<PAGE>
As filed with the Securities and Exchange Commission on February 25, 2000
Registration No. 333-93545
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
NETPLIANCE, INC.
(Exact name of registrant as specified in its charter)
Delaware 7370 77-0463167
_______________________ ___________________ _______________________
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification
organization) Code Number)
7600A North Capital of Texas Highway
Austin, Texas 78731
(512) 493-8300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
James E. Cahill
Vice President and General Counsel
Netpliance, Inc.
7600A North Capital of Texas Highway
Austin, Texas 78731
(512) 493-8300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Ross Clayton Mulford Paul R. Tobias
J. William Wilson Wilson Sonsini Goodrich &
Hughes & Luce, L.L.P. Rosati
111 Congress Avenue, Suite 900 8911 Capital of Texas Highway
Austin, Texas 78701 Austin, Texas 78759
(512) 482-6800 (512) 338-5400
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 145 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by US federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- February 25, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prospectus
, 2000
[NETPLIANCE LOGO APPEARS HERE]
7,000,000 Shares of Common Stock
- -----------------------------------------------------------
Netpliance, Inc.: The Offering:
. We are offering
. We offer 7,000,000 shares of
Internet-based our common stock.
content,
applications and . The underwriters
services through have an option to
a service purchase an
offering designed additional
to work with shares from us to
devices cover over-
specifically allotments.
designed for
Internet access, . This is our initial
commonly known as public offering, and
Internet no public market
appliances. currently exists for
our shares. We
anticipate that the
Proposed Symbol & initial public
Market: offering price for
our common stock
. We have applied will be between
for listing on $13.00 and $15.00
the Nasdaq per share.
National Market
under the symbol . Closing: ,
NPLI. 2000
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
-----------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Netpliance:
-----------------------------------------------------------------
</TABLE>
This investment involves risk. See "Risk Factors"
beginning on Page 4.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Chase H&Q
Robertson Stephens
DLJdirect Inc.
<PAGE>
[ARTWORK]
A diagram illustrates the elements of the i-opener network, starting at the
top with a picture of the i-opener Internet appliance on the left and pictures
of a cellular phone, a screen phone and set-top box with the words "Other
Access Devices" to the right. Two curved lines connect the i-opener appliance
and the access devices 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 guide to the Internet, or Web
Guide, the e-mail "Mailbox" page, the online shopping mall, or Web Mall, and a
box containing the words "update, backup, metrics" to describe the network
functions.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 5
Forward-Looking Statements................................................ 14
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business................................................................... 23
Management................................................................. 31
Related-Party Transactions................................................. 39
Principal Stockholders..................................................... 41
Description of Capital Stock............................................... 43
Shares Eligible for Future Sale............................................ 46
Underwriting............................................................... 48
Legal Matters.............................................................. 50
Experts.................................................................... 50
Where You Can Find Additional Information.................................. 50
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 offer Internet-based content, applications and services through devices
specifically designed for Internet access, commonly known as Internet
appliances. In November 1999 we introduced our current i-opener service, which
combines our i-opener Internet appliance, Internet access and our own consumer
portal. Our i-opener service includes all of the elements required for a user
to access the Internet. We believe that our i-opener offering simplifies
Internet access and appeals to both novice and veteran Internet users.
Our i-opener service consists of the following three integrated elements:
. i-opener Internet Appliance -- arrives ready to use and personalized to
the new user based on information provided while ordering. Our i-opener
Internet appliance is tailored to provide our i-opener service and comes
with a 10-inch flat-panel color screen, a standard-sized keyboard that
includes a pointer and an optional mouse. A new user is ready to access
our i-opener service and the Internet after plugging the i-opener
Internet appliance into an electric outlet, connecting it to a phone line
and turning it on. Because our i-opener Internet appliance requires no
boot-up, unlike a personal computer, our consumer portal appears
immediately after the i-opener Internet appliance is turned on.
. i-opener Internet Access -- comes prepackaged with our i-opener Internet
appliance and is delivered over a nationwide dial-up network. Our i-
opener Internet appliance can only access the Internet through our
network. Our system software enables us to deliver content over our
network to be stored locally on our i-opener Internet appliance, allowing
the user to access content even when the appliance is not connected to
the Internet. Our i-opener Internet appliance is programmed to
automatically dial into our network remotely several times a day to
retrieve new or updated content, email, system software upgrades and
software applications.
. i-opener Consumer Portal -- provides an entry point to the Internet and
provides links to consumer content and e-commerce sites tailored to the
user's age and geographic location. In the future we intend to further
tailor content to the personal preferences of each user. Our portal
provides access to stored content on our content channels, including
news, weather, sports, entertainment and finance, and e-mail. In
addition, our portal features an online shopping mall and a guide to the
Internet with direct links to pre-selected, consumer-oriented content
sites as well as an Internet browser.
We currently are deriving substantially all of our revenues from monthly
subscriptions from our users. In the future we expect to derive additional
revenue from selling advertisements featured on our portal and from revenue
sharing on e-commerce transactions initiated from our portal. We may also
receive revenue in the future from licensing our technology to manufacturers of
other Internet appliances and from selling additional applications to our users
for additional fees. We charge, and expect to continue to charge, significantly
less than our cost for our Internet appliance in order to acquire users. Our i-
opener Internet appliance is manufactured by a third party and is shipped
directly from the manufacturer to the new user.
Our objective is to establish ourselves as the leader in the new market of
delivering user-friendly Internet access, content and applications through
Internet appliances. We intend to consistently upgrade and customize our portal
and add new features to ensure user satisfaction. Our infrastructure, operating
system and network are designed to provide access to our i-opener service over
broadband digital subscriber lines and cable, and through wireless telephones
and other handheld communication devices. Our ability to remotely upgrade and
deliver software to Internet appliances through our network will allow us to
provide users with new and emerging Internet-based applications and services as
they become available.
1
<PAGE>
We were incorporated in Texas in January 1999, and we began offering our i-
opener service in November 1999. We have virtually no operating history and
have not proven our ability to generate revenues. As of December 31, 1999, we
had an accumulated deficit of $43.5 million and only $25,716 in revenues from
inception through December 31, 1999. We will be reincorporated in Delaware
prior to the closing of this offering. Our principal executive offices are
located at 7600A North Capital of Texas Highway, Austin, Texas 78731 and our
telephone number is (512) 493-8300. Our Web site address is www.netpliance.com.
Information contained on our Web site should not be considered a part of this
prospectus.
Strategic Relationships
In December 1999 we entered into an agreement with GO.com, an affiliate of
The Walt Disney Company, under which GO.com will act as our exclusive provider
of specified content to be locally stored in our children, family, sports, news
and entertainment content channels. Also in December 1999, we entered into a
non-binding letter of intent with U S WEST regarding the joint marketing and
distribution of our i-opener service to U S WEST's subscribers through dial-up
and digital subscriber lines. Affiliates of GO.com and U S WEST invested in our
Series D preferred stock.
Under agreements we entered into in February 2000 with two Canadian cable
companies, Rogers Communications and Shaw Communications, we agreed to
negotiate final agreements relating to the joint marketing and distribution of
our i-opener service in Canada through broadband cable with Rogers and Shaw.
Also in February 2000, we entered into a non-binding letter of intent with
Thomson Multimedia and ATLINKS, an affiliate of Thomson, regarding the
manufacture and sale by ATLINKS of Internet access devices, including screen
phones, enabled with our i-opener service. Rogers and affiliates of Shaw and
Thomson invested in our Series E preferred stock.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered.............................. 7,000,000 shares
Common stock to be outstanding after the offering. 59,345,935 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. However, we do
not have specific uses
planned for the net
proceeds of this offering.
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:
.18,946,446 shares of common stock outstanding as of February 24, 2000;
. 32,932,455 shares of common stock issuable upon conversion of our
preferred stock outstanding as of February 24, 2000; and
. 467,034 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:
. 8,246,070 shares of common stock issuable upon exercise of
outstanding options under our stock option plan as of February 24,
2000 at a weighted average exercise price of $3.75 per share;
. 2,253,930 shares reserved for future issuance under our stock option
plan; and
. 600,000 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 three for one stock split;
. gives effect to the conversion of all preferred stock into common
stock and the exercise of warrants to purchase 467,034 shares of
common stock;
. assumes the reservation of a total of 10,500,000 shares of common
stock issuable under our stock option plan upon the closing of this
offering;
. 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.
3
<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........................................ 27,477
-----------
Loss from operations...................................... (27,451)
Other income, net....................................... 165
-----------
Net loss.................................................. $ (27,286)
===========
Net loss applicable to common stock....................... (43,528)
===========
Weighted average common shares outstanding................ 15,588,420
===========
Loss per common share--basic and diluted.................. $ (2.79)
===========
</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 $70,599 $160,739
Working capital..................................... 11,170 72,206 162,346
Total assets........................................ 20,625 81,640 171,318
Non-current portion of capital lease obligations.... 636 636 636
Total stockholders' equity.......................... 13,097 76,133 166,273
</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 and 1,127,675 shares of Series E preferred stock, the
issuance and exercise of warrants to purchase 467,034 shares of
common stock and the exercise of options to purchase 39,375 shares of
common stock subsequent to December 31, 1999; and
. on a pro forma as adjusted basis to reflect the pro forma
transactions described above and the sale of 7,000,000 shares of
common stock offered by this prospectus at an assumed initial
offering price of $14 per share after deducting estimated
underwriting discounts and commissions and estimated offering
expenses.
4
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider carefully the following risks and the other information in this
prospectus before investing in our common stock. Each of the following risks
could seriously harm our business and results of operations. The trading price
of our common stock could decline due to any of these risks, and you may lose
all or part of your investment.
Risks Related to Our Business
We cannot predict our future results because we have virtually no operating
history.
We were incorporated in January 1999, and we began offering our i-opener
service in November 1999. Given our limited operating history, it will be
difficult for you to evaluate our performance. You should consider the
uncertainties that we may encounter as an early stage company in a new and
rapidly evolving market. These uncertainties include:
. market acceptance of Internet appliances;
. consumer demand for, and acceptance of, our i-opener service;
. our ability to create user-friendly applications and a portal that
appeals to consumers;
. our ability to contract with content providers who will furnish useful
and entertaining information to our users;
. our ability to support a large number of users;
. our ability to anticipate and adapt to a developing market and to
rapidly changing technologies;
. our unproven and evolving business model; and
. our need to expand significantly our internal resources to support
growth of our product and service offerings.
If we are not able to address successfully some or all of these
uncertainties, we may not be able to expand our business, compete effectively
or achieve profitability.
Our ability to generate revenues is unproven and we may never achieve
profitability.
We expect to generate revenues from user fees for our i-opener service and
from other sources such as application services, e-commerce, sponsorships and
advertising. Many of our potential customers have never purchased Internet
service for personal use, used the Internet and e-mail or engaged in e-commerce
transactions. We must convince these potential users to sign up for our service
and continue to pay a user fee for our i-opener service. Other potential users
already pay a monthly fee for Internet access and/or e-mail service, and we
must convince these consumers to pay our user fee in addition to their existing
fee or to switch from their existing service to our service. In addition,
certain online service providers in the Internet industry offer Internet access
at little or no cost to the user, which may cause us to lose existing and
potential users. Our inability to convince potential users to pay fees for a
significant period of time would prevent us from achieving profitability.
We currently price our i-opener Internet appliance below our cost and expect
to continue to subsidize the purchase price of our appliance for the
foreseeable future. At current pricing levels, a new customer must pay monthly
fees for our service for a significant period of time before we recover the
purchase price subsidy on that customer's appliance. Any reduction in user fee
levels due to competitive or other factors could increase significantly the
period of time necessary to recoup our purchase price subsidy. Due to our
pricing structure and the short period of time we have been offering our i-
opener service, we have experienced significant operating losses to date. If we
are unable to achieve sufficient revenues from user fees and other sources to
cover the subsidies of appliance purchases, we may never become profitable and
our business model could fail.
5
<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 $43.5 million. We
expect to continue to spend significant and increasing amounts to subsidize the
purchase price of our i-opener Internet appliance. We also expect that sales
and marketing, research and development, and general and administrative
expenses will increase significantly. From inception through December 31, 1999,
we generated only $25,716 in revenues. We will need to generate and sustain
dramatically greater revenues from sales of our services if we are to achieve
profitability. If we are unable to achieve dramatically greater revenues, our
losses will likely continue indefinitely and we may never generate profits. If
this occurs, the market price of our common stock could suffer.
Our market share and revenues will suffer if we are not able to compete
successfully for users.
The markets for Internet appliances, consumer portals and Internet access
service are intensely competitive, evolving and subject to rapid technological
change. These markets are characterized by an increasing number of entrants. We
compete for users, and consequently for potential e-commerce and advertising
revenue, directly or indirectly, with the following categories of companies:
. online service providers, such as AOL, EarthLink and Microsoft;
. software platform providers such as Aether Systems and Liberate
Technologies;
. Internet portals, such as Excite@Home, Lycos and Yahoo!;
. manufacturers of other stand alone Internet appliances, such as InfoGear
and WebTV;
. manufacturers of portable Internet appliances, such as Hewlett Packard
and Palm, and cellular telephone and pager manufacturers; and
. manufacturers of personal computers, such as Apple, Compaq, Dell,
Gateway, Hewlett Packard and IBM.
Virtually all of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a substantially larger
installed base of customers than we do. In addition, many of our competitors
have nationally known brands and have extensive knowledge of our industry.
Moreover, our current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address consumer needs or to combine
hardware product and service offerings. We expect the intensity of competition
in this market to increase in the future. Increased competition is likely to
result in price reductions, reduced or negative margins and difficulty in
gaining market share. Any of these effects could seriously harm our business.
We rely on a single third-party to manufacture our Internet appliance. If the
manufacturer fails to deliver our products in a reliable, timely and cost-
efficient manner, our business will suffer.
We depend on our relationship with Quanta Computer, Incorporated, a
manufacturer based in Taiwan, for the production and delivery of our i-opener
Internet appliance. Since we do not have direct control over Quanta's
workmanship and the quality of its service, we cannot assure you that we will
be able to provide consistently reliable products for our users. If Quanta does
not produce our products on a timely basis or delivers products of unacceptable
quality, that do not meet specifications or are otherwise flawed, we may have
to delay product delivery, recall or replace unacceptable products. As a
result, we could lose existing and potential users.
If Quanta is unable to manufacture our i-opener Internet appliance due to
natural disasters, political turmoil or other reasons, or if Quanta refuses to
provide its manufacturing services on a timely basis and on
6
<PAGE>
commercially acceptable price terms and alternative providers of these services
are not available on acceptable terms, our operating expenses could increase
significantly, reducing the likelihood of our becoming profitable.
If our brand does not achieve the broad recognition necessary to expand and
maintain our user base, our revenues may not grow and our financial performance
may suffer.
We believe that broad recognition and a favorable consumer perception of our
products and services is essential to our future success. Our success in
promoting and maintaining our brand, or any other brand that we may use in the
future, will depend largely on:
. the success of our brand-enhancement strategy, including mass marketing
and multi-media advertising, promotional programs and public relations
activities;
. the quality and ease-of-use of our services and applications; and
. our success in providing high-quality content accessible from our
Internet portal.
If we are unsuccessful in establishing or maintaining a favorable image of
our products and services, we may not be able to expand our user base. In
addition, in order to attract and retain users and to promote and maintain our
brand or future brands, we expect to increase substantially our marketing
expenditures. If we incur expenses in promoting and maintaining our brands
without a corresponding increase in revenue and income, our financial results
could be seriously harmed.
If we are unsuccessful in obtaining compelling content, or in developing or
maintaining relationships with content providers, we may be unable to attract
and retain users.
We rely on third parties to provide our cached content, including news,
weather and relevant local information, on our i-opener portal. In addition,
some content provided via links to third-party sites is provided without the
contractual agreement of the third party. Our inability to establish or
maintain any or all of the relationships with our content providers could put
our delivery of quality services in jeopardy. The inability to obtain any of
this content could result in delays in the development or delivery of our
services and the loss of existing or potential users. Alternatively, contracts
or exclusive arrangements with content providers could result in diminished
demand for our service, if the content is not appealing to users, inferior in
quality or less desirable than content available from other portals or content
providers.
We will not be able to support increased numbers of users if our network
infrastructure is unable to expand to accommodate increased usage.
If our network systems cannot be expanded to manage increased demand, or if
our systems fail to perform, we could experience:
. unanticipated disruptions and reduced quality of service;
. decreased user service and satisfaction; or
. delays in the introduction of new applications and services.
Any of these results could impair our reputation, damage our brand and result
in decreased revenues.
If the number of users of our service increases substantially, we will need
to expand significantly and upgrade our technology, transaction processing
systems and network infrastructure. We do not know whether we will be able to
project accurately the rate or timing of any such increases in usage, or expand
and upgrade our systems and infrastructure to accommodate such increases in a
timely manner. In the event we do not have the required systems and
infrastructure to accommodate increased usage of our services, we will have to
contract for additional capacity. We cannot assure you that we will be able to
contract for additional capacity on terms acceptable to us, if at all.
7
<PAGE>
Our systems may fail and consequently our business may suffer.
Our ability to facilitate transactions successfully and provide high-quality
customer service also depends on the efficient and uninterrupted operation of
our computer and communications hardware systems. Our systems and operations
also are vulnerable to damage or interruption from human error, natural
disasters, power loss, telecommunication failures, break-ins, sabotage,
computer viruses, intentional acts of vandalism and similar events. While we
currently maintain redundant servers to provide limited service during system
disruptions, we do not have fully redundant systems, a formal disaster recovery
plan or alternative providers of hosting services. In addition, we do not carry
any business interruption insurance to compensate us for any losses that may
occur. Any system failure that causes an interruption in service or decreases
the responsiveness of our services could impair our reputation, damage our
brand name and consequently reduce our revenues.
We are dependent upon our telecommunications carrier to provide Internet access
to our users; if they fail to provide quality service, we may be unable to
retain users.
Since we do not have direct control over the reliability of our carrier's
network or the quality of its service, we cannot assure you that we will be
able to provide consistently reliable Internet access for our users. If the
quality of service provided by our telecommunications carrier does not meet our
clients' expectations, we may lose users because of dissatisfaction with our
service.
We will not be able to expand our business if we fail to attract and retain key
personnel.
Our future success depends on our continuing ability to attract, hire, train
and retain a substantial number of highly skilled personnel and on the
continued service and performance of our senior management and other key
personnel, especially our Chief Executive Officer and Chairman of the Board.
The loss of the services of our executive officers or other key employees could
adversely affect our business. In addition, we will need to add a significant
number of new technical support and operations personnel to develop and
maintain the operations of our services. Our facilities are located in Austin,
Texas, which has a high demand for technical and other personnel and a
relatively low unemployment rate. Competition for qualified personnel in this
area is intense, and we may fail to attract or retain the employees necessary
to execute our business model successfully.
Rapid technological change could render our products and services obsolete.
The Internet and the e-commerce industries are characterized by rapid
technological innovation, sudden changes in user and customer requirements and
preferences, frequent new product and service introductions and the emergence
of new industry standards and practices. Each of these characteristics could
render our services, products, intellectual property and systems obsolete. The
rapid evolution of our market will require that we improve continually the
performance, features and reliability of our products and services,
particularly in response to competitive offerings. Our success also will
depend, in part, on our ability:
. to develop or license new products, services and technology that address
the varied needs of our customers and prospective customers; and
. to respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
If we are unable, for technical, financial, legal or other reasons, to adapt
in a timely manner to changing market conditions or user preferences, we could
lose users, which would cause a decrease in our revenue.
8
<PAGE>
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.
We may not be able to compete effectively if we are not able to protect our
intellectual property.
We rely on a combination of trademark, trade secret and copyright law and
contractual restrictions to protect our intellectual property. We have applied
to register several trademarks, including Netpliance and i-opener, in the
United States. We have not yet attempted to register other marks that may
become important to us in the future, and none of our marks has been registered
in any other country. We have several United States patent applications
currently pending. If we are not successful in obtaining the patent protection
we seek, our competitors may be able to replicate our technology and compete
more effectively against us. The legal protections described above would afford
only limited protection. Unauthorized parties may attempt to copy aspects of
our products, services, or otherwise attempt to obtain and use our intellectual
property. Enforcement of trademark rights against unauthorized use,
particularly over the Internet and in other countries, may be impractical or
impossible and could generate confusion and diminish the value of those rights.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets and to determine the validity and scope of the
proprietary rights of others. Any litigation could result in substantial costs
and diversion of our resources and could seriously harm our business and
operating results. In addition, our inability to protect our intellectual
property may harm our business and financial prospects. Also, if we cannot
protect our domain names and prevent others from using similar domain names or
trademarks, we may not be able to establish a strong brand and our business and
financial results could suffer.
Our products and services employ technology that may infringe on the
proprietary rights of others, and we may be liable to others for significant
damages.
We believe there is an increasing amount of litigation in the Internet
industry regarding intellectual property rights. It is possible that third
parties may in the future claim that we or our products or services infringe
upon their intellectual property rights. We expect that developers and
providers of Internet appliances and similar devices, and providers of Internet
access and content services, will be subject to an increasing number of
infringement claims as the number of products, services and competitors in our
market grows. Any claim, with or without merit, could consume management time,
result in costly litigation, cause delays in implementation of our products or
services or require us to enter into royalty or licensing agreements. Royalty
or licensing agreements, if required and available, may be on terms
unacceptable to us or detrimental to our business. Moreover, a successful claim
of product infringement against us or our failure or inability to license the
infringed or similar technology on commercially reasonable terms could
seriously harm our business.
We may incur potential product liability for our i-opener Internet appliance
and for products sold over the Internet.
To date, we have had limited experience in selling our i-opener Internet
appliance. In addition, we have had limited experience in selling products over
the Internet and developing relationships with manufacturers or
9
<PAGE>
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.
If we expand our business internationally, our business would become
increasingly susceptible to numerous international business risks.
Although we have not had international sales and subscription fee revenue to
date, we intend to initiate international sales efforts. International sales
and subscription fees are subject to inherent risks, including:
. unexpected changes in international regulatory requirements and tariffs;
. difficulties in staffing and managing foreign operations;
. longer payment cycles;
. greater difficulty in accounts receivable collection;
. potentially adverse tax consequences;
. price controls or other restrictions on foreign currency; and
. difficulties in obtaining export and import licenses.
To the extent our dependence on revenues from international sales and
subscription fees increases, a material adverse effect on our international
business could materially and adversely affect our overall business, operating
results and financial condition.
Risks Related to Our Industry
The market for Internet appliances is new and may not develop as we anticipate.
Because the Internet appliance market is new and evolving, the potential
size of this market opportunity and the timing of its development are
uncertain. Broad acceptance of Internet appliances will depend on many factors.
These factors include:
. the willingness of large numbers of consumers to use devices other than
personal computers to access the Internet; and
. the development of content and applications that are accessible from
Internet appliances.
If the market for Internet appliances does not develop or develops more
slowly than we anticipate, our revenues will not grow as quickly as we
anticipate, if at all.
If Internet use does not continue to increase, we may not be able to expand our
business and increase our revenues.
Use of the Internet has grown dramatically, but we cannot assure you that
Internet use will continue to grow at the same rate, or at all. Substantially
all of our revenue is dependent on the continued growth in use of the Internet.
A decrease in the demand for Internet services or a reduction in the
anticipated growth for such services may prevent us from expanding our business
and increasing our revenue.
We could face liability for content retrieved through our Internet portal.
As a distributor of Internet content, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based upon the nature and content of the materials that we
10
<PAGE>
distribute. Although we carry general liability insurance, our insurance may
not cover claims of this type or may not be adequate to indemnify us for all
liability that we may suffer. Any of these claims, particularly those resulting
in liability that is not covered by insurance or is in excess of insurance
coverage, could occupy significant amounts of our management's time and
attention, harm our reputation and negatively affect our business.
We could be exposed to liability or increased costs if new case law is decided,
or new government regulation is enacted, regarding the Internet.
The law relating to our business and operations is evolving and no clear
legal precedents have been established. The adoption of any new Internet laws
and regulations or the application of existing laws and regulations to the
Internet and e-commerce may decrease the growth in the use of the Internet. For
example, tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in e-commerce, and new state tax
regulations may subject us to additional state sales or other taxes. These
results could decrease the demand for our products and services or increase the
cost of doing business, either of which would reduce our revenue or
profitability.
In addition, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
If we were alleged to have violated federal, state or foreign civil or criminal
law, even if we could successfully defend such claims, it could occupy
significant amounts of management's time, harm our business reputation and
negatively affect our operating results and financial condition.
Concerns regarding the security of transmission of confidential information
over the Internet may reduce consumer confidence in our product and service
offerings and negatively impact our business.
The secure transmission of confidential information over the Internet is
essential to maintaining user confidence in our Internet service. Substantial
or ongoing security breaches on our system or other Internet-based systems
could significantly damage user confidence and harm our business. A party that
is able to circumvent our security systems could steal proprietary information
or cause interruptions in our operations. Security breaches also could damage
our reputation and expose us to a risk of loss or litigation and possible
liability. Our insurance policies carry low coverage limits, which may not be
adequate to reimburse us for losses caused by security breaches. While we
attempt to protect against and remedy security breaches, we cannot guarantee
that our security measures will prevent security breaches. We also face risks
associated with security breaches affecting third parties conducting business
over the Internet. Any publicized security problems relating to third parties
could heighten concern regarding security and privacy on the Internet, inhibit
the growth of the Internet and, therefore, our Internet service as a means of
conducting commercial transactions.
Risks Related to this Offering
You may not be able to sell your stock for the same price or a price higher
than you paid when you want to sell it if a public market does not exist for
our stock.
An active public market for our common stock may not develop or be sustained
after this offering. The market price for our common stock will vary from the
initial offering price. The market price of our common stock may fluctuate
significantly in response to a number of factors, some of which are beyond our
control, including:
. variations in quarterly operating results;
. changes in estimates of our financial performance by securities
analysts;
. changes in market valuations of comparable Internet-related companies;
11
<PAGE>
. 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 59,345,935 shares of common stock outstanding immediately
after this offering. The 7,000,000 shares sold in this offering will
immediately be transferable without restriction in the public market, unless
these shares are held by affiliates. 411,348 shares will become eligible for
sale 90 days after the date of this prospectus. The holders of an additional
49,982,955 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, 32,096,736 additional shares will be eligible for immediate
sale in the public market subject to restrictions pursuant to Rule 144. See
"Shares Eligible for Future Sale."
Our stockholders could be adversely affected if our management and larger
stockholders use their influence in a manner adverse to our stockholders'
interests.
On completion of this offering, our executive officers, directors and 5%
stockholders will beneficially own, in the aggregate, approximately 55.7% of
our outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent someone from acquiring or merging
with us. These stockholders may use their influence to approve or take actions
which are adverse to your interests. See "Principal Stockholders."
You will experience immediate and substantial dilution.
The initial public offering price is expected to be substantially higher
than the book value per share of the outstanding common stock immediately after
the offering. Accordingly, if you purchase common stock in the offering, you
will incur immediate dilution in the book value per share of the common stock
from the price you pay for the common stock. This dilution will be
approximately $11.17 per share, at the initial public offering price of $14.00.
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."
12
<PAGE>
Some shares in this offering may have been offered or sold in violation of the
Securities Act.
Prior to the effectiveness of the registration statement covering the shares
of our common stock being sold in this offering, Donaldson, Lufkin & Jenrette
Securities Corporation, an underwriter of this offering, provided written
materials to approximately 200 individuals that we had designated as potential
purchasers of up to 350,000 shares of common stock in this offering through a
directed share program. These materials may constitute a prospectus that does
not meet the requirements of the Securities Act of 1933. No individual who
received these written materials should rely upon them in any manner in making
a decision whether to purchase shares of common stock in this offering.
If the distribution of these materials by Donaldson, Lufkin & Jenrette
Securities Corporation did constitute a violation of the Securities Act of
1933, the recipients of these materials who purchased common stock in this
offering would have the right, for a period of one year from the date of their
purchase of common stock, to obtain recovery of the consideration paid in
connection with their purchase of common stock, or, if they had already sold
the stock, sue us for damages resulting from their purchase of common stock.
These damages could total up to approximately $4.9 million plus interest, based
on the initial public offering price of $14.00 per share, if these investors
seek recovery or damages after an entire loss of their investment. If this
occurs, our business, results of operations and financial condition would be
harmed.
If our management does not effectively use the proceeds from this offering, we
may not be able to successfully operate and grow our business.
We do not have specific uses planned for the net proceeds of this offering.
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.
13
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, without limitation, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"anticipate," "believe," "estimate" and similar expressions are generally
intended to identify forward-looking statements. Because these forward-looking
statements involve risks and uncertainties, there are important factors that
could cause actual results to differ materially from those expressed or implied
by these forward-looking statements, including our plans, objectives,
expectations and intentions and other factors discussed under "Risk Factors."
14
<PAGE>
USE OF PROCEEDS
We expect to receive net proceeds of approximately $90.1 million from the
sale of 7,000,000 shares of our common stock in this offering, at an assumed
initial public offering price of $14 per share after deducting underwriting
discounts and commissions and estimated expenses payable by us. We will receive
approximately $13.7 million from the sale of an additional 1,050,000 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.
We do not have specific uses planned for the net proceeds of this offering.
We believe that we need to retain flexibility with respect to the use of the
net proceeds of this offering to respond to factors affecting our business. The
amounts and timing of these expenditures will vary depending on a number of
factors, including competitive and technological developments, success of our
marketing efforts and the rate of growth, if any, of our business. Because of
these uncertainties, we cannot tell you with any reasonable certainty how we
plan to allocate the net proceeds.
We will retain broad discretion in the allocation of net proceeds of this
offering.
Pending the uses described above, we will invest the net proceeds in short-
term, interest bearing, investment-grade securities, certificates of deposit or
direct or guaranteed U.S. government obligations, such as Treasury bills.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business and do not anticipate paying any cash dividends in the
foreseeable future.
15
<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 on January 5, 2000 and 1,127,675 shares of Series E preferred stock
on February 7, 2000, the issuance and exercise of warrants to purchase
467,034 shares of common stock, the beneficial conversion features
approximating $27,155,700 and $13,532,100 associated with the Series D
and E preferred stock issuances, respectively, approximately $21,100,000
of deferred stock option compensation and $4,620,000 of compensation
expense relating to stock options granted to employees and directors
prior to February 24, 2000 and the exercise of options to purchase 39,375
shares of common stock subsequent to December 31, 1999; and
. on a pro forma as adjusted basis to reflect the pro forma transactions
described above and the sale of 7,000,000 shares of common stock offered
by this prospectus at an assumed initial offering price of $14 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 $ 70,599 $160,739
======== ======== ========
Noncurrent portion of capital lease
obligations................................... $ 636 $ 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 -- --
Common stock, par value $0.01; 250,000,000
shares authorized, 18,907,071 shares issued
and outstanding actual; 52,345,935 shares
issued and outstanding pro forma; and
59,345,935 shares issued and outstanding pro
forma as adjusted .......................... 189 523 593
Additional paid-in capital................... 41,749 200,534 290,604
Deferred stock option compensation........... (14,164) (35,267) (35,267)
Notes receivable from stockholders........... (821) (821) (821)
Accumulated deficit.......................... (43,528) (88,836) (88,836)
-------- -------- --------
Total stockholders' equity................... 13,097 76,133 166,273
-------- -------- --------
Total capitalization........................... $ 13,733 $ 76,769 $166,909
======== ======== ========
</TABLE>
Outstanding shares in this table excludes:
. 8,246,070 shares of common stock issuable upon the exercise of stock
options outstanding as of February 24, 2000 under our stock option plan
at a weighted average exercise price of $3.75 per share;
. 2,253,930 shares of common stock available for issuance under our stock
option plan; and
. 600,000 shares of common stock issuable upon exercise of an outstanding
common stock purchase warrant that does not expire upon the closing of
this offering.
16
<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 245,634 shares of common stock outstanding as of
December 31, 1999, was approximately $15.2 million, or approximately $0.34 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 44,412,135, 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 245,634 shares of common
stock outstanding as of December 31, 1999. After giving effect to the issuance
and conversion into common stock of 1,430,000 shares of Series D preferred
stock and 1,127,675 shares of Series E preferred stock, the exercise of options
to purchase 39,375 shares of common stock subsequent to December 31, 1999, and
the issuance and exercise of warrants to purchase 221,400 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 $77.7 million or $1.49 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 7,000,000 shares
of common stock offered by this prospectus at an assumed initial public
offering price of $14 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 $167.9
million, or approximately $2.83 per share. This represents an immediate
increase in pro forma net tangible book value of $2.49 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$11.17 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................... $14.00
Pro forma net tangible book value per share as of December 31,
1999........................................................... $0.34
Increase per share attributable to new investors................ 2.49
-----
Adjusted pro forma net tangible book value per share after this
offering......................................................... $ 2.83
------
Dilution in pro forma net tangible book value per share to
investors purchasing in this offering............................ $11.17
======
</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 $14 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.... 51,878,901 87% $ 99,472,254 50% $ 1.92
Existing warrant holders. 467,034 1 1,997,268 1 4.28
Purchasers in this
offering................ 7,000,000 12 98,000,000 49 14.00
---------- --- ------------ --- ------
Total.................. 59,345,935 100% $199,469,522 100% $ 3.36
========== === ============ === ======
</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."
17
<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
Loss on subsidized appliance and accessory sales........... 1,679
Research and development................................... 6,457
Sales and marketing........................................ 14,070
General and administrative................................. 4,134
-----------
Total operating expenses.................................. 27,477
-----------
Loss from operations....................................... (27,451)
Interest income............................................ 305
Interest expense........................................... (140)
-----------
Net loss................................................... (27,286)
Effect of beneficial conversion feature of convertible
preferred stock........................................... (16,242)
-----------
Net loss applicable to common stock........................ $ (43,528)
===========
Loss per common share:
Weighted average common shares outstanding(1).............. 15,588,420
Basic and diluted(1)....................................... $ (2.79)
Unaudited pro forma loss per common share:
Weighted average shares outstanding(1)..................... 31,181,298
Basic and diluted(1)....................................... $ (1.40)
<CAPTION>
As of
December 31, 1999
<S> <C>
Balance Sheet Data:
Cash and cash equivalents.................................. $ 9,563
Working capital............................................ 11,170
Total assets............................................... 20,625
Non-current portion of capital lease obligations........... 636
Total stockholders' equity................................. 13,097
</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.
18
<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 offer Internet-based content, applications and services, through devices
specifically designed for Internet access, commonly known as Internet
appliances. In November 1999, we introduced our current i-opener service, which
combines our i-opener Internet appliance, Internet access and our own consumer
portal. Our i-opener service includes all of the elements required for a user
to access the Internet. We believe that our i-opener offering simplifies
Internet access and appeals to both novice and veteran Internet users.
We have a limited operating history and have generated only $25,716 in
revenues from inception through December 31, 1999. We expect to incur
significant operating expenses over the next several years in connection with
the continued development and expansion of our business. In particular, we
expect our sales and marketing expenses to increase as we continue to establish
our brand. In addition, we subsidize the purchase price of our i-opener
Internet appliance. As our user base increases, we anticipate a corresponding
increase in total expenditures for these subsidies. We have experienced
operating losses since inception as a result of efforts to develop and market
our i-opener service. We expect that we will continue to incur net losses as we
continue to expend significant resources on sales and marketing and develop
additional products and service offerings. As of December 31, 1999, we had an
accumulated deficit of $43.5 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.
19
<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.
Subsidized appliance and accessory sales. We offer our i-opener Internet
appliance and accessories at a price below our cost, as an incentive for new
customers to subscribe our Internet service. We present the loss generated from
the sale of the units and accessories as an operating expense since sales of
these devices are not our principal business activity and the loss primarily
represents customer acquisition costs. At December 31, 1999, subsidized
appliance and accessory sales resulted in a charge of approximately $1.7
million.
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 $4.1 million related to the grant to U S WEST of an
immediately exercisable warrant to purchase 600,000 shares of common stock at
an exercise price of $6.67 per share. The expense represents the estimated fair
value of the warrant on the date of grant.
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 $4.1 million for the period ended December 31, 1999.
Included in general and administrative expenses for the period ended December
31, 1999 is $154,251 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 $14.2
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.
20
<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. Subsequent to December 31, 1999, we entered into an additional
facility lease agreement expiring in the year 2004. The total commitment under
this lease approximates $6.0 million.
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. As of
February 24, 2000, we have made deposits to the manufacturer sufficient to
satisfy this purchase commitment.
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.
Although we have no definitive plans regarding future expenditures, 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 Series E preferred stock and the net proceeds from this offering will
be sufficient to fund our operations for at least the next 12 months. Despite
our expectations, we may need to raise additional capital before that time. We
may need to raise additional funds in order:
. to fund anticipated growth, including significant increases in personnel,
facilities and computer systems;
. to develop new or enhance existing services and products, including our
network infrastructure;
. to subsidize the purchase price of our i-opener Internet appliance; or
. acquire or invest in complementary businesses, technologies, services or
products.
In addition, in order to meet long term liquidity needs, we may need to
raise additional funds, establish a credit facility or seek other financing
arrangements. Additional funding may not be available on favorable terms, or at
all.
Year 2000
We have designed our network and our service for use in the year 2000 and
beyond and believe our network and service are year 2000 ready.
To date, we have not experienced any material year 2000 problem relating to
any of our internal systems or services. Our internal operations and business
are also dependent upon the computer-controlled systems of third parties such
as our suppliers, customers and other service providers. We believe that,
absent a systemic failure outside our control, such as a prolonged loss of
electrical or telecommunications service, year 2000 problems at third parties
will not have a material impact on our operations. The failure of our internal
systems or the systems of third parties to be year 2000 ready could temporarily
prevent us from providing service to our customers, issuing invoices and
developing products and services and could require us to devote significant
resources to correct such problems. The costs associated with remediating any
year 2000 problems have not been material to date. Although we do not
anticipate that these costs will be material in the future, we cannot assure
you that these costs will not be material.
21
<PAGE>
Disclosure About Market Risk
All of our current contracts are denominated in United States dollars and we
do not currently invest in derivative financial instruments. However, we invest
our excess cash balances in short-term, interest bearing, investment-grade
securities, certificates of deposit or direct or guaranteed U.S. government
obligations, such as Treasury bills, that are subject to market risk. We
believe the effect on our financial position, results of operations and cash
flows of any reasonably likely changes in interest rates would not be material.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. We will adopt SFAS No. 133 as required
by SFAS No. 137, "Deferral of the Effective Date of the FASB Statement No.
133," in fiscal year 2001. We do not expect the adoption of SFAS No. 133 to
have an impact on our financial condition or results of operations.
22
<PAGE>
BUSINESS
Overview
We offer Internet-based content, applications and services through devices
specifically designed for Internet access, commonly known as Internet
appliances. In November 1999 we introduced our current i-opener service, which
combines our i-opener Internet appliance, Internet access and our own consumer
portal. Our i-opener service includes all of the elements required for a user
to access the Internet. We believe that our offering avoids many of the
technological complexities associated with using personal computers, or PCs.
For example, because our i-opener Internet appliance requires no boot-up, our
consumer portal appears immediately after the i-opener Internet appliance is
turned on. For this reason, we believe that our i-opener offering simplifies
Internet access and appeals to both novice and veteran Internet users.
Our objective is to establish ourselves as the leader in the new market of
delivering user-friendly Internet access, content and applications through
Internet appliances. We intend to consistently upgrade and customize our portal
and add new features to ensure user satisfaction. Our infrastructure, operating
system and network are designed to provide access to our i-opener service over
broadband digital subscriber lines and cable, and through wireless telephones
and other handheld communication devices. Our ability to remotely upgrade and
deliver software to Internet appliances through our network, will allow us to
provide users with new and emerging Internet-based applications and services as
they become available.
Industry Overview
Growth of the Internet
The Internet is an increasingly significant global mass medium for
conducting business, collecting and exchanging information, facilitating
communication and providing entertainment. International Data Corporation, or
IDC, estimates that the number of Internet users worldwide will grow from
approximately 142 million at the end of 1998 to approximately 502 million by
the end of 2003, representing a compound annual growth rate of 29%. We expect
growth in Internet usage to translate into growth in demand for devices to
access the Internet and growth in revenues for online service providers.
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
23
<PAGE>
video game consoles are being introduced to the market to address the
disadvantages of PCs. IDC estimates that the worldwide market for information
appliances will grow from approximately $2.4 billion in 1999 to approximately
$17.8 billion in 2004.
Internet content and the number of Web pages available to consumers are
increasing dramatically. According to IDC, the number of Web pages will
increase from approximately 925 million at the end of 1998 to over 13 billion
by the end of 2003, representing a compound annual growth rate of 70%. We
believe the proliferation of content is making it increasingly difficult and
time-consuming for users to navigate the Internet and to locate useful and
relevant information.
Market Opportunity for a Simplified Internet Solution
With the growth of the Internet and the proliferation of Web sites and
content, we believe that many consumers will seek a simple way to get on-line
and access relevant content. We believe that a comprehensive yet easy-to-use
method for Internet access will be appealing to consumers. Ultimately, we
believe that there is a significant market opportunity to develop a platform
to manage the delivery of Internet content and services to users employing all
types of other Internet appliances, including cellular telephones, TV set-top
boxes and Web-enabled personal digital assistants. In addition, we believe
that aggregating information on a large number of consumers through one
platform will provide an opportunity to effectively target advertisements and
market products and services over the Internet.
The Netpliance Solution
Our i-opener service includes all of the elements required for a user to
access the Internet and delivers Internet access, content and applications to
the user's i-opener Internet appliance or other access device illustrated
below.
[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 pictures
of a cellular phone, a screen phone and set-topbox with the words "Other
Access Devices" to the right. Two curved lines connect the i-opener appliance
and the access devices 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 guide to the Internet, or
WebGuide, the e-mail "Mailbox" page, the online shopping mall or Web Mall and
a box containing the words "update, backup, metrics" to describe the network
functions.
24
<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 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
25
<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 user-friendly Internet access, content and applications
through Internet appliances. Establishing and maintaining a market leadership
position should enable us to develop new sources of revenue and grow our
business. To achieve this objective, we intend to:
Build a Premier Brand. We are aggressively marketing i-opener as a consumer
service. We believe that establishing brand awareness is critical to attracting
and retaining users, content providers, e-commerce companies and advertisers,
and to developing co-branding relationships. Our strategy is to promote our i-
opener service as a simple way to access the Internet, targeted content and
applications 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 and traditional retailers. We also plan to offer a platform for
businesses to develop Internet-based services for their customers or employees.
Enhance Our Consumer Portal. We will continue to develop our relationships
with content providers to aggregate more high-quality and relevant content for
our users. We currently plan to offer a significant number of additional
applications during 2000, such as enhanced e-mail, instant messaging, calendar,
portfolio, chat, music, audio and video streaming. We intend to consistently
upgrade and customize our portal to ensure that our users can continue to
access content in a simple manner.
Develop Multiple Revenue Sources. We believe that there will be significant
opportunities to develop multiple sources of revenue. We believe that an
established user base will enable us to develop sponsorship relationships with
content providers who will pay to distribute content through our channels or
offer links through our i-opener portal. We also plan to generate e-commerce
revenues through relationships with established on-line retailers in our i-
opener Web Mall.
Develop Application Hosting Services. We believe our installed base of
devices and ability to simultaneously upgrade and deliver software to our
entire user base remotely through our network will allow us to host new and
emerging Web-based applications and services. For example, in the future a user
may be able to rent the use of tax preparation software on a per user basis
instead of purchasing and installing the software. In addition, users may be
able to rent secure personal space on our network for personal files and data.
Extend Our Platform to New Technologies. Our infrastructure, operating
system and network are also able to support additional devices such as cellular
and wireless telephones and other handheld communications devices. In the
future, we plan to make our platform compatible with emerging access
technologies such as broadband, wireless and home radio frequency to continue
to provide an enhanced user experience and make the Internet more accessible
and conducive to consumers.
26
<PAGE>
Strategic Relationships
GO.com. In December 1999 we entered into an agreement with GO.com, an
affiliate of The Walt Disney Company. GO.com has agreed to serve as our content
provider for our children, family, sports, news and entertainment related
categories for the cached instant channels on our i-opener portal. The
agreement also provides certain co-branding and revenue sharing arrangements.
In January 2000, an affiliate of The Walt Disney Company purchased shares of
our Series D preferred stock.
U S WEST. In December 1999 we entered into a non-binding letter of intent
with U S WEST regarding joint sales, marketing and distribution of our i-opener
service to its customers and the use of U S WEST's dial-up and DSL network. We
currently anticipate entering into a definitive and binding agreement with
respect to these matters with U S WEST in the first quarter of 2000. An
affiliate of U S WEST purchased shares of our Series D preferred stock and a
warrant to purchase common stock.
Rogers Communications and Shaw Communications. In February 2000 we entered
into agreements with Rogers Communications Inc. and Shaw Communications Inc. We
agreed to execute a final agreement under which Rogers and Shaw would jointly
market and distribute our i-opener service in Canada through a broadband cable
service. Rogers and an affiliate of Shaw invested in our Series E preferred
stock.
ATLINKS. In February 2000 we entered into a non-binding letter of intent
with Thomson Multimedia and ATLINKS, an affiliate of Thomson, regarding the
manufacture and sale by ATLINKS of Internet appliances enabled with our i-
opener service. An affiliate of Thomson also invested in our Series E preferred
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.
Our i-opener Internet appliance is tailored to provide our i-opener service
and comes with a 10-inch flat-panel color screen, a standard-sized keyboard
that includes a pointer and an optional mouse. 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.
27
<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 . No need for purchaser to
i-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
when the user connects to without tying up the
the Internet phone line
. e-Mail notification light . Alerts users to new e-
on the i-opener Internet mail
appliance
- -------------------------------------------------------------------------------
Content Customization and . Types users by geographic . Delivers updated
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 . Internet content such as . Users can quickly access
e-mail, i-opener instant cached content without
news, sports, weather, tying up their phone line
finance and entertainment
channels is delivered
periodically from the . Users have easy access to
Internet and stored fresh information without
locally having to search the
Internet
- -------------------------------------------------------------------------------
Software and Application . Software and system . Frees consumers from
Updates maintenance updates are complex system and
handled remotely without software configurations
user intervention
. Protects consumers
against software
obsolesence
</TABLE>
- -------------------------------------------------------------------------------
We continually seek new ways to enhance our i-opener service, and are
currently designing new products and services, many of which we anticipate
introducing in 2000. We believe these new products and services will enrich
the i-opener experience for our users and help attract new users and
merchants.
Sales and Marketing
We are building a team of sales and marketing professionals whose efforts
are focused on establishing the i-opener brand, educating consumers about the
features and benefits of our i-opener service and promoting the benefits of
our Internet service platform to businesses. We plan to pursue an aggressive
advertising and promotional campaign designed to raise awareness of our i-
opener brand among both first-time and experienced Internet users. We believe
that we will be most effective by using traditional media, such as television,
national newspapers and magazines, and radio. Additionally, we plan to promote
our brand through retail points of presence, promotional events and
conferences.
28
<PAGE>
Consumers can purchase our i-opener service through our Web site,
www.netpliance.com, over the telephone at 1-888-iopener and through selected
consumer electronics retailers, including Circuit City starting in February
2000. 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 phone calls for
customer service and technical support.
We believe that businesses will be attracted to our i-opener service by the
opportunity to develop co-branded Internet-based services for their customers
or employees. Through a co-branded service, businesses will be able to provide
their customers with direct and simplified access to their products and
services. Our marketing targets include businesses that want to expand or
initiate their use of the Internet to attract new customers or solidify
existing relationships, and businesses seeking to enhance communications with
employees. Currently, our specific targets include financial services providers
and on-line retailers focused on consumer goods that require frequent purchases
such as groceries, pharmaceuticals and pet supplies.
Network
We provide Internet access to our users over a redundant network throughout
the United States that includes local dial-up access and toll-free inbound
access as a default when users are unable to dial-up locally. The network is
monitored and maintained twenty-four hours a day, seven days a week by our
personnel in a Network Operations Control Center (NOCC) located at our
facilities. We interconnect the national network and our NOCC, through a local
area network, with our production and back-office systems that provide the
intelligence for our portal. Our production facilities manage the content feeds
and applications for our portal and perform the update, back-up and logging of
our users' relevant data. Production systems are co-located at a third-party
telecommunications facility, where we lease both rack space and managed
bandwidth. Our back-office systems employ Portal Software for billing and to
manage the internal information on our users.
The costs associated with our network infrastructure are a major component
of our cost of service. Our strategy of purchasing telecommunications capacity
from third-party wholesale providers will allow us to expand the geographic
scope of our service, and accommodate user growth without building our own
network. Additionally, we believe that our strategy of using wholesale
providers will enable us to change providers or technologies as cost or
performance improvements become available. As a result, we believe we can be
flexible in responding to user demand for higher-speed access and other types
of improved service such as DSL, cable modems, high-speed wireless access and
other broadband technologies.
Direct Fulfillment Model
We outsource the production of our i-opener Internet appliances to Quanta, a
leading manufacturer of portable computers that is located in Taiwan. Quanta
has strategic alliances with key component providers and utilizes state-of-the-
art information tools and strong inventory management practices to achieve
rapid inventory turnover and maintain reduced inventory levels. Quanta's
manufacturing methods provide rapid pass-through of material cost decreases in
its products.
We utilize an integrated distribution and delivery system that allows us to
minimize inventory and shipping costs as well as delivery time. Upon sale of an
i-opener Internet appliance, a customer's order is recorded in our automated
system and routed to Quanta for processing, assembly and delivery. Quanta then
coordinates drop-shipment through Federal Express. We believe the average time
from placing of an order to delivery is approximately three to five days.
Competition
We compete for users, and consequently for potential e-commerce and
advertising revenue, directly or indirectly, with the following categories of
companies:
. online service providers, such as AOL, EarthLink and Microsoft;
. software platform providers such as Aether Systems and Liberate
Technologies.
29
<PAGE>
. Internet portals, such as Excite@Home, Lycos and Yahoo!; and
. manufacturers of other stand alone Internet appliances, such as InfoGear
and WebTV;
. manufacturers of portable Internet appliances, such as Hewlett Packard
and Palm, and cellular telephone and pager manufacturers;
. manufacturers of personal computers, such as Apple, Compaq, Dell,
Gateway, Hewlett Packard and IBM;
However, we believe our i-opener service offers advantages over our
competition. Unlike companies that are Internet service providers only, we are
not limited to the PC-user market. We believe our i-opener service is more
convenient and practical than the TV-related Internet boxes. Most of the
companies that are producing Internet appliances, screenphones, and inexpensive
or free PCs do not offer Internet access, tailored content portals or
applications. By providing only the equipment, these companies cannot capture
the wealth of user data and ensure user loyalty. Our model is based on creating
long-term loyalty of our users.
Patent Applications and Intellectual Property
We have filed patent applications for several inventions that are key
enablers to our service offerings. We believe these inventions will
differentiate us in the marketplace. Our pending patent applications include:
. a method for immediate personalization of devices, allowing us to
customize devices before they reach the customer. A variation of the
method allows us to perform the personalization remotely and
transparently during the installation of the device.
. a method for updating user and device profile information remotely and
transparently from the server to the device. This method allows for
transparent and reliable connect and reconfiguration of the device.
. a method for downloading cached content based on incremental changes to
the content and individual preferences. Content is predicted based on
user preferences and updated adaptively based on user behavior.
. a simplified address book scheme that allows specific users to edit a
user's address book remotely and to pre-configure an address book for
immediate use.
If we are not successful in obtaining the patent protection we seek, our
competitors may be able to replicate our technology and more effectively
compete with us.
Employees
As of February 24, 2000, we had a total of 156 full-time employees 60 in
research and development, 58 in sales and marketing, 13 in network operations
and 25 in general administration, and 17 part-time employees. 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 have also entered into a new
five-year office lease agreement to lease an additional 43,713 square feet near
our current location in Austin, Texas beginning in May 2000.
Legal Proceedings
We are not currently involved in any material litigation matters.
30
<PAGE>
MANAGEMENT
The following table sets forth, as of February 24, 2000, the name, age and
position of each of our directors, executive officers and certain other key
employees:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
John F. McHale *(1).......... 43 Chairman of the Board and Co-founder
Kent A. Savage *(1).......... 38 President, CEO, Director and Co-founder
Ann M. Bacon................. 42 Vice President of Corporate Communications and
Retail Sales
James E. Cahill.............. 33 Vice President and General Counsel
Craig Cantrell............... 40 Vice President of Client Development
William C. Cobb.............. 44 Vice President and General Manager of Consumer
Sales
Greg A. Cummings............. 39 Vice President of Product Management and User
Experience
Thomas E. Gaunt.............. 41 Vice President of Business Sales
M. David Hampton............. 32 Treasurer and Controller
Barbara A. Kaczynski......... 40 Chief Financial Officer
Kenneth A. Kalinoski......... 38 Vice President of Development and Co-founder
Marc Willebeek-LeMair........ 38 Chief Technology Officer and Chief Architect
Camillo Martino.............. 37 Vice President and General Manager of
International Operations
Michael R. Corboy (2)........ 69 Director
Kevin Denuccio............... 40 Director
Grant A. Dove................ 71 Director
David S. Lundeen (3)......... 38 Director
James M. Mansour (3)......... 40 Director
Steven G. Papermaster........ 41 Director
Joseph R. Zell............... 40 Director
Paul S. Zito (2)(3).......... 44 Director and Secretary
</TABLE>
- ---------------------
* Denotes executive officer
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
John F. McHale was a Co-founder of Netpliance and has served as our Chairman
of the Board since our inception in January 1999. From January 1996 to April
1998, Mr. McHale served as President, Chief Executive Officer and Chairman of
NetSpeed, Inc. From January 1985 to November 1995, Mr. McHale was President,
Chief Executive Officer and Chairman of NetWorth, Inc. Mr. McHale also serves
as the Chairman of Panja Corporation.
Kent A. Savage was a Co-founder of Netpliance and has served as our
President, Chief Executive Officer and Director since our inception in January
1999. From April 1998 to December 1998, Mr. Savage served as Director and
General Manager of Broadband Operations for Cisco Systems, Inc. From April 1996
to April 1998, Mr. Savage served as Vice President of Sales and Marketing for
NetSpeed, Inc. From November 1993 to April 1996, Mr. Savage served as Vice
President of Sales and Marketing for Connectware, Inc.
Ann M. Bacon has served as our Vice President of Corporate Communications
and Retail Sales since June 1999. From April 1994 to May 1999, Ms. Bacon served
as Manager, Director and General Manager for the Handheld Division of Compaq
Computer Corporation.
James E. Cahill has served as our Vice President and General Counsel since
November 1999. From September 1993 to October 1999, Mr. Cahill served as an
attorney with Hughes & Luce, L.L.P.
31
<PAGE>
Craig Cantrell has served as our Vice President of Client Development since
June 1999. From April 1998 to May 1999, Mr. Cantrell served as Senior Manager
for the broadband customer premise equipment organization of Cisco Systems,
Inc. From June 1996 to April 1998, Mr. Cantrell served as a Director of
Engineering for NetSpeed, Inc. From September 1989 to June 1996, Mr. Cantrell
served as Engineering Manager for Interphase Corporation.
William C. Cobb has served as our Vice President and General Manager of
Consumer Sales starting February 2000. From July 1997 to February 2000, Mr.
Cobb served as Senior Vice President and Chief Marketing Officer for the Tricon
Restaurants International division of Tricon Global Restaurants, Inc. From
August 1995 to July 1997, Mr. Cobb served as Senior Vice President and Chief
Marketing Officer for the Pizza Hut division of PepsiCo, Inc. From September
1990 to September 1995, Mr. Cobb served as Vice President of Marketing for the
Pepsi-Cola division of PepsiCo, Inc.
Greg A. Cummings has served as our Vice President of Product Management and
User Experience since April 1999. From March 1998 to March 1999, Mr. Cummings
served as Research and Development Manager for Hewlett-Packard. From April 1996
to March 1998, Mr. Cummings served as Senior Products Manager and Director of
Product and Program Management for Hitachi Ltd. From June 1992 to April 1996,
Mr. Cummings served as Program Manager of personal computer development for
Dell Computer Corporation.
Thomas E. Gaunt has served as our Vice President of Business Sales since
July 1999. From June 1996 to June 1999, Mr. Gaunt served as a Director at
Inprise Corporation. From June 1994 to April 1996, Mr. Gaunt served as
President of Double Impact Multimedia, which filed for Chapter 11 bankruptcy
and was subsequently liquidated.
M. David Hampton has served as our Treasurer since December 1999 and
Controller since February 1999. From February 1994 to January 1999, Mr. Hampton
served as a Financial Analyst in the Consumer Desktop Division of Dell Computer
Corporation.
Barbara A. Kaczynski has served as our Chief Financial Officer since
February 2000. From April 1999 to November 1999, Ms. Kaczynski served as Chief
Operating Officer and Chief Financial Officer for Adsmart Corporation. From
January 1997 to March 1999 Ms. Kaczynski pursued personal interests. From June
1987 to December 1996 Ms. Kaczynski served in various capacities for Time,
Inc., most recently as Vice President of Finance and Controller from September
1993 to December 1996.
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.
Camillo Martino has served as our Vice President and General Manager of
International Operations since February 2000. From October 1998 to February
2000, Mr. Martino served as the Worldwide Director of the WebPAD Internet
Appliance Business Unit at National Semiconductor Corporation. From January
1997 to September 1998, Mr. Martino served as a Strategic Marketing Director in
the Personal Systems & Computing Division of National Semiconductor
Corporation. From May 1991 to December 1996, Mr. Martino served as Marketing
and Business Unit Director for National Semiconductor Corporation-Japan.
Michael R. Corboy has served as our Director since February 1999. Since
January 1992, Mr. Corboy has served as President of Corboy Investment Company.
32
<PAGE>
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.
Grant A. Dove has served as our Director since February 2000. Since January
1993, Mr. Dove has been Managing Partner of Technology Strategies & Alliances.
He also serves as a director of MediaOne Group, Inc., Inet Technologies, Inc.,
Cooper Cameron Corporation and InterVoice Brite, Inc.
David S. Lundeen has served as our Director since October 1999. Since
February 1999, Mr. Lundeen has been Managing General Partner of Watershed
Capital. From June 1995 to August 1998, Mr. Lundeen served as Executive Vice
President and Chief Financial Officer of BSG Corporation. From February 1990
to April 1995, Mr. Lundeen served as director of the Merger and Acquisition
Group and President of the Technology Division of Blockbuster Entertainment
Corporation. He also serves as a director of How2.com, Inc and Perficient,
Inc.
James M. Mansour has served as our Director since February 1999. Since May
1998, Mr. Mansour has served as President of Telephone Management, Inc. From
March 1991 to April 1998, he served as President of NationalTel, Inc. He
currently serves as a director of GT Group Telecom, Inc.
Steven G. Papermaster has served as our Director since February 1999. Since
May 1996, Mr. Papermaster has served as the Chairman of Powershift Group.
Since January 1999, he has also served as CEO of Agillion, Inc. From 1987 to
1997, he was CEO of BSG Corporation. Mr. Papermaster also serves as a director
of Perficient, Inc. and Vignette Corporation.
Joseph R. Zell has served as our Director since January 2000. Since March
1997, Mr. Zell has served as President of the !nterprise Networking Services
Division of U S WEST Communications, Inc. From April 1996 to April 1997, he
served as President of the Carrier Division of U S WEST. From April 1995 to
April 1996 he served as Vice President of Market and Innovation for U S WEST
Communications, Inc. From April 1994 to March 1995, he served as Executive
Director of Applications and Services Development for the !nterprise
Networking Services Division of U S WEST. Mr. Zell also serves as a director
of USinternetworking, Inc.
Paul S. Zito has served as our Director since January 1999 and Secretary
since February 1999. From April 1996 until April 1998 Mr. Zito served as Chief
Operating Officer, Secretary, and Treasurer of NetSpeed, Inc. From 1993 to
March 1996 Mr. Zito served as Chief Financial Officer and Director of
NetWorth, Inc.
Board Representation
Our Board of Directors currently consists of ten members, two of whom are
our founders and eight 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. 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. See "Description of Securities."
There are no family relationships among any of the directors, officers or
key employees of Netpliance.
Board Composition
Our Board of Directors consists of ten 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.
33
<PAGE>
Directors Compensation
Our directors may receive such compensation for their services as may be
approved by the Board of Directors from time to time, including a fixed sum and
expenses for attendance at each meeting of the Board of Directors or a
committee of the Board of Directors. To date, no cash compensation has been
paid to any member of the Board of Directors for his service. We have granted
options to purchase 90,000 shares of common stock to each of our non-employee
directors. Prior to February 2000, we extended the opportunity to each of our
directors to purchase 90,000 shares of our common stock at the time they joined
our Board of Directors. Each of our directors, except for Joseph R. Zell and
Grant A. Dove, purchased those shares. David S. Lundeen subsequently
transferred his shares to Watershed Capital I, L.P.
Board Committees
Effective upon the closing of this offering, the following committees of the
Board of Directors shall be established:
Executive Committee. The executive committee has broad discretionary
authority to take most actions that may be taken by the Board of Directors,
including acting upon recommendations of other committees of the Board of
Directors, declaring a dividend and authorizing the issuance of stock. Actions
the executive committee is not authorized to take include amending our
certificate of incorporation or bylaws, adopting an agreement of merger or
consolidation or appointing members to committees of our Board of Directors.
The executive committee typically meets once per month and reports to the Board
of Directors on a quarterly basis. The executive committee consists of Messrs.
McHale and Savage.
Audit Committee. The audit committee is responsible for, among other things,
making recommendations to the Board of Directors regarding the engagement of
our independent public accountants, reviewing with the independent public
accountants the plans and results of the audit engagement, approving
professional services provided by the independent public accountants, and
reviewing the adequacy of our internal accounting controls. The audit committee
consists of Messrs. Lundeen, Mansour and Zito.
Compensation Committee. The compensation committee is responsible for
determining salaries and incentives compensation for our directors, officers,
employees and consultants and administering our stock option plan. The
compensation committee consists of Messrs. Corboy and Zito. The compensation
committee establishes the salary of the Chief Executive Officer by considering
the salaries of executive officers in similar positions with comparably sized
companies in our industry and in related industries, the experience and
contribution of the individual and our financial performance. Mr. Savage's
employment agreement requires that his salary not be less than $195,000 per
year.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves on the board of directors or
compensation committee of any entity that has one or more executive officers
who is a member of our Board of Directors or Compensation Committee.
The members of our compensation committee are Messrs. Corboy and Zito.
Except for Mr. Zito's service as our secretary, none of the members of our
compensation committee is currently or has been an officer or employee. Prior
to the formation of the compensation committee, all decisions regarding
compensation for directors, officers, employees and consultants, or concerning
administration of stock and incentive plans, were made by the Board of
Directors.
Executive Compensation
The following table sets forth information concerning compensation awarded
to, earned by or paid to our Chief Executive Officer during the year ended
December 31, 1999. No other executive officer has earned in excess of $100,000
since inception. This executive is referred to as the Named Executive Officer
elsewhere in this prospectus.
34
<PAGE>
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 10,500,000 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. The number of shares reserved for
issuance under the stock option plan automatically increases at the end of each
year such that shares representing at least 15% of our issued and outstanding
common stock are reserved for issuance under the plan, or a lesser amount as
determined by the Board.
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
35
<PAGE>
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 restricted stock at the time of
vesting and the amount paid for the restricted stock, if any.
The compensation committee may not grant an incentive stock option to any
person who, at the time of the grant, owns, or is deemed to own, stock
possessing more than 10% of the total combined voting power of Netpliance or
any affiliate of Netpliance, unless the exercise price is at least 110% of the
fair market value of the stock on the grant date and the option term is five
years or less. In addition, the board may not grant an employee an incentive
stock option under the stock option plan that exceeds the $100,000 per year
limitation set forth in Section 422(d) of the Internal Revenue Code. To
calculate the $100,000 per year limitation, we determine the aggregate number
of shares under all incentive stock options granted to the employee that will
become exercisable for the first time during a calendar year. For this purpose,
we include incentive stock options granted under the stock option plan as well
as under any other stock plans that our affiliates or we maintain. We then
determine the aggregate fair market value of such stock as of the grant date of
the option. Taking the options into account in the order in which they were
granted, we treat only the options covering the first $100,000 worth of stock
as incentive stock options. We treat any options covering stock in excess of
$100,000 as nonstatutory stock options.
Section 162(m) of the Internal Revenue Code, among other things, denies a
deduction to publicly held corporations for compensation paid to the chief
executive officer or the four highest compensated officers in a taxable year to
the extent that the compensation exceeds $1,000,000. Unless our stock option
plan is modified, Section 162(m) will not apply to any compensation paid
pursuant to the plan until the first stockholder meeting that occurs during the
fourth calendar year after this offering.
Option Terms. The compensation committee determines the exercise price for
any options, provided that incentive stock options are required to have an
exercise price of 100% or more of the fair market value of a share of our
common stock on the grant date. The maximum option term is 10 years. The board
may provide for exercise periods of any length in individual option grants.
However, generally an option terminates three months after the optionholder's
service to Netpliance and its affiliates terminates. If such termination is due
to the optionholder's death or disability, the exercise period generally is
extended to 12 months.
No option granted under the plan is transferable or assignable by an
optionee, voluntarily or by operation of law, other than by will or the laws of
descent and distribution. Each option is exercisable during the optionee's
lifetime, only by him or her.
Terms of Other Stock Awards. The compensation committee determines the
purchase price of other stock awards but it may not be less than the fair
market value of our common stock on the grant date. The compensation committee
may award stock bonuses in consideration of past services without a purchase
36
<PAGE>
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 February 24, 2000, we had issued options to purchase
8,246,070 shares at a weighted average exercise price of $3.75, and 2,253,930
shares remained available for future grant. As of February 24, 2000, the board
had granted no shares as restricted stock awards under the stock option plan.
2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan was adopted by the Board of Directors
in February 2000 and we expect that the purchase plan will be approved by the
stockholders in February 2000, and will become effective on the date of this
offering. A total of 600,000 shares of common stock has been reserved for
issuance under the purchase plan. The amount reserved under the purchase plan
will automatically increase at the end of each fiscal year by the lesser of
900,000 shares or 1% of the issued and outstanding shares on such date or a
lesser amount as determined by the Board.
The purchase plan, which is intended to qualify under Section 423 of the
Code, contains successive six-month offering periods. The offering periods
generally start on the first trading day on or after January 1 and July 1 of
each year.
Employees are eligible to participate in the purchase plan if they are
employed by us for at least 20 hours per week and more than five months in any
calendar year, although any employee who would own stock constituting 5% or
more of the total combined voting power or value of all classes of our stock
may not participate in the purchase plan. The purchase plan permits
participants to purchase common stock through payroll deductions of up to 15%
of the participant's base compensation, up to a maximum aggregate deduction of
$25,000 for all offering periods ending within any calendar year.
Amounts deducted and accumulated under the purchase plan are used to
purchase shares of common stock at the end of each offering period. The price
of stock purchased under the purchase plan is 85% of the lower of the fair
market value of the common stock at the beginning of the offering period or end
of the offering period. Participants may end their participation at any time
during an offering period and will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with
Netpliance.
Rights granted under the purchase plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the purchase plan. The purchase plan provides that, in the event
of a corporate transaction as described in Section 424(a) of the Code, our
Board of Directors may approve assumption of the purchase plan by a successor
corporation that becomes the employer of a significant number of participating
employees. The Board of Directors has the authority to amend or terminate the
purchase plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the purchase plan.
37
<PAGE>
401(k) Plan
We maintain the Netpliance, Inc. 401(k) Retirement Plan for eligible
employees. In order to be a participant in the 401(k) plan, an employee must
have attained age 21. A participant may contribute up to 20% of his or her
total annual compensation to the 401(k) plan, or up to a statutorily prescribed
annual limit, if less. The annual limit for 1999 is $10,000. Each participant
is fully vested in his or her deferred salary contributions. Participant
contributions are held and invested by the 401(k) plan's trustee. We may make
discretionary contributions as a percentage of participant contributions,
subject to established limits. To date, we have not made any contributions to
the 401(k) plan on behalf of the participants. The 401(k) plan is intended to
qualify under Section 401 of the Internal Revenue Code, so that contributions
by us or our employees to the 401(k) plan, and income earned on the 401(k) plan
contributions, are not taxable to employees until withdrawn from the 401(k)
plan, and so that our contributions, if any, will be deductible by us when
made.
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.
38
<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 and as adjusted for a three-for-one
stock split. 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 equivalent shares of preferred stock
------------------------------------------------
Directors, Executive Shares of
Officers and 5% common Series
Stockholders: stock Series A Series B Series C Series D E
<S> <C> <C> <C> <C> <C> <C>
John F. McHale.......... 1,108,641 16,071,420 -- 1,000,020 -- --
Kent A. Savage.......... 5,963,199 -- -- -- -- --
Paul S. Zito............ 221,565 100,020 -- -- -- --
James M. Mansour........ 920,193 125,010 -- -- -- --
Steven G. Papermaster... 962,784 -- -- -- -- --
Michael R. Corboy....... 218,301 -- -- -- -- --
Kevin Denuccio.......... 180,000 -- -- -- -- --
Kenneth A. Kalinoski.... 4,601,868 -- -- -- -- --
David S. Lundeen........ 90,000 -- -- -- -- --
Watershed Capital I,
L.P. .................. -- -- 3,499,980 1,000,020 -- 283,023
U S WEST Internet
Ventures, Inc. ........ 600,000(1) -- -- -- 2,100,000 --
</TABLE>
- ---------------------
(1) Includes a warrant to purchase 600,000 shares of common stock for $6.67 per
share purchased by U S WEST Internet Ventures, Inc. for $5,000 in December
1999.
On January 19, 1999 we sold 14,400,000 shares of common stock to our
founders for an aggregate purchase price of $240,000. 3,981,060 of these shares
were subsequently repurchased and reissued to other investors. From February
1999 through February 2000 we issued an aggregate of 8,527,506 shares of common
stock to employees and other investors for an aggregate purchase price of
$6,692,745.
Prior to February 2000, we extended the opportunity to each of our non-
employee directors to purchase 90,000 shares of our common stock at the time
they joined our Board of Directors. Each of our non-employee directors, except
for Joseph R. Zell and Grant A. Dove, purchased these shares. David S. Lundeen
subsequently transferred his shares to Watershed Capital I, L.P.
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 February 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
39
<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 entered into irrevocable commitments
to purchase an aggregate of 1,430,000 shares of Series D preferred stock
for an aggregate purchase price of $28.6 million. The Series D preferred
stock financing closed on January 5, 2000. In December 1999, we also
granted to U S WEST Internet Ventures, Inc. a warrant to purchase 600,000
shares of our common stock at a price of $6.67 per share.
. In February 2000, we sold an aggregate of 1,127,675 shares of Series E
preferred stock to four investors for an aggregate purchase price of
$33,830,250.
Shares of Series A, Series B and Series C preferred stock are convertible
to common stock on a thirty-for-one basis, and shares of Series D and Series E
preferred stock are convertible to common stock on a three-for-one basis. All
outstanding shares of our preferred stock will automatically convert upon the
closing of the offering.
Executive Officer and Stockholder Loans
We loaned $97,298 to Kent Savage, our President, Chief Executive Officer
and a member of our Board of Directors which he repaid in February 2000. The
loan had an interest rate of seven percent per annum, was due and payable on
January 18, 2004 and was secured by a pledge of 5,837,880 shares of our common
stock owned by Mr. Savage.
We loaned $71,351 to Ken Kalinoski, our Vice President of Development,
which he repaid in February 2000. The loan had an interest rate of seven
percent per annum, was due and payable on January 18, 2004 and was secured by
a pledge of 4,281,060 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."
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following sets forth certain information concerning the beneficial
ownership of our outstanding common stock and preferred stock as of February
24, 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 February 24, 2000 but excludes
shares of common stock underlying options held by any other person. Percentage
of beneficial ownership is based on 52,945,935 shares of common stock
outstanding as of February 24, 2000, assuming the conversion of the preferred
stock and the exercise of warrants to purchase common stock outstanding as of
February 24, 2000, a three-for-one stock split and 59,945,935 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 (2)....................... 15,508,095 29.3% 25.9%
Kent A. Savage (3)....................... 5,963,199 11.3 10.0
Paul S. Zito (4)......................... 1,446,585 2.7 2.4
James M. Mansour (5)..................... 1,135,203 2.1 1.9
Steven G. Papermaster (6)................ 997,284 1.9 1.7
Michael R. Corboy (7).................... 308,301 * *
Grant A. Dove (8)........................ 90,000 * *
Kevin Denuccio (9)....................... 270,000 * *
David S. Lundeen (10).................... 4,963,023 9.4 8.3
Joseph R. Zell (11)...................... 2,700,000 5.1 4.5
5% Stockholders:
Kenneth A. Kalinoski (12)................ 4,540,368 8.6 7.6
Watershed Capital I, L.P. (13)........... 4,873,023 9.2 8.1
U S WEST Internet Ventures, Inc. (14).... 2,700,000 5.1 4.5
All executive officers and directors as a
group
(10 persons)............................. 33,381,690 63.0 55.7
</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 10,500,000 shares of our common stock
41
<PAGE>
for issuance to directors, executive officers, and employees under the
plan, of which we have issued options to purchase 8,246,070 shares of
common stock at a weighted average exercise price of $3.75 per share to
date.
(2) Includes 105,240 shares held by each of the Caitlin McHale Trust, Casey
McHale Trust and Ryan McHale Trust for the benefit of family members of Mr.
McHale.
(3) Includes 30,000 shares held by each of the ACS Trust 2000, CKS Trust 2000
and MAS Trust 2000, for the benefit of family members of Mr. Savage.
(4) These shares are held for the benefit of Mr. Zito by Z Start I, L.P.
Includes option to purchase 90,000 shares of common stock which are
immediately exercisable.
(5) These shares are held for the benefit of Mr. Mansour by JMM PHLP, Ltd.
Includes option to purchase 90,000 shares of common stock which are
immediately exercisable.
(6) Includes options to purchase 90,000 shares of common stock which are
immediately exercisable.
(7) Includes options to purchase 90,000 shares of common stock which are
immediately exercisable.
(8) Includes options to purchase 90,000 shares of common stock which are
immediately exercisable.
(9) Includes options to purchase 90,000 shares of common stock which are
immediately exercisable.
(10) David S. Lundeen was appointed to our Board of Directors by Watershed
Capital I, L.P. and is managing general partner of Watershed. Includes
4,873,023 shares held by Watershed. Mr. Lundeen disclaims beneficial
ownership of the shares held by Watershed. Also includes options to
purchase 90,000 shares of common stock which are immediately exercisable.
Mr. Lundeen's address is 650 Castro Street, Suite 2000, Mountain View,
California 94041.
(11) 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 2,100,000 shares held by U S WEST and a warrant to
purchase 600,000 shares of common stock held by U S WEST that is currently
exercisable. Mr. Zell disclaims beneficial ownership of these securities
held by U S WEST. Mr. Zell's address is 1999 Broadway, Denver, Colorado
80202.
(12) 4,300,368 of these shares are held by Kalinoski, LTD for the benefit of
Mr. Kalinoski and family members. 120,000 of these shares are held by
Nicholas Kalinoski and 120,000 of these shares are held by Jaclyn
Kalinoski. Kalinoski, LTD's and Nicholas and Jaclyn Kalinoski's address is
4687 Rockcliff Road, Austin, Texas 78746.
(13) Watershed's address is 650 Castro Street, Suite 2000, Mountain View,
California 94041.
(14) Includes shares issuable upon exercise of a warrant to purchase 600,000
shares of common stock held by U S WEST that is currently exercisable. U S
WEST's address is 1999 Broadway, Denver, Colorado 80202.
42
<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 thirty-for-one basis,
and all shares of Series D and Series E preferred stock will automatically
convert on a three-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 600,000 shares of our common stock at $6.67 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 5,500,020 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
43
<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. On February 7, 2000, the investor
rights agreement was amended and restated to provide for our issuance of the
Series E preferred stock. Under the terms of the amended and restated investors
rights agreement, holders of 7,673,025 shares (on an as-converted basis) of our
Series D preferred stock and Series E 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 stock once we are eligible to use a short-form
registration statement. However, holders of these shares have agreed not to
exercise their registration rights until 180 days after the effective date of
this prospectus. Registration of shares of common stock upon the exercise of
demand registration rights would result in the covered shares becoming freely
tradable without restriction under the Securities Act immediately upon the
effectiveness of the registration under which these shares were registered.
Delaware Anti-Takeover Statute and Charter and Bylaw Provisions
Under Delaware law, we may not engage in a "business combination," which
includes a merger or sale of more than 10% of our assets, with any "interested
stockholder," namely a stockholder who owns 15% or more of our outstanding
voting stock, as well as affiliates and associates of the stockholder, for
three years following the time that stockholder became an interested
stockholder unless:
. the transaction in which the stockholder became an interested stockholder
is approved by our board of directors prior to the time the interested
stockholder attained that status;
. upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of Netpliance outstanding at the time the
transaction commenced, excluding those shares owned by persons who are
directors and also officers; or
. at or after the time the stockholder became an interested stockholder the
business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders by the affirmative vote
of at least two-thirds of the outstanding voting stock which is not owned
by the interested stockholder.
Upon the closing of this offering, certain provisions of our certificate of
incorporation and bylaws may also discourage, delay or prevent a merger or
acquisition that a stockholder may consider favorable.
Such provisions could include:
. authorizing the issuance of "blank check" preferred stock;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
44
<PAGE>
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
Netpliance. These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in our control or our management.
Limitation of Liability and Indemnification Matters
We have adopted provisions in our certificate of incorporation that
eliminate the personal liability of our directors for monetary damages arising
from a breach of their fiduciary duties in certain circumstances to the fullest
extent permitted by law. Such limitation of liability does not affect the
availability of equitable remedies, such as injunctive relief or rescission. We
are aware that, in the opinion of the Securities and Exchange Commission,
indemnification against liabilities arising out of breaches of the federal
securities laws is against
public policy and, therefore, is unenforceable. Accordingly, if a claim for
such indemnification is submitted to Netpliance, we reserve the right to submit
the issue of enforceability of any provision for indemnification, which is or
may be by its terms applicable in the circumstances, to a court of competent
jurisdiction and, if it does so, will be governed by the final adjudication of
such issue.
Our certificate of incorporation also provides that we may indemnify our
directors, and have the power to indemnify our officers, employees and agents,
to the fullest extent permitted under the Delaware law.
We also intend to enter into Indemnity Agreements with our officers and
directors.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C. has been appointed as the transfer
agent and registrar for our common stock.
Listing
We have applied for listing of our common stock on the Nasdaq National
Market under the trading symbol NPLI.
45
<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 59,345,935 shares of common
stock, assuming no exercise of outstanding options. Of these shares, the
7,000,000 shares to be sold in this offering, or 8,050,000 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 52,345,935 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>
411,348 90 days after the date of this offering, subject to restrictions
under Rule 144.
32,096,736 Additional shares, 180 days after the date of this prospectus, upon
the expiration of lock-up agreements between the stockholders and
the underwriters or us, provided that Donaldson, Lufkin & Jenrette
can waive the restriction at any time. All of these shares will
also be subject to sales volume restrictions under Rule 144 under
the Securities Act.
19,837,851 Additional shares, upon expiration of applicable one-year holding
periods under Rule 144, which will expire between 180 days after
the date of this offering and February 22, 2001, subject to
restrictions under Rule 144.
</TABLE>
Pursuant to the "lock-up" agreements of our directors, executive officers,
employees, stockholders and optionees with the underwriters, the holders of
49,982,955 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.
46
<PAGE>
The underwriters may choose to release some or all of these shares from the
restrictions prior to the expiration of the 180-day lock-up period, although we
believe they have no current intention of doing so.
We also have entered into an agreement with the underwriters that we will
not offer, sell or otherwise dispose of common stock for a period of 180 days
from the date of this offering. On the date of the expiration of the lock-up
agreements, all of the restricted shares will be eligible for immediate sale,
of which shares will be subject to the volume, manner of sale and other
limitations under Rule 144.
Following the expiration of the lock-up periods, some shares issued upon
exercise of options that we granted prior to the date of this offering will
also be available for sale in the public market pursuant to Rule 701 under the
Securities Act. Rule 701 permits resales of such shares in reliance upon Rule
144 under the Securities Act but without compliance with the restrictions,
including the holding-period requirement, imposed under Rule 144. In general,
under Rule 144 as in effect at the closing of this offering, beginning 90 days
after the date of this prospectus, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year,
including the holding period of any prior owner who is not an affiliate, would
be entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of:
. 1% of the then-outstanding shares of common stock; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner who is not an affiliate, is entitled to sell these shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
We intend to file, within 90 days after the effective date of this offering,
registration statements on Form S-8 to register up to 10,500,000 million shares
of common stock reserved for issuance under our stock option plan and up to
600,000 shares of common stock reserved for issuance under our employee stock
purchase 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 13,173,045 shares of
common stock will, under some circumstances, have rights to require us to
register their shares for future sale.
47
<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................................................................. 7,000,000
=========
</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 1,050,000 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
48
<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.
49
<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 143,037
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.
50
<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>
WHEN THE THREE-FOR-ONE STOCK SPLIT REFERRED TO IN THE FIFTH PARAGRAPH OF
NOTE 12 OF THE NOTES TO FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE
IN A POSITION TO RENDER THE FOLLOWING REPORT.
KPMG LLP
Austin, Texas
February 24, 2000
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.
Austin, Texas
February , 2000
F-2
<PAGE>
NETPLIANCE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1999
--------------------------
Pro forma
(Unaudited)
Assets Actual (note 2(m))
<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............................ 978,048 978,048
------------ ------------
$ 20,625,183 $ 20,625,183
============ ============
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
------------ ------------
Deposit received on Series D preferred stock ...... 2,000,000 2,000,000
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 ......... 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 ......... 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 ......... 5,979,387 --
Common stock, $0.01 par value; 50,000,000 shares
authorized; 18,907,071 shares (44,166,501 shares
pro forma) issued and outstanding................ 189,071 441,665
Additional paid-in capital........................ 41,749,006 71,169,297
Deferred stock option compensation................ (14,164,611) (14,164,611)
Stockholder notes receivable...................... (821,449) (821,449)
Accumulated deficit............................... (43,527,816) (43,527,816)
------------ ------------
Total stockholders' equity....................... 13,097,086 13,097,086
------------ ------------
$ 20,625,183 $ 20,625,183
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
NETPLIANCE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Period from
January 12,
1999
(Inception)
through
December 31,
1999
-------------
<S> <C>
Subscription revenue............................................ $ 25,716
Operating expenses:
Cost of services............................................... 1,136,746
Loss on subsidized appliance and accessory sales............... 1,678,814
Research and development....................................... 6,457,133
Sales and marketing............................................ 14,069,426
General and administrative..................................... 4,134,135
-------------
Loss from operations........................................... (27,450,538)
Interest income................................................. 304,761
Interest expense................................................ (139,918)
-------------
Net loss....................................................... (27,285,695)
Effect of beneficial conversion feature of convertible
preferred stock............................................... (16,242,121)
-------------
Net loss applicable to common stock............................ $ (43,527,816)
=============
Weighted average common shares outstanding...................... 15,588,420
=============
Loss per common share--basic and diluted........................ $ (2.79)
=============
Weighted average shares outstanding--pro forma.................. 31,181,298
=============
Pro forma loss per common share--basic and diluted (unaudited).. $ (1.40)
=============
</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>
Series A Series B Series C
Preferred Preferred Preferred Common Deferred
Stock Stock Stock Stock Additional stock
------------------- ------------------ ----------------- ----------------------- paid-in option
Shares Amount Shares Amount Shares Amount Shares Amount capital compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
inception...... -- $ -- -- $ -- -- $ -- -- $ -- $ -- $ --
Issuance of
common stock... -- -- -- -- -- -- 22,870,131 228,701 6,986,004 --
Repurchase of
common stock... -- -- -- -- -- -- (3,981,060) (39,810) (26,541) --
Exercise of
common stock
options........ -- -- -- -- -- -- 18,000 180 3,240 --
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 -- -- -- --
Beneficial
conversion
feature on
convertible
preferred stock
............... -- -- -- -- -- -- -- -- 16,242,121 --
Deferred stock
option
compensation... -- -- -- -- -- -- -- -- 14,318,861 (14,318,861)
Amortization of
deferred
stock option
compensation... -- -- -- -- -- -- -- -- -- 154,250
Issuance of
warrants to
purchase shares
of common
stock.......... -- -- -- -- -- -- -- -- 4,225,321 --
Net loss........ -- -- -- -- -- -- -- -- -- --
------- ----------- ------- ---------- ------ ---------- ------------- -------- ----------- ------------
Balances at
December 31,
1999........... 658,647 $16,925,598 116,666 $6,767,900 66,668 $5,979,387 $ 18,907,071 $189,071 $41,749,006 $(14,164,611)
======= =========== ======= ========== ====== ========== ============= ======== =========== ============
<CAPTION>
Total
Stockholder Accum- stock-
notes ulated holders'
receivable deficit equity
<S> <C> <C> <C>
Balances at
inception...... $ -- $ -- $ --
Issuance of
common stock... (892,800) -- 6,321,905
Repurchase of
common stock... 71,351 -- 5,000
Exercise of
common stock
options........ -- -- 3,420
Issuance of
Series A
preferred
stock, net of
issuance costs. -- -- 16,925,598
Issuance of
Series B
preferred
stock, net of
issuance costs. -- -- 6,767,900
Issuance of
Series C
preferred
stock, net of
issuance costs. -- -- 5,979,387
Beneficial
conversion
feature on
convertible
preferred stock
............... -- (16,242,121) --
Deferred stock
option
compensation... -- -- --
Amortization of
deferred
stock option
compensation... -- -- 154,250
Issuance of
warrants to
purchase shares
of common
stock.......... -- -- 4,225,321
Net loss........ -- (27,285,695) (27,285,695)
----------- ------------- -------------
Balances at
December 31,
1999........... $(821,449) $(43,527,816) $ 13,097,086
=========== ============= =============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
NETPLIANCE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
January 12,
1999
(Inception)
through
December 31,
1999
------------
<S> <C>
Cash flows from operating activities:
Net loss........................................................ $(27,285,695)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 752,315
Noncash compensation expense................................... 4,891,338
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.................... 2,000,000
Payment of deferred offering costs.............................. (36,900)
------------
Net cash provided by financing activities........................ 36,561,869
------------
Increase in cash and cash equivalents since inception............ $ 9,563,362
============
Supplemental disclosure:
Interest paid during period..................................... $ 139,918
Supplemental disclosure of noncash investing and financing
activities:
Acquisition of computer equipment through capital leases........ $ 1,939,187
Issuance of common stock for notes receivable................... $ 821,449
Accrual of deferred offering costs.............................. $ 445,613
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) Incorporation and Nature of Business
Netpliance, Inc. ("Netpliance" or the "Company") was incorporated in the
State of Texas in January 1999 as Shbang! Inc. In May 1999, the Company's name
was changed to Netpliance, Inc.
The Company has experienced operating losses since inception as a result of
efforts to 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 or 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 Costs
Advertising costs are included in sales and marketing. Production costs are
expensed as incurred and communication costs are expensed the first time the ad
is run. Advertising costs approximated $5.7 million from January 12, 1999
(inception) through December 31, 1999. At December 31, 1999, the Company had
prepaid $3.15 million of advertising costs for television commercials that have
not yet run. This amount is included in prepaid expenses and will be expensed
the first time the commercial is run.
(g) Subsidized Appliance and Accessory Sales
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 presents the loss generated from the sale of the units and accessories
as an operating expense since sales of these devices are not the Company's
principal business activity and the loss primarily represents customer
acquisition costs. The Company records a provision for estimated warranty costs
and sales returns at the time of sale. To date, the Company's warranty costs
have not been significant. The sales return allowance was $110,000 at December
31, 1999. The loss on the sale of i-opener Internet appliances and related
accessories for the period ended December 31, 1999 is as follows:
<TABLE>
<S> <C>
Appliance and accessory sales, net of return provision.............. $1,193,780
Cost of appliance and accessory sales............................... 2,872,594
----------
$1,678,814
==========
</TABLE>
(h) 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.
(i) 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.
F-8
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(j) 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.
(k) 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.
(l) 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.
(m) 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 thirty-for-one conversion ratio. The unaudited pro forma balance sheet
reflects the conversion of the preferred stock as though it occurred as of
December 31, 1999.
(3) Net Loss Per Share
Historical
Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, "Earnings Per Share." In accordance with SFAS No. 128 and SEC Staff
Accounting Bulletin No. 98, basic loss per share is computed using the weighted
average number of common shares outstanding during the period. Diluted loss per
share is equivalent to basic loss per share because outstanding stock options,
warrants and convertible preferred stock are anti-dilutive. Potentially
dilutive securities that were excluded from the calculation of loss per share
because their effect was antidilutive were options to purchase 3,717,750 shares
of common stock, warrants to purchase 845,634 shares of common stock and shares
of preferred stock convertible into 25,259,430 shares of common stock.
Pro Forma Net Loss Per Share (Unaudited)
The following table sets forth the computation of the unaudited pro forma
basic and diluted loss per share for the period, assuming the conversion of the
Series A, B and C preferred stock into shares of the Company's
F-9
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
common stock effective upon the closing of the Company's initial public
offering as if such conversion occurred at the date of issuance:
<TABLE>
<S> <C>
Numerator:
Net loss.................................................... $ (27,285,695)
Effect of beneficial conversion feature of convertible
preferred stock............................................ (16,242,121)
-------------
Net loss applicable to common stock......................... $ (43,527,816)
=============
Denominator:
Weighted average common shares outstanding.................. 15,588,420
Conversion of Series A preferred stock...................... 14,531,973
Conversion of Series B preferred stock...................... 902,262
Conversion of Series C preferred stock...................... 158,643
-------------
Shares used in pro forma calculation........................ 31,181,298
-------------
Pro forma basic and diluted loss per share.................. $ (1.40)
=============
</TABLE>
(4) Property and Equipment
Property and equipment at December 31, 1999 consists of:
<TABLE>
<S> <C>
Computer equipment.............................................. $2,482,568
Furniture and fixtures.......................................... 221,822
Leasehold improvements.......................................... 74,897
Office and other equipment...................................... 159,805
Software........................................................ 859,582
----------
3,798,674
Less accumulated depreciation and amortization.................. (696,045)
----------
Net property and equipment...................................... $3,102,629
==========
</TABLE>
The Company's depreciation expense for the period from January 12, 1999
(inception) through December 31, 1999 totaled $696,045. Included in property
and equipment and accumulated depreciation at December 31, 1999 are $1,939,187
and $473,240, respectively, related to equipment on capital lease. Amortization
of assets leased under capital lease arrangements is included in depreciation
expense.
Terms of one of the Company's equipment leases calls for a letter of credit
in an amount equal to 25% of the value of the equipment. The Company has
pledged a certificate of deposit (included in other noncurrent assets at
December 31, 1999) in the amount of $445,231 as collateral for the letter of
credit issued by a financial institution.
(5) Accrued Liabilities
Accrued liabilities at December 31, 1999 consists of the following:
<TABLE>
<S> <C>
Payroll and employee benefits................................... $ 460,376
Professional services........................................... 545,000
Marketing and promotions........................................ 242,752
Other........................................................... 779,959
----------
$2,028,087
==========
</TABLE>
F-10
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(6) Notes Receivable
From January 12, 1999 (inception) through December 31, 1999, the Company
issued shares of its common stock in exchange for promissory notes to five
employees of the Company. The aggregate amount of the notes totaled $892,800.
In conjunction with the resignation of one of the Company's founders, one of
the notes was forgiven as part of the consideration for the repurchase of the
founder's shares. At December 31, 1999, the remaining four notes receivable
from employees were outstanding and aggregated $821,449. The notes are secured
by the common stock, bear interest at 7% and mature from January 18, 2004
through November 8, 2004. The notes have been reflected as a reduction of
stockholders' equity on the accompanying balance sheet. The Company issued
300,000 shares of common stock to an employee at a price below the estimated
fair value on the date of issuance and recognized $390,000 of expense which is
included in general and administrative expenses for the period ended December
31, 1999.
(7) Capital Stock
Common Stock
In March 1999, the Company repurchased approximately 3.9 million shares of
its common stock from one of its original founders in exchange for cash of
approximately $250,000 and a $220,546 note payable. The note payable bore
interest at 7% per annum and was paid in December 1999. The repurchased shares
were subsequently reissued to other stockholders. As the founder's shares were
issued in exchange for a note receivable that was never paid, the subsequent
repurchase of the shares, together with certain other costs related to the
founder's separation from the Company, was accounted for as compensation
expense. Such expense aggregated $472,000, and is included in general and
administrative expenses for the period ended December 31, 1999.
Convertible Preferred Stock
From inception through December 31, 1999, the Company issued 658,647 shares
of Series A preferred stock ("Series A") at prices ranging from $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 thirty shares
of common stock for each share of Series A. Additionally, each share of Series
A automatically converts into thirty 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 Conversion Price per share is $2 and $3
for Series B and Series C, respectively. Additionally, each share of Series B
and Series C automatically converts at the Conversion Price into shares of
common stock upon the Company's consummation of an initial firm underwritten
public offering of its common stock raising gross proceeds to the Company of
$15 million or more at an offering price per share greater than or equal to
150% of the initial Conversion Price, upon a consolidation or merger of the
Company with or into any other corporation or the sale or other transfer of all
or substantially all of the assets of the Company.
In the event of any liquidation or dissolution or winding up of the Company,
voluntary or involuntary, the holders of each series of preferred stock shall
be entitled to receive, subject to rights of any other class of stock
F-11
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
which ranks senior to the applicable series of preferred stock but before any
distribution is made on any class of stock ranking junior to the applicable
series of preferred stock, a liquidation preference plus any declared and
unpaid dividends. At December 31, 1999, the Series A, B and C carried a
liquidation preference equal to $5.71, $60 and $90 per share, respectively.
During the time the preferred stock is outstanding, the Company may not
declare or pay any dividends on any share of common stock unless a dividend
(including previously accrued, but unpaid dividends) is paid with respect to
all outstanding shares of the preferred stock. The holders of the preferred
stock will be entitled to receive dividends on each share of common stock into
which the preferred stock is then convertible. Any accrued dividends on the
preferred stock are payable upon the conversion of the preferred stock or
liquidation of the Company. No dividends had been declared or paid as of
December 31, 1999.
On December 22, 1999, the Company entered into an irrevocable agreement to
sell 1,430,000 shares of Series D Convertible Preferred Stock ("Series D") for
$20 per share in a private placement. On January 5, 2000, the Company
consummated the Series D offering and issued the Series D. Net proceeds to the
Company approximated $27.1 million. The holders of Series D are entitled to the
same voting and dividend rights as Series B and Series C and have a liquidation
preference equal to the original purchase price of $20 per share and in
preference to the Series A, Series B and Series C. The Series D may be
converted at the option of the holder into shares of common stock at a
conversion ratio of three-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 66,668 shares of Series C Convertible Preferred Stock and the 1.4
million shares of Series D Convertible Preferred Stock were issued with
beneficial conversion features approximating $16.2 million and $27.2 million,
respectively. The beneficial conversion features were calculated as the
difference between the conversion price and the fair value of the warrants and
common stock into which the preferred stock is convertible. These amounts are
accounted for as an increase in additional paid-in capital and in-substance
dividends to the preferred stockholders on the dates of issuance. The $16.2
million relating to the Series C Convertible Preferred Stock was recognized in
1999 and the amount relating to the Series D Convertible Preferred Stock will
be recognized in the first quarter of 2000 and accordingly will increase the
loss applicable to common stockholders by approximately $27.2 million.
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 total number of
shares authorized to be issued pursuant to options granted under the Plan is
4,500,000. 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 782,250 shares available for future
option grants under the Plan.
F-12
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 $2.85 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..................................................... $(27,286)
Pro forma....................................................... (42,423)
Basic and diluted net loss per share:
As reported..................................................... $ (2.79)
Pro forma....................................................... (3.75)
</TABLE>
A summary of changes in common stock options is as follows:
<TABLE>
<CAPTION>
Weighted
average
exercise price
Shares per share
<S> <C> <C>
Options granted....................................... 5,315,382 $1.22
Options exercised..................................... (18,000) 0.19
Options forfeited..................................... (610,500) 0.34
--------- -----
Options outstanding at December 31, 1999.............. 4,686,882 $1.34
========= =====
</TABLE>
Thirty thousand options with an exercise price of $2.55 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 $0.19 to $2.55 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>
1,279,500 9.3 $0.19
1,114,500 9.6 1.19
580,500 9.7 1.40
527,250 9.9 1.70
1,185,132 10.0 2.55
--------- -----
4,686,882 $1.34
========= =====
</TABLE>
The Company had $3,515,293 of deferred stock option compensation related to
employee stock options as of December 31, 1999 and recognized stock-based
compensation expense of $80,807 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 presented 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.
F-13
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
On December 21, 1999, the Company granted an option to purchase 969,132
shares of common stock at $2.55 per share to a consultant who is expected to
become an officer of the Company. At the time of the grant, the Company
recorded $10,722,761 of deferred stock compensation of which $73,444 was
recognized as compensation expense for the period ended December 31, 1999. 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%. On February 14,
2000 the consultant became an employee and the compensation related to the
options was remeasured on that date.
Warrants
On October 1, 1999 and December 3, 1999, the Company issued warrants to
purchase 215,634 and 30,000 shares of common stock 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 $2 and $3 per share, respectively. The warrants' fair value on
the date of grant was estimated to be $275,320. Additionally, subsequent to
December 31, 1999, in connection with the Series D offering, the Company issued
warrants to purchase 221,400 shares of the Company's common stock at $6.67 per
share.
On December 22, 1999 the Company entered into a nonbinding Memorandum of
Understanding ("MOU") with U S WEST !nterprise Networking Services ("U S WEST")
to form a strategic alliance for the distribution of the i-opener Internet
appliance. As consideration for signing the MOU, the Company granted to US West
for $5,000 an immediately exercisable warrant to purchase 600,000 shares of the
Company's common stock at $6.67 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 $4,126,544,
which has been recognized as sales and marketing expense as there were no
remaining performance obligations on behalf of the warrant holder. The fair
value of the warrant was estimated using the Black-Scholes model using an
assumed volatility of 50%, a risk-free interest rate of 6%, a weighted-average
expected life of one year, and a dividend rate of 0%.
Under the terms of the MOU it is anticipated that the Company will issue to
U S WEST incentive warrants to purchase up to 1,500,000 shares of the Company's
common stock at $6.67 per share if a binding agreement is consummated. It is
anticipated that the number of shares to be issued under the incentive warrants
will be subject to adjustment based on the number of users of the i-opener
activated by U S WEST. When and if it becomes probable that the performance
criteria will be achieved, the Company will record the then fair value of the
earned warrants as a charge to operating expenses.
(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.......................... $ 6,090,000
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......................... 1,795,000
Other..................................................... 128,000
------------
Total deferred tax assets................................... 12,084,000
Less: valuation allowance................................... (12,084,000)
------------
Net deferred tax assets..................................... $ --
============
</TABLE>
F-14
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 $15,820,000 and research tax credits of
approximately $229,000. The net operating loss carryforwards plus tax credit
carryforwards will expire at various dates beginning in 2019, if not utilized.
(10) Commitments and Contingencies
Leases
The Company leases its office space and certain equipment under non-
cancelable operating leases expiring in various years through 2002. The Company
also leases equipment, primarily computer equipment, under capital leases.
Total rent expense for all operating leases from January 12, 1999 (inception)
through December 31, 1999 was $720,756. Minimum lease commitments under non-
cancelable leases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating Capital
<S> <C> <C>
Years ended December 31:
2000...................................................... $ 921,672 $1,151,928
2001...................................................... 340,361 763,603
2002...................................................... 1,645 --
---------- ----------
Total lease payments...................................... $1,263,678 1,915,531
==========
Interest at rates ranging from 9% to 18%.................. 325,008
----------
Obligations under capital leases at December 31, 1999..... $1,590,523
==========
</TABLE>
The Company's lease for its office space is with a related party. The lease
calls for base payments of $44,625 plus common area costs and terminates in
2001. Total rent expense on this lease for the period ended December 31, 1999
approximated $479,000.
The Company is involved in certain legal proceedings as a part of its normal
course of business. Management does not believe that the ultimate resolution of
these matters will have a material impact on the Company's results of
operations or financial position.
Prior to the effectiveness of the registration statement covering the sale
of Netpliance common stock being sold in the initial public offering,
Donaldson, Lufkin & Jenrette Securities Corporation, an underwriter of the
offering, provided written materials to approximately 200 individuals that
Netpliance had designated as potential purchasers of up to 350,000 shares of
common stock in the offering through a directed share program. These materials
may constitute a prospectus that does not meet the requirements of the
Securities Act of 1933. If the distribution of these materials by Donaldson,
Lufkin & Jenrette Securities Corporation did constitute a violation of the
Securities Act of 1933, the recipients of the materials who purchased common
stock in the offering would have the right, for a period of one year from the
date of their purchase of common stock, to recover from the Company the
consideration paid in connection with their purchase of common stock or, if
F-15
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
they had already sold the stock, to sue Netpliance for damages resulting from
their purchase of common stock. These damages could total up to approximately
$4.9 million plus interest, based on the assumed initial public offering price
of $14.00 per share, if these investors seek recovery or damages after an
entire loss of their investment. While the ultimate outcome of these matters
cannot be determined, Netpliance does not expect that they will have a material
adverse effect on its financial position, results of operations or cash flows.
Significant Contracts
In May 1999, the Company entered into an agreement with QNX Software Systems
Ltd. to purchase licenses for copies of the operating system software utilized
in the i-opener Internet appliance. The agreement called for a prepayment of
$500,000 and a subsequent payment of $247,000 on May 1, 2000 for the initial
copies of the software. The unamortized portion of the initial prepayment has
been included in prepaid expenses at December 31, 1999. Amounts are expensed as
the units are shipped.
In June 1999, the Company signed an agreement with GTE for GTE to provide
the nationwide telecommunications network that will enable the Company to
provide its customers with Internet access. The term of the agreement is 36
months and calls for monthly payments based on actual usage billings during the
first six months. The contract includes minimum monthly payments of $82,500 for
months seven to nine, $165,500 for months 10 to 12 and $250,000 for months 13
to 36. Amounts are expensed as incurred based on the greater of the actual
billings or the minimum monthly payment as cost of services.
In June 1999, the Company signed an agreement under which GTE Communications
Corporation agreed to provide help-desk services for Internet service
customers. The term of the agreement is 24 months and calls for a per minute
charge to the Company for service. The agreement also obligates the Company to
pay for a minimum of 250,000 and 500,000 minutes per month for the first and
second years, respectively. Amounts are expensed as incurred based on the
greater of the actual billings or the minimum monthly payment as cost of
services.
In September 1999, the Company entered into an agreement with Quanta
Computer for Quanta to manufacture the i-opener Internet appliance. The initial
term of the agreement is for three years expiring on August 15, 2002, and is
renewable at the Company's option for one year periods. As part of the
agreement, Quanta has granted to Netpliance six months exclusivity on products
covered under the agreement. In December 1999, the Company prepaid Quanta $2.3
million as a deposit for production of an agreed number of units. This amount
has been included in prepaid expenses at December 31, 1999. The Company is
committed to purchase from Quanta a specified number of units by the end of
February 2000. The Company's remaining commitment approximated $5.7 million at
December 31, 1999.
(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.
(12) Subsequent Events
On February 4, 2000, the Company entered into an irrevocable agreement to
sell 1,127,675 shares of Series E Convertible Preferred Stock ("Series E") for
$30 per share in a private placement. The closing for the sale of these shares
was on February 7, 2000. The holders of Series E are entitled to the same
voting and
F-16
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
dividend rights as Series B, C and D and Series E has a liquidation preference
equal to the original purchase price of $30 per share. The Series E may be
converted at the option of the holder into shares of common stock at an initial
conversion ratio of three-to-one, and automatically converts upon the
consummation of the Company's initial public offering.
The 1,127,675 shares of Series E Convertible Preferred Stock were issued
with a beneficial conversion feature which approximates $13.5 million. The
beneficial conversion feature was calculated as the difference between the
conversion price and the fair value of the common stock into which the
preferred stock is convertible. This amount will be accounted for as an
increase in additional paid-in capital and an insubstance dividend to the
preferred stockholders in the first quarter of 2000 and accordingly will
increase the loss applicable to common stockholders by approximately $13.5
million.
On February 4, 2000, the Company agreed to grant to two preferred
stockholders, at such time as final agreements are entered into with these
parties, warrants to purchase 3,000,000 shares (1,500,000 shares each) of
common stock at $10 per share. An aggregate of 1,500,000 shares (750,000 each)
will vest immediately upon execution of certain "Commercial Agreements," as
defined. The Commercial Agreements will grant the
preferred stockholders jointly an exclusive right and license to distribute,
market and promote the i-opener in Canada for broadband cable distribution for
an initial period of three years. These preferred stockholders will also
provide network and subscriber management, billing, distribution and
provisioning services and systems with respect to i-opener subscribers in their
licensed territories. The Company will record as operating expenses the fair
value of the 750,000 warrants on the date of the signing of each of the
Commercial Agreements. If and when the performance criteria of the remaining
1,500,000 warrants are met, the Company will record the then fair value of the
earned warrants as a charge to operating expenses.
Subsequent to December 31, 1999, the Company granted, to employees and
officers, options to purchase approximately 2,971,563 shares of common stock at
exercise prices ranging from $1.70 to $14.00 per share that will vest over four
years and options to directors to purchase 630,000 shares of common stock at
$6.67 per share that vest immediately. The Company will record approximately
$6,380,000 of compensation expense in the first quarter of 2000 as a result of
granting stock options with exercise prices below the estimated fair value at
the date of grant. Remaining deferred compensation of $33,510,000 will be
amortized over the remaining four-year vesting period.
On February 6, 2000, the Company's Board of Directors approved a three-for-
one stock split of common stock to be effective immediately prior to the
effective date of the Company's initial public offering. All common stock
information has been adjusted to reflect the stock split as if such split had
taken place at the inception of the Company. On the same date, the Company's
Board of Directors authorized, pending stockholder approval, an increase in the
number of shares reserved for issuance under the stock option plan to
10,500,000.
On February 11, 2000, the Company entered into a non-binding letter of
intent with ATLINKS and THOMSON MultiMedia (collectively referred to as the
"Entity") wherein Netpliance and the Entity intend to form a strategic
relationship whereby the Entity will manufacture and distribute certain
consumer Internet appliances and Netpliance will provide the i-opener Internet
service to consumers. Upon execution of a definitive agreement, the Company
will grant the Entity a warrant to purchase one share of the Company's common
stock at a purchase price of $10 per share for the net number of subscribers of
that are actually activated prior to January 1, 2002, up to a maximum of
250,000. The warrants will vest December 31, 2000, December 31, 2001 and
December 31, 2002, as to that net number of subscribers that are activated
during each
F-17
<PAGE>
NETPLIANCE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
calendar year. If and when the performance criteria of the warrants are met,
the Company will record the then fair value of the earned warrants as a charge
to operating expenses. An affiliate of THOMSON also owns a portion of the
Company's Series E preferred stock.
On February 16, 2000, the Company signed an agreement to lease additional
office space for a period of 60 months at a monthly base rate of $101,414.
The Board approved adoption of the 2000 Employee Stock Purchase Plan (the
"Plan") effective the later of (a) March 1, 2000, (b) the date stockholders'
approval is obtained or (c) the date on which a Registration Statement under
the Securities Act of 1933, as amended, covering the shares to be issued under
the Plan becomes effective. The Company initially reserved for issuance to and
purchase by qualified employees under the Plan an aggregate of 600,000 shares
of common stock. The annual increase in the number of shares reserved for
issuance pursuant to the Plan shall be the least of the following: (1) 1% of
issued and outstanding shares as of the last day of the prior fiscal year; (2)
900,000 shares; or (3) a smaller number as determined by the Board of
Directors. Such annual increase shall occur automatically on the first trading
day in January of each year. The purchase price for each share of common stock
shall be 85% of the lesser of (i) the fair market value of such share on the
last business day in June and December during the life of the Plan or (ii) the
fair market value of such share on the first day of the Purchase Period. The
Purchase Period is defined as each six month period beginning on January 1 or
July 1.
F-18
<PAGE>
Inside of Back Cover:
[ARTWORK]
Illustration of the i-opener portal homepage with circles representing
buttons that link to "Mail," "Shopping," "Weather," "Finance," "Entertainment,"
"Sports," "News" and "Webguide."
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 2000
[NETPLIANCE LOGO APPEARS HERE]
7,000,000 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.... 12,575
Printing and Mailing Expenses.................................. 240,000
Accounting Fees and Expenses................................... 225,000
Legal Fees and Expenses........................................ 450,000
Blue Sky Fees and Expenses..................................... 5,000
Registrar and Transfer Agent Fees.............................. 10,000
Miscellaneous Expenses......................................... 31,025
----------
Total.......................................................... $1,000,000
==========
</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 three-for-one stock split effective immediately prior to the
effectiveness of this Registration Statement).
(a) In January 1999, we issued 3,000 shares of common stock at $0.17 per
share in order to initially capitalize the Registrant as required by state law.
(b) Also in January 1999, we issued 14,400,000 shares of common stock at
$0.02 per share, for an aggregate purchase price of $240,000, to our founders.
3,981,060 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
4,431,066 shares of Common Stock at $0.19 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 120,000 shares of common stock at $1.19 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 3,526,065 shares of
common stock at $1.40 per share for an aggregate purchase price of $4,936,491
to 24 investors.
(h) In September 1999, we issued 122,933 shares of Series A preferred stock
at $60.00 per share for an aggregate purchase price of $7,375,980 to 30
investors.
(i) In October 1999, we issued 116,666 shares of Series B preferred stock at
$60.00 per share for an aggregate purchase price of $7,000,000 to one investor
and entered into an agreement to put, prior to December 31, 1999, 66,668 shares
of Series C preferred stock at $90.00 per share to that investor and one of our
founders. We also issued 90,000 shares of common stock to the director
nominated by the Series B preferred stock purchaser at a purchase price of
$1.70 per share in October 1999.
(j) In November 1999, we issued 300,000 shares of common stock at $1.70 for
an aggregate purchase price of $510,000 to one investor in connection with his
employment with us.
(k) In December 1999, we issued an aggregate of 66,668 shares of Series C
preferred stock to the investor in Series B preferred stock and one of our
founders pursuant to the October agreement, at $90.00 per share, for an
aggregate purchase price of $6,000,000.
(l) On December 22, 1999, we entered into irrevocable commitments to sell an
aggregate of 1,430,000 shares of Series D preferred stock for an aggregate
purchase price of $28,600,000 to eight investors and granted a warrant to
purchase 600,000 shares of our common stock to one of those investors. In
January 2000, we issued the 1,430,000 shares of Series D preferred stock.
(m) On February 7, 2000, we issued 1,127,675 shares of our Series E
preferred stock for an aggregate purchase price of $33,830,250 to four
investors. The issuance of 933,334 shares of Series E preferred stock was
exempt from the registration requirements of the Securities Act by virtue of
Regulation S promulgated thereunder.
II-2
<PAGE>
From our inception to February 24, 2000, we granted options to purchase an
aggregate of 8,303,445 shares of common stock to our directors, executive
officers, employees and consultants pursuant to our stock option plan. To date
we have issued 57,375 shares of our common stock upon exercise of outstanding
options.
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.
4.2 Amended and Restated Rights Agreement among Netpliance and
Watershed Capital L.L.P. and John F. McHale dated as of December
3, 1999.
4.3 Amended and Restated Series D and Series E Rights Agreement among
Netpliance and the purchasers of Series D and Series E preferred
stock dated February 7, 2000.
5 * Opinion of Hughes & Luce, L.L.P. as to the validity of the shares
of Common Stock of Netpliance being registered.
10.1 +** Internetworking Agreement by and between GTE Internetworking
Incorporated and Netpliance dated as of May 30, 1999, as amended.
10.2 +** OEM Purchase Agreement by and between Netpliance and Quanta
Computer dated as of August 15, 1999.
10.3 ** Sublease Agreement by and between Netpliance and Powershift
Venures, L.L.C. dated June 15, 1999.
10.4 Office Lease by and between Netpliance and SV Bull Creek Limited
Partnership dated February 16, 2000.
10.5 Netpliance's Amended and Restated 1999 Stock Option and
Restricted Stock Plan.
10.6 Netpliance's Employee Stock Purchase Plan.
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 ** 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.
23.3 Consent of International Data Corporation.
24.1 ** Power of Attorney (included in this Registration Statement).
24.2 ** Power of Attorney of Joseph R. Zell.
27.1 Financial Data Schedule.
</TABLE>
II-3
<PAGE>
- ---------------------
* To be filed by amendment.
** Previously filed
+ Confidential treatment requested as to certain portions of this Exhibit.
(b) Financial Statements filed as part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.
Item 17. Undertakings
(a) The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under Item 14 or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) for the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Austin, State of Texas,
on February 24, 2000.
NETPLIANCE, INC.
/s/ Kent A. Savage
By: _________________________________
Kent A. Savage
President and Chief Executive
Officer
/s/ Barbara A. Kaczynski
By: _________________________________
Barbara A. Kaczynski
Chief Financial Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board February 24, 2000
____________________________________
John F. McHale
/s/ Kent A. Savage President and Chief February 24, 2000
____________________________________ Executive Officer and
Kent A. Savage Director (Principal
Executive Officer)
/s/ Barbara A. Kaczynski Chief Financial Officer February 24, 2000
____________________________________ (Principal Financial
Barbara A. Kaczynski Officer)
/s/ M. David Hampton Treasurer and Controller February 24, 2000
____________________________________ (Principal Accounting
M. David Hampton Officer)
* Director and Secretary February 24, 2000
____________________________________
Paul S. Zito
* Director February 24, 2000
____________________________________
Michael R. Corboy
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director February 24, 2000
____________________________________
David S. Lundeen
* Director February 24, 2000
____________________________________
James M. Mansour
* Director February 24, 2000
____________________________________
Steven G. Papermaster
* Director February 24, 2000
____________________________________
Kevin Denuccio
* Director February 24, 2000
____________________________________
Joseph R. Zell
* Director February 24, 2000
____________________________________
Grant A. Dove
</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>
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.
4.2 Amended and Restated Rights Agreement among Netpliance and Watershed
Capital L.L.P. and John F. McHale dated as of December 3, 1999.
(Previously filed as exhibit 10.6)
4.3 Amended and Restated Series D and Series E Rights Agreement among
Netpliance and the purchasers of Series D and Series E preferred
stock dated February 7, 2000.
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 Office Lease by and between Netpliance and SV Bull Creek Limited
Partnership dated February 16, 2000.
10.5 Netpliance's Amended and Restated 1999 Stock Option and Restricted
Stock Plan.
10.6 Netpliance's Employee Stock Purchase Plan.
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 ** 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).
23.3 Consent of International Data Corporation.
24.1 ** Power of Attorney (included in this Registration Statement).
24.2 ** Power of Attorney of Joseph R. Zell.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested as to certain portions of this Exhibit.
<PAGE>
EXHIBIT 1.1
Shares
----------
NETPLIANCE, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
__________, 2000
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CHASE H&Q
ROBERTSON STEPHENS INC.
As representatives of the
several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Netpliance, Inc., a Delaware corporation (the "Company"), proposes to issue
and sell _____________ shares of its Common Stock, $0.01 par value per share
(the "Firm Shares") to the several underwriters named in Schedule I hereto (the
"Underwriters"). The Company also proposes to issue and sell to the several
Underwriters not more than an additional ____________ shares of its Common
Stock, $0.01 par value per share (the "Additional Shares") if requested by the
Underwriters as provided in Section 2 hereof. The Firm Shares and the
Additional Shares are hereinafter referred to collectively as the "Shares". The
shares of common stock of the Company to
<PAGE>
be outstanding after giving effect to the sales contemplated hereby are
hereinafter referred to as the "Common Stock".
SECTION 1. Registration Statement and Prospectus. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1, including a prospectus, relating
to the Shares. The registration statement, as amended at the time it became
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Act, is hereinafter referred to as the "Registration Statement"; and the
prospectus in the form first used to confirm sales of Shares is hereinafter
referred to as the "Prospectus". If the Company has filed or is required
pursuant to the terms hereof to file a registration statement pursuant to Rule
462(b) under the Act registering additional shares of Common Stock (a "Rule
462(b) Registration Statement"), then, unless otherwise specified, any reference
herein to the term "Registration Statement" shall be deemed to include such Rule
462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On the
basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per Share of $______ (the "Purchase Price") the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to _____________ Additional Shares from
the Company at the Purchase Price. Additional Shares may be purchased solely
for the purpose of covering over-allotments made in connection with the offering
of the Firm Shares. The Underwriters may exercise their right to purchase
Additional Shares in whole or in part from time to time by giving written notice
thereof to the Company within thirty (30) days after the date of this Agreement.
You shall give any such notice on behalf of the Underwriters, and such notice
shall specify the aggregate number of Additional Shares to be purchased pursuant
to such exercise and the date for payment and delivery thereof, which date shall
be a business day (i) no earlier than two business days after such notice has
been given (and, in any event, no earlier than the Closing Date (as hereinafter
defined)) and (ii) no later than ten business days after such notice has been
given. If any Additional Shares are to be purchased, each Underwriter,
severally and not jointly, agrees to purchase from the Company the number of
Additional Shares (subject to such adjustments to eliminate fractional shares as
you may determine) which bears the same proportion to the total number of
Additional Shares to be purchased from the Company as the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I bears to the total
number of Firm Shares.
-2-
<PAGE>
The Company hereby agrees not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, 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, (ii)
accelerate the vesting of stock options granted pursuant to the Company's
existing stock option plan, or (iii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any Common Stock (regardless of whether any of the transactions
described in clause (i), (ii) or (iii) is to be settled by the delivery of
Common Stock, or such other securities, in cash or otherwise), except to the
Underwriters pursuant to this Agreement, for a period of 180 days after the date
of the Prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. Notwithstanding the foregoing, during such
period (i) the Company may grant stock options pursuant to the Company's
existing stock option plan and (ii) the Company may issue shares of Common Stock
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof. The Company also agrees not to file any
registration statement with respect to any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock for
a period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, the Company may during such period file a registration statement
on Form S-8 relating to its employee benefit plans; provided, however, that in
no event shall such registration statement on Form S-8 be used for resale of
shares issued upon exercise of stock options or stock purchase rights during
such 180 day period and, provided further that the Company shall not, during
such 180 day period, waive any provision of any stock option or stock purchase
agreement that obligates the optionee or purchaser, as the case may be, to enter
into a 180 day lockup agreement following the offering of Company's Common Stock
contemplated hereby without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. The Company shall, prior to or concurrently
with the execution of this Agreement, deliver an agreement executed by (i) each
of the directors and officers of the Company, (ii) each stockholder, other than
as listed on Schedule II hereto, and (iii) each holder of options to purchase
equity securities of the Company, other than those listed on Schedule III
hereto, to the effect that such person will not, during the period commencing on
the date such person signs such agreement and ending 180 days after the date of
the Prospectus, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation, (A) engage in any of the transactions described
in the first sentence of this paragraph or (B) 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.
The Company hereby confirms its engagement of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") as, and DLJ hereby confirms its agreement with
the Company to render services as, a "qualified independent underwriter", within
the meaning of Section (b)(15) of Rule 2720 of the National Association of
Securities Dealers, Inc. with respect to the offering and sale of the Shares.
DLJ, solely in its capacity as the qualified independent underwriter and not
otherwise, is referred to herein as the "QIU". As compensation for the services
of the QIU hereunder, the Company agrees to pay the QIU $5,000 on the Closing
Date. The price at which the Shares will be sold to the public shall not be
higher than the maximum price recommended by the QIU.
-3-
<PAGE>
SECTION 3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the execution and delivery of this Agreement as in
your judgment is advisable and (ii) initially to offer the Shares upon the terms
set forth in the Prospectus.
SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Company shall deliver the Shares, with any transfer taxes thereon duly paid by
the respective Sellers, to Donaldson, Lufkin & Jenrette Securities Corporation
through the facilities of The Depository Trust Company ("DTC"), for the
respective accounts of the several Underwriters, against payment to the Company
of the Purchase Price therefore by wire transfer of Federal or other funds
immediately available in New York City. The certificates representing the Shares
shall be made available for inspection not later than 9:30 A.M., New York City
time, on the business day prior to the Closing Date or the applicable Option
Closing Date, as the case may be, at the office of DTC or its designated
custodian (the "Designated Office"). The time and date of delivery and payment
for the Firm Shares shall be 9:00 A.M., New York City time, on ________, 2000 or
such other time on the same or such other date as Donaldson, Lufkin & Jenrette
Securities Corporation and the Company shall agree in writing. The time and date
of delivery for the Firm Shares are hereinafter referred to as the "Closing
Date". The time and date of delivery and payment for any Additional Shares to be
purchased by the Underwriters shall be 9:00 A.M., New York City time, on the
date specified in the applicable exercise notice given by you pursuant to
Section 2 or such other time on the same or such other date as Donaldson, Lufkin
& Jenrette Securities Corporation and the Company shall agree in writing. The
time and date of delivery for any Additional Shares are hereinafter referred to
as an "Option Closing Date".
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 9 of this Agreement
shall be delivered at the offices of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, and the Shares shall be delivered at the Designated
Office, all on the Closing Date or such Option Closing Date, as the case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such advice
in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which
-4-
<PAGE>
makes any statement of a material fact made in the Registration Statement or the
Prospectus untrue or which requires any additions to or changes in the
Registration Statement or the Prospectus in order to make the statements therein
not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you three signed copies of the Registration Statement as
first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall occur
or condition shall exist as a result of which, in the opinion of counsel for the
Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of
counsel for the Underwriters, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare and file with the
Commission an appropriate amendment or supplement to the Prospectus so that the
statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you and
counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as
-5-
<PAGE>
required for distribution of the Shares and to file such consents to service of
process or other documents as may be necessary in order to effect such
registration or qualification; provided, however, that the Company shall not be
required in connection therewith to qualify as a foreign corporation in any
jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering the twelve-month period ending March
31, 2001 that shall satisfy the provisions of Section 11(a) of the Act, and to
advise you in writing when such statement has been so made available.
(h) During the period of three years after the date of this Agreement, to
furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel and
the Company's accountants in connection with the registration and delivery of
the Shares under the Act and all other fees and expenses in connection with the
preparation, printing, filing and distribution of the Registration Statement
(including financial statements and exhibits), any preliminary prospectus, the
Prospectus and all amendments and supplements to any of the foregoing, including
the mailing and delivering of copies thereof to the Underwriters and dealers in
the quantities specified herein, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) all costs of printing or producing this
Agreement and any other agreements or documents in connection with the offering,
purchase, sale or delivery of the Shares, (iv) all expenses in connection with
the registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in connection
therewith (including the filing fees and fees and disbursements of counsel for
the Underwriters in connection with such registration or qualification and
memoranda relating thereto), (v) the filing fees and disbursements of counsel
for the Underwriters in connection with the review and clearance of the offering
of the Shares by the National Association of Securities Dealers, Inc., (vi) all
fees and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all costs
and expenses incident to the listing of the Shares on the Nasdaq National
Market, (vii) the cost of printing certificates representing the Shares, (viii)
the costs and charges of any transfer agent, registrar and/or depositary, (ix)
the fees and expenses of the QIU (including the fees and disbursements of
counsel to the QIU), and (x) all other
-6-
<PAGE>
costs and expenses incident to the performance of the obligations of the Company
hereunder for which provision is not otherwise made in this Section.
(j) To use its best efforts to list for quotation the Shares on the Nasdaq
National Market and to maintain the listing of the Shares on the Nasdaq National
Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of this
Agreement does not cover all of the Shares, to file a Rule 462(b) Registration
Statement with the Commission registering the Shares not so covered in
compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b) Registration
Statement to be filed by the Company after the effectiveness of this Agreement),
when it became effective, did not contain and, as amended, if applicable, will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement) and the Prospectus comply and, as amended or supplemented, if
applicable, will comply in all material respects with the Act, (iii) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, such Rule 462(b) Registration Statement and any
amendments thereto, when they become effective (A) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(B) will comply in all material respects with the Act and (iv) the Prospectus
does not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in the Registration
-7-
<PAGE>
Statement or the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(c) Each preliminary prospectus filed as part of the registration statement
as originally filed or as part of any amendment thereto, or filed pursuant to
Rule 424 under the Act, complied when so filed in all material respects with the
Act, and did not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this paragraph do not apply to statements or omissions in any preliminary
prospectus based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.
(d) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its jurisdiction of incorporation
and has the corporate power and authority to carry on its business as described
in the Prospectus and to own, lease and operate its properties, free and clear
of all encumbrances, liens and defects except as described in the Prospectus or
as do not materially affect the value of and use of such property by the
Company, and each is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole
("Material Adverse Effect").
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(f) All the outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid, non-assessable and not
subject to any preemptive or similar rights; and the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights.
(g) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(h) The Company is not in violation of its respective charter or by-laws
or, except as would not cause a Material Adverse Effect, in default in the
performance of any obligation, agreement, covenant or condition contained in any
indenture, loan agreement, mortgage, lease or other agreement or instrument to
which the Company is a party or by which the Company or its property is bound.
-8-
<PAGE>
(i) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization.
(j) There are no legal or governmental proceedings pending or threatened
to which the Company or any of its subsidiaries is or could be a party or to
which any of their respective property is or could be subject that are required
to be described in the Registration Statement or the Prospectus and are not so
described; nor are there any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
so described or filed as required.
(k) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act, or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a material adverse effect on the business, prospects, financial
condition or results of operation of the Company and its subsidiaries, taken as
a whole.
(l) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each such Authorization is valid and in full
force and effect and each of the Company and its subsidiaries is in compliance
with all the terms and conditions thereof and with the rules and regulations of
the authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of any
notice from any authority or
-9-
<PAGE>
governing body) which allows or, after notice or lapse of time or both, would
allow, revocation, suspension or termination of any such Authorization or
results or, after notice or lapse of time or both, would result in any other
impairment of the rights of the holder of any such Authorization; and such
Authorizations contain no restrictions that are burdensome to the Company or any
of its subsidiaries; except where such failure to be valid and in full force and
effect or to be in compliance, the occurrence of any such event or the presence
of any such restriction would not, singly or in the aggregate, have a material
adverse effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole.
(m) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(n) This Agreement has been duly authorized, executed and delivered by the
Company.
(o) KPMG Peat Marwick, L.L.P. are independent public accountants with
respect to the Company and its subsidiaries as required by the Act.
(p) The financial statements included in the Registration Statement and
the Prospectus (and any amendment or supplement thereto), together with related
schedules and notes, present fairly, in all material respects, the financial
position, results of operations and changes in financial position of the Company
and its subsidiaries on the basis stated therein at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; the supporting schedules, if any, included in the
Registration Statement present fairly, in all material respects, in accordance
with generally accepted accounting principles the information required to be
stated therein; and the other financial and statistical information and data set
forth in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) are, in all material respects, accurately presented and
prepared on a basis consistent with such financial statements and the books and
records of the Company.
(q) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(r) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company, except as described in the Registration Statement or except to the
extent such right has been irrevocably waived by the person holding such
-10-
<PAGE>
right, or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement.
(s) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
(t) Each certificate signed by any officer of the Company and delivered to
the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
(u) The Company owns or possesses, or can acquire on reasonable terms, all
patents, patent rights, licenses, inventions, copyrights, know-how (including
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks and
trade names ("intellectual property") currently employed by it in connection
with the business now operated by it except where the failure to own or possess
or otherwise be able to acquire such intellectual property would not, singly or
in the aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operation of the Company; and the Company has
not received any notice of infringement of or conflict with asserted rights of
others with respect to any of such intellectual property which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the business, prospects, financial condition
or results of operations of the Company.
(v) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which they are engaged; and the Company (i)
has not received notice from any insurer or agent of such insurer that
substantial capital improvements or other material expenditures will have to be
made in order to continue such insurance or (ii) has no reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers at a cost
that would not have a material adverse effect on the business, prospects,
financial conditions or results of operations of the Company.
(w) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or
-11-
<PAGE>
specific authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
SECTION 7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter,
its directors, its officers and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")(13), from and
against any and all losses, claims, damages, liabilities and judgments
(including, without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein; provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter who failed to deliver a Prospectus, as then
amended or supplemented, (so long as the Prospectus and any amendments or
supplements thereto was provided by the Company to that Underwriter in the
requisite quantity and on a timely basis to permit proper delivery on or prior
to the Closing Date) to the person asserting any losses, claims, damages,
liabilities or judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in such preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in the Prospectus, as so amended or supplemented, and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent
as the foregoing indemnity from the Company to such Underwriter but only with
reference to information relating to such Underwriter furnished in writing to
the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the
-12-
<PAGE>
"indemnifying party") in writing and the indemnifying party shall assume the
defense of such action, including the employment of counsel reasonably
satisfactory to the indemnified party and the payment of all fees and expenses
of such counsel, as incurred (except that in the case of any action in respect
of which indemnity may be sought pursuant to both Sections 7(a) and 7(b), the
Underwriter shall not be required to assume the defense of such action pursuant
to this Section 7(c), but may employ separate counsel and participate in the
defense thereof, but the fees and expenses of such counsel, except as provided
below, shall be at the expense of such Underwriter). Any indemnified party shall
have the right to employ separate counsel in any such action and participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of the indemnified party unless (i) the employment of such counsel shall
have been specifically authorized in writing by the indemnifying party, (ii) the
indemnifying party shall have failed to assume the defense of such action or
employ counsel reasonably satisfactory to the indemnified party or (iii) the
named parties to any such action (including any impleaded parties) include both
the indemnified party and the indemnifying party, and the indemnified party
shall have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the indemnifying party (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of the
indemnified party). In any such case, the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all indemnified parties
and all such fees and expenses shall e reimbursed as they are incurred. Such
firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation, in the case of parties indemnified pursuant to Section 7(a), and by
the Company, in the case of parties indemnified pursuant to Section 7(b). The
indemnifying party shall indemnify and hold harmless the indemnified party from
and against any and all losses, claims, damages, liabilities and judgments by
reason of any settlement of any action (i) effected with its written consent or
(ii) effected without its written consent if the settlement is entered into more
than twenty business days after the indemnifying party shall have received a
request from the indemnified party for reimbursement for the fees and expenses
of counsel (in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 7 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party,
-13-
<PAGE>
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Company, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
SECTION 8. Indemnification of QIU.
-14-
<PAGE>
(a) The Company agrees to indemnify and hold harmless the QIU, its
directors, its officers and each person, if any, who controls the QIU within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, liabilities and judgments
(including, without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) related to, based upon or arising out of (i) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), the Prospectus (or any amendment or
supplement thereto) or any preliminary prospectus, or any 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 (ii) the QIU's
activities as QIU under its engagement pursuant to Section 2 hereof, except in
the case of this clause (ii) insofar as any such losses, claims, damages,
liabilities or judgments are found in a final judgment by a court of competent
jurisdiction, not subject to further appeal, to have resulted solely from the
willful misconduct or gross negligence of the QIU.
(b) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 8(a) (the "QIU Indemnified
Party"), the QIU Indemnified Party shall promptly notify the Company in writing
and the Company shall assume the defense of such action, including the
employment of counsel reasonably satisfactory to the QIU Indemnified Party and
the payment of all fees and expenses of such counsel, as incurred. Any QIU
Indemnified Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the QIU Indemnified Party unless (i) the
employment of such counsel shall have been specifically authorized in writing by
the Company, (ii) the Company shall have failed to assume the defense of such
action or employ counsel reasonably satisfactory to the QIU Indemnified Party or
(iii) the named parties to any such action (including any impleaded parties)
include both the QIU Indemnified Party and the Company, and the QIU Indemnified
Party shall have been advised by such counsel that there may be one or more
legal defenses available to it which are different from or additional to those
available to the Company (in which case the Company shall not have the right to
assume the defense of such action on behalf of the QIU Indemnified Party). In
any such case, the Company shall not, in connection with any one action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) for all QIU Indemnified Parties, which firm shall be
designated by the QIU, and all such fees and expenses shall be reimbursed as
they are incurred. The Company shall indemnify and hold harmless the QIU
Indemnified Party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with its written consent or (ii) effected without its written consent if the
settlement is entered into more than twenty business days after the Company
shall have received a request from the QIU Indemnified Party for reimbursement
for the fees and expenses of counsel (in any case where such fees and expenses
are at the expense of the Company) and, prior to the date of such settlement,
the Company shall have failed to comply with such reimbursement request. The
Company shall not, without the prior written consent of the QIU Indemnified
Party, effect any settlement or compromise of, or consent to the entry of
judgment with
-15-
<PAGE>
respect to, any pending or threatened action in respect of which the QIU
Indemnified Party is or could have been a party and indemnity or contribution
may be or could have been sought hereunder by the QIU Indemnified Party, unless
such settlement, compromise or judgment (i) includes an unconditional release of
the QIU Indemnified Party from all liability on claims that are or could have
been the subject matter of such action and (ii) does not include a statement as
to or an admission of fault, culpability or a failure to act, by or on behalf of
the QIU Indemnified Party.
(c) To the extent the indemnification provided for in this Section 8 is
unavailable to a QIU Indemnified Party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then the Company,
in lieu of indemnifying such QIU Indemnified Party, shall contribute to the
amount paid or payable by such QIU Indemnified Party as a result of such losses,
claims, damages, liabilities and judgments (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the QIU on the other hand from the offering of the Shares or (ii) if
the allocation provided by clause 8(c)(i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause 8(c)(i) above but also the relative fault of the
Company on the one hand and the QIU on the other hand in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or judgments, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the QIU on the other hand shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Company as set forth in the table on the cover page of the Prospectus, and
the fee received by the QIU pursuant to Section 2 hereof, bear to the sum of
such total net proceeds and such fee. The relative fault of the Company on the
one hand and the QIU on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the QIU and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission and whether the QIU's activities as QIU under its
engagement pursuant to Section 2 hereof involved any willful misconduct or gross
negligence on the part of the QIU.
The Company and the QIU agree that it would not be just and equitable if
contribution pursuant to this Section 8(c) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by a QIU Indemnified Party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such QIU Indemnified Party
in connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
-16-
<PAGE>
(d) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
QIU Indemnified Party at law or in equity.
SECTION 9. Conditions of Underwriters' Obligations. The several obligations
of the Underwriters to purchase the Firm Shares under this Agreement are subject
to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Kent Savage and Barbara Kaczynski, in their capacities
as the Chief Executive Officer and Chief Financial Officer of the Company,
confirming the matters set forth in Sections 6(t), 9(a) and 9(b) and that the
Company has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by the
Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) You shall have received on the Closing Date an opinion (reasonably
satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Hughes & Luce, L.L.P., counsel for the Company, to the effect that:
(i) the Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation and has the corporate
-17-
<PAGE>
power and authority to carry on its business as described in the Prospectus
and to own, lease and operate its properties;
(ii) the Company is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in which
the nature of its business or its ownership or leasing of property requires
such qualification, except where the failure to be so qualified would not
have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole;
(iii) all the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable
and not subject to any preemptive or similar rights;
(iv) the Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar
rights;
(v) this Agreement has been duly authorized, executed and delivered
by the Company;
(vi) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(vii) the Registration Statement has become effective under the Act,
no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's knowledge
after due inquiry, pending before or contemplated by the Commission;
(viii) the statements under the caption "Description of Capital Stock"
in the Prospectus and Items 14 and 15 of Part II of the Registration
Statement, insofar as such statements constitute a summary of the legal
matters, documents or proceedings referred to therein, fairly present, in
all material respects, the information called for with respect to such
legal matters, documents and proceedings;
(ix) to the best of such counsel's knowledge, the Company is not in
violation of its respective charter or by-laws and, to the best of such
counsel's knowledge after due inquiry, the Company is not in default in the
performance of any obligation, agreement, covenant or condition contained
in any indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company, to which the Company is a party
or by which the Company or its property is bound;
(x) the execution, delivery and performance of this Agreement by
the Company, the compliance by the Company with all the provisions hereof
and the consummation of the
-18-
<PAGE>
transactions contemplated hereby will not (A) require any consent,
approval, authorization or other order of, or qualification with, any court
or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (B) conflict with or
constitute a breach of any of the terms or provisions of, or a default
under, the charter or by-laws of the Company or any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is
material to the Company, to which the Company is a party or by which the
Company or its property is bound, (C) violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction over the
Company or its property or (D) result in the suspension, termination or
revocation of any Authorization of the Company or any other impairment of
the rights of the holder of any such Authorization;
(xi) after due inquiry, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company is or
might reasonably likely be a party or to which any of its property is or
might reasonably likely be subject that are required to be described in the
Registration Statement or the Prospectus and are not so described, or of
any statutes, regulations, contracts or other documents that are required
to be described in the Registration Statement or the Prospectus or to be
filed as exhibits to the Registration Statement that are not so described
or filed as required;
(xii) to the best of such counsel's knowledge, the Company has such
Authorizations of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations
and all courts and other tribunals, including, without limitation, under
any applicable Environmental Laws, as are necessary to own, lease, license
and operate its respective properties and to conduct its business, except
where the failure to have any such Authorization or to make any such filing
or notice would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of
operations of the Company; each such Authorization is valid and in full
force and effect and, to the best of such counsel's knowledge, the Company
is in compliance with all the terms and conditions thereof and with the
rules and regulations of the authorities and governing bodies having
jurisdiction with respect thereto; and, to the best of such counsel's
knowledge, no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which allows
or, after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such Authorization or results or, after
notice or lapse of time or both, would result in any other impairment of
the rights of the holder of any such Authorization; and such Authorizations
contain no restrictions that are burdensome to the Company; except where
such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of
operations of the Company;
(xiii) the Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be,
-19-
<PAGE>
an "investment company" as such term is defined in the Investment Company
Act of 1940, as amended;
(xiv) to the best of such counsel's knowledge after due inquiry,
except as disclosed in the Registration Statement, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company or,
except to the extent any such right has been irrevocably waived by the
person holding such right, to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement; and
(xv) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements and
other financial data included therein as to which no opinion need be
expressed) comply as to form with the Act, (B) such counsel has no reason
to believe that at the time the Registration Statement became effective or
on the date of this Agreement, the Registration Statement and the
prospectus included therein (except for the financial statements and other
financial data as to which such counsel need not express any belief)
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading and (C) such counsel has no reason to
believe that the Prospectus, as amended or supplemented, if applicable
(except for the financial statements and other financial data, as
aforesaid) contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
The opinion of Hughes & Luce, L.L.P. described in Section 9(e) above shall
be rendered to you at the request of the Company and shall so state therein.
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters, as to the matters referred to in Sections
9(e)(iv), 9(e)(vi), 9(e)(ix) (but only with respect to the statements under the
caption "Description of Capital Stock" and "Underwriting") and 9(e)(xvii).
In giving such opinions with respect to the matters covered by Section
9(e)(xvii) Hughes & Luce, L.L.P. and Wilson Sonsini Goodrich & Rosati,
Professional Corporation, may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and discussion
of the contents thereof, but are without independent check or verification
except as specified.
(g) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from KPMG Peat Marwick, L.L.P.,
independent public accountants, containing the information and statements of the
type ordinarily included in accountants' "comfort letters" to Underwriters with
-20-
<PAGE>
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(h) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(i) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(j) The Company shall not have failed on or prior to the Closing Date to
perform or comply with any of the agreements herein contained and required to be
performed or complied with by the Company on or prior to the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter
-21-
<PAGE>
or Underwriters agreed but failed or refused to purchase is not more than one-
tenth of the total number of Firm Shares or Additional Shares, as the case may
be, to be purchased on such date by all Underwriters, each non-defaulting
Underwriter shall be obligated severally, in the proportion which the number of
Firm Shares set forth opposite its name in Schedule I bears to the total number
of Firm Shares which all the non-defaulting Underwriters have agreed to
purchase, or in such other proportion as you may specify, to purchase the Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 10 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you
and the Company for purchase of such Firm Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the Company. In any such case which does
not result in termination of this Agreement, either you or the Company shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or arrangements may be
effected. If, on an Option Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than one-
tenth of the aggregate number of Additional Shares to be purchased on such date,
the non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase such Additional Shares or (ii) purchase not
less than the number of Additional Shares that such non-defaulting Underwriters
would have been obligated to purchase on such date in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of any such Underwriter
under this Agreement.
SECTION 11. Miscellaneous. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (i) if to the Company, to Netpliance,
Inc., 7600 N. Capital of Texas Hwy., Austin, Texas 78731, Attention: General
Counsel, and (ii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin
& Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172,
Attention: Syndicate Department, or in any case to such other address as the
person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, the QIU Indemnified Party,
the Company, the officers or directors of
-22-
<PAGE>
the Company or any person controlling the Company, (ii) acceptance of the Shares
and payment for them hereunder and (iii) termination of this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Company agrees to reimburse the several
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) incurred by them. Notwithstanding any termination of
this Agreement, the Company shall be liable for all expenses which it has agreed
to pay pursuant to Section 5(i) hereof. The Company also agrees to reimburse
the several Underwriters, their directors and officers, any persons controlling
any of the Underwriters and the QIU Indemnified Party for any and all fees and
expenses (including, without limitation, the fees disbursements of counsel)
incurred by them in connection with enforcing their rights hereunder (including,
without limitation, pursuant to Section 7 hereof).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Underwriters, the
Underwriters' directors and officers, any controlling persons referred to
herein, the QIU Indemnified Party, the Company's directors and the Company's
officers who sign the Registration Statement and their respective successors and
assigns, all as and to the extent provided in this Agreement, and no other
person shall acquire or have any right under or by virtue of this Agreement.
The term "successors and assigns" shall not include a purchaser of any of the
Shares from any of the several Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the laws
of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
-23-
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
NETPLIANCE, INC.
By:
-------------------------------------
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CHASE H&Q
ROBERTSON STEPHENS, INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By
-----------------------------
-24-
<PAGE>
SCHEDULE I
----------
Underwriters Number of Firm Shares to
be Purchased
Donaldson, Lufkin & Jenrette
Securities Corporation
Total
<PAGE>
Annex I
<PAGE>
EXHIBIT 4.3
AMENDED AND RESTATED
SERIES D AND SERIES E RIGHTS AGREEMENT
This AMENDED AND RESTATED SERIES D AND SERIES E RIGHTS AGREEMENT (this
"Rights Agreement") is made as of February 7, 2000 by and among Netpliance, Inc.
(the "Corporation"), the holders of the Corporation's Series D Convertible
Preferred Stock ("Series D Preferred") and the holders of the Corporation's
Series E Convertible Preferred Stock ("Series E Preferred" and, together with
the Series D Preferred, the "Shares"). The holders of the Shares are listed on
the signature pages hereto and are referred to collectively herein as the
"Holders". This Rights Agreement amends, restates, and supercedes entirely the
Series D Rights Agreement dated January 5, 2000 by and among the Corporation and
the holders of the Corporation's Series D Convertible Preferred Stock.
WHEREAS, the Corporation issued and sold the Series D Preferred to each of
the holders of the Series D Preferred, and the Corporation now wishes to issue
and sell the Series E Preferred to the remaining Holders; and
WHEREAS, in connection with the issuance and sale of the Shares and in
consideration for the Corporation's sale of Shares pursuant to the Series D
Preferred Stock Purchase Agreement and the Series E Preferred Stock Purchase
Agreement relating to such Shares, 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 Inspection and Observation. The Corporation will permit each Holder,
--------------------------
so long as such Holder holds at least 100,000 Shares, as adjusted for any stock
splits, stock dividends, recapitalizations or similar events, or any authorized
representative of such Holder to visit and inspect the properties of the
Corporation, including its corporate and financial records, and to discuss its
business and finances with officers of the Corporation, during normal business
hours following reasonable notice, without interference to the conduct of the
Corporation's business and as often as may be reasonably requested.
1.2 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 ("GAAP"), except for
the accompanying notes, and setting forth in each case in comparative form the
figures for the previous fiscal year; and
(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
1
<PAGE>
quarter, in reasonable detail and prepared in accordance with GAAP, subject to
year end audit adjustments and the absence of footnotes.
1.3 Termination of Information Rights. The covenants set forth in
---------------------------------
Section 1.2 shall terminate as to each Holder and be of no further force and
- -----------
effect upon the consummation of the 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 with
gross proceeds to the Corporation of at least $25,000,000 (a "Qualifying Public
Offering").
2. Composition of Board of Directors. The holders of the outstanding shares
---------------------------------
of Series D Preferred shall have the right to elect or cause to be elected to
the Corporation's Board of Directors one (1) director (the "Series D Director")
and agree to vote all securities of the Corporation over which such holder has
voting control and to take all other Necessary or desirable actions within its
control (whether as a shareholder, director or officer of the Corporation or
otherwise, and including without limitation attendance at meetings in person or
by proxy for purposes of obtaining a quorum and execution of written consents in
lieu of meetings) to elect the designee nominated by US WEST, Inc. The right
under this Section 2 to designate the Series D Director shall expire upon the
---------
earlier of: (i) such time as less than fifty (50%) of the shares of Series D
Preferred are outstanding and (ii) the consummation of the Corporation's sale of
its Common Stock in a Qualifying Public Offering.
3. 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; provided, that each officer, director and shareholder who owns more
than five percent (5%) of the Corporation's voting power agrees to be similarly
bound. 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.
4. Registration Rights. The Corporation covenants and agrees as follows:
-------------------
4.1 Definitions. For purposes of this Section 4:
------------ ---------
(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, 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 D Preferred issued pursuant to
the Series D Preferred Stock Purchase Agreement of dated January 5, 2000
("Series D Purchase Agreement"),
2
<PAGE>
(ii) issuable or issued upon conversion of the Series E Preferred issued
pursuant to the Series E Preferred Stock Purchase Agreement of even date
herewith ("Series E 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 D Preferred or Series E Preferred, excluding in all cases, however, (A)
any Registrable Securities sold by a person in a transaction in which such
person's rights under this Section 4 are not assigned, (B) any Registrable
Securities sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, or (C) any Registrable
Securities that are eligible for resale under Rule 144(k) promulgated by the
Securities and Exchange Commission (the "SEC") under the Securities Act;
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding that are, and the number of shares of Common Stock issuable pursuant
to then exercisable or convertible securities that are, Registrable Securities;
and
(d) The term "Holder" means any person owning or having the right
to acquire Registrable Securities or any assignee permitted under Section 4.12
------------
hereof.
4.2 Request for Registration.
------------------------
(a) If the Corporation shall receive, at any time after the earlier
of (i) January 5, 2003 or (ii) six (6) months after the effective date of the
first registration statement for a public offering of securities of the
Corporation to the general public, a written request from the Holders of
nineteen percent (19%) of the Registrable Securities then outstanding (the
"Initiating Holders") that the Corporation file a registration statement (other
than on Form S-3) under the Securities Act covering the registration of at least
nineteen percent (19%) of the Registrable Securities (or any lesser percentage
if the aggregate proposed offering price to the public (before deduction of
underwriting discounts and commissions) would be at least $5,000,000), then the
Corporation shall, within ten (10) days after the receipt of such request, give
written notice of such request to all Holders and shall, subject to the
limitations set forth below, use commercially reasonable efforts to effect as
soon as practicable the registration under the Act of all Registrable Securities
that the Holders request to be registered in a written request to be given
within thirty (30) days of receipt of such notice by the Corporation.
(b) The Corporation is obligated to effect only two (2)
registrations pursuant to Section 4.2 (a).
---------------
(c) After the Corporation has qualified for the use of Form S-3, in
addition to the rights contained in Section 4.2(a), the Holders of at least
--------------
nineteen percent (19%) of the Registrable Securities (provided, in any event,
that the aggregate estimated offering price of the shares included in such
registration must be at least $1,000,000) will have the right at any time and
from time to time to request up to two (2) registrations on Form S-3; provided,
--------
that the Corporation will not be required to effect a registration on Form S-3
pursuant to this Section 4.2(c) more frequently than once during any period of
--------------
12 consecutive months. Such requests
3
<PAGE>
must be in writing and must state the number of Registrable Securities proposed
to be disposed of and the intended method of distribution of such Registrable
Securities by such Holders.
(d) Notwithstanding the foregoing, if the Corporation shall furnish
to the Initiating Holders, or the Holders requesting a registration on Form S-3,
requesting a registration pursuant to this Section 4.2 within thirty (30) days
-----------
of receiving such request: (i) a certificate signed by the President of the
Corporation stating that in the good faith judgment of the Board of Directors of
the Corporation it would be seriously detrimental to the Corporation and its
shareholders for such registration statement to be filed and it is therefore
essential to defer the filing of such registration statement, or (ii) a
certificate signed by the President of the Corporation stating that the
Corporation intends within ninety (90) days after the date of such certificate
to file a registration statement for a public offering of securities of the
Corporation to the general public, the Corporation shall not be obligated to
effect the registration requested pursuant to this Section 4.2; provided,
----------- --------
however, that the Corporation shall promptly notify the Initiating Holders, or
- -------
the Holders requesting a registration on Form S-3, requesting a registration
pursuant to this Section 4.2 of any decision by the Corporation to abandon or
-----------
indefinitely delay such public offering. The Corporation shall have the right
to defer such filing for up to two (2) periods of not more than ninety (90) days
each after receipt of the request of the Initiating Holders or the Holders
requesting a registration on Form S-3; provided, however, that the Corporation
may not use this right more than once (for a total of up to one hundred eighty
(180) days) in any twelve (12)-month period.
4.3 Corporation Registration. If (but without any obligation to do so),
------------------------
at any time after the effective date of the Corporation's initial public
offering, the Corporation proposes to register any of its stock or other
securities under the Securities 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 that 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 twenty (20) days after mailing of
written notice by the Corporation, the Corporation shall, subject to the
provisions of Section 4.7, use commercially reasonable efforts to cause to be
-----------
registered under the Securities Act all of the Registrable Securities that such
Holder has requested to be registered.
4.4 Obligations of the Corporation. Whenever the Corporation registers
------------------------------
under the Securities Act any Registrable Securities in accordance with this
Section 4, 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 until the
earlier of ninety (90) days after the effective date and the day 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
4
<PAGE>
may be necessary to comply with the provisions of the Securities 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
Securities 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 best 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, excluding any consent to
service of process required by such securities or blue sky laws.
(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
Securities 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.
4.5 Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Corporation to take any action pursuant to this Section 4
---------
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.
4.6 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 4 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.
4.7 Underwriting Requirements.
-------------------------
(a) The Holders under Section 4.2 must distribute the Registrable
-----------
Securities covered by their request by means of a public offering underwritten
by a reputable national or regional underwriter. The right of any Holder to
include its Registrable Securities in such registration under Section 4.2 shall
-----------
be conditioned upon such Holder's participation in such
5
<PAGE>
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their Registrable Securities through such underwriting shall (together with the
Corporation as provided in Section 4.4(e)) enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Holders and reasonably acceptable
to the Corporation. Notwithstanding any other provisions of Section 4.2, if the
underwriter advises the Holders in writing that marketing factors require a
limitation of the number of shares to be underwritten, then the Initiating
Holders shall so advise all Holders of Registrable Securities which would
otherwise have been underwritten pursuant to Section 4.2, and the number of
shares of Registrable Securities that may be included in the registration shall
be apportioned first pro rata among the selling Holders, including the
Initiating Holders, according to the total amount of Registrable Securities held
by such Holders at the time of registration, then to the Corporation and then
pro rata among any other selling shareholders according to the total amount of
securities otherwise entitled to be included therein owned by each such selling
shareholder, or in such other proportions as shall mutually be agreed to by such
selling shareholders.
(b) In connection with any offering involving an underwriting of
shares being issued by the Corporation, the Corporation shall not be required
under Section 4.3 to include any of the Holders' securities in such underwriting
-----------
unless such Holder 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 the
selling Holders according to the total amount of Registrable Securities held by
such Holders at the time of such registration, and then among all other holders
of shares to be underwritten. For purposes of apportionment, Holders and any
selling shareholder that 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. In no event will shares of any other selling shareholders be
included in any registration which would reduce the number of shares which may
be included by the Holders without the written consent of the Holders of at
least a majority of the Registrable Securities included in such registration.
4.8 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 4.
---------
4.9 Indemnification. In the event any Registrable Securities are included
---------------
in a registration statement under this Section 4:
---------
6
<PAGE>
(a) To the extent permitted by law, the Corporation will indemnify
and hold harmless each Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls a Holder or
underwriter within the meaning of the Securities 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
Securities Act, the 1934 Act or other federal, state or provincial 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 Securities Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the 1934 Act or any state or provincial 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 4.9(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, which
consent shall not be unreasonably withheld, conditioned or delayed.
(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
Securities 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
Securities Act, the 1934 Act or other federal, state or provincial 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 written
information furnished by such Holder expressly for use in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto; 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 4.9(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 4.9(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, conditioned or
delayed; and further provided, that, in no event shall any indemnity under this
Section 4.9(b) exceed the net proceeds from the offering received by such
- --------------
Holder.
(c) Promptly after receipt by an indemnified party under this
Section 4.9 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 4.9, deliver to
-----------
the indemnifying party a written notice of the commencement
7
<PAGE>
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 acknowledges 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,
conditioned or delayed; 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, in
the opinion of such counsel, 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 4.9, 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 4.9.
-----------
(d) If the indemnification provided for in this Section 4.9 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 4.9(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 was 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. Notwithstanding the foregoing, no Holder shall be
required to participate in a registration pursuant to Section 4.3 which would
-----------
require it to execute an underwriting agreement in connection with a
registration that imposes indemnification or contribution obligations on such
Holder more onerous than those imposed
8
<PAGE>
hereunder; provided, however, that the Corporation shall not be deemed to breach
-------- -------
the provisions of Section 4.3 if a Holder is not permitted to participate in a
-----------
registration on account of such Holder's refusal to execute an underwriting
agreement on the basis of this Section 4.9(e).
--------------
(f) The obligations of the Corporation and Holders under this
Section 4.9 shall survive the completion of any offering of Registrable
- -----------
Securities in a registration statement under this Section 4 and otherwise.
---------
4.10 Reports Under Securities Exchange Act of 1934. With a view to making
---------------------------------------------
available to the Holders the benefits of Rule 144 promulgated under the
Securities 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, the Corporation agrees to use its best 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 Securities Act and the 1934 Act;
and
(c) furnish to each Holder, so long as such 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 Securities 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.
4.11 Termination of Registration Rights. Holders shall not be entitled to
----------------------------------
exercise any right provided for in this Section 4 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 Securities Act.
4.12 Assignment of Rights. The right to cause the Corporation to register
--------------------
Registrable Securities pursuant to this Section 4 may be assigned (but only with
---------
all related obligations) by a Holder to a transferee of at least 100,000 shares
of Registrable Securities, provided the Corporation is, within a reasonable time
--------
after such transfer, furnished with written notice of the name and address of
such transferee or assignee and the securities with respect to which such
registration rights are being assigned; provided, further, that such assignment
-------- -------
shall be effective only if (i) the transferee agrees to be bound by the terms
hereof and (ii) immediately following such transfer the further disposition of
such securities by the transferee or assignee is restricted under the Securities
Act.
9
<PAGE>
5. Miscellaneous Provisions.
------------------------
5.1 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 5.1 shall be binding upon Holders and
-----------
the Corporation.
5.2 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 or Canada
Post, (by first class mail, postage prepaid) addressed as follows:
(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 any Holder, at the address shown on Schedule A
----------
attached hereto, marked for attention as there indicated, to:
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 5.2. 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.
5.3 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.
5.4 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.
10
<PAGE>
5.5 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.
5.6 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.
5.7 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.
5.8 Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties with regard to the subject
matter of this Agreement.
5.9 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.
5.10 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.
[SIGNATURE PAGES FOLLOW]
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Rights Agreement on the
day and year first set forth above.
NETPLIANCE, INC.
By:
---------------------------------------------
Kent A. Savage,
President and Chief Executive Officer
HOLDERS:
US WEST INTERNET VENTURES, INC.
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
CATALYST INVESTMENTS, L.L.C.
By: The Walt Disney Company,
its sole member
By:
-----------------------------------------
Peter E. Murphy,
Senior Executive Vice President and
Chief Strategic Officer
SSBC II - NP LLC
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
------------------------------------------------
AVIV NEVO
<PAGE>
DLJ FUND INVESTMENT PARTNERS II, L.P.
By: DLJ LBO Plans Management Corporation
By:
-----------------------------------------
Ivy Dodes,
Vice President
DLJ PRIVATE EQUITY EMPLOYEES FUND, L.P.
By: DLJ LBO Plans Management Corporation
By:
-----------------------------------------
Ivy Dodes,
Vice President
DLJ PRIVATE EQUITY PARTNERS FUND, L.P.
By: WSW Capital, Inc.
By:
-----------------------------------------
Ivy Dodes,
Vice President
DLJ CAPITAL CORPORATION
By:
---------------------------------------------
Ivy Dodes,
Vice President
THOMSON CONSUMER ELECTRONICS, INC.
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
<PAGE>
862686 ALBERTA LTD.
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
ROGERS COMMUNICATIONS INC.
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
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
<PAGE>
SCHEDULE A TO SERIES D RIGHTS AGREEMENT
Names and Addresses of Holders
------------------------------
1. US WEST Internet Ventures, Inc.
1999 Broadway
Denver, Colorado 80202
Attn: Vice President, Business Development
Facsimile: (303) 298-0031
With copy to:
US WEST, Inc.
1801 California Street, Suite 5100
Denver, Colorado 80202
Attn: Strategic Transactions Group,
Law Department
Facsimile: (303) 308-0835
2. Catalyst Investments, L.L.C.
500 South Buena Vista Street
Burbank, California 91521
Attn: Chief Strategic Officer
Phone: (818) 560-1421
Facsimile: (818) 846-8726
With copy to:
The Walt Disney Company
500 South Buena Vista Street
Burbank, California 91521
Attn: Corporate Legal
Phone: (818) 560-1618
Facsimile: (818) 563-3366
3. SSBC II - NP LLC
c/o Rizvi Interests, Inc.
124 West 60th Street, Suite 49A
New York, New York 10023
Phone: (212) 581-0001
Facsimile: (212) 246-3770
<PAGE>
4. Aviv Nevo
9440 Santa Monica Blvd., Suite 600
Beverly Hills, California 90067
5. DLJ Capital Corporation
277 Park Avenue, 23rd Floor
New York, New York 10172
Phone: (212) 892-3948
Facsimile: (212) 892-2689
6. DLJ Fund Investment Partners II, L.P.
277 Park Avenue, 23rd Floor
New York, New York 10172
Phone: (212) 892-3948
Facsimile: (212) 892-2689
7. DLJ Private Equity Employees Fund, L.P.
277 Park Avenue, 23rd Floor
New York, New York 10172
Phone: (212) 892-3948
Facsimile: (212) 892-2689
8. DLJ Private Equity Partners Fund, L.P.
277 Park Avenue, 23rd Floor
New York, New York 10172
Phone: (212) 892-3948
Facsimile: (212) 892-2689
9. 862686 Alberta Ltd.
c/o Shaw Communications Inc.
Suite 900, 630 - 3rd Avenue S.W.
Calgary, Alberta, Canada
T2P 4L4
Attn: President
Facsimile: (403) 750-4506
With copy to:
Attn: General Counsel & Secretary
Facsimile: (403) 750-7466
-2-
<PAGE>
10. Rogers Communications Inc.
333 Bloor Street East
Toronto, Ontario, Canada
Attn: David Miller
Facsimile: (416) 935-3548
11. Thomson Consumer Electronics, Inc.
10330 North Meridian Street
Indianapolis, Indiana 46290-1024
Attn: George J. Lawrence, VP and General Counsel
Facsimile: (317) 587-6727
12. Watershed Capital I, L.P.
650 Castro Street, Suite 2000
Mountain View, California 94041
Attn: David S. Lundeen
Facsimile: (650) 404-9425
-3-
<PAGE>
Exhibit 10.4
Office Lease
Between
SV BULL CREEK LIMITED PARTNERSHIP
("Lessor")
and
NETPLIANCE, INC.
("Lessee")
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I - LEASED PREMISES............................................ 1
ARTICLE II - TERM AND RENT............................................. 1
2.1. Term....................................................... 1
2.2. Base Rent.................................................. 1
2.3. Additional Rent............................................ 2
ARTICLE III - SECURITY DEPOSIT......................................... 5
3.1. Security Deposit........................................... 5
ARTICLE IV - USE AND ACCEPTANCE........................................ 6
4.1. Permitted Use.............................................. 6
4.2. ADA........................................................ 6
4.3. Acceptance................................................. 7
ARTICLE V - OPERATIONS, UTILITIES AND SERVICES......................... 7
5.1. Operation.................................................. 7
5.2. Hours of Operation......................................... 7
5.3. Utilities and Services..................................... 7
5.4. Interruption of Services................................... 8
5.5. Metering Electricity....................................... 8
ARTICLE VI - REPAIRS AND MAINTENANCE................................... 8
6.1. Lessor's Obligations....................................... 8
6.2. Lessee's Obligations....................................... 9
ARTICLE VII - ALTERATIONS AND LESSEE'S PROPERTY........................ 9
7.1. Alterations by Lessee...................................... 9
7.2. Contractor Insurance....................................... 9
7.3. Lessee's Property.......................................... 10
ARTICLE VIII - HAZARDOUS MATERIALS..................................... 10
8.1. Use of Hazardous Materials................................. 10
ARTICLE IX - ASSIGNMENT AND SUBLETTING................................. 11
9.1. Assignment and Subleasing.................................. 11
ARTICLE X - CASUALTY AND CONDEMNATION.................................. 13
10.1. Damage To Property......................................... 13
10.2. Rent Abatement............................................. 14
10.3. Eminent Domain............................................. 14
ARTICLE XI - INDEMNIFICATION........................................... 14
11.1. Indemnification by Lessee.................................. 14
</TABLE>
<PAGE>
<TABLE>
<S> <C>
11.2. Lessee's Liability Insurance............................... 14
11.4. Survival of Indemnities.................................... 15
ARTICLE XII - RIGHT OF ENTRY........................................... 15
12.1. Right of Entry............................................. 15
ARTICLE XIII - PROPERTY LEFT ON THE LEASED PREMISES.................... 16
13.1. Abandoned Property......................................... 16
ARTICLE XIV - SIGNS AND ADVERTISEMENTS................................. 16
14.1. Sign....................................................... 16
ARTICLE XV - NOTICES................................................... 17
15.1. Notices.................................................... 17
ARTICLE XVI - MECHANIC'S LIENS......................................... 17
16.1. Mechanic's Liens, Indemnity................................ 17
ARTICLE XVII - SUBORDINATION AND ATTORNMENT............................ 18
17.1. Subordination.............................................. 18
17.2. Attornment................................................. 18
17.3. Confirming Agreement....................................... 18
ARTICLE XVIII - RULES AND REGULATIONS.................................. 18
18.1. Rules and Regulations...................................... 18
ARTICLE XIX - LESSOR'S LIEN............................................ 18
19.1. Lessor's Lien.............................................. 18
ARTICLE XX - ESTOPPEL CERTIFICATE...................................... 19
20.1. Lessee Estoppel............................................ 19
ARTICLE XXI - HOLDING OVER............................................. 20
21.1. Hold Over.................................................. 20
ARTICLE XXII - LESSEE'S STATUS......................................... 20
22.1. Power and Authority........................................ 20
22.2. Authorization.............................................. 20
ARTICLE XXIII - DEFAULTS AND REMEDIES.................................. 20
23.1. Default by Lessee.......................................... 20
23.2. Lessor's Remedies.......................................... 21
23.3. Lessor's Costs; Attorneys Fees............................. 22
23.4. Remedies Cumulative........................................ 22
23.5. Non-Waiver................................................. 22
23.6. Attorney's Fees............................................ 22
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE XXIV - MISCELLANEOUS........................................... 23
24.1. No Partnership............................................ 23
24.2. No Representations by Lessor.............................. 23
24.3. Waiver of Jury Trial...................................... 23
24.4. Severability of Provisions................................ 23
24.5. Interior Construction..................................... 23
24.6. Parking................................................... 23
24.7. Relocation of Leased Premises............................. 23
24.8. Benefits and Burdens...................................... 24
24.9. Waiver of Subrogation..................................... 24
24.10. Lessor's Liability........................................ 24
24.11. Brokerage................................................. 24
24.12. Recording................................................. 24
24.13. Governmental Surcharge.................................... 24
24.14. Exhibits.................................................. 25
24.15. Compliance with Law....................................... 25
24.16. Entire Agreement.......................................... 25
24.17. Force Majeure............................................. 25
</TABLE>
EXHIBIT A - LEGAL DESCRIPTION OF THE PROPERTY.......................... 27
EXHIBIT B - DESCRIPTION OF THE LEASED PREMISES......................... 28
EXHIBIT C - FORM OF LETTER OF CREDIT................................... 29
EXHIBIT D - RULES AND REGULATIONS...................................... 30
EXHIBIT E - CONSTRUCTION AGREEMENT..................................... 34
EXHIBIT F - OPTION TO RENEW............................................ 38
EXHIBIT G - BUILDING SHELL STANDARDS................................... 39
<PAGE>
OFFICE LEASE
------------
THIS OFFICE LEASE (this "Lease") is made and entered into on this _____ day
of February, 2000, between SV BULL CREEK LIMITED PARTNERSHIP ("Lessor"), a Texas
limited partnership, and NETPLIANCE, INC. ("Lessee"), a Texas corporation.
ARTICLE I - LEASED PREMISES
Lessor, in consideration of the rents and of the covenants hereinafter
contained, does hereby lease to Lessee, and Lessee, does hereby rent from Lessor
the Leased Premises (defined below) in its present condition or as altered by
the attached Construction Agreement. The term "Leased Premises" shall refer to
space containing 43,713 rentable square feet is located on the 1/st/ and 2/nd/
floors of the building known as the Reserve at Bull Creek, Building B (the
"Building"), which is situated at 7501 Capitol of Texas Highway, Austin, Texas.
The Building is located on the land described on Exhibit "A" (the "Property")
-----------
and the floor plan of the Leased Premises is attached as Exhibit "B" and
-----------
incorporated herein by reference.
As used herein, the term "Project" consists of the Property, the Building
and all other office buildings and service buildings located on the Property,
all pertinent parking facilities, landscaping, fixtures, Common Areas, and
related improvements now or hereafter constructed on the Property. The rentable
square footage of the Leased Premises is deemed to be 43,713 square feet. The
rentable square footage of the Building is deemed to be 43,713 square feet. The
rentable square footage of the Project is deemed to be 131,380 square feet.
ARTICLE II - TERM AND RENT
2.1. Term. This Lease Agreement shall continue in full force for a
period beginning on the Commencement Date (as hereinafter defined) and ending on
the date that is 60 months after the Commencement Date (the "Term"). The
Commencement Date is defined as the later of: (a) Substantial Completion, as
defined in the Construction Agreement or (b) May 1, 2000 (the "Commencement
Date").
Notwithstanding the foregoing, if, for any reason, Lessor cannot deliver
possession of the Leased Premises to Lessee on the Commencement Date, Lessor
shall not be subject to any liability, nor shall such failure affect the
validity of this Lease or the obligations of Lessee hereunder, or extend the
term hereof, but in such case Rent (as defined below) shall abate until
possession of the Leased Premises is tendered to Lessee. Lessor agrees to use
its reasonable efforts to expedite Substantial Completion.
2.2. Base Rent. Lessee shall pay rent to Lessor starting with the
Commencement Date of the Lease for the use and occupancy of the Leased Premises
at an annual rate and in monthly installments on the schedule shown below (the
"Base Rent"):
<TABLE>
<CAPTION>
Lease Annual Base Rental Annual Base Monthly Base
period Rate Per Rentable Rent Amount Rent Amount
Square Foot
<S> <C> <C> <C>
1 to 60 $27.84 $1,216,969.92 $101,414.16
</TABLE>
<PAGE>
The Base Rent is computed based upon 43,713 rentable square feet of office
space as shown on Exhibit "B". All sums due under this Lease other than Base
-----------
Rent are sometimes collectively referred to as "Additional Rent." Base Rent and
Additional Rent are sometimes collectively referred to as "Rent." Base Rent and
all other sums, whether designated Additional Rent or otherwise, payable to
Lessor under this Lease shall be payable in U.S. Dollars at Lessor's office in
Austin, Texas as reflected in Article 15 below, or at such other place or places
as Lessor may in writing direct from time to time. All Rent payable under this
Lease shall be paid by Lessee without notice or demand, both of which are
expressly waived by Lessee, except as otherwise expressly provided in Section
23.1 below. Rent and other monies due Lessor under this Lease not paid when due
shall bear interest at the rate of ten percent (10%) per annum from the date the
same is due until paid. Base Rent payable under this Lease shall be paid in
advance by Lessee in monthly installments equal to the applicable Monthly Base
Rent Amount set forth above without demand, offset or deduction, which monthly
installments shall commence on the Commencement Date and shall continue on the
first day of each calendar month thereafter. Rent for any partial calendar month
shall be prorated on a daily basis on a 360 day year.
2.3. Additional Rent.
(a) Operating Expense Stop. It is understood that the Base Rent set
----------------------
forth in Section 2.2 of this Lease includes Operating Expenses (defined below)
of $7.84 per rentable square foot (the "Operating Expense Stop") during calendar
year 2000, based upon the estimated Operating Expenses for the Project and the
Building as if fully occupied. In order that the Rent payable throughout the
Term of this Lease shall reflect any increase or decrease in such Operating
Expenses, the parties agrees to the following:
(b) Excess Operating Expenses. Lessee shall pay Lessee's Share
-------------------------
(defined below) of the amount, if any, by which Operating Expenses for each year
during the Term exceed the Operating Expense Stop (the "Excess Operating
Expenses"). Conversely, for any year during the Term where actual Operating
Expenses are less than the Operating Expense Stop, Lessee shall receive a credit
against the Base Rent for the decrease. Lessee's Share of the Excess Operating
Expenses shall be considered a part of the Additional Rent and paid as provided
in this Section 2.3.
(c) Definitions.
-----------
(i) "Lessee's Share" shall mean either (a) that percentage
equal to the rentable square footage of the Leased Premises divided by the
rentable square footage of the Project or (b) that percentage equal to the
rentable square footage of the Leased Premises divided by the rentable square
footage of the Building, depending on whether the relevant item of Operating
Expense is allocated on a Project or Building basis.
(ii) "Operating Expenses" shall mean all expenses, costs and
disbursements of every kind incurred or accrued which Lessor shall pay in
connection with the ownership, operation, maintenance and management of the
Project, including but not limited to
<PAGE>
electricity, gas, oil, steam, chilled water, coal or any other energy sources
utilized for the operational use and maintenance of the Project, outside
services including but not limited to window cleaning, carpet cleaning, drapery
or venetian blind cleaning, maintenance and repairs to landscaping and grounds
of the Project, security, rental of equipment, personal property repairs,
equipment, supplies, materials, administrative expenses, legal and professional
fees, (but only with respect to general management of the Project and not with
respect to negotiations or enforcement actions against other tenants),
insurance, real estate taxes, property taxes (specifically excluded from taxes
are income taxes of all kinds, taxes on the personal property of any tenant,
taxes on the portion of any leasehold improvement cost paid for by any tenant
and any other tax which is the responsibility of any tenant), special
assessments, janitorial including salaries and wages and all other Lessee
benefits and reasonable management fees. Operating Expenses shall include the
cost, as reasonably amortized by Lessor with interest at the rate equal to
Lessor's actual cost of funds of the unamortized amount (not to exceed ten
percent (10%) per annum), of any capital improvement made after the completion
of the initial construction of the Project and which promote safety, reduce or
control increases in Operating Expenses, and/or are required in order to comply
with any Applicable Laws (defined in Section 24.15 below) which become effective
after the date of this Lease. Operating Expenses shall be computed based on
expenses incurred or paid on behalf of Lessor and determined in accordance with
generally accepted accounting principals which shall be consistently applied.
Lessor reserves the right to allocate certain Operating Expenses between the
Building and the other office buildings located within the Project as Lessor
reasonably determines to be appropriate; however, Lessor agrees that charges for
electrical consumption shall be determined based on usage within the Building.
Operating Expenses shall not include franchise or income taxes imposed on
Lessor, nor the cost to Lessor of any work or services performed in any
instances for any lessee (including Lessee) and not paid for by Lessor.
(iii) The "Common Areas" are those areas which are furnished
and may be furnished from time to time in and on the Project for the general
common and non-exclusive use of Lessee, their officers, agents, employees,
customers, invitees and licensees, including, without limitation, delivery
passages, pedestrian sidewalks and malls, picnic areas, volley ball courts and
other recreational facilities, passenger and service elevators, escalators,
hallways, stairways, fire exits, comfort stations, parking areas and lobby
areas. The Building and its structural components (including doors and windows)
shall be deemed part of the common areas notwithstanding that all parts or
components thereof may not be capable of common and non-exclusive use.
(d) Payment of Additional Rent. Lessor shall make a reasonable
--------------------------
estimate of the Additional Rent payable by Lessee for the current year, and
Lessee shall pay to Lessor the Additional Rent, as so estimated, without demand,
deduction or set-off in twelve (12) equal monthly installments during each year,
each such installment being due with installments of Base Rent.
(e) Adjustment of Additional Rent. If the Additional Rent paid by
-----------------------------
Lessee, based upon Lessor's estimate, differs from the actual amount of
Additional Rent due and payable for the previous year, the difference shall be
payable by Lessor or Lessee, as the case may be, in
<PAGE>
a lump sum on the first day of the second month following the month in which
Lessor renders its operating statement to Lessee. Failure to give Lessee an
actual operating statement shall not constitute a waiver by Lessor of its right
to require an increase in Additional Rent. Lessee's Share of the Excess
Operating Expenses (excluding expenses relating to the cost of utilities
(including electricity), insurance, real estate taxes and other uncontrollable
expenses) payable by Lessee shall not increase by more than eight percent (8%)
in any calendar year on a compounding basis; however, in the event Lessee's
Share of the Excess Operating Expenses increases by more than eight percent (8%)
in any calendar year during the Term, Lessor shall be entitled to increase the
amount of Excess Operating Expenses payable by Lessee in subsequent years during
the Term to the extent necessary (but not in excess of eight percent (8%) in any
calendar year) to recover the total amount of Excess Operating Expenses
otherwise payable by Lessee. If the Project is not 100% occupied during any
calendar year or if Lessor is not supplying services to 100% of the total
rentable square footage of the Project at any time during a calendar year,
Operating Expenses shall be determined as if the Project had been 100% occupied
and Lessor had been supplying services to 100% of the rentable square footage of
the Project during such calendar year. The extrapolation of Operating Expenses
under the above provision shall be determined by Lessor by adjusting the cost of
those components of Operating Expenses that are impacted by changes in the
occupancy of the Project. However, in no event shall Lessee pay more than the
actual Operating Expenses attributable to Lessee's Share, provided Lessee leases
and occupies the entire Building.
(f) Verification of Operating Statement. Upon request by Lessee,
-----------------------------------
and at Lessee's cost and expense, Lessor shall furnish Lessee such information
as may be necessary for Lessee to verify Operating Expenses and shall cooperate
with Lessee in verifying the operating statement. Lessee shall have 90 days
after receipt of any operating statement to dispute the correctness or
completeness of the operating statement, after which time the operating
statement shall be deemed to be complete and correct and conclusive and binding
on Lessor and Lessee. No decreases in Operating Expense shall reduce Lessee's
Rent below the annual Base Rent set forth in Section 2.2 of this Lease, except
as otherwise expressly provided in Section 2.3(b). In addition, Lessee shall
have the right for a period of ninety (90) days after Lessor delivers to Lessee
the operating statement for the Building and the Project for the previous
calendar year to cause a certified public accounting firm of recognized national
standing to audit and/or inspect that portion of Lessor's books and records
pertaining only to the Operating Expenses for such preceding calendar year;
provided (i) such audit and/or inspection commences within ninety (90) days
after Lessor makes such books and records available to Lessee's auditor and
thereafter proceeds reasonably to conclusion, (ii) such audit and/or inspection
does not unreasonably interfere with the conduct of Lessor's business, (iii)
both Lessee and the accounting firm conducting the audit and/or inspection
executes a confidentiality agreement for the benefit of Lessor, in the form
reasonably requested by Lessor, prior to the commencement of the audit or
inspection, and (iv) the firm's report reflecting the results of such audit is
promptly delivered to Lessor. This paragraph shall not be construed to limit or
abate Lessee's obligation to pay the Additional Rental when due as set forth
hereinabove. If such audit conducted by Lessee discloses that Lessee has
overpaid or underpaid Lessee's proportionate share of Operating Expenses, then,
after verification of such audit by Lessor or by accountants selected by Lessor,
any overpayment shall be refunded to Lessee (so long as Lessee is not then in
default of any of
<PAGE>
the terms of this Lease, in which event such overpayment shall be applied
against any amount Lessee owes as a result of such default) within thirty (30)
days after the verification of the audit, or any underpayment shall be paid to
Lessor within thirty (30) days after the verification of the audit. If the audit
proves that Lessor's calculation of Lessee's Additional Rental for the calendar
year under inspection was overstated by more than three percent (3%), then,
after verification, Lessor shall pay Lessee's actual reasonable out-of-pocket
audit and inspection fees applicable to the review of said calendar year
statement within thirty (30) days after receipt of Lessee's invoice therefor.
(g) Other Costs. All costs and expenses which Lessee assumes and
-----------
agrees to pay Lessor pursuant to this Lease (other than Base Rent) shall be
deemed Additional Rent, and, in the event of non-payment thereof, Lessor shall
have all rights and remedies provided for in the case of non-payment of Base
Rent.
ARTICLE III - SECURITY DEPOSIT
3.1. Security Deposit. As an additional inducement to enter into this
Lease and as evidence of Lessee's intention to comply with the terms and
conditions of this Lease, Lessee shall, ten (10) business days following
Lessee's execution and delivery of this Lease, deliver to Lessor a Security
Deposit in the form of an irrevocable, unconditional letter of credit in the
amount of $1,000,000.00 issued by a lender reasonably acceptable to Lessor in
form and substance similar to the letter of credit attached hereto as Exhibit
-------
"C" (the "Initial Letter of Credit"). Provided, however, the form of Letter of
- ---
Credit shall be subject to the reasonable approval of the lender of Lessee. The
Initial Letter of Credit shall have an expiration date falling no sooner than
one (1) year after the date it is issued (the "Issue Date"). No later than
thirty (30) days prior to the expiration of the Initial Letter of Credit or, as
applicable, any Replacement Letter of Credit (defined below), Lessee shall
deliver to Lessor a replacement letter of credit (each a "Replacement Letter of
Credit") in an amount equal to the amount of the then existing letter of credit
less $200,000.00, issued by a lender reasonably acceptable to Lessor, identical
in form and terms of the Initial Letter of Credit, and expiring no sooner than
one (1) year after the date of delivery of such Replacement Letter of Credit to
Lessor. The Initial Letter of Credit and each Replacement Letter of Credit are
sometimes collectively referred to herein as "Letter of Credit." Lessee shall
have no obligation to deliver or maintain a Letter of Credit to Lessor after the
initial Term of this Lease or after sixty (60) months from the Issue Date.
Lessee agrees that upon any default by Lessee under the terms and provisions of
the Lease (and in the event of a non-monetary default, such default remains
uncured thirty (30) days after Lessor gives Lessee written notice of such
default), Lessor shall have the right to receive payment of the entire amount
under the Letter of Credit, and such amounts received by Lessor shall be held by
Lessor as a cash Security Deposit. Lessor shall hold the Security Deposit as
security for the performance by Lessee of Lessee's covenants and obligations
under this Lease. Lessee shall not be entitled to receive interest on the monies
held as a security deposit. The Security Deposit shall not be considered an
advance payment of Base Rent, Additional Rent or other charges provided for in
this Lease, nor shall the Security Deposit serve as a measure of the damages
which would be suffered by Lessor in the case of a default by Lessee. Lessor,
may, from time to time, without prejudice to any other remedy, use the Security
Deposit to the extent necessary to
<PAGE>
make good any arrearages or nonpayment of Base Rent, Additional Rent or other
charges provided for in this Lease, or to satisfy any obligation of Lessee
hereunder. Following any such application of the Security Deposit, Lessee shall
pay Lessor on demand the amount so applied in order to restore the Security
Deposit to its original amount. If Lessee is not in default at the expiration of
this Lease and if the Security Deposit has not been used as outlined above, then
the balance of the Security Deposit shall be returned to Lessee within thirty
(30) days after the termination date. If Lessor transfers Lessor's interest in
the Leased Premises, Lessor may assign the Security Deposit to the transferee
and thereafter have no further liability for the return of the Security Deposit.
The Security Deposit shall not be assigned or encumbered by Lessee and any
attempted assignment or encumbrance by Lessee shall be void.
ARTICLE IV - USE AND ACCEPTANCE
4.1. Permitted Use. Lessee shall use the Leased Premises for general
office purposes, and for no other purpose without the prior written consent of
Lessor. Lessee will not use or occupy the Leased Premises for any unlawful
purpose, and will comply with all present and future laws, ordinances,
regulations, and orders of the United States of America, the state in which the
Leased Premises are located, and all other governmental units or agencies having
jurisdiction over the Property and the Leased Premises. Lessee agrees to operate
its business in the Leased Premises during the entire Term and to conduct its
business in a reputable manner. Lessee shall not cause, maintain or permit any
outside storage on or about the Leased Premises, shall not commit or suffer any
waste upon the Leased Premises, or any nuisance or other act or thing which may
disturb the quiet enjoyment of any other lessees in the Project. No use shall be
made or permitted to be made of the Leased Premises, nor acts done, which will
increase the existing rate of insurance upon the Project or any portion thereof
or cause the cancellation of any insurance policy covering the Project or any
portion thereof, or any part thereof. Lessee shall not sell, or permit to be
kept, used, in or about the Leased Premises, any article which may be prohibited
by the standard form of fire insurance policy. Lessee shall, at its sole cost
and expense, comply with any and all requirements, pertaining to the Leased
Premises, of any insurance organization or company necessary for the maintenance
of reasonable fire and public liability insurance covering the Leased Premises,
the Project or any portion or appurtenances thereof. Lessee agrees to pay to
Lessor, as Additional Rent, any increase in premiums on policies which may be
carried by Lessor covering damages to the Project and/or other improvement
within the Leased Premises and loss of Rent caused by fire and the perils
normally included in extended coverage above the rates for the least hazardous
type of occupancy of the Leased Premises for office operations, in addition to
the payment required of Lessee pursuant to this Lease.
4.2. ADA. After the Commencement Date, Lessee shall at its expense make
any improvements or alterations to the Leased Premises and Lessor shall at its
expense make any improvements or alterations to the Common Areas required to
conform with the Americans With Disabilities Act of 1990 (the "ADA") and any
other Applicable Laws presently required or hereinafter enacted. Lessor
represents and warrants that as of the Commencement Date, the Common Areas
(including the men's and women's toilet rooms to the extent constructed as part
of the Building Shell pursuant to Exhibit "F") conform with the ADA and other
-----------
Applicable
<PAGE>
Laws in effect as of the date of this Lease. Lessee represents and warrants that
the use and occupancy of the Leased Premises (including the men's and women's
toilet rooms to the extent modified pursuant to the Work under the Construction
Agreement) as contemplated by this Lease comply or will comply fully with all
Applicable Laws.
4.3. Acceptance. Except as otherwise expressly provided in Exhibit "E"
-----------
(the Construction Agreement), the taking of possession of the Leased Premises by
Lessee on the Commencement Date shall be conclusive evidence that Lessee accepts
the Leased Premises "as is", subject to minor repair (punchlist) items
identified by Lessee and acknowledged by Lessor on the Commencement Date, and
the Leased Premises were in good and satisfactory condition and suitable for the
use intended by Lessee at the time such possession was taken.
ARTICLE V - OPERATIONS, UTILITIES AND SERVICES
5.1. Operation. Lessor shall operate the Building in accordance with
standards customarily followed in the operation of comparable commercial office
buildings in the Austin suburban area.
5.2. Hours of Operation. The Building will be open from 7:00 a.m. to 7:00
p.m., Monday through Friday, and from 8:00 a.m. to 12:00 p.m. on Saturday,
exclusive of holidays. The Building will be closed on Sundays and on the
following holidays: New Year's Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, Christmas Day and other days as are locally observed by
lessees in comparable commercial office buildings in the Austin suburban area.
Lessee shall have access to the Leased Premises twenty-four (24) hours per day
every day of the week.
5.3. Utilities and Services. Lessor shall provide Lessee with the
following utilities and services during hours of operation:
(a) Central heat and air-conditioning, in season, at such
temperatures and in such amounts as may be required to reasonably heat or cool
the Leased Premises except in extreme temperature conditions or when limited by
legal requirements.
(b) Hot and cold water to serve the Leased Premises as required for
lavatory and drinking purposes and such other uses as are permitted pursuant to
this Lease.
(c) Janitorial services if agreed upon by Lessor and Lessee on a
weekly basis, excluding holidays, in accordance with Lessor's janitorial
contract.
(d) Electricity to the Leased Premises sufficient for standard
consumption for general office lighting and the operation of typewriters,
personal computers and other business machines of similar low electrical
consumption.
(e) Standard passenger and freight elevator service, if applicable,
when the Building is open, and at least one passenger elevator when the Building
is closed.
<PAGE>
5.4. Interruption of Services. Lessor shall not be in default under this
Lease and shall not be liable to Lessee for failure to provide services pursuant
to this Article if failure to provide the services is caused by factors outside
of Lessor's control. Upon interruption of any service furnished by Lessor under
this Lease (a "Service Interruption") other than a Service Interruption for
scheduled maintenance, tests and inspections, Lessee shall immediately notify
Lessor, in which event Lessor shall use commercially reasonable efforts to
restore such service to the Leased Premises. No Service Interruption shall (a)
constitute a breach by Lessor under this Lease; (b) relieve Lessee of any
obligation under this Lease (except as provided below); or (c) be deemed a
constructive eviction of Lessee from the Leased Premises. Commencing on the
tenth (10th) consecutive business day of any Service Interruption within
Lessor's control, and provided such Service Interruption is not caused by a
Lessee Party, Lessee shall, as its sole remedy, be entitled to an equitable
diminution of Base Rent based upon the pro rata portion of the Leased Premises
rendered unfit for occupancy for the permitted use. As used herein, "Lessee
Party" shall refer collectively to Lessee, its officers, directors, employees,
contractors, agents and invitees.
5.5. Metering Electricity. If Lessor shall determine that Lessee's
proposed or actual consumption of electricity is in excess of standard
consumption for general office use, then Lessee, at its option, shall either (a)
pay Lessor directly for such excess services or (b) enter into a contract for
electrical service to the Leased Premises directly with the provider of
electrical service to the Building. Lessee shall pay the entire cost and expense
of installing and maintaining meters, panels, wiring and other items required to
accommodate excess services to Lessee. Notwithstanding anything herein to the
contrary, Lessee may, upon prior notice to Lessor, elect to enter into a
contract for electrical service to the Leased Premises directly with a provider
of such service. In such event, Lessor agrees to reduce the Operating Expense
Stop with respect to such budgeted electrical costs as appropriate. In addition,
if Lessee contracts directly with a provider of electrical service, Lessee shall
(i) pay the entire cost and expense of installing and maintaining any meters,
panels, wirings and other items reasonably required by Lessor to accommodate
such directly contracted electrical services and (ii) not be entitled to any
abatement for Service Interruption with respect to electrical service as
otherwise provided in Section 5.4 unless such Service Interruption was caused by
the negligence or willful intent by Lessor.
ARTICLE VI - REPAIRS AND MAINTENANCE
6.1. Lessor's Obligations. Lessor shall keep and maintain in good repair
and working order and make all repairs to and perform necessary maintenance upon
the structural components and elements, and electrical, plumbing and mechanical
systems, of the Building and all parts and appurtenances, which are required in
the normal maintenance and operation of the Building. The cost and expense of
any maintenance or repair to the Building necessary due to the acts or omissions
of Lessee or Lessee's agents, employees, contractors, invitees, licenses or
assignees, shall be reimbursed by Lessee to Lessor upon demand as Additional
Rent. Lessor shall not be responsible for ADA compliance with respect to any
Work (defined in the Construction Agreement attached hereto as Exhibit "E").
-----------
<PAGE>
6.2. Lessee's Obligations. Lessee, at its sole cost and expense, shall
keep and maintain in good repair and working order and make all repairs to and
perform necessary maintenance within and upon the Leased Premises, including
Lessee's improvements, and all parts and appurtenances thereof, which are
required in the normal maintenance and operation of the Leased Premises.
ARTICLE VII - ALTERATIONS AND LESSEE'S PROPERTY
7.1. Alterations by Lessee. Lessee shall not, without Lessor's approval
(which shall not be unreasonably withheld, conditioned or delayed), make any
alterations, additions or improvements in or on the Leased Premises, unless such
alterations are non-structural, do not require a permit and cost less than
$10,000.00. All alterations, additions or improvements that are affixed to the
Leased Premises (excluding any supplemental HVAC systems, back-up power supply
systems, satellite dish, and servers paid for by Lessee) made by Lessee shall
become the property of Lessor at the expiration of the Term of this Lease.
Lessor reserves the right to require Lessee, upon written notice given by Lessor
at the time of approval of the alterations, to remove any alteration,
improvement or addition made to the Leased Premises by Lessee, and to repair and
restore the Leased Premises to a condition substantially equivalent to the
condition of the Leased Premises prior to any such alteration, addition or
improvement. Lessee may have installed and maintained, at Lessee's sole cost and
expense, one (1) satellite dish (not to exceed four (4) feet in diameter) and
one (1) wip antenea and related wiring (collectively, the "Communications
--------------
Equipment") on the roof of the Building occupied by Lessee at locations that are
- ---------
acceptable to Lessor in its sole discretion, provided that such Communication
Equipment complies with all Applicable Laws, including any height restrictions
imposed upon the Project. Lessee shall cause the removal of the Communications
Equipment if any of the following events have occurred, within ten (10) days
after the occurrence thereof: (a) the termination of Lessee's right to possess
the Leased Premises; (b) the termination of the Lease as to all of the Leased
Premises; or (c) the expiration of the Term as to all of the Leased Premises. If
Lessee fails to perform any such removal or repair work, Lessor may do so and
store or dispose of the Communications Equipment in question in any manner
Lessor deems appropriate without liability to Lessee; Lessee shall reimburse
Lessor for all reasonable costs incurred by Lessor in connection therewith
within thirty (30) days after Lessor's request therefor. Notwithstanding
anything herein to the contrary, Lessee shall coordinate the installation,
repair and maintenance of the Communications Equipment with Lessor and Lessor
shall have the right, but not the obligation, to conduct such activities on
behalf of and at the expense of Lessee.
7.2. Contractor Insurance. In the event Lessor gives its approval to
Lessee pursuant to Section 7.1, Lessee shall require any third party vendor or
contractor performing work on the Leased Premises to carry and maintain at no
expense to Lessor: (a) Commercial General Liability Insurance on an occurrence
policy form with a minimum limit of liability of $1,000,000.00 per occurrence in
respect to injuries, death or property damage, and (b) Worker's Compensation
insurance in form and amounts as required by law.
7.3. Lessee's Property. Lessee, at its expense and at any time and from
time to time, may install in and remove from the Leased Premises its trade
fixtures, equipment, removable
<PAGE>
walls and wall systems, furniture and furnishings, provided such installation or
removal is accomplished without damage to the Leased Premises or the Building
and the installation does not interfere with the other tenants and their guests
use of the Building. On or prior to the termination of this Lease, Lessee shall
remove all of Lessee's property from the Leased Premises and repair any damage
to the Leased Premises caused by such removal. All property of Lessee remaining
on the Leased Premises after the expiration of the Term of this Lease shall be
deemed to have been abandoned and may be removed by Lessor and Lessee shall
reimburse Lessor for the cost of such removal.
ARTICLE VIII - HAZARDOUS MATERIALS
8.1. Use of Hazardous Materials.
(a) Prohibitions; Indemnity. Lessee shall not cause or permit any
-----------------------
Hazardous Material to be brought upon, kept or used in or about the Leased
Premises by Lessee, its agents, employees, contractors, or invitees other than
office supplies and cleaning supplies commonly used for general office space in
amounts reasonably necessary for Lessee's permitted use of the Leased Premises.
If Lessee breaches this obligation, Lessee shall indemnify, defend and hold
Lessor harmless from any and all claims, judgments, damages, penalties, fines,
costs or liabilities (including, without limitation, diminution in value of the
Leased Premises, damages for the loss of restriction on use of rentable or
usable space or of any amenity of the Leased Premises, damages arising from any
adverse impact on marketing of space, and sum paid in settlement of claims,
attorneys' fees, consultant fees and expert fees) which arise during or after
the Term of this Lease as a result of such contamination. This indemnification
of Lessor by Lessee, includes, without limitation, costs incurred in connection
with any investigations of site conditions or any clean-up, remedial, removal or
restoration work required by any federal, state or local governmental agency or
political subdivision because of Hazardous Material present in the soil or
ground water on or under the Leased Premises caused by the actions of Lessee,
its agents (acting within the scope of their agency), employees, contractors or
licensees. Without limiting the foregoing, if the presence of Hazardous Material
on the Leased Premises caused by the actions of Lessee its agents (acting within
the scope of their agency), employees, contractors or licensees, results in any
contamination of the Leased Premises, Lessee shall promptly take all actions at
its sole expense as are necessary to return the Leased Premises to the
conditions existing prior to the introduction of any such Hazardous Material in
the Leased Premises, provided that Lessor's approval of such actions shall first
be obtained, which approval shall not be unreasonably withheld so long as such
actions would not potentially have any material adverse long-term or short-term
effect on the Leased Premises. The foregoing indemnity shall survive the
expiration or earlier termination of this Lease.
(b) Definition. As used herein, the term "Hazardous Material" means
----------
any hazardous or toxic substance, material or waste, including, but not limited
to those substances, materials and wastes listed in the United States Department
of Transportation Hazardous Materials Table (49 CFR 172.101) or by the
Environmental Protection Agency as hazardous substances (40 CFR Part 261) and
amendments thereto, or such other hazardous or toxic
<PAGE>
substances, materials and wastes that are or become regulated under any
applicable local, state or federal law.
(c) Inspection. Lessor and its agents shall have the right, but not
----------
the duty, to inspect the Leased Premises at any time to determine whether Lessee
is complying with the terms of this Lease. If Lessee is not in compliance with
this Lease, Lessor shall have the right to immediately enter upon the Leased
Premises to remedy, any contamination caused by Lessee's failure to comply
notwithstanding any other provisions of this Lease. Lessor shall use its best
efforts to minimize interference with Lessee's business but shall not be liable
for interference caused thereby.
(d) Default. Any default under this Article shall be a material
-------
default enabling Lessor to exercise any of the remedies set forth in this Lease.
(e) Landlord's Representation. Landlord represents that, to
-------------------------
Landlord's current actual knowledge, without further inquiry, the Building
contains no reportable quantities of any Hazardous Material, the removal or
remediation of which is required by Applicable Law in effect at the time of
execution of this Lease.
ARTICLE IX - ASSIGNMENT AND SUBLETTING
9.1. Assignment and Subleasing. Except as otherwise expressly provided in
this Article, Lessee shall not assign, transfer or encumber this Lease or any
part hereof and shall not sublet, grant licenses or concessions, nor allow any
other occupant to come in, with or under Lessee, nor shall Lessee permit this
Lease or the leasehold estate hereby created to become vested in or owned by any
other person, firm or corporation by operation of law or otherwise without the
prior written consent of Lessor, which consent shall not be unreasonably
withheld, conditioned or delayed. Without limitation, Lessee agrees that
Lessor's consent shall not be considered unreasonably withheld, conditioned or
delayed if: (a) such proposed assignee's financial condition is not equal to or
better than Lessee's as of the date of this Lease (determined on the basis of
assignee's balance sheet and net income); (b) the proposed assignee or subtenant
is a governmental agency or present occupant of the Project or Lessor is
otherwise engaged in lease negotiations with the proposed assignee or subtenant
for other premises in the Project; (c) any uncured event of default that exists
under this Lease (or a condition exists which, with passage of time or giving of
notice, would become an event of default); (d) any portion of the Project would
likely become subject to additional or different laws or legal requirements or
would require a rezoning or zoning variance as a consequence of the proposed
assignment or sublease; (e) the proposed assignee's or subtenant's use of the
Leased Premises conflicts with the permitted uses or any exclusive usage rights
granted to any other tenant in the Project; (f) the use, nature, business,
activities or reputation in the business community of the proposed assignee or
subtenant (or their respective principals, employees or invitees) are not
reasonably acceptable to Lessor; (g) the proposed assignee or subtenant is or
has been involved in litigation with Lessor or any of its affiliates; (h) the
use of the Leased Premises or the Project by the proposed assignee or subtenant
would, in Lessor's reasonable judgment, require material or substantial
alterations to the Building, Leased Premises or Project in order to comply with
applicable laws; (i) the business
<PAGE>
and operations of the proposed assignee or subtenant are inconsistent with the
maintenance of a class A project, and/or would be incompatible with the business
and operations being conducted by other tenants in the Project; (j) the proposed
use by such subtenant or assignee could create a condition that is dangerous to
persons or property (for example, a foreign consulate) or could create an
atmosphere or condition that could be disruptive to the operation of the
Building or Project (for example, an abortion or methadone clinic) or (k) with
respect to a sublease, Lessee proposes to demise the sublease space in the
commercially unreasonably manner (for example, a configuration that would not be
readily leasable at the end of the Term of the Lease) and does not provide
Lessor with additional security in an amount equal to all reasonably anticipated
restoration costs. Any such assignment or subletting shall only be approved
under such conditions as Lessor may, in it reasonable discretion, determine
necessary. If Lessee is a corporation, then any type of transfer or assignment,
whether by merger, consolidation, liquidation, or otherwise, or any change in
the ownership or power to vote a majority of Lessee's outstanding voting stock
shall constitute a prohibited assignment for the purposes of this section.
Acceptance of Rent by Lessor from anyone other than Lessee shall not be
construed as a waiver by Lessor of the actions prohibited by this Section, nor
as a release of Lessee from any obligation or liability under this Lease. In the
event Lessor consents to an assignment or sublet by Lessee, Lessee shall not be
relieved from its obligations under this Lease.
In lieu of giving or objecting to any consent to a full assignment of this
Lease, Lessor may, at Lessor's option, elect to terminate this Lease. In the
case of a proposed subletting of a portion of the Leased Premises, Lessor may,
at Lessor's option, elect to terminate this Lease with respect to that portion
of the Leased Premises being proposed for subletting. The effective date of any
such termination shall be thirty (30) days after the proposed effective date of
any proposed assignment or subletting. Notwithstanding anything to the contrary
contained in this Section, if Lessor elects to exercise its right to terminate
this Lease as set forth in this Section, Lessee shall have the right, within
five (5) days after receipt of Lessor's election, to notify Lessor in writing
that Lessee rescinds its request for Lessor's consent to the assignment or
sublet, in which case this Lease shall continue in full force and effect.
Notwithstanding anything herein to the contrary, if the proposed sublease is for
less than thirty (30) months and there shall remain after the term of such
sublease of at least twelve (12) months in the term of this Lease, Lessor shall
not have the right to terminate the Lease as provided above.
Notwithstanding anything to the contrary contained in this Lease, Lessee,
without Lessor's prior written consent, may sublet the Leased Premises or assign
this Lease to: (i) a subsidiary, affiliate, franchisee, division or corporation
controlling, controlled by or under common control with Lessee; or (ii) a
successor corporation related to Lessee by merger, consolidation, acquisition,
non-bankruptcy reorganization or government action provided all of the following
conditions are satisfied (in each case, a "Permitted Transferee"): (A) no event
of default shall have occurred under this Lease; (B) Lessee's successor shall
own all or substantially all of the assets of Lessee; (C) Lessee's successor
shall have a net worth which is at least equal to the greater of; Lessee's net
worth at the date of this Lease or; Lessee's net worth as of the day prior to
the proposed purchase, merger, consolidation or reorganization; (D) no portion
of the Project or Leased Premises would likely become subject to additional or
different laws as a consequence of the proposed assignment or sublease; (E)
Lessee's successor's use of the Leased Premises shall
<PAGE>
not conflict with the permitted use under the Lease or any exclusive usage
rights granted to any other tenant in the Project; (F) Lessee's successor is not
and has not been involved in litigation with Lessor or any of its affiliates;
and (G) Lessee shall give Lessor written notice at least twenty (20) days prior
to the effective date of the proposed purchase, merger, consolidation or
reorganization. Lessee's notice to Lessor shall include information and
documentation showing that each of the above conditions has been satisfied. If
requested by Lessor, Lessee's successor shall sign a commercially reasonable
form of assumption agreement. For purposes of this Lease, a sale of Lessee's
capital stock through any public exchange (including, without limitation, an
initial public offering of equity securities in Lessee) shall not be deemed an
assignment, subletting or other transfer of this Lease or the Leased Premises
requiring Lessor's consent.
One-half of any proceeds in excess of Base Rent and Lessee's Share of
Excess Operating Costs which is received by Lessee pursuant to an assignment or
subletting consented to by Lessor, less reasonable brokerage commissions
actually paid by Lessee, and less other reasonable costs incurred by Lessee in
connection with making the space available for lease, shall be remitted to
Lessor as Additional Rent within ten (10) days of receipt by Lessee. For
purposes of this paragraph, all money or value in whatever form received by
Lessee from or on account of any part as consideration for an assignment or
subletting shall be deemed to be proceeds received by Lessee pursuant to an
assignment or subletting.
ARTICLE X - CASUALTY AND CONDEMNATION
10.1. Damage To Property. If the Leased Premises are made substantially
untenable by fire or other casualty, Lessor may elect to:
(a) Terminate this Lease as of the date of such fire or other
casualty by delivery of notice of termination to Lessee within sixty (60) days
after said date.
(b) Without termination of this Lease proceed with reasonable
diligence to repair, restore or rehabilitate the Building or the Leased
Premises, other than leasehold improvements paid for by Lessee.
If the Leased Premises are damaged by fire or other casualty not due to the
act or neglect of Lessee, its employees, agents or servants, but are not made
substantially untenable, then Lessor shall proceed with reasonable diligence to
repair and restore the Leased Premises, other than leasehold improvements paid
for by Lessee, unless such damage occurs during the last twelve (12) months of
the Term of this Lease, in which even Lessor shall have the right to terminate
this Lease as of the date of such fire or other casualty by delivery of written
notice of termination to Lessee within thirty (30) days after said date. If all
or any part of the Leased Premises are rendered substantially untenable by fire
or other casualty not due to the act or neglect of Lessee, its employees, agents
or servants, and this Lease is not terminated, Rent due hereunder shall abate
for all or said part of the Leased Premises which are untenable on a per diem
basis from and after date of the fire or other casualty and until the Leased
Premises are substantially repaired and restored.
<PAGE>
10.2. Rent Abatement. Commencing with the date of such casualty, but
subject to the terms stated in Section 10.1(b), the Base Rent and Additional
Rent provided for herein shall abate pro rata to the extent that, and for so
long as, any portion of the Leased Premises is not reasonably usable by Lessee
in the ordinary conduct of its business.
10.3. Eminent Domain. In the event the whole or any substantial part of
the Building or the Leased Premises shall be taken or condemned by any competent
authority for any public or quasi-public use or purpose, this Lease shall
terminate as of the date of the taking of possession by the condemning
authority, and Rent shall be apportioned as of said date. In the event less than
a substantial part of the Building or the Leased Premises shall be taken or
condemned for any public or quasi-public use or purpose, or if any adjacent
property or street shall be condemned or improved in such manner as to require
the use of any part of the Leased Premises or the Building, then at the election
of Lessor expressed by delivery of written notice to Lessee within thirty (30)
days after said date of taking, condemnation or improvement, this Lease shall
terminate as of said date without any payment to Lessee therefor. All income,
rent, awards or interest derived from any such taking or condemnation shall
belong to and be the property of Lessor, and Lessee hereby assigns Lessee's
interest, if any, in such award to Lessor.
ARTICLE XI - INDEMNIFICATION
11.1. Indemnification by Lessee. Lessor shall not in any event be
responsible for loss of property from or for damage to person or property
occurring in or about the Leased Premises, however caused, including but not
limited to any damage from steam, gas, electricity, water, plumbing, rain, snow,
leakage, breakage or overflow, whether originating in the Leased Premises,
premises of other lessees, or any part of the Project whatsoever.
Lessee agrees to indemnify and hold harmless Lessor from and against all
claims of whatever nature arising from any accident, injury or damage to person
or property during the Term of this Lease in or about the Leased Premises or
arising from any accident, injury or damage to personal property occurring
outside the Leased Premises but within the Project or any other property of
which the Leased Premises is a part, where such accident, injury or damage
results or is claimed to have resulted from an act, omission or negligence on
the part of Lessee, or on the part of any of its licensees, agents, invitees,
servants or employees. This indemnity agreement shall include indemnity against
all costs, claims, expenses, penalties, liens and liabilities including
attorney's fees incurred in or in connection with any such claims or proceedings
brought thereon and the defense thereof.
11.2. Lessee's Liability Insurance. Lessee will maintain commercial
general liability insurance with respect to the Leased Premises naming Lessor as
additional insured, with a combined single limit of not less than $1,000,000 per
occurrence with respect to both bodily injury or death and property damage
occurring upon, in or about the Leased Premises and a $2,000,000 aggregate
limit. This insurance coverage shall extend to any liability of Lessee arising
out of the indemnities provided for in this Lease. Lessor shall be named as an
additional insured and the insurance shall be primary to any insurance
maintained by Lessor. Lessee shall
<PAGE>
deliver to Lessor a Certificate of Insurance at least seven (7) days prior to
the commencement of the Term of this Lease and a renewal certificate at least
seven (7) days prior to the expiration of the Certificate it renews. Said
Certificate must provide thirty (30) days prior notice to Lessor in the event of
material change or cancellation. Lessee also agrees to maintain broad form
commercial property insurance coverage under ISO form CP1030 or like coverage
under non-ISO form covering all Lessee's personal property and improvements and
worker's compensation insurance in accordance with applicable state law and
employer's liability insurance with limits of not less than $100,000/$100,000
/$500,000.
11.3 Lessor's Indemnification; Insurance. Notwithstanding anything to the
contrary contained in this Lease, Lessor shall not be released from, and shall
indemnify, defend, protect and hold harmless Lessee from all damages,
liabilities, judgments, actions, claims and reasonable fees and expenses
(including attorneys' fees and consultants' fees) arising solely from (a) the
gross negligence or willful misconduct of Lessor or its employees or (b) a
material breach of Lessor's obligations or representations under this Lease.
Lessee shall promptly advise Lessor in writing of any action as to which this
indemnification may apply, and if such indemnification provision does apply,
Lessor, at Lessor's expense, shall assume on behalf of Lessee and conduct with
due diligence and in good faith the defense with counsel reasonably satisfactory
to Lessee; provided, however, that Lessee shall have the right, at its option,
to be represented by advisory counsel of its own selection and at its own
expense. In addition, Lessor shall insure the Building and the Project
(excluding any property which Lessee is obligated to insure, but including the
Work) against damage with all risk property insurance in the amount of the full
replacement cost of the Building and the Project (less any deductible), and
comprehensive general commercial liability insurance, in such amounts and with
such deductibles as are carried by prudent owners of commercial buildings
located in the geographical vicinity of the Building, determined by Lessor in
its reasonable discretion.
11.4. Survival of Indemnities. Each indemnity agreement and hold harmless
agreement contained herein shall survive the expiration or termination of this
Lease.
ARTICLE XII - RIGHT OF ENTRY
12.1. Right of Entry. Lessor reserves the right to use the Building and
every part thereof, and Lessee shall permit access to the Leased Premises to
Lessor or its agents at all reasonable times for inspection and cleaning and
from time to time to repair of the Building as provided in Section 6.1,
maintain, alter, improve and remodel, and to add additional offices to the
Building and each part thereof; Lessee shall not be entitled to any
compensation, damages or abatement or reduction in Rent on account of any such
repairs, maintenance, alterations, improvements or remodeling or adding of
additional stories. Lessor reserves the right at any time and from time to time
upon 24 hours prior notice (which notice shall not be required in the event of
emergency) to enter, and be upon the Leased Premises for the purpose of
examining same. Lessor shall have the right, at reasonable hours, and upon
notice to Lessee, to enter upon the Leased Premises or exhibit the same to
prospective lessees, purchasers and insurers. Lessee shall have the right and be
given the opportunity to accompany Lessor at all such entrances and
examinations, except in the case of emergency.
<PAGE>
ARTICLE XIII - PROPERTY LEFT ON THE LEASED PREMISES
13.1. Abandoned Property. Upon the expiration of this Lease or if the
Leased Premises should be vacated at any time, or abandoned by the Lessee, or
this Lease should terminate for any cause, and at the time of such termination,
vacation, abandonment Lessee or Lessee's agents, or any other person should
leave any property of any kind or character on or in the Leased Premises, the
property shall be deemed abandoned. Lessor, its agents or attorneys, shall have
the right and authority to remove and destroy, or to sell or authorize disposal
of such property, or any part thereof, without being in any way liable to Lessee
for the abandoned property. The abandoned property shall belong to Lessor as
compensation for the removal and disposition of said property.
ARTICLE XIV - SIGNS AND ADVERTISEMENTS
14.1. Sign. No exterior signs, advertisements, posters on windows,
decorations or other fixtures shall be erected by Lessee without the prior
written consent of Lessor. However, Lessor agrees, at its sole cost and expense,
to provide a monument sign on Capital of Texas Highway and Lessee's name shall
be displayed, at Lessee's expense, on such monument sign. Lessee shall also have
the right to have installed, at its sole cost and expense, a monument sign at
the entrance on the east side of the Building, in a specific location to be
determined by Lessor, to be used exclusively by Lessee. In addition, Lessee
shall have the right to have installed an exterior back-lit sign identifying
Lessee's name on the Building. Such monument signs and exterior building sign
shall be maintained by Lessor, at Lessee's sole cost and expense, until the
expiration or earlier termination of this Lease. Lessee may also install,
without Lessor's consent, interior signs on each floor within the Building
prominently displayed and visible from the entrance to each floor. The location,
size, material and design of all signage permitted under this Lease shall be
subject to the written approval of Lessor, which shall not be unreasonably
withheld, conditioned or delayed and, if required, the written approval of all
governmental entities having such authority. Except for the addition of names of
affiliates, divisions or permitted subtenants or assignees, in the Building
directory sign, Lessee agrees not to make any subsequent alterations in or
additions to the permitted signage without, and in each instance first,
obtaining the written approval of Lessor, which shall not be unreasonably
withheld, conditioned or delayed. Lessee acknowledges that Lessor, in granting
or withholding its approval with respect to any signage, may take into
consideration the effect Lessee's sign(s) will have on other signs within the
Project. If at any time Lessee's rights to use any of the permitted signage
should be terminated due to reasons outside of Lessor's control (e.g.
governmental action), Lessor agrees to use reasonable diligence in notifying
Lessee. Lessor shall have the right to cause Lessee to remove, at Lessee's sole
expense, such signage upon the expiration or termination of this Lease or of
Lessee's right to maintain the signage as provided above, at which time the
signage shall be deemed the property of Lessee; provide, however, if the signage
is not removed from the Building within thirty (30) days after notice from
Lessor, then such signage shall conclusively be deemed to have been abandoned by
Lessee and may be disposed of by Lessor without further notice to Lessee and
without any obligation to
<PAGE>
account therefore and Lessee shall pay Lessor all expenses incurred in
connection with the disposition of the signage.
ARTICLE XV - NOTICES
15.1. Notices. Any notice, demand, request, consent, approval or
communication under this Lease shall be in writing and shall be deemed to have
been duly given and received at the time and on the date when personally
delivered, or one (1) day after being delivered to a nationally recognized
commercial carrier service for next-day delivery or three (3) days after deposit
in the United States mail, certified or registered mail with a return receipt
requested, with all postage prepaid, addressed to Lessor or Lessee (as the case
may be) as follows:
If to Lessor:
Transwestern Commercial Services
Barton Oaks Plaza One
901 South Mopac Expressway
Building 1, Suite 520
Austin, Texas 78746
Attention: Daryl Chalberg
Telephone: (512) 328-5600
Facsimile: (512) 330-0688
If to Lessee:
Netpliance, Inc.
7501 Capitol of Texas Highway, Building B
Austin, Texas 78731
Attention: David Hampton
Telephone: (512) ___________
Facsimile: (512) ___________
ARTICLE XVI - MECHANIC'S LIENS
16.1. Mechanic's Liens, Indemnity. Lessee and any vendor or Contractor
performing work on behalf of Lessee shall keep the Building, the Leased Premises
and the improvements at all times during the Term of this Lease, free of
mechanic's and materialmen's liens and other liens of like nature. Lessee at all
times shall fully protect and indemnify Lessor against all such liens or claims
and against all attorney's fees and other costs and expenses growing out of or
incurred by reason or on account of any such liens or claims. Should Lessee fail
fully to discharge or bond around any such lien or claim, Lessor, in its sole
discretion may pay the same or any part thereof, and Lessor shall be the sole
judge of the validity of said lien or claim. All amounts so paid by Lessor,
together with interest thereon at the lesser rate of 18% per annum or the
highest rate allowed by applicable law from the time of payment by Lessor until
<PAGE>
repayment by Lessee, shall be paid by Lessee upon demand, and if not so paid,
shall continue to bear interest at the aforesaid rate, payable monthly as
Additional Rent.
ARTICLE XVII - SUBORDINATION AND ATTORNMENT
17.1. Subordination. Lessor may, from time to time, grant first lien deeds
of trust, security deeds, mortgages or other first lien security interests
covering its estate in the Project or any portion thereof (each a "Mortgage").
Lessee agrees that this Lease shall be subject and subordinate to each Mortgage,
including any modifications, extensions or renewals thereof and advances
thereunder from time to time in effect. The foregoing provisions shall be self
operative, and no further instrument of subordination shall be required to make
this Lease subject and subordinate to any Mortgage. Lessee shall, upon request,
from time to time execute and deliver to Lessor or the holder of any Mortgage
any instrument requested by Lessor or the holder of such Mortgage to evidence
the subordination of this Lease to any such Mortgage.
17.2. Attornment. Lessee agrees to recognize and attorn to any party
succeeding to the interest of Lessor as a result of the enforcement of any
Mortgage, and to be bound to such party under all the terms, covenants, and
conditions of this Lease, for the balance of the term of this Lease, including
any extended term, with the same force and effect as if such party were the
original Lessor under this Lease.
17.3. Confirming Agreement. Upon the request of Lessor, Lessee agrees to
execute a subordination and attornment agreement incorporating the provisions
set forth above and otherwise in form reasonably acceptable to Lessor.
ARTICLE XVIII - RULES AND REGULATIONS
18.1. Rules and Regulations. The rules and regulations attached as Exhibit
-------
"D" ("Rules and Regulations") are Lessor's Rules and Regulations for the
- ---
Project. Lessee shall faithfully observe and comply with such Rules and
Regulations and such reasonable changes therein (whether by modification,
elimination, addition or waiver) as Lessor may hereafter make and communicate in
writing to Lessee, which shall be necessary or desirable for the reputation,
safety, care or appearance of the Project or the preservation of good order
therein or the operation or maintenance of the Project or the equipment thereof
or the comfort of tenants or others in the Project. In the event of a conflict
between the Rules and Regulations and the provisions of this Lease, the
provisions of this Lease shall control.
ARTICLE XIX - LESSOR'S LIEN
19.1. Lessor's Lien. Lessee hereby grants to Lessor, to secure payment by
Lessee of all Base Rent, Additional Rent, and all other payments to be made by
Lessee under this Lease and the performance by Lessee of all its other duties
and obligations under this Lease, a first priority lien and security interest in
all equipment, trade fixtures, goods and other tangible personal property now or
hereafter owned by Lessee (exclusive of Lessee's proprietary equipment, software
and data) and located on the Leased Premises, and all substitutions,
replacements,
<PAGE>
additions and accessions thereto and proceeds thereof. No such property shall be
removed from the Leased Premises without the consent of Lessor until all Base
Rent, Additional Rent and other amounts payable under this Lease have been paid
and until Lessee has fully and completely performed all of the other duties and
obligations of Lessee under this Lease. If Lessee is in default under this
Lease, Lessor shall have, in addition to all other rights and remedies, provided
for herein or allowed by law or in equity, all rights and remedies of a secured
party under the Uniform Commercial Code, including the right to sell any or all
of the property described above at one or more public or private sales upon
providing the notice required by the Uniform Commercial Code. Lessee agrees that
ten (10) days prior notice of any such sale will constitute commercially
reasonable notice. Lessee shall, at the request of Lessor, execute and deliver
such additional documents as may be reasonably required, including Uniform
Commercial Code financing statements, to perfect the lien and security interest
granted by Lessee to Lessor herein. Any statutory lien for rent is not waived,
the express contractual lien and security interest herein granted being
supplementary thereto. Lessor agrees to subordinate its foregoing contractual
lien rights and all other statutory and constitutional lien rights to a third
party providing furniture, fixtures and/or equipment for Lessee's use in the
Leased Premises during the Term of this Lease (or providing funds for the
acquisition of same), provided that (i) there is no uncured event of default by
Lessee under the Lease at the time of such subordination; (ii) such
subordination shall be limited to the specified items, amount and time stated in
the subordinating instrument; and (iii) such subordination shall be in writing,
signed by all parties and in a form reasonably acceptable to Lessor, Lessee and
Lessee's lender. Notwithstanding the foregoing, Lessor's security interest (i)
shall not attach to any personal property subject to an existing perfected
security interest (but only for so long as such other security interest exists)
in favor of a bank or other financial institution whose loan and security
agreements with Lessee prohibit any other liens on such collateral, but (ii)
shall be subordinate to any such existing security interests that do not
prohibit subordinate liens.
ARTICLE XX - ESTOPPEL CERTIFICATE
20.1. Lessee Estoppel. Lessee shall from time to time, upon not less than
ten (10) days prior written notice by Lessor, execute, acknowledge and deliver
to Lessor a statement in writing:
(a) Certifying that this Lease is unmodified and in full force and
effect (or if there have been modifications, that this Lease is in full force
and effect as modified and stating the modifications);
(b) Stating the dates to which Rent and other charges hereunder
have been paid by Lessee;
(c) Stating whether, to the best knowledge of Lessee, Lessor is in
default in the performance of any covenant, agreement or condition contained in
this Lease, and if so, specifying any such default of which Lessee may have
knowledge; and
(d) Stating the address to which notices to Lessee should be sent
pursuant to Article XV of this Lease. Any such statement delivered pursuant
hereto may be relied upon by
<PAGE>
any owner of the Project, Building and/or the Leased Premises, any prospective
purchaser of the Project, Building and/or Leased Premises, any mortgagees or
prospective mortgagee of the Project, Building and/or Leased Premises, any
prospective assignee of any such mortgagee, or any purchaser of Lessor, actual
or prospective, of the underlying land upon which the Project, Building or
Leased Premises are located.
ARTICLE XXI - HOLDING OVER
21.1. Hold Over. If Lessee retains possession of the Leased Premises or
any part thereof after the termination of this Lease by lapse of time or
otherwise without any modification of this Lease or other written agreement
between the parties, Lessee shall be a tenant at will and shall be liable to
Lessor for payment of Base Rent in an amount equal to at 150% of the Base Rent
in effect on the date of termination of this Lease, plus the Additional Rent
otherwise due and payable. In addition, Lessee shall pay to Lessor all direct
and consequential damages sustained by Lessee's retention of possession,
including but not limited to lost rentals, leasing fees, advertising costs,
marketing costs, Lessee finish expense and relocation costs. There shall be no
renewal of this Lease by operation of law.
ARTICLE XXII - LESSEE'S STATUS
Lessee represents and warrants to Lessor that:
22.1. Power and Authority. Lessee has the right, power and authority to
execute and deliver this Lease and to perform the provisions hereof, and is, to
the extent required, qualified to transact business and in good standing under
the laws of the State of Texas.
22.2. Authorization. The execution of this Lease by Lessee, or by the
persons or other entities executing them on behalf of Lessee, and the
performance by Lessee of Lessee's obligations under this Lease in accordance
with the provisions hereof have been, to the extent required, duly authorized by
all necessary action of Lessee.
ARTICLE XXIII - DEFAULTS AND REMEDIES
23.1. Default by Lessee. Lessee shall be in default under this Lease if:
(a) Lessee shall fail to pay when due any Base Rent, Additional
Rent, or other payment to be made by Lessee under this Lease; provided, however,
the first two (2) such failures during any consecutive twelve (12) month period
shall not be an event of default if Lessee pays the amount due within five (5)
days after written notice from Lessor.
(b) Lessee violates or breaches, or fails to fully and completely
observe, keep, satisfy, perform and comply with, any agreement, term, covenant,
condition, requirement, restriction or provision of this Lease, and fails to
cure such breach or failure within thirty (30) days after delivery of written
notice by Lessor to Lessee; provided, however, that if such breach or failure is
incapable of cure within thirty (30) days, Lessee shall not be in default
hereunder if
<PAGE>
Lessee commences the cure within such thirty (30) day period and thereafter
diligently prosecutes the cure to completion.
(c) Lessee fails to take possession of or cease to do business in
or abandon any substantial portion of the Leased Premises.
(d) Lessee becomes insolvent, or makes an assignment for the
benefit of creditors; or any action is brought by Lessee seeking its dissolution
or liquidation of its assets or seeking the appointment of a trustee, interim
trustee, receiver or other custodian for any of its property.
(e) Lessee commences a voluntary proceeding under the Federal
Bankruptcy Code, or any reorganization or arrangement proceeding is instituted
by Lessee for the settlement, readjustment, composition or extension of any of
its debts upon any terms; or any action or petition is otherwise brought by
Lessee seeking similar relief or alleging that it is insolvent or unable to pay
its debts as they mature; or if any action is brought against Lessee seeking its
dissolution or liquidations of any of its assets, or seeking the appointment of
a trustee, interim trustee, receiver or other custodian for any of its property,
and any such action is consented to or acquiesced in by Lessee or is not
dismissed within three (3) months after the date upon which it was instituted.
23.2. Lessor's Remedies. On the occurrence of any default by Lessee,
Lessor may, at any time thereafter, with or without notice or demand and without
limiting Lessor in the exercise of any right or remedy which Lessor may have:
(a) Terminate Lessee's right to possession of the Leased Premises,
in which case Lessee shall immediately surrender possession of the Leased
Premises to Lessor. In such event, Lessor shall be entitled to recover from
Lessee all damages incurred by Lessor by reason of Lessee's default, including
(a) the worth at the time of the court award of the unpaid Base Rent, Additional
Rent and other charges which had been earned at the time of the termination; (b)
the worth at the time of the court award of the amount by which the unpaid Base
Rent, Additional Rent and other charges which would have been earned after
termination until the time of the award exceeds the amount of such rental loss
that Lessee proves could have been reasonably avoided; (c) the worth at the time
of the court award of the amount by which the unpaid Base Rent, Additional Rent
and other charges which would have been paid for the balance of the Term after
the time of award exceeds the amount of such rental loss that Lessee proves
could have been reasonably avoided; and (d) such other amounts as are necessary
to compensate Lessor for the detriment caused by Lessee's failure to perform its
obligations under this Lease, including, but not limited to, the cost of
recovering possession of the Leased Premises, expenses of reletting, including
necessary renovation or alteration of the Leased Premises, Lessor's reasonable
attorneys' fees incurred in connection therewith, and any real estate commission
paid or payable. As used above, the "worth at the time of the court award" is
computed by allowing interest on unpaid amounts at the rate of twelve (12%) per
annum, or such lesser amount as may then be the maximum lawful rate;
<PAGE>
(b) Maintain Lessee's right to possession, in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the Leased
Premises. In such event, Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state in which the Leased Premises
is located. Lessor's exercise of any right or remedy shall not prevent it from
exercising any other right or remedy.
No action taken by or on behalf of Lessor under this Section shall
be construed to be an acceptance of a surrender of this Lease. No termination of
this Lease shall affect Lessor's rights to collect Base Rent, Additional Rent or
other amounts due for the period prior to termination. In the event of any
termination, in addition to any other remedies set forth above, Lessor shall
have the right to recover from Lessee upon such termination an amount equal to
the excess of the Base Rent, Additional Rent and other amounts to be paid by
Lessee during the remaining Term of this Lease over the then reasonable rental
value of the Leased Premises for the remaining Term of this Lease, discounted to
present value using a reasonable discount rate.
23.3. Lessor's Costs; Attorneys Fees. Lessee shall pay all costs and
expenses incurred by Lessor as a result of any breach or default by Lessee under
this Lease, including court costs and attorneys fees paid by Lessor.
23.4. Remedies Cumulative. The foregoing remedies are cumulative of, and
in addition to, and not restrictive or in lieu of, the other remedies provided
for herein or allowed by law or in equity, and may be exercised separately or
concurrently, or in any combination, and pursuit of any one or more of such
remedies shall not constitute an election of remedies which shall exclude any
other remedy available to Lessor.
23.5. Non-Waiver. Lessor's forbearance in pursuing or exercising one or
more of its remedies shall not be deemed or construed to constitute a waiver of
any default or any remedy, and no waiver by Lessor of any right or remedy on one
occasion shall be construed as a waiver of that right or remedy on any
subsequent occasion or as a waiver of any right or remedy then or thereafter
existing. No failure of Lessor to pursue or exercise any of its rights or
remedies or to insist upon strict compliance by Lessee with any term or
provision of this Lease, and no custom or practice at variance with the terms of
this Lease, shall constitute a waiver by Lessor of the right to demand strict
compliance with the terms and provisions of this Lease.
23.6. Attorney's Fees. In the event of any legal action or proceeding
brought by either party against the other arising out of this Lease, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
costs incurred in such action (including, without limitation, all costs of
appeal) and such amount shall be included in any judgement rendered in such
proceeding.
ARTICLE XXIV - MISCELLANEOUS
<PAGE>
24.1. No Partnership. Nothing contained in this Lease shall be deemed or
construed to create a partnership or joint venture of our between Lessor and
Lessee, or to create any other relationship between the parties hereto other
than that of Lessor and Lessee.
24.2. No Representations by Lessor. Neither Lessor nor any other agent or
employee of Lessor has made any representations or promises with respect to
Leased Premises, Building or Project, except as expressly set forth in this
Lease, and no rights, privileges, easements or licenses are acquired by Lessee
except as herein expressly set forth.
Lessor covenants and agrees that so long as Lessee has committed no default
under this Lease, Lessee's peaceful and quiet possession of the Leased Premises
during the Term of this Lease shall not be disturbed by Lessor or by anyone
claiming through or under Lessor, subject to the terms of this Lease and to any
mortgages, ground or underlying leases, agreements and encumbrances to which
this Lease is or may be subordinated.
24.3. Waiver of Jury Trial. Lessor and Lessee hereby waive trial by jury
in any action, proceeding or counterclaim brought by either of the parties
hereto against the other on or in respect to any matter whatsoever arising out
of or in any way connected with this Lease, the relationship of Lessor and
Lessee hereunder, Lessee's use of occupancy of the Leased Premises, and/or any
claim of injury or damage.
24.4. Severability of Provisions. If any clause or provision of this Lease
shall be determined to be illegal, invalid or unenforceable under the present or
future laws effective during the Term hereof, then and in that event it is the
intention of the parties that the remainder of this Lease shall not be affected
by the invalid clause, and it is also the intention of the parties to this Lease
that in place of any such clause or provision that is illegal, invalid, or
unenforceable there be added as a part of this Lease a clause or provision as
similar in terms to such illegal, invalid or unenforceable clause or provision
as may be possible and be legal, valid and enforceable.
24.5. Interior Construction. Unless the Leased Premises are leased "as
is", the construction of Lessee's space, including any Lessee finish or
improvements shall be completed pursuant to the Construction Agreement attached
hereto as Exhibit "E".
-----------
24.6. Parking. Lessee and its employees, and its contractors, licensees
and invitees shall be entitled to use the parking facility associated with the
Project in accordance with the Rules and Regulations promulgated from time to
time by Lessor. The number of parking spaces available for Lessee's use shall
not exceed 158 (determined on the basis of one (1) space for every 275 rentable
square feet in the Leased Premises) and such parking spaces will be unassigned.
Lessor shall not be obligated to control any of Lessee's authorized visitor
parking spaces.
24.7. Relocation of Leased Premises. Intentionally Omitted.
<PAGE>
24.8. Benefits and Burdens. The provisions of this Lease shall be binding
upon, and shall inure to the benefit of, the parties hereto and each of their
respective representatives, permitted successors and permitted assigns. Lessor
shall have the right, at any time and from time to time, to freely and fully
assign all or any part of its interest under this Lease for any purpose
whatsoever. Neither Lessor nor any owner of any interest in Lessor whether
disclosed or undisclosed, shall be under any personal liability with respect to
any of the provisions of this Lease. If Lessor is in breach or default with
Lessee's obligations under or in connection with this Lease or otherwise, Lessee
shall look solely to the equity of Lessor in the Leased Premises for the
satisfaction of Lessee's remedies.
24.9. Waiver of Subrogation. Notwithstanding anything contained in this
Lease to the contrary, if either party suffers a loss of or damage to property
in the Leased Premises or related to this Lease, which is covered by valid and
collectible insurance policies (or would be covered by policies which are
required hereunder or which would be required but for any specific provisions
for self-insurance), that party waives any claim therefor which it may have
against the other party or its employees, regardless of whether negligence or
fault of the latter party or its Employees may have caused the loss or damage.
Each party will have its appropriate insurance policies properly endorsed, if
necessary, to prevent any invalidation of insurance coverage required hereunder
due to these mutual waivers.
24.10. Lessor's Liability. The obligations of Lessor under this Lease do
not constitute personal obligations of Lessor of the individual partners, joint
venturers, directors, officers, shareholders or beneficial owners of Lessor, and
Lessee shall look solely to the Building and to no other assets of Lessor for
satisfaction of any liability in respect to this Lease. Lessee will not seek
recourse against Lessor or such individual entities or such other assets for
such satisfaction. As used in this Lease, the term "Lessor" means only the
current owner or owners of the fee title to the Leased Premises or the leasehold
estate under a ground lease of the Leased Premises at the time in question. Any
Lessor who transfers its title or interest is relieved of all liability with
respect to the obligations of Lessor under this Lease to be performed on or
after the date of transfer.
24.11. Brokerage. This Lease has been negotiated on behalf of Lessee
through the agency of Rodell Interests, Inc., and Lessee warrants and represents
to Lessor that no other broker was involved with the leasing of the Leased
Premises or the negotiation of this Lease or is entitled to any commission in
connection herewith. Lessee agrees to indemnify and hold Lessor harmless against
any other claims (including court costs and attorneys fees) for commissions by
any other broker claiming to act on Lessee's behalf.
24.12. Recording. Lessee shall not record this Lease without Lessor's prior
written consent, and such recordation shall, at the option of Lessor, constitute
a non-curable default of Lessee hereunder. Lessee shall upon request of Lessor,
execute, acknowledge and deliver to Lessor a short-form memorandum of this Lease
for recording purposes.
24.13. Governmental Surcharge. Lessee agrees to pay as Additional Rent upon
demand, Lessee's Share of any parking charges, regulatory fees, utility
surcharges, or any other costs levied, assessed or imposed by, or at the
direction of, or resulting from statutes or
<PAGE>
regulations, or interpretations thereof, promulgated by any federal, state,
municipal or local government authority in connection with the use or occupancy
of the Leased Premises or the parking facilities serving the Leased Premises.
24.14. Exhibits. The terms and provisions of the attached Exhibits "A"
-----------
through Exhibit "G" are incorporated herein and made a part hereof.
-----------
24.15. Compliance with Law. Lessee, at Lessee's expense, shall comply with
all laws, rules, orders, ordinances, directions, regulations and requirements of
federal, state, county and municipal authorities pertaining to Lessee's use of
the Leased Premises and with the recorded covenants, conditions and restrictions
affecting the Project, including, without limitation, all applicable federal,
state and local laws, regulations or ordinance pertaining to air and water
quality Hazardous Materials (as hereinafter defined), waste disposal, air
emissions and other environmental matters, all zoning and other land use
matters, and utility availability, and with any direction of any public officer
or officers, pursuant to law, which shall impose any duty upon Lessor or Lessee
with respect to the use or occupation of the Leased Premises (collectively,
"Applicable Laws"). Provided, however, Lessee shall not have any obligation to
pay for capital improvements required as a result of Applicable Laws except with
respect to (a) improvements to the Leased Premises after the Commencement Date
or as provided in the Construction Agreement or (b) costs of improvements
expressly included as an Operating Expense pursuant to Section 2.3(c)(ii).
24.16. Entire Agreement. It is understood that there are no oral agreements
between the parties hereto affecting this Lease, and this Lease supersedes and
cancels any and all previous negotiations, arrangements, brochures, agreements
and understanding, if any, between the parties hereto or displayed by Lessor to
Lessee with respect to the subject matter thereof, and none hereof shall be used
to interpret or construe this Lease.
24.17. Force Majeure. Whenever a period of time is herein prescribed for
action to be taken by Lessor or Lessee, the party taking the action shall not be
liable or responsible for, and there shall be excluded from the computation for
any such period of time, any delays due to strikes, riots, acts of God,
shortages of labor or materials, delays caused by third parties, war,
governmental laws, regulations or restrictions or any other causes of any kind
whatsoever which are beyond the reasonable control of such party; provided,
however, in no event shall the foregoing apply to the financial obligations of
either Lessor or Lessee to the other under this Lease, including Lessee's
obligation to pay Base Rent, Additional Rent or any other amount payable to
Lessor hereunder.
24.18 Disclosure. Lessor acknowledges that Lessee shall have the right to
disclose the terms of this Lease as part of its initial public offering to the
extent Lessee reasonably determines that such disclosure is required by
Applicable Law.
[SIGNATURES ON FOLLOWING PAGE]
<PAGE>
IN WITNESS WHEREOF, these presents have been executed to be effective as of the
day and year first above written.
(LESSOR)
SV BULL CREEK LIMITED PARTNERSHIP,
a Texas limited partnership
By: Simmons Vedder & Co.,
a Texas corporation, its general partner
By: _________________________________
Name: _________________________________
Title: _________________________________
(LESSEE)
NETPLIANCE, INC.,
a Texas corporation
By: ___________________________
Name: ___________________________
Title: ___________________________
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF THE PROPERTY
Lot 1, Block A, Continuum Office Park, a subdivision in Travis County, Texas,
according to the map or plat thereof recorded in Volume 101, pages 72-73 of the
Plat Records of Travis County, Texas.
<PAGE>
EXHIBIT B
DESCRIPTION OF THE LEASED PREMISES
<PAGE>
EXHIBIT C
FORM OF LETTER OF CREDIT
RE: Irrevocable Letter of Credit No. ________________, Dated ________________,
in the amount of $1,000,000.00
Gentlemen:
We hereby establish our Irrevocable Letter of Credit No. _______________,
in your favor for the account of Netpliance, Inc., in the aggregate amount of
One Million and no/100 Dollars ($1,000,000.00).
You may draw upon such Letter of Credit at sight on or before ____________.
You may draw upon this Letter of Credit upon the presentation of your draft,
executed by any duly authorized representative of SV Bull Creek Limited
Partnership, accompanied by his/her written statement under penalty of perjury
that (i) an event of default by Lessee exists under that certain Office Lease
(as amended, the "Lease") between SV Bull Creek Limited Partnership and
Netpliance, Inc. dated February ____, 2000, and (ii) such default exists beyond
any applicable cure period provided in the Lease for such default, if any. The
written statement shall specify in reasonable detail the nature of the default
and shall attach to it a copy of the written notice of such default provided to
Lessee, if any.
This Letter of Credit is binding upon and shall inure to the benefit of the
parties and their successors and assigns. This Letter of Credit sets forth our
entire undertaking, and shall not be modified, amended or expanded by reference
to any other document, instrument or agreement. Except to the extent expressly
inconsistent therewith, this Letter of Credit is subject to the Uniform Customs
and Practice for Documentary Credits (1993 Revisions), International Chamber of
Commerce Publication 500, and the Uniform Commercial Code, as adopted in the
State in which this Bank is located, as the same may be revised from time to
time. In the event of a conflict between the Uniform Customs and Practice and
the Uniform Commercial Code, the former shall govern and control.
(Name of Bank)
By:
Vice President
<PAGE>
EXHIBIT D
RULES AND REGULATIONS
The Rules and Regulations set forth in this Exhibit shall be and hereby are
made a part of the Lease to which they are attached. Whenever the term "Lessee"
is used in these Rules and Regulations, it shall be deemed to include Lessee,
its employees or agents, and any other persons permitted by Lessee to occupy or
enter the Leased Premises. The following Rules and Regulations may from time to
time be modified by Lessor.
1. The sidewalks, entryways, passages, and other common facilities of the
Building shall be controlled by Lessor and shall not be obstructed by Lessee or
used for any purpose other than ingress or egress to and from the Leased
Premises. Lessee shall not have the right to remove any obstruction or any such
item without the prior written consent of Lessor. Lessor shall have the right to
remove any obstruction or any such item without notice to Lessee and at the
expense of Lessee.
2. Lessor may restrict access to and from the Leased Premises and the
Building outside the ordinary business hours of the Building for reasons of
building security or in the event of emergency. Lessor may require
identification of persons entering and leaving the Building and, for this
purpose, may issue building and/or parking passes to Lessees of the Building.
3. Lessor and/or Building manager may at all times keep a pass key to the
Leased Premises, and such manager and other agents of Lessor shall at all times
be allowed admittance to the Leased Premises; subject, however, to Lessee's
reasonable security requirements which may prohibit access except when
accompanied by Lessee's authorized security personnel.
4. Subject always to Lessee's reasonable security requirements, no
additional lock or locks shall be placed by Lessee on any door in the Building
and no existing lock shall be changed unless written consent of Lessor shall
first have been obtained, A reasonable number of keys to the Leased Premises
will be furnished by Lessor and Lessee shall not have any duplicate key made. At
the termination of this tenancy, Lessee shall promptly return to Lessor all
keys.
5. The delivery or shipping of merchandise and supplies to and from the
Building and Leased Premises shall be subject to such rules and regulations as
in the judgment of Lessor are necessary for the property operation of the Leased
Premises.
6. On Saturdays, Sundays and legal holidays, and on other days between
the hours of 6:00 PM and 8:00 AM, the following day, access to the Building or
to the Leased Premises may be refused unless the person seeking access is known
to the person or employee of the Building in charge and has a pass or is
properly identified. Lessor shall in no case be liable for damages or any error
with regard to the admission to or exclusion from the Building of any person. In
case of invasion, mob, riot, public excitement, or other commotion, Lessor
reserves the right to prevent access to the Leased Premises and Building during
the continuance of the same by
<PAGE>
closing of the doors or otherwise, for the safety of tenants and protection of
property in the Leased Premises and Building.
7. Lessor reserves the right to exclude or expel from the Leased Premises
or Project any person who, in the judgment of Lessor is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in violation
of any of the rules and regulations of the Project.
8. Lessor shall have the right, exercisable without notice and without
liability to Lessee, to change the name and street address of the Building of
which the Leased Premises are a part.
9. Without the written consent of Lessor, Lessee shall not use the name
of the Project or Building in connection with or in promoting or advertising the
business of Lessee except as Lessee's address.
10. Lessor shall have the right to control and operate the public portions
of the Project and any public facilities, as well as facilities furnished for
the common use of Lessees, in such manner as it deems best for the benefit of
tenants generally.
11. Lessor reserves the right to restrict, control or prohibit canvassing,
soliciting and peddling on the Leased Premises. Lessee shall not grant any
concessions, licenses, or permission for the sale or taking of orders for food,
beverages, services or merchandise in the Building.
12. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside or
inside of the Building without the written consent of Lessor, and Lessor shall
have the right to remove any such sign, placard, picture, advertisement, name
and notice without notice to and at the expense of Lessee. At all times and at
its sole discretion, Lessor shall have the express right to control signage
outside the Building.
13. Except with the prior written consent of Lessor, no personnel or
persons other than those approved by Lessor shall be permitted to enter the
Building or Leased Premises for the purpose of cleaning, maintaining, servicing,
replacing or repairing the same. Lessee shall not cause any unnecessary labor by
reason of Lessee's carelessness or indifference in the preservation of good
order and cleanliness.
14. Lessee shall see that the doors of the Leased Premises are closed and
securely locked before leaving the Leased Premises and must observe strict care
and caution that all water faucets or water apparatus are entirely shut off
before Lessee or Lessee's employees leave the Building, and that all electricity
shall likewise be carefully shut off, so as to prevent waste or damage; and for
any default or carelessness, Lessee shall make good all injuries sustained by
other lessees or occupants of the Leased Premises, Building, or Project.
<PAGE>
15. The plumbing facilities shall not be used for any other purpose than
that for which that are constructed, and no foreign substance of any kind shall
be thrown therein, and the expense of any breakage, stoppage, or damage
resulting from a violation of this provision shall be borne by Lessee who shall,
or whose employees, agents, or invitees shall, have caused it.
16. If Lessee desires telegraphic or telephonic connections, Lessor, at
the sole cost of Lessee will direct the electricians approved by Lessor as to
where the wires are to be introduced and without such direction no boring or
cutting for wires shall be permitted.
17. No animal or bird shall be allowed in any part of the Leased Premises
without the prior written consent of Lessor.
18. Lessee and its employees, contractors, licensees or invitees shall not
park cars on the street or internal drives of the Project of which the herein
Leased Premises are a part or in any alley or court in the Project of which the
herein Leased Premises are a part. Where there is a rear entrance, all loading
and unloading of goods shall be made at the rear entrance. Lessee and its
employees shall park their cars in areas as designated by Lessor from time to
time. All trucks, vans and other delivery vehicles shall be required to park at
the rear of the Building. Lessee further agrees that, upon written notice from
Lessor, Lessee will, within five (5) days, furnish the state automobile license
numbers assigned to the cars of all of Lessee's employees and those other
parties occupying the Leased Premises.
19. Bicycles or other vehicles shall not be permitted anywhere inside or
on the sidewalks outside the Building, except in those areas designated by
Lessor for bicycle parking.
20. Lessee shall not allow anything to be placed or stored on the outside
of the Building, nor shall anything be thrown by Lessee out of the windows or
doors.
21. No windows, shades, blinds, screens or draperies will be attached or
detached by Lessee and no awnings shall be placed over the windows without
Lessor's prior written consent. Lessee agrees to abide by Lessor's rules with
respect to maintaining uniform curtains, draperies and linings at all windows
and hallways so that the Building will present a uniform exterior appearance.
Lessee will use its best efforts to have all curtains, draperies and blinds
closed at the end of each day in order to help conserve energy. Except in case
of fire or other emergency, Lessee shall not open any outside window because the
opening of windows interferes with the proper functioning of the Building
heating and air conditioning systems.
22. Lessee shall not install or operate any steam or gas engine or boiler,
or carry on any mechanical business in the Leased Premises without Lessor's
prior written consent, which consent may be withheld in Lessor's absolute
discretion. The use of oil, gas or flammable liquids other than those supplied
by Lessor for heating, air conditioning, lighting or any other purpose is
expressly prohibited. Explosives and other articles deemed extra hazardous shall
not be brought into the Building.
<PAGE>
23. Any repairs, maintenance and alterations required or permitted to be
done by Lessee under this Lease shall be done only during the ordinary business
hours of the Building unless Lessor shall have first consented to such work
being done outside of such times. If Lessee desires to have such work done by
Lessor's employees on Saturdays, Sundays, holidays or weekdays outside of
ordinary business hours, Lessee shall pay the extra cost of such labor.
24. Except as permitted by Lessor, Lessee shall not mark upon, paint signs
upon, cut, drill into, drive nails or screws into, or in any way deface the
walls, ceilings, partitions or floors of the Leased Premises or of the Building,
and any defacement, damage or injury caused by Lessee shall be paid for by
Lessee, due and payable upon demand by Lessor.
25. No furniture, freight or equipment of any kind shall be brought into
the Building without prior notice to Lessor and all moving of the same into or
out of the Building shall be done at such time and in such manner as Lessor
shall designate. Lessor shall have the right to prescribe the weight, size and
position of all safes and other heavy equipment brought into the Building and
also the times and manner of moving the same in and out of the Building. Safes
or other heavy objects shall, if considered necessary by Lessor, stand on
supports of such thickness as is necessary to properly distribute the weight.
Lessor will not be responsible for loss of or damage to any such safe or
property from any cause and all damage done to the Building by moving or
maintaining any such safe or other property shall be repaired at the expense of
Lessee.
26. Lessee shall not use, keep or permit to be used or kept any foul or
noxious gas or substance in the Leased Premise, or permit or suffer the Leased
Premises to be occupied or used in a manner offensive or objectionable to Lessor
or other occupants of the Building by reason of noise, odors, and/or vibrations,
or interfere in any way with other lessees or those having business therein.
27. No cooking shall be done or permitted by any lessee on the Leased
Premises, nor shall the Leased Premises be used for the storage of merchandise,
for washing clothes, for lodging, or for any improper objectionable or immoral
purposes.
28. Lessee will at all times cooperate with Lessor in preserving a first
class image of the Building.
29. Lessor reserves the right to change these rules and to make such other
and further reasonable rules and regulations either as it affects one or all
lessees as in its judgment from time to time be needed for the safety, care and
cleanliness of the Leased Premises and the Building, or for the preservation of
good order therein or for any other cause, and when changes are made, such
modified or new rules shall be deemed a part hereof, with the same effect as if
written herein, when a copy shall have been delivered to Lessee or left with
some person in charge of the Leased Premises.
INITIAL ______ INITIAL ______
Lessee Lessor
<PAGE>
EXHIBIT E
CONSTRUCTION AGREEMENT
This Construction Agreement is attached as an Exhibit to an Office Lease
dated February ____, 2000 (the "Lease") between SV BULL CREEK LIMITED
PARTNERSHIP, as Lessor, and NETPLIANCE, INC., as Lessee. Unless otherwise
specified, all capitalized terms used herein shall have the same meanings as in
the Lease.
1. Approved Construction Documents.
-------------------------------
(a) Lessee's Information. No later than ten (10) business days after the
--------------------
execution of the Lease by Lessee, Lessee shall submit to Lessor all information
necessary for the preparation of complete, detailed architectural, mechanical,
electrical and plumbing drawings and specifications for construction of the Work
(as defined below) in the Leased Premises, including Lessee's partition and
furniture layout, reflected ceiling, telephone and electrical outlets and
equipment rooms, satellite dish, initial provider(s) of telecommunications
services, doors (including hardware and keying schedule), glass partitions,
windows, critical dimensions, structural loads, millwork, finish schedules, and
HVAC and electrical requirements, together with all supporting information and
delivery schedules ("Lessee's Information").
(b) Construction Documents. Following Lessor's execution of the Lease and
----------------------
receipt of Lessee's Information, Lessor's designated architectural/engineering
firm shall prepare and submit to Lessee all finished and detailed architectural
drawings and specifications, including mechanical, electrical and plumbing
drawings (the "Construction Documents"). In addition, Lessor shall advise Lessee
of the number of days of Lessee Delay (defined below) attributable to any
extraordinary requirements (if any) contained in Lessee's Information.
(c) Approved Construction Documents. Within ten (10) days after receipt,
-------------------------------
Lessee shall approve and return the Construction Documents to Lessor. Upon
Lessee's approval, the Construction Documents shall become the "Approved
Construction Documents".
2. Pricing and Bids.
----------------
(a) Estimates. Following receipt of the Approved Construction Documents,
---------
Lessor will promptly price the construction of the Work (defined below) in
accordance therewith and furnish written price estimates to Lessee.
(b) Approved Pricing. Upon receipt, Lessee shall promptly review such
----------------
estimates and complete negotiations with Lessor for any changes or adjustments
thereto. Within ten (10) days after such receipt, Lessee shall return the
estimates with written approval to Lessor.
3. Lessor's Contributions.
----------------------
<PAGE>
(a) Construction Allowance. Lessor will contribute a sum not to exceed
----------------------
$17.50 per rentable square foot in the Leased Premises (the "Construction
Allowance") towards the cost of constructing the Work (as defined below) in
accordance with this Construction Agreement. Payments shall be made directly to
Lessor's contractor performing the Work. The cost of all space planning, design,
consulting or review services and construction drawings shall be included in the
cost of the Work and may be paid out of the Construction Allowance, to the
extent sufficient funds are available for such purpose.
(b) Unused Allowance(s). Any allowance made available to Lessee under this
-------------------
construction Agreement must be utilized for its intended purpose within twelve
(12) months of the effective date of the Lease or be forfeited with no further
obligation on the part of Lessor.
4. Construction.
------------
(a) The Work. Subject to the terms of this Construction Agreement, Lessor
--------
agrees to cause permanent leasehold improvements to be constructed in the Leased
Premises (the "Work") in a good and workmanlike manner in accordance with the
Approved Construction Documents. The Work is in addition to Lessor's completion
of the building core and shell (the "Building Shell"), which includes the items
identified on Exhibit "G" attached hereto. Lessee hereby acknowledges its
-----------
inspection, approval and acceptance of the Building Shell.
(b) General Terms. Lessee acknowledges that Lessor is not an architect or
-------------
engineer, and that the Work will be designed and performed by independent
architects, engineers and contractors. Accordingly, Lessor does not guarantee or
warrant that the Approved Construction Documents will comply with Applicable Law
or be free from errors or omissions, nor that the Work will be free from
defects, and Lessor will have no liability therefor. In the event of such
errors, omissions or defects, and upon Lessee's written request, Lessor will use
commercially reasonable efforts to cooperate with Lessee in enforcing any
applicable warranties. In addition, unless expressly agreed to in writing by
Lessor prior to commencement of the Work, Lessor's approval of the Construction
Documents or the Work shall not be interpreted to Waive or otherwise modify the
terms and provisions of the Lease.
(c) ADA Compliance. Lessor shall, as an Operating Expense, be responsible
--------------
for ADA compliance for the base Building, core areas (including elevators,
Common Areas, Service Areas and the Building's parking facilities) and all
points of access into the Building. Lessee shall, at its expense, be responsible
for ADA compliance in the Leased Premises, including restrooms on any floor now
or hereafter leased or occupied in its entirety by Lessee, its affiliates or
Transferees. Lessor shall not be responsible for determining whether Lessee is a
public accommodation under ADA or whether the Approved Construction Documents
comply with ADA requirements. Such determinations, if desired by Lessee, shall
be the sole responsibility of Lessee.
<PAGE>
(d) Substantial Completion.
----------------------
(i) Definition. Subject to adjustment under Paragraphs 4(e)(iii) and
----------
4(e)(iv), "Substantial Completion" shall occur, with respect to the Leased
Premises, when (A) all of the Work has been completed in accordance with this
Construction Agreement and the Approved Construction Documents, to the extent
that Lessee would have access to the Leased Premises and would be able to
conduct its business in a reasonable manner, and (B) Lessor has obtained final
inspection approval from all appropriate regulatory authorities (if required)
for the Leased Premises, even though adjustments or corrections may be necessary
and Punchlist Items remain to be completed.
(ii) Time of the Essence. Time is of the essence in connection with
-------------------
the obligations of Lessor and Lessee under this Construction Agreement.
(iii) Lessee Delay. If Lessor is delayed in achieving Substantial
------------
Completion due to a delay caused by a Lessee Party or for any other cause
arising from an act or omission of any Lessee Party including (A)Lessee's
request for change orders to the Work, (B) Lessee's failure to timely deliver or
approve any required documentation, such as Lessee's Information, if applicable,
Construction Documents, pricing estimates, and the like, (C) Lessee's failure to
pay any Cost Overruns (as defined below), or (D) Lessee's failure to otherwise
respond to any other Lessor request (collectively, "Lessee Delay"), Substantial
Completion shall be deemed to have occurred on the date Substantial Completion
would have been achieved but for such Lessee Delay.
(iv) Other Delay. If Substantial Completion is delayed for any reason
-----------
other than Lessee Delay, Substantial Completion shall occur on the date when
actually achieved (subject to adjustment for Lessee Delay).
(v) Lessor Liability. Lessor shall not be liable or responsible for
----------------
any Claims incurred (or alleged) by Lessee due to any delay in achieving
Substantial Completion for any reason. However, Lessee's sole and exclusive
remedy for any delay in achieving Substantial Completion for any reason other
than Lessee Delay shall be the resulting postponement (if any) of the
commencement of rental payments under the Lease.
5. Costs.
-----
(a) Change Orders and Cost Overruns. All change orders must be approved in
-------------------------------
advance in writing by Lessor. Change orders requested by Lessee and approved by
Lessor which increase the cost of the Work shall be paid by Lessee within
fifteen (15) days of receipt of Lessor's invoice therefor (which payment may be
required by Lessor prior to commencing construction). Except as otherwise
expressly provided in this Construction Agreement, all costs of the Work in
excess of the Construction Allowance (collectively, "Cost Overruns") shall be
paid by Lessee to Lessor within ten (10) days of Lessor's invoice. In addition,
at Lessor's election, Lessor may require Lessee to prepay any projected Cost
Overruns within five (5) days of Lessor's invoice. Lessor may stop or decline to
commence all or any portion of the Work until
<PAGE>
such payment (or prepayment) is received. On or before the Commencement Date,
and as a condition to Lessee's right to take possession of the Leased Premises,
Lessee shall pay Lessor the entire amount of all Cost Overruns, less any prepaid
amounts.
(b) Construction Management Fee. Within ten (10) days following the date of
---------------------------
invoice, Lessee shall, for supervision and administration of the construction
and installation of the Work, pay Lessor a construction management fee equal to
3% of the aggregate contract price for the Work, which may be paid from the
unused portion of the Construction Allowance (if any). Lessee's failure to pay
such amount when due shall constitute an event of default under the Lease.
<PAGE>
EXHIBIT F
OPTION TO RENEW
1. Lessee may, at its option, extend the Term for one (1) renewal period
of five (5) years (the "Renewal Period"), by written notice to Lessor (the
"Renewal Notice") given no earlier than twelve (12) nor later than nine (9)
months prior to the expiration of the Term (as it may have been extended or
preceding Renewal Period, as applicable), provided that at the time of such
notice and at the commencement of such Renewal Period, (i) Lessee remains in
occupancy of the Leased Leased Premises, and (ii) no uncured event of default
exists under this Lease (and no condition exists which, with the passage of time
and/or giving of notice, would be an event of default beyond applicable notice
and cure periods). Such Renewal Period shall commence upon the expiration date
of the initial Term (or preceding Renewal Period, as applicable). The Base Rent
payable during the Renewal Period shall be at the Market Rental Rate (defined
below) for the Leased Premises, including any projected rate increases over the
applicable Renewal Period and assuming no other concessions to Lessee (including
without limitation, any further construction allowance). However, in no event
shall the Base Rent for any Renewal Period be less than the Base Rent during the
last year of the Term (or preceding Renewal Period, as applicable). Except as
provided in this Exhibit "E", all terms and conditions of this Lease shall
-----------
continue to apply during the Renewal Period.
2. Within thirty (30) days of the Renewal Notice, Lessor shall notify
Lessee of the Base Rent for such Renewal Period (the "Rental Notice"). Lessee
may accept the terms set forth in the Rental Notice by written notice (the
"Acceptance Notice") to Lessor given within fifteen (15) days after receipt of
the Rental Notice. If Lessee timely delivers its Acceptance Notice, Lessee
shall, within fifteen (15) days after receipt, execute a lease amendment
confirming the Base Rent and other terms applicable during the Renewal Period.
If Lessee fails timely (i) to deliver its Acceptance Notice or (ii) to execute
and return the required lease amendment, then this Option to Extend shall
automatically expire and be of no further force or effect.
3. The "Market Rental Rate" is the rate (or rates) a willing Lessee would
pay and a willing Lessor would accept for a comparable transaction (e.g.,
renewal, expansion, relocation, etc., as applicable, in comparable space and in
a comparable buildings in the suburban Austin area) as of the commencement date
of the applicable term, neither being under any compulsion to lease and both
having reasonable knowledge of the relevant facts, considering the highest and
most profitable use if offered for lease in the open market with a reasonable
period of time in which to consummate a transaction. In calculating the Market
Rental Rate, all relevant factors will be taken into account, including the
location and quality of the Building, lease term, amenities of the Project,
condition of the space and any concessions and allowances commonly being offered
by Lessor for comparable transactions in the Project.
<PAGE>
EXHIBIT G
BUILDING SHELL STANDARDS
Landlord shall provide a building core and shell which shall include the
following items in a finished condition:
1. Men's and women's toilet rooms
2. Drinking fountain at core
3. Electrical and telephone closets
4. Building fire stairwells for exiting
5. Mechanical equipment room with air handling unit
6. Sheetrock core walls (including elevator lobby), perimeter and interior
columns
7. HVAC: primary HVAC duct loop from the mechanical equipment room around the
building core
8. Variable air volume control boxes with thermostats provided at the interior
and exterior zones in existing locations and quantities
9. Sprinklers: protection consisting of mains, laterals and up rights,
installed according to building code and on a ratio of one head per 225
usable square feet
10. Fire protection alarm and communication system installed according to
building code and any applicable ADA requirements
11. Life safety and life support systems as are required by building code for
shell building
12. Smooth and level concrete floor in accordance with industry standards
13. 208/120 volt and 480/277 volt power panels (fused to current building code)
connected to building power providing 6 watts/sf connected load for
Tenant's lighting and convenience plugs.
14. Building standard window treatments (miniblinds)
15. All areas of the building's common areas in compliance with current ADA,
life safety and other applicable building codes
16. A finished lobby of the building commensurate with an office building of
this clas and character
17. 2' X 4' ceiling grid and 2' X 2' ceiling tile stacked in the Premises
18. 2' X 4' lights (one per 100 rentable square feet) stacked in the Premises.
<PAGE>
Exhibit 10.5
NETPLIANCE, INC.
AMENDED AND RESTATED
1999 STOCK OPTION AND RESTRICTED STOCK PLAN
1. Purpose. The Netpliance, Inc. Amended and Restated 1999 Stock
-------
Option and Restricted Stock Plan (the "Plan") is intended to advance the
interests of Netpliance, Inc., a Delaware corporation (the "Company"), and its
stockholders, by encouraging and enabling selected officers, directors and
employees, upon whose judgment, initiative and effort the Company is largely
dependent for the successful conduct of its business, to acquire and retain a
proprietary interest in the Company by ownership of its stock. It is intended
that options which may qualify for treatment as "incentive stock options" under
Section 422 of the Internal Revenue Code of 1986, as amended, and applicable
regulations and rulings promulgated thereunder (collectively the "Code"), as
well as options which may not so qualify, may be granted under the Plan.
2. Definitions.
-----------
(a) "Committee" means a Committee of the Board of Directors of the
Company to whom the Board's authority has been delegated in accordance with
Section 3 of this Plan.
---------
(b) "Common Stock" means the Company's Common Stock, $.01 par value
per share.
(c) "Date of Grant" means the date on which an Option or Restricted
Stock is granted under the Plan, which will be the date the Committee
authorizes the Option or Restricted Stock unless the Committee specifies
another date as the date the grant is to be effective.
(d) "Date of Exercise" means the date on which an Option is validly
exercised pursuant to the Plan.
(e) "Disability" means any medically determinable physical or mental
impairment that, in the opinion of the Committee, based upon medical
reports and other evidence satisfactory to the Committee, can reasonably be
expected to prevent an Optionee from performing substantially all of the
Optionee's customary duties of employment for a continuous period of not
less than 12 months so as to be disabled within the meaning of Section
22(a)(3) of the Code.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(g) "Fair Market Value" of the Company's Common Stock means the
closing sale price (or the average of the quoted closing bid and asked
prices if there is no closing sale price reported) on the last market
trading day prior to the date of determination as reported by the principal
national stock exchange on which the Common Stock is then
1
<PAGE>
listed. If there is no reported price information for the Common Stock, the
Fair Market Value will be determined by the Committee, in its sole
discretion. In making such determination, the Committee may, but shall not
be obligated to, commission and rely upon an independent appraisal of the
Common Stock.
(h) "Incentive Stock Option" means an option that qualifies as an
incentive stock option under all of the requirements of the Code.
(i) "Incentive Stock Option Agreement" means the agreement between
the Company and the Optionee, in such form as may from time to time be
adopted by the Committee, under which the Optionee may purchase Common
Stock pursuant to the terms of an Incentive Stock Option granted under the
Plan.
(j) "Non-Employee Director" means a director of the Company who is
not an employee of the Company or of any subsidiary or affiliate of the
Company.
(k) "Non-Qualified Stock Option" means an option to purchase Common
Stock granted pursuant to the provisions of the Plan that does not qualify
as an Incentive Stock Option.
(l) "Non-Qualified Stock Option Agreement" means the agreement
between the Company and the Optionee, in such form as may from time to time
be adopted by the Committee, under which the Optionee may purchase Common
Stock pursuant to the terms of a Non-Qualified Stock Option granted under
the Plan.
(m) "Option" means an option granted under the Plan.
(n) "Optionee" means a person to whom an Option, which has not
expired, has been granted under the Plan.
(o) "Participant" means any person who receives an Option or
Restricted Stock pursuant to this Plan.
(p) "Restricted Stock" means Common Stock awarded to a person
pursuant to Section 7 of this Plan.
(q) "Retirement" shall mean the termination of an Optionee's
employment in accordance with the requirements of a written retirement
plan, policy or rule of the Company which has been duly adopted by the
Board of Directors of the Company.
(r) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
as (and to the extent) such rule, or any successor thereto, may from time
to time be in effect and including all interpretations thereunder.
(s) "Subsidiary" or "Subsidiaries" means a subsidiary corporation or
2
<PAGE>
corporations of the Company as defined in Section 424(f) of the Code.
(t) "Successor" means the legal representative of the estate of a
deceased Optionee or the person or persons who acquire the right to
exercise an Option by bequest or inheritance or by reason of the death of
an Optionee.
3. Administration and Interpretation of Plan. The Plan shall be
-----------------------------------------
administered by a Committee designated by the Board of Directors which shall
consist entirely of "Non-Employee Directors" in accordance with the provisions
of Rule 16b-3. The Committee shall have full and final authority in its
discretion, subject to the provisions of the Plan: (i) to determine the
individuals to whom, and the time or times at which, Options or Restricted Stock
shall be granted and the number of shares of Common Stock covered by each Option
or grant of Restricted Stock and to determine all other substantive provisions
of the terms of such Options; (ii) to construe and interpret the Plan; and (iii)
to make all other determinations and take all other actions deemed necessary or
advisable for the proper administration of the Plan. All such actions and
determinations by the Committee shall be final and conclusively binding for all
purposes and upon all persons.
4. Common Stock Subject to Options and Grants of Restricted Stock.
--------------------------------------------------------------
The aggregate number of shares of the Company's Common Stock which may be issued
upon the exercise of Options or upon the grant of Restricted Stock under the
Plan shall not exceed ten million five hundred thousand (10,500,000) shares of
Common Stock, subject to adjustment as set forth in Section 5 of this Plan. The
---------
shares of Common Stock to be issued upon the exercise of Options or upon the
grant of Restricted Stock may be authorized but unissued shares, shares issued
and reacquired by the Company or shares bought on the open market for the
purposes of the Plan. In the event any Option shall, for any reason, terminate
or expire or be canceled or surrendered without having been exercised in full,
or Restricted Stock should fail to vest and be forfeited in whole or in part for
any reason, the shares subject thereto shall, unless the Plan has terminated, be
available for the grant of additional Options or Restricted Stock under this
Plan, subject to the limitations set forth above.
5. (a) Adjustments. In the event that the number of outstanding shares
-----------
of Common Stock is changed by reason of a stock dividend, stock split,
recapitalization or combination of shares, the number of shares of Common
Stock subject to the Plan and to Options and Restricted Stock granted
pursuant to the Plan shall be proportionately adjusted.
(b) Annual Increase. The annual increase in the number of shares
---------------
reserved for issuance as Incentive Stock Options shall be the least of the
following: (1) a number of shares so that the shares reserved for issuance
of Incentive Stock Options shall be equal to 15% of issued and outstanding
shares as of the last day of the prior fiscal year; (2) 10,500,000 shares;
or (3) a smaller number as determined by the Board of Directors. The number
of shares reserved for issuance under this Plan (including Incentive Stock
Options, Non-Qualified Stock Options, and Restricted Stock) shall be
increased so that
3
<PAGE>
the total number of shares that may be issued under this Plan equals 15% of
the outstanding shares as of the final day of the prior fiscal year. Such
annual increases shall occur automatically on the first trading day in
January of each year.
6. Participants. Incentive Stock Options may be granted under the Plan
------------
to any person who is an officer or other key employee (including officers and
employees who are also directors) of the Company or any of its Subsidiaries.
Non-Qualified Options and Restricted Stock may be granted under the Plan to any
person who is an officer, key employee, director or consultant of the Company;
provided, however, that no member of any Committee administering this Plan shall
be eligible to be granted an option hereunder except under circumstances that
may be permitted under Rule 16b-3 without adversely affecting any requirement of
such rule that this Plan be administered by Non-Employee Directors.
7. Non-Employee Director Stock Options. Any Options granted to Non-
------------------------------------
Employee Directors under the Plan shall be Non-Qualified Stock Options. Such
Options granted to Non-Employee Directors may be granted pursuant to the pre-
established formula described in the next paragraph or may, in the sole
discretion of the entire Board of Directors, be granted as to such number of
shares and upon such terms and conditions as shall be determined by the Board of
Directors. Options granted to Non-Employee Directors under the Plan shall be
evidenced by a written agreement in such form as the Committee shall from time
to time approve, which agreements shall comply with and be subject to the terms
and conditions described below and in Section 8:
---------
Formula-based Director Stock Options. For each calendar year, an Option to
purchase 30,000 shares of Common Stock shall be granted automatically to each
Non-Employee Director on the first day of each calendar year on which the Nasdaq
National Market, or such other exchange or market on which the Company's Common
Stock is then traded, is open for trading. The option price per share with
respect to each Option granted to a Non-Employee Directors hereunder shall be
100% of the Fair Market Value of the Common Stock on the Date of the Grant of
the Option. Options granted to Non-Employee Directors hereunder shall be
exercisable in full upon the Date of Grant of the Option and shall remain
exercisable for a term of ten years after such Date of Grant.
Termination of Service. Upon an Optionee's termination of status as a Non-
Employee Director with the Company for any reason, any vested Options held by
such former Non-Employee Director which may be exercised during the thirty day
period following such termination, and shall expire at the end of such thirty
day period. Notwithstanding the foregoing sentence, if the Optionee's status as
an Non-Employee Director terminates by reason of or within three months after a
merger or other business combination resulting in a "Change of Control" as
defined below, the Non-Employee Director's Options shall terminate upon the
latest of (i) six months and one day after the merger or business combination,
(ii) ten business days following the expiration of the period during which
publication of financial results covering at least thirty days of post-merger
combined operations has occurred, and (iii) the expiration of the stated term of
such Non-Employee Director's Options.
4
<PAGE>
For purposes hereof, "Change of Control" means the occurrence of any
of the following events, as a result of one transaction or a series of
transactions: (a) any "person" (as that term is used in Sections 13(d) and
14(d) of the Exchange Act (as defined below), but excluding the Company,
its affiliates and any qualified or non-qualified plan maintained by the
Company or its affiliates) becomes the "beneficial owner" (as defined in
Rule 13d-3 promulgated under such Act), directly or indirectly, of
securities of the Company representing more than 50% of the combined voting
power of the Company's then outstanding securities; (b) individuals who
constitute a majority of the Board of Directors of the Company immediately
prior to a contested election for positions on the Board cease to
constitute a majority as a result of such contested election; (c) the
Company is combined (by merger, share exchange, consolidation, or
otherwise) with another corporation and as a result of such combination,
less than 50% of the outstanding securities of the surviving or resulting
corporation are owned in the aggregate by the former shareholders of the
Company; (d) the Company sells, leases, or otherwise transfers all or
substantially all of its properties or assets to another person or entity;
or (e) a dissolution or liquidation of the Company.
Notwithstanding the foregoing, in no event shall any Non-Employee
Director be entitled to any "excess parachute payment" as defined in
Section 280G of the Code.
8. Terms and Conditions of Options. Any Option granted under the Plan
-------------------------------
shall be evidenced by either an Incentive Stock Option Agreement or a Non-
Qualified Stock Option Agreement executed by the Company and the Optionee. Such
agreement shall be subject to the following limitations and conditions:
(a) Option Price. The option price per share with respect to each
------------
Option shall be determined by the Committee but in no instance shall the
option price for an Option which is intended to qualify as an Incentive
Stock Option be less than 100% of the Fair Market Value of a share of the
Common Stock on the Date of Grant.
(b) Payment of Option Price.
-----------------------
(i) Full payment for shares purchased upon exercising an Option
shall be made in cash or by check, or by delivery of shares of Common
Stock, or partly in cash or by check and partly in Common Stock. The
value of shares of Common Stock delivered in connection with the
payment of the option price shall be the Fair Market Value of such
shares on the Date of Exercise of the Option. Any shares of Common
Stock to be used as payment must, if originally acquired from the
Company pursuant to the exercise of an Incentive Stock Option, have
been held for at least two years after the Date of Grant and one year
after the Date of Exercise.
(ii) If the shares of Common Stock to be purchased are covered by
an effective registration statement under the Securities Act of 1933,
as amended, any
5
<PAGE>
Option granted under the Plan may be exercised by a broker-dealer
acting on behalf of an Optionee if (a) the broker-dealer has received
from the Optionee or the Company a fully- and duly-endorsed agreement
evidencing such Option, together with instructions signed by the
Optionee requesting the Company to deliver the shares of Common Stock
subject to such Option to the broker-dealer on behalf of the Optionee
and specifying the account into which such shares should be deposited,
(b) adequate provision has been made with respect to the payment of
any withholding taxes due upon such exercise, and (c) the broker-
dealer and the Optionee have otherwise complied with Section
220.3(e)(4) of Regulation T, 12 CFR Part 220, or any successor
provision.
(c) Term of Option. The expiration date of each Incentive Stock
--------------
Option and each Non-Qualified Option shall not be more than ten (10) years
from the Date of Grant.
(d) Vesting of Stockholder Rights. Neither an Optionee nor his
-----------------------------
Successor shall have any of the rights of a stockholder of the Company
until the certificate or certificates evidencing the shares purchased
pursuant to the exercise of an Option are properly delivered to such
Optionee or his Successor.
(e) Exercise of an Option. Each Option shall be exercisable at any
---------------------
time, and from time to time, and in no particular order if the Optionee
holds more than one Option, throughout a period commencing on or after the
Date of Grant, as specified by the Committee and reflected in the Incentive
Stock Option Agreement or Non-Qualified Stock Option Agreement, as the case
may be, and ending upon the earliest of the expiration, cancellation,
surrender or termination of the Option; provided however, that no Option
shall be exercisable in whole or in part prior to the date of stockholder
approval of the Plan. Furthermore, the exercise of each Option shall be
subject to the condition that if at any time the Company shall determine in
its discretion that the satisfaction of withholding tax or other
withholding liabilities, or that the listing, registration or qualification
of any share otherwise deliverable upon such exercise upon any securities
exchange or under any state or federal law, or that the report to, or
consent or approval of any regulatory body, is necessary or desirable as a
condition of, or in connection with, such exercise or the delivery or
purchase of shares pursuant thereto, then in any such event, such exercise
shall not be effective unless such withholding, listing, registration,
qualification, report, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Company.
(f) Company Loans. The Company may make stock purchase loans in
-------------
connection with Option exercises upon the following terms and conditions:
(i) Upon the exercise by an Optionee of his Option, or any part
thereof, and the Optionee's request for a loan pursuant hereto, the
Company, upon approval by the Committee, may loan said Optionee, for
the sole purpose of purchasing Common Stock from the Company pursuant
to the exercise of such Option, an amount up to the exercise price of
the Option; provided, however, that
6
<PAGE>
the Optionee shall execute concurrently a promissory note in form
satisfactory to the Committee for such amount payable to the order of
the Company;
(ii) The Company shall have no obligation to make any loan to
any Optionee at any time;
(iii) The promissory note referenced above shall provide for
interest to be payable upon the outstanding principal balance thereof
at such rate and times as the Committee may determine. Interest shall
be payable at least annually and shall be charged at the minimum rate
necessary to avoid the treatment as interest under any applicable
provision of the Code, of any amounts other than amounts stated to be
interest under such note. Such note shall also provide that the
Committee may require the Optionee to secure the payment thereof at
any time with collateral deemed adequate by the Committee in its sole
discretion. Such note shall mature, and all outstanding principal and
interest shall become immediately due and payable in installments or
in lump sum at such time or times as the Committee shall provide. The
note will provide for prepayment of principal and accrued interest in
whole or in part from time to time without premium or penalty and may
be extended or modified, from time to time, at the Committee's
discretion. The note shall provide for acceleration of maturity by the
Company upon the happening of any events determined appropriate by the
Committee, including, without limitation, any of the following events:
(1) failure of the Optionee to pay or perform any term or
provision thereof;
(2) termination of the Optionee's employment with the
Company or a Subsidiary for any reason, whether voluntary or
involuntary, except Retirement, Disability or death;
(3) if the Optionee shall execute an assignment for the
benefit of creditors, or admit in writing his inability to pay
his debts generally as they become due, or voluntarily seek the
benefit of, or have a petition filed against him seeking the
benefit of, a judgment, order or decree filed against him
pursuant to any bankruptcy, insolvency, reorganization, or
similar debtor relief law affecting the rights of creditors
generally;
(4) failure of the Optionee to have discharged within a
period of thirty (30) days after the commencement thereof any
attachment, sequestration or similar proceeding against any of
the assets of the Optionee;
(5) failure of the Optionee to pay any money judgment
against him at least thirty (30) days prior to the date on which
any of his assets may be lawfully sold to satisfy such judgment;
7
<PAGE>
(6) failure or refusal of the Optionee to comply with any of
the terms and conditions of his stock option agreement or any
other oral or written agreement with the Company;
(7) failure or refusal of the Optionee to provide adequate
security for payment of the promissory note immediately upon
request for collateral by the Committee; or
(8) the divorce of the Optionee, unless arrangement
satisfactory to the Committee are agreed to prior to the entry of
the divorce decree.
(g) Nontransferability of Option. No Option shall be 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 shall be
exercisable, during the Optionee's lifetime, only by such Optionee. No
Option or the shares covered thereby shall be pledged or hypothecated in
any way and no Option or the shares covered thereby shall be subject to
execution, attachment or similar process.
(h) Termination of Employment. Unless otherwise provided in the terms
-------------------------
of an Incentive Stock Option Agreement or a Non-Qualified Agreement, as the
case may be, pursuant to Section 7(k), upon termination of an Optionee's
employment with the Company or with any of its Subsidiaries for any reason
other than death or Disability, any and all outstanding Options of such
Optionee shall expire, and shall not be exercisable with respect to any
vested portion as to which such Options have not been exercised on a date
thirty days after such date of termination. Any and all Outstanding
Options shall be null and void, and shall not be exercisable with respect
to any unvested portion of such Options immediately upon the termination of
the Optionee's employment with the Company for any reason, including death
or Disability. The right of the Optionee to receive any benefits from the
Company or any of its Subsidiaries after termination of employment with the
Company or any of its Subsidiaries by reason of employment contract,
severance arrangement or otherwise shall not affect the determination that
an Optionee's employment has been terminated with the Company or any of its
Subsidiaries for purposes of the Plan. Neither the adoption of this Plan
nor the grant of an Option to an eligible person shall alter in any way the
Company's or the relevant Subsidiary's rights to terminate such person's
employment or directorship at any time with or without cause nor does it
confer upon such person any rights or privileges to continued employment,
or any other rights and privileges, except as specifically provided in the
Plan.
(i) Disability or Death of Optionee. If an Optionee dies or suffers a
-------------------------------
Disability while in the employ of the Company, but prior to termination of
his right to exercise an Option in accordance with the provisions of his
stock option agreement, without having totally exercised the Option, the
Option may be exercised, to the extent of the shares with respect to which
the Option could have been exercised by the Optionee on the date of the
8
<PAGE>
Optionee's death or Disability, by (i) the Optionee's estate or by the
person who acquired the right to exercise the Option by bequest or
inheritance or by reason of the death of the Optionee in the event of the
Optionee's death, or (ii) the Optionee or his personal representative in
the event of the Optionee's Disability, provided the Option is exercised
prior to the date of its expiration or not more than one year from the date
of the Optionee's death or Disability, whichever first occurs. The date of
Disability of an Optionee shall be determined by the Company.
(j) Ten Percent Stockholders. Notwithstanding anything herein to the
------------------------
contrary, an Option which is intended to qualify as an Incentive Stock
Option shall be granted hereunder to any Optionee who, immediately before
such Option is granted, beneficially owns, directly or indirectly, more
than 10% of the total combined voting power of all classes of stock of the
Company only if both of the following conditions are met:
(i) The option price per share shall be no less than 110% of the
Fair Market Value of a share of Common Stock on the Date of Grant; and
(ii) The expiration date of the Option shall be not more than
five (5) years from the Date of Grant.
(k) Other Terms. Each Incentive Stock Option Agreement or Non-
-----------
Qualified Stock Option Agreement, as the case may be, may contain such
other provisions (not inconsistent herewith) as the Committee in its
discretion may determine, including, without limitation:
(i) any provision which shall condition the exercise of all or
part of an Option upon such matters as the Committee may deem
appropriate (if any) such as the passage of time, or the attainment of
certain performance goals, appropriate to reflect the contribution of
the Optionee to the performance of the Company;
(ii) any provision which would accelerate the exercisability of
an Option in spite of any provision contained in an Option, under such
circumstances as the Committee may deem appropriate, including a
Change of Control;
(iii) the manner in which an Option is to be exercised.
In the event the Committee includes a provision for acceleration
on a Change of Control, the Committee shall also include in such
agreement a provision addressing whether "excess parachute payments"
as defined in Section 280G of the Code are permitted, and if
permitted, whether compensation for the parachute excise tax is to be
paid by the Company to the Optionee.
9. Restricted Stock. The Committee shall determine the number of shares
----------------
of Common Stock to be granted as Restricted Stock from time to time under the
Plan. The grant of
9
<PAGE>
Restricted Stock shall be evidenced by Restricted Stock agreements containing
such terms and provisions, including provisions concerning vesting and
transferability, as are approved by the Committee, and executed on behalf of the
Corporation by an appropriate officer. The Committee in its discretion may award
shares of Restricted Stock under the Plan without requiring the payment of cash
consideration for such shares by the Participant.
10. Allotment of Shares. The grant of an Option or Restricted Stock shall
-------------------
not be deemed either to entitle the Participant to, or disqualify the
Participant from, participation in any other grant of options or restricted
stock under this Plan or any other stock option plan of the Company. The number
of shares allotted to each Participant shall be determined by the Committee, in
its discretion; provided, that the aggregate Fair Market Value (determined as of
the time the option is granted) of the Common Stock with respect to which
Options which are intended to qualify as Incentive Stock Options are exercisable
for the first time by such Optionee during any calendar year (under all such
plans of the Optionee's employer corporation and its parent and subsidiary
corporations) shall not exceed $100,000.
11. Additional Restrictions. No employee shall be eligible to receive
-----------------------
Incentive Stock Options (under the Plan and all other option plans of the
Company, its parent and subsidiary corporations) that are exercisable for the
first time in any calendar year with respect to stock with an aggregate Fair
Market Value (determined at the Date of Grant) in excess of $100,000, or such
other limits as may be imposed by the applicable laws and regulations under the
Code in effect on the Date of Grant. In the event the Participant's total
Incentive Stock Options exceed the $100,000 limit in any calendar year (whether
due to acceleration of exercisability, miscalculation, error or otherwise) the
amount of Participant's Incentive Stock Options that exceed such limit shall be
treated as Non-Qualified Stock Options. The Incentive Stock Options granted
earliest (whether under this Plan or any other agreement or plan) shall be
applied first to the $100,000 limit. In the event that only a portion of the
Incentive Stock Options granted at the same time can be applied to the $100,000
limit, the company shall issue separate share certificates for such number of
shares as does not exceed the $100,000 limit, and shall designate such shares as
Incentive Stock Options stock in its share transfer records.
12. Designation of Incentive Stock Options. The Committee shall cause
--------------------------------------
each Option granted hereunder to be clearly designated in the agreement
evidencing such Option, at the time of grant, as to whether or not it is
intended to qualify as an Incentive Stock Option.
13. Notices. Whenever any notice is required or permitted hereunder, such
-------
notice must be in writing and personally delivered or sent by mail. Any notice
required or permitted to be delivered hereunder shall be deemed to be delivered
on the date which it is personally delivered, or, whether actually received or
not, on the third business day after it is deposited in the United States mail,
certified or registered, postage prepaid, addressed to the person who is to
receive it at the address which such person has theretofore specified by written
notice delivered in accordance herewith. The Company or a Participant may
change, at any time and from time to time, by written notice to the other, the
address which it or he had theretofore specified for
10
<PAGE>
receiving notices. Until changed in accordance herewith, the Company and each
Participant shall specify as its and his address for receiving notices the
address set forth in the option agreement pertaining to the shares to which such
notice relate.
14. Amendment or Discontinuance. The Plan and any Option or Restricted
---------------------------
Stock outstanding hereunder may be amended or discontinued by the Committee
without the approval of the stockholders of the Company, except that the
Committee may not, except as expressly provided in the Plan, increase the
aggregate number of shares which may be issued under Options or Restricted Stock
granted pursuant to the Plan, materially amend the eligibility requirements of
the Plan or materially increase the benefits which may accrue to participants
under the Plan, without such approval (if any) as may be required pursuant to
the provisions of Rule 16b-3, or applicable law (including the Code) or the
requirements of any national stock exchange upon which the Company's Common
Stock is traded.
15. Effect of the Plan. Neither the adoption of this Plan nor any action
------------------
of the Committee shall be deemed to give any officer or employee any right to be
granted an option to purchase Common Stock or restricted stock of the Company or
any of its Subsidiaries, or any other rights except as may be evidenced by a
stock option or restricted stock agreement, or any amendment thereto, duly
authorized by the Committee and executed on behalf of the Company and then only
to the extent and on the terms and conditions expressly set forth therein.
16. Grant of Incentive Stock Options. No Incentive Stock Options shall be
--------------------------------
granted pursuant to this Plan after the expiration of ten (10) years from the
date of the earlier of: (i) the date the Plan is adopted, or (ii) the date the
Plan is approved by the stockholders of the Company.
17. Shares Not Transferable. As a condition to the transfer of the shares
-----------------------
of Common Stock issued under this Plan, the Company may require an opinion of
counsel, satisfactory to the Company, to the effect that such transfer will not
be in violation of the Securities Act of 1933, as amended, or any other
applicable securities laws or that such transfer has been registered under
federal and all applicable state securities laws. The Board may impose such
additional restrictions on the ownership and transfer of shares of Common Stock
issued pursuant to the Plan as it deems desirable; any such restrictions shall
be set forth in any Option or Restricted Stock agreement entered into hereunder.
Further, the Company shall be authorized to refrain from delivering or
transferring shares of Common Stock issued under this Plan until the Committee
has determined that the Participant has tendered to the Company any federal,
state or local tax owed by the Participant as a result of exercising the Option,
receiving a grant of Restricted Stock or disposing of any Common Stock, when the
Company has a legal liability to satisfy such tax. The Company shall not be
liable to any party for damages due to a delay in the delivery or issuance of
any stock certificate for any reason whatsoever.
18. Reservation of Shares. During the term of the Plan, the Company will
---------------------
at all times reserve and keep available, and will seek or obtain from any
regulatory body having jurisdiction any requisite authority in order to issue
and sell such number of shares of Common Stock as shall be sufficient to satisfy
the requirements of the Plan. The inability of the Company to obtain the
11
<PAGE>
authority from any regulatory body having jurisdiction which is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any shares
of Common Stock hereunder shall relieve the Company of any liability in respect
of the nonissuance or sale of such Common Stock as to which such requisite
authority shall not have been obtained.
19. Approval of Plan. The Plan shall be subject to approval by the
----------------
majority of votes cast on the issue, including abstentions, in a separate vote
of the shareholders of the Company. Any amendments to the Plan which require
stockholder approval shall be by the a majority of the majority of votes cast on
the issue, including abstentions. No options granted under the Plan shall be
exercised unless and until the Plan has been approved by the stockholders of the
Company as specified above.
20. Conformity with the Code. The Incentive Stock Options authorized
------------------------
pursuant to the Plan are intended to satisfy all requirements for the Incentive
Stock Options under the Code and, notwithstanding any provision of the Plan or
any Incentive Stock Option Agreement, the Plan and all Incentive Stock Options
granted pursuant hereto shall be so construed and all contrary provisions shall
be so limited in scope and effect and to the extent they cannot be so limited,
they shall be void.
21. Liability of the Company. Neither the Company, its directors,
------------------------
officers or employees, nor any Subsidiary which is in existence or hereafter
comes into existence, shall be liable to any Participant or other person (a) if
it is determined for any reason by the Internal Revenue Service or any court
having jurisdiction that any incentive stock option granted hereunder does not
qualify for tax treatment as an incentive stock option under Section 422 of the
Code, or (b) for refusing to sell or issue any shares covered by any Option or
for refusing to issue Restricted Stock if the Company cannot obtain authority
from the appropriate regulatory bodies deemed by the Company to be necessary to
sell or issue such shares in compliance with all applicable federal and state
securities laws and the requirements of any national exchange or trading system
on which the Common Stock is then listed or traded. In addition, the Company
shall have no obligation to any Participant, express or implied, to list,
register or otherwise qualify the shares of Common Stock covered by any Option
or Restricted Stock.
22. Governing Law. The Plan shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware and the United States, as
applicable, without reference to the conflict of laws provisions thereof.
23. Severability of Provisions. If any provision of this Plan is
--------------------------
determined to be invalid, illegal or unenforceable, such invalidity, illegality
or unenforceability shall not affect the remaining provisions of the Plan, but
such invalid, illegal or unenforceable provision shall be fully severable, and
the Plan shall be construed and enforced as if such provision had never been
inserted herein.
12
<PAGE>
Exhibit 10.6
NETPLIANCE, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose and Effect of Plan.
The purpose of the 2000 Employee Stock Purchase Plan (the "Stock Purchase
Plan" or the "Plan") is to secure for Netpliance, Inc., a Delaware corporation
(the "Company"), and its stockholders the benefits of the incentive inherent in
the ownership of the Company's capital stock by employees of the Company and its
subsidiaries. The Stock Purchase Plan is intended to comply with the provisions
of Section 423 of the Internal Revenue Code of 1986, as amended (the Code), and
the Plan shall be administered, interpreted, and construed in accordance with
such provisions.
2. Shares Reserved for the Plan.
There shall be initially reserved for issuance to and purchase by employees
under the Stock Purchase Plan an aggregate of 600,000 shares of Common Stock,
$.01 par value per share, of the Company ("Common Stock"), subject to adjustment
as provided in Section 12 and to an annual increase. The annual increase in the
number of shares reserved for issuance pursuant to the plan shall be the least
of the following: (1) 1% of issued and outstanding shares as of the last day of
the prior fiscal year; (2) 900,000 shares; or (3) a smaller number as determined
by the Board of Directors. Such annual increase shall occur automatically on the
first trading day in January of each year. Shares subject to the Plan may be
shares now or hereafter authorized but unissued or shares that were once issued
and subsequently reacquired by the Company. The Company reserves the right to
purchase shares on the market. If shares are purchased on the market by the
Company, the Company will make a cash contribution to the Plan equal to the
difference between the employee's purchase price and the price paid for the
shares on the market. If and to the extent that any right to purchase reserved
shares shall not be exercised by any employee for any reason or if such right to
purchase shall terminate as provided herein, such shares which have not been so
purchased hereunder shall again become available for the purposes of the Plan
unless the Plan shall have been terminated, but such unpurchased shares shall
not be deemed to increase the aggregate number of shares specified above to be
reserved for purposes of the Plan (subject to adjustment as provided in Section
12).
3. Administration of the Plan.
The Stock Purchase Plan shall be administered, at the expense of the
Company, by a committee appointed by the Board of Directors, which shall be
designated as the Employee Stock Purchase Plan Committee (the "Committee"),
consisting of not less than two members, who shall serve at the pleasure of the
Board of Directors. The Committee shall select one of its members as chairman
and shall hold meetings at such times and places as it may determine. The
Committee may request advice or assistance or employ such persons, including a
broker or custodian, as are necessary for proper administration of the Plan.
Subject to the express provisions of the Plan, the Committee shall have the
discretionary authority to interpret the Plan, to supply omissions or correct
errors in the Plan, to prescribe, amend and rescind rules and regulations
relating to it, to make equitable adjustments for any mistakes made in the
administration of the Plan, and to make all other
1
<PAGE>
determinations necessary or advisable in administering the Plan, all of which
determinations shall be final and binding upon all persons unless otherwise
determined by the Board of Directors. A quorum of the Committee shall consist of
a majority of its members and the Committee may act by vote of a majority of its
members at a meeting at which a quorum is present or without a meeting by a
written consent to their action taken signed by all members of the Committee.
4. Eligible Employees.
All present and future employees of the Company, its present and future
domestic subsidiaries and such of its present or future foreign subsidiaries as
may be designated from time to time by the Committee, shall be eligible to
participate in the Stock Purchase Plan, provided each of such employees:
(a) has been employed by the Company and/or any of its subsidiaries
(or any predecessor thereof) since the May 31 or November 30 immediately
preceding the Enrollment Date in question, as hereinafter defined,
(b) has customary employment of a minimum of 20 hours per week during
at least five months of the year, and
(c) does not own, immediately after the right is granted, stock
possessing five percent (5%) or more of the total combined voting power or
value of all classes of capital stock of the Company or of any subsidiary
company.
In determining whether a corporation is a subsidiary, the rules of Section
424(f) of the Code shall be followed and in determining stock ownership under
this paragraph, the rules of Section 424(d) of the Code shall apply and stock
which the employee may purchase under outstanding options shall be treated as
stock owned by the employee. Employees eligible to participate in the Stock
Purchase Plan pursuant to the provisions of this Section 4 are hereinafter
referred to as "Eligible Employees".
"Leased employees," "independent contractors," or other workers in similar
classifications are not eligible to participate.
5. Election to Participate.
Each Eligible Employee, at the effective date of the Stock Purchase Plan
and at January 1 in each calendar year after the calendar year which includes
the effective date, and at July 1, 2000 and each subsequent July 1 (each such
January 1 or July 1 being referred to as the "Enrollment Date," and each six-
month period beginning on an Enrollment Date being referred to as a "Purchase
Period"), may participate in the Plan by filing with the Committee prior to such
effective date or Enrollment Date, as the case may be, an Enrollment Form
authorizing specified regular payroll deductions (in any whole percent from one
percent (1%) through fifteen percent (15%) of his or her base compensation. Base
compensation is gross compensation actually paid for the pay period, including
overtime pay and overtime premium, but before reductions for 401(k)
contributions or
2
<PAGE>
cafeteria plan contributions, excluding all bonuses, severance pay, any
extraordinary pay, expense allowances/reimbursements, moving expenses and income
from restricted stock or stock options. Employees who so elect to participate in
the Plan are referred to herein as Participating Employees. Payroll deductions
for each Participating Employee shall be made regularly commencing on the
Enrollment Date, by the Company and shall be credited to an account which the
Company shall establish in the name of each participant (the "Payroll Deduction
Account"). A Participating Employee may at any time withdraw the entire balance
accumulated in his or her Payroll Deduction Account and thereby cease to be a
Participating Employee in the Plan until the following Enrollment Date of the
Plan. Such payroll deductions shall continue until the Plan terminates or the
Participating Employee elects to cease participating or elects to change his or
her contribution percentage. A Participating Employee may at any time (but not
more than once during a six month period) decrease his or her payroll deduction,
but not to less than one percent (1%), by filing a new Enrollment Form which
shall become effective on the following payroll date, or as soon thereafter as
practicable. All funds in Payroll Deduction Accounts may be used by the Company
for any corporate purpose. Payroll Deduction Accounts are not credited with
interest.
6. Limitation of Number of Shares Which an Employee May Purchase.
(a) No right to purchase shares under this Stock Purchase Plan shall
permit an employee to purchase stock under all employee stock purchase
plans of the Company and its subsidiaries at a rate which exceeds
either $25,000 of fair market value of such stock (determined at the
time the right is granted) for any calendar year in which the right is
outstanding, or such other limits as may be imposed by the applicable
laws and regulations under the Code in effect during such calendar
year.
(b) The maximum number of shares which an employee may purchase in any one
Purchase Period is 1,500. In no event shall an employee purchase
shares in excess of the limitation in part (a) of this section.
7. Purchase Price.
The purchase price for each share of Common Stock shall be eighty-five
percent (85%) of the lesser of (i) the fair market value of such share on the
Investment Date (as defined in Section 8) and (ii) the fair market value of such
share on the first day of the Purchase Period.
"Fair market value" shall be determined by the Committee by any fair and
reasonable means, including if the Common Stock is listed for trading on a
national securities exchange or market, the closing price on such exchange or
market on the date in question, or if the Common Stock shall not have been
traded on such exchange on such date, the closing price on such exchange or
market on the first day prior thereto on which the Common Stock was traded.
8. Method of Payment.
As of the last business day in June and December during the life of the
Plan (each of such dates being known as an "Investment Date"), each
Participating Employee shall have the right to purchase the number of whole
shares of Common Stock determined by dividing the amount of the
3
<PAGE>
balance in his or her Payroll Deduction Account by the purchase price as
determined in Section 7. Each Participating Employee having funds in his or her
Payroll Deduction Account on an Investment Date shall be deemed, without any
further action, to have purchased with the funds in such account the number of
whole shares which such Participating Employee has the right to purchase at the
purchase price on that Investment Date. Such shares shall be issued promptly on
behalf of the employee participants. Any amount remaining in a Participating
Employee's Payroll Deduction Account after any Investment Date shall be retained
in his or her Payroll Deduction Account for use in purchasing shares of Common
Stock on subsequent Investment Dates or refunded to the Participating Employee
if for any reason he or she ceases to participate in the Plan.
9. Registration of Certificates.
Stock certificates may be registered in the name of such other agent or
custodian as the Board of Directors shall designate or in the name of the
individual Participating Employee.
10. Rights as a Stockholder.
When a Participating Employee's Payroll Deduction Account shall be charged
with the amount of the purchase price of stock, he shall immediately thereupon
have all of the rights or privileges of a stockholder of the Company with
respect to shares purchased under the Plan, whether or not certificates
representing the purchased shares shall have been issued.
11. Rights Not Transferable.
Rights under the Plan are not transferable by a Participating Employee and
are exercisable only by the Participating Employee.
12. Adjustment in Case of Changes Affecting the Company's Stock.
In the event of a subdivision of outstanding shares of Common Stock or the
payment of a stock dividend thereon, the number of shares reserved or authorized
to be reserved under this Stock Purchase Plan shall be increased
proportionately, and such other adjustment shall be made as may be deemed
necessary or equitable by the Board of Directors. In the event of a reverse
stock split affecting outstanding shares of Common Stock, the number of shares
reserved or authorized to be reserved under this Stock Purchase Plan shall be
decreased proportionately, and such other adjustment shall be made as may be
deemed necessary or equitable by the Board of Directors. In the event of any
other change affecting the Common Stock, such adjustment shall be made as may be
deemed equitable by the Board of Directors to give proper effect to such event,
subject to the limitations of Section 424 of the Code. In the event of a
corporate transaction described in Section 424(a) of the Code, the Board of
Directors of the Company may, alternatively, approve the assumption of the Plan
by a successor corporation that becomes the employer of a significant number of
Participating Employees ("Successor Employer"). In such event, any uninvested
amounts in the Payroll Deduction Accounts of Participating Employees who become
employees of the Successor Employer (or its subsidiary) shall be invested in
stock of the Successor Employer in accordance with Section 424(a), and such
Participating Employees' most recent Enrollment Forms
4
<PAGE>
shall be deemed to continue in effect, subject to the right of any Participating
Employee to cease participating at any time. In the event of assumption of the
Plan, Participating Employees who do not become employees of the Successor
Employer (or one of its subsidiaries) shall be deemed to have terminated
employment, solely for purposes of this Plan.
13. Retirement, Termination and Death.
In the event of a Participating Employee's retirement or termination of
employment, the amount in his or her Payroll Deduction Account shall be refunded
to such Participating Employee. If a Participating Employee is a resident of
Texas, in the event of his or her death, the amount in his or her Payroll
Deduction Account shall be paid to his or her designated beneficiary. If a
Participating Employee is not a resident of Texas, the amount in his or her
Payroll Deduction Account shall be paid to his or her surviving spouse; or, if
there is no surviving spouse, the Committee, in its sole discretion, may direct
payment to the deceased Participating Employee's estate or to one or more of his
or her surviving family members.
14. Amendment of the Plan.
The Board of Directors may at any time, or from time to time, amend the
Plan in any respect, except that, without the approval of the holders of a
majority of the shares of Common Stock of the Company voting thereon, no
amendment shall be made (a) increasing or decreasing the number of shares to be
reserved under the Plan (other than as provided in Sections 2 and 12) or (b)
altering the eligibility criteria for participation in the Plan.
15. Termination of the Plan.
The Plan and all rights of employees hereunder shall terminate:
(a) on any Investment Date when Participating Employees become
entitled to purchase a number of shares greater than the number of reserved
shares remaining available for purchase; or
(b) if the Plan is terminated at any time, at the discretion of the
Board of Directors.
In the event that the Plan terminates under circumstances described at (a)
above, reserved shares remaining as of the termination date shall be issued to
Participating Employees in proportion to the balances in the Payroll Deduction
Accounts of such employees. Upon termination of the Plan, all amounts held in
the Payroll Deduction Accounts shall, to the extent not used to purchase shares
of the Common Stock, be refunded to the Participating Employee entitled thereto.
16. Effective Date of Plan.
The Plan shall become effective the latest of (a) March 1, 2000, (b) the
date on which stockholders' approval is obtained and (c) the date on which a
Registration Statement under the
5
<PAGE>
Securities Act of 1933, as amended, covering the shares to be issued under the
Plan becomes effective.
17. Governmental and Other Regulations.
The Plan, and the grant and exercise of the rights to purchase shares
hereunder, and the Company's obligation to sell and deliver shares upon the
exercise of rights to purchase shares, shall be subject to all applicable
Federal, state and foreign laws, rules and regulations, and to such approvals by
any regulatory or governmental agency as may, in the opinion of counsel for the
Company, be required.
18. Indemnification of Committee.
Members of the Committee shall be indemnified and entitled to reimbursement
of expenses pursuant to the Company's Certificate of Incorporation and bylaws to
the same extent as if they were directors of the Company.
19. Listing of Shares and Related Matters.
If at any time the Board of Directors or the Committee shall determine,
based on opinion of counsel, that the listing, registration or qualification of
the shares covered by the Plan upon any national securities exchange or under
any state or federal law or the consent or approval of any governmental
regulatory body is necessary or desirable as a condition of, or in connection
with, the sale of purchase of shares under the Plan, no shares will be sold,
issued or delivered unless and until such listing, registration, qualification,
consent or approval shall have been effected or obtained, or otherwise provided
for, free of any conditions not acceptable to counsel.
20. Third Party Beneficiaries.
None of the provisions of the Plan shall be for the benefit of or
enforceable by any creditor of a Participating Employee or any other third
party. A Participating Employee may not create a lien, encumbrance or assignment
on any portion of the cash balance accumulated in his or her Payroll Deduction
Account or on any shares covered by a right to purchase before a stock is issued
for his or her benefit.
21. General Provisions.
The Plan shall neither impose any obligation on the Company or on any
parent or subsidiary corporation to continue the employment of any Participating
Employee, nor in any way limit or restrict the right of the Company or any
parent or subsidiary to discharge any Participating Employee or to change his or
her position or compensation. For purposes of the Plan, an employment
relationship shall be deemed to exist between an individual and a corporation
if, at the time of the determination, the individual is an "employee" of such
corporation within the meaning of Section 423(a)(2) of the Code and the
regulations and rulings interpreting such Section. For purposes of the Plan, the
transfer of a Participating Employee from employment with the Company to
employment
6
<PAGE>
with a parent or subsidiary of the Company, or vice versa, shall not be deemed a
termination of employment of the Participating Employee. Subject to the specific
terms of the Plan, all Participating Employees granted rights to purchase shares
hereunder shall have the same rights and privileges.
22. Governing Law.
The Plan and rights to purchase shares that may be granted hereunder shall
be governed by and construed and enforced in accordance with the laws of the
State of Delaware without regard to any principles of conflicts of laws that
would require application of laws of a different jurisdiction.
7
<PAGE>
EXHIBIT 23.1
WHEN THE THREE-FOR-ONE STOCK SPLIT REFERRED TO IN THE FIFTH PARAGRAPH OF
NOTE 12 OF THE NOTES TO THE FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL
BE IN A POSITION TO RENDER THE FOLLOWING CONSENT.
/s/ KPMG LLP
Austin, Texas
February 25, 2000
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.
<PAGE>
EXHIBIT 23.3
[LETTERHEAD OF INTERNATIONAL DATA CORPORATION]
Donaldson Lufkin and Jenrette:
02/23/00
To whom it may concern:
Per our discussion, you have approval to use the following statistics as stated
below:
1. 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%. Source: The Global Market Forecast for Internet Usage
and Commerce - Report #W19262 - June 1999 - Table 1
2. According to IDC, the percentage of Web users buying goods and services on
the Web will increase from approximately 22% in 1998 to approximately 36% in
2003, and the total value of goods and services purchased directly on the Web
will increase from approximately $27.0 billion in 1998 to approximately $842.7
billion in 2003. Source: The Global Market Forecast for Internet Usage and
Commerce - Report #W19262 - June 1999 - Executive Summary / Table 12
3. IDC estimates that the worldwide market for information appliances will grow
from approximately 89 million units, or $17.8 billion, in 2004, up from a market
of 11 million units and $2.4 billion in 1999. Source: IDC's Review and forecast
of the Worldwide Information Appliance Market, 1999-2004 - Executive Summary
4. 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%. Source: The Global Market
Forecast for Internet Usage and Commerce - Report #W19262 - June 1999 - Table 1
Sincerely,
/s/ Alexa McCloughan
Alexa McCloughan
Senior Vice President
<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> 20,625
<CURRENT-LIABILITIES> 4,892
<BONDS> 0
0
29,673
<COMMON> 189
<OTHER-SE> (16,765)
<TOTAL-LIABILITY-AND-EQUITY> 20,625
<SALES> 26
<TOTAL-REVENUES> 26
<CGS> 1,137
<TOTAL-COSTS> 27,476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (140)
<INCOME-PRETAX> (27,286)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,286)
<EPS-BASIC> (2.79)
<EPS-DILUTED> (2.79)
</TABLE>
