<PAGE>
As filed with the Securities and Exchange Commission on January 14, 2000
Registration No. 333-93545
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
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 Code
organization) 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 & Rosati
Hughes & Luce, L.L.P. 8911 Capital of Texas Highway
111 Congress Avenue, Suite 900 Austin, Texas 78759
Austin, Texas 78701 (512) 338-5400
(512) 482-6800
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. [_]
----------------
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 -- January 14, 2000
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Prospectus
, 2000
[NETPLIANCE LOGO APPEARS HERE]
Shares of Common Stock
- --------------------------------------------------------------
Netpliance, Inc.: The Offering:
. We are pioneering . We are offering
a new model for shares of
delivering a our common stock.
simplified and
more relevant
Internet
experience through
consumer Internet
appliances.
. The underwriters have
an option to purchase
an additional
shares from
us to cover over-
allotments.
Proposed Symbol &
Market: . This is our initial
public offering, and
no public market
currently exists for
our shares.
. 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.
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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]
Graphical design depicting some of the pages of the i-opener consumer
portal. Eight rectangular shapes encircle the i-opener appliance. The
rectangles show the design and content of the i-opener portal, mailbox and
address book pages, Web Guide directory of Internet links, the home page for i-
opener for kids, the i-opener Web Mall and examples of the i-opener weather and
finance pages.
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........................................... 11
Use of Proceeds...................................................... 12
Dividend Policy...................................................... 12
Capitalization....................................................... 13
Dilution............................................................. 14
Selected Financial Data.............................................. 15
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 16
Business............................................................. 20
Management........................................................... 28
Related-Party Transactions........................................... 35
Principal Stockholders............................................... 37
Description of Capital Stock......................................... 39
Shares Eligible for Future Sale...................................... 42
Underwriting......................................................... 44
Legal Matters........................................................ 46
Experts.............................................................. 46
Where You Can Find Additional Information............................ 46
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 a simplified and more relevant
Internet experience through consumer 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 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.
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 have invested in our Series D preferred stock.
We were incorporated in Texas in January 1999 and 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:
.6,332,357 shares of common stock outstanding as of January 14, 2000;
. 9,849,810 shares of common stock issuable upon conversion of our
preferred stock outstanding as of January 14, 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:
. 1,625,794 shares of common stock issuable upon exercise of
outstanding options under our stock option plan as of January 14,
2000 at a weighted average exercise price of $4.19 per share;
. 874,206 shares reserved for future issuance under our stock option
plan as of January 14, 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 $37,264
Working capital..................................... 11,170 38,871
Total assets........................................ 20,543 48,224
Non-current portion of capital lease obligations.... 636 636
Total stockholders' equity.......................... 15,015 42,716
</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, the issuance of 30,000 shares of common
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 our operating history is limited.
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,
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 these risks and difficulties, we
will 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, or have never used the Internet, used e-mail and
other applications 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 participants 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 product cost subsidy. 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. Therefore, we will need to generate and
sustain dramatically greater revenues from sales of our products and services
if we are to achieve profitability. If we are unable to achieve dramatically
greater revenues, our losses will likely continue indefinitely. 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 or well-established relationships 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.
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.
5
<PAGE>
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, or products that do not meet specifications or are otherwise flawed,
we may have to delay product delivery, or 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 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 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 use
of and demand for our service, if the content is not appealing to users or
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 we are unable to
enhance our network infrastructure.
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.
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,
6
<PAGE>
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 at our
server site, 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 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. 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.
7
<PAGE>
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 the 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.
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.
8
<PAGE>
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 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-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.
9
<PAGE>
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 market, unless
these shares are held by affiliates. 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 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
10
<PAGE>
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.
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 such 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 such forward-looking statements, including our plans, objectives,
expectations and intentions and other factors discussed under "Risk Factors."
11
<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.
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.
12
<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, the issuance of 30,000 shares of common 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 $ 37,264 $
======== ======== =======
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; 16,337,845 shares
issued and outstanding pro forma; and
shares issued and outstanding pro
forma as adjusted .......................... 63 163
Additional paid-in capital................... 9,305 68,578
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 42,716
-------- -------- -------
Total capitalization........................... $ 15,651 $ 43,352 $
======== ======== =======
</TABLE>
Outstanding shares in this table excludes:
. 1,625,794 shares of common stock issuable upon the exercise of stock
options outstanding as of January 14, 2000 under our stock option plan at
a weighted average exercise price of $4.19 per share;
. 874,206 shares of common stock available for issuance as of January 14,
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.
13
<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, the issuance of 30,000 shares of common 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 $44.6 million or $2.73 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..... 16,182,167 % $66,137,372 % $ 4.09
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."
14
<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.
15
<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 a limited amount
of revenues to date. 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.
16
<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.
17
<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.
We are not currently aware of any material year 2000 problem relating to any
of our material 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.
18
<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 high-quality credit instruments, primarily U.S.
Treasury securities and money market funds 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.
19
<PAGE>
BUSINESS
Overview
We are pioneering a new model for delivering a simplified and more relevant
Internet experience through consumer 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%. Growth in
Internet usage is expected to translate into growth in demand for devices to
access the Internet and revenues for Internet 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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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 has
increased 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 will 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 the functionality of our portal to ensure that our users
continue to access content in a simplified 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
Agreement with 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.
Agreement with 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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<PAGE>
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 to 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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<PAGE>
phone calls for customer service and technical support. The i-opener Internet
appliance currently sells for $199 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;
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<PAGE>
. software platform providers such as Aether Systems and Liberate
Technologies.
. 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 which 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 which 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 January 14, 2000, we had a total of 117 full-time employees including
49 in research and development, 39 in sales and marketing, 10 in network
operations and 19 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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<PAGE>
MANAGEMENT
The following table sets forth, as of January 14, 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
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............. 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.
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.
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<PAGE>
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 1998,
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.
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.
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.
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<PAGE>
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.
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 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. Mansour and Zito.
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<PAGE>
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.
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.
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<PAGE>
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.
. 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
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<PAGE>
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.
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 January 14, 2000, we had issued options to purchase
1,625,794 shares at a weighted average exercise price of $4.19, and 874,206
shares remained available for future grant. As of January 14, 2000, the board
had granted no shares as stock awards under the stock option 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
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<PAGE>
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.
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 -- -- -- --
Joseph R. Zell.......... -- -- -- -- --
Watershed Capital I,
L.P. .................. -- -- 1,166,660 333,340 --
U S WEST Internet
Ventures, Inc. ........ 230,000(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.
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.
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, and 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 January 14,
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 16,537,845 shares of common stock
outstanding as of January 14, 2000, assuming the conversion of the preferred
stock and the exercise of warrants to purchase common stock outstanding as of
January 14, 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.................... 320,928 1.9
Michael R. Corboy........................ 72,767 *
Kevin Denuccio........................... 60,000 *
David S. Lundeen (4)..................... 1,530,000 9.3
Joseph R. Zell (5)....................... 930,000 5.6
5% Stockholders
Kenneth A. Kalinoski..................... 1,518,456 9.2
Watershed Capital I, L.P. (4)............ 1,530,000 9.3
US West Internet Ventures, Inc. (5)...... 930,000 5.6
All executive officers and directors as a
group
(9 persons).............................. 10,871,389 65.7
</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 a partner of Watershed. Includes 1,500,000 shares
held by Watershed. Mr. Lundeen disclaims beneficial ownership of the shares
held by Watershed. Watershed's and 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 730,000 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. U S WEST's and Mr. Zell'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
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<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 stockholders, 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.
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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 Indemnification 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.
41
<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.
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 , 2000 and ,
2001, subject to sales volume restrictions under Rule 144.
</TABLE>
Pursuant to the "lock-up" agreements between our directors, executive
officers, stockholders, optionees and 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.
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
42
<PAGE>
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.
43
<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
44
<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.
45
<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.
46
<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 Deferred
Stock Stock Stock preferred Stock Additional stock
------------------- ------------------ ----------------- stock ----------------- paid-in option
Shares Amount Shares Amount Shares Amount issuance Shares Amount capital compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
inception...... -- $ -- -- $ -- -- $ -- $ -- -- $ -- $ -- $ --
Issuance of
common stock... -- -- -- -- -- -- -- 6,296,357 62,964 6,695,390 --
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 (1,696,666)
Amortization of
deferred
stock option
compensation... -- -- -- -- -- -- -- -- -- -- 34,266
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 $(1,662,400)
======= =========== ======= ========== ====== ========== ========== ========= ======= ========== ===========
<CAPTION>
Total
Stockholder Accum- stock-
notes ulated holders'
receivable deficit equity
<S> <C> <C> <C>
Balances at
inception...... $ -- $ -- $ --
Issuance of
common stock... (821,449) -- 5,936,905
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... -- -- --
Amortization of
deferred
stock option
compensation... -- -- 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........... $(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 offers its customers the i-opener
service, a simple, seamless and relevant all-in-one Internet experience
integrating an Internet appliance, access and portal.
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. Such costs are
expensed as incurred and 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.
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.
(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 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.
F-8
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(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.
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 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>
F-9
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(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>
(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
F-10
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 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.
F-11
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
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
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>
F-12
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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%.
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 had an immaterial fair value on the date of grant.
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.
F-13
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 and the Company intends
to sell the i-opener Internet appliance at a loss. 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 US West. If issued, the value of the incentive warrants will be
recognized as sales and marketing expense as they are issued.
(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 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.
F-14
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(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.
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.
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.
F-15
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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]
Graphical design illustrating the i-opener Internet appliance.
<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 John F.
McHale. 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 John McHale
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. 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 January 14, 2000, we granted options to purchase an
aggregate of 1,625,794 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 $4.19.
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.
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.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
* To be filed by amendment.
(1) Financial Statements filed as part of this Registration Statement are
listed in the Index to Combined Financial Statements on page F-1.
+ Confidential treatment requested as to certain portions of this Exhibit.
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 January 13, 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 January 13, 2000
____________________________________
John F. McHale
/s/ Kent A. Savage President and Chief January 13, 2000
____________________________________ Executive Officer and
Kent A. Savage Director (Principal
Executive Officer)
/s/ M. David Hampton Treasurer and Controller January 13, 2000
____________________________________ (Principal Accounting
M. David Hampton Officer)
* Director and Secretary January 13, 2000
____________________________________
Paul S. Zito
* Director January 13, 2000
____________________________________
Michael R. Corboy
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director January 13, 2000
____________________________________
David S. Lundeen
* Director January 13, 2000
____________________________________
James M. Mansour
Director
____________________________________
Steven G. Papermaster
* Director January 13, 2000
____________________________________
Kevin Denuccio
</TABLE>
/s/ Kent A. Savage
* By _____________________
Kent A. Savage
Attorney-in-Fact
Pursuant to Power of Attorney
II-6
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number
<C> <S> <C>
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
27.1 Financial Data Schedule
</TABLE>
- ---------------------
* To be filed by amendment.
+ Confidential treatment requested as to certain portions of this Exhibit.
<PAGE>
Exhibit 3.2
BYLAWS
OF
NETPLIANCE, INC.
<PAGE>
TABLE OF CONTENTS
BYLAWS
OF
NETPLIANCE, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I OFFICES...................................................................................................... 2
Section 1. Registered Office........................................................................................... 2
-----------------
Section 2. Other Offices............................................................................................... 2
-------------
ARTICLE II MEETINGS OF THE STOCKHOLDERS................................................................................ 2
Section 1. Place of Meetings........................................................................................... 2
-----------------
Section 2. Annual Meeting.............................................................................................. 3
--------------
Section 3. Special Meeting............................................................................................. 3
---------------
Section 4. Notice of Annual or Special Meeting......................................................................... 3
-----------------------------------
Section 5. Business at Special Meeting................................................................................. 3
---------------------------
Section 6. Quorum of Stockholders...................................................................................... 3
----------------------
Section 7. Act of Stockholders' Meeting................................................................................ 4
----------------------------
Section 8. Proxies..................................................................................................... 4
-------
Section 9. Voting List................................................................................................. 4
-----------
ARTICLE III BOARD OF DIRECTORS......................................................................................... 4
Section 1. Powers...................................................................................................... 5
------
Section 6. Compensation of Directors................................................................................... 5
-------------------------
Section 7. Chairman of the Board....................................................................................... 5
---------------------
ARTICLE IV MEETINGS OF THE BOARD....................................................................................... 5
Section 1. First Meeting............................................................................................... 5
-------------
Section 2. Regular Meetings............................................................................................ 5
----------------
Section 3. Special Meetings............................................................................................ 5
----------------
Section 4. Business at Regular or Special Meeting...................................................................... 5
--------------------------------------
Section 5. Quorum of Directors......................................................................................... 6
-------------------
Section 6. Act of Directors' Meeting................................................................................... 6
-------------------------
Section 7. Action by Unanimous Written Consent Without a Meeting....................................................... 6
-----------------------------------------------------
ARTICLE V COMMITTEES................................................................................................... 6
ARTICLE VI NOTICES..................................................................................................... 7
Section 1. Methods of Giving Notice.................................................................................... 7
------------------------
Section 2. Waiver of Notice............................................................................................ 7
----------------
Section 3. Attendance as Waiver........................................................................................ 7
--------------------
ARTICLE VII DIRECTORS' ACTION WITHOUT A MEETING BY USE OF CONFERENCE TELEPHONE......................................... 7
ARTICLE VIII OFFICERS................................................................................................... 8
Section 1. Executive Officers.......................................................................................... 8
------------------
Section 2. Election and Qualification.................................................................................. 8
--------------------------
Section 3. Salaries.................................................................................................... 8
--------
Section 4. Term, Removal, and Vacancies................................................................................ 8
----------------------------
Section 5. Chief Executive Officer..................................................................................... 8
-----------------------
Section 6. President................................................................................................... 9
---------
Section 7. Vice Presidents............................................................................................. 9
---------------
Section 8. Secretary................................................................................................... 9
---------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 9. Assistant Secretaries..................................................................................... 9
---------------------
Section 10. Treasurer................................................................................................. 9
---------
Section 11. Assistant Treasurer....................................................................................... 10
-------------------
Section 12. Officers' Bond............................................................................................ 10
--------------
ARTICLE IX CERTIFICATES FOR SHARES..................................................................................... 10
Section 1. Certificates Representing Shares.......................................................................... 10
--------------------------------
Section 2. Restriction on Transfer of Shares......................................................................... 11
---------------------------------
Section 3. Voting Agreements......................................................................................... 11
-----------------
Section 4. Transfer of Shares........................................................................................ 11
------------------
Section 5. Lost, Stolen, or Destroyed Certificate.................................................................... 11
--------------------------------------
Section 6. Fixing Record Date........................................................................................ 12
------------------
Section 7. Registered Stockholders................................................................................... 12
-----------------------
ARTICLE X GENERAL PROVISIONS........................................................................................... 12
Section 1. Dividends................................................................................................. 12
---------
Section 2. Reserves.................................................................................................. 12
--------
Section 3. Negotiable Instruments.................................................................................... 12
----------------------
Section 4. Fiscal Year............................................................................................... 13
-----------
Section 5. Seal...................................................................................................... 13
----
Section 6. Books and Records......................................................................................... 13
-----------------
ARTICLE XI AMENDMENTS.................................................................................................. 13
</TABLE>
BYLAWS
OF
NETPLIANCE, INC.
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office shall be located in
-----------------
the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The corporation also may have offices at such
-------------
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or as the business of the corporation
may require.
ARTICLE II
MEETINGS OF THE STOCKHOLDERS
Section 1. Place of Meetings. All meetings of the stockholders for the
-----------------
election of directors or for any other proper purpose shall be held at such
place either within or without the State of Delaware as the Board of Directors
may from time to time designate, as stated in the notice of such meeting or a
duly executed waiver of notice thereof.
Section 2. Annual Meeting. An annual meeting of the stockholders shall
--------------
be held at such time and date as the Board of Directors may determine. At such
meeting the stockholders
<PAGE>
entitled to vote thereat shall elect a Board of Directors and may transact such
other business as properly may be brought before the meeting.
Section 3. Special Meeting. 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.
Section 4. Notice of Annual or Special Meeting. Unless otherwise required
-----------------------------------
by law, written or printed notice stating the location, day and hour of the
meeting and, in case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten nor more than 60 days
before the date of the meeting, either personally or by mail, by or at the
direction of the Chairman of the Board of the corporation or the Board of
Directors to each stockholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail, addressed to the stockholder at his address as it appears on the
stock transfer books of the corporation, with postage thereon prepaid.
Section 5. Business at Special Meeting. The business transacted at any
---------------------------
special meeting of the stockholders shall be limited to the purposes stated in
the notice thereof.
Section 6. Quorum of Stockholders. Unless otherwise provided in the
----------------------
Certificate of Incorporation or applicable law, the holders of a majority of the
shares entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of the stockholders. If, however, a quorum shall not be
present or represented at any meeting of the stockholders, the stockholders
present in person or represented by proxy shall have power to adjourn the
meeting from time to time, without notice other than announcement of location,
day, and hour of the adjourned meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified, unless the adjournment is for more than 30
days or a new record date is fixed for the adjourned meeting, in which case
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at such meeting. The stockholders present at a duly organized
meeting may continue to transact business until adjournment, and the subsequent
withdrawal of any stockholder or the refusal of any stockholder to vote shall
not affect the presence of quorum at the meeting.
Section 7. Act of Stockholders' Meeting. Except with respect to the
----------------------------
election of directors, the vote of the holders of a majority of the shares
entitled to vote and represented in person or by proxy at a meeting at which a
quorum is present shall be the act of the stockholders' meeting, unless the vote
of a greater number is required by law or the Certificate of Incorporation.
Unless otherwise provided in the Certificate of Incorporation, directors shall
be
<PAGE>
elected by a plurality of the votes cast by the holders of shares entitled to
vote in the election of directors at a meeting of stockholders at which a quorum
is present and all elections of directors shall be by written ballot. Where a
separate vote by a class or classes is required, a majority of the outstanding
shares of such class or classes, present in person or represented by proxy,
shall constitute a quorum entitled to take action with respect to that vote on
that matter and the affirmative vote of the majority of shares of such class or
classes present in person or represented by proxy at the meeting shall be the
act of such class.
Section 8. Proxies. At any meeting of the stockholders, each stockholder
-------
having the right to vote shall be entitled to vote either in person or by proxy
executed in writing by the stockholder or by his duly authorized attorney-in-
fact. No proxy shall be valid after three (3) years from its date of execution
unless otherwise provided in the proxy. Each proxy shall be revocable unless
expressly provided therein to be irrevocable and the proxy is coupled with an
interest sufficient in law to support an irrevocable proxy or otherwise made
irrevocable by law.
Section 9. Voting List. The officer or agent having charge of the stock
-----------
ledger of the corporation shall make, at least ten days before each meeting of
the stockholders, a complete list of the stockholders entitled to vote at such
meeting or any adjournment thereof, arranged in alphabetical order, with the
address of and number of shares held by each, which list shall be maintained,
for a period of ten days prior to such meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held, and shall be subject to inspection by any stockholder at any time
during ordinary business hours. Such list shall also be produced and kept open
at the time and place of the meeting and shall be subject to the inspection of
any stockholder during the whole time of the meeting. The original stock ledger
shall be the only evidence as to who are the stockholders entitled to examine
such list or transfer books of the corporation or to vote at any such meeting of
stockholders.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Powers. The business and affairs of the corporation shall be
------
managed by or under the direction of its Board of Directors, which may exercise
all such powers of the corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised and done by the stockholders.
Section 2. Compensation of Directors. As specifically prescribed from
-------------------------
time to time by resolution of the Board of Directors, the directors of the
corporation may be paid their expenses of attendance at each meeting of the
Board and may be paid a fixed sum for attendance at each meeting of the Board or
a stated compensation for their services in their capacity as directors. This
provision shall not preclude any director from serving the corporation in any
other capacity and receiving compensation therefor. Members of special or
standing committees
<PAGE>
may be allowed like compensation for attending committee meetings.
Section 3. Chairman of the Board. The Board of Directors, at its first
---------------------
meeting after each annual meeting of stockholders, may elect one of its members
Chairman of the Board. The Chairman of the Board shall preside at all meetings
of the Board of Directors and shall have such other powers and duties as usually
pertain to such position or as may be delegated by the Board of Directors.
ARTICLE IV
MEETINGS OF THE BOARD
Section 1. First Meeting. The first meeting of each newly elected Board
-------------
of Directors shall be held immediately following the annual meeting of the
stockholders and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present.
Section 2. Regular Meetings. Regular meetings of the Board of Directors
----------------
may be held with or without notice at such time and at such place either within
or without the State of Delaware as from time to time shall be prescribed by the
Board of Directors.
Section 3. Special Meetings. Special meetings of the Board of Directors
----------------
may be called by the Chairman of the Board, the President or by a majority of
the Board of Directors. Written notice of special meetings of the Board of
Directors shall be given to each director at least 24 hours before the time of
the meeting.
Section 4. Business at Regular or Special Meeting. Neither the business
--------------------------------------
to be transacted at nor the purpose of any regular or special meeting of the
Board of Directors need be specified in the notice or waiver of notice of such
meeting.
Section 5. Quorum of Directors. A majority of the Board of Directors
-------------------
shall constitute a quorum for the transaction of business, unless a greater
number is required by law or the Certificate of Incorporation. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.
Section 6. Act of Directors' Meeting. The act of a majority of the
-------------------------
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors, unless the act of a greater number is required by law or
the Certificate of Incorporation.
Section 7. Action by Unanimous Written Consent Without a Meeting. Any
-----------------------------------------------------
action required or permitted to be taken at a meeting of the Board of Directors
or any executive committee under the provisions of any applicable law, the
Certificate of Incorporation or these Bylaws may be taken without a meeting if a
consent in writing setting forth the action so taken is
<PAGE>
signed by all members of the Board of Directors or of the executive committee,
as the case may be, and such consent is filed with the minutes of proceedings of
the Board of Directors or the executive committee, as the case may be. Such
consent shall have the same force and effect as a unanimous vote of the Board of
Directors or of the executive committee, as the case may be.
ARTICLE V
COMMITTEES
The Board of Directors, by resolution adopted by a majority of the full
Board of Directors, may designate from among its members an executive committee
and one or more other committees, each of which, to the extent provided in such
resolution or in the Certificate of Incorporation or in these Bylaws, shall have
and may exercise all the authority of the Board of Directors, subject to the
limitations imposed by applicable law. The Board of Directors, by resolution
adopted by a majority of the full Board of Directors, may designate one or more
of its members as alternate members of any committee, who may, subject to any
limitations imposed by the Board of Directors, replace absent or disqualified
members at any meeting of that committee. Vacancies in the membership of any
such committee shall be filled by resolution adopted by the majority of the full
Board of Directors at a regular or special meeting of the Board. All committees
shall keep regular minutes of their proceedings and report the same to the Board
of Directors when required. To the extent applicable, the provisions of Article
IV of these Bylaws governing the meetings of the Board of Directors shall
likewise govern the meetings of any committee thereof. Any member of the
executive committee or any other committee may be removed by the Board of
Directors by the affirmative vote of a majority of the full Board, whenever, in
its judgment, the best interests of the corporation will be served thereby.
ARTICLE VI
NOTICES
Section 1. Methods of Giving Notice. Whenever any notice is required to
------------------------
be given to any stockholder or director under the provisions of any law, the
Certificate of Incorporation or these Bylaws, it shall be given in writing and
delivered personally or mailed to such stockholder or director at such address
as appears on the books of the corporation, and such notice shall be deemed to
be given at the time the same shall be deposited in the United States mail with
sufficient postage thereon prepaid. Notice to directors may also be given by
telegram, telex, telecopy, or similar means of visual data transmission, and
notice given by any of such means shall be deemed to be delivered when
transmitted for delivery to the recipient.
Section 2. Waiver of Notice. Whenever any notice is required to be
----------------
given to any stockholder or director under the provisions of any law, the
Certificate of Incorporation, or these Bylaws, a waiver thereof in writing
signed by the person or persons entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent to the giving of such
notice.
<PAGE>
Section 3. Attendance as Waiver. Attendance of a stockholder or director
--------------------
at a meeting shall constitute a waiver of notice of such meeting, except where a
stockholder or director attends a meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business on the
ground that the meeting is not lawfully called or convened. Neither the business
to be transacted at, nor the purpose of, a meeting need be specified in any
written waiver unless required by the Certificate of Incorporation or these
Bylaws.
ARTICLE VII
DIRECTORS' ACTION BY USE OF CONFERENCE TELEPHONE
Subject to the provisions required or permitted for notice of meetings,
unless otherwise restricted by the Certificate of Incorporation or these Bylaws,
members of the Board of Directors or members of any committee designated by such
Board of Directors may participate in and hold a meeting of such Board of
Directors or committee by conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in such a meeting shall constitute presence in
person at such meeting, except where a person participates in the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
ARTICLE VIII
OFFICERS
Section 1. Executive Officers. The officers of the corporation shall
------------------
consist of a President and a Secretary and may also include one or more Vice
Presidents, a Treasurer, and such other officers as are provided for in this
Article VIII, each of whom shall be elected by the Board of Directors as
provided in Section 2 of this Article. Any two (2) or more offices may be held
by the same person.
Section 2. Election and Qualification. The Board of Directors, at its
--------------------------
first meeting held immediately after each annual meeting of stockholders, shall
choose a President and a Secretary. The Board of Directors also may elect one or
more Vice Presidents, a Treasurer, and such other officers, including assistant
officers and agents as may be deemed necessary, who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board of Directors.
Section 3. Salaries. The compensation of all officers and agents of the
--------
corporation shall be determined by the Board of Directors.
Section 4. Term, Removal, and Vacancies. Each officer of the
----------------------------
corporation shall hold office until his successor is chosen and qualified or
until his death, resignation, or removal. Any officer may resign at any time
upon giving written notice to the corporation. Any officer or
<PAGE>
agent or member of the executive committee elected or appointed by the Board of
Directors may be removed by the Board of Directors with or without cause, but
such removal shall be without prejudice to the contract rights, if any, of the
person so removed. Election or appointment of an officer or agent shall not of
itself create contract rights. Any vacancy occurring in any office of the
corporation by death, resignation, removal, or otherwise shall be filled by the
Board of Directors.
Section 5. Chief Executive Officer. Unless the Board of Directors
-----------------------
designates otherwise, the President shall be the Chief Executive Officer of the
corporation. The Chief Executive Officer shall preside at all meetings of the
stockholders. The Chief Executive Officer shall have such other powers and
duties as usually pertain to such office or as may be delegated by the Board of
Directors.
Section 6. President. The President shall, subject to the oversight and
---------
the direction of the Board of Directors, have general powers of oversight,
supervision, and management of the business and affairs of the corporation, and
shall see that all orders and resolutions of the Board of Directors are carried
into effect. The President shall have such other powers and duties as usually
pertain to such office or as may be prescribed by the Board of Directors. The
President shall execute bonds, mortgages, instruments, contracts, agreements,
and other documentation, except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
Section 7. Vice Presidents. Unless otherwise determined by the Board of
---------------
Directors, the Vice Presidents, in the order of their seniority as such
seniority may from time to time be designated by the Board of Directors, shall
perform the duties and exercise the powers of the President in the absence or
disability of the President. They shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
Section 8. Secretary. The Secretary shall attend all meetings of the
---------
Board of Directors and all meetings of the stockholders, shall record all the
proceedings of the meetings of the stockholders and of the Board of Directors in
books to be kept for that purpose, and shall perform like duties for the
standing committees when required. The Secretary shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and shall perform such other duties as may be prescribed by
the Board of Directors. The Secretary shall keep in safe custody the seal of the
corporation, and, when authorized by the Board of Directors, affix the same to
any instrument requiring it. When so affixed, such seal shall be attested by his
or her signature or by the signature of the Treasurer or an Assistant Secretary.
Section 9. Assistant Secretaries. Unless otherwise determined by the
---------------------
Board of Directors, the Assistant Secretaries, in the order of their seniority
as such seniority may from time to time be designated by the Board of Directors,
shall perform the duties and exercise the powers of the Secretary in the absence
or disability of the Secretary. They shall perform such
<PAGE>
other duties and have such other powers as the Board of Directors may from time
to time prescribe.
Section 10. Treasurer. The Treasurer shall have the custody of the
---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall perform such other duties and have such other powers as
the Board of Directors may from time to time prescribe.
Section 11. Assistant Treasurer. Unless otherwise determined by the
-------------------
Board of Directors, the Assistant Treasurer shall perform the duties and
exercise the powers of the Treasurer in the absence or disability of the
Treasurer. The Assistant Treasurer shall perform such other duties and have
such other powers as the Board of Directors may from time to time prescribe.
Section 12. Officers' Bond. If required by the Board of Directors, any
--------------
officer so required shall give the corporation a bond, which shall be renewed as
the Board of Directors may require, in such sum and with such surety or sureties
as shall be satisfactory to the Board of Directors for the faithful performance
of the duties of his or her office and for the restoration to the corporation,
in case of his or her death, resignation, retirement or removal from office, of
any and all books, papers, vouchers, money and other property of whatever kind
in his or her possession or under his or her control belonging to the
corporation.
ARTICLE IX
CERTIFICATES FOR SHARES
Section 1. Certificates Representing Shares. The corporation shall
--------------------------------
deliver certificates representing all shares to which stockholders are entitled.
Such certificates shall be numbered and shall be entered in the books of the
corporation as they are issued, and shall be signed by the Chairman of the Board
of Directors, the President or a Vice President, and by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
corporation, and may be sealed with the seal of the corporation or a facsimile
thereof. Any or all signatures on the certificate may be a facsimile. In case
any officer who has signed or whose facsimile signature has been placed upon
such certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the corporation with the same effect as if he or she
were such officer at the date of its issuance. If the corporation is authorized
to issue shares of more than one class, there shall be set forth upon the face
or back of the certificate a statement that the corporation will furnish to any
stockholder upon request and without charge a full statement of all of the
powers, designations, preferences, limitations and relative, participating,
optional, or other special rights of the shares of each class authorized to be
issued and the qualifications, limitations or restrictions of such preferences
and/or rights and, if the corporation is authorized to
<PAGE>
issue any preferred or special class in series, the variations in the relative
rights and preferences between the shares of each such series so far as the same
have been fixed and determined and the authority of the Board of Directors to
fix and determine the relative rights and preferences of subsequent series. Each
certificate representing shares shall state upon the face thereof that the
corporation is organized under the laws of the State of Delaware, the name of
the person to whom issued, the number and the class and the designation of the
series, if any, which such certificate represents and the par value of each
share represented by such certificate or a statement that the shares are without
par value. No certificate shall be issued for any share until the consideration
therefor has been fully paid.
Section 2. Restriction on Transfer of Shares. If any restriction on
---------------------------------
the transfer, or registration of the transfer, of shares shall be imposed or
agreed to by the corporation, as permitted by law, the Certificate of
Incorporation, or these Bylaws, such restriction shall be noted conspicuously on
each certificate representing shares in accordance with applicable law.
Section 3. Voting Agreements. A written counterpart of any voting
-----------------
agreement entered into among any number of stockholders of the corporation, or
any number of stockholders of the corporation and the corporation itself, for
the purpose of providing that shares of the corporation shall be voted in the
manner prescribed in the agreement shall be deposited with the corporation at
its registered office in Delaware and shall be subject to the inspection by any
stockholder of the corporation or any beneficiary of the agreement daily during
business hours. In addition, certificates of stock or uncertificated stock shall
be issued to the person or persons or corporation or corporations authorized to
act as trustee for purposes of vesting in such person or persons, corporation or
corporations the right to vote such shares, to represent any stock of an
original issue so deposited with the trustee or trustees, and any certificates
of stock or uncertificated stock so transferred to the voting trustee or
trustees shall be surrendered and cancelled and new certificates or
uncertificated stock shall be issued therefore to the voting trustee or
trustees. In the certificate so issued, if any, it shall be stated that it is
issued pursuant to such agreement, and that fact shall also be stated in the
stock ledger of the corporation.
Section 4. Transfer of Shares. Subject to the provisions of Section 7 of
------------------
this Article IX, upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment, or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction upon its books.
Section 5. Lost, Stolen, or Destroyed Certificate. The Board of
--------------------------------------
Directors may direct a new certificate or certificates to be issued in place of
any certificate or certificates theretofore issued by the corporation alleged to
have been lost, stolen, or destroyed upon the making of an affidavit of that
fact by the person claiming the certificate to be lost, stolen or destroyed.
When authorizing such issue of a new certificate or certificates, the Board of
Directors, in its discretion
<PAGE>
and as a condition precedent to the issuance thereof, may require the owner of
such lost, stolen or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require and/or
to give the corporation a bond in such sum as it may direct to indemnify the
corporation against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen or destroyed or the
issuance of such new certificate.
Section 6. Fixing Record Date. For the purpose of determining
------------------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution, or in order to make a determination of stockholders for any other
proper purpose, the Board of Directors may fix a date as the record date for any
such determination of stockholders, such date to not precede the date of
adoption of the resolution fixing the record date, and such date to be not more
than 60 days, and, in case of a meeting of stockholders, not less than ten days,
prior to the date on which the particular action requiring such determination of
stockholders is to be taken. If no record date is fixed for the determination of
stockholders entitled to notice of or to vote at a meeting of stockholders, or
stockholders entitled to receive payment of a dividend or other distribution, or
for any other proper purpose, the close of business on the day next preceding
the date on which notice of the meeting is mailed or if notice is waived, the
close of business on the day next preceding the day on which the meeting is held
or the date on which the resolution of the Board of Directors declaring such
dividend or relating to such other proper purpose is adopted, as the case may
be, shall be the record date for such determination of stockholders. When a
determination of stockholders entitled to vote at any meeting of stockholders
has been made as provided in this Section 6, such determination shall apply to
any adjournment thereof; provided that the Board of Directors may fix a new
record date for the adjourned meeting.
Section 7. Registered Stockholders. The corporation shall be entitled
-----------------------
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person, whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of the State
of Delaware.
ARTICLE X
GENERAL PROVISIONS
Section 1. Dividends. The Board of Directors from time to time may
---------
declare, and the corporation may pay, dividends on its outstanding shares in
cash, property, or its own shares pursuant to law and subject to the provisions
of the Certificate of Incorporation and these Bylaws.
Section 2. Reserves. The Board of Directors may by resolution create a
--------
reserve or reserves out of earned surplus for any proper purpose or purposes,
and may abolish any such
<PAGE>
reserve in the same manner.
Section 3. Negotiable Instruments. All bills, notes, checks, or
----------------------
instruments for the payment of money shall be signed by such officer or officers
or such other person or persons as permitted by these Bylaws or in such manner
as the Board of Directors from time to time may designate.
Section 4. Fiscal Year. The fiscal year of the corporation shall be
-----------
fixed by resolution of the Board of Directors.
Section 5. Seal. The corporate seal shall have inscribed thereon the
----
name of the corporation and may be used by causing it or a facsimile thereof to
be impressed or affixed or in any other manner reproduced.
Section 6. Books and Records. The corporation shall keep books and
-----------------
records of account and shall keep minutes of the proceedings of the
stockholders, the Board of Directors, and each committee of the Board of
Directors. The corporation shall keep at its registered office or principal
place of business, or at the office of its transfer agent or registrar, a record
of the original issuance of shares issued by the corporation and a record of
each transfer of those shares that have been presented to the corporation for
registration of transfer. Such records shall contain the names and addresses of
all past and current stockholders of the corporation and the number and class of
shares issued by the corporation held by each of them. Any books, records,
minutes, and share transfer records may be in written form or in any other form
capable of being converted into written form within a reasonable time.
ARTICLE XI
AMENDMENTS
The Bylaws may be amended or repealed or new bylaws adopted as provided by
the Certificate of Incorporation.
CERTIFICATE OF SECRETARY
------------------------
The undersigned hereby certifies that (i) he is the duly elected and
qualified Secretary of Netpliance, Inc., a Delaware corporation (the "Company"),
and (ii) the foregoing is a true and correct copy of the Bylaws of the Company
reviewed and adopted by the Board of Directors of the Company.
____________________________________
Paul S. Zito, Secretary
____________________________________
Date
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
EXHIBIT 10.2
OEM PURCHASE AGREEMENT
BETWEEN NETPLIANCE, INC. AND
QUANTA COMPUTER
FOR NETPLIANCE INTERNET PERSONAL ACCESS DEVICE
This Agreement is made effective as of the August 15, 1999 by and between
Netpliance Corporation, 7600A N. Capital of Texas Highway, Austin, Texas, U.S.A
and Quanta Computer, Incorporated having its principal place of business at No.
188. Wen Hwa 2nd Rd., Kuei Shan Hsiang, Tao Yuan Shien, Taiwan, R.O.C.
(hereinafter referred to as "Supplier"), which shall include Supplier's
subsidiaries.
1.0 DEFINITIONS
1.1
"Subsidiary" will mean a corporation, company, or other entity more than
fifty percent (50%) of whose outstanding shares of securities (representing
the right other than as affected by events of default, to vote for the
election of directors or other managing authority) are now or hereafter
owned or controlled, directly or indirectly, by a party hereto. But such
corporation, company, or entity will be deemed to be a subsidiary only so
long as such ownership or control exists.
1.2
"Product(s)" will mean Internet Personal Access Devices and Assemblies;
Part Numbers as described in the Attachment A set forth in this Agreement,
or such other Part Number, which may be subsequently assigned by Netpliance
Order or Order alteration.
1.3
"Spare Part(s)" will mean any part, assembly or subassembly of the Product.
1.4
"Delivery" will mean delivery of Products or Spare Parts to a destination
designated by Netpliance.
1.5
"Billback" will mean any re-invoicing or changes to increase the price paid
for products by Supplier that are the result of Netpliance failure to
purchase certain quantities of products.
2.0 DELIVERY
2.1
Supplier will deliver product to Netpliance's Designated Destination based
on the requested delivery date advised on the Order release. Supplier
shall not deliver the product more than 5 days early or 0 days late, based
on the requested delivery date without prior approval from Netpliance. If
there is a specific delivery date request, on before or after a certain
date, Supplier commits to deliver on that specific date. If deliveries are
made without Netpliance prior approval, Netpliance may elect to delay
receipt or passage of title until the requested delivery date or return the
Product at Supplier's expense. In any event, payment shall be based upon
the requested delivery date advised on the Order Release or actual delivery
date, whichever is later. Supplier will be responsible for management of
the logistics carrier and will ensure that the carrier is committed to
delivery 100% of the product to the end customer within 72 hrs from pick up
at Suppliers facility.
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
2.0 DELIVERY (Continued)
2.1
Deliver performance will be measured against the key order milestones, as
follows:
D0 - Netpliance releases Order to Supplier (cut off time 6pm Central
Time Standard, 8am Taiwan Time)
D1 - Supplier receives and confirms Order (day difference due to time
zones)
D2 - Supplier Ships Order (logistics carrier cut off at 11 am)
Supplier commits to shipping 90% of the systems on day two (D2) and the
remaining 10% by day three (D3) if order is receive day is D1. Performance
will be reviewed after the initial 3 months shipments.
2.2
Supplier shall not deliver any Product without an Order Release from
Netpliance, without prior written authorization. Shipments made without
Order Release or prior written authorization are subject to return or
delayed receipt by Netpliance, at its own discretion. Netpliance may
return all or any portion of such shipments; or, delay receipt of all or
any portion of such shipments. In any event, payment shall be due based
upon the date of actual delivery date or scheduled delivery, whichever is
later.
2.3
Supplier is expected to maintain a one hundred (100%) percent on-time
delivery per Section 2.1. Supplier shall notify Netpliance immediately of
any anticipated late deliveries and any impending plant or facilities
shutdown for any reason, including vacation, tool repair, labor
difficulties, or government order. In the event Supplier is delinquent on
delivering product to Netpliance in accordance with a mutually agreed upon
delivery schedule, for reasons other than Force Majeure, Supplier shall
deliver Product to Netpliance in the most expeditious manner possible. In
this regard, Supplier agrees to cooperate by taking extraordinary measures
at Suppliers expense to minimize any delivery delays which shall include
but is not limited to expedited manufacture, expenditure of premiums for
parts, expenditure of premium labor cost and the payment of premium
transportation costs associated with the delivery of the Product.
2.4
Netpliance will release Orders to Supplier based on actual receipts of
Customer Orders. Upon release of an order from Netpliance, Supplier will
ship the product to the designated destination based on the schedule
described in Section 2.1. If product is needed at the destination at a
different time, Netpliance will notify the supplier upon Order Release.
With the exception of late delivery by Supplier, Netpliance will pay for
the actual additional freight cost associated with the expedited shipment.
2.5
Unless otherwise set forth in the Order, title and risk of loss will pass
to Netpliance upon Supplier's delivery to Netpliance's designated
destination. Supplier will be responsible for the management of the
logistics carrier and will be responsible for the product until it arrives
at the designated destination.
2.6
In the event of a shortage or shortages in allocated quantities of
components, common to Supplier's other product lines and utilized in the
manufacture of the Product, Supplier agrees to allocate components to
Netpliance, based on the proportional share of Netpliance prior three (3)
months of shipments.
2
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
2.0 DELIVERY (Continued)
2.7
If Supplier does not or will not be able to deliver an Order on time,
Netpliance shall have the right to cancel the delinquent product without
liability. If Netpliance agrees to accept the product, Supplier will pay
all expedite costs. In the event of a price change, Netpliance will pay
the lower cost.
3.0 TERM
The initial Term of this Agreement will commence on August 15, 1999 and
expire on August 15, 2002. Thereafter, Netpliance will have the option to
renew this Agreement for periods of one (1) year each, upon 30 days prior
written notice to the supplier.
4.0 STATEMENT OF WORK
Supplier agrees to sell and Netpliance agrees to purchase the Products in
accordance with the terms and conditions of this Agreement. Supplier will
build and deliver to Netpliance only that quantity of Products ordered by
Netpliance Order Releases.
Supplier will provide all parts, labor, and materials necessary to perform
Supplier's obligations hereunder. Netpliance may request, subject to
mutually agreeable adjustment of price, that Supplier purchase specific
material or parts for the manufacture or assembly of the Product. The
foregoing notwithstanding, Supplier agrees to manufacture and assemble
Products in accordance with the Specifications detailed in Attachment A of
this Agreement.
5.0 CONTINGENCY PLANS
Supplier will develop and implement contingency plans in order to ensure
Netpliance an effective and efficient continuity of supply on the Product
and all components thereof. The parties will negotiate the specific
details of such plans in good faith within forty-five (45) days after
execution of this Agreement.
6.0 ORDERS
6.1 Forecast.
Netpliance agrees to provide a (13) thirteen-week Order forecast to
Supplier on a weekly basis to allow Supplier to support the planning and
purchase of material to lead-time. In addition, a (6) six-month rolling
forecast will be provided for reference only. The (6) six-month rolling
forecast if for planning purposes only, and shall not be construed as a
guarantee or a minimum purchase amount. Netpliance makes no commitment
with respect to the amount of Products to be purchased under the Agreement.
6.2 Order Release.
Products will only be shipped by Supplier after receipt of an Order Release
from Netpliance. Such Order Releases will be subject to the terms and
conditions of the Agreement, and will contain, at a minimum, the following
information:
(i) Product description, including quantity of Products ordered;
(ii) Desired shipping date and delivery location (in most cases the
end-user address);
(iii) Method of shipment and designated carrier; if different from
current logistics carrier
6.3 Freight
All Orders shall ship complete and freight pre-paid unless Netpliance
authorizes otherwise. Freight invoices will be paid monthly after receipt
of invoice, based on fax.
3
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
7.0 PRICE AND PAYMENT
7.1
With exception to the payment terms, as set forth in Attachment H, the unit
price to be paid by Netpliance for Products hereunder will be expressed in
U.S. dollars and negotiated monthly with agreement to be reached at least
five (5) days prior to the first day of the following month; otherwise,
prices will remain constant during the following month. Quoted prices will
remain firm for the deliveries shipped from Supplier on the first calendar
day through the last calendar day of the applicable month unless otherwise
mutually agreed.
7.2
With exception to the payment terms, as set forth in Attachment H,
referencing the initial product shipments, Supplier will invoice
Netpliance, upon receipt of Product at Netpliances' designated destination.
For the first 90 days, of the Term, the Payment Terms shall be net 30 days
from receipt of invoice by Netpliance. The payment performance will be
reviewed monthly. One Hundred and Eighty (180) days after 1st Shipment the
parties will review the payment history to determine whether payment terms
may be extended to net 45 days from receipt of invoice.
7.3
Notwithstanding Subsection 7.1, Netpliance may elect to negotiate a new
Price during any given month on the basis of market place conditions that
significantly decrease the market price for the Product or similar items.
The negotiated Price will be agreed to by both parties and incorporated
into this Agreement. Supplier and Netpliance will mutually agree on an
effective date for the new price to be implemented.
7.4
Supplier warrants that the prices specified in this Agreement do not and at
all times shall not, exceed Supplier's price to any other customer during
the term of this Agreement for a substantially similar product in
substantially similar volumes, and under commercial terms and conditions
similar to those of this Agreement. In the event that Supplier should sell
or offer to sell Products to customers other than Netpliance at prices
lower than those agreed Supplier shall: 1) notify Netpliance in writing
within five (5) days of the offer or sale (such notice shall include the
price, quantity, payment terms, and other material conditions allowing for
such lower price), and 2) make available to Netpliance the option to
purchase Product at such lower price under the same terms as those offered
to other customers.
7.5
Supplier shall offer Netpliance pricing that equivalent to or below those
offered to the Supplier's other customers for similar products and/or
components. Supplier shall, whenever possible, combine purchases of
similar components to obtain best market pricing and provide Netpliance
with this pricing. Should the Supplier fail to offer such pricing to
Netpliance, Netpliance reserves the right to audit Suppliers' records and
seek adjustments for Price variances, when appropriate. Should Supplier
fail to offer such pricing to Netpliance, Netpliance reserves the right to
terminate this agreement without consequence.
7.6
Billbacks by Supplier do not apply to this Agreement.
4
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
8.0 PACKAGING
Supplier will package each Product according to the Netpliance Packaging
Specification Guidelines as set forth as an Attachment C to this Agreement.
In packaging Products, Supplier will also take any additional steps needed
to ensure maximum protection from damage due to rough handling and other
hazards which might occur during transit.
9.0 RECORDS AND AUDIT
Supplier will maintain complete and accurate accounting records, in a form
in accordance with generally acceptable accounting practices, to
substantiate Supplier's charges hereunder. Such records, related to
Supplier's obligations under this Agreement, will include material cost,
tooling invoices and material component invoices. Supplier will retain
such records for a period of three (3) years from the date of final payment
hereunder. Netpliance will have access to such records for purposes of
audit, during normal business hours, for the three-(3) years following
final payment hereunder. Netpliance will provide at least one (1) week
notification to Supplier for Audit.
10.0 ORDER CANCELLATIONS AND RESCHEDULING
10.1
Netpliance may cancel Order(s) or any portions thereof for any reason by
notifying Supplier in writing prior to the scheduled Delivery date on the
purchase order(s) in compliance with the flexibility terms shown below.
Cancellation will be effective upon Supplier's receipt of the written
cancellation notice from Netpliance, or thereafter upon the date specified
in such cancellation notice. Supplier will cease work on affected Order(s)
in accordance with the cancellation notice. Netpliance will have no
liability for canceled Orders other than as set forth in Subsection 10.2.
10.2
Flexibility Terms, Supplier and Netpliance will use the following table as
a guideline for the reschedule and cancellation of an Order. However, in
the event of a reschedule or cancellation request, Supplier agrees to make
best efforts to redirect, return or resell the components to minimize
Netpliance's liabilities. Certain market conditions (e.g. worldwide
allocation) that do not allow Supplier to meet the agreed guidelines, will
be taken into consideration and both Netpliance and Supplier will mutually
agree to new guidelines/schedule.
<TABLE>
<CAPTION>
Upside Downside
<S> <C> <C>
0-2 Weeks Fixed Fixed
3-4 Weeks 25% 10%
5-6 Weeks 45% 30%
7-12 Weeks 75% 50%
13 Weeks + 100% 100%
</TABLE>
Supplier agrees to purchase material to actual lead times in support of the
forecast. Supplier will minimize on-hand inventories according to actual
lead times and forecasted demand. Supplier will ensure it will have enough
material to support the forecast provided from Netpliance, in accordance
with the Flexibility Terms above. In the event of reschedules and/or
cancellations of deliveries by Netpliance, exceeding the agreed to
Flexibility Terms, material held by the Supplier for more than 30 days may
be charged an inventory holding fee. The inventory handing fee will be
assessed in the form of interest, at .8% per month, based on the actual
amount of excess material inventory on-hand beginning on day 31. Supplier
agrees to notify Netpliance immediately of any potential excess inventory
and Netpliance and Supplier will review the complete list monthly.
5
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
10.0 ORDER CANCELLATIONS AND RESCHEDULING (Continued)
10.3
In the event of a cancellation under Subsection 10.1, Supplier shall make
every effort to utilize all work in process to minimize cancellations
costs. Subject to the foregoing, Netpliance will pay Supplier for the
actual materials cost incurred by Supplier pursuant to cancelled Orders
prior to the effective date of the cancellation, and Supplier will deliver
to Netpliance all completed Products, assemblies in process, and all
components procured on account of subject Orders. In the event of a
cancellation, Netpliance and Supplier will use the material liability
guidelines in Attachment I. The actual liability will be based on actual
lead-times for the purchase of material at that time. Any material
procured outside of lead-time without prior consent from Netpliance, will
be the sole responsibility of Supplier. Prior to payment, Netpliance may
audit Supplier's records at reasonable times or require Supplier to provide
reasonable documentation and invoices to substantiate any and all charges
to Netpliance under this Section.
10.4
Supplier will immediately notify Netpliance if and when, for any reason,
Supplier is unable or refuses to perform its obligations under this
Agreement or Order(s) issued hereunder. Such obligations include, but are
not limited to the delivery schedules set forth in Netpliance Orders, the
Product Specifications, and the Supplier Quality Assurance Requirements.
If for any reason other than "Force Major", Supplier is unable or refuses
to continue delivering products as required by Netpliance Order(s) or if
Supplier is otherwise in default of this Agreement and fails to correct
such default within ten (10) days of Netpliance's written notice,
Netpliance will have the right to cancel Order(s) or portions thereof by
written notice. If Netpliance cancels Orders under this Subsection 10.4,
Netpliance 's only obligation is to pay for Products already delivered at
the time of Netpliance cancellation notice. Netpliance may, at its sole
option, purchase from Supplier's supplier materials or parts already
acquired by Supplier, or committed to Supplier from its supplier(s) for the
manufacture of Products or Spare Parts.
11.0 TERMINATION
11.1
Supplier and Netpliance have the option to terminate this Agreement and/or
any Order, in whole or in part, in the event that:
11.1.1
Either party becomes insolvent, file, or have filed against it a
petition in bankruptcy or undergo reorganization pursuant to a
petition in bankruptcy filed with respect to it.
11.1.2
Either party will have all or a substantial portion of its capital
stock or assets expropriated by any government.
11.1.3
Either party will be dissolved or liquidated or have a petition for
dissolution or liquidation filed with respect to it.
11.1.4
Either party will be subject to property attachment or court
injunction or court order, which substantially and negatively affects
its operations.
11.1.5
Either party will be unlikely to fulfill its obligations under this
Agreement because of significant changes of its assets, credit, or
business position; or
11.1.6
Either party defaults or breaches any material provision of this
Agreement and does not remedy the default or breach within thirty (30)
days after written notice by the other party
6
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
11.0 TERMINATION (Continued)
11.2
If any event in Subsection 11.1 occurs, either party will have the right to
file a security interest in such property or to invoke any other legal or
equitable remedy available to protect its interest in the property.
11.3
If Netpliance terminates this Agreement for any of the reasons in
Subsection 11.1 Supplier will:
11.3.1
Immediately cease all assembly operation and production required by
Netpliance Orders issued under this Agreement.
11.3.2
Deliver all completed Products manufactured pursuant to Netpliance
Order instructions;
11.3.3
Return, at Netpliance's expense, all loaned or leased equipment
provided to Supplier by Netpliance under this Agreement;
11.3.4
Prepare and submit to Netpliance an itemization of all partially
completed Products, assemblies in process, and parts inventories
(including parts, which Supplier is committed to purchase from its
subSuppliers) which are allocated to the Netpliance Orders placed
under this Agreement. Netpliance will pay Supplier the price agreed
with Netpliance for the current month for the completed Products
delivered pursuant to Subsection 11.3.2. Netpliance may, at its sole
option, elect to purchase any or all of those items identified under
Subsection 11.3.4, however, Netpliance will not be obligated to
purchase any such items and will bear no cost or liability with regard
to any items it elects not to purchase. If Netpliance elects to
purchase any items in Subsection 11.3.4, the parties will negotiate in
good faith a reasonable price for such items, however, such negotiated
prices shall not exceed the amount established by the cancellation
schedule in Subsection 10.2.
11.4
If Supplier terminates this Agreement for any of the reasons in Subsection
11.1 Netpliance will:
11.4.1
Pay Supplier for all the delivered products including the due payment.
All Product delivered at that time must be based on Order Releases
only.
11.4.2
Pay Supplier for any material liabilities based on the cancellation
Terms in Section 10.
12.0 TEST EQUIPMENT
12.1
In the event Netpliance considers it necessary to insure quality assurance
requirements are met, the parties agree that at Netpliance 's sole
discretion, Netpliance may consign test equipment for functional
verification of the Product(s) at Supplier's location, subject to the terms
and conditions of the Equipment Loan Agreement, as set forth in Attachment
F of this Agreement. In this event, Supplier will provide all reasonable
assistance requested by Netpliance in the development and installation of
the test equipment. The test equipment will only be utilized by Supplier
to verify functional operation of the Products purchased by Netpliance.
Netpliance will assist Supplier in installing and calibrating the test
equipment
7
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
and will provide operator training and maintenance instructions, if
requested. Supplier will thereafter maintain the test equipment utilizing
Netpliance provided spare parts.
12.0 TEST EQUIPMENT (CONTINUED)
12.2
Nothing contained herein will limit Supplier's obligation to supply
Products that meet the requirements of the Supplier Quality Assurance
Requirements and the Product Specification, as set forth in Attachment A
and E of this Agreement.
13.0 MARKETING RIGHTS WARRANTY
13.1
Supplier warrants that it has the unrestricted worldwide right to
manufacture, sell, and deliver to Netpliance the Product and Spare Parts
that are the subject of this Agreement. Further, Supplier hereby warrants
that it is under no restriction, and that it will not assume or assert any
such restriction, which would prevent Netpliance and its Subsidiaries from
marketing the Product and Spare Parts, anywhere in the world.
13.2
Nothing in this Agreement will limit the right of Netpliance to develop,
have developed, procure and/or market Products or services now or in the
future which may be competitive with those which are the subject of this
Agreement.
14.0 EXCLUSIVITY
14.1
Supplier will grant Netpliance a (6) six-month exclusivity on products
covered by this agreement, from the date of first production shipments
based on order releases. Exclusivity under this agreement will extend to
all customizations which were developed by or for Netpliance, including
mechanical (including ornamentation and design), electrical and
firmware/software assemblies of the delivered products. After a (6) six-
month period, nothing in the Agreement shall be construed as limiting
Supplier's right to sell derivative products but such right shall not
extend to including mechanical (including ornamentation and design), and
software assemblies of the delivered products. Supplier shall have no
right to sell or otherwise provide the Software and/or Customizations to
any third party without written consent of Netpliance.
14.2
Nothing in the Agreement shall be construed as creating an exclusive
purchase arrangement or requirements contract between Netpliance and
Supplier. Netpliance shall have the right to obtain similar products from
any other manufacturer.
15.0 MANUFACTURING RIGHTS
15.1
Netpliance shall own all rights to the Product hardware and software
created by the Supplier specifically for Netpliance. To the extent that
Netpliance does not own the rights to the Product hardware and software,
the Supplier grants to Netpliance all rights necessary for Netpliance to
produce, manufacture and/or have manufactured quantities of such Product
for distribution by Netpliance. Supplier shall provide to Netpliance
access to and use of all items that are necessary and/or useful in the
manufacture of the Products for distribution by Netpliance, including but
not limited to, Suppliers drawings, software, Bill of Materials, Processes,
Tools and vendor Lists, to enable Netpliance to manufacture and/or have
manufactured Products for distribution by Netpliance.
8
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
15.0 MANUFACTURING RIGHTS (Continued)
15.2
If Supplier fails to perform its obligations as set forth in this Agreement
Netpliance will have the right to manufacture or have manufactured the
Products at its discretion. Supplier hereby grants to Netpliance a license
under trade secrets, copyrights and patents to access and use all of
Suppliers drawings, bill of material and vendors to make and have made
Products and create improvements to the Products.
16.0 ENGINEERING CHANGES
16.1
Supplier may make Engineering changes to the Product or Spare Parts, or to
the production processes used in their manufacture, which would affect the
performance, reliability, safety, serviceability, appearance, dimensions,
tolerances, firmware/software, or composition of bills of material(s) or
material sources thereof in accordance with subsections 16.2 and 16.3.
16.2
Supplier will notify Netpliance of any Engineering Change proposed to be
made by Supplier to the Product, and will supply a written description of
the expected effect of the Engineering Change on the Product, including its
effect on price, performance, reliability, capability, and serviceability.
Netpliance may elect to evaluate parts and/or designs specified as part of
the proposed change. Netpliance agrees to approve or disapprove Supplier
proposed changes within no more than sixty (60) days of receipt of a
written request. Netpliance shall acknowledge receipt of Supplier's
proposed change within seven (7) days of receipt. Supplier will not change
or modify the Product or Spare Parts without Netpliance prior written
approval. Netpliance and Supplier will make best efforts to expedite the
turn around on the proposed changes.
16.3
Netpliance may request, in writing, that Supplier incorporate an
Engineering Change into the Product, and Supplier will provide to
Netpliance its written proposal within ten (10) calendar days after
Netpliance's request. Supplier's proposal will state the cost savings or
increase, if any, expected to be created by the Engineering Change, and the
effect on the performance, reliability, safety, appearance, dimensions,
tolerances, composition of bills of material, and serviceability of the
Product. If Netpliance requests Supplier to incorporate an Engineering
Change into the Product, the product Specification and Price will be
amended as required. Supplier will not unreasonably refuse to incorporate
Netpliance Engineering Changes into the Product.
17.0 INSPECTION AND ACCEPTANCE
The terms and conditions with respect to quality, inspection and acceptance
are set forth in Attachment E.
18.0 APPLICABLE APPROVALS
Supplier will be responsible for obtaining the certifications and approvals
specified in the Product Specification set forth in Attachment A to this
Agreement. Supplier will submit to sufficient proof of the approvals and
will affix on the appropriate area of each Product a label stating such
approvals if required. Supplier will perform all acts necessary to
maintain these approvals, certifications, and listings while this Agreement
is in effect.
9
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
19.0 PRODUCT WARRANTY
In addition to the terms and conditions set forth in Attachment G with
respect to Product Warranty, Spare Parts Support and Service Support, the
following terms and conditions shall apply:
19.1
Supplier warrants that title to all Products delivered to Netpliance and to
Netpliance Customers by Supplier shall be free and clear of all liens,
encumbrances, security interests or other claims and that for a period of
fifteen (15) months beginning on the date of receipt at Netpliance or
Netpliances' designated destination, hereunder conform in every respect to
all specifications which are part of this Agreement and will be free from
defects in material and workmanship under normal use and operation.
Supplier will pass on all remaining material warranties provided by
Supplier's subcontractors to Netpliance.
19.2 Epidemic Failure
In addition to the foregoing warranty, Supplier warrants the Product
against epidemic failure. An epidemic failure shall mean a Product field
failure exhibiting the same root cause symptom and resulting in a two (2)
percent or greater failure of Netpliance Customer delivered Product during
a ninety-(90) day period. In the event of epidemic failure, Supplier shall
establish within two (2) days notice by Netpliance of such failure a
mutually agreed upon emergency procedure to resolve and replace all
defective Products. Any and all costs associated with the emergency
procedure are to be borne by Supplier. Supplier also agrees to inform
Netpliance in writing of any other epidemic failure occurring in products
sold to Supplier's other OEM customers and Supplier shall take whatever
steps are reasonably necessary to prevent or correct Netpliance Products
from such failure.
20.0 REPLACEMENT PRODUCTS
If, during any Term of this Agreement, Supplier develops and markets a
product that is a replacement for the Product to be provided hereunder,
Supplier agrees to sell said product to Netpliance at Netpliances' option,
for a price to be negotiated between the parties. Both parties also agree
that all appropriate provisions of this Agreement will apply to any such
replacement product. Nonetheless, Supplier agrees to continue to make the
original product available to Netpliance through the end of the last Term
of this Agreement.
21.0 SPARE PARTS
Supplier agrees to sell Spare Parts to Netpliance at a reasonable price and
lead-time until the end of three (3) years after the last Term of this
Agreement expires or is terminated. Supplier should notify Netpliance
immediately when any components are coming to end of life. Supplier should
provide an alternative component at that time to ensure availability of
material for the three (3) year period.
22.0 PRODUCT REPAIR
Supplier agrees to provide Product repair service to Netpliance at a
reasonable price and lead time until the end of five (5) years after the
last Term of this Agreement expires or is terminated, pursuant to terms and
conditions substantially similar to those set forth in the Product Repair
Service Agreement, as set forth in Attachment G to this Agreement.
10
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
23.0 INTELLECTUAL PROPERTY
23.1 Patent and Copyright Indemnification
Supplier at its own expense, will settle or defend and pay any damages,
costs, attorney's fees, and fines resulting from all proceedings, threats
of proceedings, or claims against Netpliance, its Subsidiaries, and
respective customers by any third party for infringement or alleged
infringement by the products furnished under this Agreement or any part or
use thereof of patents (including utility models and registered designs)
and copyright in any country of the world and U.S. mask works. In meeting
its obligation hereunder, Supplier may procure for Netpliance the right to
continue to market the Products or Supplier may modify the products to be
non-infringing so long as the modified Products meets Netpliance
specifications. In the event the foregoing are deemed impractical by
Supplier and the product(s) continued use is enjoined, Supplier will buy
the Product(s) back from Netpliance at the original purchase price paid by
Netpliance. Supplier's obligations under this Section shall not extend to
any infringement caused solely by a mandatory design change requested by
Netpliance if Supplier's unchanged products do not infringe or allegedly
infringe the patent or copyright in question.
23.2 Trademarks
Any other provisions of this Agreement notwithstanding, neither party
hereto shall have the right to use the trademarks, trade names, or product
names of the other party (including those of Subsidiaries) directly or
indirectly in connection with any product, promotion or publication without
the prior written approval of the other party; provided, however, that
either party may use the other parties trademarks, trade names, and/or
product names to the extent permitted by law and customs regarding their
usage by the general public.
24.0 CONFIDENTIAL INFORMATION
All Netpliance Confidential Information disclosed to Supplier, the results
of Supplier's work and the data deliverable to Netpliance under this
Agreement will be treated by Supplier as Netpliance Confidential
Information pursuant to the provisions of the Non Disclosure Agreement
dated April 16th, 1999 which is incorporated herein by reference.
25.0 GENERAL PROVISIONS
25.1 Communications
All communications between Netpliance and Supplier will be carried out
through the Netpliance and Supplier designated representatives.
25.2 Notice
Any legal notice required or permitted to be made or given to either party
hereto pursuant to this Agreement shall be sufficiently made or given on
the date of mailing if sent to such party by certified mail, postage
prepaid, to a party hereto at its address set forth below, or to such other
party as it shall designate by written notice given to the other party.
For Kent Savage
Netpliance Corporation
7600A Capital of Texas Highway
Austin, Texas 78731
For Supplier: Ted Lu
Quanta Computer Inc.
No. 188, Wen Hwa 2nd Rd.,
Kuei Shan Hsiang,
Tao Yuan Shien,
Taiwan, R.O.C
11
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
25.0 GENERAL PROVISIONS (Continued)
25.3 Taxes
Supplier will be responsible for and pay all taxes imposed on supplier,
except sales, use or similar taxes. Netpliance will be responsible for any
applicable sales, use or similar tax, except Netpliance will have no
liability for any tax for which Netpliance has an appropriate resale or
other tax exemption.
25.4 Assignment
No right or interest in this Agreement will be assigned by either party
without the express written permission of the other, and no delegation of
any obligation of Supplier will be made without prior written permission.
25.5 Liability
Supplier is responsible for the acts of its employees. Supplier will
indemnify and save Netpliance harmless from and against any and all suits
or claims of liability and/or property damage arising from the acts of
Supplier, its subSuppliers or anyone directly or indirectly employed by
Supplier arising out of, or in connection with, Supplier's performance
under this Agreement.
UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE FOR SPECIAL, INDIRECT,
INCIDENTAL, OR CONSEQUENTIAL DAMAGES, INCLUDING LOST REVENUE OR LOST
PROFITS HEREUNDER, EVEN IF ADVISED OF THE POSSIBILITY THEREOF.
25.6 Supplier's Employees Deemed not Netpliance's
Both parties agree that Supplier is retained as an independent Supplier and
in no event will employees or agents hired by Supplier be or be considered
employees of Netpliance. Matters governing the terms and conditions of
employment of Supplier's employees are entirely within the control of
Supplier. Netpliance will have no right to control any of the actions of
the employees of Supplier. Supplier's matters such as work schedules, wage
rates, withholding income taxes, disability benefits or the manner and
means through which the work under this Agreement will be accomplished are
entirely within the discretion of Supplier.
25.7 Survival from This Agreement
The rights and obligations of the Sections and Attachments entitled
"RECORDS", "MARKETING RIGHTS WARRANTY," "PRODUCT WARRANTY," "INTELLECTUAL
PROPERTY," "CONFIDENTIAL INFORMATION," "Liability," "Attorneys' Fees,"
"Survival From this Agreement," "Public Disclosure," "Forum," "Spare Parts
Agreement," "Product Repair Agreement," and all terms and conditions of
this Agreement as they apply to any outstanding Orders issued hereunder
will survive and continue after any expiration, cancellation, or
termination of this Agreement and will bind the parties and their legal
representatives, successors, heirs, and assigns.
25.8 Force Majeure
Neither Supplier nor Netpliance will be considered in default or liable for
any delay or failure to perform any provision of this Agreement if such
delay or failure arises directly or indirectly out of an act of nature,
acts of the public enemy, freight embargoes, strikes, quarantine
restrictions, unusually severe weather conditions, insurrection, riot, and
other such causes beyond the control of the party responsible for the delay
of failure to perform, provided the affected party notifies the other party
within fifteen (15) calendar days of the occurrence.
25.9 Compliance with Governmental Legal Requirements
Supplier agrees to comply and do all things necessary to enable Netpliance
to comply with all applicable federal, state and local laws, regulations,
and ordinances including but not limited to the regulations of the U.S.
Government relating to the export of technical data insofar as they relate
to the activities to be performed under this Agreement. Supplier agrees to
obtain the required government documents and approvals prior to the export
or re-export of any technical data disclosed to it or the direct product
related thereto.
12
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
25.0 GENERAL PROVISIONS (CONTINUED)
25.10 Public Disclosure
Supplier agrees not to disclose the fact that Supplier has furnished or
contracted to furnish to Netpliance the products and services hereunder, or
the terms and conditions of this Agreement without the express written
consent of Netpliance, except as may be required by law or governmental
rule or regulation, or to establish Supplier's rights under this Agreement;
provided, however, that if Supplier's seeks to disclose for reasons not
requiring Netpliance's consent, Supplier will limit the disclosure to the
extent required, will allow Supplier to review this information disclosed
and will apply, where available, for confidentiality, protective orders and
the like. Any review by Netpliance under this Section will not be
construed to make Netpliance responsible for the content of the disclosure.
Supplier will remain solely responsible for such contents.
25.11 Section Headings
Headings used in this Agreement are for reference purposes only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
25.12 Order of Precedence
In the event of an inconsistency in the various documents, which govern the
parties' performance, the order of precedence will be:
i) This Agreement
ii) The Confidential Disclosure Agreement
iii) Attachments to this Agreement
iv) The face side of the Order
v) The reverse side of the Order.
25.13 Attorney's Fees
If one party brings suit against the other party, for any cause whatsoever,
and the other party is finally adjudicated not to have liability, the party
bringing suit agrees to pay the other party's reasonable attorneys' fees
and other costs of litigation.
25.14 Waiver
Failure by Netpliance to insist upon strict conformance to any term herein,
or in Orders issued hereunder, or failure by Netpliance in the event of a
breach or default, shall not be construed as a consent or waiver of that
breach or default or any subsequent breach or default of the same or of any
other term contained herein.
26.0 APPLICABLE LAW
This Agreement will be interpreted in accordance with the substantive and
procedural law of the State of Texas, except its conflicts of law
provisions. Both Netpliance and Supplier consent to Texas State Court
jurisdiction.
27.0 ENTIRE AGREEMENT
Together with Attachments A through I and Non Disclosure Agreement dated
April 16th, 1999, this Agreement and Order(s) issued from time to time
hereunder will constitute the entire Agreement of the parties respecting
the subject matter hereof and will supersede all previous communications
and understanding, either written or oral, between the parties relative to
the subject matter hereof and will supersede all previous communications
and understandings, either written or oral, between the parties relative to
the subject matter hereof.
This Agreement may only be amended by express written agreement signed by
authorized representatives of both parties.
If any provision of this Agreement is held to be illegal, invalid, or
unenforceable, the legality, validity, and enforceability of the remaining
provisions will not be affected or impaired.
13
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the day and year first set forth
above.
NETPLIANCE SUPPLIER
By:___________________________ By:________________________________
Title:________________________ Title:_____________________________
Date:_________________________ Date:______________________________
By:___________________________ By:________________________________
Title:________________________ Title:_____________________________
Date: ________________________ Date:______________________________
14
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
ATTACHMENT A
PRODUCT DEFINITION/INVENTORY CLASSIFICATION
A1. Product Definition for Internet Personal Access Device (Netpliance Model
NP 1000)
Reference documentation
1) Quanta Computer, Inc., IA1 Engineering Specification, Revision 1B,
Release Date 7/21/1999
2) Darfon Electronics, Proposal to Quanta/Netpliance, dated July 9, 1999
3) ActionTec, Specifications of V.90/K56flex Controller-based Modem
Module: LF560LKQ, Dated 7/10/99
The Netpliance Model NP1000 system, as shipped from the supplier consists of:
. NP 1000 System Unit
. PS2 Keyboard with integrated pointing device
. 19Volt, 1.84 Amp wall-mount AC Adapter
. RJ-11 Modem Cable
. Netpliance User Manual
. Netpliance Quick Setup Guide
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
ATTACHMENT B
PROJECTED DELIVERY SCHEDULE
This projected worldwide delivery schedule will be an estimate of the monthly
quantities, which are forecasted by. The first Term of the Agreement will
include one year's Deliveries.
Monthly Demand
Forecast
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Sept Oct Nov Dec Jan Feb Mar
<S> <C> <C> <C> <C> <C> <C>
[*] [*] [*] [*] [*] [*] [*]
- ------------------------------------------------------------------
</TABLE>
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
ATTACHMENT C
PACKAGING SPECIFICATION
C1. UNIT PACK COMPONENTS
The components to be packaged for shipment of the Netpliance NP1000 device,
referenced in Attachment A, Section A1, shall consist of:
. NP 1000 System Unit
. PS2 Keyboard with integrated pointing device
. 19 Volt, 1.84 Amp, wall-mount AC Adapter
. RJ-11 Modem Cable
. Netpliance User Manual
. Netpliance Quick Setup Guide
C2. PACKAGING DESIGN AND CERTIFICATION
Supplier will design and test individual unit packaging, capable of single unit
shipments of the unit pack components in C1, the meets or exceeds the
requirements of the Association of Transport Packaging (ISTA); ISTA 2 Series,
version 2A. Supplier will test all packaging with the ISTA 2A procedures and
demonstrate compliance.
Supplier warrants all packaging materials are free of CFC's.
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
ATTACHMENT D
ACCEPTANCE TEST PROCEDURE
To be mutually agreed and completed within 30 days of Agreement being signed.
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
ATTACHMENT E
QUALITY REQUIREMENTS
To be mutually agreed and completed within 30 days of agreement being signed.
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
ATTACHMENT F
EQUIPMENT LOAN AGREEMENT
To be mutually agreed and completed within 30 days of agreement being signed.
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
ATTACHMENT G
PRODUCT REPAIR SERVICE AGREEMENT
To be mutually agreed and completed within 30 days of agreement being signed.
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
ATTACHMENT H
PAYMENT TERMS FOR 1ST 30,000 UNITS
[*]
[*] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Netpliance/Quanta
AGREEMENT #NP1
DATED:__ September 10, 1999
ATTACHMENT I
MATERIAL LIABILITY GUIDELINES
To be mutually agreed and completed within 30 days of agreement being signed.
<PAGE>
EXHIBIT 10.3
SUBLEASE AGREEMENT
This Sublease is made this _______ day of _______________, 1999 at
Travis County, Texas by and between POWERSHIFT VENTURES, LLC, (herein,
"SUBLESSOR"), and SHBANG! INC., (herein, "SUBLESSEE").
RECITALS:
A. Pursuant to the Office Building Lease Agreement dated December 26,
1995, between Motorola, Inc. ("MOTOROLA"), as tenant, and AAW Lakewood, Ltd., as
landlord (as amended by the First Amendment to Lease Agreement dated April 8,
1996, the Second Amendment to Lease Agreement dated September 10, 1996, the
Third Amendment to Office Building Lease Agreement dated January 23, 1998, all
of which are attached hereto as Exhibit "A" and are collectively referred to as
the ("MAIN LEASE"), and the Assignment and Assumption of Lease dated
_______________, 1999, the ("ASSIGNMENT") by and between Motorola and Sublessor,
Sublessor has become the Tenant under the Lease for certain premises described
therein consisting of 30,000 square feet of space (the "PREMISES") in the office
building known as Building A of Lakewood on the Park in Austin, Texas (the
"BUILDING");
B. Hub Properties Trust ("LANDLORD") is the successor in interest to
Austin Lakewood on the Park, Ltd. and is the current owner of the Building and
the rights and interests of the landlord under the Lease; and
C. Sublessor desires to sublease the Premises to Sublessee and
Sublessee is willing to assume the obligations imposed upon Sublessor accruing
from and after the commencement date of the term of this Sublease under the
Lease, subject to and conditioned upon agreements hereinafter set forth.
In consideration of the mutual promises contained herein, Sublessor
hereby subleases the Premises to Sublessee, subject to the terms of the Main
Lease, and subject further to the provisions of this Sublease, as follows:
1. Main Lease. From and after the commencement date of the term of this
Sublease, Sublessee agrees to abide by and observe all the terms, covenants
and conditions of the Main Lease.
2. Term and Termination. The term of this Sublease shall commence as of the
effective date of the Assignment ("EFFECTIVE DATE") and shall terminate
February 28, 2001, unless earlier terminated pursuant to the Main Lease.
3. Incorporation of Main Lease. Insofar as the provisions of the Main Lease
do not conflict with the specific provisions of this Sublease, they and
each of them are incorporated into this Sublease as if fully completely
rewritten herein, and Sublessee agrees to be bound to the Sublessor by all
the terms of the Main Lease and to assume towards Sublessor and perform all
the obligations and responsibilities accruing from and after the
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commencement date of the term of this Sublease that Sublessor, by the Main
Lease, assumes towards the Landlord, except for the payment of rent by
Sublessee to Sublessor, which is governed by Paragraph 4 herein. Terms not
defined in this Sublease shall have the meanings given such terms in the
Main Lease. Sublessee agrees to look solely to Landlord for any and all
remedies it may seek for any damages of any kind related to the Main Lease,
except as expressly provided in this Sublease; provided, however, the
foregoing shall not impair Sublessee's right to seek any remedies it may
have against Sublessor due to Sublessor's breach of this Sublease.
Sublessor shall have no liability to Sublessee for any wrongful action or
default on the part of Landlord pursuant to the terms of the Main Lease,
and Sublessee hereby agrees to look solely to Landlord in event of any such
wrongful action or default; provided, however, that Sublessor shall not do
anything nor permit anything to be done that would cause the Main Lease to
be terminated or forfeited because of any right of termination or
forfeiture reserved or vested in Landlord, Sublessor, or any other party
under the Main Lease. Sublessor will indemnify and hold Sublessee harmless
from and against all liabilities and claims of any kind (i) arising out of
or relating to the Tenant's obligations under the Main Lease accruing on or
prior to the commencement date of the term of this Sublease, or (ii) by
reason of any breach or default under the Main Lease that is caused by any
act or omission on the part of Sublessor, its employees, agents or
contractors by reason of which the Main Lease may be terminated or
forfeited. All of the parties hereto agree that, notwithstanding any
default under the Main Lease by Landlord, Sublessor, or any other parties
under the Main Lease, Sublessor will not disturb Sublessee's quiet
possession of the Premises throughout the term of this Sublease so long as
Sublessee is not in default of its rental payments to Landlord pursuant to
this Sublease. Specifically, and without limiting the generality of the
foregoing, Sublessor shall not exercise its right to terminate the Main
Lease pursuant to Section I.B. of the Main Lease. Sublessor's indemnity
and other obligations pursuant to this section shall survive the expiration
or termination of the Main Lease and this Sublease.
4. Rent. Sublessee agrees to pay directly to Landlord, as and when due, all
amounts accruing from and after the commencement date of the term of this
Sublease as base rent, Tenant Costs, and any and all other costs that
Sublessor would be obligated to pay as Tenant under the Main Lease,
provided that, with respect to Tenant Costs that are billed by Landlord to
Sublessor from time to time that require payment by Sublessor to Landlord
under the terms of the Main Lease (e.g., estimates of variable Tenant Costs
that change from month to month or annually), Sublessor shall, immediately
upon receipt of such bill or notice, forward such bill or notice to
Sublessee.
5. Alterations and Improvements; Sublease. Sublessee shall make no
alterations or improvements to the Premises without Sublessor's and
Landlord's prior written consent pursuant to the terms and provisions of
the Main Lease (which consent by Sublessor shall not be unreasonably
withheld or delayed); any permitted alterations or improvements shall be at
Sublessee's sole cost and expense. Sublessee may, without Landlord's
consent, erect such shelves, bins, office equipment and trade fixtures as
it desires, as may be permitted under the Main Lease. Sublessee shall have
no right to assign or sublet any interest in this Sublease without first
obtaining the written consent of the Landlord and
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Sublessor, which consent may or may not be granted by the Landlord or
Sublessor in their sole opinion, judgment or discretion.
6. Insurance. Sublessee agrees that under all applicable insurance provisions
of the Main Lease, whenever Landlord is named as an additional insured and
provided with proof of such insurance, Sublessor will also be named as an
additional insured and provided with proof of insurance, pursuant to the
terms of such insurance provisions.
7. Indemnification. Sublessee agrees to indemnify and hold harmless Sublessor
from and against any and all claims, liabilities, losses, damages, costs,
expenses (including attorneys' fees and costs) or demands of any kind
whatsoever and however arising, resulting from this Sublease or the tenancy
created hereby, including but not limited to mechanics liens caused
directly or indirectly due to Sublessee's actions or failure to act, any
acts by Sublessee which result in breach of the Main Lease, any other
damage caused by Sublessee, or any loss, damage or costs incurred in
connection with the Premises as a result of alterations or improvements to
the Premises performed by Sublessee or Sublessee's agents or independent
contractors after the commencement of the term of this Sublease
(collectively, "LOSSES"), unless such Losses result from the negligence of
Sublessor.
8. Default. The following events shall be deemed to be events of default by
Sublessee under this Sublease: any events of default by Sublessee, listed
as events of default by Tenant set forth in the Main Lease, or any default
in the provisions of this Sublease. Upon the occurrence of any such events
of default, and in addition to any other available remedies provided by law
or in equity, Sublessor shall have all remedies granted to Landlord in the
Main Lease.
9. Consent of Landlord. This Sublease is subject to and conditioned upon the
approval and consent of the Landlord. Sublessee and Sublessor have
executed this Sublease upon the understanding that this Sublease shall not
in any way bind Sublessor or Sublessee until receipt by Sublessor and
Sublessee of the written consent of Landlord. In the event Sublessee and
Sublessor do not receive written consent of Landlord for this Sublease on
or before April 1, 1999, this Sublease shall automatically terminate and
Sublessee and Sublessor shall have no further rights or obligations under
this Sublease except as expressly set forth herein.
10. Brokers. Sublessor and Sublessee warrant and represent to each other that
no brokers are entitled to receive a commission in connection with this
Sublease except in accordance with separate written commission agreements,
if any. Each party hereto ("FIRST PARTY") hereby indemnifies and holds the
other party hereto harmless from and against any and all claims for
realtors' or brokers' commissions in connection with this Sublease made by
parties claiming by, through or under the First Party.
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11. Miscellaneous.
11.1 Notices. Any notice or other communication required or
permitted to be given under this Sublease shall be in writing and shall be
deemed to be delivered on the date it is hand delivered to the party to whom
such notice is given, at the address set forth below, or if such notice is
mailed, on the date on which it is deposited in the United States Mail, postage
prepaid, certified or registered mail, return receipt requested, addressed to
the party to whom such notice is directed, at the address set forth below:
If to Sublessor: If to Sublessee:
POWERSHIFT VENTURES LLC SHBANG! INC.
Suite 220 Suite 220
7600 B N. Capital of Texas Highway 7600 B N. Capital of Texas Highway
Austin, TX 78731 Austin, TX 78731
11.2 Severability. In the event any one or more of the provisions
contained in this Sublease shall for any reason be held invalid, illegal, or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision hereof and this agreement shall be
construed as if such invalid, illegal or unenforceable provisions had never been
contained herein.
11.3 Waiver of Breach. The waiver by Sublessor of any breach or
violation of any provision of this Sublease shall not operate as, or be
construed to be, a waiver of any subsequent breach of the same or any other
provision hereof.
11.4 Entire Agreement. This agreement constitutes the sole and only
agreement of the parties hereto and supersedes any prior understandings and
written or oral agreements between the parties respecting the subject matter of
this Sublease.
11.5 Further Assurances, Nondisturbance. Each party agrees to
execute and deliver such additional .documents and instruments and to perform
such additional acts as may be necessary or appropriate to effectuate, carry out
and perform all of the terms, provisions, and conditions of this Sublease and
the transactions contemplated hereby. To the extent Sublessor is party to a
non-disturbance agreement with any mortgagee of the Building, Sublessee shall be
entitled to the benefit thereof.
11.6 Representations and Covenants of Sublessor. Sublessor, for
itself and its legal representatives, successors and assigns, covenants and
represents to Sublessee and agrees as follows:
(a) Sublessor, as of the Effective Date, has full right, authority and
power to sublease the Premises, subject to Landlord's consent;
(b) No other assignment or sublease of the Main Lease has been made by
Sublessor, and the rights and interests of Sublessor in and under the Main Lease
are as of the Effective Date free and clear of any liens and encumbrances made
by Sublessor;
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(c) As of the Effective Date, Sublessor is not in default under any of
the terms of the Main Lease.
(d) Sublessor has no knowledge of any default in the performance and
observance of obligations contained in the Main Lease to be kept, observed and
performed by Landlord, or of any condition which with the giving of notice or
passage of time, or both, would constitute a default under the Main Lease;
(e) If Sublessee requests Sublessor to do so, Sublessor shall at
Sublessee's expense use commercially reasonable efforts to enforce the
obligations of Landlord under the Main Lease and to maintain the Main Lease in
full force and effect throughout the term of this Sublease; and
(f) Sublessor has not exercised prior to the date hereof, and will not
exercise from and after the date hereof, the early termination right of the
Tenant in section I.B. of the Main Lease.
11.7 Headings. All headings herein are inserted only for convenience
and ease of reference and are not to be considered in the construction or
interpretation of any provision of this Sublease.
11.8 Multiple Counterparts. This Sublease may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same agreement. A facsimile signature may be used
for any purpose in lieu of an original signature.
11.9 Attorney Fees. In the event either party hereto commences an
action or proceeding against the other with respect to this Sublease, the
prevailing party in such dispute shall be entitled to recover from the other
party all reasonable fees, costs and expenses of enforcing any right of the
prevailing party, including without limitation, reasonable attorneys' fees and
costs.
EXECUTED as of the day and year first above written.
Sublessor: Sublessee:
POWERSHIFT VENTURES, LLC SHBANG! INC.
By:__________________________ By:__________________________
Title:_______________________ Title:_______________________
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CONSENT BY LANDLORD
HUB PROPERTIES TRUST, Landlord under the Main Lease referred to in
this Sublease, hereby consents to the foregoing Sublease, and, notwithstanding
section 12 of the Main Lease or any other provision of the Main Lease, Landlord
consents to the continued use of the computer labs within the Premises by
Sublessee, and such use is not a violation of or an Event of Default under the
Main Lease or this Sublease.
LANDLORD:
HUB PROPERTIES TRUST
By:___________________________
Printed Name:_________________
Title:________________________
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EXHIBIT 10.6
AMENDED AND RESTATED RIGHTS AGREEMENT
This Amended and Restated Rights Agreement (this "Rights Agreement") is
made as of December 2, 1999 by and among Netpliance, Inc. (the "Corporation"),
and the holders of the Corporation's Series B Convertible Preferred Stock
("Series B Preferred") and Series C Convertible Preferred Stock ("Series C
Preferred" and together with the Series B Preferred, the "Shares"). The holders
of the Series B Preferred and Series C Preferred are referred to collectively
herein as the "Holders".
WHEREAS, the Corporation has previously issued and sold the Series B
Preferred to Watershed Capital I, L.P., a Holder ("Watershed"); and
WHEREAS, the Corporation now wishes to issue and sell the Series C
Preferred to Watershed and to John F. McHale ("McHale"); and
WHEREAS, in connection with the issuance and sale of the Series B Preferred
and the Series C Preferred and in consideration for the Corporation's sale of
Shares pursuant to the Purchase Agreements relating to the sale of the Series B
Preferred and the Series C Preferred, the Corporation agreed to grant certain
rights to the Holders as set forth in this Rights Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
1. Information Rights.
1.1 Delivery of Financial Statements. The Corporation shall deliver to
each Holder, so long as such Holder holds at least ninety percent (90%) of the
Shares originally purchased by such Holder:
(a) as soon as practicable after the end of each fiscal year, but in any
event within ninety (90) days thereafter, audited, consolidated balance sheets
and statements of operations and cash flow for such fiscal year, prepared in
accordance with generally accepted accounting principles (other than for
accompanying notes) and setting forth in each case in comparative form the
figures for the previous fiscal year;
(b) within forty-five (45) days of the end of each fiscal quarter of the
Corporation, an unaudited statement of operations and balance sheet for and as
of the end of such quarter, in reasonable detail and prepared in accordance with
GAAP, subject to year end audit adjustments and the absence of footnotes; and
(c) within thirty (30) days of the end of each calendar month, an
unaudited statement of operations and balance sheet for and as of the end of
such month, in reasonable detail and prepared in accordance with GAAP, subject
to adjustments and the absence of footnotes.
1.2 Termination of Information Rights. The covenants set forth in
Section 1.1 shall terminate as to each Holder and be of no further force and
effect upon the consummation of the
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sale of securities pursuant to a registration statement filed by the Corporation
under the Securities Act of 1933, as amended (the "Securities Act"), in
connection with the initial firm commitment underwritten offering of its
securities to the general public at a price per share of at least $9.00 and with
gross proceeds to the Corporation of at least $15,000,000 (a "Qualifying Public
Offering").
2. Preemptive Rights. Subject to the terms and conditions specified in this
Section 2, the Corporation hereby grants to each Holder, a preemptive right with
respect to future sales by the Corporation of its New Securities (as defined in
Section 2.4 (a)).
2.1 In the event the Corporation proposes to issue New Securities, it
shall give each Holder written notice (the "Notice") of its intention stating
(i) a description of the New Securities it proposes to issue, (ii) the number of
shares of New Securities it proposes to offer, (iii) the price per share at
which, and other terms on which, it proposes to offer such New Securities and
(iv) the number of shares that such Holder has the right to purchase under this
Section 1.3, based on Holder's Percentage (as defined in Section 2.4(b)).
2.2 Within ten (10) days after the Notice is given (in accordance with
Section 2.2), each Holder may elect to purchase, at the price specified in the
Notice, up to the number of shares of the New Securities proposed to be issued
equal to Holder's Percentage. An election to purchase shall be made in writing
and must be given to the Corporation within such ten (10) day period (in
accordance with Section 6.2). The closing of the sale of New Securities by the
Corporation to a Holder upon exercise of its rights under this Section 2 shall
take place simultaneously with the closing of the sale of New Securities to
third parties.
2.3 The Corporation shall have ninety (90) days after the last date on
which Holders' preemptive right lapsed to enter into an agreement (pursuant to
which the sale of New Securities covered thereby shall be closed, if at all,
within forty-five (45) days from the execution thereof) to sell the New
Securities which such Holder did not elect to purchase under this Section 2, at
or above the price and upon terms not materially more favorable to the Holders
of such securities than the terms specified in the initial Notice given in
connection with such sale. In the event the Corporation has not entered into an
agreement to sell the New Securities within such ninety (90) day period (or sold
and issued New Securities in accordance with the foregoing within forty-five
(45) days from the date of such agreement), the Corporation shall not thereafter
issue or sell any New Securities without first offering such New Securities to
Holders in the manner provided in this Section 2.
2.4 (a) "New Securities" shall mean any shares of, or securities
convertible into or exercisable for any shares of, any class of the
Corporation's capital stock; provided that "New Securities" does not
include: (A) securities issued pursuant to the acquisition of another
business entity by the Corporation by merger, purchase of substantially all
of the assets of such entity, or other reorganization whereby the
Corporation owns not less than a majority of the voting power of such
entity; (B) shares of the Corporation's Series D Preferred Stock (if and
when such Series D Preferred Stock is designated, issued, and placed as
described in the Private Placement Memorandum of the Corporation dated
November 15, 1999, the "Series D Preferred") or options or warrants to
purchase shares of the Corporation's Common Stock, and the shares of Common
Stock issuable upon
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exercise of such options or warrants, issued pursuant to any arrangement
approved by the Board of Directors to employees, officers and directors of,
or consultants, advisors or other persons performing services for, the
Corporation, or issuable upon conversion of the Corporation's Series A
Preferred Stock (the "Series A Preferred"), the Series B Preferred, Series
C Preferred or Series D Preferred, and; (C) shares of the Corporation's
Common Stock issued in connection with any stock split, stock dividend or
recapitalization of the Corporation; or (D) shares of the Corporation's
Common Stock issued upon exercise of warrants, options or convertible
securities if the issuance of such warrants, options or convertible
securities was a result of the exercise of the preemptive right granted
under this Section 2 or was subject to the preemptive right granted under
this Section 2.
(b) The applicable "Percentage" for each Holder shall be the number of
shares of New Securities calculated by dividing (i) the total number of
shares of Common Stock owned by such Holder (assuming conversion of all
outstanding shares of Series A Preferred, Series B Preferred, and Series C
Preferred and other convertible securities and exercise of all outstanding
options and warrants) by (ii) the total number of shares of Common Stock
outstanding at the time the Notice is given (assuming conversion of all
outstanding shares of Series A Preferred, Series B Preferred and Series C
Preferred and any other convertible securities and exercise of all
outstanding options and warrants).
2.5 The preemptive right granted under this Section 2 may only be assigned
by a Holder upon prior written consent of the Corporation to such transfer.
2.6 The preemptive right granted under this Section 2 shall not apply to
and shall expire upon the consummation of the Corporation's sale of its Common
Stock in a Qualifying Public Offering.
3. Composition of Board of Directors. The holders of a majority of the
outstanding shares of Series B Preferred shall have the right, so long as
Watershed holds at least 100,000 shares of Series B Preferred, to elect or cause
to be elected to the Corporation's Board of Directors one (1) director (the
"Watershed Director") designated by such holders of a majority of the
outstanding shares of Series B Preferred. The right under this Section 3 to
designate the Watershed Director shall expire upon the consummation of the
Corporation's sale of its Common Stock in a Qualifying Public Offering.
4. Market Standoff. Following the effective date of a registration
statement of the Corporation filed under the Securities Act, for the duration
specified by and to the extent requested by the Corporation or an underwriter of
the Corporation's securities, but in no event for a period in excess of 180
days, each Holder covenants and agrees it shall not directly or indirectly sell,
offer to sell, contract to sell (including, without limitation, any short sale),
grant any option to purchase or otherwise transfer or dispose of the Shares or
any other securities of the Corporation acquired by such Holder; and each Holder
agrees to execute an agreement to such effect if and when requested by the
Corporation. In order to enforce the foregoing covenant, the Corporation may
impose stop-transfer instructions with respect to the securities of a Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
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5. Registration Rights. The Corporation covenants and agrees as follows:
5.1 Definitions. For purposes of this Section 5:
(a) The terms "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended ("the
Act"), and the declaration or ordering of effectiveness of such registration
statement or document;
(b) The term "Registrable Securities" means the Common Stock, (i)
issuable or issued upon conversion of the Series C Preferred Stock issued
pursuant to the Stock Purchase Agreement of even date herewith ("Purchase
Agreement"), (ii) issuable or issued upon conversion of the Series B Convertible
Preferred Stock of the Corporation ("Series B Preferred") issued to Watershed
pursuant to that certain Stock Purchase Agreement dated October 1, 1999 (the
"Series B Purchase Agreement"), and (iii) any Common Stock of the Corporation
issued as (or issuable upon the conversion or exercise of any warrant, right or
other security which is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of, such Series B Preferred or Series C
Preferred, excluding in all cases, however, (i) any Registrable Securities sold
by a person in a transaction in which such person's rights under this Section 5
are not assigned, or (ii) any Registrable Securities sold to or through a broker
or dealer or underwriter in a public distribution or a public securities
transaction;
(c) The number of shares of "Registrable Securities then outstanding"
shall be determined by the number of shares of Common Stock outstanding which
are, and the number of shares of Common Stock issuable pursuant to then
exercisable or convertible securities which are, Registrable Securities;
(d) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 5.13 hereof; and
(e) The term "Form S-3" means such form under the Act as in effect on
the date hereof or any registration form under the Act subsequently adopted by
the Securities and Exchange Commission (the "SEC") which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Corporation with the SEC.
5.2 Request for Registration.
(a) If the Corporation shall receive at any time after six (6) months
after the effective date of the first registration statement for a public
offering of securities of the Corporation (other than a registration statement
relating either to the sale of securities to employees of the Corporation
pursuant to a stock option, stock purchase or similar plan or a SEC Rule 145
transaction) (the "Initial Registration"), a written request from Watershed that
the Corporation file a registration statement under the Act covering the
registration of at least 40% of the Registrable Securities (or a lesser amount
of Registrable Securities provided that the offering price to the public exceeds
$10,000,000), then the Corporation shall, subject to the limitations of Section
5.2(b) and as set for the below, use its commercially reasonable efforts to
effect as soon as practicable the registration under the Act of all Registrable
Securities which
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Watershed requests to be registered within ninety (90) days; provided, however,
that the Corporation shall not be obligated to take any action to effect any
such registration, qualification or compliance pursuant to this Section 5.2(a):
(i) During the period starting with the date sixty (60) days prior to
the Corporation's estimated date of filing of, and ending on the date 120 days
immediately following the effective date of, any registration statement
pertaining to securities of the Corporation (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan), provided that the Corporation is actively employing in good faith
commercially reasonable efforts to cause such registration statement to become
effective;
(ii) After the Corporation has effected one registration pursuant to
this Section 5.2(a), and such registration has been declared or ordered
effective; and
(iii) If the Corporation shall furnish to Watershed a certificate
signed by the President of the Corporation stating that in the good faith
judgment of the Board of Directors it would be seriously detrimental to the
Corporation or its shareholders to file a registration statement at such time,
then the Corporation's obligation to use its commercially reasonable efforts to
register, qualify or comply under this Section 5.2(a) shall be deferred for a
period not to exceed 180 days from the date of receipt of written request from
Watershed;
and further provided, however, that upon receipt by the Corporation of the
written request of Watershed to file any registration statement pursuant to this
Section 5.2, the Corporation shall promptly give written notice of such
registration to any other holders of the capital stock of the Corporation having
rights to register their holdings at such time as the Corporation shall file or
cause to be filed a registration statement with respect to any of its
securities, and such holders shall have at least twenty (20) days after mailing
of such written notice by the Corporation to request that the Corporation cause
the Shares or other shares of capital stock to be registered under the Act.
(b) If Watershed, in initiating the registration request hereunder,
intends to distribute the Registrable Securities covered by its request by means
of an underwriting, it shall so advise the Corporation as a part of its request
made pursuant to this Section 5.2 and the Corporation shall include such
information in the written notice referred to in Section 5.2(a). In such event,
the right of Watershed to include such Registrable Securities in such
registration shall be conditioned upon Watershed's participation in such
underwriting and the inclusion of such Registrable Securities in the
underwriting. If Watershed proposes to distribute its securities through such
underwriting, Watershed shall (together with the Corporation as provided in
Section 5.4(e)) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by the Corporation.
Notwithstanding any other provision of this Section 5.2, if the underwriter
advises the Company that marketing factors require a limitation of the number of
shares to be underwritten, then the number of shares that may be included in the
underwriting shall be allocated pro rata among all holders of shares to be
underwritten; provided, however, that any holder of the Corporation's Series D
Convertible Preferred Stock, if and when designated and issued, shall receive
priority over the Holders as to registration, placement, allocation and
otherwise in the event of such limitations of the number of shares to be
underwritten.
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5.3 Corporation Registration. If (but without any obligation to do so)
the Corporation proposes to register any of its stock or other securities under
the Act in connection with the public offering of such securities solely for
cash (other than a registration relating solely to the sale of securities to
participants in a Corporation stock plan, or a registration on any form which
does not include substantially the same information as would be required to be
included in a registration statement covering the sale of the Registrable
Securities), the Corporation shall, at such time, promptly give each Holder
written notice of such registration. Upon the written request of a Holder given
within ten (10) days after mailing of written notice by the Corporation, the
Corporation shall, subject to the provisions of Section 5.9, use commercially
reasonable efforts to cause to be registered under the Act all of the
Registrable Securities that such Holder has requested to be registered.
5.4. Registration on Form S-3. At any time after the Corporation becomes
eligible to file a Form S-3, the holders of 25% or more of the Registrable
Securities may request the Company, in writing, to effect the registration on
Form S-3, of all or such portion of the Registrable Shares as the Holder or
Holders shall specify, provided that the value of the Registrable Securities to
be offered is at least $1,000,000 on the date of the request by such holders of
Registrable Securities. If the holders initiating the registration intend to
distribute the Registrable Shares in an underwritten offering, they shall so
advise the Corporation in their request. The Corporation shall, as expeditiously
as possible, use its commercially reasonable efforts to effect the registration
on Form S-3 of all Registrable Shares that the Corporation has been so requested
to register; provided, however, that registrations under this Section 5.4 shall
not be deemed as demands for registration or registrations pursuant to Section
5.2 or Section 5.3; and further provided, however, that the Corporation shall
not be obligated to take any action to effect any such registration,
qualification or compliance pursuant to this Section 5.4:
(a) After the Corporation has effected one registration statement on Form
S-3 during the current calendar year;
(b) After the Corporation has effected two registrations pursuant to this
Section 5.4; and
(c) Within six months after the effective date of any other Registration
Statement of the Company.
Upon receipt by the Corporation of the written request of a Holder to file
any registration statement pursuant to this Section 5.3, the Corporation shall
promptly give written notice of such registration to the Holders of the Shares,
and to any other holders of the capital stock of the Corporation having rights
to register their holdings at such time as the Corporation shall file or cause
to be filed a registration statement with respect to any of its securities, and
such holders shall have at least twenty (20) days after mailing of such written
notice by the Corporation to request that the Corporation cause the Shares or
other shares of capital stock to be registered under the Act. Holders of the
Corporation's Series D Convertible Preferred Stock, if and when designated and
issued, shall receive priority over the Holders as to registration, placement,
allocation and otherwise in the event of any limitations of the number of shares
to be registered on Form S-3.
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5.5 Obligations of the Corporation. Whenever required under this Section
5 to effect the registration of any Registrable Securities, the Corporation
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its commercially reasonable
efforts to cause such registration statement to become effective, and, upon the
request of a Holder, keep such registration statement effective for the earlier
of ninety (90) days or until the distribution described in the Registration
Statement has been completed.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as it may reasonably request in order to
facilitate the disposition of Registrable Securities owned by it.
(d) Use its commercially reasonable efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by a Holder, provided that the Corporation shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Any Holder, if
participating in such underwriting, shall also enter into and perform its
obligations under such an agreement.
(f) Notify Holders if covered by such registration statement at any
time when a prospectus relating thereto is required to be delivered under the
Act of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing.
5.6 Furnish Information. It shall be a condition precedent to the
obligations of the Corporation to take any action pursuant to this Section 5
with respect to the Registrable Securities of a Holder that such Holder shall
furnish to the Corporation such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
5.7 Expenses of Demand Registration. All expenses other than underwriting
discounts and commissions incurred in connection with registrations, filings or
qualifications pursuant to Section 5.2, including (without limitation) all
registration, filing and qualification
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fees, printers' and accounting fees, fees and disbursements of counsel for the
Corporation, and the reasonable fees and disbursements of one counsel for the
Holders collectively (not to exceed $10,000 in the aggregate) shall be borne by
the Corporation; provided, however, that the Corporation shall not be required
to pay for any expenses of any registration proceeding begun pursuant to Section
5.2 if the registration request is subsequently withdrawn at the request of a
Holder (in which case such Holder shall bear such expenses), unless such Holder
agrees to forfeit its right to the demand registration pursuant to Section 5.2.
5.8 Expenses of Corporation Registration. The Corporation shall bear and
pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 5.3 for Holders, including (without limitation) all
registration, filing, and qualification fees, printers and accounting fees
relating or apportionable thereto, and the reasonable fees and disbursements of
one counsel for the Holders collectively (not to exceed $10,000 in the
aggregate), but excluding underwriting discounts and commissions relating to
Registrable Securities.
5.9 Underwriting Requirements. In connection with any offering involving
an underwriting of shares being issued by the Corporation, the Corporation shall
not be required under Section 5.3 to include any of the Holders' securities in
such underwriting unless it accepts the terms of the underwriting as agreed upon
between the Corporation and the underwriters selected by it (or by other persons
entitled to select the underwriters), and then only in such quantity as will
not, in the opinion of the underwriters, jeopardize the success of the offering
by the Corporation. If the underwriters advise the Corporation that marketing
factors require a limitation of the number of shares to be underwritten, then
the number of shares that may be included in the underwriting shall be allocated
first to the Corporation, which shall have priority as to registration,
placement, allocation and otherwise in such event, and then pro rata among all
other holders of shares to be underwritten; provided, however, that any holder
of the Corporation's Series D Convertible Preferred Stock, if and when
designated and issued, shall receive priority over any Holder as to
registration, placement, allocation and otherwise in the event of such
limitations of the number of shares to be underwritten. For purposes of
apportionment, Holders and any selling shareholder which is a partnership or
corporation, the partners, retired partners and shareholders of such Holder, or
the estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing persons shall be deemed to be a
single "selling shareholder," and any pro rata reduction with respect to such
"selling shareholder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included in
such "selling shareholder," as defined in this sentence.
The Corporation shall have the right to include shares now or hereafter
owned by the Corporation's officers and employee directors that are not already,
by virtue of this Agreement, deemed Registrable Securities (the "Management
Shares") in any registration pursuant to Section 5.3. If Management Shares are
included in a registration pursuant to Section 5.3, each holder of Management
Shares will be deemed a "Holder" for purposes of this Section 5 only.
5.10 Delay of Registration. Holders shall not have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 5.
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5.11 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 5:
(a) To the extent permitted by law, the Corporation will indemnify and
hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls a Holder or underwriter within the
meaning of the Act or the Securities Exchange Act of 1934, amended (the "1934
Act"), against any losses, claims, damages, or liabilities (joint or several) to
which they may become subject under the Act, the 1934 Act or other federal or
state law, insofar as such losses, claims, damages, or liabilities (or actions
in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation"): (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (ii) the omission or
alleged omission to state therein a material fact required to be stated therein,
or necessary to make the statements therein not misleading, or (iii) any
violation or alleged violation by the Corporation of the Act, the 1934 Act, any
state securities law or any rule or regulation promulgated under the Act, the
1934 Act or any state securities law; and the Corporation will pay to a Holder,
underwriter or controlling person, as incurred, any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this Section 5.11(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Corporation, nor shall the
Corporation be liable in any such case for any such loss, claim, damage,
liability, or action to the extent that it arises out of or is based upon a
Violation which occurs in reliance upon and in conformity with information
furnished for use in connection with such registration by a Holder or
controlling person.
(b) To the extent permitted by law, each Holder, severally and not
jointly, will indemnify and hold harmless the Corporation, each of its
directors, each of its officers who has signed the registration statement, each
person, if any, who controls the Corporation within the meaning of the Act, any
underwriter, any other shareholder selling securities in such registration
statement and any controlling person of any such underwriter or other
shareholder, against any losses, claims, damages, or liabilities (joint or
several) to which any of the foregoing persons may become subject, under the
Act, the 1934 Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereto) arise out of or are
based upon any Violation, in each case to the extent that such Violation occurs
in reliance upon and in conformity with information furnished by such Holder for
use in connection with such registration; and such Holder will pay, as incurred,
any legal or other expenses reasonably incurred by any person intended to be
indemnified pursuant to this Section 5.11(b), in connection with investigating
or defending any such loss, claim, damage, liability, or action; provided,
however, that the indemnity agreement contained in this Section 5.11(b) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of such
Holder, which consent shall not be unreasonably withheld; and further provided,
that, in no event shall any indemnity under this Section 5.11(b) exceed the net
proceeds from the offering received by such Holder.
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(c) Promptly after receipt by an indemnified party under this Section
5.11 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 5.11, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof if (a) the indemnifying party
acknowledge its obligation to indemnify the indemnified party for any losses,
damages or liabilities resulting from such claim and provide reasonable evidence
to the indemnified party of its financial ability to satisfy such obligation;
(b) the claim does not seek to impose any liability or obligation on the
indemnified party other than for money damages; and (c) the claim does not
relate to the indemnified party's relationship with its customers or employees.
If such conditions are satisfied and the indemnifying party elects to assume and
control the defense of a claim, then (i) the indemnified party will not be
liable for any settlement of such claim effected without the consent of the
indemnified party, which consent will not be unreasonably withheld; and (ii) the
indemnifying party may settle such claim without the consent of the indemnified
party; provided, however, that an indemnified party shall have the right to
retain its own counsel, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 5.11, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 5.11.
(d) If the indemnification provided for in this Section 5.11 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations; provided, that, in no event shall any contribution by a Holder
under this Section 5.11(d) exceed the net proceeds from the offering received by
a Holder, except in the case of willful fraud by a Holder. The relative fault
of the indemnifying party and of the indemnified party shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
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(f) The obligations of the Corporation and Holders under this Section
5.11 shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 5, and otherwise.
5.12 Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the Act and
any other rule or regulation of the SEC that may at any time permit Holders to
sell securities of the Corporation to the public without registration or
pursuant to a registration on Form S-3, the Corporation agrees to use
commercially reasonable efforts to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after the effective date of
the first registration statement filed by the Corporation for the offering of
its securities to the general public;
(b) file with the SEC in a timely manner all reports and other
documents required of the Corporation under the Act and the 1934 Act; and
(c) furnish to Holders, so long as any Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Corporation
that it has complied with the reporting requirements of SEC Rule 144 (at any
time after ninety (90) days after the effective date of the first registration
statement filed by the Corporation), the Act and the 1934 Act (at any time after
it has become subject to such reporting requirements), or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any time
after it so qualifies), (ii) a copy of the most recent annual or quarterly
report of the Corporation and such other reports and documents so filed by the
Corporation, and (iii) such other information as may be reasonably requested in
availing a Holder of any rule or regulation of the SEC which permits the selling
of any such securities without registration or pursuant to such form.
5.13 Termination of Registration Rights. A Holder shall not be entitled
to exercise any right provided for in this Section 5 when such Holder can sell
all of such Holder's Registrable Securities in a ninety (90) day period pursuant
to Rule 144 promulgated under the Act.
5.14 Subordination. All of Holders' rights with respect to registration
under any provision of this Section 5 shall be subordinate to the rights of any
Holder of the Corporation's Series D Convertible Preferred Stock, if and when
designated and issued.
6. Miscellaneous Provisions.
6.1 Waivers and Amendments. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Corporation and each Holder. Any amendment or waiver
effected in accordance with this Section 6.1 shall be binding upon Holders and
the Corporation.
6.2 Notices. All notices and other communications required or permitted
hereunder shall be in writing and, except as otherwise noted herein, shall be
deemed effectively given upon personal delivery, delivery by nationally
recognized courier or upon deposit with the United States Post Office, (by first
class mail, postage prepaid) addressed as follows:
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(a) if to the Corporation, to:
Netpliance, Inc.
7600A N. Capital of Texas Highway
Austin, Texas 78731
Attention: Jim Cahill, Vice President and General Counsel
Fax: (512) 493-8499
with a copy to:
Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
Attention: R. Clayton Mulford
Fax: (214) 939-5849
(b) if to Watershed, to:
Watershed Capital I, LP
650 Castro Street, Suite 200
Mountain View, California 94041
Attention: David S. Lundeen
Fax: (650) 404-9425
with a copy to:
Gail E. Papermaster
Attorney at Law
701 Brazos, Suite 500
Austin, Texas 78701
Fax: (512) 320-5711
(c) if to McHale, to:
John F. McHale
111 Congress Avenue
Austin, Texas 78701
or to such other address as the party to whom notice is to be given may have
furnished to the other in writing in accordance with the provisions of this
Section 6.2. Any such notice or communication shall be deemed to have been
received: (i) in the case of telecopy or personal delivery, on the date of such
delivery; (ii) in the case of nationally-recognized overnight courier, on the
next business day after the date sent; and (iii) if by registered or certified
mail, on the third business day following the date postmarked.
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6.3 Descriptive Headings. The descriptive headings herein have been
inserted for convenience only and shall not be deemed to limit or otherwise
affect the construction of any provisions hereof.
6.4 Governing Law. This Agreement shall be governed by and interpreted
under the laws of the State of Texas as applied to agreements among Texas
residents, made and to be performed entirely within the State of Texas.
6.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument, but only one of which
need be produced.
6.6 Expenses. If any action at law or in equity is necessary to enforce
or interpret the terms of this Agreement, the prevailing party shall be entitled
to reasonable attorney's fees, costs and necessary disbursements in addition to
any other relief to which such party may be entitled.
6.7 Successors and Assigns. Except as otherwise expressly provided in
this Agreement, this Agreement shall benefit and bind the successors, assigns,
heirs, executors and administrators of the parties to this Agreement.
6.8 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subject
matter of this Agreement.
6.9 Separability; Severability. Unless expressly provided in this
Agreement, the rights of each Holder under this Agreement are several rights,
not rights jointly held with any other Holders. Any invalidity, illegality or
limitation on the enforceability of this Agreement with respect to any Holder
shall not affect the validity, legality or enforceability of this Agreement with
respect to the other Holders. If any provision of this Agreement is judicially
determined to be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not be affected or impaired.
6.10 Stock Splits. All references to numbers of shares in this Agreement
shall be appropriately adjusted to reflect any stock dividend, split,
combination or other recapitalization of shares by the Corporation occurring
after the date of this Agreement.
[THE REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY.]
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IN WITNESS WHEREOF, the parties have executed this Rights Agreement on the
day and year first set forth above.
NETPLIANCE, INC.
By:__________________________________________
Name: Kent Savage
Title: President and Chief Executive Officer
WATERSHED CAPITAL I, L.P.
By: Watershed Capital G.P. I, L.P.
Its General Partner
By: Watershed Capital G.P. I, L.L.C.,
Its General Partner
By:_______________________________
David S. Lundeen,
Managing Member
_____________________________________________
John F. McHale
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EXHIBIT 10.7
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made as of February 1,
1999, by and between Shbang! Inc., a Texas corporation (the "Company"), and Kent
Savage ("Employee").
WHEREAS, the Company desires to obtain the services of Employee, and
Employee desires to provide services to the Company, in accordance with the
terms and conditions of this Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Employee agree as
follows.
1. Employment. Effective on the Effective Date (as defined in
Section 2) and subject to the terms and conditions of this Agreement, the
Company agrees to employ Employee as its Chief Executive Officer and President,
and Employee agrees to perform the duties associated with that position
diligently and to the reasonable satisfaction of the Company's President and
Board of Directors. From the Effective Date until termination of this
Agreement, Employee will devote his full business time, attention and energies
to the business of the Company. Employee will report to the Board of Directors
of the Company and will comply with the policies and guidelines established by
the Company's Board of Directors from time to time.
2. Term and Termination. Employee will be employed under this
Agreement for an initial term of two years (the "Initial Term"), beginning on
the date of the Agreement (the "Effective Date"). This Agreement shall renew
for successive one year periods after the completion of the Initial Term unless
either party gives written notice of termination at least 30 days prior to the
expiration of the Initial Term or any renewal term. Notwithstanding the
foregoing, either party may terminate this Agreement at any time, with or
without cause, by giving 30 days written notice of termination to the other
party, and upon termination, neither party will have any continuing obligation
to the other party, except as follows: (a) if the Company terminates this
Agreement without Cause (as defined below) prior to the end of the first year of
the Initial Term, then the Company will be obligated to continue paying
Employee's base salary and employee benefits pursuant to Section 4 hereof for a
period of six (6) months after such termination; and (b) the provisions of
Sections 5, 6 and 7 hereof will survive any termination of this Agreement for
any reason in accordance with their terms. As used in this Agreement,
termination for "Cause" shall mean any termination of Employee for (a) refusal
to perform duties assigned, or disobedience of orders and directives issued to
Employee; (b) violation of any rule or regulation of which Employee has notice
and that may be established from time to time for the conduct of the Company's
business, (c) unlawful misconduct by Employee, including, without limitation,
the commission of an act of fraud or embezzlement against the Company or
commission of a crime involving moral turpitude, (d) consistent willful
misconduct or negligence in performing Employee's duties hereunder, (e) breach
of fiduciary duty in connection with Employee's employment by the Company or (f)
a breach of any of the terms of this Agreement.
3. Compensation. Beginning on the Effective Date and thereafter
during the term of Employee's employment, the Company will pay Employee a base
salary at the rate of
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$195,000 per year, payable biweekly or semi-monthly in accordance with the
payroll practices of the Company in effect from time to time. Such base salary
shall be subject to review and potential adjustment annually, in accordance with
the compensation policies of the Company in effect from time to time. Employee
shall also, during the term of his employment hereunder, be eligible for an
annual discretionary incentive bonus of up to 15% of Employee's base salary,
such bonus to be awarded in the discretion of the Company in accordance with the
bonus policies established by the Company from time to time. All of Employee's
compensation under this Agreement will be subject to deduction and withholding
authorized or required by applicable law.
4. Employee Benefits. Beginning on the Effective Date and thereafter
during the term of this Agreement, the Company will provide to Employee such
fringe benefits, perquisites, vacation and other benefits that the Company
provides to its similarly situated employees. The Company will reimburse
Employee for reasonable out-of-pocket business expenses incurred and documented
in accordance with the policies of the Company in effect from time to time.
5. Assignment of Intellectual Property Rights.
(a) In consideration of the Company's agreement to employ
Employee and the receipt by the Employee of Confidential Information,
Employee hereby assigns to the Company all of his rights in all
Intellectual Property which Employee makes or conceives, whether as a sole
inventor or as a joint inventor, whether made within or outside working
hours or upon the premises of the Company or elsewhere, during Employee's
employment with the Company, its subsidiaries or affiliates. This
assignment shall not apply to Intellectual Property that Employee has an
obligation to assign to a former employer. "Intellectual Property" means
any information of a technical and/or business nature such as ideas,
discoveries, inventions, trade secrets, know-how, and writings and other
works of authorship which relate in any manner to the actual or anticipated
business or research and development of the Company, its subsidiaries or
affiliates.
(b) During and subsequent to Employee's employment, upon the
request and at the expense of the Company or its nominee and for no
additional personal remuneration, Employee agrees to execute any instrument
which the Company considers necessary to secure for or maintain for the
benefit of the Company adequate patent and other property rights in the
United States and all foreign countries with respect to any Intellectual
Property. Employee also agrees to assist the Company as required to draft
said instruments and to obtain and enforce said rights.
(c) Employee agrees to promptly disclose to the Company any
Intellectual Property when conceived or made by Employee, in whole or in
part, and to make and maintain adequate and current records thereof. Upon
the termination of Employee's employment for any reason, Employee agrees to
promptly turn over to the Company all models, prototypes, drawings,
records, documents, and the like in Employee's possession or under
Employee's control, whether prepared by Employee or others, relating to
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Intellectual Property, and any other work done for the Company related
thereto. Employee acknowledges that all such items are the sole property
of the Company.
(d) Employee agrees that any Intellectual Property disclosed by
Employee within one (1) year following termination of Employee's employment
for any reason shall be the sole property of the Company unless and until
finally determined by a court of competent jurisdiction to have been made
or conceived after the termination of Employee's employment.
6. Confidential Information.
(a) In the course of performing services for the Company under
this Agreement, Employee may receive or have access to commercially
valuable, confidential or proprietary information. "Confidential
Information" means all confidential information, whether oral or written,
now or hereafter developed, acquired or used by the Company and relating to
the business of the Company that is not generally known to others in the
Company's area of business, including without limitation (to the extent
confidential) (i) any trade secrets, work product, processes, analyses,
know-how, software and hardware development information or other
Intellectual Property of the Company; (ii) the Company's advertising,
product development, strategic and business plans and information; (iii)
customer lists and prices at which the Company has sold or offered to sell
its products or services; and (iv) the Company's financial statements and
other financial information.
(b) Employee acknowledges and agrees that the Confidential
Information (to the extent it can be owned) is and will be the sole and
exclusive property of the Company. Employee will not use any Confidential
Information for his own benefit or disclose any Confidential Information to
any third party (except in the course of performing his authorized duties
for the Company under this Agreement), either during or subsequent to his
employment with the Company. Upon termination of his employment with the
Company, Employee will promptly deliver to the Company all documents,
computer disks and other computer storage devices and other papers and
materials (including all copies thereof in whatever form) containing or
incorporating any Confidential Information or otherwise relating in any way
to the Company's business that are in his possession or under his control.
Employee also agrees not to disclose to the Company any Confidential
Information belonging to others.
7. Restrictive Covenant. For purposes hereof, the "Noncompetition
Period" will begin on the Effective Date and end eighteen (18) months after the
date Employee's employment with the Company is terminated for any reason. In
consideration of the Company's agreement to employ Employee and the receipt by
the Employee of Confidential Information, Employee hereby agrees that, during
the Noncompetition Period, he will not (except in the course of performing his
authorized duties for the Company under this Agreement), directly or indirectly,
on his own behalf or as an officer, director, employee, consultant or other
agent of, or as a stockholder, partner or other investor in, any person or
entity (other than the Company or its affiliates):
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(a) engage in any business conducted by the Company, its
subsidiaries or affiliates and any business competitive with the business
conducted by the Company, its subsidiaries or affiliates (collectively a
"Competing Business") within any geographic area in which the Company, its
subsidiaries or affiliates conducts any business, or in which businesses
competitive with the businesses of the Company, its subsidiaries or
affiliates are conducted (the "Territory"), or give advice or lend credit,
money or Employee's reputation to any natural person or entity engaged in
or establishing a Competing Business in the Territory or;
(b) directly or indirectly influence or attempt to influence any
customer, potential customer, supplier or accounts of the Company, its
subsidiaries or affiliates located within the Territory to purchase, sell
or lease goods or services related to a Competing Business other than from
or to the Company; or
(c) solicit, encourage, or take any other action which is
intended, directly or indirectly, to induce any other employee of the
Company to terminate his or her employment with the Company, or interfere
in any manner with the contractual or employment relationship between the
Company and any other employees of the Company, or hire or attempt to hire
any former employee of the Company whose termination from employment has
been effective for ninety (90) days or less;
provided, that the foregoing will not apply to any investment in publicly traded
securities constituting less than 5% of the outstanding securities in such
class. For purposes of this Agreement, the term "affiliate" means with respect
to any person or entity any other person or entity controlling, controlled by or
under common control with such person or entity.
8. Enforcement.
(a) Employee represents to the Company that he is willing and
able to engage in businesses other than a Competing Business within the
Territory and that enforcement of the restrictions set forth in Section 7
would not be unduly burdensome to Employee. The Company and Employee
acknowledge and agree that the restrictions set forth in Section 7 are
reasonable as to time, geographic area and scope of activity and do not
impose a greater restraint than is necessary to protect the goodwill and
other business interests of the Company, and Employee agrees that the
Company is justified in believing the foregoing.
(b) If the provisions of Section 7 are found by a court of
competent jurisdiction to contain unreasonable or unnecessary limitations
as to time, geographical area or scope of activity, then such court is
hereby directed to reform such provisions to the minimum extent necessary
to cause the limitations contained therein as to time, geographical area
and scope of activity to be reasonable and enforceable.
(c) Employee acknowledges and agrees that the Company would be
irreparably harmed by any violation of Employee's obligations under
Sections 5, 6 and 7 hereof and
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that, in addition to all other rights or remedies available at law or in
equity, the Company will be entitled to injunctive and other equitable
relief to prevent or enjoin any such violation. If Employee violates
Section 7, the period of time during which the provisions thereof are
applicable will automatically be extended for a period of time equal to the
time that Employee began such violation until such violation permanently
ceases.
9. No Obligation to Third Party. Employee represents and warrants
that Employee is not under any obligation to any person or other third party and
does not have any other interest which is inconsistent or in conflict with this
Agreement, or which would prevent, limit, or impair Employee's performance of
any of the covenants hereunder or Employee's duties as an employee of the
Company.
10. Entire Agreement. This Agreement embody the complete agreement
of the parties with respect to the subject matter hereof and supersedes any
prior written, or prior or contemporaneous oral, understandings or agreements
between the parties that related in any way to the subject matter hereof. This
Agreement may be amended only in writing executed by the Company and Employee.
11. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the respective heirs, executors, administrators, legal
representatives and successors of the Company and Employee.
12. Notice. Any notice required or permitted under this Agreement
must be in writing and will be deemed to have been given when delivered
personally, by telecopy or by overnight courier service or three days after
being sent by mail, postage prepaid, to (a) if to the Company, to the Company's
principal place of business, or (b) if to Employee, to his residence or to his
latest address then contained in the Company's records (or to such changed
address as such person may subsequently give notice of in accordance herewith).
13. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH SUBSTANTIVE LAWS OF TEXAS, WITHOUT GIVING
EFFECT TO ANY CONFLICTS OF LAW, RULE OR PRINCIPLE THAT MIGHT REQUIRE THE
APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.
5
<PAGE>
IN WITNESS WHEREOF, the Company and Employee have executed and
delivered this Agreement as of the date first above written.
SHBANG! INC.
By:____________________________________________
Name: Kent Savage
Title: President and Chief Executive Officer
_______________________________________________
Name: KENT SAVAGE
6
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made as of February 1,
1999, by and between Shbang! Inc., a Texas corporation (the "Company"), and Ken
Kalinoski ("Employee").
WHEREAS, pursuant to the terms of that certain Assignment dated as of
the date hereof (the "Assignment") between Employee and the Company, Employee
has transferred certain intellectual property to the Company;
WHEREAS, the Company desires to obtain the services of Employee, and
Employee desires to provide services to the Company, in accordance with the
terms and conditions of this Agreement;
NOW, THEREFORE, for good and valuable consideration, including,
without limitation, the Assignment, the receipt and sufficiency of which are
hereby acknowledged, the Company and Employee agree as follows.
1. Employment. Effective on the Effective Date (as defined in
Section 2) and subject to the terms and conditions of this Agreement, the
Company agrees to employ Employee as its Vice President - Development, and
Employee agrees to perform the duties associated with that position diligently
and to the reasonable satisfaction of the Company's President and Board of
Directors. From the Effective Date until termination of this Agreement,
Employee will devote his full business time, attention and energies to the
business of the Company. Employee will report to the President of the Company
and will comply with the policies and guidelines established by the Company's
Board of Directors from time to time.
2. Term and Termination. Employee will be employed under this
Agreement for an initial term of two years (the "Initial Term"), beginning on
the date of the Agreement (the "Effective Date"). This Agreement shall renew
for successive one year periods after the completion of the Initial Term unless
either party gives written notice of termination at least 30 days prior to the
expiration of the Initial Term or any renewal term. Notwithstanding the
foregoing, either party may terminate this Agreement at any time, with or
without cause, by giving 30 days written notice of termination to the other
party, and upon termination, neither party will have any continuing obligation
to the other party, except as follows: (a) if the Company terminates this
Agreement without Cause (as defined below) prior to the end of the first year of
the Initial Term, then the Company will be obligated to continue paying
Employee's base salary and employee benefits pursuant to Section 4 hereof for a
period of six (6) months after such termination; and (b) the provisions of
Sections 5, 6 and 7 hereof will survive any termination of this Agreement for
any reason in accordance with their terms. As used in this Agreement,
termination for "Cause" shall mean any termination of Employee for (a) refusal
to perform duties assigned, or disobedience of orders and directives issued to
Employee; (b) violation of any rule or regulation of which Employee has notice
and that may be established from time to time for the conduct of the Company's
business, (c) unlawful misconduct by Employee, including, without limitation,
the commission of an act of fraud or embezzlement against the Company or
commission of a crime
1
<PAGE>
involving moral turpitude, (d) consistent willful misconduct or negligence in
performing Employee's duties hereunder, (e) breach of fiduciary duty in
connection with Employee's employment by the Company or (f) a breach of any of
the terms of this Agreement.
3. Compensation. Beginning on the Effective Date and thereafter
during the term of Employee's employment, the Company will pay Employee a base
salary at the rate of $150,000 per year, payable biweekly or semi-monthly in
accordance with the payroll practices of the Company in effect from time to
time; provided, that as part of the consideration for the Assignment and the
agreements made herein, the Company shall pay to Employee effective on the date
hereof an amount equal to the Employee's bi-weekly or semi-monthly salary. Such
base salary shall be subject to review and potential adjustment annually, in
accordance with the compensation policies of the Company in effect from time to
time. Employee shall also, during the term of his employment hereunder, be
eligible for an annual discretionary incentive bonus of up to 15% of Employee's
base salary, such bonus to be awarded in the discretion of the Company in
accordance with the bonus policies established by the Company from time to time.
All of Employee's compensation under this Agreement will be subject to deduction
and withholding authorized or required by applicable law.
4. Employee Benefits. Beginning on the Effective Date and thereafter
during the term of this Agreement, the Company will provide to Employee such
fringe benefits, perquisites, vacation and other benefits that the Company
provides to its similarly situated employees. The Company will reimburse
Employee for reasonable out-of-pocket business expenses incurred and documented
in accordance with the policies of the Company in effect from time to time.
5. Assignment of Intellectual Property Rights.
(a) In consideration of the Company's agreement to employ
Employee and the receipt by the Employee of Confidential Information,
Employee hereby assigns to the Company all of his rights in all
Intellectual Property which Employee makes or conceives, whether as a sole
inventor or as a joint inventor, whether made within or outside working
hours or upon the premises of the Company or elsewhere, during Employee's
employment with the Company, its subsidiaries or affiliates. This
assignment shall not apply to Intellectual Property that Employee has an
obligation to assign to a former employer. "Intellectual Property" means
any information of a technical and/or business nature such as ideas,
discoveries, inventions, trade secrets, know-how, and writings and other
works of authorship which relate in any manner to the actual or anticipated
business or research and development of the Company, its subsidiaries or
affiliates.
(b) During and subsequent to Employee's employment, upon the
request and at the expense of the Company or its nominee and for no
additional personal remuneration, Employee agrees to execute any instrument
which the Company considers necessary to secure for or maintain for the
benefit of the Company adequate patent and other property rights in the
United States and all foreign countries with respect to any
2
<PAGE>
Intellectual Property. Employee also agrees to assist the Company as
required to draft said instruments and to obtain and enforce said rights.
(c) Employee agrees to promptly disclose to the Company any
Intellectual Property when conceived or made by Employee, in whole or in
part, and to make and maintain adequate and current records thereof. Upon
the termination of Employee's employment for any reason, Employee agrees to
promptly turn over to the Company all models, prototypes, drawings,
records, documents, and the like in Employee's possession or under
Employee's control, whether prepared by Employee or others, relating to
Intellectual Property, and any other work done for the Company related
thereto. Employee acknowledges that all such items are the sole property
of the Company.
(d) Employee agrees that any Intellectual Property disclosed by
Employee within one (1) year following termination of Employee's employment
for any reason shall be the sole property of the Company unless and until
finally determined by a court of competent jurisdiction to have been made
or conceived after the termination of Employee's employment.
6. Confidential Information.
(a) In the course of performing services for the Company under
this Agreement, Employee may receive or have access to commercially
valuable, confidential or proprietary information. "Confidential
Information" means all confidential information, whether oral or written,
now or hereafter developed, acquired or used by the Company and relating to
the business of the Company that is not generally known to others in the
Company's area of business, including without limitation (to the extent
confidential) (i) any trade secrets, work product, processes, analyses,
know-how, software and hardware development information or other
Intellectual Property of the Company; (ii) the Company's advertising,
product development, strategic and business plans and information; (iii)
customer lists and prices at which the Company has sold or offered to sell
its products or services; and (iv) the Company's financial statements and
other financial information.
(b) Employee acknowledges and agrees that the Confidential
Information (to the extent it can be owned) is and will be the sole and
exclusive property of the Company. Employee will not use any Confidential
Information for his own benefit or disclose any Confidential Information to
any third party (except in the course of performing his authorized duties
for the Company under this Agreement), either during or subsequent to his
employment with the Company. Upon termination of his employment with the
Company, Employee will promptly deliver to the Company all documents,
computer disks and other computer storage devices and other papers and
materials (including all copies thereof in whatever form) containing or
incorporating any Confidential Information or otherwise relating in any way
to the Company's business that are in his possession or under his control.
Employee also agrees not to disclose to the Company any Confidential
Information belonging to others.
3
<PAGE>
7. Restrictive Covenant. For purposes hereof, the "Noncompetition
Period" will begin on the Effective Date and end eighteen (18) months after the
date Employee's employment with the Company is terminated for any reason. In
consideration of the Company's agreement to employ Employee and the receipt by
the Employee of Confidential Information, Employee hereby agrees that, during
the Noncompetition Period, he will not (except in the course of performing his
authorized duties for the Company under this Agreement), directly or indirectly,
on his own behalf or as an officer, director, employee, consultant or other
agent of, or as a stockholder, partner or other investor in, any person or
entity (other than the Company or its affiliates):
(a) engage in any business conducted by the Company, its
subsidiaries or affiliates and any business competitive with the business
conducted by the Company, its subsidiaries or affiliates (collectively a
"Competing Business") within any geographic area in which the Company, its
subsidiaries or affiliates conducts any business, or in which businesses
competitive with the businesses of the Company, its subsidiaries or
affiliates are conducted (the "Territory"), or give advice or lend credit,
money or Employee's reputation to any natural person or entity engaged in
or establishing a Competing Business in the Territory or;
(b) directly or indirectly influence or attempt to influence any
customer, potential customer, supplier or accounts of the Company, its
subsidiaries or affiliates located within the Territory to purchase, sell
or lease goods or services related to a Competing Business other than from
or to the Company; or
(c) solicit, encourage, or take any other action which is
intended, directly or indirectly, to induce any other employee of the
Company to terminate his or her employment with the Company, or interfere
in any manner with the contractual or employment relationship between the
Company and any other employees of the Company, or hire or attempt to hire
any former employee of the Company whose termination from employment has
been effective for ninety (90) days or less;
provided, that the foregoing will not apply to any investment in publicly traded
securities constituting less than 5% of the outstanding securities in such
class. For purposes of this Agreement, the term "affiliate" means with respect
to any person or entity any other person or entity controlling, controlled by or
under common control with such person or entity.
8. Enforcement.
(a) Employee represents to the Company that he is willing and
able to engage in businesses other than a Competing Business within the
Territory and that enforcement of the restrictions set forth in Section 7
would not be unduly burdensome to Employee. The Company and Employee
acknowledge and agree that the restrictions set forth in Section 7 are
reasonable as to time, geographic area and scope of activity and do not
impose a greater restraint than is necessary to protect the goodwill and
other business interests of the Company, and Employee agrees that that the
Company is justified in believing the foregoing.
4
<PAGE>
(b) If the provisions of Section 7 are found by a court of
competent jurisdiction to contain unreasonable or unnecessary limitations
as to time, geographical area or scope of activity, then such court is
hereby directed to reform such provisions to the minimum extent necessary
to cause the limitations contained therein as to time, geographical area
and scope of activity to be reasonable and enforceable.
(c) Employee acknowledges and agrees that the Company would be
irreparably harmed by any violation of Employee's obligations under
Sections 5, 6 and 7 hereof and that, in addition to all other rights or
remedies available at law or in equity, the Company will be entitled to
injunctive and other equitable relief to prevent or enjoin any such
violation. If Employee violates Section 7, the period of time during which
the provisions thereof are applicable will automatically be extended for a
period of time equal to the time that Employee began such violation until
such violation permanently ceases.
9. No Obligation to Third Party. Employee represents and warrants
that Employee is not under any obligation to any person or other third party and
does not have any other interest which is inconsistent or in conflict with this
Agreement, or which would prevent, limit, or impair Employee's performance of
any of the covenants hereunder or Employee's duties as an employee of the
Company.
10. Entire Agreement. This Agreement and the Assignment embody the
complete agreement of the parties with respect to the subject matter hereof and
supersedes any prior written, or prior or contemporaneous oral, understandings
or agreements between the parties that related in any way to the subject matter
hereof. This Agreement may be amended only in writing executed by the Company
and Employee.
11. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the respective heirs, executors, administrators, legal
representatives and successors of the Company and Employee.
12. Notice. Any notice required or permitted under this Agreement
must be in writing and will be deemed to have been given when delivered
personally, by telecopy or by overnight courier service or three days after
being sent by mail, postage prepaid, to (a) if to the Company, to the Company's
principal place of business, or (b) if to Employee, to his residence or to his
latest address then contained in the Company's records (or to such changed
address as such person may subsequently give notice of in accordance herewith).
13. GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH SUBSTANTIVE LAWS OF TEXAS, WITHOUT GIVING
EFFECT TO ANY CONFLICTS OF LAW, RULE OR PRINCIPLE THAT MIGHT REQUIRE THE
APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.
5
<PAGE>
IN WITNESS WHEREOF, the Company and Employee have executed and
delivered this Agreement as of the date first above written.
SHBANG! INC.
By:_________________________________________
Name: Kent Savage
Title: President and Chief Executive Officer
____________________________________________
Name: KEN KALINOSKI
6
<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
January 13, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NETPLIANCE
INC.'S AUDITED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED DECEMBER 31,
1999 AND ITS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-12-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,563
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,062
<PP&E> 3,799
<DEPRECIATION> (696)
<TOTAL-ASSETS> 20,543
<CURRENT-LIABILITIES> 4,892
<BONDS> 0
0
29,673
<COMMON> 63
<OTHER-SE> (14,721)
<TOTAL-LIABILITY-AND-EQUITY> 20,543
<SALES> 26
<TOTAL-REVENUES> 26
<CGS> 1,137
<TOTAL-COSTS> 22,596
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (140)
<INCOME-PRETAX> (23,542)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,542)
<EPS-BASIC> (4.53)
<EPS-DILUTED> (4.53)
</TABLE>
