAGE>
EXHIBIT 10.9
INDEMNITY AGREEMENT
-------------------
AGREEMENT, effective as of _____________, 2000 between Netpliance,
Inc., a Delaware corporation (the "Company"), and ___________________ (the
"Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as
directors and officers the most capable persons available;
WHEREAS, Indemnitee is a director and/or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk
of litigation and other claims being asserted against directors and officers of
public companies in today's environment;
WHEREAS, the Bylaws (the "Bylaws") and Amended and Restated
Certificate of Incorporation (the "Certificate") of the Company require the
Company to indemnify and advance expenses to its directors and officers to the
fullest extent permitted by law, and the Indemnitee has agreed to serve as a
director [and/or] an officer of the Company in part in reliance on such
provisions in the Bylaws and Certificate;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability to enhance Indemnitee's continued service
to the Company in an effective manner and Indemnitee's reliance on the foregoing
provisions in the Bylaws and Certificate, and in part to provide Indemnitee with
specific contractual assurance that the protection promised by such provisions
in the Bylaws and Certificate will be available to Indemnitee (regardless of,
among other things, any amendment to or revocation of such provisions in the
Bylaws or Certificate or any change in the composition of the Company's Board of
Directors (the "Board") or acquisition transaction relating to the Company), the
Company wishes to provide in this Agreement for the indemnification of and the
advancing of expenses to Indemnitee to the fullest extent permitted by law and
as set forth in this Agreement, and, to the extent insurance is maintained, for
the continued coverage of Indemnitee under Company directors' and officers'
liability insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly or, at its request, with another
enterprise, and intending to be legally bound hereby, the parties hereto agree
as follows:
1. Certain Definitions.
-------------------
(a) Change in Control: shall be deemed to have occurred upon any of the
-----------------
following events:
(i) The acquisition in or more transactions by any "Person" (as the
term person is used for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), of
"Beneficial
1
<PAGE>
Ownership" (within the meaning of Rule 13d-3 promulgated under
the 1934 Act) of twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding voting
securities (the "Voting Securities"), provided, however, that for
-------- -------
purposes of this Section 1(a)(i), the Voting Securities acquired
directly from the Company by any Person, or with the prior
approval of the Board, shall be excluded from the determination
of such Person's Beneficial Ownership of Voting Securities (but
such Voting Securities shall be included in the calculation of
the total number of Voting Securities then outstanding); or
(ii) The individuals who, as of the Effective Date, are members of the
Board (the "Incumbent Board"), cease for any reason to constitute
at least two-thirds of the Board; provided, however, that if the
election, or nomination for election by the Company's
stockholders, of any new director was approved by a vote of at
least two-thirds of the Incumbent Board, such new director shall,
for purposes of this Agreement, be considered as a member of the
Incumbent Board; or
(iii) Approval by stockholders of the Company of (A) a merger or
consolidation involving the Company if the stockholders of the
Company immediately before such merger or consolidation do not
own, directly or indirectly immediately following such merger or
consolidation, more than seventy-five percent (75%) of the
combined voting power of the outstanding voting securities of the
corporation resulting from such merger or consolidation in
substantially the same proportion as their ownership of the
Voting Securities immediately before such merger or consolidation
or (B) a complete liquidation or dissolution of the Company or an
agreement for the sale or other disposition of all or
substantially all of the assets of the Company.
(iv) Notwithstanding the foregoing, a Change in Control shall not be
deemed to occur solely because twenty-five percent (25%) or more
of the then outstanding Voting Securities is acquired by (i) a
trustee or other fiduciary holding securities under one or more
employee benefit plans maintained by the Company or any of its
subsidiaries or (ii) any corporation that, immediately prior to
such acquisition, is owned directly or indirectly by the
stockholders of the Company in the same proportion as their
ownership of stock in the Company immediately prior to such
acquisition;
(v) Moreover, notwithstanding the foregoing, a Change in Control
shall not be deemed to occur solely because any Person (the
"Subject Person") acquired Beneficial Ownership of more than the
permitted amount of the outstanding Voting Securities as a result
of the acquisition of Voting Securities by the Company which, by
reducing the number of Voting Securities outstanding, increases
the proportional number of shares Beneficially Owned by the
Subject Person, provided that if a Change in
2
<PAGE>
Control would occur
(but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Company, and after such
share acquisition by the Company, the Subject Person becomes the
Beneficial Owner of any additional Voting Securities which
increases the percentage of the then outstanding Voting
Securities Beneficially Owned by the Subject Person, then a
Change in Control shall occur.
(b) Claim: any threatened, pending or completed action, suit or
-----
proceedings, including any arbitration proceeding, whether civil,
criminal, administrative or investigative or other, including, without
limitation, an action by or in the right of any other corporation of
any type or kind, domestic or foreign, or any partnership, joint
venture, trust, employee benefit plan or other enterprise, whether
predicated on foreign, federal, state or local law and whether formal
or informal.
(c) Expenses: include attorneys' fees and all other costs, charges and
--------
expenses paid or incurred in connection with investigating, defending,
being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in any Claim
relating to any Indemnifiable Event.
(d) Indemnifiable Event: any event or occurrence related to the
-------------------
Indemnitee's status as, or agreement to become, a director, officer,
employee, agent or fiduciary of the Company, or is or was serving or
has agreed to serve in any capacity, at the request of the Company, in
any other corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, or by reason of anything done or not
done by Indemnitee in any such capacity.
(e) Potential Change in Control: shall be deemed to have occurred if: (i)
---------------------------
the Company enters into an agreement or arrangement, the consummation
of which would result in the occurrence of a Change in Control; or
(ii) the Board adopts a resolution to the effect that, for purposes of
this Agreement, a Potential Change in Control has occurred.
(f) Voting Securities: any securities of the Company that vote generally
-----------------
in the election of directors.
2. Basic Indemnification Arrangement.
---------------------------------
(a) In the event Indemnitee was, is or becomes a party to or witness or
other participant in, or is threatened to be made a party to or
witness or other participant in, a Claim by reason of (or arising in
part out of) an Indemnifiable Event, the Company shall indemnify
Indemnitee to the fullest extent permitted by applicable law, as soon
as practicable but in no event later than thirty days after written
demand is presented to the Company, against any and all Expenses,
judgments, fines, penalties, excise taxes and amounts paid or to be
paid in settlement (including all interest, assessments and other
charges paid or payable in connection with or in respect of such
Expenses, judgments, fines, penalties, excise
3
<PAGE>
taxes or amounts paid or to be paid in settlement) of such Claim. If
Indemnitee makes a request to be indemnified under this Agreement, the
Board of Directors (acting by a quorum consisting of directors who are
not parties to the Claim with respect to an Indemnifiable Event or, if
such a quorum is not obtainable, acting upon an opinion in writing of
independent legal counsel ("Board Action")) shall, as soon as
practicable but in no event later than thirty days after such request,
authorize such indemnification. Notwithstanding anything in the
Certificate, the Bylaws or this Agreement to the contrary, following a
Change in Control, Indemnitee shall be entitled to indemnification
pursuant to this Agreement in connection with any claim initiated by
Indemnitee.
(b) Notwithstanding anything in the Certificate, the Bylaws or this
Agreement to the contrary, if so requested by Indemnitee, the Company
shall advance (within two business days of such request) any and all
Expenses relating to a Claim to Indemnitee (an "Expense Advance"),
upon the receipt of a written undertaking by or on behalf of
Indemnitee to repay such Expense Advance if a judgment or other final
adjudication or determination adverse to Indemnitee establishes that
Indemnitee, with respect to such claim, is not entitled to
indemnification.
(c) If there has been no Board Action or Arbitration (as defined in
Section 3), or if Board Action determines that Indemnitee would not be
permitted to be indemnified, in any respect, in whole or in part, in
accordance with Section 2(a) of this Agreement, Indemnitee shall have
the right to commence litigation in the court that is hearing the
action or proceeding relating to the Claim for which indemnification
is sought or in any court in the State of Texas having subject matter
jurisdiction thereof and in which venue is proper seeking an initial
determination by the court that Indemnitee is entitled to
indemnification hereunder, and the Company hereby consents to service
of process and to appear in any such proceeding. In any such
litigation, the burden of proof will be on the Company to establish
that Indemnitee is not entitled to indemnification hereunder.
Notwithstanding anything in the Certificate, the Bylaws or this
Agreement to the contrary, if Indemnitee has commenced legal
proceedings in a court of competent jurisdiction or Arbitration to
secure a determination that Indemnitee should be indemnified under
this Agreement, the Bylaws of the Company or applicable law, any Board
Action under which Indemnitee would not be permitted to be indemnified
in accordance with Section 2(a) of this Agreement shall not be
conclusive or binding and shall not create any presumption that
Indemnitee is not entitled to indemnification hereunder. Any Board
Action not followed by such litigation or Arbitration shall be
conclusive and binding on the Company and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change
-----------------
in Control, Indemnitee, by giving written notice to the Company and the American
Arbitration Association (the "Notice"), may require that any controversy or
claim arising out of or relating to this Agreement, or the breach thereof, shall
be settled by arbitration (the "Arbitration") in Austin, Texas in accordance
with the Rules of the American Arbitration Association (the "Rules"). The
4
<PAGE>
Arbitration shall be conducted by a panel of three arbitrators selected in
accordance with the Rules within thirty days of delivery of the Notice. The
decision of the panel shall be made as soon as practicable after the panel has
been selected, and the parties agree to use their reasonable efforts to cause
the panel to deliver its decision within ninety days of its selection. The
Company shall pay all fees and expenses of the Arbitration. The Arbitration
shall be conclusive and binding on the Company and Indemnitee, and the Company
or Indemnitee may cause judgment upon the award rendered by the arbitrators to
be entered in any court having jurisdiction thereof.
4. Indemnification For Additional Expenses. The Company shall
---------------------------------------
indemnify Indemnitee against any and all expenses (including attorneys' fees)
and, if requested by Indemnitee, shall (within two business days of such
request) advance such expenses to Indemnitee, which are incurred by Indemnitee
in connection with any claim asserted by or action brought by Indemnitee for (i)
indemnification or advance payment of Expenses by the Company under law, this
Agreement, or any other agreement or By-law of the Company now or hereafter in
effect relating to Claims for Indemnifiable Events and/or (ii) recovery under
any directors' and officers' liability insurance policies maintained by the
Company, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advance expense payment or insurance recovery,
as the case may be.
5. Partial Indemnity, Etc. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of the Expenses, judgments, fines, penalties, excise taxes and amounts
paid or to be paid in settlement of a Claim but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding
any other provision of this Agreement, to the extent that Indemnitee has been
successful on the merits or otherwise in defense of any or all Claims relating
in whole or in part to an Indemnifiable Event or in defense of any issue or
matter therein, including, without limitation, dismissal without prejudice,
Indemnitee shall be indemnified against any and all Expenses, judgments, fines,
penalties, excise taxes and amounts paid or to be paid in settlement of such
Claim. In connection with any determination by Board Action, Arbitration or a
court of competent jurisdiction that Indemnitee is not entitled to be
indemnified hereunder, the burden of proof shall be on the Company to establish
that Indemnitee is not so entitled.
6. No Presumption. For purposes of this Agreement, the termination
--------------
of any claim, action, suit or proceeding, by judgment, order, settlement
(whether with or without court approval) or conviction, or upon a plea of nolo
contendere or its equivalent, shall not create a presumption that Indemnitee did
not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law or this Agreement.
7. Contribution. In the event that the indemnification provided for
------------
in this Agreement is unavailable to Indemnitee for any reason whatsoever, the
Company, in lieu of indemnifying Indemnitee, shall contribute to the amount
incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes,
amounts paid or to be paid in settlement and/or for Expenses, in connection with
any Claim deemed fair and reasonable in light of all of the circumstances of
such action by Board Action or Arbitration or by the court before which such
5
<PAGE>
action was brought in order to reflect (i) the relative benefits received by the
Company and Indemnitee as a result of the event(s) and/or transaction(s) giving
cause to such action; and/or (ii) the relative fault of the Company (and its
other directors, officers, employees and agents) and Indemnitee in connection
with such event(s) and/or transaction(s). Indemnitee's right to contribution
under this Paragraph 7 shall be determined in accordance with, pursuant to and
in the same manner as, the provisions in Paragraphs 2 and 3 hereof relating to
Indemnitee's right to indemnification under this Agreement.
8. Notice to the Company by Indemnitee. Indemnitee agrees to notify
-----------------------------------
the Company promptly in writing upon being served with or having actual
knowledge of any citation, summons, complaint, indictment or any other similar
document relating to any action which may result in a claim of indemnification
or contribution hereunder.
9. Non-exclusive, Etc. The rights of the Indemnitee hereunder shall
-------------------
be in addition to any other rights Indemnitee may have under the Company's
Certificate or Bylaws or the Delaware General Corporation Law or otherwise, and
nothing herein shall be deemed to diminish or otherwise restrict Indemnitee's
right to indemnification under any such other provision. To the extent
applicable law or the Certificate of Incorporation or the Bylaws of the Company,
as in effect on the date hereof or at any time in the future, permit greater
indemnification than as provided for in this Agreement, the parties hereto agree
that Indemnitee shall enjoy by this Agreement the greater benefits so afforded
by such law or provision of the Certificate of Incorporation or Bylaws and this
Agreement shall be deemed amended without any further action by the Company or
Indemnitee to grant such greater benefits. Indemnitee may elect to have
Indemnitee's rights hereunder interpreted on the basis of applicable law in
effect at the time of execution of this Agreement, at the time of the occurrence
of the Indemnifiable Event giving rise to a Claim or at the time indemnification
is sought.
10. Liability Insurance.
-------------------
(a) To the extent the Company maintains at any time an insurance policy or
policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage
available for any other Company director or officer under such
insurance policy. The purchase and maintenance of such insurance
shall not in any way limit or affect the rights and obligations of the
parties hereto, and the execution and delivery of this Agreement shall
not in any way be construed to limit or affect the rights and
obligations of the Company and/or of the other parties under any such
insurance policy. Indemnitee will provide all such information that
the Company may reasonably request in connection with the purchase and
maintenance of such insurance.
(b) For five years after the Indemnitee no longer serves as a director or
officer of the Company, the Company shall continue to provide
directors' and officers' liability coverage for liabilities of the
Indemnitee occurring during his service with the Company on terms no
less favorable in terms of coverage and amount than such insurance
maintained by the Company at the date of the Indemnitee's separation
6
<PAGE>
from the Company. In the event such coverage is not available, the
maximum available coverage shall be maintained pursuant to this
covenant.
11. Period of Limitations. No legal action shall be brought and no
---------------------
cause of action shall be asserted by or on behalf of the Company or any
affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs,
executors or personal or legal representatives after the expiration of two years
from the date of accrual of such cause of action, and any claim or cause of
action of the Company or its affiliate shall be extinguished and deemed released
unless asserted by the timely filing of a legal action within such two-year
period; provided, however, that if any shorter period of limitations is
-------- -------
otherwise applicable to any such cause of action such shorter period shall
govern.
12. Amendments, Etc. No supplement, modification or amendment of
----------------
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
13. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery with respect to such payment of Indemnitee, who shall execute all
papers required and shall do everything that may be necessary to secure such
rights, including the execution of such documents necessary to enable the
Company effectively to bring suit to enforce such rights.
14. No Duplication of Payments. The Company shall not be liable
--------------------------
under this Agreement to make any payment in connection with any Claim made
against Indemnitee to the extent Indemnitee has otherwise actually received
payment (under any insurance policy, By-law or otherwise) of the amounts
otherwise indemnifiable hereunder.
15. Binding Effect, Etc. This Agreement shall be binding upon and
--------------------
inure to the benefit of and be enforceable against and by the parties hereto and
their respective successors, assigns (including any direct or indirect successor
by purchase, merger, consolidation or otherwise to all or substantially all of
the business and/or assets of the Company), spouses, heirs and personal and
legal representatives. The Company shall require and cause any successor
(whether direct or indirect by purchase, merger, consolidation, or otherwise) to
all, substantially all, or a substantial part, of the business and/or assets of
the Company, by written agreement in form and substance satisfactory to
Indemnitee, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform if
no such succession had taken place. This Agreement shall continue in effect
regardless of whether Indemnitee continues to serve as a director and/or officer
of the Company or of any other enterprise at the Company's request.
16. Severability. The provisions of this Agreement shall be
------------
severable in the event that any of the provisions thereof (including any
provision within a single section, paragraph or sentence) are held by a court of
competent jurisdiction to be invalid, void or otherwise
7
<PAGE>
unenforceable, and the remaining provisions shall remain enforceable to the
fullest extent permitted by law.
17. Notices. All notices, requests, demands and other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand or when mailed by certified registered
mail, return receipt requested, with postage prepaid.
A. If to Indemnitee, to:
-----------------------------------
-----------------------------------
-----------------------------------
or to such other person or address which Indemnitee shall furnish to the Company
in writing pursuant to the above.
B. If to the Company, to: Netpliance, Inc.
7600 A North Capital of Texas Highway
Austin, Texas 78731
Attention: General Counsel
or to such person or address as the Company shall furnish to Indemnitee in
writing pursuant to the above.
18. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such State without giving effect to the
principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement as of the Effective Date.
NETPLIANCE, INC.
By:
-----------------------------
Name:
-----------------------------
Title:
-----------------------------
INDEMNITEE:
----------------------------------
8
<PAGE>
EXHIBIT 10.11
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") is made and entered into as of
---------
December 22, 1999 (the "Effective Date") by and among Netpliance, Inc., a Texas
---------------
corporation (the "Company"), and US WEST Internet Ventures, Inc. (the
-------
"Investor") and the other parties executing the signature pages hereto (the
--------
"Shareholders").
- -------------
R E C I T A L S
- - - - - - - -
A. Concurrently herewith, the Investor is purchasing from the Company
shares of its Series D Preferred Stock (the "Series D Stock") pursuant to a
---------------
Series D Preferred Stock Purchase Agreement dated as of December 22, 1999
between the Company, the Investor and certain other purchasers of the Series D
Stock (the "Purchase Agreement").
------------------
B. As an inducement to the Investor to purchase the Series D Stock
pursuant to the Purchase Agreement, the Investor, the Shareholders and the
Company desire to enter into this Agreement to set forth their agreements and
understandings with respect to how shares of the Company's capital stock held by
them will be voted on certain matters.
NOW THEREFORE, in consideration of the above recitals and the mutual
covenants made herein, the parties hereby agree as follows:
1. Election of Board of Directors.
------------------------------
1.1 Voting; Board Composition. During the term of this Agreement,
-------------------------
each Shareholder agrees to vote all shares of capital stock of the Company then
directly or indirectly owned (of record or beneficially) by such Shareholder, in
such manner as may be necessary to elect (and maintain in office) as a member of
the Company's Board of Directors one (1) individual (the "Investor Designee")
-----------------
designated from time to time in a writing delivered to the Company and signed by
a representative of the Investor.
1.2 Changes in Board Designee. From time to time during the term of
-------------------------
this Agreement, the Investor may, in its sole discretion:
(i) elect to remove from the Company's Board of Directors
any incumbent Investor Designee; and/or
(ii) designate a new Investor Designee for election to
the Board seat for which the Investor is entitled to designate the Investor
Designee under Section 1.1 (whether to replace a prior Investor Designee or to
fill a vacancy in such Board seat).
In the event of such a removal and/or designation of the Investor
Designee under this Section 1.2, the Shareholders shall vote their shares of the
Company's capital stock as provided in Section 1.1 to cause: (a) the removal
from the Company's Board of Directors of the Investor Designee so designated for
removal by the Investor; and (b) the election to the
<PAGE>
Company's Board Directors of any new Investor Designee so designated for
election to the Company's Board of Directors by the Investor.
1.3 Notice; Cumulative Voting. The Company shall promptly give each
-------------------------
of the Shareholders written notice of any change in composition of the Company's
Board of Directors and of any proposal by the Investor to remove or elect a new
Investor Designee. In any election of directors pursuant to this Section 1, the
Shareholders shall vote their shares in a manner sufficient to elect to the
Company's Board of Directors the Investor Designee.
2. Further Assurances. Each of the Shareholders and the Company agree not
------------------
to vote any shares of Company stock, or to take any other actions, that would in
any manner defeat, impair, be inconsistent with or adversely affect the stated
intentions of the parties under Section 1 of this Agreement.
3. Enforcement of Agreement. Each of the Shareholders acknowledge and
------------------------
agree that any breach by any of them of this Agreement shall cause the Investor
irreparable harm which may not be adequately compensable by money damages.
Accordingly, in the event of a breach or threatened breach by a Shareholder of
any provision of this Agreement, the Investor shall be entitled to the remedies
of specific performance, injunction or other preliminary or equitable relief,
including the right to compel any such breaching Shareholder, as appropriate, to
vote such Shareholder's shares of capital stock of the Company in accordance
with the provisions of this Agreement, in addition to such other rights remedies
as may be available to the Investor for any such breach or threatened breach,
including but not limited to the recovery of money damages.
4. Term. This Agreement shall commence on the Effective Date and shall
----
terminate upon the first to occur of the following:
(a) the later to occur of (i) December 31, 2003;
(b) The execution by (i) the Investor and (ii) Shareholders holding
shares of outstanding common stock of the Company representing more than fifty
percent (50%) of the voting power of the then outstanding shares of common stock
of the Company then held by all Shareholders, of a written agreement to
terminate this Agreement;
(c) Immediately prior to the closing of (i) any consolidation or
merger of the Company with or into any other corporation or corporations in
which the holders of the Company's outstanding shares immediately before such
consolidation or merger do not, immediately after such consolidation or merger,
retain stock representing a majority of the voting power of the surviving
corporation of such consolidation or merger or stock representing a majority of
the voting power of a corporation that wholly owns, directly or indirectly, the
surviving corporation of such consolidation or merger; (ii) the sale, transfer
or assignment of securities of the Company representing a majority of the voting
power of all the Company's outstanding voting securities by the holders thereof
to an acquiring party in a single transaction or series of related transactions;
(iii) any other sale, transfer or assignment of securities of the Company
representing over fifty percent (50%) of the voting power of the Company's then
<PAGE>
outstanding voting securities by the holders thereof to an acquiring party; or
(iv) the sale of all or substantially all the Company's assets; or
(d) The first date on which the number of shares of Common Stock
(assuming the conversion of all shares of Series D Stock) held by the Investor
falls below 350,000 shares, as adjusted proportionately to reflect stock splits,
stock dividends, combinations and the like.
5. Miscellaneous.
-------------
5.1 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of Texas applicable to
contracts made among residents of, and wholly to be performed within, the State
of Texas, without regard to principles of conflict of laws or choice of laws.
5.2 Further Instruments. From time to time, each party hereto shall
-------------------
execute and deliver such instruments and documents as may be reasonably
necessary to carry out the purposes and intent of this Agreement.
5.3 Successors. This Agreement shall be binding upon and shall inure
----------
to the benefit of the executors, administrators, legal representatives, heirs,
successors, and assigns of the parties hereto.
5.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.5 Entire Agreement. This document constitutes and contains the
----------------
entire agreement and understanding of the parties regarding the subject matter
of this Agreement and supersedes any and all prior negotiations, correspondence,
understandings and agreements among the parties respecting the subject matter
hereof.
5.6 Amendments and Waivers. Any terms of this Agreement may be
----------------------
amended and the observance of any term of the Agreement may be waived (either
generally or in a particular) instance and either retroactively or
prospectively), with the written consent of (a) the Investor and (b) by
Shareholders holding fifty percent (50%) of the outstanding common stock of the
Company then held by all Shareholders. Any amendment or waiver effected in
accordance with this Section shall be binding upon the Company, the Investor,
the Shareholders and their permitted transferees and assignees.
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
and year first above written.
COMPANY: INVESTOR:
- ------- --------
Netpliance, Inc. US WEST Internet Ventures, Inc.
Name: Name:
--------------------------- -----------------------------
By: By:
----------------------------- -------------------------------
Title: Title:
-------------------------- ----------------------------
SHAREHOLDERS:
- ------------
Signature: Signature:
---------------------- ------------------------
Name: John F. McHale Name: Kent A. Savage
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Netpliance, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Austin, Texas
February 1, 2000
