<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 13, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
CONNECT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 7375 77-0431045
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
ORGANIZATION)
CONNECT, INC.
515 ELLIS STREET MOUNTAIN VIEW, CA 94043-2242 (415) 254-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
THOMAS P. KEHLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER CONNECT, INC. 515 ELLIS STREET MOUNTAIN
VIEW, CA 94043-2242 (415) 254-4000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
DONALD M. KELLER, JR. CARLA S. NEWELL
MARK L. SILVERMAN EDWARD Y. KIM ANTHONY M. ALLEN CRAIG M. SCHMITZ
VENTURE LAW GROUP A PROFESSIONAL GUNDERSON DETTMER STOUGH VILLENEUVE
CORPORATION 2800 SAND HILL ROAD MENLO FRANKLIN & HACHIGIAN, LLP 600 HANSEN
PARK, CA 94025 (415) 854-4488 WAY PALO ALTO, CA 94304 (415) 843-0500
----------------
APPROXIMATE DATE 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 415 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 statement 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 statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.001
per share............ 2,875,000 shares $14.00 $40,250,000.00 $13,880.00
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 375,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
----------------
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 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CONNECT, INC.
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING
IN FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
---------------------------------- ----------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Outside Front Cover Page
Cover Page of Prospectus......
2. Inside Front and Outside Back
Cover Pages of Prospectus..... Inside Front and Outside Back Cover
Pages
3. Summary Information, Risk
Factors and Ratio of Earnings Prospectus Summary; Risk Factors;
to Fixed Charges.............. The Company
4. Use of Proceeds................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Outside Front Cover Page; Underwriting
Price.........................
6. Dilution....................... Risk Factors; Dilution
7. Selling Security Holders....... Not Applicable
8. Plan of Distribution........... Outside Front and Outside Back Cover
Pages; Underwriting
9. Description of Securities to be Prospectus Summary; Dividend Policy;
Registered.................... Capitalization; Description of Capital
Stock
10. Interests of Named Experts and Not Applicable
Counsel.......................
11. Information with Respect to the Outside Front and Inside Front Cover
Registrant.................... Pages; Prospectus Summary; Risk Factors;
The Company; Dividend Policy; Dilution;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Certain Relationships and Related
Transactions; Principal Stockholders;
Description of Capital Stock; Shares
Eligible for Future Sale; Financial
Statements
12. Disclosure of Commission
Position on Indemnification Not Applicable
for Securities Act
Liabilities...................
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated June 13, 1996
PROSPECTUS
2,500,000 SHARES
[LOGO]
COMMON STOCK
-------------
All of the shares of Common Stock offered in the United States and Canada are
being sold by CONNECT, Inc. ("CONNECT" or the "Company"). Prior to the
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be
between $12.00 and $14.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
Application has been made to have the Common Stock approved for listing on the
Nasdaq National Market under the symbol "CNKT."
-------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............. $ $ $
- -------------------------------------------------------------------------------
Total(3)............... $ $ $
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</TABLE>
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2)Before deducting estimated expenses of $1,275,000 of the offering payable by
the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
-------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of the shares
will be made at the offices of Lehman Brothers Inc., New York, New York on or
about , 1996.
-------------
LEHMAN BROTHERS
VOLPE, WELTY & COMPANY
UBS SECURITIES
, 1996
<PAGE>
CONNECT ENABLES THE
VIRTUAL SALES CHANNEL(TM)
[PHOTOGRAPH OF MAN OPERATING PERSONAL COMPUTER. COMPUTER SCREEN DISPLAYS THE
COMPANY'S ORDERSTREAM PRODUCT.]
[CONNECT LOGO]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
VIRTUAL SALES CHANNEL (vur choo-al) (salz) (chan al) 1: a sec
marketing and order capture 2: a cost-effective new distribution channel cha
operators and salespersons) 3: designed to complement existing sales and dis
ONESERVER & ORDERSTREAM (wun surver) (or dar strem)
2: industrial-strength scaleable applications for Internet-based interactive
com
THE VIRTUAL SALES CHANNEL COMPLEMENTS EXISTING SALES CHANNELS
<TABLE>
<S> <C> <C>
Buyer [OneServer Logo and Seller*
Web background image
on entire page]
[Photograph of retail Retailer [photograph of [Time Warner Cable Logo]
shopper] storefront]
[Photograph of woman at Distributor [photograph of [Fruit of the Loom Logo]
desk] warehouse scene]
[Photograph of woman using Catalog Sales [photograph of [PhotoDisc Logo]
PC] telephone operator]
[Photograph of two men at Direct Sales [photograph of [Entex Logo]
PC] man using PC and cellular
phone]
</TABLE>
* PhotoDisc is operating OneServer commercially while other licensees are in
the process of implementing the OneServer software.
<PAGE>
ure Internet-based interactive commerce solution that combines sales,
racterized by minimal staffing and physical infrastructure (e.g. telephone
distribution channels
1: application software packages that enable the virtual sales channel
merce 3: designed for fast time-to-market and low cost of ownership
CONNECT ONESERVER MAKES INTERACTIVE COMMERCE POSSIBLE.
[Icons and associated text connected by arrows]
<TABLE>
<S> <C> <C>
[Icon] [Icon] [Icon]
Five levels Multimedia Three-tiered search
of security protect catalogs expedites selection of
both buyer and seller dynamically desired products from large
adapt to catalogs and multimedia
individual buyer preferences databases
and
purchasing patterns
[Icon] [OneServer Logo] [Icon]
Universal OneServer software enables
browser drag and drop administration
access of site content & user
supports profiles
guests and
registered users
[Icon] [Icon] [Icon]
Online order Enterprise system links Electronic P.O.s and credit
status tracks ensure card processing complete the
purchases integration with existing online purchases
through the channels
delivery cycle and business processes
</TABLE>
[Connect logo]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including Risk Factors and Financial Statements, including Notes
thereto, appearing elsewhere in this Prospectus.
THE COMPANY
CONNECT designs, develops, markets and supports industrial strength,
scaleable application software for Internet-based interactive commerce.
CONNECT's software and services are designed to reduce the time and overall
cost for businesses to implement and maintain a secure sales, marketing and
order capture capability on the World Wide Web (the "Web"). The Company's
software supports key functions necessary for large-scale interactive commerce,
including user registration, multimedia catalog and content management, dynamic
merchandising, order capture and management, security, payment processing,
enterprise integration and systems administration.
In today's competitive global business environment, companies are seeking to
streamline their business processes in order to lower costs, forge closer
relationships with customers and suppliers and increase market share, revenue
and profits. Traditional approaches to sales, marketing and order capture still
rely heavily on human involvement, paper-based systems, physical infrastructure
and costly advertising and promotion. The Internet is emerging as a powerful
new interactive commerce medium that has the potential to address the
limitations of these traditional approaches by linking businesses directly with
their customers, distributors and suppliers. While the adoption of the Internet
as a medium for interactive commerce is in its early stages, Forrester
Research, Inc. estimates that the market for all Internet-based packaged
applications, including electronic commerce applications, will grow from less
than $1.0 million in 1995 to over $1.7 billion in 1999.
CONNECT's core product, OneServer, is a cross-industry software application
for Internet-based interactive commerce, including sales, marketing and order
capture. In addition, the Company has developed OrderStream, its first
preconfigured implementation of OneServer for business-to-business interactive
commerce in selected vertical markets. CONNECT's applications are designed to
support large numbers of purchasers, products and transactions. The Company's
object-oriented software architecture and robust transaction manager tightly
integrate OneServer and OrderStream with a relational database to provide
increased system performance and transaction capacity. The Company and its
Solution Partners offer a broad range of services to implement, support and
operate CONNECT's applications.
The Company's goal is to be the leading provider of packaged application
software for Internet-based interactive commerce. The Company's strategy is to
provide comprehensive software and service solutions that can be implemented
across a broad range of industries. Additionally, in order to expand market
share and establish a leadership position, the Company plans to develop
specific implementations of OneServer, such as OrderStream, targeted at
specific vertical markets.
The Company intends to target corporations planning to deploy large-scale
interactive commerce sites on the Web. The Company has licensed its OneServer
application to ten customers including Ameritech Corporation, ENTEX Information
Services, Inc., First Data Corporation, Fruit of the Loom, Inc., PhotoDisc,
Inc. and Time Warner Cable (a division of Time Warner Entertainment, L.P.).
PhotoDisc, Inc. is operating OneServer commercially, while the other OneServer
licensees are in the process of implementing OneServer.
The Company was incorporated under the laws of the State of California in
April 1987, and will be reincorporated in Delaware prior to the effective date
of the offering. The Company's principal executive offices are located at 515
Ellis Street, Mountain View, California 94043-2242, and its telephone number is
(415) 254-4000. CONNECT's World Wide Web site is located at
"www.connectinc.com." Information contained on the Company's Web site shall not
be deemed to be a part of this Prospectus. As used in this Prospectus, the
terms "CONNECT" and the "Company" mean CONNECT, Inc. CONNECT(R) is a registered
service mark of the Company. OneServer, OrderStream, COOL and the CONNECT logo
and OneServer logo are trademarks of the Company. This Prospectus also includes
trademarks of companies other than CONNECT.
3
<PAGE>
THE OFFERING
Common Stock offered by the Company..... 2,500,000 shares
Common Stock to be outstanding after 18,179,496 shares(1)
the offering............................
Proposed Nasdaq National Market CNKT
symbol..................................
Use of proceeds......................... Working capital and general corporate
purposes.
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
License................ $ 222 $ 212 $ 1,015 $ 1,627 $ 288 $ 35 $ 404
Service................ 2,419 2,617 2,847 6,345 8,285 3,008 1,059
------- ------- ------- ------- -------- ------- -------
Total revenue......... 2,641 2,829 3,862 7,972 8,573 3,043 1,463
Loss from
operations(2).......... (2,135) (2,691) (1,648) (1,540) (13,194) (4,699) (5,080)
Net loss(2)............. $(2,268) $(2,932) $(1,921) $(1,765) $(14,139) $(4,837) $(5,065)
Pro forma net loss per
share(3)............... $ (0.79) $ (0.27) $ (0.28)
Shares used in computing
pro forma net loss per
share(3)............... 17,864 17,859 17,906
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $11,275 $40,225
Working capital ......................................... 6,815 35,765
Total assets............................................. 16,382 45,332
Long-term debt........................................... 1,412 1,412
Stockholders' equity .................................... 9,210 38,160
</TABLE>
- --------
(1) Based on the number of shares outstanding as of March 31, 1996. Excludes
(i) an aggregate of 2,313,815 shares subject to outstanding options as of
March 31, 1996 at a weighted average exercise price of $0.23 per share
under the 1989 Stock Option Plan (of which 83,316 shares have been
exercised as of June 12, 1996), (ii) 758,850 shares issuable upon exercise
of options granted between April 1, 1996 and June 12, 1996, and (iii)
219,155 shares issuable upon exercise of warrants outstanding as of March
31, 1996 at a weighted average exercise price of $3.30 per share (of which
the Company expects warrants to purchase 200,236 shares will be exercised
immediately prior to completion of the offering). See "Capitalization,"
"Management--Stock Plans" and Notes 8 and 14 of Notes to Financial
Statements.
(2) Includes a one-time expense of $4.1 million in the first quarter of 1995
from the Company's termination of exclusive distribution rights of its
European distributor.
(3) See Note 2 of Notes to Financial Statements.
(4) As adjusted to give effect to the sale of 2,500,000 shares of Common Stock
at an assumed initial public offering price of $13.00 per share. See "Use
of Proceeds."
----------------
Except as otherwise noted herein, all information in this Prospectus assumes
(i) the reincorporation of the Company in Delaware pursuant to a merger at an
exchange ratio of one share of Common Stock of the Delaware corporation for
each two shares of Common Stock and common stock equivalents of the California
corporation to be effected prior to the effective date of the offering and the
automatic conversion of the Company's outstanding Preferred Stock into Common
Stock upon completion of the offering, and (ii) no exercise of the
Underwriters' over-allotment option.
4
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, investors
should carefully consider the following risk factors in evaluating an
investment in the Common Stock offered hereby. This Prospectus contains
certain forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from the results discussed in
the forward-looking statements as a result of certain of the risk factors set
forth below and elsewhere in this Prospectus.
RECENT INTRODUCTION OF PRIMARY PRODUCTS; PRODUCT CONCENTRATION
Although the Company was founded in 1987, it recently initiated a new
business strategy focused on providing packaged software applications for
Internet-based interactive commerce. Consequently, the Company is decreasing
its reliance on historical sources of revenue and its current and future
business prospects are dependent upon the successful development, market
acceptance and sales of OneServer, released in September 1995, and
OrderStream, currently in development. Accordingly, the Company's business
must be considered in light of the risks, expenses and problems frequently
encountered by companies in an early stage of development, particularly
companies in new and rapidly evolving markets such as the Internet. Such risks
include a lack of acceptance of products and services by target customers,
development of equal or superior products or services by competitors, the
failure of electronic commerce in general, and Internet-based electronic
commerce in particular, to be broadly adopted, inability to develop and
enhance competitive products or to successfully commercialize any such
products, and the inability to identify, attract, retain and motivate
qualified personnel. There can be no assurance that the Company will succeed
in addressing such risks.
To date, the Company has licensed OneServer to ten customers, one of which
is operating OneServer commercially, while the others are in the process of
implementing OneServer applications. The OrderStream product currently is in
development and has not been licensed to any customer. The Company expects
OneServer, OrderStream and related services to account for most of its
revenues for the foreseeable future. As a result, factors adversely affecting
the pricing of or demand for OneServer and OrderStream, such as competition,
technological change, failure of the market for Internet-based packaged
applications to develop as the Company anticipates, lack of customer
acceptance of OneServer and OrderStream or failure of the Company to develop
and introduce new and enhanced versions of OneServer and OrderStream on a
timely basis, could have a material adverse effect on its business, operating
results and financial condition. Further, if any of the Company's customers
are not able to successfully develop and deploy interactive commerce
applications with OneServer or OrderStream or for any other reason are not
satisfied with its products or services, the Company's reputation could be
damaged, which could have a material adverse effect on its business, operating
results and financial condition.
ACCUMULATED DEFICIT AND ANTICIPATED FUTURE LOSSES
The Company has not realized a profit in any year, and as of March 31, 1996
had an accumulated deficit of approximately $35.9 million. In 1995 and the
first quarter of 1996, the Company experienced significant negative cash flow
from operations. The Company's operating expenses and net losses increased
substantially in 1995 and the first quarter of 1996 compared to prior periods,
and the Company anticipates that operating expenses will continue to increase
significantly, resulting in continuing net losses and negative cash flow from
operations for the foreseeable future. There can be no assurance that the
Company can generate revenue growth, or that any revenue growth that is
achieved can be sustained. To the extent that increases in such operating
expenses precede or are not subsequently followed by increased revenues, the
Company's business, results of operations and financial condition would be
materially adversely affected. There can be no assurance that the Company will
ever achieve or sustain profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
5
<PAGE>
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced and expects to continue to experience
significant fluctuations in future quarterly operating results that may be
caused by many factors including, among others, the number, timing and
significance of product enhancements and new product announcements by the
Company or its competitors, the ability of the Company to develop, introduce
and market new and enhanced versions of the Company's products on a timely
basis, the length of the Company's sales cycle, market acceptance of and
demand for the Company's products, the pace of development of electronic
commerce conducted on the Internet, the mix of the Company's products sold,
customer order deferrals in anticipation of enhancements or new products
offered by the Company or its competitors, nonrenewal of service agreements,
software defects and other product quality problems, the Company's ability to
attract and retain key personnel, the extent of international sales, changes
in the level of operating expenses and general economic conditions. The
Company anticipates that a significant portion of its revenue will be derived
from a limited number of orders placed by large corporations, and the timing
of receipt and fulfillment of any such orders is expected to cause material
fluctuations in the Company's operating results, particularly on a quarterly
basis. The Company expects to recognize the majority of its license revenue in
the last month of each quarter. As a result, any delay in delivery of products
at the end of a quarter could materially adversely affect operating results
for that quarter. In addition, the Company intends, in the near term, to
significantly increase its personnel, including its direct sales force and
development team. The timing of such expansion and the rate at which new sales
people become productive could also cause material fluctuations in the
Company's quarterly operating results. Furthermore, the operating results of
many software companies reflect seasonal trends, and the Company expects to be
affected by such trends in the future.
Due to the foregoing factors, quarterly revenue and operating results are
difficult to forecast. In addition, as a result of the Company's recent shift
in business strategy, the Company's results of operations prior to fiscal 1996
should not be relied upon as indicative of future results. Revenue is also
difficult to forecast because the market for Internet-based packaged
applications software is rapidly evolving and the Company's sales cycle may
vary substantially from customer to customer. Further, the Company's expense
levels are based, in significant part, on the Company's expectations as to
future revenue and are therefore relatively fixed in the short term. If
revenue levels fall below expectations, net income is likely to be
disproportionately adversely affected because a proportionately smaller amount
of the Company's expenses varies with its revenue. There can be no assurance
that the Company will be able to achieve or maintain profitability on a
quarterly or annual basis in the future. Due to all the foregoing factors, in
some future quarter the Company's operating results may be below the
expectations of securities analysts and investors. In such event, the price of
the Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
DEPENDENCE UPON PRODUCT DEVELOPMENT; RISKS OF TECHNOLOGICAL CHANGE AND
EVOLVING INDUSTRY STANDARDS
The Company's success will depend upon its ability to develop new products
and provide new services that meet changing customer requirements. The market
for the Company's products is characterized by rapidly changing technology,
evolving industry standards and customer requirements, emerging competition
and frequent new product and service introductions. As a result, the Company
may be required to change and improve its products in response to changes in
operating systems, application and networking software, computer and
communications hardware, programming tools and computer language technology.
In particular, the Company's software operates on the HP-UX 10 and Sun Solaris
2.4/2.5 versions of the UNIX operating system. The Company intends to port its
software to the Windows NT operating system from Microsoft Corporation
("Microsoft") in the future. There can be no assurance that the Company will
be successful in developing and marketing, on a timely basis, products ported
to the Windows NT operating system or any other operating system. As a result,
any shift in the market toward products running on operating systems other
than UNIX, including Windows NT, before the Company offers versions of its
software running on such operating systems, could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company can successfully respond to
changing technology, identify new product
6
<PAGE>
opportunities or develop and bring new products and services to market in a
timely manner. The Company has in the past experienced delays in software
development and there can be no assurance that the Company will not experience
delays in connection with its current or future product development
activities. Delays and difficulties associated with new product introductions
or product enhancements could have a material adverse effect on the Company's
business, operating results and financial condition. Failure of the Company,
for technological or other reasons, to develop and introduce new products and
product enhancements and new services on a timely basis that are compatible
with industry standards and that satisfy customer requirements would have a
material adverse effect on the Company's business, operating results and
financial condition.
In addition, the Company or its competitors may announce enhancements to
existing products or services, or new products or services embodying new
technologies, industry standards or customer requirements that have the
potential to supplant or provide lower cost alternatives to the Company's
existing products and services. The introduction of such enhancements or new
products and services could render the Company's existing products and
services obsolete and unmarketable. There can be no assurance that the
announcement or introduction of new products or services by the Company or its
competitors or any change in industry standards will not cause customers to
defer or cancel purchases of existing products or services, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
Furthermore, introduction by the Company of products or services with
reliability, quality or compatibility problems could result in reduced orders,
delays in collecting accounts receivable and additional service costs. The
failure to introduce a new product, service or product enhancement on a timely
basis could delay or hinder market acceptance. Any such event could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Products and Services."
COMPETITION
The market for interactive commerce software is new, rapidly evolving and
intensely competitive. The Company expects competition to intensify in the
future.
The Company competes with vendors of prepackaged electronic commerce
software, vendors of software tools for developing electronic commerce
applications, system integrators and providers of business application
software. In addition, potential customers may elect to develop their own
interactive commerce solutions. The Company's competitors include Open Market,
Inc. ("OMI"), the Illustra Division of Informix Software, Inc. ("Illustra"),
BroadVision, Inc. ("BroadVision"), and Netscape Communications Corporation
("Netscape"). The Company expects additional competition from other emerging
and established companies, including Microsoft and Oracle Corporation
("Oracle"), both of which have announced products for Internet-based
electronic commerce. In addition, Microsoft recently announced that it has
entered into an agreement to acquire eShop Inc., a provider of software
programming tools for creating electronic commerce applications. The Company's
potential competitors also include a number of successful client/server
applications software companies, such as Baan Company ("Baan"), PeopleSoft,
Inc. ("PeopleSoft") and SAP AG ("SAP"), and electronic data interchange
("EDI") solution vendors, including Sterling Commerce, Inc. ("Sterling
Commerce") and General Electric Information Services Corporation ("GEIS").
Many of these competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than the Company
and thus may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and potential
competitors have greater name recognition and more extensive customer bases
that could be leveraged, thereby gaining market share to the Company's
detriment. Such competitors may be able to undertake more extensive
promotional activities, adopt more aggressive pricing policies and offer more
attractive terms to purchasers than the Company and to bundle their products
in a manner that may discourage users from purchasing products offered by the
Company. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to enhance their products. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
7
<PAGE>
share. There can be no assurance that the Company will be able to compete
effectively with competitors or that the competitive pressures faced by the
Company will not have a material adverse effect on the Company's business,
operating results and financial condition.
MANAGEMENT OF RAPIDLY CHANGING BUSINESS; NEW MANAGEMENT TEAM; DEPENDENCE ON
KEY PERSONNEL
The Company's anticipated expansion of operations will place a significant
strain on the Company's managerial, operational and financial resources. To
manage this anticipated expansion, the Company must continue to implement and
improve its operational and financial controls and systems and to expand,
train and manage its employee base. Further, the Company will need to manage
multiple relationships with various customers and other third parties. There
can be no assurance that the Company will implement on a timely basis the
systems, procedures or controls required to support its operations or that
will enable the Company to successfully market its products and services. The
Company's future operating results will also depend on its ability to expand
its sales and marketing organization, establish a distribution channel to
penetrate different and broader markets and expand its support organization.
If the Company is unable to respond effectively to changing business
conditions, its business, operating results and financial condition would be
materially adversely affected.
The Company's performance depends substantially on the performance of its
executive officers and key employees, many of whom have joined the Company in
the past year. Specifically, Patrick D. Quirk, Vice President of Sales, Gordon
J. Bridge, Chairman, Craig D. Norris, Vice President of Professional Services,
Barton S. Foster, Vice President of Marketing, and Joseph G. Girata, Vice
President of Finance and Administration and Chief Financial Officer joined the
Company in July 1995, November 1995, January 1996, March 1996 and June 1996,
respectively. These individuals have not previously worked together and there
can be no assurance that they can successfully integrate as a management team.
The Company's future success also depends on its continuing ability to
identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. The
inability to attract and retain its executive officers and other key technical
and managerial personnel could have a material adverse effect upon the
Company's business, operating results and financial condition. See "Business--
Customers" and "--Employees" and "Management."
UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR ELECTRONIC COMMERCE
The market for Internet-based packaged software applications, including
electronic commerce applications, was less than $1.0 million in 1995,
according to Forrester Research, Inc. ("Forrester Research"). The Company's
future operating results depend upon the development and growth of this new
and rapidly evolving market, which itself is dependent upon acceptance of
electronic commerce and the Internet as an effective sales, marketing and
order capture medium. The acceptance of electronic commerce in general and, in
particular, the Internet as a sales, marketing and order capture medium are
highly uncertain and subject to a number of risks. Critical issues concerning
the commercial use of the Internet (including security, reliability, cost,
ease of use, quality of service and the effect of government regulation)
remain unresolved and may impact the growth of the Internet. If widespread use
of the Internet for commercial transactions does not develop or if the
Internet does not develop as an effective sales, marketing and order capture
medium, the Company's business, operating results and financial condition
would be materially adversely affected.
The adoption of the Internet for sales, marketing, order capture and other
commercial transactions, and the development of a market for packaged
electronic commerce applications require acceptance of new ways of transacting
business and exchanging information. In particular, enterprises that have
already invested substantial resources in other means of transacting business
may be particularly reluctant to adopt a new strategy that may make certain of
their existing personnel and infrastructure obsolete. If the market for
Internet-based packaged applications fails to develop or develops more slowly
than the Company anticipates, or if the Company's products do not achieve
market acceptance, the Company's business, operating results and financial
condition would be materially adversely affected.
8
<PAGE>
RISKS ASSOCIATED WITH COMPLEX SOFTWARE PRODUCTS; LENGTHY SALES AND
IMPLEMENTATION CYCLES
The Company's products are complex and expensive and will generally involve
significant investment decisions by prospective customers. Accordingly, the
license of the Company's software products is often an executive-level
decision by prospective customers and can be expected to require the Company
to engage in a lengthy sales cycle to provide a significant level of education
to prospective customers regarding the use and benefits of the Company's
products. In addition, the implementation of the Company's products involves a
significant commitment of resources by customers over an extended period of
time. As a result, the Company's sales and customer implementation cycles are
subject to a number of significant delays over which it has little or no
control. The Company believes that rapid implementation is critical to success
in the Internet-based interactive commerce applications market. Significant
delays in implementation, whether or not such delays are within the Company's
control, could materially adversely affect its business, operating results and
financial condition. From time to time, the Company enters into fixed price
arrangements for its implementation services and currently has three such
arrangements. Fixed price arrangements have resulted in the past, and could in
the future result in, losses primarily due to delays in the implementation
process or other complexities associated with completion of the project. Such
losses could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, delays in license
transactions due to lengthy sales cycles or delays in customer production or
deployment of a system could have a material adverse effect on the Company's
business, operating results and financial condition and could be expected to
cause the Company's operating results to vary significantly from quarter to
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Marketing and Sales."
The marketability and acceptance of OneServer and OrderStream also will be
highly dependent on the success of initial implementations of these products
by the Company's customers. Problems or delays experienced by the Company's
initial customers in the installation and use of OneServer or OrderStream,
even if such problems or delays are not attributable to the Company or its
products, or a failure of the Company's customers to successfully attract
purchasers to interactive commerce Web sites, could slow the rate of adoption
of the Company's products by other potential customers. Moreover, products as
complex as those offered by the Company may contain undetected errors when
first introduced or when new versions are released. There can be no assurance
that, despite testing by the Company, errors will not occur in current or new
products after commencement of commercial shipments, resulting in adverse
publicity, in loss of or delay in market acceptance, or in claims by the
customer against the Company, which would have a material adverse effect on
the Company's business, operating results and financial condition.
DEPENDENCE ON SERVICE PROVIDERS
The Company expects that its customers will typically rely on professional
services organizations, such as consulting firms and systems integrators, as
well as design firms to assist with implementation of the Company's products.
If the Company were unable to adequately train a sufficient number of such
firms or if for any reason a large number of such firms were to support or
promote competing products or technologies, the Company's business, operating
results and financial condition could be materially adversely affected. Many
of these relationships are not subject to formal agreements and none of such
providers are under any obligation to provide services to the Company or its
customers. Failure of the Company to develop and maintain relationships with
leading service providers and design firms could adversely impact the
Company's ability to successfully market, sell and deploy its products, which
would have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Marketing and Sales," "--
Solution Partners," "--Competition" and "--Proprietary Rights."
DEPENDENCE ON CERTAIN LICENSES
The Company relies on certain technology that it licenses from third
parties, including a relational database management system from Oracle, a text
search engine from Fulcrum Technologies Inc. ("Fulcrum"), encryption
9
<PAGE>
technology from RSA Data Security, Inc. ("RSA") and other software that is
integrated with internally developed software and used in the Company's
software to perform key functions. Oracle also offers products that are
competitive with those offered by the Company. There can be no assurance that
the Company's third-party technology licenses will continue to be available to
the Company on commercially reasonable terms, or at all. The loss or inability
to maintain any of these technology licenses could result in delays in
introduction of the Company's products and services until equivalent
technology, if available, is identified, licensed and integrated, which could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--Solution Partners" and "--Proprietary
Rights."
RSA is currently in litigation with Cylink Corporation ("Cylink") pursuant
to which Cylink alleges that RSA's encryption technology infringes certain
Cylink patents and asserts that RSA has no right to sublicense such
technology. If it is determined that RSA is unable to sublicense this
technology to the Company, the Company may be deemed to be infringing Cylink's
patent rights. The Company is unable to predict the outcome of the dispute
between RSA and Cylink, but if the Company were deemed to be infringing
Cylink's patent rights, the Company could be required to pay damages to Cylink
and possibly enter into a royalty or licensing agreement with Cylink. Such
royalty or licensing agreement, if required, may not be available on terms
acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Business--Products and Services," "--Technology" and "--Proprietary
Rights."
DEPENDENCE UPON THE INTERNET INFRASTRUCTURE
The use of the Company's products and services will depend in large part
upon the continued development of the infrastructure for providing Internet
access and services. Because global commerce and online exchange of
information on the Internet is new and evolving, it is difficult to predict
with any assurance whether the Internet will prove to be a viable commercial
marketplace. The Internet has experienced, and is expected to continue to
experience, substantial growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In
addition, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased
levels of Internet activity, or due to increased governmental regulation.
Further, the costs of use of the Internet could increase to a degree which
reduces its attraction as a platform for electronic commerce. As a result,
there can be no assurance that the infrastructure or complementary services
necessary to make the Internet a viable commercial marketplace will be
developed, or, if developed, that the Internet will become a viable commercial
marketplace for products and services such as those offered by the Company. If
the necessary infrastructure or complementary services or facilities are not
developed, or if the Internet does not become a viable commercial marketplace,
the Company's business, operating results and financial condition would be
materially adversely affected.
RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION
To date, the Company has sold its products through a direct sales force. The
Company's ability to achieve revenue growth in the future will depend in large
part on its success in recruiting and training sufficient direct sales
personnel and establishing and maintaining relationships with distributors,
resellers, systems integrators and other third parties. Although the Company
is currently investing, and plans to continue to invest, significant resources
to expand its sales force and to develop distribution relationships with
third-party distributors and resellers, the Company may at times experience
difficulty in recruiting qualified sales personnel and in establishing
necessary third-party alliances. In addition, as the Company hires new sales
personnel it is anticipated that there will be a delay before such personnel
become productive. There can be no assurance that the Company will be able to
successfully expand its direct sales force or other distribution channels or
that any such expansion will result in an increase in revenues. Any failure by
the Company to expand its direct sales force or other distribution channels
would materially adversely affect the Company's business, operating results
and financial condition. See "Business--CONNECT Strategy" and "Business--
Marketing and Sales."
10
<PAGE>
RISKS ASSOCIATED WITH SECURITY, SYSTEM DISRUPTIONS AND COMPUTER INFRASTRUCTURE
Despite the implementation in the Company's products of various security
mechanisms, the Company's products may be vulnerable to break-ins and similar
disruptive problems caused by Internet users. The level of security provided
by the Company's products is dependent on the level of security selected by
the Company's customers and the proper configuration and use of the products'
security mechanisms. Such computer break-ins and other disruptions would
jeopardize the security of information stored in and transmitted through the
computer systems of users of the Company's products, which may result in
significant liability to the Company and may also deter potential customers.
Persistent security problems continue to plague public and private data
networks. Recent break-ins reported in the press and otherwise have included
incidents involving hackers bypassing firewalls by posing as authorized
computers and involving the theft of confidential information. Alleviating
problems caused by third parties may require significant expenditures of
capital and resources by the Company. Such expenditures could have a material
adverse effect on the Company's business, operating results and financial
condition. Moreover, the security and privacy concerns of existing and
potential customers, as well as concerns related to computer viruses, may
inhibit the growth of the Internet marketplace generally, and the Company's
customer base and revenues in particular. There can be no assurance that the
Company's attempts to limit its liability to customers, including liability
arising from a failure of the security feature contained in the Company's
products, through contractual provisions will be enforceable. The Company
currently does not have product liability insurance to protect against these
risks and there can be no assurance that such insurance will be available to
the Company on commercially reasonable terms, or at all.
As part of the Company's services, the Company operates and manages online
networks for certain of its customers on a seven day per week, twenty four
hour basis, and provides hosting for certain customers' OneServer
applications. These services depend on the Company's ability to protect the
computer equipment and the information stored in its data center against
damage that may be caused by fire, earthquakes, power loss, telecommunications
failures, unauthorized entry and other similar events. Any such damage or
failure that causes interruptions in the Company's operations could materially
adversely affect the businesses of the Company's customers, which could expose
the Company to liability for these adverse effects.
DEPENDENCE ON PROPRIETARY RIGHTS; RISKS OF INFRINGEMENT
The Company relies on trademark, copyright and trade secret laws, employee
and third-party non-disclosure agreements and other methods to protect its
proprietary rights. The Company does not currently have any patents or pending
patent applications. The Company believes that, due to the rapid pace of
technological innovation for Internet products, the Company's ability to
establish and maintain a position of technology leadership in the industry
depends more on the skills of its development personnel, new product
developments, frequent product enhancements, and name recognition than upon
the legal protections afforded its existing technology. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights as
fully as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights in the United States or
abroad will be adequate. There can be no assurance that its agreements with
employees, consultants and others who participate in the development of its
software will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors. Furthermore, there can be
no assurance that the Company's efforts to protect its rights through
trademark and copyright laws will not fail to prevent the development and
design by others of products or technology similar to or competitive with
those developed by the Company.
11
<PAGE>
The Company expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps and there can be no assurance that third
parties will not assert infringement claims against the Company. Any such
claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. In the event of a
successful claim of product infringement against the Company and failure or
inability of the Company to license the infringed or similar technology, the
Company's business, operating results and financial condition would be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
On March 25, 1996, PhotoDisc, Inc. ("PhotoDisc"), one of the Company's
licensees of OneServer, was sued, along with 21 other defendants including
AGFA Division-Miles Inc. ("AGFA"), Axcis Information Network, Inc. ("Axcis"),
Software Publishing Corporation ("SPC"), and others, in the Federal District
Court in Connecticut, by E-data Corporation ("E-data"). In the litigation
against PhotoDisc, E-data alleges that PhotoDisc is infringing E-data's U.S.
Patent No. 4,528,643 issued July 9, 1985, entitled "System for Reproducing
Information in Material Objects at Point of Sale Location," in connection with
electronic distribution of images on the Internet. E-data has also sued other
defendants including Broderbund Software, Inc. ("Broderbund"), Compuserve Inc.
("Compuserve"), Adobe Systems Incorporated ("Adobe") and others in the Federal
District Court in New York City alleging infringement of the same patent,
PhotoDisc recently tendered the defense of its E-data litigation to the
Company.
The Company is currently reviewing the infringement claims made by E-data
against PhotoDisc. Based upon its initial review of the E-data patent and the
nature of the claims and the Company's indemnity obligations, and after
consultation with counsel, management believes that the resolution of this
matter will not have a material adverse effect on the Company's business,
operating results and financial condition. However, given the early stage of
the litigation and the complex technical issues and uncertainties in patent
litigation, the results of these proceedings, including any potential
settlement, are uncertain and there can be no assurance that E-data will not
prevail in the current litigation or that it will not bring similar claims
against other licensees of the Company. If E-data were to prevail, PhotoDisc
could be required to pay damages to E-data for the infringement of its patent
and enter into a licensing or royalty arrangement in order to continue to
conduct its online business in the same manner. There can be no assurance that
the amount of such damages would not be material or that such license or
royalty arrangement would be available on acceptable terms. Under the terms of
its license with PhotoDisc, the Company may be required to defend against the
E-data claim and to indemnify PhotoDisc for some or all of its losses in
connection with the litigation, any settlement or judgment and any ongoing
license fees or royalties. In addition, whether or not the Company were to
prevail in any defense of PhotoDisc, such litigation could be time consuming
and costly to defend.
LACK OF PRIOR MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained. The initial offering price for the Common Stock to be
sold by the Company will be established by negotiations among the Company and
the Underwriters and may bear no relationship to the price at which the Common
Stock will trade after completion of this offering. See "Underwriting" for
factors to be considered in determining such offering price. The market price
of the Common Stock could be subject to significant fluctuations in response
to quarter-to-quarter variations in the Company's operating results,
announcements of technological innovations or new products and services by the
Company or its competitors, and other events or factors. For example, any
shortfall in revenue or net income, or increase in losses or expenses from
levels expected by securities analysts, could have an immediate and
significant adverse effect on the market price of the Company's Common Stock.
In addition, the stock market in recent years, and in particular the market
for stocks relating to the Internet, has experienced extreme price and
12
<PAGE>
volume fluctuations that have particularly affected the market prices of many
high technology companies and that have often been unrelated or
disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the market price for the Common Stock.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there
are currently few laws or regulations directly applicable to access to, or
commerce on, the Internet. However, due to the increasing popularity and use
of the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, covering issues such as user privacy,
pricing and characteristics and quality of products and services. The
Telecommunications Reform Act of 1996 was recently enacted and imposes
criminal penalties on anyone who distributes obscene, lascivious or indecent
communications on the Internet. The adoption of any such laws or regulations
may decrease the growth of the Internet, which could in turn adversely affect
the Company's business, operating results or financial condition. Moreover,
the applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain. Further, due to
the encryption technology contained in the Company's products, such products
are subject to U.S. export controls. There can be no assurance that such
export controls, either in their current form or as may be subsequently
enacted, will not delay the introduction of new products or limit the
Company's ability to distribute products outside of the United States or
electronically. While the Company intends to take precautions against unlawful
exportation, the global nature of the Internet makes it difficult to
effectively control the distribution of the Company's products. In addition,
federal or state legislation or regulation may further limit levels of
encryption or authentication technology. Further, various countries regulate
the import of certain encryption technology and have adopted laws relating to
personal privacy issues which could limit the Company's ability to distribute
products in those countries. Any such export or import restrictions, new
legislation or regulation or government enforcement of existing regulations
could have a material adverse impact on the Company's business, operating
results and financial condition.
BROAD LATITUDE AS TO USE OF PROCEEDS
The Company has not designated any specific use for the net proceeds from
the sale of Common Stock described in this Prospectus. Rather, the Company
expects to use the net proceeds primarily for general corporate purposes,
including working capital. Consequently, the Board of Directors and management
of the Company will have significant discretion in applying the net proceeds
of the offering. See "Use of Proceeds."
CONTROL BY EXISTING SECURITY HOLDERS
Upon completion of this offering, the Company's officers and directors,
together with entities affiliated with them, will own approximately 71.4% of
the outstanding Common Stock of the Company. Such persons will have sufficient
power to control the outcome of many matters (including the election of
directors, and any merger, consolidation or sale of all or substantially all
of the Company's assets) submitted to the stockholders for approval. As a
result, certain transactions will not be possible without the approval of
these stockholders. These transactions include proxy contests, mergers
involving the Company, tender offers, open-market purchase programs or other
purchases of Common Stock that could give stockholders of the Company the
opportunity to realize a premium over the then-prevailing market price for
their shares of Common Stock. See "Management" and "Principal Stockholders."
ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
After completion of the offering, the Board of Directors will have the
authority to issue up to 10,000,000 shares of Preferred Sock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may
have the effect of delaying, deferring
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<PAGE>
or preventing a change of control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the
holders of Common Stock. The Company has no present plans to issue shares of
Preferred Stock. Further, certain provisions of the Company's charter
documents, including provisions eliminating the ability of stockholders to
take action by written consent and limiting the ability of stockholders to
raise matters at a meeting of stockholders without giving advance notice, may
have the effect of delaying or preventing changes in control or management of
the Company, which could have an adverse effect on the market price of the
Company's Common Stock. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
offering or the anticipation of such sales could materially affect then
prevailing market prices. All of the 2,500,000 shares offered hereby are
immediately saleable in the public market. In addition, approximately 140,419
shares of Common Stock, of which 40,419 shares are issuable upon exercise of
warrants will be immediately saleable in the public market. Beginning 180 days
after the date of this Prospectus, upon expiration of pre-existing lock-up
agreements and lock-up agreements between the representatives of the
Underwriters and officers, directors and certain stockholders of the Company,
approximately 244,623 additional shares (as well as an additional 2,955,281
shares and 178,736 shares issuable upon exercise of outstanding options and
warrants, respectively) will be eligible for sale under Rule 144(k) and Rule
701 under the Securities Act of 1933, as amended (the "Securities Act")
subject in some cases to volume limitations and vesting provisions, and
3,631,178 shares will be eligible for sale subject to compliance with the
restrictions of Rule 144 under the Securities Act and subject in some cases to
vesting provisions. Any early waiver of the lock-up agreement by the
Underwriters, which, if granted, could permit sales of a substantial number of
shares and could adversely affect the trading price of the Company's shares,
may not be accompanied by an advance public announcement by the Company. In
addition, 11,787,011 total shares will become eligible for public resale
following expiration of the lock-up agreements at various times over a period
of less than two years following the completion of this offering, subject in
some cases to vesting provisions and volume limitations. The Securities and
Exchange Commission has recently proposed reducing the initial Rule 144
holding period to one year and the Rule 144(k) holding period to two years. If
enacted, such rule change would cause substantially all of the remaining
shares to be eligible for public resale upon expiration of the 180-day lock-up
agreements. Holders of approximately 15,449,634 shares of outstanding Common
Stock also will have the right to include such shares in any future
registration of securities effected by the Company and to require the Company
to register their shares for future sale, subject to certain exceptions. See
"Description of Capital Stock--Registration Rights of Certain Holders" and
"Shares Eligible for Future Sale."
DILUTION
The initial public offering price is expected to be substantially higher
than the book value per share of the outstanding Common Stock. Investors
purchasing shares of Common Stock in the offering will therefore incur
immediate, substantial dilution. In addition, investors purchasing shares of
Common Stock in the offering will incur additional dilution to the extent
outstanding options and warrants are exercised. See "Dilution."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby are estimated to be $28,950,000 ($33,483,750 if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $13.00 per share. The Company currently
expects to use the net proceeds for working capital and general corporate
purposes. The working capital purposes for which the offering proceeds will be
used include, among other uses, funding the Company's operations in general
and, in particular, expenditures for product development and marketing.
The Company may from time to time seek to acquire complementary businesses,
products, services or technologies. The Company may use a portion of the net
proceeds for one or more of such transactions, although the Company has no
current plans or agreements with respect to any such transactions. The exact
cost, timing and amount of funds required for specific uses by the Company
cannot be precisely determined at this time. Pending such uses, the Company
intends to invest such funds in short-term, investment grade, interest-bearing
obligations.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends in the foreseeable future,
but intends instead to retain future earnings for reinvestment in its
business. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such
other factors as the Board of Directors deems relevant.
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CAPITALIZATION
The following table sets forth the Company's (i) actual capitalization at
March 31, 1996, (ii) pro forma capitalization after conversion of all
outstanding shares of Preferred Stock into shares of Common Stock upon the
closing of this offering, and (iii) adjusted capitalization as of such date to
give effect to the receipt of the net proceeds from the sale by the Company of
2,500,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $13.00.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt............... $ 979 $ 979 $ 979
------- ------- -------
Long-term debt, less current portion............ 1,412 1,412 1,412
------- ------- -------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; authorized:
35,640,498 shares actual, 10,000,000 pro forma
and as adjusted; outstanding: 14,473,000
actual, no forma or as adjusted............... 14 -- --
Common Stock, $0.001 par value; authorized:
40,000,000 shares actual, pro forma and as
adjusted; outstanding: 449,000 actual,
15,679,000 pro forma and 18,179,000 as
adjusted(1)................................... 1 16 18
Additional paid-in capital..................... 45,091 45,090 74,038
Accumulated deficit............................ (35,896) (35,896) (35,896)
------- ------- -------
Total stockholders' equity.................... 9,210 9,210 38,160
------- ------- -------
Total capitalization.......................... $11,601 $11,601 $40,551
======= ======= =======
</TABLE>
- --------
(1) Excludes (i) an aggregate of 2,313,815 shares subject to outstanding
options as of March 31, 1996 at a weighted average exercise price of $0.23
per share under the Company's 1989 Stock Option Plan (of which 83,316
shares have been exercised as of June 12, 1996), (ii) 219,155 shares
issuable upon exercise of warrants outstanding as of March 31, 1996 at a
weighted average exercise price of $3.30 per share (of which the Company
expects warrants to purchase 200,236 shares will be exercised immediately
prior to completion of the offering), (iii) 758,850 shares issuable upon
exercise of options granted subsequent to March 31, 1996, at a weighted
average exercise price of $0.60 per share, (iv) an additional 1,833,600
shares reserved for issuance upon exercise of options that may be granted
subsequent to June 12, 1996 under the 1996 Stock Option Plan, (v) 250,000
shares reserved for issuance upon exercise of options that may be granted
under the 1996 Directors' Stock Option Plan, and (vi) 500,000 shares
reserved for issuance under the 1996 Employee Stock Purchase Plan. See
"Management--Stock Plans," and Notes 8 and 14 of Notes to Financial
Statements.
16
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996 was
approximately $9,200,000 or $0.59 per share of Common Stock. "Net tangible book
value" per share represents the amount of total tangible assets of the Company
reduced by the amount of its total liabilities and divided by the total number
of shares of Common Stock outstanding. After giving effect to the sale of the
2,500,000 shares of Common Stock offered by the Company at an assumed initial
public offering price of $13.00 per share, and the adjustments set forth above,
the pro forma net tangible book value of the Company as of March 31, 1996 would
have been $38,100,000 or $2.10 per share of Common Stock. This represents an
immediate increase in net tangible book value of $1.51 per share to existing
stockholders and an immediate dilution of $10.90 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Pro forma net tangible book value per share before the
offering.................................................... $0.59
Increase attributable to new investors....................... 1.51
-----
Pro forma net tangible book value after the offering.......... 2.10
------
Dilution per share to new investors........................... $10.90
======
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1996, the
differences between the existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 15,679,496 86.3% $46,254,000 58.7% $ 2.95
New investors.......... 2,500,000 13.7 32,500,000 41.3 13.00
---------- ----- ----------- -----
Total................. 18,179,496 100.0% $78,754,000 100.0%
========== ===== =========== =====
</TABLE>
The information presented with respect to existing stockholders assumes no
exercise of warrants to purchase 219,555 shares that were outstanding on March
31, 1996 with a weighted average exercise price of $3.30 per share (of which
the Company expects warrants to purchase 200,236 shares will be exercised
immediately prior to completion of the offering) and no exercise of outstanding
options under the 1989 Stock Option Plan or the 1996 Stock Option Plan. As of
March 31, 1996, options to purchase 2,313,815 shares were outstanding under the
1989 Stock Option Plan with a weighted average exercise price of $0.23 per
share (of which 83,316 shares have been exercised as of June 12, 1996). In
addition, 758,850 shares are issuable upon exercise of options granted
subsequent to March 31, 1996 with a weighted average exercise price of $0.60
per share, 1,833,600 shares are reserved for issuance upon exercise of options
that may be granted subsequent to June 12, 1996 under the 1996 Stock Option
Plan, 250,000 shares are reserved for issuance upon exercise of options that
may be granted under the 1996 Directors' Stock Option Plan and 500,000 shares
are reserved for issuance under the 1996 Employee Stock Purchase Plan. The
issuance of Common Stock under these plans will result in further dilution to
new investors. See "Management--Stock Plans" and Notes 8 and 14 of Notes to
Financial Statements.
17
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and
should be read in conjunction with the Financial Statements and related Notes
thereto appearing elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The selected
statement of operations data for the years ended December 31, 1993, 1994 and
1995 and the balance sheet data as of December 31, 1994 and 1995 are derived
from the Financial Statements of the Company which have been audited by Ernst
& Young LLP, independent auditors, and included herein. The selected statement
of operations data for the year ended December 31, 1991 and the balance sheet
data as of December 31, 1991 are derived from unaudited financial statements
not included herein. The selected statement of operations data for the year
ended December 31, 1992 and the balance sheet data at December 31, 1992 and
1993 are derived from audited financial statements not included herein. The
financial data as of March 31, 1996 and for the three months ended March 31,
1995 and 1996 are derived from the Company's unaudited financial statements
included elsewhere in this Prospectus. Historically, results of operations for
any interim period are not necessarily indicative of results to be expected
for the full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
License................ $ 222 $ 212 $ 1,015 $ 1,627 $ 288 $ 35 $ 404
Service................ 2,419 2,617 2,847 6,345 8,285 3,008 1,059
------- ------- ------- ------- -------- ------- -------
Total revenue......... 2,641 2,829 3,862 7,972 8,573 3,043 1,463
Cost of revenue:
License................ 83 68 134 162 140 40 134
Service................ 1,092 1,422 1,641 4,426 5,452 1,913 2,209
------- ------- ------- ------- -------- ------- -------
Total cost of
revenue.............. 1,175 1,490 1,775 4,588 5,592 1,953 2,343
Operating expenses:
Research and
development........... 1,909 1,884 1,573 1,622 4,810 449 1,174
Sales and marketing.... 831 607 859 1,355 3,978 590 2,480
General and
administrative........ 862 1,539 1,303 1,947 3,330 693 546
Termination of
distribution rights... -- -- -- -- 4,057 4,057 --
------- ------- ------- ------- -------- ------- -------
Total operating
expenses............. 3,602 4,030 3,735 4,924 16,175 5,789 4,200
------- ------- ------- ------- -------- ------- -------
Loss from operations.... (2,135) (2,691) (1,648) (1,540) (13,194) (4,699) (5,080)
Other income (expense).. (133) (241) (273) (199) (971) (138) 15
------- ------- ------- ------- -------- ------- -------
Loss before income
taxes.................. (2,268) (2,932) (1,921) (1,739) (14,165) (4,837) (5,065)
Provision (benefit) for
income taxes........... -- -- -- 26 (26) -- --
------- ------- ------- ------- -------- ------- -------
Pro forma net loss...... $(2,268) $(2,932) $(1,921) $(1,765) $(14,139) $(4,837) $(5,065)
======= ======= ======= ======= ======== ======= =======
Pro forma net loss per
share.................. $ (0.79) $ (0.27) $ (0.28)
======== ======= =======
Shares used in computing
pro forma net loss per
share.................. 17,864 17,859 17,906
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 24 $ 142 $ 64 $ 1,594 $12,929 $11,275
Working capital
(deficit).............. (3,338) (2,814) (1,045) (2,786) 11,302 6,815
Total assets............ 738 814 1,743 5,161 18,063 16,382
Long-term debt.......... -- 1,125 1,570 1,167 1,636 1,412
Stockholders' equity
(deficit).............. (3,041) (3,724) (1,979) (1,538) 13,318 9,210
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Prospectus. This
discussion contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including, but not limited to those discussed in "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
CONNECT designs, develops, markets and supports packaged application
software for Internet-based interactive commerce. The Company was founded in
1987 to provide online information services to businesses. During the period
1987 through 1992, the Company's primary business was the operation and
management of a private online service and the licensing of related client
software. In 1993 and 1994, the Company also offered software for creation,
access and operation of custom online systems. In late 1994, the Company began
to shift its focus from providing online services to developing packaged
software applications for Internet-based interactive commerce. During 1994 and
1995, the Company derived a significant portion of its revenue from contract
software development projects with two companies under which the Company
retained ownership of the technology developed. These projects formed the
foundation for the development of OneServer, the Company's current software
application, which was commercially released in September 1995.
As of May 31, 1996, the Company had licensed OneServer to ten customers. One
of the Company's customers is operating OneServer commercially, while the
others are in the process of implementing OneServer applications. The Company
is developing OrderStream, the first pre-configured implementation of
OneServer for selected vertical markets, in mid 1996. The Company believes
that the majority of its 1996 revenue will be generated through licenses of
OneServer and OrderStream, and related services revenue. The Company expects
that revenue from the operation of private online services will constitute a
decreasing portion of the Company's overall revenue in the future. As a result
of the recent transition in the Company's business, the Company's results of
operations prior to fiscal 1996 should not be relied upon as indicative of
future results.
The Company derives revenue from software license fees and services. License
fees primarily consist of revenue from licenses of the Company's application
software. Service revenue consists of fees from implementation (including
customization of licensed software), training, maintenance and support,
contract software development projects, and system hosting and online
services. License revenue is recognized on shipment of the application
software provided there are no significant remaining obligations and
collectability is deemed probable by management. License fees under contracts
requiring significant implementation, including customization, of licensed
application software are recognized on a percentage-of-completion basis. To
date, a majority of the revenue from OneServer has been recognized on this
basis. Revenue from implementation services is recognized as the services are
performed, except for revenue from certain fixed price contracts which is
recognized on a percentage-of-completion basis. Actual costs and gross margins
on fixed price contracts could differ from management's estimates and such
differences could be material to the financial statements.
The Company also enters into maintenance agreements in connection with
licenses of its application software under which revenue is recognized ratably
over the term of the agreement, generally one year. Usage fees related to the
Company's training, system hosting services, private online services and
consulting services are recognized as the services are performed.
Additionally, service revenue from contract software development projects, in
which the Company developed specific technology for its customers, has been
recognized on a percentage-of-completion basis.
The Company has incurred net losses in each fiscal year since inception and,
as of March 31, 1996, had an accumulated deficit of $35.9 million. The
Company's operating expenses have increased substantially since 1994
19
<PAGE>
as the Company made investments related to the development and introduction of
OneServer. To date, all research and development costs have been expensed as
incurred and have not been capitalized because capitalizable costs have not
been material. The Company anticipates that operating expenses will continue
to increase for the foreseeable future as it continues to develop its
technology, increase sales and marketing efforts and establish and expand
distribution channels. Accordingly, the Company expects to incur additional
losses on a quarterly and annual basis for the foreseeable future.
The Company's prospects are dependent upon the successful acceptance of
OneServer and OrderStream by the market, and must be evaluated in light of the
risks and uncertainties frequently encountered by companies dependent upon
such early stage products. In addition, the Company's markets are new and
rapidly evolving, which heightens these risks and uncertainties. To address
these risks, the Company must, among other things, successfully implement its
marketing strategy, respond to competitive developments, continue to develop
and upgrade its products and technologies more rapidly than its competitors,
and commercialize its products and services incorporating these enhanced
technologies. There can be no assurance that the Company will succeed in
addressing any or all of these risks. See "Risk Factors."
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenue, items from
the Company's statements of operations for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
License................. 26% 20% 3% 1% 28%
Service................. 74 80 97 99 72
------- ------- -------- ------- -------
Total revenue.......... 100 100 100 100 100
Cost of revenue:
License................. 4 2 2 1 9
Service................. 42 56 63 63 151
------- ------- -------- ------- -------
Total cost of revenue.. 46 58 65 64 160
Operating expenses:
Research and
development............ 41 20 56 15 80
Sales and marketing..... 22 17 47 19 170
General and
administrative......... 34 24 39 23 37
Termination of
distribution rights.... -- -- 47 133 --
------- ------- -------- ------- -------
Total operating
expenses.............. 97 61 189 190 287
------- ------- -------- ------- -------
Loss from operations..... (43) (19) (154) (154) (347)
Other income (expense)... (7) (3) (11) (5) 1
------- ------- -------- ------- -------
Loss before income
taxes................... (50) (22) (165) (159) (346)
Provision (benefit) for
income taxes............ -- -- -- -- --
------- ------- -------- ------- -------
Net loss................. (50)% (22)% (165)% (159)% (346)%
======= ======= ======== ======= =======
Gross margin:
License................. 87% 90% 51% (14)% 67%
Service................. 42 30 34 36 (108)
</TABLE>
20
<PAGE>
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Revenue
License. License revenue increased from $35,000 in the first quarter of 1995
to $0.4 million in the first quarter of 1996, primarily as a result of an
increase in fees from licenses of the Company's OneServer application software
which was first licensed in the fourth quarter of 1995. See "Business--
Customers."
Service. Service revenue decreased 65% from $3.0 million in the first
quarter of 1995 to $1.1 million in the first quarter of 1996. In the first
quarter of 1995 service revenue consisted primarily of revenue associated with
contract software development projects with AT&T Corporation ("AT&T") and
Electronic Marketplace Systems, Inc. ("EMS") which terminated in June 1995
(the "Development Projects"). Service revenue in the first quarter of 1996
consisted primarily of revenue from private online services, and to a lesser
extent revenue from implementation services in connection with OneServer
licenses.
Costs of Revenue
Cost of License. Cost of license revenue includes sublicense fees and
expenses relating to product media, duplication and manuals. Cost of license
revenue increased from $40,000 in the first quarter of 1995 to $0.1 million in
the first quarter of 1996, and decreased as a percentage of license revenue
from 114% to 33%.
Cost of Service. Cost of service revenue consists of: costs of
implementation services including fees of third-party contract developers and
Company personnel costs; training and customer support costs for OneServer;
costs associated with contract software development projects; and
telecommunications, personnel and hardware costs related to hosting services
and the operation of the Company's private online service. Cost of service
revenue increased from $1.9 million in the first quarter of 1995 to $2.2
million in the first quarter of 1996, and increased as a percentage of service
revenue from 64% to 208%. The cost of service revenue in the first quarter of
1995 was comprised primarily of costs associated with the Development Projects
and the Company's private online service. In the first quarter of 1996, cost
of service revenue was comprised primarily of a charge of approximately $1.0
million in connection with a fixed price contract obligation to implement the
Company's OneServer software for a customer, and costs associated with the
Company's private online service. The Company expects that service revenue
will decline as a percentage of total revenue due to the Company's focus on
licensing OneServer and OrderStream.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of personnel and equipment costs. Research and development expenses
increased 161% from $0.4 million in the first quarter of 1995 to $1.2 million
in the first quarter of 1996, and increased as a percentage of total revenue
from 15% to 80%. The increase in research and development expenses in total
dollars and as a percentage of total revenue was attributable to increased
staffing and associated support costs of software engineers required to expand
and enhance the Company's product line, including development of OneServer and
OrderStream. The Company expects research and development expense to continue
to increase in absolute dollars.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions of sales and marketing personnel, and travel,
marketing and promotional expenses. Sales and marketing expenses increased
320% from $0.6 million in the first quarter of 1995 to $2.5 million in the
first quarter of 1996, and increased as a percentage of total revenue from 19%
to 170%. The increase in sales and marketing expenses in absolute dollars and
as a percentage of revenue was attributable to building a direct sales force
and increasing marketing and promotional activities directed at developing its
position in the emerging Internet-based packaged application software market.
Historically, a large portion of the Company's revenue was generated without
any related commission expense as such revenue was largely comprised of non-
commissioned services. The Company expects sales and marketing expenses to
increase in absolute dollars both as a result of higher marketing and sales
costs related to increased promotional activities and increased commission
expense associated with licenses.
21
<PAGE>
General and Administrative. General and administrative expenses consist
primarily of salaries of financial, administrative and management personnel
and related travel expenses, as well as legal and accounting expenses. General
and administrative expenses decreased 21% from $0.7 million in the first
quarter of 1995 to $0.5 million in the first quarter of 1996 due primarily to
higher professional service fees in the 1995 period. General and
administrative expenses increased as a percentage of total revenue from 23% in
the first quarter of 1995 to 37% in the first quarter of 1996 due to lower
total revenue generated in the latter period. The Company expects general and
administrative expenses to continue to increase in absolute dollars.
Termination of Distribution Rights. The Company incurred a one-time expense
of $4.1 million in the first quarter of 1995 related to its termination of
exclusive European distribution rights of its former European distributor.
Other Income (Expense)
Other income (expense) consists primarily of interest expense. Net interest
expense, which results principally from interest incurred under notes payable
and capital lease obligations, was $0.1 million in the first quarter of 1995.
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Revenue
License. Revenue from licenses was $1.0 million, $1.6 million and $0.3
million in 1993, 1994 and 1995, respectively, representing an increase of 60%
from 1993 to 1994 and a decrease of 82% from 1994 to 1995. The increase in
license revenue from 1993 to 1994 was attributable primarily to an increase in
licenses of the Company's software introduced in 1993 for creation, access and
operation of custom online services. The decrease in license revenue from 1994
to 1995 resulted primarily from a decrease in licenses of such software as the
Company refocused its sales and marketing efforts on OneServer.
Service. Service revenue was $2.8 million, $6.3 million and $8.3 million in
1993, 1994 and 1995, respectively, representing an increase of 123% from 1993
to 1994 and an increase of 31% from 1994 to 1995. The increase in service
revenue from 1993 to 1994 and 1994 to 1995 was attributable primarily to
revenue from the Development Projects. The Development Projects were
terminated in June 1995.
Costs of Revenue
Cost of License. Cost of license revenue was $0.1 million, $0.2 million and
$0.1 million in 1993, 1994 and 1995, respectively, representing 13%, 10% and
49% of license revenue for each respective period.
Cost of Service. Cost of service revenue was $1.6 million, $4.4 million and
$5.5 million in 1993, 1994 and 1995, respectively, representing 58%, 70% and
66% of service revenue for each respective period. The increase in cost of
service revenue from 1993 to 1994 was due primarily to costs associated with
the Development Projects. The increase in cost of service revenue from 1994 to
1995 was due primarily to the cost of converting the Company's private online
service from an International Business Machines Corporation ("IBM") mainframe
to a UNIX-based environment, as well as increased operating costs of the
private online service.
Operating Expenses
Research and Development. Research and development expenses were $1.6
million, $1.6 million and $4.8 million in 1993, 1994 and 1995, respectively,
representing 41%, 20% and 56% of total revenue in each respective period. A
significant portion of the initial development costs related to OneServer were
included in cost of service in 1994 and 1995 as such development was performed
under the Development Projects. The increase in research and development
expenses from 1994 to 1995 was attributable primarily to increased staffing
and associated support costs of software engineers required to develop
OneServer.
22
<PAGE>
Sales and Marketing. Sales and marketing expenses were $0.9 million, $1.4
million and $4.0 million in 1993, 1994 and 1995, respectively, representing
22%, 17% and 47% of total revenue for each respective period. The increase in
sales and marketing expenses in absolute dollars from 1993 to 1994 and 1994 to
1995 were attributable to the Company's investment in building its direct
sales force and related travel expense, increased promotional and marketing
activities and expenses relating to the opening of regional sales offices.
General and Administrative. General and administrative expenses were $1.3
million, $1.9 million and $3.3 million in 1993, 1994 and 1995, respectively,
representing 34%, 24% and 39% of total revenue in each respective period. The
increase in general and administrative expenses in absolute dollars from 1993
to 1994 resulted primarily from the addition of personnel. The increase in
general and administrative expenses from 1994 to 1995 resulted primarily from
the addition of personnel, including two senior executives, and expenses
associated with capital raising activities.
Termination of Distribution Rights. The Company had a one-time expense of
$4.1 million in 1995 from the termination of exclusive European distribution
rights of its European distributor.
Other Income (Expense)
Net interest expense was $0.3 million, $0.2 million and $1.0 million in
1993, 1994 and 1995, respectively. Interest expense in 1995 consisted
primarily of interest paid on bridge loans from existing stockholders, which
were converted to equity in December 1995.
Income Taxes
The provision (benefit) for income taxes for 1995 reflects a reversal of the
provision for income taxes for 1994 due to the utilization of net operating
loss carrybacks to offset 1994 taxable income. The provision for income taxes
for 1994 arises primarily as a result of the limitation on the utilization of
net operating loss carryforwards under Section 382 of the Internal Revenue
Code. At December 31, 1995 the Company had approximately $7.7 million of gross
deferred tax assets consisting primarily of net operating loss carryforwards.
A valuation allowance has been recorded for the entire deferred tax asset as a
result of uncertainties regarding the realization of the asset due to the lack
of earnings history of the Company. To support the Company's conclusion that a
full allowance was required, management primarily considered the Company's
history of operating losses and expected net losses for the foreseeable
future. The Company will continue to assess the realizability of the deferred
tax assets on actual and forecasted operating results. For information
regarding the Company's provision (benefit) for income taxes and limitation on
net operating losses and credit carryforwards, refer to Note 12 of the Notes
to Financial Statements, which information is hereby incorporated by
reference.
23
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited financial information for
each of the last five quarters. The information for each of these quarters
includes all adjustments, consisting only of normal recurring adjustments,
which the Company considers necessary for a fair presentation of this
information when read in conjunction with the Financial Statements and notes
thereto appearing elsewhere in this Prospectus. The results of operations for
any quarter and any quarter-to-quarter trends are not necessarily indicative
of the results to be expected for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1995 1996
-------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue:
License........................ $ 35 $ 54 $ 34 $ 165 $ 404
Service........................ 3,008 2,455 694 2,128 1,059
------- ------- ------- -------- -------
Total revenue................. 3,043 2,509 728 2,293 1,463
Cost of revenue:
Cost of license................ 40 17 41 42 134
Cost of service................ 1,913 1,463 842 1,233 2,209
------- ------- ------- -------- -------
Total cost of revenue......... 1,953 1,480 883 1,275 2,343
Operating expenses:
Research and development....... 449 1,059 1,834 1,468 1,174
Sales and marketing............ 590 704 984 1,700 2,480
General and administrative..... 693 1,301 774 563 546
Termination of distribution
rights........................ 4,057 -- -- -- --
------- ------- ------- -------- -------
Total operating expenses...... 5,789 3,064 3,592 3,731 4,200
------- ------- ------- -------- -------
Loss from operations............ (4,699) (2,035) (3,747) (2,713) (5,080)
Other income (expense).......... (138) (228) (287) (318) 15
------- ------- ------- -------- -------
Loss before income taxes........ (4,837) (2,263) (4,034) (3,031) (5,065)
Benefit for income taxes........ -- -- -- (26) --
------- ------- ------- -------- -------
Net loss........................ $(4,837) $(2,263) $(4,034) $ (3,005) $(5,065)
======= ======= ======= ======== =======
</TABLE>
24
<PAGE>
The following table sets forth the above unaudited quarterly financial
information as a percentage of total revenue:
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1995 1996
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
License......................... 1% 2 % 5 % 7 % 28%
Service......................... 99 98 95 93 72
---- --- ---- ---- ----
Total revenue.................. 100 100 100 100 100
Cost of revenue:
Cost of license................. 1 1 5 2 9
Cost of service................. 63 58 116 54 151
---- --- ---- ---- ----
Total cost of revenue.......... 64 59 121 56 160
Operating expenses:
Research and development........ 15 42 252 64 80
Sales and marketing............. 19 28 135 74 170
General and administrative...... 23 52 107 24 37
Termination of distribution
rights......................... 133 -- -- -- --
---- --- ---- ---- ----
Total operating expenses....... 190 122 494 162 287
---- --- ---- ---- ----
Loss from operations............. (154) (81) (515) (118) (347)
Other income (expense)........... (5) (9) (39) (14) 1
---- --- ---- ---- ----
Loss before income taxes......... (159) (90) (554) (132) (346)
Benefit for income taxes......... -- -- -- (1) --
---- --- ---- ---- ----
Net loss......................... (159)% (90)% (554)% (131)% (346)%
==== === ==== ==== ====
</TABLE>
The Company has experienced and expects to continue to experience
significant fluctuations in future quarterly operating results that may be
caused by many factors including, among others, the number, timing and
significance of product enhancements and new product announcements by the
Company or its competitors, the ability of the Company to develop, introduce
and market new and enhanced versions of the Company's products
on a timely basis, the length of the Company's sales cycle, market acceptance
of and demand for the Company's products, the pace of development of
electronic commerce conducted on the Internet, the mix of the Company's
products sold, customer order deferrals in anticipation of enhancements or new
products offered by the Company or its competitors, nonrenewal of service
agreements, software defects and other product quality problems, the Company's
ability to attract and retain key personnel, the extent of international
sales, changes in the level of operating expenses and general economic
conditions. The Company anticipates that a significant portion of its revenue
will be derived from a limited number of orders placed by large corporations,
and the timing of receipt and fulfillment of any such orders is expected to
cause material fluctuations in the Company's operating results, particularly
on a quarterly basis. The Company expects to recognize the majority of its
license revenue in the last month of each quarter. As a result, any delay in
delivery of products at the end of a quarter could materially adversely affect
operating results for that quarter. In addition, the Company intends, in the
near term, to significantly increase its personnel, including its direct sales
force. The timing of such expansion and the rate at which new sales people
become productive could also cause material fluctuations in the Company's
quarterly operating results. Furthermore, the operating results of many
software companies reflect seasonal trends, and the Company expects to be
affected by such trends in the future.
Due to the foregoing factors, quarterly revenue and operating results are
difficult to forecast. In addition, as a result of the Company's recent shift
in business strategy, the Company's results of operations prior to fiscal 1996
should not be relied upon as indicative of future results. Revenue is also
difficult to forecast because the market for Internet-based packaged
applications software is rapidly evolving and the Company's sales cycle may
vary substantially from customer to customer. Further, the Company's expense
levels are based, in significant
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<PAGE>
part, on the Company's expectations as to future revenue and are therefore
relatively fixed in the short term. If revenue levels fall below expectations,
net income is likely to be disproportionately adversely affected because a
proportionately smaller amount of the Company's expenses varies with its
revenue. There can be no assurance that the Company will be able to achieve or
maintain profitability on a quarterly or annual basis in the future. Due to
all the foregoing factors, in some future quarter the Company's operating
results may be below the expectations of securities analysts and investors. In
such event, the price of the Company's Common Stock would likely be materially
adversely affected. See "Risk Factors--Fluctuations in Quarterly Operating
Results."
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through the
private sale of equity securities and the use of capitalized leases for
equipment financing. The Company had working capital of $6.8 million at March
31, 1996.
Net cash used in operating activities was $2.0 million in 1993, net cash
generated by operating activities was $1.4 million in 1994 and net cash used
in operating activities in 1995 was $14.9 million. Net cash used in operating
activities in 1995 consisted primarily of net losses plus a decrease in
deferred revenue, offset in part by the issuance of stock in connection with
the termination of the Company's contract with its German distributor. Net
cash used in operating activities in the first quarter of 1996 was $1.9
million resulting primarily from a net loss, offset in part by an increase in
accrued liabilities related to the $1.0 million charge taken in the first
quarter of 1996 and increased bonus accruals.
During 1993, 1994 and 1995, the Company used $0.6 million, $1.6 million and
$1.8 million, respectively, in investing activities, primarily as a result of
the purchase of furniture and equipment. Net cash provided by financing
activities in 1993, 1994 and 1995 was $2.6 million, $1.8 million and $28.0
million, respectively. Net cash provided by financing activities in 1995
resulted primarily from the Company's private equity financing in December
1995. Net cash provided by financing acitivities was $0.7 million in the first
quarter of 1996 resulting primarily from a second closing of the Company's
private equity financing.
The Company believes that the proceeds from the offering and funds that may
be generated from operations, will be sufficient to finance the Company's
currently anticipated working capital requirements through the end of 1997.
There can be no assurance, however, that the Company's actual needs will not
exceed anticipated levels, or that the Company will generate sufficient
revenue to fund its operations in the absence of other sources. There also can
be no assurance that any additional required financing will be available
through bank borrowings, debt or equity offerings or otherwise, or that if
such financing is available, it will be available on terms favorable to the
Company or its stockholders.
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<PAGE>
BUSINESS
The following description of the Company's business should be read in
conjunction with the information included elsewhere in this Prospectus. This
description contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from the
results discussed in the forward-looking statements as a result of certain of
the risk factors set forth below and elsewhere in this Prospectus.
OVERVIEW
CONNECT designs, develops, markets and supports industrial strength,
scaleable software applications for Internet-based interactive commerce.
CONNECT application software and services are designed to reduce the time and
overall cost for businesses to implement and maintain a secure sales,
marketing and order capture capability on the World Wide Web. The Company's
software supports key functions necessary for large-scale interactive
commerce, including user registration, multimedia catalog and content
management, dynamic merchandising, order capture and management, security,
payment processing, enterprise integration and systems administration.
CONNECT's core product, OneServer, is a cross-industry software application
for Internet-based interactive commerce, including sales, marketing and order
capture. In addition, the Company has developed OrderStream, its first
preconfigured implementation of OneServer for business-to-business interactive
commerce in selected vertical markets. CONNECT's applications are designed to
support large numbers of purchasers, products and transactions. The Company's
object-oriented software architecture and robust transaction manager tightly
integrate OneServer and OrderStream with a relational database to provide
increased system performance and transaction capacity. The Company and its
Solution Partners offer a broad range of services to implement, support and
operate CONNECT's applications.
INDUSTRY BACKGROUND
In today's competitive global business environment, companies are seeking to
streamline their business processes in order to lower costs, forge closer
relationships with customers and suppliers and increase market share, revenue
and profits. Companies have concentrated their efforts on reengineering and
automating their internally focused business processes such as manufacturing,
product development, finance and administration. However, the traditional
direct and indirect methods that companies use to market and sell products and
to capture customer orders continue to rely heavily on human involvement,
paper-based systems, physical infrastructure and costly advertising and
promotion.
Direct sales methods allow companies to target buyers, customize the sales
process and build close customer relationships, but often require large
investments and result in high fixed operating costs. Multi-tier distribution
methods using resellers, distributors or dealers involve one or more steps
between the original supplier and the customer. These multi-tier distribution
methods often result in substantial product inventory at each step, reduce
control over merchandising and pricing, and limit opportunities to build
value-added relationships with customers. Catalog-based distribution provides
broader coverage at lower cost and offers greater control over merchandising
and pricing. However, catalog-based distribution involves expensive printing
and delivery costs, restricts the form and volume of product information
presented and limits interaction with customers.
Recent Approaches to Automating Sales, Marketing and Order Capture
Many companies have tried to leverage the power of computers and
telecommunications to automate business processes, including sales, marketing
and customer order capture. These companies have sought to combine the
benefits of direct and indirect sales channels with electronic order capture
and management. Approaches to date have included systems based upon electronic
data interchange (EDI) standards, industry-specific proprietary electronic
commerce systems and packaged enterprise applications. Each of these
approaches, however, has provided only a partial or narrowly focused solution.
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<PAGE>
EDI is a set of uniform formats for commercial documents such as invoices
and purchase orders which allow computers to exchange such documents without
human intervention. EDI automates the flow of transaction information among
buyers and sellers and the back-office work associated with transactions.
Systems based on EDI standards have been adopted by a number of companies and
industries in order to link single companies with multiple suppliers or to
automate certain aspects of the distribution process for entire industries.
Widespread adoption of EDI in an industry has required either a dominant buyer
or a critical mass of connected trading partners and, in many industries, has
been hampered by the cost and complexity of implementation. While systems
based on EDI standards have offered advantages over paper-based systems, such
systems have not been designed to support a full range of sales, marketing and
order capture functions.
Several industries have adopted industry-specific information systems to
automate aspects of the sales, marketing and order capture processes. These
custom systems typically have been deployed by industry leaders, and have
included the SABRE reservation system deployed by American Airlines and the
order and inventory management systems deployed by McKesson Corporation and
Baxter International Inc. Such proprietary systems are designed to provide
more revenue and a higher level of customer service by linking companies,
distributors and customers. While these systems have helped solidify customer
relationships and resulted in competitive advantages, they are costly and
difficult to implement and maintain due to custom development costs,
networking costs, and the need for proprietary client-side software.
More recently, companies have made large investments to replace their core
business systems with client/server enterprise applications to decrease costs,
increase revenue and improve customer service. Packaged enterprise
applications such as those offered by Baan, PeopleSoft, and SAP support a
range of business functions such as finance, accounting, human resources,
manufacturing and distribution. Although these applications provide
substantial benefits by integrating business functions within an enterprise,
they are not designed to extend outside the enterprise to directly link a
company with its customers, suppliers and other trading partners.
The Internet as an Interactive Commerce Medium
The Internet is emerging as a powerful new medium for interactive commerce,
including sales, marketing and order capture. The Internet has the potential
to address many of the limitations of existing approaches. Key benefits of the
Internet include direct access to millions of users, an open, standards-based
architecture, a global communications infrastructure and the capability to
deliver multimedia content. The Internet provides a cost-effective mechanism
to extend a company's internal systems to directly link to its customers and
trading partners. It also allows a company to establish a global sales and
marketing presence and order capture capability.
The adoption of the Internet as a medium for sales, marketing and order
capture is still in its early stages. To date, companies have used the
Internet primarily to publish marketing materials and company literature in
digital format on the Web. This approach has provided a cost-effective method
of distributing information, but has not significantly enhanced customer
interaction or captured substantial new revenue. Recently, some companies have
established Web sites that allow the purchase and sale of goods and services.
While these sites provide an interactive user experience, they require complex
custom software that is costly and difficult to build and maintain, and in
general, are not designed to scale to support large numbers of purchasers,
products and transactions.
For the Internet to achieve widespread adoption as an interactive commerce
medium, the Company believes Web-based interactive commerce solutions must
support all elements of sales, marketing and order capture from merchandising
through transaction processing. These solutions also must leverage the
multimedia and interactive potential of the Web and integrate with enterprise
systems to leverage companies' technology investments and existing information
resources. Finally, Internet-based solutions need to enable central system
management and provide a high degree of security.
In order to realize the full potential of Internet-based interactive
commerce, CONNECT believes that companies will require cost-effective,
scaleable and industrial strength software applications that can be rapidly
deployed with minimal customization. In other computing environments, packaged
applications were developed
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<PAGE>
to address these time-to-market and cost concerns. Similarly, the Company
believes that the compelling economics of packaged software applications
compared to custom development will drive the growth of an Internet-based
packaged applications market. Forrester Research estimates that the market for
all Internet-based packaged applications, including electronic commerce
applications, will grow from less than $1.0 million in 1995 to over $1.7
billion in 1999 (excluding browsers, servers, development tools and applets).
CONNECT SOLUTION
CONNECT offers a comprehensive software and services solution that is
designed to enable businesses to quickly, securely and cost effectively
implement an Internet-based interactive commerce capability. This sales,
marketing and order capture channel complements existing sales channels and
enables customers to seek to capture new revenue by leveraging the
capabilities of the Internet. CONNECT refers to this complementary new channel
as the Virtual Sales Channel.
The CONNECT Solution
--------------------
[Graphic displaying customers, trading partners, the Internet, CONNECT products
- -------------------------------------------------------------------------------
and enterprise systems and their logical position in the CONNECT Solution]
--------------------------------------------------------------------------
The Virtual Sales Channel(TM)
-----------------------------
Customers . OneServer Enterprise Systems
Business Customers . OrderStream . Order Management
Distributors Internet . CONNECT Services . Inventory
Suppliers . Solution Partners . Financials
. Manufacturing
Customers
and Seller
Trading Partners
CONNECT's core product, OneServer, is a cross-industry software application
for Internet-based interactive commerce, including sales, marketing and order
capture. In addition, the Company has developed OrderStream, its first
preconfigured implementation of OneServer for business-to-business interactive
commerce in selected vertical markets. OrderStream has not yet been
commercially released. The Company and its Solution Partners also offer a
broad range of services to support its applications. The Company's products
and services offer the following benefits:
. Faster Time to Market. The Company believes that rapid implementation is
critical to success in the Internet-based interactive commerce
applications market. The Company's software incorporates key functions
designed to permit rapid implementation, including user registration,
advertising, multimedia catalog and content management, dynamic
merchandising, browsing and searching, order capture, order management,
usage tracking, security, payment processing, enterprise integration, and
system administration. OneServer's HTML (Hypertext Markup Language)
Template Engine and business object architecture minimize the need for
custom software code, allowing rapid implementation to meet a
29
<PAGE>
company's specific requirements. To further accelerate time to market, the
Company intends to develop a series of preconfigured implementations of
OneServer tailored to meet the interactive commerce requirements of
selected vertical markets. The Company's first such application,
OrderStream, is scheduled for commercial release in mid 1996.
. Lower Cost of Ownership. CONNECT's solution is designed to reduce the
overall cost of deploying and maintaining an Internet-based interactive
commerce application. The Company's open architecture, pre-built
functions and integrated approach limit custom coding, thereby reducing
implementation and ongoing maintenance costs.
. Industrial Strength, Scaleable Applications. The Company's applications
are designed to support large numbers of purchasers, products and
transactions and are based on a foundation of industry-standard
technology. The Company's software can be integrated with existing
enterprise systems and business processes, offers state-of-the-art
security and supports the critical requirements for high capacity
interactive commerce.
CONNECT STRATEGY
The Company's goal is to be the leading provider of packaged applications
software for Internet-based interactive commerce. The key elements of the
Company's strategy are as follows:
Provide Comprehensive Solutions. The Company's strategy is to provide the
software and services necessary for businesses to quickly, securely and cost-
effectively implement an Internet-based interactive commerce channel.
CONNECT's application software provides the broad range of functions necessary
for interactive commerce including marketing, merchandising, sales, order
management, administration and integration with enterprise systems. The
Company's comprehensive solution complements customers' existing sales
channels.
Target Large Corporations in Selected Vertical Markets. In order to expand
market share and establish a leadership position, the Company plans to target
specific vertical markets. The Company has identified a number of market
segments that it believes have a current need for packaged Internet-based
interactive commerce applications, including: (i) business-to-business
suppliers such as resellers and distributors of computer hardware and
software, electronic components and office equipment and supplies; (ii)
consumer retailers, such as specialty and direct mail retailers and general
merchandisers; and (iii) industries employing multi-tier distribution
including apparel, food and beverage and consumer appliance manufacturers. The
Company intends to leverage existing customer relationships in order to expand
its business into each of these areas. In addition, the Company intends to
develop a series of preconfigured implementations of OneServer, tailored to
meet the specific requirements of these vertical markets. OrderStream is the
first such application, and targets catalog-based business-to-business
suppliers.
Exploit Technology Leadership. The Company believes its significant
technology base is one of its core competitive differentiators. The Company
plans to continue to invest significant resources to maintain its technology
leadership position and to provide industry-leading interactive commerce
solutions. The Company's software applications integrate a powerful
transaction manager, object-oriented architecture and sophisticated HTML
template engine with an industry standard relational database management
system. The Company believes it was among the first to integrate a
comprehensive client/server architecture with Web-based technology. For
example, in addition to universal browser support, OneServer's architecture
supports client software developed with standard tools such as Java, Visual
Basic and Visual C++. In addition, the Company will continue to support and
integrate relevant Internet and client/server software standards as they
emerge.
Leverage Third-Party Providers. A key element of the Company's strategy is
to continue to expand its strategic relationships with third-party software,
service and hardware providers. The Company believes that such relationships
increase the visibility of its application software in the marketplace and
enable the Company to supplement its core products and services to provide a
comprehensive solution to customers. As part of this
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<PAGE>
strategy, the Company integrates into its software applications certain
software from Oracle, Fulcrum and RSA. Solution Partners also include platform
providers such as hardware companies, solution enhancement providers such as
software companies, professional service providers to assist with development
and implementation of the CONNECT solution, and design firms that participate
in Web site development.
Expand Sales and Distribution Capability. The Company intends to expand its
sales and distribution infrastructure domestically and internationally to
increase sales coverage and capture market share. The Company plans to
leverage its direct sales efforts by pursuing sales prospects generated by
Solution Partners and by selling through value-added resellers, as well as
establishing other indirect sales channels.
PRODUCTS AND SERVICES
OneServer
CONNECT'S core product, OneServer, is a software application for Internet-
based interactive commerce. OneServer integrates the key features and
functions necessary to implement a Virtual Sales Channel. CONNECT's customers
license OneServer and, using CONNECT's professional services capabilities or
those of a Solution Partner, tailor OneServer to the specific needs of their
business. OneServer is designed to enable CONNECT's customers to quickly,
securely and cost-effectively implement an Internet-based sales, marketing,
and order capture capability. For sellers, benefits include more control over
order execution, customer specific promotions, better product and pricing
information and tighter relationships with purchasers. The key business
benefits for purchasers include expedited purchasing, lower cost and 24 hour
availability.
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<PAGE>
OneServer Version 1.0 was commercially released in September 1995 and
Version 1.2 is scheduled for commercial release in mid 1996. There can be no
assurance that Version 1.2 will be released on schedule. OneServer has been
licensed to ten customers and implemented commercially by one customer.
OneServer offers the following key functionality:
OneServer Functionality
[Graphic showing Logical position of OneServer functionality]
<TABLE>
<CAPTION>
Sales Order Management
<S> <C> <C> <C>
. Access and purchase . Order capture
controls . Payment and credit
. Browsing and searching card processing
. Shopping and purchasing
Mulitmedia Product
Consumers Marketing and Catalog
Business Merchandising
Customers Internet . Catalog management
Distributors . Product database
Suppliers management
. Dynamic content
. Multimedia content
. Advertising Enterprise Integration
. User registration . APIs
. Dynamic merchandising . Electronic mail
interface
Administration Enterprise
. Security . Support for Systems
. System administration industry standards
</TABLE>
The Company has licensed its OneServer software to customers for fees
ranging from approximately $100,000 to approximately $800,000. Fees for
professional services and annual fees for maintenance and support are
additional. The amount of revenue derived from a particular sale depends on a
number of factors including the number of computer processors, complexity of
the customer application supported, amount of necessary customization and
other factors.
32
<PAGE>
OrderStream
OrderStream is a preconfigured implementation of OneServer tailored for
business-to-business interactive commerce in selected vertical markets. These
vertical markets include resellers and distributors of computer hardware and
software, electronic components and office equipment and supplies. OrderStream
includes pre-built OneServer business objects and a set of preconfigured HTML
templates (Web pages) designed to support the specific requirements of these
markets. OrderStream is scheduled for commercial release in mid 1996. There
can be no assurance that OrderStream will be released on schedule.
OrderStream includes the following features in addition to those provided by
its OneServer foundation:
<TABLE>
<CAPTION>
BUSINESS PROCESS ADDITIONAL ORDERSTREAM FUNCTIONALITY
--------------------------------------------------------------------------------
<S> <C>
Marketing and
Merchandising . Customer-specific catalog and pricing
. Feature-specific product search
. Automated catalog creation and update through
bulk data importation
. User interface screens for catalog, SKU and
product management
. Seller-branded product catalogs
. Custom product designations (e.g., preferred
items and required approvals)
--------------------------------------------------------------------------------
Sales and Order Management . Real-time inventory availability checking
. User interface screens for customer service and
order capture
. Order review, routing, approval and rejection
. Order status tracking
. Purchase controls by buyer, frequency and dollar
amount
--------------------------------------------------------------------------------
Administration and . OrderStream-specific APIs (e.g., inventory
Integration availability and order status)
. Electronic data interchange (EDI)
</TABLE>
The Company intends to license OrderStream at a premium to OneServer license
fees. Each OrderStream license will include a OneServer run-time sublicense.
As with OneServer, the Company will charge separately for professional
services and annual fees for maintenance and support. The amount of revenue
derived from a particular sale will depend on a number of factors, including
the number of computer processors, complexity of the customer application
supported, amount of necessary customization and other factors.
Services
The Company provides a full range of services to support the licensing of
its software applications. These services include project implementation and
training, maintenance and support, system hosting and online services. To
retain its focus on technology and software development, the Company leverages
its own capabilities through relationships with leading third-party providers
of systems integration and design services. The Company believes that the
quality and breadth of these services are an important competitive advantage.
Implementation and Training. The Company offers fee-based services to help
customers design and implement OneServer and OrderStream applications. The
Company and its Solution Partners work closely with customers to clarify the
project business case, define project scope and establish a project plan and
schedule. In addition, the Company offers fee-based education and training on
the use of its products to customers and third-party implementation partners.
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<PAGE>
Maintenance and Support. The Company provides software maintenance including
product updates and technical support to its customers and Solutions Partners.
The Company offers two levels of support which differ in the hours that the
customer may access support personnel. Fees charged depend upon the support
level and size of the customer's application.
Hosting Services. CONNECT offers system hosting services for its customers'
OneServer and OrderStream applications. These services include installing the
application on a remote server located at CONNECT's headquarters or a Solution
Partner's site, maintaining and administering the database, and other system
management services. The Company provides these services on a fee basis to
customers who do not want to operate and manage their own Internet-based
applications. The Company is actively recruiting Solutions Partners to provide
such hosting services.
Online Services. Since 1988, the Company has provided private online
services to various businesses and other organizations. These services include
e-mail, user forums and access to public and private information resources and
are marketed under the COOL (CONNECT Online) brand name. These services may be
accessed by registered users through the Web or proprietary client software.
As of May 31, 1996, approximately 15,000 users in multiple organizations were
using these services.
Licensing and Third-Party Software
The Company typically provides its software products to its customers under
nonexclusive object code licenses. Generally, CONNECT sublicenses to its
customers third-party software integrated in the Company's software, including
a relational database management system from Oracle, a text search engine from
Fulcrum and encryption technology from RSA. The Company's customers also may
obtain such licenses directly from such third-party software vendors. See
"Risk Factors--Dependence on Certain Licenses."
CUSTOMERS
As of May 31, 1996, CONNECT had licensed its OneServer platform and
associated applications to the following customers: Ameritech Corporation; ARI
Network Services, Inc.; ENTEX Information Services ("ENTEX"); Evergreen, Inc.;
First Data Corporation; Fruit of the Loom, Inc. ("Fruit of the Loom");
PhotoDisc; Reader's Digest; Time Warner Cable; and World Merchandise Exchange
(Womex). PhotoDisc is operating OneServer commercially, while the other
OneServer licensees are in the process of implementing OneServer applications.
The Company commenced marketing its OrderStream product in May 1996. The
OrderStream product is currently being tested by the Company and has not been
licensed to any customer. The Company expects ENTEX to convert its OneServer
license to an OrderStream license upon OrderStream's commercial release.
Below are examples of how customers are using or expect to use CONNECT's
application software and services to create Internet-based sales, marketing
and order capture capability. These customers also have retained certain of
CONNECT's Solution Partners to assist with systems integration and user
interface design.
PhotoDisc. PhotoDisc is a leading distributor of digital stock photography
for the marketing, publishing and multimedia markets. In October 1995,
PhotoDisc introduced PhotoDisc Online, a custom application based on OneServer
that supports a fully-automated sales and distribution channel over the
Internet for its digital photographs. The application features a searchable
database of more than 15,000 images representing 60,000 individual resolutions
organized in multiple catalogs. PhotoDisc customers may browse individual
catalogs, or search by categories or text description in each or all catalogs.
Customers can select, download and license photos and images. Purchases can be
made online using a PhotoDisc account or by credit card. The system also
provides for promotional campaigns and new customer registration. PhotoDisc
Online was launched in October 1995. The PhotoDisc site has won multiple
awards, including USA Today Web Site of the Week and a NewMedia INVISION Gold
Award.
Fruit of the Loom. Fruit of the Loom, a leading apparel manufacturer,
selected OneServer as the platform to implement a secure Web-based order
management application for its Activewear Division. Fruit of the Loom
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<PAGE>
intends to establish Web sites and order management applications built on
OneServer for 45 of its largest distributors. These Web sites are designed to
enable 30,000 screen shops to order Fruit of the Loom and other apparel
makers' products from these distributors 24 hours a day, seven days a week.
The application is intended to support complex, multi-line orders and
inventory checks; recommend substitutions for out-of-stock items; conduct a
multi-warehouse search by zip code; and incorporate customer-specific
considerations based on customer profiles and buying histories. The system is
being designed to capture incremental revenue and more closely link Fruit of
the Loom to its distributors. Fruit of the Loom expects to launch its program
in mid 1996.
ENTEX Information Services. ENTEX Information Services is a provider of
computer and network products and related services. In a major initiative to
provide additional value-added services to its corporate customers, ENTEX has
retained CONNECT to develop a virtual sales channel for its customers using a
pre-release version of the Company's OrderStream product. ENTEX will provide
information on its 20,000 computer and technology products over the Internet,
enabling ENTEX's business customers to directly order products and services.
The ENTEX application will provide online catalogs tailored to each customer.
The application automates ENTEX's order capture and provides services that
assist ENTEX's customers in managing the purchase process. ENTEX expects to
launch the application in late 1996.
Time Warner Cable Programming, Digital Marketing Group--DreamShop. Time
Warner Cable is using the OneServer application to develop an advanced
transactional platform that supports DreamShop, Time Warner Cable's upscale
digital shopping mall. The DreamShop platform expects to relaunch with 20 to
25 merchants, including Eddie Bauer, Sharper Image and Spiegel, with plans to
expand. The new DreamShop will allow consumers to shop for products from
multiple retailers and to purchase the products online in a single
transaction. Time Warner Cable expects to launch the DreamShop transactional
platform in September 1996.
There can be no assurance that these systems will be deployed on a timely
basis. Delays on implementation could have an adverse effect on the Company's
revenues and results of operations. See "Risk Factors--Risks Associated with
Complex Software Products; Lengthy Sales and Implementation Cycle."
During 1995, AT&T accounted for 52% of the Company's revenue pursuant to a
contract software development project. During the first three months of 1996,
Time Warner Cable, HandsNet, Inc. and First Data Corporation, which accounted
for 18%, 15% and 13%, respectively, of the Company's revenue. No other
customer accounted for more than ten percent of the Company's revenue in any
such period.
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<PAGE>
TECHNOLOGY
The Company's technology represents a third generation software architecture
based on the Company's experience in the online services market. The Company's
architecture is comprised of six tightly integrated layers:
OneServer
Multi-Layer Architecture
[Multi-layer architectural diagram]
Architectural Layers Components
- ----------------------------------- -------------------------------------
Client Support . Browsers
. Java
. Visual Basic
. Visual C++
HTML Template Engine . Dynamic web pages
. Presentation and content management
Transaction Manager . Security and authentication
. Data consistency
. Multi-threading
Business Objects . Prepackaged interactive commerce features
. Application-specific objects
Object Manager . Object filing system
. Simplified storage and access
Industry Standard Technology . Oracle RDBMS
. RSA encryption
. Fulcrum text search engine
Client Support. OneServer works with leading Web browsers and supports
HTML and Web standards such as HTTP (Hypertext Transfer Protocol) and SSL
(Secure Sockets Layer). In addition, for more complex applications,
OneServer supports Microsoft's Visual Basic and Visual C++, and Sun
Microsystems' Java clients.
HTML Template Engine. The OneServer HTML Template Engine separates the
management of database content from the presentation format. The HTML
Template Engine combined with the Object Manager reduces the amount of
custom code and CGI (common gateway interface) scripting needed to
dynamically create HTML pages, thereby improving time to market, lowering
maintenance costs and improving system performance.
Transaction Manager. OneServer's Transaction Manager offers robust
security and authentication protection. The Transaction Manager features
multi-processing and multi-threading, thereby enabling OneServer and
OrderStream to scale across multiple processors to accommodate large
numbers of purchasers, products and transactions. In addition, the
Transaction Manager ensures application-wide data consistency regardless of
data type (e.g., text, graphic and structured), and includes the Company's
RAMP (Reprioritizable Asynchronous Multi-threaded Protocol), a transaction
dispatcher and monitor.
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<PAGE>
Business Objects. OneServer includes pre-packaged business functionality
or objects designed for use in interactive commerce. Customers can extend
these objects or build new objects quickly and easily to match precise
business requirements. The pre-packaged objects support common sales and
marketing and other business functions including user registration,
advertising, multimedia catalog and content management, dynamic
merchandising, browsing and searching, order management, security and
authorization, transaction processing, enterprise integration and system
administration.
Object Manager. The OneServer Object Manager defines and manages objects
thereby extending the capabilities of the Oracle 7 database to handle
custom and predefined objects, including multimedia objects. These
capabilities are designed to allow customers to create robust, complex and
flexible data models. The Object Manager hides storage and access
complexities, allowing the customer to focus on automating business
processes. The Object Manager allows objects to be extended by inheriting
characteristics from multiple parent objects, reducing data redundancies
and extraneous coding requirements. An object's attributes can be accessed
through the Internet-based URL reference instead of custom code.
Industry Standard Technology. OneServer incorporates industry-leading
technology as part of its architecture, including the Oracle 7 relational
database management system, the Fulcrum text search engine and RSA
encryption. The tight integration between the Oracle 7 database and
OneServer results in increased system performance and transaction capacity.
The Company's software applications run on the HP-UX 10 and Sun Solaris
2.4/2.5 versions of the UNIX operating system.
MARKETING AND SALES
CONNECT's marketing efforts are focused on increasing awareness of CONNECT
and its products in selected target markets, and positioning CONNECT as a
leading interactive commerce software provider. CONNECT marketing programs
have three primary goals: market education and awareness, sales effectiveness
and product management. The Company's market education and awareness
activities include seminars, speaking engagements and sponsorship of market
studies by leading industry analysts. In addition, CONNECT utilizes direct
mail, public relations, trade shows, telemarketing and innovative sales tools
to disseminate its marketing message and improve sales effectiveness.
CONNECT's product management staff works with customers and industry experts
to ensure that the Company's products will satisfy market requirements.
The Company currently sells its products and related services using two
channels: a direct sales model and a "leveraged" direct sales model (using
leads referred by Solution Partners). The Company's selling efforts generally
focus on senior level executives in large corporations. The Company intends to
expand distribution of its OneServer product in the future to include indirect
sales channels, such as value-added resellers (VARs).
The Company markets and sells its products and services through an
organization consisting of 40 employees as of May 31, 1996, based at the
Company's corporate office in Mountain View, California, and offices in Lisle,
Illinois and Stamford, Connecticut. Currently, all international sales
activity is coordinated through the Company's headquarters.
SOLUTION PARTNERS
A key element of the Company's strategy is to continue to expand its
strategic alliances with Solution Partners. The Company believes that such
relationships promote the visibility of the OneServer application and enable
the Company to supplement its core products and services to provide a complete
solution. The Company's Solution Partners can be segmented into the following
four categories:
Technology Providers. CONNECT has incorporated industry-leading software
into its products. The Company licenses and resells software from Oracle
(relational database management system), Fulcrum (text search engine) and RSA
(encryption). The Company also engages in joint marketing activities with
other technology companies, including Hewlett-Packard and Sun Microsystems.
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Solution Enhancement. CONNECT is working with other companies that offer
additional complementary solution elements. These include First Data
Corporation (payment processing), CyberCash, Inc. (payment processing),
Verisign, Inc. (authentication), Brio Technology, Inc. (reporting tools),
Media Share (content management tools) and BBN Planet Corporation (Internet
access).
Professional Services. CONNECT works with a group of leading professional
services organizations to assist customers in implementing OneServer and
OrderStream. These organizations include Cambridge Technology Partners,
ClearSystems, Inc. Computer Sciences Corporation, Compuware Corporation,
Logica plc, Sage Solutions, Inc. and Sapient Technologies, Inc. These
providers perform services such as business process reengineering and
integration, database design and application development.
Creative Partners. CONNECT works with organizations that specialize in the
creative aspects of developing Web sites. These organizations include CKS
Partners Ltd., Eagle River Interactive Inc., Poppe Tyson Advertising & Public
Relations, Ikonic Interactive Inc., Organic Online, Studio Archetype (formerly
Clement Mok Designs, Inc.) and Thomas Nicholson. These firms frequently are an
important initial contact point for companies exploring interactive commerce
applications and are important sources of referrals for the Company.
RESEARCH AND DEVELOPMENT
Since inception, the Company has made substantial investments in research
and product development. The Company spent $1.6 million in 1993, $1.6 million
in 1994 and $4.8 million in 1995, and expects to increase research and
development expenses in 1996. The Company's current software products have
been developed primarily by its internal product development staff. A
significant portion of the Company's development efforts during 1994 and 1995
were performed under the Development Projects. In general, under these
Development Projects the Company retained ownership of the technology being
developed subject, in certain cases, to nonexclusive licenses granted to the
Company's customers. The Company's research and development efforts are
currently focused primarily on adding functionality to the Company's OneServer
application and developing new implementations of OneServer for selected
vertical markets. The Company's research and development staff consisted of 35
employees as of March 31, 1996. In the future, the Company intends to increase
its development staff. The level of research and development costs will vary,
however, depending upon the amount of development work being performed by the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company's success will depend upon its ability to develop new products
and provide new services that meet changing customer requirements. The market
for the Company's products is characterized by rapidly changing technology,
evolving industry standards and customer requirements, emerging competition
and frequent new product and service introductions. As a result, the Company
may be required to change and improve its products in response to changes in
operating systems, application and networking software, computer and
communications hardware, programming tools and computer language technology.
There can be no assurance that the Company can successfully respond to
changing technology, identify new product opportunities or develop and bring
new products and services to market in a timely manner. Failure of the
Company, for technological or other reasons, to develop and introduce new
products and product enhancements and new services that are compatible with
industry standards and that satisfy customer requirements would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors--Dependence upon Product Development;
Risks of Technological Change and Evolving Industry Standards."
COMPETITION
The market for interactive commerce software is new, rapidly evolving and
intensely competitive. The Company expects competition to intensify in the
future.
The Company competes with vendors of prepackaged electronic commerce
software, vendors of software tools for developing electronic commerce
applications, system integrators and providers of business application
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software. In addition, potential customers may elect to develop their own
interactive commerce solutions. The Company's competitors include OMI,
Illustra, BroadVision, and Netscape. The Company expects additional
competition from other emerging and established companies, including Microsoft
and Oracle, both of which have announced products for Internet-based
electronic commerce. In addition, Microsoft recently announced that it has
entered into an agreement to acquire eShop Inc., a provider of software
programming tools for creating electronic commerce applications. The Company's
potential competitors also include a number of successful client/server
applications software companies, such as Baan, PeopleSoft and SAP, and EDI
solution vendors, including Sterling Commerce and GEIS.
Many of these competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than the Company
and thus may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and potential
competitors have greater name recognition and more extensive customer bases
that could be leveraged, thereby gaining market share to the Company's
detriment. Such competitors may be able to undertake more extensive
promotional activities, adopt more aggressive pricing policies and offer more
attractive terms to purchasers than the Company and to bundle their products
in a manner that may discourage users from purchasing products offered by the
Company. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to enhance their products. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. There can be no assurance that the Company will be able to compete
effectively with competitors or that the competitive pressures faced by the
Company will not have a material adverse effect on the Company's business,
operating results and financial condition.
The Company believes that rapid implementation of software applications is
critical to success in the Internet-based interactive commerce applications
market. The Company has a limited history in implementing its products and
there can be no assurance that the Company will be able to meet customer needs
and expectations in this regard. Additional competitive factors affecting the
market for the Company's services and software products include vendor and
product reputation, architecture, functionality and features, ease of use,
time-to-market, quality of support, product quality, performance and price.
Based on these factors, the Company believes that it has competed effectively
to date. In order to be successful in the future, the Company must continue to
respond promptly and effectively to the challenges of technical change and
competitors' innovations. Performance in these areas will, in turn, depend
upon the Company's ability to attract and retain highly qualified technical
and sales personnel in a competitive market for experienced and talented
software developers, sales representatives and managers.
PROPRIETARY RIGHTS
The Company relies on trademark, copyright and trade secret laws, employee
and third-party non-disclosure agreements and other methods to protect its
proprietary rights. The Company does not currently have any patents or pending
patent applications. The Company believes that, due to the rapid pace of
technological innovation for Internet products, the Company's ability to
establish and maintain a position of technology leadership in the industry
depends more on the skills of its development personnel, new product
developments, frequent product enhancements, and name recognition than upon
the legal protections afforded its existing technology. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights as
fully as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights in the United States or
abroad will be adequate. There can be no assurance that its agreements with
employees, consultants and others who participate
39
<PAGE>
in the development of its software will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to or independently developed by competitors.
Furthermore, there can be no assurance that the Company's efforts to protect
its rights through trademark and copyright laws will not fail to prevent the
development and design by others of products or technology similar to or
competitive with those developed by the Company.
The Company expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps and there can be no assurance that third
parties will not assert infringement claims against the Company. Any such
claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. In the event of a
successful claim of product infringement against the Company and failure or
inability of the Company to license the infringed or similar technology, the
Company's business, operating results and financial condition would be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
On March 25, 1996, PhotoDisc, one of the Company's licensees of OneServer,
was sued, along with 21 other defendants including AGFA, Axcis, SPC, and
others, in the Federal District Court in Connecticut, by E-data. In the
litigation against PhotoDisc, E-data alleges that PhotoDisc is infringing E-
data's U.S. Patent No. 4,528,643 issued July 9, 1985, entitled "System for
Reproducing Information in Material Objects at Point of Sale Location," in
connection with electronic distribution of images on the Internet. E-data has
also sued other defendants including Broderbund, Compuserve, Adobe and others
in the Federal District Court in New York City. PhotoDisc recently tendered
the defense of its E-data litigation to the Company.
The Company is currently reviewing the infringement claims made by E-data
against PhotoDisc. Based upon its initial review of the E-data patent and the
nature of the claims and the Company's indemnity obligations, and after
consultation with counsel, management believes that the resolution of this
matter will not have a material adverse effect on the Company's business,
operating results and financial condition. However, given the early stage of
the litigation and the complex technical issues and uncertainties in patent
litigation, the results of these proceedings, including any potential
settlement, are uncertain and there can be no assurance that E-data will not
prevail in the current litigation or that it will not bring similar claims
against other licensees of the Company. If E-data were to prevail, PhotoDisc
could be required to pay damages to E-data for the infringement of its patent
and enter into a licensing or royalty arrangement in order to continue to
conduct its business in the same manner. There can be no assurance that the
amount of such damages would not be material or that such license or royalty
arrangement would be available on acceptable terms. Under the terms of its
license with PhotoDisc, the Company may be required to defend against the E-
data claim and to indemnify PhotoDisc for some or all of its losses in
connection with the litigation, any settlement or judgement and any ongoing
license or royalty fees. In addition, whether or not the Company were to
prevail in any defense of PhotoDisc, such litigation could be time consuming
and costly to defend.
The Company relies in part on certain technology which it licenses from
third parties, including encryption technology from RSA. RSA is currently in
litigation with Cylink pursuant to which Cylink alleges that RSA's encryption
technology infringes certain Cylink patents and asserts that RSA has no right
to sublicense such technology. If it is determined that RSA is unable to
sublicense this technology to the Company, the Company may be deemed to be
infringing Cylink's patent rights. The Company is unable to predict the
outcome of the dispute between RSA and Cylink, but if the Company were deemed
to be infringing Cylink's patent rights, the Company could be required to pay
damages to Cylink and possibly enter into a royalty or licensing agreement
with Cylink. Such royalty or licensing agreement, if required, may not be
available on terms acceptable to the Company or at all, which could have a
material adverse effect upon the Company's business, operating results and
financial condition. See "Risk Factors--Dependence on Proprietary Rights;
Risks of Infringement."
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EMPLOYEES
At March 31, 1996, CONNECT employed 116 people full time, of whom 40 were
involved in sales and marketing, 14 were involved in services, 35 were
involved in research and development and 27 were involved in finance,
administration and operations. The Company has not experienced any work
stoppages and considers its employee relations to be good.
FACILITIES
The Company is headquartered in Mountain View, California, where it leases
an aggregate of approximately 30,000 square feet of space which houses
administrative, sales and marketing, customer service and product development
activities. The Company's field operations occupy leased facilities in Lisle,
Illinois (an aggregate of approximately 2,000 square feet) and Stamford,
Connecticut (an aggregate of approximately 2,700 square feet). The Company
believes that its existing facilities are adequate to meet current needs, but
that the Company may need to lease additional space in 1997. There can be no
assurance additional space will be available on reasonable terms.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of May 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Gordon J. Bridge 53 Chairman of the Board and
Director
Thomas P. Kehler 49 President, Chief Executive
Officer and Director
Joseph G. Girata 52 Vice President of Finance and
Administration, Chief Financial
Officer and Secretary
Kenneth M. Ross 43 Chief Technical Officer and
Executive Vice President of
Development
Barton S. Foster 31 Vice President of Marketing
Paul A. Lansky 55 Vice President of Operations
Craig D. Norris 48 Vice President of Professional
Services
Patrick D. Quirk 39 Vice President of Sales
Promod Haque(1)(2) 48 Director
Rory T. O'Driscoll(1) 31 Director
Richard W. Weening(2) 50 Director
William B. Welty (2) 54 Director
</TABLE>
- --------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
Gordon J. Bridge joined the Company in November 1995 as the Chairman of the
Board of Directors. Since November 1995 Mr. Bridge has also served as the
chief business development officer of the Company. Mr. Bridge is also an
Executive Vice President and director of Quaestus Management Corporation
("Quaestus"), a venture capital investment and private equity fund management
company, which funds, collectively, are a principal stockholder of the
Company, although Mr. Bridge does not hold an equity interest in the Quaestus
funds. From 1988 to 1995, Mr. Bridge held various executive management
positions with AT&T Corporation, a telecommunications company, including
President of AT&T Computer Systems, President of EasyLink Services, President
of AT&T Consumer Interactive Services and most recently Vice President,
Corporate Strategy responsible for Emerging Services and Products. Prior to
joining AT&T Corporation in 1988, he served for 23 years with IBM Corporation
in various positions, including Vice President of Marketing and Vice President
of U.S. Sales. Mr. Bridge is a director of ARI Network Services, Inc., an
electronic commerce services provider. Mr. Bridge holds a B.A. in Mathematics
from Bradley University.
Thomas P. Kehler joined the Company in July 1992 as the President and Chief
Executive Officer and a member of the Board of Directors. Prior to joining the
Company, from January 1986 to October 1991 he was Chairman and Chief Executive
Officer of IntelliCorp, a software company. Prior to his employment with
IntelliCorp, Mr. Kehler was a manager with Texas Instruments Incorporated, an
electronics manufacturer. Mr. Kehler holds a B.S.E.E., an M.S.E.E. and a Ph.D.
in Electrical Engineering/Applied Physics from Drexel University.
Joseph G. Girata joined the Company in June 1996 as Vice President of
Finance and Administration and Chief Financial Officer. Prior to joining the
Company, Mr. Girata was an independent consultant from September 1995 to June
1996. From September 1994 to August 1995, Mr. Girata was Vice President and
Chief Financial Officer of Wind River Systems, Inc., a software company, and
from October 1989 to August 1994, he was Senior
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Vice President and Chief Financial Officer of Walker Interactive Systems,
Inc., a software company. In addition, Mr. Girata has held executive financial
management positions with Data Design Associates, a software company, Atlantic
Financial, a thrift institution holding company, and Signetics Corporation, a
semiconductor company. Mr. Girata holds a B.S. in Finance from California
State University, Hayward and is a Certified Public Accountant.
Kenneth M. Ross joined the Company in July 1993 as Chief Technical Officer
and Executive Vice President of Development. From January 1991 to September
1991, Mr. Ross served as Executive Vice President of Development and
Engineering and as a director at Hunter Systems, a software applications
company, and from September 1991 to July 1993, he was Vice President of
Development and Operations and General Manager of the Software Publishing
Division of Woodside Technologies/UNIX Central, a developer and distributor of
UNIX software tools and utilities. Mr. Ross also held senior management
positions at IntelliCorp from 1983 to 1987, and from 1988 to 1991, he held
several director-level software development management roles at Oracle
Corporation, a software company ("Oracle"). Mr. Ross holds a B.S. in
Mathematics from Massachusetts Institute of Technology and a Ph.D. in
Linguistics from the University of Massachusetts at Amherst.
Barton S. Foster joined the Company in March 1996 as Vice President of
Marketing. Prior to joining the Company, Mr. Foster held various management
positions with Oracle, from July 1994 to March 1996, including Vice President,
Applications and Industry Marketing and Director, Applications Business
Development. Prior to joining Oracle, Mr. Foster held various positions with
Booz, Allen & Hamilton, a management consulting firm, from 1987 to 1994. Mr.
Foster holds a B.A. in Economics and Political Science from Stanford
University and an M.B.A. from Harvard University Graduate School of Business.
Paul A. Lansky became Vice President of Operations of the Company in March
1996, after joining the Company in September 1994 as Vice President of Sales.
In addition, from July 1995 to November 1995, Mr. Lansky served as Vice
President of Professional Services, and from December 1995 to March 1996, he
was Vice President of Strategic Accounts of the Company. Prior to joining the
Company, he held various sales management positions with other software
companies, including Vice President of Highland Digital, from June 1994 to
August 1994, and Executive Vice President of Highland Software from April 1992
to March 1994. From September 1991 to March 1992, Mr. Lansky served as Vice
President of Sales of BusinessWise, Inc., a software company. Mr. Lansky holds
a B.S. in Electrical Engineering from the University of Michigan and an M.B.A.
from Wayne State University.
Craig D. Norris joined the Company in January 1996 as Vice President of
Professional Services. Prior to joining the Company, Mr. Norris was a
management consultant with Gemini Consulting Inc., a consulting firm, from
October 1992 to December 1995. From October 1988 to October 1992, Mr. Norris
was Vice President, West Area at Cap Gemini America, a consulting firm. Mr.
Norris holds a B.A. in Economics from Macalester College and an M.B.A. from
Fairleigh Dickenson University.
Patrick D. Quirk joined the Company in July 1995 as Vice President of Sales.
Prior to joining the Company, from May 1993 to May 1995, Mr. Quirk was Vice
President of the Americas at Avalon Software, Inc. From April 1989 to May
1993, Mr. Quirk held several positions with Oracle, including Group Sales
Manager. Prior to his employment with Oracle, from January 1983 to April 1989,
Mr. Quirk was a Global Sales manager of the Yield Management Systems division
of Control Data Corporation, a computer hardware and software company. Mr.
Quirk holds a B.S. in Industrial Engineering from the University of Wisconsin-
Madison.
Promod Haque became a member of the Board of Directors of the Company in
December 1995. Mr. Haque joined Norwest Venture Capital Management, Inc., a
venture capital investment firm, in November 1990 and currently serves as its
Vice President. He is also a partner of two general partnerships that are the
general partners of Norwest Equity Partners V, L.P., a principal stockholder
of the Company. Mr. Haque currently serves as a director of Forte Software,
Inc., Raster Graphics, Inc., Transaction Systems Architects, Inc., Optical
Sensors, Inc., Prism Solutions, Inc. and several privately held companies. Mr.
Haque holds a B.S.E.E. from the University of Delhi, India, and a Ph.D.E.E.
and an M.B.A. from Northwestern University.
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<PAGE>
Rory T. O'Driscoll became a member of the Board of Directors of the Company
in December 1995. Mr. O'Driscoll is a Principal of BankAmerica Ventures, a
venture capital firm, and a General Partner of BA Venture Partners I. Prior to
joining BankAmerica Ventures in September 1993, Mr. O'Driscoll served in the
Corporate Development department of BankAmerica Corporation from March 1992 to
September 1993. Before his employment with BankAmerica Corporation, he worked
as a financial advisor to a number of privately-held companies in the United
Kingdom from March 1991 to December 1991. Mr. O'Driscoll also serves as a
director of several private companies. Mr. O'Driscoll holds a B.Sc. in
Economics from the London School of Economics.
Richard W. Weening became a member of the Board of Directors of the Company
in March 1992. Since 1990, Mr. Weening has served as Chief Executive Officer
and Chairman of Quaestus. Previously, from 1981 to 1989, Mr. Weening was
President and Chief Executive Officer of AgriData Resources Inc., a business
information magazine and newsletter publishing company, and from 1972 to 1985,
he was President and Publisher of Raintree Publishers Inc., a multimedia
educational publishing company. In addition, Mr. Weening is currently
President and Chief Executive Officer of RPI Holdings Inc., the managing
general partner of Quaestus Limited Partnership, a principal stockholder of
the Company. Mr. Weening currently serves as Chairman of the Board and a
director of ARI Network Services, Inc. ("ARI"), and several other private
information services and media companies. Mr. Weenings holds a B.A. in
Economics and Philosophy from St. John's University.
William B. Welty became a member of the Board of Directors of the Company in
July 1994. Mr. Welty is a general partner of Volpe, Welty & Company, an
investment banking firm, and is the Chief Executive Officer of Volpe Welty
Asset Management, L.L.C. Mr. Welty is also a member of the Board of Directors
of Macromedia, Inc., a multimedia software company. Mr. Welty is also a
director of Action Technologies, Inc. and several other private companies. Mr.
Welty holds a B.S. in Industrial Engineering and a B.S. in Business
Administration from Iowa State University.
BOARD COMPOSITION
Mr. Kehler was elected by the holders of the Company's Common Stock pursuant
to the Company's Restated Certificate of Incorporation. Messrs. Bridge, Haque,
Weening, Welty and O'Driscoll were elected by the holders of the Company's
Preferred Stock pursuant to the Company's Restated Certificate of
Incorporation and a certain Amended Stockholders Agreement dated as of
December 27, 1995. See "Certain Relationships and Related Transactions."
Following the anticipated reincorporation of the Company in Delaware and
commencing at the first annual meeting of stockholders following the annual
meeting of stockholders when the Company shall have had at least 800
stockholders, the Restated Certificate of Incorporation of the Company will
provide for the Board of Directors to be divided into two classes, each with
staggered two-year terms: Class I, whose term will expire at the annual
meeting following the annual meeting of stockholders when the Company shall
have had at least 800 stockholders; and Class II, whose term will expire at
the annual meeting the following year. As a result, only one class of
directors will be elected at each annual meeting of stockholders of the
Company, with the other class continuing for the remainder of its respective
two-year term. Upon the division of the Board of Directors into two classes,
stockholders shall no longer have cumulative voting rights and the Company's
stockholders representing a majority of the shares of Common Stock outstanding
will be able to elect all of the directors. These provisions in the Company's
Restated Certificate of Incorporation may have the effect of delaying or
preventing changes in control or management of the Company. See "Description
of Capital Stock--Delaware Anti-Takeover Law and Certain Charter Provisions."
The officers of the Company are appointed annually and serve at the
discretion of the Board of Directors. Each of the Company's officers and
directors, other than nonemployee directors, devotes substantially full time
to the affairs of the Company. The Company's nonemployee directors devote such
time to the affairs of the Company as is necessary to discharge their duties.
44
<PAGE>
BOARD COMMITTEES
The Compensation Committee of the Board of Directors makes recommendations
concerning salaries and incentive compensation for employees of the Company
and administers the Company's stock plans and determines the terms and
conditions of stock option grants. The Audit Committee of the Board of
Directors reviews the results and scope of the audit and other services
provided by the Company's independent auditors and supervises the Company's
finance and accounting functions.
DIRECTOR COMPENSATION
The Company's non-employee directors will be eligible to receive stock
option grants pursuant to the Company's 1996 Directors' Stock Option Plan and
1996 Stock Option Plan. Directors do not otherwise receive compensation for
their service as directors, except that non-employee directors are reimbursed
for out-of-pocket expenses incurred in connection with attendance at meetings
of the Board of Directors and its committees. See "--Stock Plans--1996
Directors' Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following transactions have occurred between the Company and members of
the Company's Compensation Committee, or their affiliates:
Gordon J. Bridge, the Chairman of the Board of Directors, is Executive Vice
President and a director of Quaestus Management Corporation ("Quaestus"), and
Richard W. Weening, a director of the Company, is President, Chief Executive
Officer and a director of Quaestus. In addition, Charles Wright, a former
director of the Company, is Vice President and a director of Quaestus.
Quaestus is the managing general partner of Quaestus Partner Fund and Network
Partners. In addition, RPI Holdings, Inc. ("RPI"), of which Mr. Weening is the
President and Chief Executive Officer, is the managing general partner of
Quaestus Limited Partnership, ("QLP") which, collectively with Quaestus
Partner Fund and Network Partners, is the principal stockholder of the
Company. Quaestus is the manager of QLP pursuant to a contractual agreement
with RPI.
William B. Welty, a director of the Company, is a General Partner of Volpe,
Welty & Company, one of the representatives of the Underwriters, and a General
Partner of Volpe, Welty & Company Hybrid Fund I, Volpe, Welty & Company Hybrid
Fund II and Volpe, Welty & Company Hybrid Fund I SLP (collectively the "Volpe,
Welty Funds"), which are collectively a principal stockholder of the Company.
Since the beginning of the fiscal year ended December 31, 1993, the Company
has issued to Quaestus Partner Fund, Network Partners and QLP (collectively,
the "Quaestus Funds") shares of Series D, Series E and Series F Preferred
Stock which are convertible into an aggregate of 1,703,762 shares, 320,000
shares and 2,803,010 shares, respectively, of Common Stock. During the same
period, the Company has issued to the Volpe, Welty Funds shares of Series E
and Series F Preferred Stock which are convertible into an aggregate of
319,999 shares and 2,132,151 shares, respectively, of Common Stock.
On June 10, 1994 the Company issued to QLP, Mr. Weening and other
individuals affiliated with QLP, warrants which are exercisable for Shares E
Preferred Stock convertible into an aggregate of 84,000 shares of Common Stock
at an exercise price of $3.13 (on an as-converted basis) for services rendered
in connection with the Company's private placement of Series E Preferred
Stock.
From March 1995 to November 1995, the Company issued Convertible
Subordinated Secured Notes to Network Partners and the Volpe, Welty Funds in
the aggregate principal amounts of $6,599,100 and $5,401,000, respectively.
The outstanding principal amount and accrued interest under such notes were
converted into shares of Series F Preferred Stock on December 27, 1995. In
connection with the Note Purchase Agreement dated March 10, 1995, pursuant to
which these notes were issued, an aggregate of $128,982 in commitment fees was
paid to Quaestus and Volpe, Welty & Company.
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On March 9, 1992 the Company entered into a consulting agreement with QLP,
pursuant to which personnel of QLP would provide up to ten hours per week of
business and financial planning consulting services. This agreement provides
for the payment of a monthly fee of $6,500 plus reimbursement of out-of-pocket
expenses, and terminates on March 31, 1997 unless terminated earlier by QLP.
Any services performed by personnel of QLP in the capacity of a member of the
Board of Directors of the Company do not constitute services rendered under
the agreement. This agreement has been assigned by QLP to Quaestus, its
manager, and services under the agreement have been and are performed by
personnel of Quaestus. During the year ended 1995, the Company paid $184,500
for additional consulting services rendered by Quaestus, in addition to
amounts owed pursuant to the agreement.
In December 1995, the Company issued to Volpe, Welty & Company a warrant to
purchase 56,818 shares of Common Stock at an exercise price of $2.64 per share
and paid a placement fee of $375,000 for services rendered in connection with
the Company's private placement of Series F Preferred Stock in December 1995.
On February 6, 1996 the Company entered into a software license agreement
with ARI, pursuant to which ARI will pay an aggregate of $97,287 in license
fees to the Company. Messrs. Bridge and Weening both serve as directors of
ARI.
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid to the Company's Chief
Executive Officer and the Company's four other most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000
during the year ended December 31, 1995 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
--------------------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Thomas P. Kehler
President and Chief
Executive Officer........... $ 198,520 -- -- --
Michael Muller (1)
General Manager of Corporate
Online Services............. 134,420 -- -- --
Kenneth M. Ross
Chief Technical Officer and
Executive Vice President of
Development................. 135,000 $14,020(2) -- --
Paul A. Lansky
Vice President of
Operations.................. 118,560 -- -- --
Kathleen Gladney (3)
Vice President of
Operations.................. 100,000 11,645(2) -- --
</TABLE>
- --------
(1) As a result of management changes subsequent to December 31, 1995, Mr.
Muller remains an employee of the Company but is no longer an executive
officer of the Company.
(2) Represents 1994 bonus paid in January 1995.
(3) Ms. Gladney resigned from the Company in February 1996.
During the year ended December 31, 1995, no stock options were granted to
the Named Executive Officers. Subsequent to December 31, 1995, the Company has
granted options to the Named Executive Officers as follows (all of the options
described below are immediately exercisable for all option shares; however,
any shares issuable upon exercise of such options are subject to vesting
provisions):
In January 1996 and April 1996, the Company issued to Thomas P. Kehler and
Paul A. Lansky, respectively, options to purchase 375,000 shares and 15,000
shares, respectively, in each case at an exercise price
46
<PAGE>
of $0.50 per share. Pursuant to the terms of these options, 16.7% of the
shares issuable under such options vest on the first anniversary of the grant
date, with the remaining shares vesting in equal monthly installments over the
following five years thereafter. However, the vesting schedule of each such
option may be accelerated to a four year vesting schedule upon the achievement
of certain performance objectives.
In January 1996 and April 1996, the Company issued to Kenneth M. Ross
options to purchase 75,000 shares and 50,000 shares, respectively, in each
case at an exercise price of $0.50 per share. Pursuant to the terms of these
options, 25% of the shares issuable under such options vest on the first
anniversary of the grant date, with the remaining shares vesting in equal
monthly installments over the following three years thereafter.
In addition, subsequent to December 31, 1995 the Company has granted options
to the following executive officers who are not named in the Summary
Compensation Table above. Pursuant to the terms of such options, 25% of the
shares issuable under such options vest on the first anniversary of the grant
date, with the remaining shares vesting in equal monthly installments over the
following three years thereafter. In January 1996, the Company granted options
to purchase 95,000 shares and 52,500 shares to Craig D. Norris, Vice President
of Professional Services, and Patrick D. Quirk, Vice President of Sales,
respectively, each at an exercise price of $0.50 per share. In April 1996, the
Company granted options to purchase 197,500 shares and 50,000 shares to Barton
S. Foster, Vice President of Marketing, and Mr. Norris, respectively, each at
an exercise price of $0.50 per share. In June 1996, the Company issued an
option to purchase 175,000 shares at an exercise price of $9.60 per share to
Joseph G. Girata, Vice President of Finance and Administration and Chief
Financial Officer.
In January 1996 and April 1996, the Company issued to Gordon J. Bridge,
Chairman of the Board, options to purchase 125,000 shares and 25,000 shares,
respectively, each at an exercise price of $0.50 per share. Pursuant to the
terms of these options, 16.67% of the shares issuable upon exercise of each
such option vest on the first anniversary of the grant date, with the
remaining shares vesting in equal monthly installments over the following five
years; provided, however, that such vesting schedules may be accelerated to a
total of four years upon the achievement of certain performance objectives.
In June 1996, the Company entered into an agreement with Henry V. Morgan,
the former Executive Vice President of Finance and Administration of the
Company and Chief Financial Officer. Under this agreement, Mr. Morgan's
employment with the Company shall terminate no later than November 15, 1996.
In addition, the Company has agreed to accelerate vesting with respect to
15,000 option shares held by Mr. Morgan, provided that such accelerated
options shall be forfeited if Mr. Morgan voluntarily terminates his employment
prior to August 15, 1996. If Mr. Morgan is an employee of the Company on
August 15, 1996, vesting shall accelerate on an additional 5,000 option
shares. However, for each month or portion thereof that Mr. Morgan remains an
employee of the Company after August 15, 1996, 1,667 of the 5,000 additional
accelerated option shares shall be cancelled or forfeited.
47
<PAGE>
The following table sets forth certain information as of December 31, 1995
and for the year then ended with respect to stock options exercised by the
Named Executive Officers.
AGGREGATED OPTIONS IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL AT FISCAL
YEAR-END YEAR-END(1)
SHARES ---------------- ----------------
ACQUIRED VALUE EXERCISABLE / EXERCISABLE /
NAME ON EXERCISE REALIZED(1) UNEXERCISABLE(2) UNEXERCISABLE(2)
---- ----------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Thomas P. Kehler........ 20,000 $6,000 203,615/0 $43,908/$0
Michael Muller.......... -- -- 0/0 0/ 0
Kenneth M. Ross......... -- -- 118,499/0 24,390/ 0
Paul A. Lansky.......... -- -- 37,000/0 0/ 0
Kathleen Gladney(4)..... -- -- 42,500/0 6,339/ 0
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the underlying
securities at year-end, minus the exercise price. The fair market value of
the Company's Common Stock as of such date was determined to be $0.50 per
share based upon a number of factors, including the Company's book value,
historical and projected financial results, prices of recent sales of the
Company's Preferred Stock, and the status and uncertainties associated
with recent and planned product introductions. The Company did not find it
practicable to, and did not attempt to, assign relative weights to the
factors underlying this determination.
(2) These stock options, which were granted under the 1989 Stock Option Plan,
are immediately exercisable for all option shares; however, any shares
purchased upon exercise of such options are subject to repurchase by the
Company at the original exercise price per share upon the termination of
the optionee's employment with the Company. The vesting schedules for each
option is determined by the Administrator of the 1989 Stock Option Plan.
(3) As a result of management changes subsequent to December 31, 1995, Mr.
Muller remains an employee of the Company but is no longer an executive
officer of the Company.
(4) Ms. Gladney resigned from the Company in February 1996.
STOCK PLANS
1989 Stock Option Plan
The Company's 1989 Stock Option Plan (the "1989 Option Plan") provides for
the granting to employees (including officers and employee directors) of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and for the granting to
employees and consultants (including nonemployee directors) of nonstatutory
stock options. 2,700,000 shares of Common Stock have been authorized for
issuance under the 1989 Option Plan. The 1989 Option Plan is administered by
the Board of Directors or a committee of the Board (the "Administrator"). As
of May 31, 1996 options to purchase a total of 114,181 shares of Common Stock
had been exercised and options to purchase a total of 2,288,881 shares were
outstanding. The Company does not intend to issue any additional options under
the 1989 Option Plan. The term of a stock option may not exceed ten years.
Options granted to each employee, consultant or director under the 1989 Option
Plan generally are immediately exercisable, and the shares purchasable under
such options are subject to repurchase by the Company at their original
exercise price, which repurchase rights lapse in a series of installments
determined by the Administrator, which generally are at the rate of 25% of the
total number of shares one year from the date of grant, and approximately
2.08% each month thereafter, subject to continued service as an employee,
consultant or director. The exercise price of all incentive stock options
granted under the 1989 Option Plan must be at least equal to the fair market
value of the Common Stock of the Company on the date of grant. The exercise
price of all nonstatutory stock options must equal at least 85% of the fair
market
48
<PAGE>
value of the Common Stock on the date of grant. The exercise price of any
incentive stock option granted to an optionee who owns stock representing more
than 10% of the voting power of the Company's outstanding capital stock (a
"10% Stockholder") must equal at least 110% of the fair market value of the
Common Stock on the date of grant. Payment of the exercise price may be made
in cash, promissory notes or other consideration determined by the Board of
Directors or a committee of the Board of Directors. If the Company
consolidates or merges with or into another corporation, each option shall be
assumed or an equivalent option substituted by the successor corporation,
unless the Board of Directors makes the option fully exercisable in lieu of
such assumption or substitution in which case each option will be fully
exercisable for 15 days from the date of notice of such acceleration. The
Board of Directors or a committee thereof may terminate or amend the 1989
Option Plan at any time.
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Option Plan") was adopted by
the Board of Directors and stockholders in April 1996. An aggregate of
2,500,000 shares of the Company's Common Stock are reserved for issuance under
the 1996 Option Plan. As of May 31, 1996 no options issued under the 1996
Option Plan had been exercised and options to purchase a total of 322,500 were
outstanding. Subsequent to May 31, 1996, options to purchase an aggregate of
344,000 shares have been granted.
The purposes of the 1996 Option Plan are to attract and retain the best
available personnel for positions of substantial responsibility to the
Company, to provide such persons with additional incentive and to promote the
success of the Company's business. The 1996 Option Plan provides for the
granting to employees (including officers and employee directors) of
"incentive stock options" within the meaning of Section 422 of the Code, and
for the granting to employees, non-employee directors and consultants of
nonstatutory stock options. However, to the extent an optionee would have the
right in any calendar year to exercise for the first time one or more
incentive stock options for shares having an aggregate fair market value
(under all plans of the Company and determined for each share as of the date
the option to purchase the share was granted) in excess of $100,000, any such
excess options shall be treated as nonstatutory stock options. The 1996 Option
Plan provides that the maximum number of shares which may be granted to any
optionee during any fiscal year shall be 1,000,000, subject to adjustment as
provided in the 1996 Option Plan.
The 1996 Option Plan may be administered by the Board of Directors or a
committee of the Board (the "Administrator"). The Administrator determines the
terms of options granted under the 1996 Option Plan, including the number of
shares subject to the option, exercise price, term and exercisability. The
exercise price of all incentive stock options granted under the 1996 Option
Plan must be at least equal to the fair market value of the Common Stock of
the Company on the date of grant. The exercise price of any incentive stock
option granted to an optionee who owns stock representing more than 10% of the
voting power of the Company's outstanding capital stock (a "10% Stockholder")
must equal at least 110% of the fair market value of the Common Stock on the
date of grant. Payment of the exercise price may be made in cash, promissory
notes or other consideration determined by the Administrator.
The Administrator determines the term of options. The term of an incentive
stock option may not exceed ten years, or five years in the case of a 10%
Stockholder. No option may be transferred by the optionee other than by will
or the laws of descent or distribution. Each option may be exercised during
the lifetime of the optionee only by such optionee. The Administrator
determines when options become exercisable. Options granted to each employee
under the Stock Option Plan generally are immediately exercisable, and the
shares purchasable under such options are subject to repurchase by the Company
at their original exercise price, which repurchase rights lapse in a series of
installments determined by the Administrator, which generally are at the rate
of 25% of the total number of shares one year from the date of grant, and
approximately 2.08% each month thereafter.
If the Company consolidates or merges with or into another corporation, then
each option will be assumed or an equivalent option substituted by the
successor corporation, unless the Administrator determines, in the exercise of
its sole discretion, that each option will accelerate in connection with such
transaction, in which case
49
<PAGE>
each option will be exercisable for 30 days from notice of such acceleration.
The Administrator has the authority to amend or terminate the 1996 Option Plan
as long as such action does not adversely affect any outstanding option and
provided that stockholder approval may be required to the extent necessary for
the 1996 Option Plan to be qualified under Rule 16b-3 of the Securities
Exchange Act of 1934 and certain provisions of the Code. If not terminated
earlier, the 1996 Option Plan will terminate in 2006.
1996 Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in June 1996 and is expected to be submitted
to the Company's stockholders for approval in June 1996. A total of 500,000
shares of Common Stock has been reserved for issuance under the Purchase Plan.
The Purchase Plan, which is intended to qualify under Section 423 of the Code,
generally will be implemented in a series of offering periods of 24 months
duration with new offering periods (other than the first offering period)
commencing on or about January 1 and July 1 of each year. Each offering period
will consist of four consecutive purchase periods of six months duration, with
the last day of each period being designated a purchase date. The first such
offering period is expected to commence on the effective date of this offering
and continue through June 30, 1998, with the first purchase date occurring on
December 31, 1996, and subsequent purchase dates to occur every six months
thereafter. The Purchase Plan will be administered by the Board of Directors
or by a committee appointed by the Board. Employees (including officers and
employee directors) of the Company, or of any majority owned subsidiary
designated by the Board, are eligible to participate if they are employed by
the Company or any such subsidiary for at least 20 hours per week and more
than five months per year. The Purchase Plan permits eligible employees to
purchase Common Stock through payroll deductions, which may not exceed 10% of
an employee's compensation, at a price equal to the lower of 85% of the fair
market value of the Company's Common Stock at the beginning of the offering
period or the purchase date. If the fair market value of the Common Stock on a
purchase date is less than the fair market value at the beginning of the
offering period, a new 24-month offering period will automatically begin on
the first business day following the purchase date with a new fair market
value. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on
termination of employment with the Company. In addition, participants may
decrease their level of payroll deductions once during an offering period.
The Purchase Plan provides that in the event of a merger of the Company with
or into another corporation or a sale of substantially all of the Company's
assets, each right to purchase stock under the plan will be assumed or an
equivalent right substituted by the successor corporation unless the Board of
Directors shortens the offering period so that employees' rights to purchase
stock under the plan are exercised prior to the merger or sale of assets. The
Board of Directors has the power to amend or terminate the Purchase Plan as
long as such action does not adversely affect any outstanding rights to
purchase stock thereunder and provided that stockholder approval may be
required to the extent necessary for the Purchase Plan to be qualified under
Rule 16b-3 of the Securities Exchange Act of 1934 and certain provisions of
the Code. If not terminated earlier, the Purchase Plan will have a term of 20
years.
1996 Directors' Stock Option Plan
The 1996 Directors' Stock Option Plan (the "Directors' Plan") was adopted by
the Board of Directors in June 1996 and is expected to be submitted for
approval by the Company's stockholders in June 1996. A total of 250,000 shares
of Common Stock has been reserved for issuance under the Directors' Plan. The
Directors' Plan provides for the grant of nonstatutory stock options to
nonemployee directors of the Company. The Directors' Plan is designed to work
automatically without administration; however, to the extent administration is
necessary, it will be performed by the Board of Directors.
The Directors' Plan provides that each person who first becomes a
nonemployee director of the Company after the date of effectiveness of this
offering will be granted an option to purchase 20,000 shares of Common Stock
(a "First Option") on the date on which the optionee first becomes a
nonemployee director of the Company. Thereafter, on the date of each Annual
Meeting of the Company's stockholders following which a
50
<PAGE>
nonemployee director is serving on the Board of Directors, each such
nonemployee director will be granted an option to purchase 5,000 shares of
Common Stock, provided that on such date, he or she shall have served on the
Company's Board of Directors for at least six months prior to the date of such
Annual Meeting.
The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one nonemployee director, but does
specify the number of shares that may be included in any grant and the method
of making a grant. No option granted under the Directors' Plan is transferable
by the optionee other than by will or the laws of descent or distribution or
pursuant to a qualified domestic relations order (as defined in the Code), and
each option is exercisable, during the lifetime of the optionee, only by such
optionee. The Directors' Plan provides that each First Option granted
thereunder becomes exercisable in equal installments on the first four
anniversaries of the grant date and that each subsequent option becomes
exercisable in full on the first anniversary of the date of grant. The
exercise price of all stock options granted under the Directors' Plan will be
equal to the fair market value of a share of the Company's Common Stock on the
date of grant of the option, which is defined to be the closing price of the
Company's Common Stock on the Nasdaq National Market on such date. Options
granted under the Directors' Plan have a term of ten years.
In the event of the dissolution or liquidation of the Company, a sale of all
or substantially all of the assets of the Company, the merger of the Company
with or into another corporation in which more than 50% of the shares of the
Company entitled to vote are exchanged, each nonemployee director shall have
either (i) a reasonable time within which to exercise the option, including
any part of the option that would not otherwise be exercisable, prior to the
effectiveness of such dissolution, liquidation, sale, merger or
reorganization, at the end of which time the option shall terminate, or (ii)
the right to exercise the option, including any part that would not otherwise
be exercisable, or receive a substitute option with comparable terms, as to an
equivalent number of shares of stock of the corporation succeeding the Company
or acquiring its business by reason of such dissolution, liquidation, sale,
merger or reorganization. The Board of Directors may amend or terminate the
Directors' Plan; provided, however, that no such action may adversely affect
any outstanding option, and the provisions regarding the grant of options
under the plan may be amended only once in any six-month period, other than to
comport with changes in the tax laws or the Employee Retirement Income
Security Act of 1974, as amended. If not terminated earlier, the Directors'
Plan will have a term of ten years.
Repricing of Options Granted under 1989 Stock Option Plan
On December 14, 1995, the Board of Directors approved the repricing of
certain options outstanding under the 1989 Stock Option Plan. Pursuant to this
option repricing program, the Company offered to all optionees (including
executive officers and directors) holding outstanding options under the
Company's 1989 Stock Option Plan the opportunity to exchange options with an
exercise price exceeding $0.50 per share for new stock options with an
exercise price of $0.50 per share (which was the fair market value per share
of the Company's Common Stock as determined by the Board of Directors on the
date of the Board of Director's action). All other terms of the new stock
options remained substantially the same as the surrendered options (including
number of shares, vesting and expiration date). Options representing an
aggregate of 386,018 shares of Common Stock were repriced pursuant to this
program.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
In connection with the reincorporation of the Company in Delaware prior to
the closing of this offering, the Company plans to adopt provisions in its
Restated Certificate of Incorporation that limit the liability of its
directors for monetary damages arising from a breach of their fiduciary duty
as directors to the fullest extent permitted by the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission. The limitation
of monetary liability also does not apply to liabilities arising under the
federal securities laws.
The Company's Bylaws will provide that the Company will indemnify its
directors and officers under certain circumstances, including circumstances in
which indemnification may otherwise be discretionary under
51
<PAGE>
Delaware law. The Company intends to enter into indemnification agreements
with its officers and directors containing provisions which are in some
respects broader than the specific indemnification provisions contained in the
Delaware General Corporation Law. The indemnification agreements may require
the Company, among other things, to indemnify its officers and directors
against certain liabilities that may arise by reason of their status or
service as officers or directors (other than liabilities arising from willful
misconduct of a culpable nature) and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted.
EMPLOYMENT AGREEMENTS
On October 19, 1995, the Company entered into a letter agreement with Gordon
J. Bridge to offer Mr. Bridge the position of Chairman of the Board of
Directors, which provides that Mr. Bridge will receive an annual base salary
of $150,000 and an option to purchase 195,000 shares of Common Stock of the
Company for his services as Chairman of the Board of Directors and for
services related to business development of the Company. This agreement also
provides that, in the event that Mr. Bridge is terminated by the Company from
such position without cause, he will receive one year's salary plus any
bonuses that the Compensation Committee determines are due to him. On January
1, 1996 and April 24, 1996, Mr. Bridge was granted additional options of
125,000 shares and 25,000 shares, respectively. If such termination occurs
prior to November 1, 1996, 50% of the unvested portion of such options to
purchase an aggregate of 345,000 shares will become vested, and if such
termination occurs on or after November 1, 1996, 100% of the unvested portion
of such stock options will become vested. In addition, in the event of a
change of control of the Company, 100% of the unvested portion of such options
to purchase an aggregate of 345,000 shares will become vested.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain stock option grants to directors and executive officers of the
Company are described herein under the caption "Management--Executive
Compensation."
The Company's Restated Certificate of Incorporation to be filed in
connection with the reincorporation of the Company in Delaware will provide
that the holders of the Company's Common Stock, voting together as a single
class, have the right to elect two members of the Company's Board of
Directors, and the holders of the Company's Preferred Stock, voting together
as a single class, have the right to elect the remaining eight members of the
Company's Board of Directors. Pursuant to its terms, this provision will
expire upon the completion of the offering. Pursuant to the terms of an
Amended Stockholders Agreement dated as of December 27, 1995 among the Company
and certain of its principal stockholders (the "Stockholders Agreement'), such
stockholders have agreed to cast their votes in any election of directors so
as to maintain on the Board of Directors at all times three directors
designated by entities affiliated with Quaestus Management Corporation and one
director designated by each of the following: entities affiliated with Volpe,
Welty & Company, entities affiliated with BankAmerica Ventures, Norwest Equity
Partners, V, 21st Century Communications Partners, L.P. and Michael Muller.
Pursuant to its terms, the Stockholders Agreement will automatically terminate
upon the closing of this Offering.
Since the beginning of the fiscal year ended December 31, 1993, the Company
issued, in private placement transactions (collectively, the "Private
Placement Transactions"), shares of Preferred Stock as follows: shares of
Series D Preferred Stock convertible into an aggregate of 1,775,253 shares of
Common Stock at $2.14 per share of Common Stock in April 1993, July 1993 and
October 1993; shares of Series E Preferred Stock convertible into an aggregate
of 899,999 shares of Common Stock at $3.13, per share of Common Stock in June
1994 and March 1995; and shares of Series F Preferred Stock convertible into
an aggregate of 11,090,612 shares of Common Stock at $2.64 per share of Common
Stock in December 1995 and January 1996.
52
<PAGE>
The following table summarizes the shares of Preferred Stock purchased by
executive officers, directors and 5% stockholders of the Company and persons
and entities associated with them in the Private Placement Transactions: The
share and per share data below assume the reincorporation of the Company in
Delaware and the automatic conversion of the Company's outstanding Preferred
Stock into Common Stock upon completion of the offering.
<TABLE>
<CAPTION>
SERIES D SERIES E SERIES F
PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK
--------- --------- ---------
Entities Affiliated with Directors
----------------------------------
<S> <C> <C> <C>
Entities affiliated with BankAmerica Ventures
(Rory O'Driscoll)(1)........................... -- -- 1,136,363
Norwest Equity Partners, V (Promod Haque)....... -- -- 1,818,182
Entities affiliated with Quaestus Management
Corporation
(Gordon J. Bridge, Richard W. Weening)(2)...... 1,703,762 320,000 2,803,010
Entities affiliated with Volpe, Welty & Company
(William B. Welty)(3).......................... -- 319,999 2,132,151
<CAPTION>
Other 5% Stockholders
---------------------
<S> <C> <C> <C>
RRE Connect Investors, L.P...................... -- -- 1,174,242
Entities affiliated with 21st Century
Communications Partnerships
(Michael Marocco)(4)........................... -- -- 1,515,150
Michael Muller(5)............................... 71,491 64,000 360,000
</TABLE>
- --------
(1) Includes shares held by BankAmerica Ventures and BA Venture Partners I.
(2) Includes shares held by Quaestus Limited Partnership, Quaestus Partner
Fund and Network Partners.
(3) Includes shares held by Volpe, Welty & Company Hybrid Fund I, Volpe, Welty
& Company Hybrid Fund II and Volpe, Welty & Company Hybrid Fund I SLP.
(4) Includes shares held by 21st Century Communications Partners, L.P., 21st
Century Communications T-E Partners, L.P. and 21st Century Foreign
Communications Partners, L.P.
(5) Includes shares held by Muller Family Trust, Muller Children's Trust,
Muller Family Partners, L.P., Muller Capital, L.P., Erik M. Muller,
Kristofer M. Muller and Marissa J. Muller.
The Company has entered into a number of relationships and transactions with
the entities affiliated with Quaestus Management Corporation and Volpe, Welty
& Company, set forth in the table above. Such relationships and transactions
are described in "Management--Compensation Committee Interlocks and Insider
Participation."
On January 16, 1996 the Board of Directors granted to Thomas P. Kehler, the
Company's President and Chief Executive Officer, and to Gordon J. Bridge, the
Chairman of the Board of Directors, options to purchase 375,000 shares and
125,000 shares, respectively, of Common Stock, each at an exercise price of
$0.50 per share. Pursuant to the terms of these options, 16.67% of the shares
issuable upon exercise of such options vest on the first anniversary of the
grant date, with the remaining shares vesting in equal monthly installments
over the following five years; provided, however, that such vesting schedules
may be accelerated to a total of four years upon the achievement of certain
performance objectives. In addition, on April 24, 1996 the Board of Directors
granted to Mr. Bridge an option to purchase an additional 25,000 shares at an
exercise price of $0.50 per share, with the same vesting provisions as the
foregoing options.
On December 22, 1995 and January 12, 1996 the Company entered into a
software license agreement and software maintenance agreement, respectively,
with First Data Resources ("FDR"), a wholly-owned subsidiary of First Data
Corporation, pursuant to which FDR will pay an aggregate of approximately
$217,280 in software license and maintenance fees. First Data Corporation is a
limited partner of RRE Connect Investors, L.P., a principal stockholder of the
Company.
In connection with the resignations in June 1996 of Richard H. Lussier and
Terry R. McGowan from the Company's Board of Directors, the Company has agreed
to accelerate the vesting of options to purchase 9,642 shares and 14,061
shares held by Messrs. Lussier and McGowan, respectively.
53
<PAGE>
In connection with the resignation in June 1996 of Henry V. Morgan, the
former Executive Vice President of Finance and Administration and Chief
Financial Officer of the Company, the Company has entered into an agreement
with Mr. Morgan providing for the accelerated vesting of certain stock options
held by Mr. Morgan. See "Management--Executive Compensation."
The Company intends to enter into indemnification agreements with its
officers and directors containing provisions which may require the Company,
among other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities arising from willful misconduct of a
culpable nature) and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of June 12, 1996, and as
adjusted to reflect the sale by the Company of the shares offered hereby and
conversion of all outstanding shares of Preferred Stock into shares of Common
Stock upon completion of this offering: (i) by each person known by the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) by each director of the Company who beneficially owns shares,
(iii) by each of the officers of the Company named under "Management--Summary
Compensation Table," and (iv) by all officers and directors of the Company as
a group.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED(1)
------------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OFFERING OFFERING
- --------------------------------------- --------------------- -------- ----------
<S> <C> <C> <C>
Entities affiliated with 6,239,630 38.6% 33.4%
Quaestus Management
Corporation(3)...............
330 E. Kilbourn Avenue
Milwaukee, WI 53202
Entities affiliated with 2,508,968 15.9% 13.7%
Volpe, Welty & Company(4)....
One Maritime Plaza
San Francisco, CA 94111
Norwest Equity Partners, 1,818,182 11.5% 10.0%
V(5).........................
245 Lytton Ave.
Suite 250
Palo Alto, CA 94301
Entities affiliated with 21st 1,515,150 9.6% 8.3%
Century Communications
Partnerships(6)..............
GM Building
767 Fifth Avenue
New York, NY 10153
RRE Connect Investors, L.P. .. 1,174,242 7.4% 6.4%
126 East 56th St., 22nd Floor
New York, NY 10022
Entities affiliated with 1,136,363 7.2% 6.2%
BankAmerica Ventures(7)......
950 Tower Lane, Suite 700
Foster City, CA 94404
Gordon J. Bridge(8)........... 345,000 2.1% 1.9%
Promod Haque(5)............... 1,818,182 11.5% 10.0%
Thomas P. Kehler(9)........... 609,864 3.7% 3.2%
Paul A. Lansky(10)............ 56,500 * *
Kathleen Gladney(11).......... 18,988 * *
Michael Muller(12)............ 1,179,099 7.5% 6.5%
Rory T. O'Driscoll(7)......... 1,136,363 7.2% 6.2%
Kenneth M. Ross(13)........... 243,499 1.5% 1.3%
Richard W. Weening(14)........ 5,884,955 37.2% 32.1%
William B. Welty(4)........... 2,508,968 15.9% 13.7%
All officers and directors as
a group (15 persons)(15).... 14,529,900 81.4% 71.4%
</TABLE>
- --------
* Less than 1%.
55
<PAGE>
(1) Applicable percentage of beneficial ownership is based on 15,762,812
shares of Common Stock outstanding as of June 12, 1996 and 18,262,812
shares of Common Stock outstanding after the completion of the offering,
together with applicable options and warrants for such stockholder.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting and
investment power. Shares of Common Stock subject to the warrants and
options currently exercisable, or exercisable within 60 days after June
12, 1996, are deemed outstanding for computing the percentage ownership
of the person holding such options, but are not deemed outstanding for
computing the percentage ownership of any other person. Unless otherwise
indicated, the address of each of the named individuals is: c/o CONNECT,
Inc., 515 Ellis Street, Mountain View, CA 94043.
(2) To the Company's knowledge, 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, subject to community property laws
where applicable and the information contained in the footnotes to this
table.
(3) Includes 4,718,135 shares held by Network Partners, 6,774 shares held by
Quaestus Limited Partnership and 1,094,047 shares held by Quaestus
Partner Fund (collectively, the "Quaestus Funds"). Also includes 40,000
shares, 1,999 shares, 345,000 shares, 23,100 shares, 3,375 shares and
6,300 shares issuable upon exercise of options or warrants held by
Network Partners, Quaestus Limited Partnership, Gordon J. Bridge, Richard
W. Weening, Charles Wright and Terrence J. Leahy, respectively,
exercisable within 60 days of June 12, 1996. Mr. Weening is President and
Chief Executive Officer and a director of Quaestus Management
Corporation, and Mr. Bridge is Executive Vice President and a director of
Quaestus Management Corporation. Mr. Wright, a former director of the
Company, and Mr. Leahy are both Vice Presidents and Directors of Quaestus
Management Corporation. Quaestus Management Corporation is the managing
general partner of Network Partners and Quaestus Partner Fund. In
addition, Mr. Weening is the President and Chief Executive Officer of RPI
Holdings, Inc., the managing general partner of Quaestus Limited
Partnership, which is managed by Quaestus Management Corporation. Mr.
Weening disclaims beneficial ownership of the shares held by such
entities, except to the extent of his proportionate interest therein. Mr.
Bridge disclaims any beneficial ownership of the shares held by such
entities.
(4) Includes 1,888,707 shares held by Volpe, Welty & Company Hybrid Fund I,
197,946 shares held by Volpe, Welty & Company Hybrid Fund II and 365,497
shares held by Volpe, Welty & Company Hybrid Fund I SLP (collectively,
the "Volpe, Welty Funds"). Also includes 56,818 shares issuable upon
exercise of a warrant to purchase Common Stock held by Volpe, Welty &
Company. William B. Welty is a general partner of Volpe, Welty & Company
and the fund manager and a general partner of the Volpe, Welty Funds. Mr.
Welty disclaims beneficial ownership of the shares held by such entities
except to the extent of his proportionate partnership interest therein.
(5) Includes 1,818,182 shares held by Norwest Equity Partners V, L.P. Promod
Haque is a Vice President of Norwest Venture Capital Management, Inc. and
a general partner of two general partnerships that are the general
partners of Norwest Equity Partners V, L.P. Mr. Haque disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate partnership interest therein.
(6) Includes 1,027,272 shares held by 21st Century Communications Partners,
L.P., 349,621 shares held by 21st Century Communications T-E Partners,
L.P. and 138,257 shares held by 21st Century Foreign Communications
Partners, L.P. (collectively the "21st Century Communications
Partnerships").
(7) Includes 1,022,727 shares held by BankAmerica Ventures and 113,636 shares
held by BA Venture Partners I. Rory T. O'Driscoll is a Principal of
BankAmerica Ventures and a General Partner of BA Venture Partners I. Mr.
O'Driscoll disclaims beneficial ownership of the shares held by such
entities except to the extent of his proportionate general partnership
interest in BA Venture Partners I.
(8) Includes 345,000 shares issuable upon exercise of stock options
exercisable within 60 days of June 12, 1996. A portion of the shares
issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over time.
56
<PAGE>
(9) Includes 31,250 shares issued upon exercise of stock options and 578,614
shares issuable upon exercise of stock options exercisable within 60 days
of June 12, 1996. A portion of the shares issued or issuable upon
exercise of stock options is subject to repurchase by the Company at the
original exercise price in the event of termination of employment, which
repurchase right lapses over time.
(10) Includes 4,500 shares issued upon exercise of stock options and 52,000
shares issuable upon exercise of stock options exercisable within 60 days
of June 12, 1996. A portion of the shares issued or issuable upon
exercise of stock options is subject to repurchase by the Company at the
original exercise price in the event of termination of employment, which
repurchase right lapses over time.
(11) Includes 18,988 shares issued upon exercise of stock options. Ms. Gladney
resigned from the Company in February 1996.
(12) Includes 35,953 shares, 15,357 shares and 15,357 shares held by Michael
Muller's children, Erik M. Muller, Kristofer M. Muller and Marissa J.
Muller, respectively. Mr. Muller disclaims beneficial ownership of such
shares. Also includes 250,991 shares and 117,841 shares held by the
Muller Family Trust and the Muller Children's Trust, respectively, both
of which Mr. Muller is co-trustee, and 406,100 shares and 337,500 shares
held by Muller Family Partners, L.P. and Muller Capital, L.P.,
respectively, both of which Mr. Muller is a general partner. Mr. Muller
disclaims beneficial ownership of the shares held by such entities except
to the extent of his proportionate partnership interest in Muller Family
Partners, L.P. and Muller Capital, L.P.
(13) Includes 243,499 shares issuable upon exercise of stock options
exercisable within 60 days of June 12, 1996. A portion of the shares
issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over time.
(14) Includes 718,135 shares held by Network Partners, 6,774 shares held by
Quaestus Limited Partnership and 1,094,947 shares held by Quaestus
Partner Fund (collectively, the "Quaestus Funds"). Also includes 23,100
shares, 40,000 shares and 1,999 shares issuable upon exercise of warrants
held by Mr. Weening, Network Partners and Quaestus Limited Partnership,
respectively. Mr. Weening disclaims beneficial ownership of the shares
held by the Quaestus Funds, except to the extent of his proportionate
interest therein.
(15) Includes 177,500 shares issued upon exercise of stock options and
1,950,970 shares issuable upon exercise of stock options exercisable
within 60 days of June 12, 1996. A portion of the shares issued or
issuable upon exercise of stock options is subject to repurchase by the
Company at the original exercise price in the event of termination of
employment, which repurchase right lapses over time. Also includes
121,917 shares issuable upon exercise of warrants.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Following the closing of the sale of the shares offered hereby, the
authorized capital stock of the Company will consist of 40,000,000 shares of
Common Stock, $0.001 par value per share, and 10,000,000 shares of Preferred
Stock, $0.001 par value per share. As of June 12, 1996, there were 15,762,812
shares held by 119 record holders of the Company's Common Stock assuming no
exercise of options or warrants after June 12, 1996.
COMMON STOCK
Upon completion of the offering, the holders of Common Stock are entitled to
one vote per share on all matters to be voted upon by the stockholders.
Subject to preferences that may be applicable to any outstanding Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior rights of Preferred Stock, if
any, then outstanding. The Common Stock has no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund
provisions available to the Common Stock. All outstanding shares of Common
Stock are fully paid and non-assessable.
PREFERRED STOCK
Upon completion of the offering, the Company will have 10,000,000 authorized
shares of "blank check" Preferred Stock with such designations, rights and
preferences as may be determined from time to time by the Board of Directors,
without any further vote or action by the stockholders. The rights of the
holders of the Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The 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 a
majority of the outstanding voting stock of the Company, thereby delaying,
deferring or preventing a change in control of the Company. Furthermore, such
Preferred Stock may have other rights, including economic rights, senior to
the Common Stock, and as a result, the issuance of such Preferred Stock could
have a material adverse effect on the market value of the Common Stock.
Although the Company has no present intention to issue any additional shares
of its Preferred Stock, there can be no assurance that the Company will not do
so in the future. See "Delaware Anti-Takeover Law and Certain Charter
Provisions."
WARRANTS
As of June 12, 1996, warrants to purchase 219,155 shares of the Company's
Common Stock were outstanding at a weighted average exercise price of $3.30
per share. These warrants, which were issued primarily in connection with
certain financing transactions, expire on various dates from October 1, 1997
to June 30, 1999.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of approximately 15,449,634 shares of Common Stock (the
"Registrable Securities") or their transferees are entitled to certain rights
with respect to the registration of such shares under the Securities Act.
These rights are provided under the terms of agreements between the Company
and the holders of Registrable Securities. If at any time, the Company
registers any of its Common Stock, the holders of Registrable Securities are
entitled to include their shares of Common Stock in the registration. A
holder's right to include shares in an underwritten registration is subject to
the ability of the underwriters to limit the number of shares included in the
offering. All registration expenses must be borne by the Company and all
selling expenses relating to Registrable Securities must be borne by the
holders of the securities being registered. In addition, such holders may
require the Company to use its best efforts to file a registration statement
under the Securities Act at the Company's expense with respect to their shares
of Common Stock, subject to certain limitations.
58
<PAGE>
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Certain provisions of Delaware law and the Company's Restated Certificate of
Incorporation could make more difficult the acquisition of the Company by
means of a tender offer, a proxy contest or otherwise and the removal of
incumbent officers and directors. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of the Company to first
negotiate with the Company. The Company believes that the benefits of
increased protection of the Company's potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure
the Company outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals could result in an
improvement of their terms.
The Company will be subject to the provisions of Section 203 of the Delaware
law. In general, the statute prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date that the person became an interested
stockholder unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved
in a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior,
did own) 15% or more of the corporation's voting stock. This provisions may
have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the Company's stockholders.
Commencing at the first annual meeting of stockholders following the annual
meeting of stockholders when the Company shall have had at least 800
stockholders, the Restated Certificate of Incorporation of the Company will
provide for the Board of Directors to be divided into two classes, with
staggered two-year terms. As a result, only one class of directors will be
elected at each annual meeting of stockholders of the Company, with the other
class continuing for the remainder of its respective two-year term.
Thereafter, stockholders shall no longer have cumulative voting rights and the
Company's stockholders representing a majority of the shares of Common Stock
outstanding will be able to elect all of the directors. The classification of
the Board of Directors and elimination of cumulative voting make it more
difficult for the Company's existing stockholders to replace the Board of
Directors as well as for another party to obtain control of the Company by
replacing the Board of Directors. Since the Board of Directors has the power
to retain and discharge officers of the Company, these provisions could also
make it more difficult for existing stockholders or another party to effect a
change in management. See "Management."
The Company's Restated Certificate of Incorporation will provide that
stockholder action can be taken only at an annual or special meeting of
stockholders and may not be taken by written consent. The Bylaws will provide
that special meetings of stockholders can be called only by the Board of
Directors, the Chairman of the Board, if any, the President of the Company and
holders of 10% of the votes entitled to be cast at a meeting. Moreover, the
business permitted to be conducted at any special meeting of stockholders is
limited to the business brought before the meeting by the Board of Directors,
the Chairman of the Board, if any, the President of the Company or any such
10% holder. The Bylaws will set forth an advance notice procedure with regard
to the nomination, other than by or at the direction of the Board of
Directors, of candidates for election as directors and with regard to business
to be brought before a meeting of stockholders of the Company.
The Company's Restated Certificate of Incorporation will contain a provision
requiring the affirmative vote of the holders of at least two-thirds of the
voting stock of the Company to amend the foregoing provisions of the Restated
Certificate of Incorporation and Bylaws.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Corporation. Its telephone number is (800) 835-8778.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 18,262,812 shares of
Common Stock outstanding, assuming no exercise of options or warrants after
June 12, 1996. Of these shares, the 2,500,000 shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 of the Securities Act. The remaining 15,762,812 shares
outstanding upon completion of this offering will be "restricted securities"
as that term is defined under Rule 144 (the "Restricted Shares"). Sales of
Restricted Shares in the public market, or the availability of such shares for
sale, could adversely affect the market price of the Common Stock.
All directors and officers and certain other stockholders of the Company
have agreed with the Underwriters that, for a period of 180 days after the
effective date of the registration statement, they will not offer to sell or
otherwise sell, dispose of or grant rights with respect to any shares of
Common Stock, now owned or hereafter acquired directly by such holders or with
respect to which they have the power of disposition, otherwise than with the
prior written consent of Lehman Brothers Inc. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements
will not be salable until the agreements expire. Any early waiver of the lock-
up agreement by the underwriters, which, if granted, could permit sales of a
substantial number of shares and could adversely affect the trading price of
the Company's shares, may not be accompanied by an advance public announcement
by the Company. See "Underwriting."
Taking into account the lock-up agreements, the number of shares that will
be available for sale in the public market under the provisions of Rules 144,
144(k) and 701, including certain shares issuable upon exercise of warrants,
will be as follows: (i) approximately 140,419 Restricted Shares, of which
40,419 shares are issuable upon exercise of warrants, will be eligible for
sale immediately after the effective date of the registration statement, (ii)
approximately 3,875,801 additional Restricted Shares (as well as an additional
2,955,281 shares and 178,736 shares issuable upon exercise of outstanding
options and warrants, respectively) will be eligible for sale beginning 180
days after the effective date of the registration statement, subject in some
cases to certain volume limitations and vesting provisions, and (iii) the
remaining 11,787,011 Restricted Shares will become eligible for public resale
following expiration of the lock-up agreements at various times over a period
of less than two years following the completion of this offering, subject in
some cases to vesting provisions and volume and manner of sale limitations.
The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule
changes will be enacted. If enacted, such rule change would cause
substantially all of the remaining shares to be eligible for public resale
upon expiration of the 180-day lock-up agreements.
Beginning 90 days after the effective date of the registration statement,
certain shares issued or issuable upon exercise of options granted by the
Company prior to the effective date of the registration statement will also be
eligible for sale in the public market pursuant to Rule 701 under the
Securities Act, subject to pre-existing lockup agreements. In general, Rule
701 permits resales of shares issued pursuant to certain compensatory benefit
plans and contracts commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, in
reliance upon Rule 144 but without compliance with certain restrictions,
including the holding period requirements, contained in Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least two years, including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the number of shares
of Common Stock then outstanding 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 certain
manner of sale provisions and notice requirements and to the availability of
current public information about the Company. In addition, a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned for at least three years the
shares proposed to be sold, would be entitled to
60
<PAGE>
sell such shares under Rule 144(k) without regard to the requirements
described above. The Company is unable to estimate accurately the number of
Restricted Shares that will be sold under Rule 144 since this will depend in
part on the market price for the Common Stock, the personal circumstances of
the seller and other factors.
In connection with the offering, the Company intends to file a registration
statement under the Securities Act covering approximately 5,136,273 shares of
Common Stock subject to outstanding options or reserved for issuance under the
1989 and 1996 Option Plans and the Directors' Plan and 250,000 shares of
Common Stock reserved for issuance under the Purchase Plan. Such registration
statement is expected to be filed approximately 180 days after the completion
of this offering. Accordingly, shares registered under such registration
statement will, subject to Rule 144 volume limitations and the lapsing of the
Company's repurchase options, be available for sale in the open market, except
to the extent that such shares are subject to vesting restrictions with the
Company or the contractual restrictions described above. Pursuant to Rule 144
and upon expiration of the two-year holding period, an additional 132,536
shares of Common Stock will be available for sale upon the exercise of
warrants outstanding. As of June 12, 1996, options to purchase 2,288,881
shares were issued and outstanding under the 1989 Option Plan, options to
purchase 666,400 shares were issued and outstanding under the 1996 Option
Plan, no options were granted under the Directors' Plan, and no shares had
been issued under the Purchase Plan. See "Management--Stock Plans."
61
<PAGE>
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement (the "Registration Statement") of which this Prospectus
forms a part, the Underwriters named below (the "Underwriters"), for whom
Lehman Brothers Inc., Volpe, Welty & Company and UBS Securities LLC are acting
as representatives (the "Representatives"), have severally agreed to purchase
from the Company, and the Company have agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite the name of each
such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Lehman Brothers Inc. .............................................
Volpe, Welty & Company............................................
UBS Securities LLC................................................
---------
Total.......................................................... 2,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase shares of Common Stock are subject to certain conditions, and that
if any of the foregoing shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all the shares of Common
Stock agreed to be purchased by the Underwriters must be so purchased.
The Company has been advised that the Underwriters propose to offer the
shares of Common Stock directly to the public at the initial public offering
price set forth on the cover page of this Prospectus, and to certain selected
dealers (who may include the Underwriters) at such public offering price less
a selling concession not in excess of $ per share. The selected dealers may
reallow a concession not in excess of $ per share to certain brokers and
dealers. After the initial public offering, the public offering price, the
concession to selected dealers and reallowance may be changed by the
Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Company has granted to the Underwriters an option to purchase up to an
aggregate of 375,000 additional shares of Common Stock, respectively,
exercisable solely to cover over-allotments, at the offering price to the
public less the underwriting discounts and commissions, shown on the cover
page of this Prospectus. Such option may be exercised at any time until 30
days after the date of the Underwriting Agreement. To the extent that the
option is exercised, each Underwriter will be committed, subject to certain
conditions, to purchase a number of the additional shares of Common Stock
proportionate to such Underwriter's initial commitment as indicated in the
preceding tables.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price will be negotiated among the Company and the
Underwriters. The primary factors considered in determining the initial public
offering price of the Common Stock, in addition to prevailing market
conditions, will be the Company's historical performance and capital
structure, estimates of business potential and earnings prospects of the
Company, an assessment of the Company, an assessment of the Company's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
Holders of 15,762,812 shares of Common Stock of the Company have agreed that
they will not, subject to certain limited exceptions, directly or indirectly,
offer, sell or otherwise dispose of any shares of Common Stock
62
<PAGE>
or any securities convertible into or exchangeable or exercisable for any such
shares for a period of 180 days after the effective date of the offering
without the prior written consent of the Company or the Representatives. The
Company has agreed to refrain from releasing any stockholder from such lock-up
agreements without the prior written consent of Lehman Brothers Inc. on behalf
of the Representatives. The Representatives reserve the right to release any
or all of such stockholders from their obligations under such lock-up
agreements at any time without notice. Any such release would increase the
number of shares available for sale into the public market, which could have a
material adverse effect on the price of the Common Stock. In addition, the
Company has agreed that it will not, subject to certain limited exceptions,
directly or indirectly, offer, sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exchangeable for such
shares without the prior written consent of the Representatives for 180 days
after the effective date of the offering.
The Representatives have informed the Company that they do not intend to
confirm sales of Common Stock offered hereby to any accounts over which they
exercise discretionary authority.
William B. Welty, a director of the Company, is affiliated with Volpe, Welty
& Company, a Representative and a principal Underwriter of this offering. In
addition, as more fully set forth in "Certain Relationships and Related
Transactions," Volpe, Welty & Company holds a warrant to purchase 56,818
shares of the Company's Common Stock, and the Volpe, Welty Funds hold an
aggregate of 319,999 shares of Series E Preferred Stock and 2,132,151 shares
of Series F Preferred Stock, respectively. As a result of such affiliations
with the Company, Volpe, Welty & Company may be deemed to be an "affiliate" of
the Company within the meaning of Schedule E of the Bylaws of the National
Association of Securities Dealers, Inc. ("Schedule E"). Consequently, this
offering will be conducted in accordance with the provisions of Schedule E and
the initial public offering price will be no higher than that recommended by a
"qualified independent underwriter" as defined therein. In accordance with the
requirements of Schedule E, Lehman Brothers Inc., another principal
Underwriter of this offering (the "Independent Underwriter"), will serve in
such role and recommend a price in compliance with such requirements. The
Independent Underwriter in its role of "qualified independent underwriter" has
performed due diligence investigations and reviewed and participated in the
preparation of this Prospectus and the Registration Statement of which this
Prospectus forms a part. The Independent Underwriter will not receive any
additional fees for serving as a "qualified independent underwriter" in
connection with this offering.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Venture Law Group, A
Professional Corporation, Menlo Park, California. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Palo Alto,
California.
EXPERTS
The financial statements of CONNECT at December 31, 1994 and 1995, and for
each of the three years in the period ended December 31, 1995 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
63
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the 1933 Act with
respect to the shares of Common Stock offered hereby. This Prospectus 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 the
Company and such Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as a part thereof. Statements contained
in this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete, and in each instance, if such
contract or document is filed as an exhibit, reference is made to the copy of
such document filed as an exhibit to the Registration Statement. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Room 1228,
Seven World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in
New York, New York and Chicago, Illinois, at prescribed rates.
64
<PAGE>
CONNECT, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CONNECT, Inc.
We have audited the accompanying balance sheets of CONNECT, Inc. as of
December 31, 1994 and 1995, and the related statements of operations,
stockholders' equity and cash flows for the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide 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 CONNECT, Inc., at December
31, 1994 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
San Jose, California
February 23, 1996, except for Note 14, as to which the date is June , 1996
- -------------------------
The foregoing report is in the form that will be signed upon the completion
of the reincorporation of the Company in Delaware and the related exchange of
common and preferred shares as described in Note 14 in the Notes to the
Financial Statements.
Ernst & Young LLP
San Jose, California June 11, 1996
F-2
<PAGE>
CONNECT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
-------------------------- MARCH 31, MARCH 31,
1994 1995 1996 1996
------------ ------------ ------------ -------------
ASSETS (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equiva-
lents................ $ 1,593,871 $ 12,928,911 $ 11,275,331
Accounts receivable,
net.................. 728,945 1,009,624 694,282
Prepaid expenses and
other current as-
sets................. 347,316 471,819 605,626
Deferred tax assets... 77,000 -- --
------------ ------------ ------------
Total current assets.... 2,747,132 14,410,354 12,575,239
Property and equipment,
net.................... 2,146,184 3,263,030 3,336,454
Deposits and other as-
sets................... 267,763 389,145 470,654
------------ ------------ ------------
Total assets........ $ 5,161,079 $ 18,062,529 $ 16,382,347
============ ============ ============
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Current liabilities:
Notes payable......... $ 193,565 $ 194,938 $ 132,729
Notes payable to
stockholders......... 126,350 -- --
Accounts payable...... 756,668 621,806 1,104,758
Accrued payroll and
related expenses..... 237,634 305,772 510,000
Other accrued liabili-
ties................. 499,656 708,211 2,043,642
Deferred revenue...... 2,985,818 422,984 1,122,537
Current portion of
extended vendor
liabilities.......... 419,565 252,192 251,485
Obligations under cap-
ital leases.......... 313,389 602,292 594,949
------------ ------------ ------------
Total current liabili-
ties................... 5,532,645 3,108,195 5,760,100
Notes payable......... 115,822 67,009 55,361
Long-term portion of
extended vendor
liabilities.......... 803,963 656,269 592,398
Long-term obligations
under capital
leases............... 246,852 912,902 763,964
Commitments and contin-
gencies
Stockholders' equity:
Preferred stock (pro
forma):
Authorized shares--
10,000,000 -- -- -- $ --
Issued and
outstanding--none...
Convertible preferred
stock:
Authorized shares--
55,544,540 (none pro
forma)
Issued and
outstanding shares--
3,148,464,
14,112,899 and
14,472,899
(unaudited) at
December 31, 1994
and 1995 and March
31, 1996,
respectively, with
an aggregate
liquidation
preference at March
31, 1996 of
$69,998,268 (none
issued and
outstanding pro
forma).............. 8,059,888 37,041,259 37,981,345 --
Common stock:
Authorized shares--
50,000,000,
(40,000,000 pro
forma)
Issued and
outstanding shares--
369,985, 398,624 and
448,946 (unaudited)
at December 31, 1994
and 1995 and March
31, 1996,
respectively ($.001
par value,
15,679,496 shares
pro forma).......... 7,093,557 7,107,474 7,125,153 15,679
Additional paid-in
capital (pro forma).. -- -- -- 45,090,819
Accumulated deficit... (16,691,648) (30,830,579) (35,895,974) (35,895,974)
------------ ------------ ------------ -----------
Total stockholders' eq-
uity (deficit)......... (1,538,203) 13,318,154 9,210,524 $ 9,210,524
------------ ------------ ------------ ===========
Total liabilities and
stockholders' equity... $ 5,161,079 $ 18,062,529 $ 16,382,347
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONNECT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License............... $ 1,014,687 $ 1,627,294 $ 287,471 $ 35,402 $ 404,237
Service............... 2,847,246 6,344,746 8,285,427 3,008,082 1,058,641
----------- ----------- ------------ ----------- -----------
Total revenue....... 3,861,933 7,972,040 8,572,898 3,043,484 1,462,878
Cost of revenue:
License............... 134,260 162,471 139,961 39,843 134,430
Service............... 1,640,888 4,425,893 5,451,893 1,913,906 2,208,388
----------- ----------- ------------ ----------- -----------
Total cost of
revenue............ 1,775,148 4,588,364 5,591,854 1,953,749 2,342,818
Operating expenses:
Research and
development.......... 1,573,090 1,622,081 4,810,166 449,070 1,174,197
Sales and marketing... 858,740 1,354,844 3,978,361 590,204 2,480,112
General and
administrative....... 1,303,134 1,946,731 3,329,400 692,662 545,521
Termination of
distribution rights.. -- -- 4,057,292 4,057,292 --
----------- ----------- ------------ ----------- -----------
Total operating
expenses........... 3,734,964 4,923,656 16,175,219 5,789,228 4,199,830
----------- ----------- ------------ ----------- -----------
Loss from operations.... (1,648,179) (1,539,980) (13,194,175) (4,699,493) (5,079,770)
Interest expense........ (205,459) (239,943) (1,002,761) (109,316) (96,850)
Interest income and
other income (expense),
net.................... (66,945) 41,388 32,005 (28,553) 111,225
----------- ----------- ------------ ----------- -----------
Loss before income
taxes.................. (1,920,583) (1,738,535) (14,164,931) (4,837,362) (5,065,395)
Provision (benefit) for
income taxes........... -- 26,000 (26,000) -- --
----------- ----------- ------------ ----------- -----------
Net loss................ $(1,920,583) $(1,764,535) $(14,138,931) $(4,837,362) $(5,065,395)
=========== =========== ============ =========== ===========
Pro forma net loss per
share.................. $ (0.79) $ (0.27) $ (0.28)
============ =========== ===========
Shares used in computing
pro forma net loss per
share.................. 17,863,668 17,858,838 17,905,922
============ =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONNECT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
---------------------- ------------------ ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY (DEFICIT)
---------- ----------- ------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992................... 1,118,080 $ 2,248,713 213,222 $7,034,217 $(13,006,530) $(3,723,600)
Issuance of Series D
preferred stock for
cash................. 244,231 635,000 -- -- -- 635,000
Exercise of employee
stock options........ -- -- 26,302 5,989 -- 5,989
Conversion of notes
payable to
stockholders to
Series D preferred
stock, net of
issuance costs of
$2,681............... 1,157,581 3,007,030 -- -- -- 3,007,030
Common stock issued
for services......... -- -- 6,538 17,000 -- 17,000
Net loss.............. -- -- -- -- (1,920,583) (1,920,583)
---------- ----------- ------- ---------- ------------ -----------
Balance at December 31,
1993................... 2,519,892 5,890,743 246,062 7,057,206 (14,927,113) (1,979,164)
Issuance of Series E
preferred stock for
cash................. 437,715 1,532,001 -- -- -- 1,532,001
Exercise of employee
stock options........ -- -- 123,923 36,351 -- 36,351
Conversion of notes
payable to
stockholders to
Series E preferred
stock, net of
issuance costs of
$30,856.............. 190,857 637,144 -- -- -- 637,144
Net loss.............. -- -- -- -- (1,764,535) (1,764,535)
---------- ----------- ------- ---------- ------------ -----------
Balance at December 31,
1994................... 3,148,464 8,059,888 369,985 7,093,557 (16,691,648) (1,538,203)
Conversion of notes
payable to
stockholders and
accrued interest for
Series D preferred
stock................ 58,821 152,933 -- -- 152,933
Termination of
distribution rights
settled in Series E
preferred stock...... 175,000 1,417,500 -- -- -- 1,417,500
Issuance of Series F
preferred stock for
cash and notes, net
of issuance costs of
$917,888............. 10,730,614 27,410,938 -- -- -- 27,410,938
Exercise of employee
stock options and
other................ -- 28,639 13,917 -- 13,917
Net loss.............. -- -- -- -- (14,138,931) (14,138,931)
---------- ----------- ------- ---------- ------------ -----------
Balance at December 31,
1995................... 14,112,899 37,041,259 398,624 7,107,474 (30,830,579) 13,318,154
Issuance of Series F
preferred stock for
cash (unaudited)..... 360,000 940,086 -- -- -- 940,086
Exercise of employee
stock options
(unaudited).......... -- -- 50,322 17,679 -- 17,679
Net loss (unaudited).. -- -- -- -- (5,065,395) (5,065,395)
---------- ----------- ------- ---------- ------------ -----------
Balance at March 31,
1996 (unaudited)..... 14,472,899 $37,981,345 448,946 $7,125,153 $(35,895,974) $ 9,210,524
========== =========== ======= ========== ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONNECT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(1,920,583) $(1,764,535) $(14,138,931) $(4,837,362) $(5,065,395)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 279,787 473,351 987,829 239,124 388,658
Common stock issued
for services......... 17,000 -- -- -- --
Termination of
distribution rights
settled in Series E
preferred stock...... -- -- 1,417,500 1,417,500 --
Deferred income tax... -- (77,000) 77,000 77,000 --
Changes in assets and
liabilities:
Accounts
receivable......... (405,746) 77,059 (280,679) (278,746) 315,342
Prepaid expenses and
other current as-
sets............... (179,588) (111,038) (124,503) (415,811) (133,807)
Deposits and other
assets............. -- (173,263) (215,882) (9,138) (81,509)
Accounts payable,
accrued payroll and
related expenses,
other accrued
liabilities, and
extended vendor
liabilities........ 63,268 65,162 (52,153) 523,527 1,958,033
Deferred revenue.... 98,628 2,887,190 (2,562,834) (1,109,299) 699,553
----------- ----------- ------------ ----------- -----------
Net cash provided by
(used in) operating
activities............. (2,047,234) 1,376,926 (14,892,653) (4,393,205) (1,919,125)
INVESTING ACTIVITIES
Purchases of property
and equipment.......... (38,588) (1,627,126) (1,772,591) (506,569) (462,082)
Purchase of equipment
for sale and
leaseback.............. (609,229) -- -- -- --
----------- ----------- ------------ ----------- -----------
Net cash used in
investing activities... (647,817) (1,627,126) (1,772,591) (506,569) (462,082)
FINANCING ACTIVITIES
Proceeds from sale and
leaseback of equipment
at net book value...... 573,657 -- 1,197,393 1,197,393 --
Proceeds from issuance
of common stock........ 5,989 36,351 13,917 12,831 17,679
Proceeds from issuance
of preferred stock..... 635,000 1,532,001 28,328,826 -- 940,086
Issuance costs
associated with
conversion of notes
payable and issuance of
preferred stock........ (2,681) (30,856) (917,888) -- --
</TABLE>
See accompanying notes.
F-6
<PAGE>
CONNECT, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Proceeds from issuance
of notes payable
converted into Series E
preferred stock........ $ -- $ 668,000 $ -- $ -- $ --
Proceeds from issuance
of notes payable....... 2,163,509 43,090 133,534 2,933,534 --
Repayment of principal
on notes payable....... (654,058) (149,677) (180,974) (42,753) (73,857)
Repayment of principal
under capital lease
obligations............ (103,796) (318,987) (574,524) (202,391) (156,281)
---------- ---------- ----------- ----------- -----------
Net cash provided by
financing activities... 2,617,620 1,779,922 28,000,284 3,898,614 727,627
---------- ---------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (77,431) 1,529,722 11,335,040 (1,001,160) (1,653,580)
Cash and cash
equivalents at
beginning of period.... 141,580 64,149 1,593,871 1,593,871 12,928,911
---------- ---------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 64,149 $1,593,871 $12,928,911 $ 592,711 $11,275,331
========== ========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION
Cash paid during the
year for interest...... $ 241,777 $ 239,943 $ 373,948 $ 109,316 $ 96,850
Cash paid for income
taxes.................. $ -- $ 8,500 $ -- $ -- $ --
SUPPLEMENTAL NONCASH
INVESTING AND FINANCING
INFORMATION
Notes payable to
stockholders, including
$40,116 of accrued
interest, converted
into Series D preferred
stock.................. $3,009,711 $ -- $ -- $ -- $ --
Notes payable to
stockholders, including
$26,583 of accrued
interest, converted
into Series D preferred
stock.................. $ -- -- $ 152,933 $ 152,933 $ --
Incurrence of capital
lease obligations...... $ 627,071 $ 355,955 $ 332,084 $ 332,084 $ --
</TABLE>
See accompanying notes.
F-7
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION
CONNECT, Inc. (the Company) was incorporated in the state of California in
April 1987. The Company designs, develops, markets, and supports industrial
strength, scaleable software applications for Internet-based interactive
commerce. The Company's application software and support services are designed
to reduce the time and overall cost for businesses to implement and maintain a
secure sales, marketing and order capture capability on the World Wide Web.
The Company's software supports key functions necessary for large-scale
interactive commerce, including user registration, multimedia catalog and
content management, dynamic merchandising, order capture and management,
security, payment processing, enterprise integration and systems
administration.
The Company has recently initiated a new business strategy focused on
providing packaged software applications for Internet-based interactive
commerce. As a result, the Company is decreasing its reliance on historical
sources of revenue and its current and future business prospects are dependent
upon the successful development, market acceptance and sales of two recently
developed products. The Company's business must be considered in light of the
risks, expenses and problems frequently encountered by companies in an early
stage of development, particularly companies in new and rapidly evolving
markets such as the Internet. Specifically, such risks include the lack of
acceptance of the Company's products and services by its target customers,
development of equal or superior products or services by competitors, the
failure of electronic commerce in general, and Internet-based electronic
commerce in particular, to be broadly adopted as a sales, marketing and
distribution medium, the Company's inability to develop and enhance
competitive products or to successfully commercialize any such products, and
the inability to identify, attract, retain and motivate qualified personnel.
There can be no assurance that the Company will succeed in addressing such
risks.
Basis of Presentation
For the year ended December 31, 1995 and three months ended March 31, 1996,
the Company had net losses of approximately $14,139,000 and $5,065,000,
respectively, and has incurred substantial losses to date.
The Company plans to raise additional funds through public or private equity
financings or other sources. However, there can be no assurance that such
funds will be available or available on terms favorable to the Company or its
stockholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Interim Financial Information
The financial statements at March 31, 1996 and for the three months ended
March 31, 1995 and 1996 are unaudited but include all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for
a fair presentation of financial position and operating results. Operating
results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for any future periods.
F-8
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
Concentration of Credit Risk
The Company licenses products and provides services to a variety of
customers. The Company generally does not perform credit evaluations or
require collateral on individual customer service or license transactions that
involve relatively small amounts. However, credit worthiness on larger service
or license transactions are evaluated on a case-by-case basis. At December 31,
1994, 1995, and March 31, 1996, the Company had an allowance for potential
credit losses of approximately $174,000, $320,000 and $333,000, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity (at the date of purchase) of three months or less to be the
equivalent of cash for the purpose of the balance sheet presentation and
statement of cash flows. The Company has classified all debt securities as
available-for-sale. Available-for-sale securities are carried at an amount
which approximates fair value. Unrealized gains and losses, if material, are
reported in a separate component of stockholders' equity. Realized gains and
losses and declines in value judged to be other-than-temporary are included in
interest expense, net.
All available-for-sale securities mature in three months or less and are
included in cash and cash equivalents. Available for sale securities at
December 31, 1994 and 1995, and March 31, 1996, totaled $999,773, $12,314,990
and $8,598,934, respectively, and are comprised of certain U.S. government
obligations. At December 31, 1994 and 1995 and at March 31, 1996, gross
unrealized gains and losses were not significant. There were no gross realized
gains or losses on available-for-sale securities for the year ended December
31, 1994, 1995, and for the three months ended March 31, 1995 and 1996.
Property and Equipment
Property and equipment are stated at cost and are depreciated on a straight-
line basis over their estimated useful lives of three to seven years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the lease term or the estimated useful life of the improvements.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Computer equipment...... $2,063,044 $2,184,932 $1,750,724
Equipment under capital
leases................. 979,562 2,589,818 3,470,702
Furniture and fixtures.. 130,741 173,206 185,171
Leasehold emprovements.. 70,256 400,322 403,763
---------- ---------- ----------
3,243,603 5,348,278 5,810,360
Accumulated depreciation
and amortization....... 1,097,419 2,085,248 2,473,906
---------- ---------- ----------
$2,146,184 $3,263,030 $3,336,454
========== ========== ==========
</TABLE>
Revenue Recognition and Deferred Revenue
The Company derives revenue from software license fees and services. License
fees primarily consist of revenue from licenses of the Company's application
software. Service revenue consists of fees from
F-9
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
implementation (including customization of licensed software products),
training, maintenance and support, contract software development projects, and
system hosting and online services.
The Company's revenue recognition policy is in compliance with the
provisions of the American Institute of Certified Public Accountants'
Statements of Position 91-1, "Software Revenue Recognition."
License Revenue
The Company licenses application software to end-users under non-cancelable
license agreements. License revenue is recognized on shipment of the
application software provided there are no significant remaining obligations
and collectability is deemed probable by management. License fees under
contracts requiring significant implementation, including customization, of
licensed software products are recognized on the percentage-of-completion
method based on the ratio of incurred costs to total estimated costs. Actual
costs and gross margins on such contracts could differ from management's
estimates and such differences could be material to the financial statements.
Service Revenue
Fees for implementation services are recognized as the services are
performed, except for such fees under fixed price contracts which are
recognized on the percentage-of-completion method as noted above. At December
31, 1994, 1995, and at March 31, 1996, the Company had an excess of billings
over costs incurred and estimated earnings on uncompleted implementation
services of approximately $0, $295,000, and $1,109,000, respectively, which is
included in deferred revenue.
The Company also enters into maintenance agreements in connection with
licenses of its application software under which revenue is recognized ratably
over the term of the agreement, generally one year. Usage fees related to the
Company's private online services, system hosting services, training and other
consulting services are recognized as the services are performed.
Revenue from contract software development projects, in which the Company
developed specific technology for its customers, has been recognized on the
percentage-of-completion method based on the ratio of incurred costs to total
estimated costs. The Company entered into two such contracts in 1994 for the
development of certain technology. These contracts were terminated in 1995.
The Company recognized service revenue in connection with these contracts of
approximately $2,551,000 and $4,867,000 for the years ended December 31, 1994
and 1995, respectively. Related cost of service revenue in connection with
these contracts was approximately $1,725,000 and $1,615,000, for the years
ended December 31, 1994 and 1995, respectively. At December 31, 1994 and 1995,
the Company had an excess of billings over costs incurred and estimated
earnings on the two uncompleted contract software development projects of
approximately $2,590,000 and $0, respectively, which is included in deferred
revenue.
Deferred Revenue
Deferred revenue includes billings or collections in excess of revenue
recognized on development arrangements, deferred maintenance, and other
payments received in advance of services to be performed.
F-10
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
Research and Development
Research and development expenditures are generally charged to operations as
incurred. The Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent
to the establishment of technological feasibility. Based on the Company's
product development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between the
completion of the working model and the point at which the product is ready
for general release have been insignificant. Accordingly, the Company has
charged all such costs to research and development expenses in the
accompanying statements of operations.
Advertising and Promotion Costs
The Company's policy is to expense advertising and promotion costs as they
are incurred. The Company's advertising and promotion expenses were
approximately $0, $238,706, and $372,000, in 1993, 1994, and 1995,
respectively, and $87,049 and $251,000 for the three months ended March 31,
1995 and 1996, respectively.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Net Loss Per Share
Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding. Common equivalent shares
from convertible preferred stock (using the if-converted method) and from
stock options and warrants (using the treasury stock method) have been
included in the computation when dilutive. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued by the Company at prices below the assumed public offering price
during the twelve-month period prior to the offering have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method at the assumed initial public offering price.) The
difference between primary and fully diluted earnings per share is not
material for all periods presented.
Per share information calculated on the above noted basis is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net loss................ $ (0.14) $ (0.13) $ (1.03) $ (0.35) $ (0.37)
========== ========== ========== ========== ==========
Shares used in computing
net loss per share..... 13,565,121 13,643,503 13,717,010 13,712,180 13,759,264
========== ========== ========== ========== ==========
</TABLE>
F-11
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
Pro Forma Net Loss Per Share and Unaudited Pro Forma Stockholders' Equity
Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from
convertible preferred stock that will automatically convert upon the closing
of the Company's initial public offering (using the if-converted method). If
the offering contemplated by this Prospectus is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into an aggregate of 15,230,550 shares of common
stock, based on the number of shares of convertible preferred stock
outstanding at March 31, 1996.
Unaudited pro forma stockholders' equity at March 31, 1996, as adjusted for
the assumed conversion of the preferred stock, is disclosed on the balance
sheet.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The Company will be required to adopt SFAS 123 in the year
ending December 31, 1996. It is the Company's intention to continue to account
for employee stock options in accordance with Accounting Principles Board
Opinion No. 25 and to adopt the "discosure only" alternative described in SFAS
123.
3. NOTES PAYABLE
The Company has a $450,000 promissory note with a financing company.
Principal and interest are payable monthly over three years, and the note
matures on August 1, 1996. The note bears interest at the rate of 20.2%. At
December 31, 1994, 1995, and at March 31, 1996, the principal outstanding was
$266,297, $108,056, and $62,532 respectively. The note is guaranteed by a
stockholder and officer of the Company.
The Company has three additional notes payable with remaining principal
balances outstanding of $32,450, $23,863, and $97,578 at December 31, 1995 and
$14,557, $23,863 and $87,138 outstanding at March 31, 1996. These unsecured
notes bear interest at 9.19%, 11%, and 11% and mature on December 16, 1996,
December 15, 1997, and March 1, 1998, respectively.
4. EXTENDED VENDOR LIABILITIES
During 1992 and 1993, the Company renegotiated payment terms with a number
of its largest vendors. The resulting agreements bear interest at rates
ranging from 0% to 8%, and certain of the repayment agreements extend beyond
one year.
In April 1994, the Company terminated its service and license agreement with
a vendor, resulting in a reduction of $253,656 in extended vendor liabilities.
In addition, the repayment terms for certain amounts due the vendor were
extended from three to five years. Beginning in December 1994, the total
liability due the vendor of $1,000,000 will be due in monthly installments,
plus interest, at an annual rate of 6% through November 1999.
F-12
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
Principal payments due in each calendar year as of December 31, 1995 and
March 31, 1996 relating to the above agreements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
1996.................................................. $252,192 $187,614
1997.................................................. 256,468 256,468
1998.................................................. 212,624 212,624
1999.................................................. 187,177 187,177
-------- --------
$908,461 $843,883
======== ========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
The lease agreement for the Company's primary facility expires December 9,
1999. At December 31, 1995 and March 31, 1996, the future minimum lease
payments related to operating lease agreements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
<S> <C> <C>
1996................................................. $ 392,317 $ 293,986
1997................................................. 400,334 400,334
1998................................................. 317,891 317,891
1999................................................. 308,125 308,125
---------- ----------
$1,418,667 $1,320,336
========== ==========
</TABLE>
Rental expense charged to operations for the years ended December 31, 1993,
1994, and 1995, were approximately $240,300, $307,058, $317,690, respectively,
and $121,974 and $95,592 for the three months ended March 31, 1995 and 1996,
respectively.
Capital Leases
The Company leases certain equipment under capital leases having terms of 36
to 42 months. Accumulated depreciation on these assets was approximately
$231,000, $988,848 and $1,121,189 at December 31, 1994, 1995, and March 31,
1996, respectively.
The following is a schedule by year of future minimum lease payments under
capital leases as of December 31, 1995 and March 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
<S> <C> <C>
1996................................................ $ 852,132 $ 631,140
1997................................................ 707,896 707,896
1998................................................ 384,650 384,650
---------- ----------
Total minimum lease payments........................ 1,944,678 1,723,686
Amount representing interest........................ 429,484 364,773
---------- ----------
1,515,194 1,358,913
Less current portion................................ 602,292 594,949
---------- ----------
$ 912,902 $ 763,964
========== ==========
</TABLE>
F-13
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
Contingencies
On March 25, 1996, one of the Company's licensees of OneServer (the
Customer) was sued, along with 21 other defendants in the Federal District
Court in Connecticut, by E-data Corporation ("E-data"). This litigation is
similar to another proceeding commenced by E-data in the Federal District
Court in New York City against multiple other defendants. In the litigation
against the Company's licensee, E-data alleges that each defendant is
infringing E-data's U.S. patents in connection with the provision of products
online. The Customer recently tendered the defense of this litigation to the
Company. The Company is currently reviewing the infringement claims made by E-
data against the Customer. Based upon its initial review of the E-data patent
and the nature of the claims and the Company's indemnity obligations, and
after consultation with counsel, management believes that the resolution of
this matter will not have a material adverse on the Company's business,
operating results and financial condition. However, given the early stage of
the litigation and the complex technical issues and uncertainties in patent
litigation, the results of these proceedings, including any potential
settlement, are uncertain and there can be no assurance that E-data will not
prevail in the current litigation or that it will not bring similar claims
against other licensees of the Company. If E-data were to prevail, the
Customer could be required to pay damages to E-data for the infringement of
its patent and enter into a licensing or royalty arrangement. There can be no
assurance that the amount of such damages would not be material or that such
license or royalty arrangement would be available on acceptable terms. Under
the terms of its license with the Customer, the Company may be required to
defend against the E-data claim and to indemnify the Customer for some or all
of its losses in connection with the litigation and any settlement or
judgement, including ongoing license fees. In addition, whether or not the
Company were to prevail in any defense of the Customer, such litigation could
be time consuming and costly to defend.
The Company relies in part on certain technology which it licenses from
third parties, including encryption technology from RSA. RSA is currently in
litigation with Cylink Corporation ("Cylink") pursuant to which Cylink alleges
that RSA's encryption technology infringes certain Cylink patents and asserts
that RSA has no right to sublicense such technology. If it is determined that
RSA is unable to sublicense this technology to the Company, the Company may be
deemed to be infringing Cylink's patent rights. The Company is unable to
predict the outcome of the dispute between RSA and Cylink, but if the Company
were deemed to be infringing Cylink's patent rights, the Company could be
required to pay damages to Cylink and possibly enter into a royalty or
licensing agreement with Cylink. Such royalty or licensing agreement, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition.
F-14
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
6. CONVERTIBLE PREFERRED STOCK
Convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Authorized shares--55,544,540
Series C preferred stock:
Authorized shares--2,240,130
Issued and outstanding shares--1,118,080
(Aggregate liquidation preference at March
31, 1996--$2,973,481).................... $2,248,713 $ 2,248,713 $ 2,248,713
Series D preferred stock:
Authorized shares--2,921,266
Issued and outstanding shares--1,401,812
at December 31, 1994 and 1,460,633 at
December 31, 1995 and March 31, 1996
(Aggregate liquidation preference at March
31, 1996--$4,960,514).................... 3,642,030 3,794,963 3,794,963
Series E preferred stock:
Authorized shares--1,757,144
Issued and outstanding shares--628,572 at
December 31, 1994, and 803,572 at
December 31, 1995 and March 31, 1996
(Aggregate liquidation preference at March
31, 1996--$3,205,483).................... 2,169,145 3,586,645 3,586,645
Series F preferred stock:
Authorized shares--24,313,000
Issued and outstanding shares--10,730,614
and 11,090,614 at December 31, 1995 and
March 31, 1996, respectively
(Aggregate liquidation preference at March
31, 1996--$59,128,790)................... -- 27,410,938 28,351,024
Series F-a preferred stock:
Authorized shares--24,313,000
Issued and outstanding shares--none....... -- -- --
---------- ----------- -----------
Convertible preferred stock................. $8,059,888 $37,041,259 $37,981,345
========== =========== ===========
</TABLE>
Commencing January 1, 1996, the holders of Series C, D, E, and F convertible
preferred stock are entitled to receive cumulative dividends, when and if
declared by the Board of Directors, out of legally available funds, at a per
annum rate of $0.16 per share for Series C preferred stock, $0.208 per share
for Series D preferred stock, $0.28 per share for Series E preferred stock,
and $0.212 per share for Series F preferred stock, payable before any
dividends may be paid on common stock. Such dividends shall accumulate
quarterly on each share whether or not earned or declared.
The preferred stock is convertible at any time to common stock by
multiplying the number of preferred shares outstanding with the conversion
ratio in effect for such series. As of December 31, 1995, the conversion ratio
for Series C, D, E, and F is 1.31, 1.22, 1.12, and 1.00, respectively. The
conversion price may also be adjusted if there are changes in capitalization
or certain subsequent sales of stock occur at prices per share lower than the
conversion price of the Series C, D, E, and F preferred stock in effect at the
time of such sale. The conversion of Series C, D, E, and F preferred stock is
automatic upon an underwritten public offering of the
F-15
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
Company's common stock, subject to certain minimum aggregate gross proceeds.
As of December 31, 1995 and March 31, 1996, an adequate amount of shares of
common stock have been reserved for issuance upon conversion. Preferred
stockholders are entitled to vote in the same manner and with the same effect
as if their stock had been converted into common stock.
In the event of liquidation, the preferred stockholders are entitled to a
per share liquidation preference distribution of $2.62 per share for Series C
preferred stock, $3.16 per share for Series D preferred stock, $3.92 per share
for Series E preferred stock, and $5.28 per share for Series F preferred
stock, plus all accumulated and unpaid dividends.
7. EMPLOYEE BENEFIT PLAN
The Company maintains an employee savings plan that qualifies under Section
401(k) of the Internal Revenue Code (the Code) for all of its full-time
employees. The plan allows employees to make specified percentage pretax
contributions up to the maximum dollar limitation prescribed by the Code. The
Company has the option to contribute to the plan; however, there have been no
contributions to date.
8. STOCK OPTION PLAN
The Company has a 1989 Stock Option Plan (the Plan) under which the
committee, as appointed by the Board of Directors, may grant incentive or
nonqualified stock options. The Plan authorizes the issuance of up to
2,700,000 shares of common stock. Options are generally granted at an exercise
price of no less than the fair value per share of the common stock on the date
of grant as determined by the Board of Directors. The options issued under the
Plan are immediately exercisable; however, shares acquired pursuant to the
exercise of these options generally vest over four years, expiring no later
than ten years from the date of grant. Unvested shares may be repurchased by
the Company at the original purchase price.
F-16
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
The Company accounts for its stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
In February 1996, the Company offered to each employee with stock options
having an exercise price greater than $0.50 per share the opportunity to amend
the terms of such options and reduce the exercise price to $0.50 per share (an
amount not less than fair market value, as deemed by the Board of Directors,
as of the offer date). The new options will have the same vesting terms as the
surrendered options. Options representing 386,018 shares of common stock were
repriced, and have been included in option grants and cancellations in the
period ended March 31, 1996. A summary of the activity under the Plan is as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES -------------------------
AVAILABLE NUMBER OF PRICE
FOR GRANT SHARES PER SHARE
---------- --------- --------------
<S> <C> <C> <C>
Balance at December 31, 1992.......... 440,067 246,881 $0.20 - $ 2.00
Options granted..................... (298,159) 298,159 $0.20 - $ 0.26
Options exercised................... -- (26,302) $0.20 - $ 2.00
Options canceled.................... 45,462 (45,463) $0.20 - $ 2.00
---------- --------- --------------
Balance at December 31, 1993.......... 187,370 473,275 $0.20 - $ 2.00
Additional shares reserved.......... 164,000
Options granted..................... (397,651) 397,651 $0.26 - $ 4.00
Options exercised................... -- (123,923) $0.20 - $ 0.70
Options canceled.................... 99,981 (99,981) $0.20 - $ 2.00
---------- --------- --------------
Balance at December 31, 1994.......... 53,700 647,022 $0.20 - $ 4.00
Additional shares reserved.......... 1,845,000
Options granted..................... (475,500) 475,500 $0.50 - $13.00
Options exercised................... -- (25,795) $0.20 - $ 4.00
Options canceled.................... 59,595 (59,595) $0.26 - $13.00
---------- --------- --------------
Balance at December 31, 1995.......... 1,482,795 1,037,132 $0.20 - $13.00
Options granted..................... (1,828,618) 1,828,618 $0.50
Options exercised................... -- (50,322) $0.20 - $ 0.50
Options canceled.................... 501,613 (501,613) $0.20 - $13.00
---------- --------- --------------
Balance at March 31, 1996............. 155,790 2,313,815 $0.20 - $0.50
========== ========= ==============
</TABLE>
At December 31, 1995 and March 31, 1996, options to purchase 358,354 and
419,527 common shares, respectively, were vested and unexercised.
Additionally, at December 31, 1995 and March 31, 1996, 34,184 and 40,794
shares, respectively, from exercised options were subject to repurchase by the
Company.
9. STOCK WARRANTS
In October 1992, the Company issued a warrant to purchase 13,919 shares of
common stock at $4.12 per share to bank in connection with a note payable that
was paid in 1993. The warrant expires October 15, 1997.
In November 1992, the Company issued a warrant to an investor to purchase
1,985 shares of Series C preferred stock, (which may be converted into 2,600
shares of common stock), at $2.00 per share in exchange for certain services
related to the issuance of Series C preferred stock. The warrant expires
November 30, 1997.
In December 1992, the Company issued a warrant to a vendor to purchase 5,000
shares of common stock at $20.00 per share. The warrant expires October 1,
1997.
F-17
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
In June 1994, the Company issued a warrant to purchase 75,000 shares of
Series E preferred stock, (which may be converted into 84,000 shares of common
stock), at $3.50 per share to certain officers/stockholders in exchange for
services rendered in conjunction with the issuance of Series E preferred
stock. The warrant expires June 30, 1999.
In December 1995, the Company issued warrants to purchase 113,636 shares of
common stock at $2.64 per share to certain stockholders in exchange for
services rendered in conjunction with the issuance of Series F preferred
stock. The warrants expire on December 27, 2000.
10. TERMINATION OF DISTRIBUTION RIGHTS
In December 1994, the Company signed an agreement that provided the Company
the option to terminate the marketing and distribution rights of its European
distributor. In connection with this option agreement, the Company paid its
European distributor a nonrefundable $250,000 fee which the Company expensed
in 1994. The Company exercised its option on March 13, 1995 and paid its
European distributor approximately $2,640,000 in cash and issued 175,000
shares of its Series E preferred stock. Due to impairment of the net
realizable value of the European distribution rights, the Company expensed all
payments made in connection with the transaction in 1995.
11. MAJOR CUSTOMERS
Customers comprising 10% or greater of the Company's revenue are summarized
as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ ---------------
1993 1994 1995 1995 1996
-------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Company A................. -- 22% 52% 62% --
Company B................. 10% 12% -- -- --
Company C................. -- 12% * * --
Company D................. * * * * 15%
Company E................. -- -- -- -- 18%
Company F................. -- -- -- -- 13%
</TABLE>
* Revenue less than 10%.
F-18
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
12. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
--------------- ---------
<S> <C> <C> <C>
Federal:
Current....................................... $ -- $ 94,000 $ (94,000)
Deferred...................................... -- (77,000) 77,000
----- --------- ---------
-- 17,000 (17,000)
State:
Current....................................... -- 9,000 (9,000)
----- --------- ---------
9,000 (9,000)
----- --------- ---------
Provision (benefit) for income taxes............ $ -- $ 26,000 $ (26,000)
===== ========= =========
</TABLE>
A reconciliation of the provision (benefit) for income taxes between the
Company's effective tax rate and the U.S. statutory rate is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
Tax at federal statutory rate............ $(653,000) $(591,000) $(4,958,000)
State taxes.............................. -- 9,000 (9,000)
Losses not currently benefited........... 653,000 608,000 4,941,000
--------- --------- -----------
Provision (benefit) for income taxes..... $ -- $ 26,000 $ (26,000)
========= ========= ===========
</TABLE>
The components of deferred income taxes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 1,088,000 $ 5,425,000
Research credit carryforwards.................... 167,000 167,000
Deferred revenue................................. 1,000,000 195,000
Depreciation and amortization.................... 183,000 1,561,000
Other............................................ 167,000 314,000
----------- -----------
Total deferred tax assets.......................... 2,605,000 7,662,000
Valuation allowance................................ (2,528,000) (7,662,000)
----------- -----------
Total net deferred taxes........................... $ 77,000 $ --
=========== ===========
</TABLE>
F-19
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
The valuation allowance increased by $228,000 in 1994 and $5,134,000 in
1995. A valuation allowance has been recorded for the entire deferred tax
asset as a result of uncertainties regarding the realization of the asset due
to the lack of earnings history of the Company. To support the Company's
conclusion that a full allowance was required, management primarily considered
the Company's history of operating losses and expected net losses for the
foreseeable future. The Company will continue to assess the realizability of
the deferred tax assets on actual and forecasted operating results.
At December 31, 1995, the Company had available federal net operating loss
carryforwards of approximately $15,500,000, which will expire in 2007 through
2009, if not utilized. Also available at December 31, 1995 are federal
research credit carryforwards of approximately $167,000, which will expire in
2007 through 2009, if not utilized. The Company's issuance of Series E
preferred stock in June 1994 was considered to have caused a change in
ownership for the purpose of the limitation on the utilization of net
operating loss and research credit carryforwards as set forth in the Internal
Revenue Code. Accordingly, $3,800,000 of the Company's net operating losses
and the deduction equivalent of $477,000 in research credit carryforwards will
be subject to an annual limitation of approximately $360,000 per year. The
Company's issuance of Series F preferred stock in December 1995 also may have
caused a change in ownership so as to limit the Company's entire net operating
loss of $15,500,000 to an annual limitation of approximately $540,000 per
year. As a result, approximately $7,400,000 of the Company's net operating
loss and all research credit carryforwards may expire unutilized. In addition,
the Company's issuance of Series C preferred stock in 1992 resulted in a
change in ownership that virtually eliminated the future utilization of
federal net operating losses and research credits at the time of approximately
$7,200,000 and $106,000, respectively.
13. RELATED PARTY TRANSACTIONS
In November 1993, $2,969,595 of notes payable to stockholders were converted
into Series D preferred stock. Accrued interest outstanding on the notes
payable of $40,116 was also converted into Series D preferred stock.
In June 1994, $668,000 of notes payable to stockholders were converted into
Series E preferred stock. There was no accrued interest outstanding relating
to these notes at the time of conversion.
For the year ended December 31, 1994, the Company earned license revenue of
approximately $900,000 from a related party, of which approximately $10,000 is
included in the accounts receivable balance at December 31, 1994.
During 1995, $126,350 of notes payable to a stockholder were converted into
Series D preferred stock. Accrued interest outstanding on the notes payable of
$26,583 was also converted into Series D preferred stock.
The Company incurred approximately $132,640, $75,226, $262,500, in
consulting and other fees to officers and/or stockholders for the years ended
December 31, 1993, 1994, and 1995, respectively and $35,936, and $0 for the
three months ended March 31, 1995 and 1996, respectively.
F-20
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
14. SUBSEQUENT EVENTS
In April and June 1996, subject to stockholder approval, the Board of
Directors approved (i) the adoption of the 1996 Stock Option Plan pursuant to
which 2,500,000 shares of the Company's common stock have been reserved for
future issuance, (ii) the reincorporation of the Company in Delaware pursuant
to which (a) each two shares of outstanding common stock will be exchanged for
one common share of the Company's Delaware successor (b) each two shares of
outstanding convertible preferred stock will be exchanged for one preferred
share of the same series of the Company's Delaware successor, (c) all
outstanding options and warrants to purchase two shares of common stock or
preferred stock will become options or warrants to purchase one share of the
Company's Delaware successor's common stock or preferred stock, respectively,
at two times the exercise price per share, (d) the authorized number of common
stock will be reduced to 40,000,000 shares, (e) the authorized number of
convertible preferred stock will be reduced to 25,640,498 shares, and (f) the
authorization of an additional 10,000,000 shares of preferred stock that is
not designated in by series and with respect to which the Board of Directors
has the authority to fix the rights, preferences, privileges and restrictions,
(iii) the adoption of the 1996 Employee Stock Purchase Plan pursuant to which
500,000 shares of the Company's common stock have been reserved for future
issuance, and (iv) the adoption of the 1996 Directors' Stock Option Plan
pursuant to which 250,000 shares of the Company's common stock have been
reserved for future issuance.
In addition, the Board of Directors authorized management of the Company to
file a Registration Statement with the Securities and Exchange Commission
covering the proposed sale of shares of its common stock to the public. Upon
completion of this proposed sale, all outstanding shares of the Company's
convertible preferred stock will automatically convert into common stock.
Unaudited pro forma stockholders' equity, as adjusted for the assumed
conversion of the convertible preferred stock, is disclosed in the
accompanying unaudited pro forma balance sheet.
F-21
<PAGE>
HOW CONNECT ONESERVER WORKS.
JAVA SUPPORT
[PRODUCT TECHNICAL ARCHITECTURE LAYOUT, INCLUDING THE FOLLOWING TEXT ELEMENTS]:
CUSTOM CLIENT
SUPPORT
WEB PAGE
PRESENTATION
SEPARATED FROM
CONTENT
FLEXIBLE USAGE
TRACKING AND
ANALYSIS
ENTERPRISE
SYSTEM
LINKS
INDUSTRIAL
STRENGTH CORE
UNIVERSAL
BROWSER
ACCESS
INDUSTRY
STANDARDS
SUPPORT
HIGH-
PERFORMANCE
SCALABLE
TRANSACTION
MODEL
ADAPTABLE
BUSINESS
OBJECT
MODEL
WWW BROWSERS
HTTP, SSL, ETC.
TCP/IP
FUTURE
LISTENER
S-HTTP
LISTENER
SSL LISTENER
HTTP LISTENER
COMMON
GATEWAY INTERFACE
PERL
API
C/C++
API
DATA TRANSACTIONS
JAVA APPLETS
THE INTERNET
HTML TEMPLATE ENGINE
RAMP (REPRIORITIZABLE ASYNCHRONOUS MULTI-THREADED PROTOCOL)
TRANSACTION DISPATCHER
TRANSACTION MONITOR
TRACKING
TRANSACTIONS
DYNAMIC BUSINESS MODEL
OBJECT MANAGER
UNIX OPERATING SYSTEM
CUSTOM CLIENTS
CLIENT CODE
(C, C++ OR VB)
VB API(VBX)
CLASS API (C++)
RAMP API (C)
NETWORK LAYER
RAMP
LISTENER
USAGE TRACKING
SERVICE
EXTERNAL
TRANSACTION SYSTEM
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
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
Business................................................................. 27
Management............................................................... 42
Certain Relationships and Related Transactions........................... 52
Principal Stockholders................................................... 55
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 60
Underwriting............................................................. 62
Legal Matters............................................................ 63
Experts.................................................................. 63
Additional Information................................................... 64
Index to Financial Statements............................................ F-1
</TABLE>
------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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2,500,000 SHARES
[LOGO]
COMMON STOCK
------------------
PROSPECTUS
, 1996
------------------
LEHMAN BROTHERS
VOLPE, WELTY & COMPANY
UBS SECURITIES
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq National
Market Listing Fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC Registration Fee............................................. $ 13,880
NASD Filing Fee.................................................. 4,525
Nasdaq National Market Listing Fee............................... 50,000
Printing Fees and Expenses....................................... 200,000
Legal Fees and Expenses.......................................... 350,000
Accounting Fees and Expenses..................................... 180,000
Director and Officer Insurance Expenses.......................... 400,000
Blue Sky Fees and Expenses....................................... 15,000
Transfer Agent and Registrar Fees................................ 10,000
Miscellaneous.................................................... 51,595
----------
Total.......................................................... $1,275,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Act").
Article VIII of the Registrant's Certificate of Incorporation (Exhibit 3.1
hereto) provides for indemnification of its directors and officers to the
maximum extent permitted by the Delaware General Corporation Law and Section
6.1 of Article VI of the Registrant's Bylaws (Exhibit 3.2 hereto) provides for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law. In addition,
the Registrant has entered into Indemnification Agreements (Exhibit 10.1
hereto) with its directors and officers containing provisions which are in
some respects broader than the specific indemnification provisions contained
in the Delaware General Corporation Law. The indemnification agreements may
require the Company, among other things, to indemnify its directors against
certain liabilities that may arise by reason of their status or service as
directors (other than liabilities arising from willful misconduct of culpable
nature) and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since May 31, 1993, the Registrant has issued and sold (without payment
of any selling commission to any person, except as set forth below) the
following unregistered securities (as adjusted to reflect the Registrant's
reincorporation in Delaware and the automatic conversion of its outstanding
Preferred Stock upon the completion of this offering):
(1) In connection with the reincorporation of the Registrant in Delaware
to be effected prior to the closing of this offering, the Registrant will
exchange shares of its capital stock for the outstanding shares of capital
stock of Connect, Inc., a California corporation.
(2) In June 1994, issued and sold shares of Series E Preferred Stock
convertible into an aggregate of 703,999 shares of Common Stock to a total
of five investors for an aggregate purchase price of $2,200,002.
II-1
<PAGE>
(3) In June 1994 the Registrant issued to an investment management
company a warrant to purchase shares of Series E Preferred Stock
convertible into an aggregate of 84,000 shares of Common Stock at an
exercise price of $3.125 per share of Common Stock in consideration of
services rendered in connection with the Registrant's issuance and sale of
Series E Preferred Stock.
(4) In March 1995 the Registrant issued to two German individuals 196,000
shares of Series E Preferred Stock convertible into an aggregate of 196,000
shares of Common Stock in connection with the termination of a distribution
and license agreement with Connect GmbH Information Systeme, a German
limited liability company ("Connect GmbH"), and the assignment of certain
contracts from Connect GmbH to the Registrant.
(5) From March 1995 to December 1995 the Registrant issued Convertible
Subordinated Secured Notes to four investors in the aggregate principal
amount of $12,000,099 at an interest rate of 10% per annum. All of such
notes were converted into shares of Series F Preferred Stock in December
1995.
(6) In December 1995 and January 1996 the Registrant issued and sold
shares of Series F Preferred Stock convertible into an aggregate of
11,090,612 shares of Common Stock to a total of 14 investors for an
aggregate purchase price of $29,279,221.
(7) In December 1995 the Registrant issued to each of Volpe, Welty &
Company and Hambrecht & Quist LLC a warrant to purchase 56,818 shares of
Common Stock at an exercise price of $2.64 per share in consideration of
services rendered in connection with the Registrant's issuance and sale of
Series F Preferred Stock. In addition, the Registrant paid to Volpe, Welty
& Company and Hambrecht & Quist LLC a brokerage fee equal to 5% of the
gross proceeds received from the sale of the Series F Preferred Stock to
certain investors.
(8) As of June 12, 1996, 313,896 shares of Common Stock had been issued
upon exercise of options and 2,955,281 shares of Common Stock were issuable
upon exercise of outstanding options under the Registrant's 1989 and 1996
Stock Option Plans.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 26(a).
The issuance described in Item 26(a)(1) will be exempt from registration
under Rule 145 under the Securities Act on the basis that such transaction
will not involve a "sale" of securities. The issuances described in Items
26(a)(2) through 26(a)(7) were deemed to be exempt from registration under the
Securities Act in reliance upon Section 4(2) thereof as transactions by an
issuer not involving any public offering. The issuances described in Item
26(a)(8) were deemed to be exempt from registration under the Securities Act
in reliance upon Rule 701 promulgated thereunder in that they were offered and
sold either pursuant to written compensatory benefit plans or pursuant to a
written contract relating to compensation, as provided by Rule 701. The
recipients of securities in each such transaction represented their intentions
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 where
affixed to the securities issued in such transactions. All recipients had
adequate access to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Form of Agreement and Plan of Merger between the Registrant and
Connect, Inc., a California corporation.
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
3.3 Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be filed prior to completion of the offering.
4.1* Form of the Registrant's Common Stock Certificate.
5.1 Opinion of Venture Law Group, a Professional Corporation.
9.1 Amended Stockholders Agreement dated December 27, 1995 by and among
the Registrant and certain holders of the Registrant's securities.
10.1 Form of Indemnification Agreement.
10.2 1989 Stock Option Plan, as amended, and form of stock option
agreement.
10.3* 1996 Stock Option Plan and form of stock option agreement.
10.4 1996 Employee Stock Purchase Plan and form of subscription
agreement.
10.5 1996 Directors' Stock Option Plan and form of stock option
agreement.
10.6 Amended and Restated Registration Rights Agreement dated December
27, 1995 between the Registrant and certain holders of the
Registrant's securities.
10.7 Lease Agreement dated September 19, 1994 between the Registrant and
BRE Properties, Inc.
10.8 Master Equipment Lease dated January 19, 1995 between the
Registrant and Phoenix Leasing Incorporated.
10.9* Software License Agreement dated February 5, 1996 between the
Registrant and Entex Information Services Inc.
10.10* Software License Agreement dated March 26, 1996 between the
Registrant and Union Underwear Company, Inc.
10.11* Software License Agreement dated November 7, 1995 between the
Registrant and PhotoDisc, Inc.
10.12* Amendment to Software License Agreement dated March 29, 1996
between the Registrant and PhotoDisc, Inc.
10.13* Software Development and Distribution License Agreement dated
September 16, 1994 between the Registrant and Fulcrum Technologies
Inc. and related Amending Agreement, Amending Agreement No. 2 and
Amending Agreement No. 3.
10.14* OEM Master License Agreement dated June 30, 1995 between the
Registrant and RSA Data Security, Inc.
10.15 Letter Agreement dated May 10, 1995 between the Registrant and
Hambrecht & Quist Incorporated and related mutual release dated
June 6, 1996.
10.16* Option agreement dated January 16, 1996 between the Registrant and
Thomas P. Kehler.
10.17* Option agreement dated January 16, 1996 between the Registrant and
Gordon J. Bridge.
10.18* Option agreement dated April 24, 1996 between the Registrant and
Gordon J. Bridge.
10.19* Letter agreement dated October 19, 1995 between the Registrant and
Gordon J. Bridge, and related interpretive letter.
10.20 Consulting Agreement dated March 9, 1992 between the Registrant and
Quaestus Limited Partnership.
10.21 Form of Common Stock Warrant issued to Hambrecht & Quist LLC and
Volpe, Welty & Company on December 27, 1995.
11.1 Statement Regarding Computation of Per Share Earnings.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27 Financial Data Schedule.
</TABLE>
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* To be supplied by amendment.
(b) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, 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 any 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, 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 UNDERSIGNED
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
MOUNTAIN VIEW, STATE OF CALIFORNIA, ON JUNE 12, 1996.
CONNECT, INC.
/s/ Thomas P. Kehler
By: __________________________________
THOMAS P. KEHLER, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS THOMAS P. KEHLER AND GORDON BRIDGE, AND EACH ONE
OF THEM, HIS ATTORNEYS-IN-FACT, EACH WITH THE POWER OF SUBSTITUTION, FOR HIM IN
ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS TO THIS REGISTRATION
STATEMENT (INCLUDING POST-EFFECTIVE AMENDMENTS), AND TO FILE THE SAME, WITH
EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION, HEREBY RATIFYING AND CONFIRMING ALL THAT
EACH OF SAID ATTORNEYS-IN-FACT, OR HIS SUBSTITUTE OR SUBSTITUTES, MAY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF. THIS POWER OF ATTORNEY MAY BE SIGNED IN
SEVERAL COUNTERPARTS.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT ON FORM S-1 HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
/s/ Gordon J. Bridge Chairman of the June 12, 1996
- ------------------------------------ Board, Director
(GORDON J. BRIDGE)
/s/ Thomas P. Kehler President, Chief June 12, 1996
- ------------------------------------ Executive Officer
(THOMAS P. KEHLER) and Director
(Principal Executive
Officer)
/s/ Joseph G. Girata Vice President of June 12, 1996
- ------------------------------------ Finance and
(JOSEPH G. GIRATA) Administration and
Secretary (Principal
Financial Officer)
/s/ Promod Haque Director June 12, 1996
- ------------------------------------
(PROMOD HAQUE)
/s/ Rory T. O'Driscoll Director June 12, 1996
- ------------------------------------
(RORY T. O'DRISCOLL)
/s/ Richard W. Weening Director June 12, 1996
- ------------------------------------
(RICHARD W. WEENING)
/s/ William B. Welty Director June 12, 1996
- ------------------------------------
(WILLIAM B. WELTY)
II-5
<PAGE>
CONNECT, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1993, 1994, 1995, AND THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED BALANCE
BEGINNING TO COST AT END
OF PERIOD AND EXPENSE DEDUCTIONS OF PERIOD
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1993
Allowance for doubtful accounts.... 66,331 93,070 (84,185) 75,216
Year ended December 31, 1994
Allowance for doubtful accounts.... 75,216 365,967 (267,183) 174,000
Year ended December 31, 1995
Allowance for doubtful accounts.... 174,000 166,842 (20,842) 320,000
Three months ended March 31, 1996
Allowance for doubtful accounts.... 320,000 13,000 -- 333,000
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
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<C> <S> <C>
1.1* Form of Underwriting Agreement.
2.1* Form of Agreement and Plan of Merger between the
Registrant and Connect, Inc., a California corporation.
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
3.3 Form of Amended and Restated Certificate of
Incorporation of the Registrant, to be filed prior to
completion of the offering.
4.1* Form of the Registrant's Common Stock Certificate.
5.1 Opinion of Venture Law Group, a Professional
Corporation.
9.1 Amended Stockholders Agreement dated December 27, 1995
by and among the Registrant and certain holders of the
Registrant's securities.
10.1 Form of Indemnification Agreement.
10.2 1989 Stock Option Plan, as amended, and form of stock
option agreement.
10.3* 1996 Stock Option Plan and form of stock option
agreement.
10.4 1996 Employee Stock Purchase Plan and form of
subscription agreement.
10.5 1996 Directors' Stock Option Plan and form of stock
option agreement.
10.6 Amended and Restated Registration Rights Agreement
dated December 27, 1995 between the Registrant and
certain holders of the Registrant's securities.
10.7 Lease Agreement dated September 19, 1994 between the
Registrant and BRE Properties, Inc.
10.8 Master Equipment Lease dated January 19, 1995 between
the Registrant and Phoenix Leasing Incorporated.
10.9* Software License Agreement dated February 5, 1996
between the Registrant and Entex Information Services
Inc.
10.10* Software License Agreement dated March 26, 1996 between
the Registrant and Union Underwear Company, Inc.
10.11* Software License Agreement dated November 7, 1995
between the Registrant and PhotoDisc, Inc.
10.12* Amendment to Software License Agreement dated March 29,
1996 between the Registrant and PhotoDisc, Inc.
10.13* Software Development and Distribution License Agreement
dated September 16, 1994 between the Registrant and
Fulcrum Technologies Inc. and related Amending
Agreement, Amending Agreement No. 2 and Amending
Agreement No. 3.
10.14* OEM Master License Agreement dated June 30, 1995
between the Registrant and RSA Data Security, Inc.
10.15 Letter Agreement dated May 10, 1995 between the
Registrant and Hambrecht & Quist Incorporated and
related mutual release dated June 6, 1996.
10.16* Option agreement dated January 16, 1996 between the
Registrant and Thomas P. Kehler.
10.17* Option agreement dated January 16, 1996 between the
Registrant and Gordon J. Bridge.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
------- ------------
<C> <S> <C>
10.18* Option agreement dated April 24, 1996 between the
Registrant and Gordon J. Bridge.
10.19* Letter agreement dated October 19, 1995 between the
Registrant and Gordon J. Bridge, and related
interpretive letter.
10.20 Consulting Agreement dated March 9, 1992 between the
Registrant and Quaestus Limited Partnership.
10.21 Form of Common Stock Warrant issued to Hambrecht &
Quist LLC and Volpe, Welty & Company on December 27,
1995.
10.22* Business Alliance Program Agreement and Amendment One
and Amendment Two thereto dated June 11, 1996 between
the Registrant and Oracle Corporation.
10.23* Agreement and Mutual Release dated June 12, 1996
between the Registrant and Henry V. Morgan.
10.24* Development and License Agreement dated March 29, 1996
between the Registrant and Time Warner Cable.
11.1 Statement Regarding Computation of Per Share Earnings.
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27 Financial Data Schedule
</TABLE>
- --------
* To be supplied by amendment.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
CONNECT, INC.
ARTICLE I
The name of the corporation is Connect, Inc. (the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington,County of New Castle. The name of its
registered agent at such address is The Prentice-Hall Corporation System, Inc.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The aggregate number of shares which this Corporation shall have authority
to issue is 1,000 shares of capital stock all of which shall be designated
"Common Stock" and have a par value of $.001 per share.
ARTICLE V
The name and mailing address of the incorporator are as follows:
Thomas H. Tobiason
Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
ARTICLE VI
The Board of Directors of the Corporation is expressly authorized to make,
alter or repeal Bylaws of the Corporation, but the stockholders may make
additional Bylaws and may alter or repeal any Bylaw whether adopted by them or
otherwise.
<PAGE>
ARTICLE VII
Elections of directors need not be by written ballot unless otherwise
provided in the Bylaws of the Corporation.
ARTICLE VIII
(A) To the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(B) The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer or employee of
the Corporation or any predecessor of the Corporation, or serves or served at
any other enterprise as a director, officer or employee at the request of the
Corporation or any predecessor to the Corporation.
(C) Neither any amendment nor repeal of this Article VIII, nor the adoption
of any provision of this Corporation's Certificate of Incorporation inconsistent
with this Article VIII, shall eliminate or reduce the effect of this Article
VIII in respect of any matter occurring, or any action or proceeding accruing or
arising or that, but for this Article VIII, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
ARTICLE IX
The Corporation is to have perpetual existence.
ARTICLE X
The number of directors which will constitute the whole Board of Directors
of the Corporation shall be designated in the Bylaws of the Corporation.
ARTICLE XI
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any statutory provision) outside the State of Delaware at such place
or places as may be designated from time to time by the Board of Directors in
the Bylaws of the Corporation.
-2-
<PAGE>
Executed this 20th day of May, 1996.
----
/s/ Thomas H. Tobiason
---------------------------------
Thomas H. Tobiason, Incorporator
-3-
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
CONNECT, INC.
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 Registered Office.
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is Prentice-Hall Corporation System,
Inc.
1.2 Other Offices.
-------------
The Board of Directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 Place Of Meetings.
------------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the Board of Directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 Annual Meeting.
---------------
The annual meeting of stockholders shall be held on any date, time and
place, either within or without the State of Delaware, as may be designated by
resolution of the Board of Directors from time to time. At the meeting,
directors shall be elected and any other proper business may be transacted.
2.3 Special Meeting.
----------------
A special meeting of the stockholders may be called at any time by the
Board of Directors, the Chairman of the Board, the President, or the holders of
shares entitled to cast not less than ten percent of the votes at the meeting.
No other person or persons are permitted to call a special meeting. No business
may be conducted at a special meeting other than the business brought before
-1-
<PAGE>
the meeting by the Board of Directors, the Chairman of the Board, the President
or the holders of shares entitled to cast not less than ten percent of the votes
at the meeting.
2.4 Notice Of Stockholders' Meetings.
---------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called. Upon request by any person
or persons entitled to call a special meeting, the Chairman of the Board,
President, Vice President or Secretary shall cause within twenty (20) days after
receipt of the request cause notice to be given to the shareholders entitled to
vote that a special meeting will be held at a time requested by the person or
persons calling the meeting, but not less than thirty-five (35) nor more than
sixty (60) days after receipt of the request.
2.5 Advance Notice Of Stockholder Nominees.
---------------------------------------
Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the discretion of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this Section. Such nominations, other than those made
by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the corporation not less than twenty (20) days
nor more than sixty (60) days prior to the meeting; provided, however, that in
-------- -------
the event less than thirty (30) days notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received not later than the close of business on the
tenth day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made. Such stockholder's notice shall set
forth (a) as to each person, if any, whom the stockholder proposes to nominate
for election or re-election as a director: (i) the name, age, business address
and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
corporation which are beneficially owned by such person, (iv) any other
information relating to such person that is required by law to be disclosed in
solicitations of proxies for election of directors, and (v) such person's
written consent to being named as a nominee and to serving as a director if
elected; and (b) as to the stockholder giving the notice: (i) the name and
address, as they appear on the corporation's books, of such stockholder, and
(ii) the class and number of shares of the corporation which are beneficially
owned by such stockholder, and (iii) a description of all arrangements or
understandings between such stockholder and each nominee and any other person or
persons (naming such person or persons) relating to the nomination. At the
request of the Board of Directors any person nominated by the Board for election
as a director shall furnish to the Secretary of the corporation that information
required to be set forth in the stockholder's notice of nomination which
pertains to the nominee. No person shall be of eligible for election as a
director of the corporation unless nominated in accordance with the procedures
set forth
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in this Section. The chairman of the meeting shall, if the facts warrant,
determine and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by these bylaws, and if he should so
determine, he shall so declare at the meeting and the defective nomination shall
be disregarded.
2.6 Advance Notice Of Stockholder Business.
---------------------------------------
At any meeting of the stockholders, only such business shall be conducted
as shall have been properly brought before the meeting. To be properly brought
before a meeting, business must be: (a) as specified in the notice of meeting
(or any supplement thereto) given by or at the direction of the Board of
Directors, (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (c) otherwise properly brought before
the meeting by a stockholder. Business to be brought before a meeting by a
stockholder shall not be considered properly brought if the stockholder has not
given timely notice thereof in writing to the Secretary of the corporation. To
be timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than twenty (20) nor
more than sixty (60) days prior to the meeting; provided, however, that in the
event less than thirty (30) days notice or prior public disclosure of the date
of the meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. A stockholder's notice to the Secretary shall
set forth as to each matter the stockholder proposes to bring before the
meeting: (i) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting, (ii)
the name and address of the stockholder proposing such business, (iii) the
class and number of shares of the corporation, which are beneficially owned by
the stockholder, (iv) any material interest of the stockholder in such
business, and (v) any other information that is required by law to be provided
by the stockholder in his capacity as a proponent of a stockholder proposal.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at any meeting except in accordance with the procedures set forth in
this Section. The chairman of the meeting shall, if the facts warrant,
determine and declare at the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section, and, if he
should so determine, he shall so declare at the meeting that any such business
not properly brought before the meeting shall not be transacted.
2.7 Manner Of Giving Notice; Affidavit Of Notice.
---------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.8 Quorum.
-------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stock-
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holders for the transaction of business except as otherwise provided by statute
or by the certificate of incorporation. If, however, such quorum is not present
or represented at any meeting of the stock-holders, then either (i) the Chairman
of the meeting or (ii) the stockholders entitled to vote thereat, present in
person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum is present or represented. At such adjourned meeting at which a quorum is
present or represented, any business may be transacted that might have been
transacted at the meeting as originally noticed.
2.9 Adjourned Meeting; Notice.
--------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.10 Conduct Of Business.
--------------------
The Chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of business.
2.11 Voting.
-------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.14 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder.
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2.12 Waiver Of Notice.
-----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.13 Stockholder Action By Written Consent Without A Meeting.
--------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of the corporation, or any action that may be taken at any annual
or special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.14 Record Date For Stockholder Notice; Voting; Giving Consents.
------------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the Board of Directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which
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notice is given, or, if notice is waived, at the close of business on the day
next preceding the day on which the meeting is held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is necessary, shall be the day on which the first
written consent is expressed.
(iii) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
2.15 Proxies.
--------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section 212
of the General Corporation Law of Delaware.
ARTICLE III
DIRECTORS
---------
3.1 Powers.
------
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these Bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board of
Directors.
3.2 Number of Directors.
-------------------
The Board of Directors shall consist of not fewer than 9 nor more than
10 persons. The exact number of directors shall be 10 persons until changed by
a proper amendment of this Section 3.2. No reduction of the authorized number
of directors shall have the effect of removing any director before that
director's term of office expires.
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<PAGE>
3.3 Election, Qualification and Term of Office of Directors.
-------------------------------------------------------
Except as provided in Section 3.4 of these Bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 Resignation and Vacancies.
-------------------------
Any director may resign at any time upon written notice to the
attention of the Secretary of the corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
Bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in
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office as aforesaid, which election shall be governed by the provisions of
Section 211 of the General Corporation Law of Delaware as far as applicable.
3.5 Place of Meetings; Meetings by Telephone.
----------------------------------------
The Board of Directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 Regular Meetings.
----------------
Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
3.7 Special Meetings; Notice.
------------------------
Special meetings of the Board of Directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 Quorum.
------
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
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A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 Waiver of Notice.
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these Bylaws.
3.10 Board Action by Written Consent Without a Meeting.
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee. Written consents representing actions taken by the
board or committee may be executed by telex, telecopy or other facsimile
transmission, and such facsimile shall be valid and binding to the same extent
as if it were an original.
3.11 Fees and Compensation of Directors.
----------------------------------
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor.
3.12 Approval of Loans to Officers.
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
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3.13 Removal of Directors.
--------------------
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that if the stockholders of the corporation are entitled to cumulative voting,
if less than the entire Board of Directors is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
3.14 Chairman of the Board of Directors.
----------------------------------
The corporation may also have, at the discretion of the Board of
Directors, a chairman of the Board of Directors who shall not be considered an
officer of the corporation.
ARTICLE IV
COMMITTEES
----------
4.1 Committees of Directors.
-----------------------
The Board of Directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors or in the Bylaws of the corporation, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority to (i) amend the certificate
of incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), (ii) adopt an agreement of merger or
consolidation under Sections 251 or 252 of the General Corporation Law of
Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets,
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(iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or (v) amend the Bylaws of the corporation; and,
unless the board resolution establishing the committee, the Bylaws or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware.
4.2 Committee Minutes.
-----------------
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
4.3 Meetings and Action of Committees.
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Section 3.5 (place of meetings and
meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and
Section 3.10 (action without a meeting) of these Bylaws, with such changes in
the context of such provisions as are necessary to substitute the committee and
its members for the Board of Directors and its members; provided, however, that
the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee, that
special meetings of committees may also be called by resolution of the Board of
Directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
--------
5.1 Officers.
--------
The officers of the corporation shall be a chief executive officer, a
president, a secretary, and a chief financial officer. The corporation may also
have, at the discretion of the Board of Directors, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these Bylaws. Any number of offices may be held by the same
person.
5.2 Appointment of Officers.
-----------------------
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
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5.3 Subordinate Officers.
--------------------
The Board of Directors may appoint, or empower the chief executive
officer or the president to appoint, such other officers and agents as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in these
Bylaws or as the Board of Directors may from time to time determine.
5.4 Removal and Resignation of Officers.
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
attention of the Secretary of the corporation. Any resignation shall take
effect at the date of the receipt of that notice or at any later time specified
in that notice; and, unless otherwise specified in that notice, the acceptance
of the resignation shall not be necessary to make it effective. Any resignation
is without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
5.5 Vacancies In Offices.
--------------------
Any vacancy occurring in any office of the corporation shall be filled
by the Board of Directors.
5.6 Chief Executive Officer.
-----------------------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board, if any, the chief executive
officer of the corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these bylaws.
5.7 President.
---------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board (if any) or the chief executive
officer, the president shall have general supervision, direction, and control of
the business and other officers of the corporation. He or she shall have the
general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
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5.8 Vice Presidents.
---------------
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a vice president designated by the Board
of Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the president or the chairman of the board.
5.9 Secretary.
---------
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show
the time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required to be given by law or
by these Bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 Chief Financial Officer.
-----------------------
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the
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corporation, and shall have other powers and perform such other duties as may be
prescribed by the Board of Directors or the bylaws.
5.11 Representation Of Shares Of Other Corporations.
----------------------------------------------
The chairman of the board, the chief executive officer, the
president, any vice president, the chief financial officer, the secretary or
assistant secretary of this corporation, or any other person authorized by the
Board of Directors or the chief executive officer or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by the person
having such authority.
5.12 Authority And Duties Of Officers.
--------------------------------
In addition to the foregoing authority and duties, all officers of
the corporation shall respectively have such authority and perform such duties
in the management of the business of the corporation as may be designated from
time to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
--------------------------------------------------------------------
6.1 Indemnification Of Directors And Officers.
-----------------------------------------
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (i) who is or was
a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 Indemnification Of Others.
-------------------------
The corporation shall have the power, to the maximum extent and in
the manner permitted by the General Corporation Law of Delaware, to indemnify
each of its employees and agents (other than directors and officers) against
expenses (including attorneys' fees), judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding,
arising by reason of the fact that such person is or was an agent of the
corporation. For purposes of this Section 6.2, an "employee" or "agent" of the
corporation (other than a director or officer) includes any person (i) who is or
was an employee or agent of the corporation, (ii) who is or
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<PAGE>
was serving at the request of the corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or (iii) who
was an employee or agent of a corporation which was a predecessor corporation of
the corporation or of another enterprise at the request of such predecessor
corporation.
6.3 Payment Of Expenses In Advance.
------------------------------
Expenses incurred in defending any action or proceeding for which
indemnification is required pursuant to Section 6.1 or for which indemnification
is permitted pursuant to Section 6.2 following authorization thereof by the
Board of Directors shall be paid by the corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or on
behalf of the indemnified party to repay such amount if it shall ultimately be
determined that the indemnified party is not entitled to be indemnified as
authorized in this Article VI.
6.4 Indemnity Not Exclusive.
-----------------------
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the certificate of
incorporation
6.5 Insurance.
---------
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
6.6 Conflicts.
---------
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(a) That it would be inconsistent with a provision of the certificate
of incorporation, these Bylaws, a resolution of the stockholders or an agreement
in effect at the time of the accrual of the alleged cause of the action asserted
in the proceeding in which the expenses were incurred or other amounts were
paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
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<PAGE>
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 Maintenance And Inspection Of Records.
-------------------------------------
The corporation shall, either at its principal executive offices or at
such place or places as designated by the Board of Directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 Inspection By Directors.
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order
the corporation to permit the director to inspect any and all books and records,
the stock ledger, and the stock list and to make copies or extracts therefrom.
The Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 Annual Statement To Stockholders.
--------------------------------
The Board of Directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 Checks.
------
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other
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evidences of indebtedness that are issued in the name of or payable to the
corporation, and only the persons so authorized shall sign or endorse those
instruments.
8.2 Execution Of Corporate Contracts And Instruments.
------------------------------------------------
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 Stock Certificates; Partly Paid Shares.
--------------------------------------
The shares of a corporation shall be represented by certificates,
provided that the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the Board
of Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the Board of Directors, or the chief executive officer or the president or vice-
president, and by the chief financial officer or an assistant treasurer, or the
secretary or an assistant secretary of such corporation representing the number
of shares registered in certificate form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if he or she were such officer, transfer agent or registrar at the
date of issue.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 Special Designation On Certificates.
-----------------------------------
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General
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<PAGE>
Corporation Law of Delaware, in lieu of the foregoing requirements there may be
set forth on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, the designations, the preferences, and the relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
8.5 Lost Certificates.
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 Construction; Definitions.
-------------------------
Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 Dividends.
---------
The directors of the corporation, subject to any restrictions
contained in (i) the General Corporation Law of Delaware or (ii) the certificate
of incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 Fiscal Year.
-----------
The fiscal year of the corporation shall be fixed by resolution of the
Board of Directors and may be changed by the Board of Directors.
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<PAGE>
8.9 Seal.
----
The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.10 Transfer Of Stock.
-----------------
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 Stock Transfer Agreements.
-------------------------
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 Registered Stockholders.
-----------------------
The corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
----------
The Bylaws of the corporation may be adopted, amended or repealed by the
stockholders entitled to vote; provided, however, that the corporation may, in
its certificate of incorporation, confer the power to adopt, amend or repeal
Bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal Bylaws.
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<PAGE>
EXHIBIT 3.3
CONNECT, INC.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
CONNECT, Inc., a corporation organized and existing under the laws of the
State of Delaware, hereby certifies as follows:
1. The name of the corporation is CONNECT, Inc. and the original
Certificate of Incorporation of the corporation was filed with the Secretary of
State of the State of Delaware on May __, 1996.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of this corporation's
Certificate of Incorporation.
3. The terms and provisions of this Amended and Restated Certificate of
Incorporation have been duly approved by written consent of the required number
of shares of outstanding stock of this corporation pursuant to Subsection 228(a)
of the General Corporation Law of the State and written notice pursuant to
Subsection 228(d) of the General Corporation Law of the State has been given to
those stockholders whose written consent has not been obtained.
4. The text of the Amended and Restated Certificate of Incorporation is as
hereby restated and further amended to read in its entirety as set forth in
Exhibit A attached hereto.
- ---------
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
has been signed this _____ day of June, 1996.
CONNECT, INC.
- ----------------------------------------------
Thomas P. Kehler, Chief Executive Officer
ATTEST:
- ----------------------------------------------
Henry V. Morgan, Secretary
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF CONNECT, INC.
ARTICLE I
The name of the Corporation is CONNECT, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, Wilmington, County of New Castle. The name of
its registered agent at such address is The Prentice-Hall Corporation System,
Inc.
ARTICLE III
STOCK
-----
The corporation is authorized to issue two classes of shares to be
designated respectively "Preferred Stock", $0.001 par value per share, and
"Common Stock"", $0.001 par value per share. The total number of shares of
Preferred Stock authorized is 35,640,498 and the total number of shares of
Common Stock authorized is 40,000,000. The Preferred Stock may be issued from
time to time in one or more series. There shall initially be five series of
Preferred Stock, "Series C Preferred Stock" comprised of 1,120,065 shares,
"Series D Preferred Stock" comprised of 1,460,633 shares, "Series E Preferred
Stock" comprised of 878,572 shares, "Series F Preferred Stock" comprised of
11,090,614 shares, and "Series F-a Preferred Stock" comprised of 11,090,614
shares. As used hereafter in these Restated Articles of Incorporation, the
terms "Preferred Stock" or "preferred shares" without designation shall refer
to shares of Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock and Series F-a Preferred Stock.
Except as otherwise expressly provided herein, shares of Series F Preferred
Stock and Series F-a Preferred Stock shall have identical rights, preferences
and privileges, and all references to Series F Preferred Stock shall be deemed
to include Series F-a Preferred Stock and each other series of Preferred Stock
created pursuant to Article IV, Section I below.
Subject to the restrictions prescribed by law and the provisions of
Article IV, the Board of Directors is authorized to fix by resolution or
resolutions the number of shares of any series of Preferred Stock and to
determine or alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock and,
within the limits and restrictions stated in any resolution or resolutions of
the Board
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<PAGE>
of Directors originally fixing the number of shares constituting any series of
Preferred Stock, to increase (but not above the total number of authorized
shares of Preferred Stock) or decrease (but not below the number of shares of
any such series then outstanding) the number of shares of any such series
subsequent to the issue of shares of that series.
The authority of the Board of Directors with respect to each series of
Preferred Stock shall include, but not be limited to, determination of the
following:
(a) the number of shares constituting that series and the
distinctive designation of that series;
(b) the dividend rate on the shares of that series, whether
dividends shall be cumulative, and if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of that
series;
(c) whether that series shall have voting rights in addition to the
voting rights provided by law, and if so, the terms of such voting rights;
(d) whether that series shall have conversion privileges, and if so,
the terms and conditions of such privileges, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(e) whether or not the shares of that series shall be redeemable,
and if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(f) whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and if so, the terms in the amount of
such sinking funds;
(g) the rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
corporation, and the relative rights of priority, if any, of payment of shares
of that series; and
(h) any other relative rights, preferences and limitations of that
series.
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<PAGE>
ARTICLE IV
RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS ON STOCK
------------------------------------
The rights, preferences, privileges and restrictions granted to or
imposed upon the Common Stock and Preferred Stock of the corporation are as
follows:
A. Distributions.
-------------
1. Series F Preferred Stock. The holders of shares of Series F
------------------------
Preferred Stock shall be entitled to receive dividends, out of any assets
legally available therefor, prior and in preference to any declaration or
payment of any dividend (payable other than in Common Stock or other
securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock of this
corporation) on the other series of Preferred Stock or the Common Stock of
this corporation, at the rate of $0.2112 per share per annum. Such dividends
shall cumulate quarterly on each share beginning January 1, 1996, and shall
accrue from day to day, whether or not earned or declared. Such dividends
shall be cumulative so that, except as provided below, if such dividends in
respect of any previous or current quarterly dividend period, at the annual
rate specified above, shall not have been paid the deficiency shall first be
fully paid before any dividend or other distribution shall be paid on or
declared and set apart for the other series of Preferred Stock or Common
Stock. Any accumulation of dividends on the Series F Preferred Stock shall
not bear interest. Cumulative dividends with respect to a share of Series F
Preferred Stock which are accrued, payable and/or in arrears shall, upon
conversion of such share to Common Stock pursuant to Section D.1(a) of these
Restated Articles, not then or thereafter be paid and shall cease to be
accrued, payable and/or in arrears.
2. Series C, D and E Preferred Stock. Subject to the rights of the
---------------------------------
Series F Preferred Stock, the holders of shares of Series C, D and E Preferred
Stock shall be entitled to receive dividends, out of any assets legally
available therefor, prior and in preference to any declaration or payment of
any dividend (payable other than in Common Stock or other securities and
rights convertible into or entitling the holder thereof to receive, directly
or indirectly, additional shares of Common Stock of this corporation) on the
Common Stock of this corporation, at the rates of $0.16, $0.208 and $0.28 per
share per annum, respectively. Such dividends shall cumulate quarterly on
each share beginning January 1, 1996, and shall accrue from day to day,
whether or not earned or declared. With respect to the period prior to
January 1, 1996, no cumulative dividends shall accrue or exist on shares of
Series C, D and E Preferred Stock for such period. Such dividends shall be
cumulative so that, except as provided below, if such dividends in respect of
any previous or current quarterly dividend period, at the annual rate
specified above, shall not have been paid the deficiency shall first be fully
paid before any dividend or other distribution shall be paid on or declared
and set apart for the Common Stock. To the extent that there are insufficient
funds to pay such dividends, the dividends shall be distributed pro rata based
upon the number of shares of Common Stock (on an as
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converted basis) held by such holders of Series C, D and E Preferred Stock.
Any accumulation of dividends on the Series C, D and E Preferred Stock shall
not bear interest. Cumulative dividends with respect to a share of Series C, D
or E Preferred Stock which are accrued, payable and/or in arrears shall, upon
conversion of such share to Common Stock, not then or thereafter be paid and
shall cease to be accrued, payable and/or in arrears.
3. Common Stock. The holders of outstanding Common Stock shall be
------------
entitled to receive, to the extent permitted by law, such distributions as may
be declared from time to time by the Board of Directors of the corporation.
No distributions shall be paid or declared to the holders of outstanding
Common Stock until all accumulated and unpaid distributions have been paid to
holders of Preferred Stock and a distribution in an amount equal to the annual
rates (pro rated for the then current period) as set forth in Subsection A.1
and 2, above, shall have been paid to or declared and set apart for payment to
all holders of Preferred Stock.
4. Definitions. For purposes of this Section A, unless the context
-----------
otherwise requires, a "distribution" shall mean the transfer of cash or
property without consideration, whether by way of dividend or otherwise,
payable other than in Common Stock, or the purchase or redemption of shares of
the corporation (other than repurchases of Common Stock held by employees or
consultants of the corporation upon termination of their employment or
services pursuant to agreements providing for such repurchase or the
repurchase by the corporation of Common Stock pursuant to written agreements
between the corporation and one or more of its shareholders) for cash or
property, including any such transfer, purchase or redemption by a subsidiary
of the corporation.
5. Deemed Consent. Each holder of shares of Preferred Stock shall
--------------
be deemed to have consented, for purposes of Sections 502, 503 and 506 of the
General Corporation Law of the State of California, to distributions made by
the corporation in connection with the repurchase of shares of Common Stock
and Preferred Stock issued to or held by employees or consultants upon
termination of their employment or services pursuant to agreements providing
for such repurchase and the repurchase of shares of Common Stock and Preferred
Stock pursuant to written agreements between the corporation and one or more
of its shareholders; provided, however, that such consent shall not apply to
distributions pursuant to Section H hereof.
B. Preference on Liquidation
-------------------------
1. Preferred Stock. In the event of any voluntary or involuntary
---------------
liquidation, dissolution or winding up of the corporation the holders of
shares of the Series C, D, E and F Preferred Stock then outstanding shall be
entitled to be paid, out of the assets of the corporation available for
distribution to its shareholders, before any payment shall be made in respect
of the corporation's Common Stock, an amount equal to $2.61 per share of
Series C Preferred Stock, plus all accumulated and unpaid dividends thereon to
the date fixed for distribution, an amount equal to $3.16 per share of Series
D Preferred Stock, plus all accumulated and unpaid dividends thereon to the
date fixed for
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<PAGE>
distribution, an amount equal to $3.92 per share of Series E Preferred Stock,
plus all accumulated and unpaid dividends thereon to the date fixed for
distribution, and an amount equal to $5.28 per share of Series F Preferred
Stock, plus all accumulated and unpaid dividends thereon to the date fixed for
distribution. If upon liquidation, dissolution or winding up of the
corporation, the assets of the corporation available for distribution to its
shareholders shall be insufficient to pay the holders of each series of
Preferred Stock the full amounts to which they shall be entitled pursuant to
this Subsection B.1, the holders of Series F Preferred Stock shall be entitled
to receive, in preference to the holders of Common Stock and the holders of
Series C, D and E Preferred Stock, the full amount which would be payable in
respect of the shares held by them upon such distribution if all amounts
payable on or with respect to said shares were paid in full. After
indefeasibly setting apart or paying in full the preferential amount due the
holders of Series F Preferred Stock, the holders of Series C, D and E
Preferred Stock shall share ratably in any distribution of assets according to
the respective amounts which would be payable in respect of the shares held by
them upon such distribution if all amounts payable on or with respect to such
shares were paid in full. After indefeasibly setting apart or paying in full
the preferential amount due the holders of each series of Preferred Stock, all
remaining assets and funds of the corporation available for distribution to
its shareholders shall be distributed to the holders of Common Stock and
Series F Preferred Stock, in accordance with the procedure set forth in
Subsection B.2 below.
2. Common Stock and Series F Preferred Stock. After indefeasibly
-----------------------------------------
setting apart or paying in full the preferential amounts due the holders of
Preferred Stock in accordance with Subsection B.1 above, all remaining assets
and funds of the corporation available for distribution to its shareholders
shall be distributed to the holders of Common Stock and Series F Preferred
Stock pro rata based on the number of shares of Common Stock held by each
(assuming conversion of all such Series F Preferred Stock).
3. Certain Events Deemed Liquidation. A reorganization, merger or
---------------------------------
consolidation of the corporation with or into any other corporation or
corporations in which the shareholders of the corporation immediately prior to
such transaction (or transactions, if such transactions comprise a related
series) do not own immediately after such transaction (or transactions, if
such transactions comprise a related series) more than 50% of the outstanding
voting securities of the surviving entity (or its parent), or a transaction
(or transactions, if such transactions comprise a related series) in which
shareholder(s) transfer more than 50% of the outstanding securities of the
corporation, or a sale or other disposition of all or substantially all of the
assets of the corporation shall be deemed to be a liquidation within the
meaning of this Section B; provided that the holders of Preferred Stock and
Common Stock shall be paid in cash or in securities received or in a
combination thereof (which combination shall be in the same proportions as the
consideration received in the transaction). Any securities to be delivered to
the holders of the Preferred Stock and Common Stock upon a merger,
reorganization or sale or other disposition of substantially all of the assets
of the corporation shall be valued as follows:
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<PAGE>
(a) If traded on a securities exchange, the value shall be
deemed to be the average of the closing prices of the securities on such
exchange over the 30-day period ending three (3) business days prior to the
closing;
(b) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid prices over the 30-day period
ending three (3) business days prior to the closing; and
(c) If there is no active public market, the value shall be the
fair market value thereof, as mutually determined by the corporation and the
holders of not less than a majority of the outstanding shares of Series F
Preferred Stock, provided that if the corporation and the holders of a
majority of the outstanding shares of Series F Preferred Stock are unable to
reach agreement, then by independent appraisal by an investment banker hired
and paid by the corporation, but acceptable to the holders of a majority of
the outstanding shares of Series F Preferred Stock.
4. Distributions Other Than in Cash. If any of the assets of the
--------------------------------
corporation are to be distributed other than in cash under this Section B or
for any purpose, then the Board of Directors of the corporation shall promptly
engage independent competent appraisers to determine the value of the assets
to be distributed to the holders of Preferred Stock or Common Stock. The
corporation shall, upon receipt of such appraiser's valuation, give prompt
written notice to each holder of shares of Preferred Stock or Common Stock of
the appraiser's valuation.
5. Notice. The corporation shall give each holder of record of
------
Preferred Stock written notice of an impending transaction described in
Section B3 not later than fifteen (15) days prior to the shareholders' meeting
called to approve such transaction, or fifteen (15) days prior to the closing
of such transaction. The first of such notices shall describe the material
terms and conditions of the impending transaction and the corporation shall
thereafter give such Holders prompt notice of any material changes. The
transaction shall in no event take place sooner than fifteen (15) days after
the corporation has given the first notice provided for herein; provided,
however, that such periods may be shortened upon the written consent of the
holders of the majority of the then outstanding Preferred Stock which are
entitled to such notice rights or similar notice rights and which includes at
least 80% of the voting power of all then outstanding shares of such Series F
Preferred Stock voting together as a single class.
C. Voting Rights.
-------------
1. Preferred Stock. Except as otherwise required by law and except
---------------
with respect to the election of directors in accordance with Subsection 3
below, the holders of each share of Preferred Stock shall be entitled to the
number of votes equal to the number of shares of Common Stock into which such
share of Preferred Stock could be converted on the record date for the vote or
consent of shareholders and shall have voting rights and powers equal to the
voting rights and powers of the holders of Common Stock. The holder of each
share of Preferred Stock shall be entitled to notice of any shareholders'
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<PAGE>
meeting in accordance with the Bylaws of the corporation and shall vote with
holders of the Common Stock upon any and all matters submitted to a vote of
shareholders, except those matters required by law or these Amended and
Restated Articles of Incorporation to be submitted to a class or series vote.
2. Common Stock. Except as otherwise required by law and except
------------
with respect to the election of directors in accordance with subsection 3
below, the holders of each share of Common Stock shall be entitled to one vote
per share for each share of Common Stock held by such holder on the record
date for the vote or consent of shareholders. The holders of each share of
Common Stock shall be entitled to notice of any shareholder's meeting in
accordance with the Bylaws of the corporation and shall vote as a single class
upon any and all matters submitted to a vote of shareholders, except those
matters required by law or these Amended and Restated Articles of
Incorporation to be submitted to a class or series vote.
3. Election of Director. The corporation shall have a board of
--------------------
directors consisting of not less than nine (9) nor more than ten (10)
directors. In the event the authorized number of directors is set at nine
(9), then at any annual or special meeting of shareholders called for the
purpose of the election of directors, the holders of Common Stock, voting as a
single class, shall have the right to elect two (2) directors and the holders
of Preferred Stock, voting as a single class, shall have the right to elect
seven (7) directors. In the event the authorized number of directors is set
at ten (10) then at any annual or special meeting of shareholders called for
the purpose of the election of directors, the holders of Common Stock, voting
as a single class, shall have the right to elect two (2) directors and the
holders of Preferred Stock, voting as a single class, shall have the right to
elect eight (8) directors.
D. Conversion Rights.
-----------------
1. Conversion of Preferred Stock. Each share of Preferred Stock
-----------------------------
shall be convertible, at the option of the holder thereof, at any time after
the issuance of such share (the "Conversion Period") into fully paid and
nonassessable shares of Common Stock of the corporation. Each share of
Preferred Stock shall automatically be converted into fully paid and
nonassessable shares of Common Stock of the corporation at any time during the
Conversion Period immediately upon the earlier to occur of:
(a) The closing of a sale of the corporation's Common Stock in a
firmly underwritten registered public offering with proceeds to the
corporation of at least Fifteen Million Dollars ($15,000,000), at a per share
offering price of at least $5.28 (as adjusted for recapitalizations, stock
splits, stock dividends and the like) (a "qualifying IPO");
(b) As to each series of Series C, D and E Preferred Stock, the
date on which the holders of a majority of the outstanding shares of such
series of Preferred Stock have either converted or have voted to convert or
consented in writing to the conversion of such shares into Common Stock;
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<PAGE>
(c) As to the Series F Preferred Stock, the date on which the
holders of eighty percent (80%) of the outstanding shares of Series F
Preferred Stock have either converted or have voted to convert or consented in
writing to the conversion of such shares into Common Stock.
2. Determination of Number of Shares of Common Stock Upon
------------------------------------------------------
Conversion. The number of shares of Common Stock into which each share of
----------
Series C Preferred Stock may be converted shall be determined by dividing (i)
$2.62 by (ii) the Conversion Price for the Series C Preferred Stock
(determined as hereinafter provided) in effect at the time of the conversion.
The number of shares of Common Stock into which each share of the Series D
Preferred Stock may be converted shall be determined by dividing (i) $3.16 by
(ii) the Conversion Price for the Series D Preferred Stock (determined as
hereinafter provided) in effect at the time of the conversion. The number of
shares of Common Stock into which each share of Series E Preferred Stock may
be converted shall be determined by dividing (i) $3.92 by (ii) the Conversion
Price for the Series E Preferred Stock (determined as hereinafter provided) in
effect at the time of the conversion. The number of shares of Common Stock
into which each share of Series F Preferred Stock may be converted shall be
determined by dividing (i) $2.64 by (ii) the Conversion Price for the Series F
Preferred Stock (determined as hereinafter provided) in effect at the time of
the conversion.
3. Determination of Initial Conversion Price. The conversion price
-----------------------------------------
per share (the "Conversion Price") at which shares of Common Stock shall be
initially issuable upon conversion shall be $2.00 in the case of Series C
Preferred Stock, $2.60 in the case of Series D Preferred Stock, $3.50 in the
case of Series E Preferred Stock, and $2.64 in the case of the Series F
Preferred Stock (with respect to each such series, the "Original Issuance
Price"), subject in each case to adjustment as provided in Section E, hereof.
4. Procedures for Exercise of Conversion Rights. The holders of
--------------------------------------------
any shares of Preferred Stock may exercise their conversion rights during the
Conversion Period as to all such shares or any part thereof by delivering to
the corporation during regular business hours, at the office of any transfer
agent of the corporation for the Preferred Stock, or at the principal office
of the corporation or at such other place as may be designated by the
corporation, the certificate or certificates for the shares to be converted,
duly endorsed for transfer to the corporation (if required by the
corporation), accompanied by written notice stating that the holder elects to
convert such shares (except that no such written notice of election to the
corporation shall be necessary in the event of an automatic conversion
pursuant to Subsection D.1). Conversion shall be deemed to have been effected
on the date when such delivery is made (except that in the event of an
automatic conversion pursuant to Subsection D.1 above, such conversion shall
be deemed to have been made immediately prior to the closing of the offering
referred to therein or the date on which the holders referred to therein have
either converted or have voted to convert or consented in writing to convert
the shares referred to therein), and such date is referred to herein as the
"Conversion Date." As promptly as practicable after the Conversion Date, the
corporation shall issue and deliver to or upon the written order of
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<PAGE>
such holder, at such office or other place designated by the corporation, a
certificate or certificates for the number of full shares of Common Stock to
which such holder is entitled and a check for cash with respect to any
fractional interest in a share of Common Stock as provided in Subsection D.5,
below. The holder shall be deemed to have become a shareholder of record as of
the close of business on the Conversion Date, but the applicable Conversion
Price shall be the Conversion Price in effect on the Conversion Date. Upon
conversion of only a portion of the number of shares of Preferred Stock
represented by a certificate surrendered for conversion, the corporation shall
issue and deliver to or upon the written order of the holder of the
certificate so surrendered for conversion, at the expense of the corporation,
a new certificate covering the number of share of Preferred Stock representing
the unconverted portion of the certificate so surrendered.
5. No Fractional Shares. No fractional shares of Common Stock or
--------------------
scrip shall be issued upon conversion of shares of Preferred Stock. If more
than one share of Preferred Stock shall be surrendered for conversion at any
one time by the same holder, the number of full shares of Common Stock
issuable upon conversion thereof shall be computed on the basis of the
aggregate number of shares of Preferred Stock so surrendered. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of Preferred Stock, the corporation shall pay a cash
adjustment in respect of such fractional interest equal to the fair market
value of such fractional interest as determined by the corporation's Board of
Directors.
6. Payment of Taxes for Conversions. The corporation shall pay any
--------------------------------
and all issue and other taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion pursuant hereto of Preferred
Stock. The corporation shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issue and delivery
of shares of Common Stock in a name other than that in which the shares of
Preferred Stock so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to
the corporation the amount of any such tax, or has established, to the
satisfaction of the corporation, that such tax has been paid.
7. Reservation of Common Stock. The corporation shall at all times
---------------------------
reserve and keep available, out of its authorized but unissued Common Stock,
solely for the purpose of effecting the conversion of the Preferred Stock, the
full number of shares of Common Stock deliverable upon the conversion of all
shares of all series of Preferred Stock from time to time outstanding.
8. Registration or Listing of Shares of Common Stock. If any
-------------------------------------------------
shares of Common Stock to be reserved for the purpose of conversion of shares
of Preferred Stock require registration or listing with, or approval of, any
governmental authority, stock exchange or other regulatory body under any
federal or state law or regulation or otherwise, before such shares may be
validly issued or delivered upon conversion, the corporation will in good
faith and as expeditiously as possible endeavor to secure such registration,
listing or approval, as the case may be.
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<PAGE>
9. Status of Common Stock Issued Upon Conversion. All shares of
---------------------------------------------
Common Stock which may be issued upon conversion of the shares of Preferred
Stock will upon issuance by the corporation be validly issued, fully paid and
non-assessable and free from all taxes, liens and charges with respect to the
issuance thereof.
10. Status of Converted Preferred Stock. In case any shares of
-----------------------------------
Preferred Stock shall be converted pursuant to this Section D, the shares so
converted shall resume the status of authorized but unissued shares of
Preferred Stock.
E. Adjustment of Conversion Prices.
-------------------------------
1. General Provisions. The Conversion Price of each series of
------------------
Preferred Stock shall be subject to adjustment from time to time as follows:
(a) Subject to Section E.1.(a)(iv) hereof in the case of the
Conversion Price of the Series F-a Preferred Stock, if the corporation shall
issue any Common Stock (other than "Excluded Stock", as defined below, or
stock dividends, subdivisions, split-ups, combinations or dividends, which are
covered by Sections E.l(b), (c) and (d)), for a consideration per share less
than the Conversion Price for Series C, Series D, Series E or Series F
Preferred Stock in effect immediately prior to the issuance of such Common
Stock, the Conversion Price of the Series F Preferred Stock in effect
immediately after each such issuance shall thereafter be reduced to the price
paid per share for such additional shares of Common Stock, and the Conversion
Price for Series C, Series D and Series E Preferred Stock in effect
immediately after each such issuance shall thereafter be reduced, if shares of
such series of Preferred Stock are outstanding, to a price equal to the
quotient obtained by dividing:
(i) an amount equal to the sum of
(w) the total number of shares of Common Stock
outstanding (including any shares of Common Stock deemed to have been issued
pursuant to subdivision (3) of this Section E.l(a) and all shares of Excluded
Stock) immediately prior to such issuance multiplied by the Conversion Price
for such series of Preferred Stock in effect immediately prior to such
issuance, plus
(x) the consideration received by the corporation
upon such issuance, by
(ii) the total number of shares of Common Stock
outstanding (including any shares of Common Stock deemed to have been issued
pursuant to subdivision (3) of this Section E.l(a) and all shares of Excluded
Stock) immediately prior to such issuance plus the additional shares of Common
Stock issued in such issuance (but not including any additional shares of
Common Stock deemed to be issued as a result of any adjustment in the
Conversion Price of the Series C, Series D or Series E Preferred Stock
resulting from such issuance).
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<PAGE>
For the purposes of any adjustment of a Conversion Price pursuant to this
Section E.l(a), the following provisions shall be applicable:
(1) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor
without deducting any discounts or commissions paid or incurred by the
corporation in connection with the issuance and sale thereof.
(2) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors of the corporation, in accordance with generally accepted
accounting treatment provided, however, that if, at the time of such
determination, the corporation's Common Stock is traded in the over-the-
counter market or on a national or regional securities exchange, such fair
market value as determined by the Board of Directors of the corporation shall
not exceed the aggregate "Current Market Price" (as defined below) of the
shares of Common Stock being issued.
(3) In the case of the issuance of (i) options to purchase
or rights to subscribe for Common Stock (other than Excluded Stock), (ii)
securities by their terms convertible into or exchangeable for Common Stock
(other than Excluded Stock), or (iii) options to purchase or rights to
subscribe for securities by their terms convertible into or exchangeable for
Common Stock (other than Excluded Stock):
(A) the aggregate maximum number of shares of Common
Stock deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the time
such options or rights were issued and for a consideration equal to the
consideration (determined in the manner provided in subdivisions (1) and (2)
above), if any, received by the corporation upon the issuance of such options
or rights plus the minimum purchase price provided in such options or rights
for the Common Stock covered thereby,
(B) the aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in exchange for any such convertible
or exchangeable securities, or upon the exercise of options to purchase or
rights to subscribe for such convertible or exchangeable securities and
subsequent conversion or exchange thereof, shall be deemed to have been issued
at the time such securities were issued or such options or rights were issued
and for a consideration equal to the consideration received by the corporation
for any such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends), plus the
additional consideration, if any, to be received by the corporation upon the
conversion or exchange of such securities or the exercise of any related
options or rights (the consideration in each case to be determined in the
manner provided in subdivisions (1) and (2) above);
-12-
<PAGE>
(C) on any change in the number of shares of Common
Stock deliverable upon exercise of any such options or rights or conversion of
or exchange for such convertible or exchangeable securities, or on any change
in the minimum purchase price of such options, rights or securities, other
than a change resulting from the antidilution provisions of such options,
rights or securities, the Conversion Price for such series shall forth with be
readjusted to such Conversion Price as would have obtained had the adjustment
made upon (x) the issuance of such options, rights or securities not
exercised, converted or exchanged prior to such change, as the case may be,
been made upon the basis of such change or (y) the options or rights related
to such securities not converted or exchanged prior to such change, as the
case may be, been made upon the basis of such change; and
(D) on the expiration of any such options or rights,
the termination of any such rights to convert or exchange or the expiration of
any options or rights related to such convertible or exchangeable securities,
the Conversion Price for such series shall forthwith be readjusted to such
Conversion Price as would have obtained had the adjustment made upon the
issuance of such options, rights, convertible or exchangeable securities or
options or rights related to such convertible or exchangeable securities, as
the case may be, been made upon the basis of the issuance of only the number
of shares of Common Stock actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such convertible or exchangeable
securities or upon the exercise of the options or rights related to such
convertible or exchangeable securities, as the case may be.
(iii) "Excluded Stock" shall mean:
(A) all shares of Common Stock and Preferred Stock
issued and outstanding on the date hereof;
(B) all shares of Common Stock into which shares of
Preferred Stock are convertible (the effect of the issuance of such shares of
Preferred Stock having been taken into account pursuant to Section E.l(a)
above, if applicable);
(C) shares of Common Stock issuable or issued to
employees, consultants, directors or vendors of this corporation directly or
pursuant to the Company's 1989 Stock Option Plan, the Company's 1996 Stock
Plan or a stock option plan or restricted stock plan approved by the Board of
Directors of the corporation subsequent to December 20, 1995, at any time when
the total number of shares of Common Stock so issuable or issued (and not
repurchased at cost by the corporation) does not exceed 5,200,000 shares.;
(D) all shares of Common Stock and Preferred Stock
issuable upon exercise of outstanding options or warrants outstanding on the
date hereof, provided that such options or warrants were disclosed as part of
that certain Series F Stock Purchase Agreement executed in December 1995 (the
"Series F Purchase
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<PAGE>
Agreement") by and between the Company and certain purchasers of Series F
Preferred Stock; and
(E) all shares of Series F Preferred Stock issued
pursuant to Sections 2.2 and 3.5 under the Series F Purchase Agreement, and
all shares of Common Stock issuable upon conversion of such shares of Series F
Preferred Stock.
All shares of Excluded Stock or stock dividends, subdivisions, split-ups,
combinations or dividends which are covered by Sections E.l(b), (c) and (d)
shall be deemed to be outstanding for all purposes of the computations of
Section E.l(a) above.
(iv) From and after such time as any share of Series F-a
Preferred Stock is issued and outstanding, the Series F-a Preferred Conversion
Price shall be the Series F Conversion Price in effect immediately prior to
the issuance of such Series F-a Preferred Stock and shall no longer be subject
to adjustment pursuant to Section E.1.(a).
(b) If the number of shares of Common Stock outstanding at any time
after the date hereof is increased by a stock dividend payable in shares of
Common Stock or by a subdivision or split-up of shares of Common Stock, then,
on the date such payment is made or such change is effective, the Conversion
Price for the Preferred Stock shall be appropriately decreased so that the
number of shares of Common Stock issuable on conversion of any shares of the
Preferred Stock shall be increased in proportion to such increase of
outstanding shares.
(c) If the number of shares of Common Stock outstanding at any time
after the date hereof is decreased by a combination of the outstanding shares
of Common Stock, then, on the effective date of such combination, the
Conversion Price for the Preferred Stock shall be appropriately increased so
that the number of shares of Common Stock issuable on conversion of shares of
the Preferred Stock shall be decreased in proportion to such decrease in
outstanding shares.
(d) In case the corporation shall declare a cash dividend upon its
Common Stock payable otherwise than out of retained earnings or shall
distribute to holders of its Common Stock shares of its capital stock (other
than Common Stock), stock or other securities of other persons, evidences of
indebtedness issued by the corporation or other persons, assets (excluding
cash dividends) or options or rights (excluding options to purchase and rights
to subscribe for Common Stock or other securities of the corporation
convertible into or exchangeable for Common Stock), then, in each such case,
immediately following the record date fixed for the determination of the
holders of Common Stock entitled to receive such dividend or distribution, the
Conversion Price for the Preferred Stock in effect thereafter shall be
determined by multiplying the Conversion Price for the Preferred Stock in
effect immediately prior to such record date by a fraction of which the
numerator shall be an amount equal to the remainder of (x) the Current Market
Price, of one share of Common Stock less (y) the amount of such cash dividend
in respect of one share of Common Stock or the fair market value (as
determined
-14-
<PAGE>
by the Board of Directors, whose determination shall be conclusive) of the
stock, securities, evidences or indebtedness, assets, options or rights so
distributed in respect of one share of Common Stock, as the case may be, and
of which the denominator shall be the Current Market Price of one share of
Common Stock. Such adjustment shall be made on the date such dividend or
distribution is made, and shall become effective at the opening of business on
the business day next following the record date for the determination of
stockholders entitled to such dividend or distribution.
(e) In case, at any time after the date hereof, of any capital
reorganization, or any reclassification of the stock of the corporation (other
than a change in par value or as a result of a stock dividend or subdivision,
split-up or combination of shares), or the consolidation or merger of the
corporation with or into another person (other than a consolidation or merger
in which the corporation is the continuing entity and which does not result in
any change in the Common Stock), or of the sale or other disposition of all or
substantially all the properties and assets of the corporation as an entirety
to any other person, the shares of Preferred Stock shall, after such
reorganization, reclassification, consolidation, merger, sale or other
disposition, be convertible into the kind and number of shares of stock or
other securities or property of the corporation or of the entity resulting
from such consolidation or surviving such merger or to which such properties
and assets shall have been sold or otherwise disposed to which such holder
would have been entitled if immediately prior to such reorganization,
reclassification, consolidation, merger, sale or other disposition he had
converted his shares of Preferred Stock into Common Stock. The provisions of
this Section E.l(e) shall similarly apply to successive reorganizations,
reclassifications, consolidations, mergers, sales or other dispositions.
(f) All calculations under this Section E shall be made to the
nearest one hundredth (1/100) of a cent or to the nearest one hundredth
(1/100) of a share, as the case may be.
(g) For the purpose of any computation pursuant to this Section E,
the "Current Market Price" at any date of one share of Common Stock, shall be
deemed to be the average of the highest reported bid and the lowest reported
offer prices on the preceding business day as furnished by the National
Quotation Bureau, Incorporated (or equivalent recognized source of
quotations); provided, however, that if the Common Stock is not traded in such
manner that the quotations referred to in this Section E are available for the
period required hereunder, Current Market Price shall be determined in good
faith by the Board of Directors of the corporation, but if challenged by the
holders of more than 50% of the outstanding Preferred Stock, then as
determined by an independent appraiser selected by the Board of Directors of
the corporation, the cost of such appraisal to be borne by the Company if the
appraisal is more than 10% above the price determined by the Board of
Directors, or otherwise by the challenging parties.
2. Minimal Adjustments. No adjustment in a Conversion Price need
-------------------
be made if such adjustment would result in a change in a Conversion Price of
less than $0.01. Any adjustment of less than $0.01 which is not made shall be
carried forward and
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<PAGE>
shall be made at the time of and together with any subsequent adjustment
which, on a cumulative basis, amounts to an adjustment of $0.01 or more in a
Conversion Price.
3. No Impairment. The corporation will not, whether by amendment
-------------
of its Restated Articles of Incorporation (unless amended in accordance with
the terms hereof) or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the corporation, but
will at all times in good faith assist in the carrying out of all the
provisions of this Section E and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of Preferred Stock against impairment. This provision shall not
restrict the corporation from amending its Restated Articles of Incorporation
in accordance with applicable and the terms hereof.
4. Computation of Adjustment. Upon the occurrence of each
-------------------------
adjustment or readjustment of the Conversion Price of any series of Preferred
Stock pursuant to this Section E, the corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof, and prepare and furnish to each holder of Preferred Stock affected
thereby a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is
based. The corporation shall, upon the written request at any time of any
holder of Preferred Stock, furnish or cause to be furnished to such holder a
like certificate setting forth (A) such adjustment or readjustment, (B) the
Conversion Price at the time in effect for the applicable Series of Preferred
Stock, and (C) the number of shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion of such
holder's shares.
F. Protective Provisions.
---------------------
1. General. In addition to any other class or series vote that
-------
may be required by law or these Restated Articles of Incorporation, so long as
any shares of Preferred Stock shall be outstanding the corporation shall not
without obtaining the approval (by vote or written consent, as provided by
law), of the holders of (i) a majority of the outstanding shares of Preferred
Stock (excluding the Series E and Series F Preferred Stock), voting as a
single class, (ii) a majority of the outstanding shares of Series E Preferred
Stock, and (iii) eighty percent (80%) of the outstanding shares of Series F
Preferred Stock.
(a) Change of Rights. Materially or adversely alter or change the
----------------
rights, preferences or privileges of the Preferred Stock; or
(b) Create a New Class. Create, or obligate itself to create, any
------------------
new security having preferences over or on a parity with any outstanding
shares of Preferred Stock as to dividends, assets, liquidation preferences,
conversion rights or voting rights or being otherwise superior to or on a
parity with any such preference or priority of any outstanding shares of
Preferred Stock; or
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(c) Reclassify. Reclassify any class or series of any Common Stock
----------
into shares having any preference or priority as to dividends, assets,
liquidation preferences, conversion rights or voting rights or otherwise
superior to or on a parity with any such preference or priority of Preferred
Stock; or
(d) Amendment to Articles of Incorporation or Bylaws. Amend any
------------------------------------------------
provisions of its Restated Articles of Incorporation or Bylaws; or
(e) Merger, Reorganization or Other Exchange. Effect any merger,
----------------------------------------
recapitalization, reorganization or other exchange involving capital stock of
the corporation, unless the shareholders immediately prior to such transaction
continue to hold a majority of the outstanding voting securities of the
surviving entity after such transaction; or
(f) Sale of Assets. Sell or otherwise dispose of all or
--------------
substantially all of its assets other than in the ordinary course of business;
(g) Increase or decrease the number of authorized shares of
Preferred Stock; or
(h) Use of Assets. Apply any of its assets to (i) the redemption,
-------------
retirement, purchase or acquisition, directly or indirectly, of any shares of
any class or series of Common Stock, except at cost from employees, advisors,
officers, directors and consultants of, and persons performing services for,
this corporation or its subsidiaries on terms approved by the Board of
Directors upon termination of employment or association (ii) the payment of
any dividends on shares of Common Stock, or (iii) the repurchase of any shares
of Preferred Stock other than pursuant to the redemption provisions set forth
under Section H hereof.
G. Sinking Fund.
------------
The shares of Preferred Stock are not subject or entitled to the
operation of a retirement or sinking fund.
H. Redemption.
----------
(a) At Option of Holders. If the corporation receives a written
--------------------
request from the holders of not less than eighty percent (80%) of the then
outstanding shares of Series F Preferred Stock that all or some of such
holders' shares be redeemed, the corporation shall (i) on the later to occur
of the fifth anniversary of the first issuance of Series F Preferred Stock or
ninety days after receipt of such request, redeem one-third of the shares of
Series F Preferred Stock pro rata based on the number of shares that are
requested to be redeemed by such holders; (ii) one year from the date of the
initial redemption under (i) above, redeem an additional one-third of the
shares of Series F Preferred Stock pro rata based on the number of shares that
are requested to be redeemed by such holders; and (iii) two years from the
date of the initial redemption under (i) above,
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<PAGE>
redeem the remaining one-third of the shares of Series F Preferred Stock
requested to be redeemed. The redemption shall be in accordance with the
provisions of this Section H.
(b) Redemption Price. The Redemption Price per share shall be an
----------------
amount equal to $2.64 plus any accumulated and unpaid dividends on the date of
redemption of the Series F Preferred Stock.
(c) Notice. At least thirty (30) days prior to the date fixed for
------
any redemption of Series F Preferred Stock (a "Redemption Date"), written
notice shall be mailed, first class postage prepaid (airmail in cases where
the sending and receiving parties are located in different countries), to each
holder of record of shares of Series F Preferred Stock at the close of
business on the business day next preceding the day on which notice is given
(the "Redemption Record Date"), at the address last shown on the records of
the corporation for such holder or given by the holder to the corporation for
the purpose of notice, or, if no such address appears or is given, at the
place where the principal executive office of the corporation is located,
notifying such holder of the redemption to be effected, whether that holder is
effected by the redemption and, if so, to what extent, specifying the
Redemption Date, the Redemption Price, the place at which payment may be
obtained and calling upon such holder to surrender to the corporation, in the
manner and at the place designated, such holder's certificate or certificates
representing the Series F Preferred Stock being redeemed (the "Redemption
Notice").
(d) Mechanics of Redemption. On or after the applicable Redemption
-----------------------
Date, each holder of Series F Preferred Stock shall surrender to the
corporation the certificate or certificates representing such shares that are
subject to redemption on such date, in the manner and at the place designated
in the Redemption Notice, and thereupon the Redemption Price of such shares
shall be payable to the person whose name appears on such certificate or
certificates as the owner thereof and each surrendered certificate shall be
canceled. In the event less than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares.
(e) Rights of Holders. From and after the Redemption Date, unless
-----------------
there shall have been a default in payment of the Redemption Price, with
respect to the shares that are subject to redemption on such date, all rights
of the holders of Series F Preferred Stock as holders of Series F Preferred
Stock (except the right to receive the Redemption Price without interest upon
surrender of their certificate or certificates) shall cease with respect to
such shares, and such shares shall not thereafter be transferred on the books
of the corporation or be deemed to be outstanding for any purpose whatsoever.
With respect to the shares that are subject to redemption on such date, if the
funds of the corporation legally available for redemption of Series F
Preferred Stock on any Redemption Date are insufficient to redeem all
outstanding Series F Preferred Stock then redeemable, those funds which are
legally available will be used to redeem the maximum possible number of such
shares ratably among the holders of the Series F Preferred Stock, based on the
amount of the Redemption Price payable to each holder. The shares not
redeemed shall remain outstanding and entitled to all the rights and
preferences provided
-18-
<PAGE>
herein. At any time thereafter when additional funds of the corporation are
legally available for the redemption of Series F Preferred Stock, such funds
will immediately be used to redeem the balance of the shares of Series F
Preferred Stock that have not been redeemed.
(f) Payment of Redemption Price. Three days prior to the Redemption
---------------------------
Date, the corporation shall deposit the Redemption Price of all outstanding
shares designated for redemption in the Redemption Notice, and not yet
redeemed or converted, with a bank or trust company having aggregate capital
and surplus in excess of $50,000,000 as a trust fund for the benefit of the
respective holders of the shares designated for redemption and not yet
redeemed. Simultaneously, the corporation shall deposit irrevocable
instruction and authority to such bank or trust company to pay, on and after
the date fixed for redemption or prior thereto, the Redemption Price of the
Series F Preferred Stock to the holders thereof upon surrender of their
certificates. Any monies deposited by the corporation pursuant to this
Section H for the redemption of shares that are thereafter converted into
shares of Common Stock pursuant to Section D no later than the close of
business on the Redemption Date shall be returned to the corporation forthwith
upon such conversion. The balance of any monies deposited by the corporation
pursuant to this Section H remaining unclaimed at the expiration of one year
following the Redemption Date shall thereafter be returned to the corporation,
provided that the shareholder to which such monies would be payable hereunder
shall be entitled, upon proof of its ownership of Series F Preferred Stock and
payment of any bond requested by the corporation, to receive such monies
without interest from the Redemption Date.
I. Special Mandatory Conversion.
----------------------------
1. If (I) any holder of shares of Series F Preferred Stock is
entitled to exercise the right of first refusal (the "Right of First Refusal")
set forth in Section 8.4 of the Series F Purchase Agreement, with respect to
an equity financing of the corporation at a price per share which is less than
the applicable Original Issuance Price (the "Equity Financing"), (II) the
corporation has complied with its obligations under the Right of First Refusal
in respect thereof, and (III) such holder, or an Affiliate (as defined in the
Series F Purchase Agreement) of the holder (a "Non-Participating Holder"),
does not by exercise of such holder's Right of First Refusal acquire the
maximum portion for which such holder is entitled to subscribe pursuant to
such Equity Financing (a "Mandatory Offering"), then all of such holder's
shares of Series F Preferred Stock shall automatically and without further
action on the part of such holder be converted into an equivalent number of
shares of Series F-a Preferred Stock effective immediately prior to the
consummation of the Mandatory Offering (the "Mandatory Offering Date");
provided, however, that no such conversion shall occur in connection with a
-------- -------
particular Equity Financing with respect to a particular holder of shares of
Series F Preferred Stock if, pursuant to the written request of the
corporation, such holder agrees in writing to waive his or its Right of First
Refusal with respect to such Equity Financing and each other holder of shares
of Series F Preferred Stock agrees in writing that such particular holder of
shares of Series F Preferred Stock may waive his or its Right of First Refusal
with respect to such Equity
-19-
<PAGE>
Financing. Upon conversion pursuant to this Section H, the shares of Series F
Preferred Stock so converted shall be cancelled and not subject to reissuance.
2. The holder of any shares of Series F Preferred Stock converted
pursuant to this Section I hereof shall deliver to the corporation during
regular business hours at the office of any transfer agent of the corporation
for the Series F Preferred Stock, or at such other place as may be designated
by the corporation, the certificate or certificates for the shares so
converted, duly endorsed or assigned in blank or to the corporation. As
promptly as practicable thereafter, the corporation shall issue and deliver to
such holder, at the place designated by such holder, a certificate or
certificates for the number of full shares of the Series F-a Preferred Stock
to be issued and such holder shall be deemed to have become a stockholder of
record of Series F-a Preferred Stock on the Mandatory Offering Date, unless
the transfer books of the corporation are closed on that date, in which event
he shall be deemed to have become a stockholder of record of Series F-a
Preferred Stock on the next succeeding date on which the transfer books are
open.
3. In the event that any shares of Series F-a Preferred Stock are
issued, concurrently with such issuance, the corporation shall use its best
efforts to take all such action as may be required, including amending the
Restated Articles of Incorporation, (I) to cancel all authorized shares of
Series F-a Preferred Stock that remain unissued after such issuance, (II) to
create and reserve for issuance upon Special Mandatory Conversion of the
Series F Preferred Stock a new series of Preferred Stock equal in number to
the number of Shares of Series F-a Preferred Stock so cancelled and designated
"Series F-b Convertible Preferred Stock" ("Series F-b Preferred Stock") with
the designations, powers, preferences and rights and the qualifications,
limitations and restrictions identical to those then applicable to the Series
F Preferred Stock as the case may be, except that the Conversion Price for
such shares of Series F-b Preferred Stock once initially issued shall be the
Conversion Price in effect immediately prior to such issuance and shall no
longer be subject to adjustment under Article IV, Section E1.(a) hereof, and
(III) to amend the provisions of this Section I to provide that any subsequent
Special Mandatory Conversion will be into shares of Series F-b Preferred Stock
rather than Series F-a Preferred Stock. The corporation shall take the same
action with respect to each successive series of Preferred Stock required to
be issued hereunder.
J. Status of Converted or Redeemed Shares.
--------------------------------------
In case shares of Preferred stock shall be converted or (in the case
of Series F Preferred) redeemed the shares so converted or redeemed shall be
cancelled, retired and eliminated from the shares which the corporation is
authorized to issue.
K. Restated Certificate.
--------------------
Upon the conversion of all outstanding shares of the Preferred
Stock, this Article IV shall be of no further force or effect, and this
Restated Certificate of Incorporation may be restated by a resolution of the
Board of Directors (and without further action by the stockholders) to delete
this Article IV.
-20-
<PAGE>
ARTICLE V
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may now or hereafter be organized under the General
Corporation Law of Delaware.
ARTICLE VI
The Corporation is to have perpetual existence.
ARTICLE VII
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, adopt, alter, amend or
repeal the Bylaws of the Corporation, subject to the right of the stockholders
entitled to vote with respect thereto to amend or repeal Bylaws made by the
Board of Directors as provided for in this Amended and Restated Certificate of
Incorporation. The affirmative vote of 66-2/3% of the total number of votes
of the then outstanding shares of capital stock of this Corporation entitled
to vote generally in the election of directors, voting together as a single
class, shall be required for the adoption, amendment or repeal of the
following sections of the Corporation's Bylaws: 2.3 (Special Meeting), 2.5
(Advance Notice of Stockholder Nominees) and 2.6 (Advance Notice of
Stockholder Business) by the stockholders of this Corporation.
ARTICLE VIII
The number of directors which shall constitute the whole Board of
Directors of the Corporation shall be as specified in the Bylaws of the
Corporation.
ARTICLE IX
The election of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statute) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XI
If at any time this Corporation shall have a class of stock registered
pursuant to the provisions of the Securities Exchange Act of 1934, for so long
as such class is so registered, any action by the stockholders of such class
must be taken at an annual or
-21-
<PAGE>
special meeting of stockholders and may not be taken by written consent. This
provision shall supersede any provision to the contrary in the Bylaws of the
Corporation.
ARTICLE XII
Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided
in the Bylaws of the Corporation.
ARTICLE XIII
Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or the Bylaws (and notwithstanding the fact that
a lesser percentage may be specified by law, this Amended and Restated
Certificate of Incorporation or the Bylaws of this Corporation), the
affirmative vote of 66-2/3% of the total number of the then outstanding shares
of capital stock of this Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
amend or repeal, or to adopt any provision inconsistent with the purpose or
intent of, Articles VII through XV. Notice of any such proposed amendment,
repeal or adoption, shall be contained in the notice of the meeting at which
it is to be considered. Subject to the provisions set forth herein, this
Corporation reserves the right to amend, alter, change or repeal any provision
contained in this Amended and Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ARTICLE XIV
To the fullest extent permitted by the Delaware General Corporation Law
as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article XIV, nor the adoption of any
provision of this Amended and Restated Certificate of Incorporation
inconsistent with this Article XIV, shall eliminate or reduce the effect of
this Article XIV in respect of any matter occurring, or any cause of action,
suit or claim that, but for this Article XIV, would accrue or arise, prior to
such amendment, repeal or adoption of any inconsistent provision.
ARTICLE XV
"Listing Event" as used in this Amended and Restated Certificate of
Incorporation shall mean the Corporation becoming a "Listed Corporation"
within the meaning of Section 301.5 of the California Corporations Code. For
the management of the business and for the conduct of the affairs of the
Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, its directors and its stockholders or any class
thereof, as the case may be, it is further provided that, effective upon the
occurrence of the Listing Event:
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<PAGE>
(i) The number of directors which shall constitute the entire Board
of Directors, and the number of directors in each class, shall be fixed
exclusively by one or more resolutions adopted from time to time by the Board
of Directors. Until changed by a resolution of the Board of Directors, Class
I shall consist of five directors, each of whom shall be designated by the
Board of Directors, and Class II shall consist of five directors, each of whom
shall be designated by the Board of Directors.
The Board of Directors shall be divided into two classes, designated as
Class I and Class II, respectively. Directors shall be assigned to each class
in accordance with a resolution or resolutions adopted by the Board of
Directors. At the first annual meeting of stockholders following the Listing
Event, the terms of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of two years. At the second annual
meeting of stockholders following the Listing Event, the term of office of the
Class II directors shall expire and Class II directors shall be elected for a
full term of two years. At each succeeding annual meeting of stockholders,
directors shall be elected for a full term of two years to succeed the
directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his or her successor is duly elected and qualified or until
his or her death, resignation, or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
Any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal, or other causes shall be filled by
either (i) the affirmative vote of the holders of a majority of the voting
power of the then-outstanding shares of voting stock of the corporation
entitled to vote generally in the election of directors (the "Voting Stock")
voting together as a single class; or (ii) by the affirmative vote of a
majority of the remaining directors then in office, even though less than a
quorum of the Board of Directors. Newly created directorships resulting from
any increase in the number of directors shall, unless the Board of Directors
determines by resolution that any such newly created directorship shall be
filled by the stockholders, be filled only by the affirmative vote of the
directors then in office, even though less than a quorum of the Board of
Directors. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the class of directors
in which the new directorship was created or the vacancy occurred and until
such director's successor shall have been elected and qualified.
(ii) There shall be no right with respect to shares of stock of the
Corporation to cumulate votes in the election of directors.
(iii) Any director, or the entire Board of Directors, may be removed
from office at any time (i) with cause by the affirmative vote of the holders
of at least a majority of the voting power of the then-outstanding shares of
the Voting Stock, voting together as a single class; or (ii) without cause by
the affirmative vote of the holders of at least 66-2/3% of the voting power of
the then-outstanding shares of the Voting Stock.
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<PAGE>
[LETTERHEAD OF VENTURE LAW GROUP APPEARS HERE]
VENTURE LAW GROUP
A Professional Corporation
2800 SAND HILL ROAD
MENLO PARK, CA 94025
June 12, 1996
CONNECT, Inc.
515 Ellis Street
Mountain View, CA 94043-2242
Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1(the "Registration
Statement") to be filed by you with the Securities and Exchange Commission on
June 13, 1996 in connection with the registration under the Securities Act of
1933, as amended, of 2,875,000 shares of your Common Stock (the "Shares"). The
Shares include an over-allotment option to purchase 375,000 shares granted to
the underwriters and are to be sold to the underwriters as described in the
Registration Statement for resale to the public. As your counsel in connection
with this transaction, we have examined the proceedings taken and are familiar
with the proceedings proposed to be taken by you in connection with the sale and
issuance of the Shares.
It is our opinion that upon conclusion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares when issued and sold in the manner
described in the Registration Statement will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and in any amendment thereto.
Very truly yours,
VENTURE LAW GROUP
A Professional Corporation
/s/ VENTURE LAW GROUP
------------------------------
DMK
<PAGE>
EXHIBIT 9.1
AMENDED STOCKHOLDERS AGREEMENT
------------------------------
This AGREEMENT is made as of the 27th day of December, 1995, among CONNECT,
INC., a California corporation (the "Company"); QUAESTUS PARTNER FUND, a
Wisconsin limited partnership ("QPF"), QUAESTUS LIMITED PARTNERSHIP, a Wisconsin
limited partnership ("QLP") and NETWORK PARTNERS, a Wisconsin limited
Partnership ("NP"), collectively referred to as the "Quaestus Entities"; VOLPE
WELTY & COMPANY HYBRID FUND I, a California limited partnership ("VWI"), VOLPE
WELTY & COMPANY HYBRID FUND II, a California limited partnership ("VWII"), and
VOLPE WELTY & COMPANY HYBRID FUND I SLP, a California limited partnership ("VWI
SLP") (collectively referred to as the "VW Entities"); Michael Muller and the
Muller Family Trust (collectively, "Muller"); and BANKAMERICA VENTURES and BA
VENTURE PARTNERS I (collectively referred to as the "BAV Entities"); 21ST
CENTURY COMMUNICATIONS PARTNERS, L.P. ("21st Century"), RRE CONNECT INVESTORS
L.P. ("RRE"), NORWEST EQUITY PARTNERS, V, a Minnesota Limited Liability
Partnership ("Norwest"), Theordore H. Ashford ("Ashford") and H&Q MacNet
Investors, L.P. ("H&Q").
WITNESSETH:
WHEREAS, the Quaestus Entities, the VW Entities, Muller, the BAV Entities,
21st Century, RRE, Norwest, H&Q and Ashford (collectively the "Shareholders")
own common and/or preferred stock of the Company (all shares of common and
preferred stock of the Company at any time owned by the Shareholders, of record
or beneficially, however obtained, are referred to hereinafter as "Stock"); and
WHEREAS, to promote stability and continuity, each Shareholder has agreed
to certain restrictions with respect to his Stock.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. Notice of Proposed Transfer. Before a Shareholder may effect any
---------------------------
transfer of any of its Stock (provided (i) the proposed transferee is not an
Affiliate (as defined below)) or (ii) the transfer is not one contemplated by
Section 8.16(e) of that certain Series F Stock Purchase Agreement dated as of
the date hereof by and between the Company and certain of its shareholders, such
Shareholder must give each of the other Shareholders a written notice signed by
the selling Shareholder (the "Selling Shareholder's Notice") stating: (a) such
Shareholder's bona fide intention to transfer such Stock; (b) the number of
shares of Stock proposed to be transferred; (c) the name, address and
relationship, if any, to such Shareholder of each proposed transferee of such
Stock and the number of shares of Stock proposed to be transferred by such
Shareholder to such proposed transferee; and (d) in reasonable detail, a
description of the offered price including, if applicable, the cash equivalent
value of the non-cash consideration as determined by the Board of Directors of
the Company in good faith, excluding any interested directors (the "Offered
Price"). Upon the request of any of the other Shareholders, the selling
Shareholder will promptly furnish such information to such Shareholder as may be
reasonably
<PAGE>
requested to establish that the offer and proposed transferee are bona fide. For
purposes of this Agreement, an "Affiliate" means, with respect to any person, a
second person (i) which, directly or indirectly, through one or more
intermediaries, controls, is controlled by or is under common control with, the
first person, (ii) which beneficially owns or holds 5% or more of the voting
stock of the first person, (iii) 5% or more of the voting stock (or in the case
of a person which is not a corporation, 5% or more of the equity interest) of
which is beneficially owned or held by the first person, or (iv) the equity
owners of which consist primarily of employees of such first person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a person, whether
through the ownership of voting stock, by contract or otherwise.
2. Right of First Refusal. Before any Stock subject to a Notice of
----------------------
Transfer as set forth in Section 1, may be sold or otherwise transferred, each
of the Shareholders shall have a right of first refusal to purchase such Stock
on the terms and conditions set forth in this Section 2.
(a) Exercise of Right of First Refusal. Each of the Shareholders may
----------------------------------
elect to purchase at the Offered Price its Proportionate Amount (as defined
below) of all of such Stock proposed to be transferred to any one or more of the
proposed transferees, by giving written notice to the selling Shareholder (the
"Election Notice"), on or before the thirtieth (30th) day after receipt of the
Selling Holder's Notice by such Shareholder (or such longer period as may
reasonably be required by BankAmerica Ventures in order to comply with
regulations by the U.S. Small Business Administration). In the event any of the
Shareholders does not elect to purchase its Proportionate Amount, the selling
Shareholder shall immediately notify each of the other Shareholders (the
"Subsequent Selling Shareholder's Notice") and such other Shareholders may
purchase all of these shares by giving written notice to the selling Shareholder
within (15) days of receipt of such notice by the selling Shareholder. If more
than one Shareholder elects to purchase such shares, the shares shall be
allocated to such Shareholders on a pro rata basis based upon the number of
shares of Common Stock then held by such Shareholder which were issued upon
conversion of Preferred Stock plus the number of shares of Common Stock issuable
upon conversion of then outstanding Preferred Stock based upon the conversion
price then in effect (the "Common Stock Equivalents") then held by such
Shareholder (assuming conversion or exercise of all outstanding options,
warrants or other rights to acquire shares of Preferred Stock of the Company).
For purposes of this Agreement, a Shareholder's "Proportionate Amount" of Stock
shall be equal to the percentage that such Shareholder's Common Stock
Equivalents bears to the total Common Stock Equivalents held by all Shareholders
participating in such transaction; provided, however, that for purposes of
Section 3(e) the total Stock held by all Shareholders shall include the shares
held by the Selling Quotaholders (as defined in Section 3(e)).
(b) Payment by the Investors. Payment of the Offered Price shall be
------------------------
made in cash (by check) within 30 days after the selling Shareholder's Notice is
received by such Shareholder or within 15 days after the Subsequent Selling
Shareholder's Notice is received by such Shareholder, if applicable.
(c) Holder's Right to Transfer. If all of the shares of Stock
--------------------------
proposed in the Selling Shareholder's Notice to be transferred to a given
proposed transferee is not purchased by the Shareholders then, subject to the
Right of Co-Sale set forth under Section 3 hereof, the selling
-2-
<PAGE>
Shareholder may sell or otherwise transfer such shares of Stock to that proposed
transferee at the Offered Price or at a higher price, provided that such sale or
other transfer is consummated within ninety (90) days after the date of the
Selling Holder's Notice and provided further that any such sale or other
transfer is effected in compliance with all applicable securities laws and the
proposed transferee agrees in writing to be bound by and becomes a party to this
Agreement and that the restrictions contained in this Agreement shall continue
to apply to the Stock in the hands of such proposed transferee. If the Stock
described in the Selling Holder's Notice is not transferred to the proposed
transferee within such period, a new Selling Holder's Notice shall be given to
each of the Shareholders and the Shareholders shall again be offered the Right
of First Refusal before any Stock held by the selling Shareholder may be sold or
otherwise transferred, in each case as set forth in Sections 1 and 2.
(d) The right of first refusal contained in this Section 2 shall
replace and supersede the rights contained under Section 9.4 of the Investment
Agreement dated June 10, 1994 between the Company and the investors named
therein (the "Investment Agreement").
3. Right of Co-Sale.
----------------
(a) Right of Co-Sale. With respect to any proposed transfer for which
----------------
a Notice of Proposed Transfer was required under Section 1, and subject to a
Shareholder's prior exercise of the Right of First Refusal set forth in Section
2 above, each of the Shareholders shall have the right to transfer to each
proposed transferee identified in the Selling Holder's Notice a number of shares
of Stock held by such Shareholder equal to up to such Shareholder's
Proportionate Amount of the offered shares of Stock proposed to be transferred
by the selling Shareholder and upon the same terms as Stock to be sold by such
selling Shareholder (the "Right of Co-Sale"). The Shareholder may exercise this
Right of Co-Sale only by giving written notice to the selling Shareholder,
within 60 days after the date on which the Selling Holder's Notice is given,
specifying the number and type of Stock (up to such Shareholder's Proportionate
Amount) that such Shareholder desires to transfer to the proposed transferee.
The number of shares of Stock originally proposed to be transferred by the
selling Shareholder to such proposed transferee shall be reduced on a share-for-
share basis by the number of shares of Stock sold by the Shareholder pursuant to
this Right of Co-Sale.
(b) Consummation of Co-Sale. In the event that a Shareholder
-----------------------
determines to exercise its Right of Co-Sale, a Shareholder shall effect its
participation in such transfer by delivering to the selling Shareholder at the
closing of the transfer of offered shares to such proposed transferee (the
"Closing") one or more certificates, properly endorsed for transfer,
representing the shares of Stock of such Shareholder to be transferred. At the
Closing, such certificates or other instruments will be transferred and
delivered to the proposed transferee set forth in the Selling Holder's Notice in
consummation of the transfer of the offered shares pursuant to the terms and
conditions specified in the Selling Holder's Notice, and the selling Shareholder
will remit, or will cause there to be remitted, to such Shareholder immediately
after such Closing that portion of the proceeds of the transfer to which such
Shareholder is entitled by reason of such Shareholder's participation in such
transfer pursuant to the Right of Co-Sale.
-3-
<PAGE>
(c) Multiple Series, Class or Type of Stock. If the offered shares
---------------------------------------
consist of more than one series or class or type of Stock, a Shareholder has the
right to transfer hereunder, as the case may be, such Shareholder's
Proportionate Amount of each such series, class or type. If a Shareholder does
not hold any one or more of the series, class, or type of the shares being
offered, and the proposed transferee is not willing at the Closing to purchase
some other series, class or type of Stock from such Shareholder as part of the
Shareholder's Proportionate Amount, or is unwilling to purchase such shares of
Stock from the Shareholder at the Closing, then the Shareholder will have the
put right (the "Put Right") set forth in Section 4 hereof.
(d) Termination. The Right of Co-Sale will terminate upon the
-----------
earliest to occur of: (a) the time immediately prior to the closing of the
initial public offering of the Company's shares of Common Stock or (b) the date
on which this Agreement is terminated.
(e) With respect to proposed transfers by Muller, the Quaestus
Entities and the VW Entities, the right of co-sale shall also be offered to the
Selling Quotaholders named in the Equity Exchange Agreement dated as of December
13, 1994 between the Company, GmbH and the Selling Quotaholders. In the event
this Section 2(e) applies, for purpose of this Section 2(e) only and for
purposes of calculating the Selling Quotaholders pro rata share, a Shareholders
Proportional Amount shall be equal to the percentage that the Selling
Quotaholders shares of stock bears to the total number of shares of stock held
by all Shareholders (including the Selling Quotaholders) participating in such
transaction (assuming all shares of Preferred Stock have been converted into
shares of Common Stock at the conversion price then in effect).
4. Refusal to Transfer; Put Right.
------------------------------
(a) Refusal to Transfer. Any attempt by any selling Shareholder to
-------------------
transfer any shares of Stock in violation of any provision of this Agreement
will be void. The Company will not (a) transfer on its books any shares of
Stock that has been sold, gifted or otherwise transferred in violation of this
Agreement, or (b) treat as the owner of such shares of Stock, or accord the
right to vote or pay dividends to, any purchaser, donee or other transferee to
whom such shares of Stock may have been so transferred.
(b) Put Right. If a selling Shareholder transfers any shares of Stock
---------
in contravention of the Right of Co-Sale of the Shareholders under this
Agreement (a "Prohibited Transfer"), or if the proposed transferee of offered
shares desires to purchase only the class, series or type of shares offered by
the selling Shareholder and the provisions of Section 3 hereof apply, then each
Shareholder having a Put Right may, by delivery of written notice given to such
selling Shareholder and the Company (a "Put Notice") within twenty (20) days
after such Shareholder becomes aware of the Prohibited Transfer or within twenty
(20) days after the transferee refuses to accept a different class, series or
type of stock, require such selling Shareholder to purchase from such
Shareholder for cash or such other consideration as the selling Shareholder
received in the Prohibited Transfer that number of shares of Stock (of such
class, series or type; otherwise of Common Stock) having a purchase price equal
to the aggregate purchase price such Shareholder would have received in the
closing of such Prohibited Transfer if such Shareholder had elected to exercise
such Shareholder's Right of Co-Sale with respect thereto and such Right of Co-
Sale had
-4-
<PAGE>
been complied with by the selling Shareholder. The closing of such sale to the
selling Shareholder will occur within 10 days after the date of the Put Notice
to such selling Shareholder.
5. Election of Directors.
---------------------
(a) The parties acknowledge that under the Restated Articles of
Incorporation of the Company, the holders of the Series C, D, E and F Preferred
Stock have the right, voting as a single class, to elect a certain number of
directors of the Company. The Quaestus Entities, Muller, BAV Entities, 21st
Century, RRE and Norwest agree to cast their votes so as to maintain on the
Board of Directors, at all times, one director to be designated by the VW
Entities; the Quaestus Entities, the VW Entities, Muller, 21st Century, RRE and
Norwest agree to cast their votes so as to maintain on the Board of Directors,
at all times, one director to be designated by the BAV Entities; the Quaestus
Entities, Muller, the VW Entities, the BAV Entities, RRE and Norwest agree to
cast their votes so as to maintain on the Board of Directors, at all times, one
director to be designated by 21st Century; the Quaestus Entities, Muller, the
BAV Entities, 21st Century, RRE and the VW Entities agree to cast their votes so
as to maintain on the Board of Directors, at all times, one director to be
designated by Norwest and the VW Entities, Muller, the BAV Entities, 21st
Century and RRE agree to cast their votes so as to maintain on the Board of
Directors, at all times, (x) three (3) directors designated by the Quaestus
Entities, and (y) with respect to any remaining directors (the "Remaining
Directors"), such directors which are designated by the Quaestus Entities and
approved by the holders of a majority of the then outstanding shares of
Preferred Stock (excluding the shares held by the Quaestus Entities), which
approval shall not be unreasonably withheld. With respect to the directors
elected by the holders of Common Stock, Muller agrees to cast his votes so as to
maintain on the Board of Directors, at all times, the Chief Executive Officer of
the Company. In addition, the Shareholders agree that the holders of Series F
Preferred Stock shall have the right to designate two (2) representatives (the
"Board Observers") and one (1) advisor to the Board of Directors (the "Board
Advisors") who will each be entitled to visitation rights to all meetings of the
Board of Directors. One Board Observer shall be designated by 21st Century and
the other Board Observer shall be designated by RRE. The Advisor shall be
designated by the holders of a majority of the then outstanding shares of Series
F Preferred Stock; provided, however, that the parties agree that James D.
Robinson III shall be the initial Advisor. The provisions contained in this
Section replace and supersede the provisions contained under Section 9.3 of the
Investment Agreement.
(b) In the event there is an Equity Financing (as defined in Article
IV, Section I of the Company's Restated Articles of Incorporation), the number
of members of the Board of Directors shall be reduced by one (1) member with a
corresponding reduction in the number of Remaining Directors which are
designated by the Quaestus Entities.
6. Legend. So long as the provisions of this Agreement remain in effect,
------
all certificates representing shares of Stock shall be endorsed with a legend to
the following effect:
(a) With respect to all certificates delivered to all Shareholders
except BA Venture Partners I:
-5-
<PAGE>
"ANY SALE, TRANSFER, PLEDGE OR OTHER ENCUMBRANCE OR DISPOSITION OF
THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO, AND WILL NOT BE VALID
UNLESS MADE IN ACCORDANCE WITH, THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY
AND CERTAIN OF ITS SHAREHOLDERS, DATED AS OF DECEMBER 27, 1995, AS AT ANY TIME
AMENDED, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF THE
COMPANY. THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF OR
TRANSFERRED UNLESS REGISTERED UNDER SUCH ACT OR UNLESS AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE."
(b) With respect to certificates delivered to BA Venture Partners I:
"ANY SALE, TRANSFER, PLEDGE (OTHER THAN A PLEDGE BY BA VENTURE
PARTNERS I TO BANKAMERICA INVESTMENT CORPORATION) OR OTHER ENCUMBRANCE OR
DISPOSITION OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO, AND
WILL NOT BE VALID UNLESS MADE IN ACCORDANCE WITH, THE TERMS OF AN AGREEMENT
BETWEEN THE COMPANY AND CERTAIN OF ITS SHAREHOLDERS, DATED AS OF DECEMBER 27,
1995, AS AT ANY TIME AMENDED, A COPY OF WHICH AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICES OF THE COMPANY. THE SHARES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR
OTHERWISE DISPOSED OF OR TRANSFERRED UNLESS REGISTERED UNDER SUCH ACT OR UNLESS
AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
7. Protective Provisions. In the event the protective provisions under
---------------------
Article III, Section F of the Company's Restated Articles of Incorporation are
required to be revised in connection with the Company's permit application with
the California Department of Corporation with respect to the 1989 Stock Option
Plan, each of the Shareholders agree that such Shareholder will not approve any
of the matters set forth under Section F unless (i) a majority of the
outstanding shares of Preferred Stock (excluding the Series E and Series F
Preferred Stock), voting as a single class, (ii) a majority of the outstanding
shares of Series E Preferred Stock, and (iii) eighty percent (80%) of the
outstanding shares of Series F Preferred Stock each approve such matter. In the
event the California Department of Corporations requires an amendment to the
Restated Articles, the Shareholders agree to approve such amendment so as to
comply with such requirement.
-6-
<PAGE>
8. Miscellaneous.
-------------
(a) This Agreement shall bind the parties hereto and their successors
and assigns. No provision hereof shall benefit or be enforceable by any person
or entity other than the parties hereto.
(b) Any notice or other communication required or permitted to be
given hereunder shall be deemed to have been duly given when personally
delivered or when sent by fax, certified mail, return receipt requested, postage
prepaid, if to the Company, at its principal address, to the attention of its
President; if to the Quaestus Entities, the VW Entities, the BAV Entities, 21st
Century or RRE at the recipient's principal address; and if to Muller, at his
residence as reflected in the Company's records. Any party may change its or
his address for the purpose of this subparagraph (b) by written notice similarly
given. A copy of all notices given to a party shall simultaneously be given to
the other parties.
(c) The parties acknowledge that the breach of any provision of this
Agreement will cause irreparable harm for which any remedies at law would be
inadequate. Accordingly, in the event of any breach or threatened or attempted
breach of any provision hereof by any party, the other parties shall, in
addition to all other remedies, be entitled to temporary and permanent
injunctions restraining such breach, and to a decree of specific performance of
the provisions hereof, without being required to show actual damage or to
furnish any bond or other security.
(d) If any clause or provision of this Agreement shall be held to be
invalid or unenforceable, such clause or provision shall be construed and
enforced as if it had been more narrowly drawn so as not to be invalid or
unenforceable and such invalidity or unenforceability shall not affect or render
invalid or unenforceable any other clause or provision of this Agreement.
(e) This Agreement may only be amended by written consent of the
Company, the holders of at least 75% of the then outstanding shares of Stock or
Common Stock issuable upon conversion thereof (other than Series F Preferred
Stock) and at least 80% of the then outstanding shares of Series F Preferred
Stock and Common Stock issued upon conversion thereof, voting as a single class.
(f) This Agreement sets forth the parties' final and entire agreement,
and supersedes any and all prior understandings with respect to the subject
matter hereof. No provision of this Agreement may be changed, waived or
terminated orally.
(g) This Agreement shall be governed by and construed in accordance
with the internal laws of the State of California.
(h) The Agreement may be executed in any number of counterparts, each
of which when so executed and delivered will be deemed an original, and all such
counterparts together will constitute one and the same agreement.
-7-
<PAGE>
(i) This Agreement replaces in its entirety the Stockholders Agreement
dated as of June 10, 1994 (the "Prior Agreement") between the Company, the
Quaestus Entities, the VW Entities and Muller, and the Prior Agreement shall
have no further force and effect.
(j) This Agreement terminates upon the closing of a sale of the
Company's Common Stock in a firmly underwritten registered public offering (the
"IPO") with proceeds to the Company of at least Fifteen Million Dollars
($15,000,000), at a per share offering price of at least $2.64 (as adjusted for
=====
recapitalizations, stock splits, stock dividends and the like).
(k) The Shareholders may not pledge or otherwise encumber their
respective Stock during the term of this Agreement, except with respect to (i)
the pledge by BA Venture Partners I to Bank America Investment Corporation and
(ii) a pledge by Muller Family Trust, provided that no shares shall be
transferred to such pledgee prior to the closing of the IPO. In connection with
such pledge by the Muller Family Trust, such trust will not enter into any
agreement which would require that such shares be transferred to the pledgee
prior to the closing of the IPO. In the event of such prohibited transfer, the
Company will not record such transfer on the stock books of the Company and the
transfer will be deemed null and void.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
CONNECT, INC. QUAESTUS PARTNER FUND, by its
general partner Quaestus Management
Corporation
By /s/ Henry V. Morgan
-----------------------------
Henry V. Morgan, Chief Financial Officer
and Secretary By /s/ Terrence J. Leahy
----------------------------
Its Vice President
/s/ Michael Muller
- -------------------------------
Michael Muller
QUAESTUS LIMITED PARTNERSHIP NETWORK PARTNERS, by its general
partner Quaestus Management Corporation
By /s/ Richard Weening By /s/ Terrence J. Leahy
---------------------------- ----------------------------
Richard Weening, Its President, Its Vice President
RPI Holdings, Inc.,
Its Managing General Partner
BANKAMERICA VENTURES BA VENTURE PARTNERS I
By /s/ BankAmerica Ventures By /s/ BA Venture Partners I
---------------------------- ----------------------------
Its Vice President Its General Partner
VOLPE, WELTY & COMPANY HYBRID VOLPE, WELTY & COMPANY HYBRID
FUND I FUND II
By /s/ William B. Welty By /s/ William B. Welty
---------------------------- ----------------------------
Its General Partner Its General Partner
VOLPE, WELTY & COMPANY HYBRID MICHAEL AND ELKIE MULLER Trustees
FUND I SLP of the Muller Family Trust dated
November 13, 1978, amended April 28,
1993
By /s/ William B. Welty
----------------------------
Its General Partner By /s/ Michael Muller
-----------------------------
Michael Muller, Trustee
<PAGE>
21ST CENTURY COMMUNICATIONS RRE CONNECT INVESTORS L.P
PARTNERS L.P., by Infomedia By: RRE Partners, L.L.C.
Associates, L.P., a general Its: General Partner
partner
By /s/ Stewart Elliman
----------------------------
By/s/ Irwin Lieber Its Member of G.P.
-----------------------------
Irwin Lieber, Treasurer
NORWEST EQUITY PARTNERS, V THEODORE H. ASHFORD
a Minnesota Limited Liability
Partnership,
By: Itasca Partners V, L.L.P.,
General Partner /s Theodore H. Ashford
-------------------------------
By /s/ Promod Haque
-----------------------------
Promod Haque, Partner
H&Q MACNET INVESTORS, L.P.
By /s/ Attorney-in-fact
----------------------------
Its Attorney-in-fact
<PAGE>
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the "Agreement") is made as of
---------
_______________, 199__, by and between Connect, Inc., a Delaware corporation
(the "Company"), and _________________________ (the "Indemnitee").
-------
RECITALS
--------
The Company and Indemnitee recognize the increasing difficulty in obtaining
directors' and officers' liability insurance, the significant increases in the
cost of such insurance and the general reductions in the coverage of such
insurance. The Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited. Indemnitee does not regard
the current protection available as adequate under the present circumstances,
and Indemnitee and other officers and directors of the Company may not be
willing to continue to serve as officers and directors without additional
protection. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
AGREEMENT
---------
In consideration of the mutual promises made in this Agreement, and for
other good and valuable consideration, receipt of which is hereby acknowledged,
the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in good faith and in a manner which Indemnitee reasonably believed to be
in or not opposed to the best interests of the Company, or, with respect
<PAGE>
to any criminal action or proceeding, that Indemnitee had reasonable cause to
believe that Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while an officer or
director or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement (if such settlement is approved in advance by
the Company, which approval shall not be unreasonably withheld), in each case to
the extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action or suit if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company and its stockholders, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been finally adjudicated by court order or judgment
to be liable to the Company in the performance of Indemnitee's duty to the
Company and its stockholders unless and only to the extent that the court in
which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1(a) or Section 1(b) or the defense of any
claim, issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith.
2. No Employment Rights. Nothing contained in this Agreement is intended
--------------------
to create in Indemnitee any right to continued employment.
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referred to in
Section l(a) or Section 1(b) hereof (including amounts actually paid in
settlement of any such action, suit or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby. Any advances to be made under this
Agreement shall be paid by the Company to Indemnitee within twenty (20) days
following delivery of a written request therefor by Indemnitee to the Company.
-2-
<PAGE>
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his or her right to be indemnified under this Agreement,
give the Company notice in writing as soon as practicable of any claim made
against Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). Notice shall be deemed received on the third business day after
the date postmarked if sent by domestic certified or registered mail, properly
addressed; otherwise notice shall be deemed received when such notice shall
actually be received by the Company. In addition, Indemnitee shall give the
Company such information and cooperation as it may reasonably require and as
shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 and this Section 3 shall be made no later than forty-five (45) days
after receipt of the written request of Indemnitee. If a claim under this
Agreement, under any statute, or under any provision of the Company's
Certificate of Incorporation or Bylaws providing for indemnification, is not
paid in full by the Company within forty-five (45) days after a written request
for payment thereof has first been received by the Company, Indemnitee may, but
need not, at any time thereafter bring an action against the Company to recover
the unpaid amount of the claim and, subject to Section 11 of this Agreement,
Indemnitee shall also be entitled to be paid for the expenses (including
attorneys' fees) of bringing such action. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses incurred in
connection with any action, suit or proceeding in advance of its final
disposition) that Indemnitee has not met the standards of conduct which make it
permissible under applicable law for the Company to indemnify Indemnitee for the
amount claimed, but the burden of proving such defense shall be on the Company
and Indemnitee shall be entitled to receive interim payments of expenses
pursuant to Section 3(a) unless and until such defense may be finally
adjudicated by court order or judgment from which no further right of appeal
exists. It is the parties' intention that if the Company contests Indemnitee's
right to indemnification, the question of Indemnitee's right to indemnification
shall be for the court to decide, and neither the failure of the Company
(including its Board of Directors, any committee or subgroup of the Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination that indemnification of Indemnitee is proper in the circumstances
because Indemnitee has met the applicable standard of conduct required by
applicable law, nor an actual determination by the Company (including its Board
of Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) that Indemnitee has not met such applicable
standard of conduct, shall create a presumption that Indemnitee has or has not
met the applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
-3-
<PAGE>
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that (i) Indemnitee shall have the
right to employ counsel in any such proceeding at Indemnitee's expense; and (ii)
if (A) the employment of counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be deemed to be within
the purview of Indemnitee's rights and the Company's obligations under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested members of the Company's Board of
Directors, the General Corporation Law of the State of Delaware, or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though he may have ceased to serve
in an such capacity at the time of any action, suit or other covered
proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred in the
investigation, defense, appeal or settlement of any civil or criminal action,
suit or proceeding, but not, however, for the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion of such expenses,
judgments, fines or penalties to which Indemnitee is entitled.
-4-
<PAGE>
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise. For example, the Company and Indemnitee
acknowledge that the Securities and Exchange Commission (the "SEC") has taken
---
the position that indemnification is not permissible for liabilities arising
under certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the SEC to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from time
----------------------------------------
to time, make the good faith determination whether or not it is practicable for
the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided
by such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a parent
or subsidiary of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required
-5-
<PAGE>
under Section 145 of the Delaware General Corporation Law, but such
indemnification or advancement of expenses may be provided by the Company in
specific cases if the Board of Directors finds it to be appropriate;
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the
extent such expenses or liabilities have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors' liability insurance
maintained by the Company; or
(d) Claims under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
-------
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand
in the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
-----------------
shall include employee benefit plans; references to "fines" shall include any
-----
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
-------------------------------------
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not
---
opposed to the best interests of the Company" as referred to in this Agreement.
- --------------------------------------------
11. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee
-6-
<PAGE>
with respect to such action, unless as a part of such action, the court of
competent jurisdiction determines that each of the material assertions made by
Indemnitee as a basis for such action were not made in good faith or were
frivolous. In the event of an action instituted by or in the name of the Company
under this Agreement or to enforce or interpret any of the terms of this
Agreement, Indemnitee shall be entitled to be paid all court costs and expenses,
including attorneys' fees, incurred by Indemnitee in defense of such action
(including with respect to Indemnitee's counterclaims and cross-claims made in
such action), unless as a part of such action the court determines that each of
Indemnitee's material defenses to such action were made in bad faith or were
frivolous.
12. Miscellaneous.
-------------
(a) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflict of law.
(b) Entire Agreement; Enforcement of Rights. This Agreement sets
----------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) Construction. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(d) Notices. Any notice, demand or request required or permitted to
-------
be given under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally or sent by telegram or forty-eight (48) hours after
being deposited in the U.S. mail, as certified or registered mail, with postage
prepaid, and addressed to the party to be notified at such party's address as
set forth below or as subsequently modified by written notice.
(e) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(f) Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and inure to the benefit of Indemnitee
and Indemnitee's heirs, legal representatives and assigns.
(g) Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of
-7-
<PAGE>
Indemnitee, who shall execute all documents required and shall do all acts that
may be necessary to secure such rights and to enable the Company to effectively
bring suit to enforce such rights.
[Signature Page Follows]
-8-
<PAGE>
The parties hereto have executed this Agreement as of the day and year set
forth on the first page of this Agreement.
CONNECT, INC.
By:
----------------------------------------
Title:
-------------------------------------
Address: 515 Ellis Street
Mountain View, CA 94043
AGREED TO AND ACCEPTED:
- ----------------------------------------
(Print name)
- ----------------------------------------
(Signature)
Address:
-------------------------------
-------------------------------
-------------------------------
-9-
<PAGE>
EXHIBIT 10.2
CONNECT, INC.
1989 STOCK OPTION PLAN
1. Purpose. The Connect, Inc. 1989 Stock Option Plan (the "Plan") is
-------
established to create additional incentive for key employees, directors and
consultants of Connect, Inc. and any successor corporation thereto (collectively
referred to as the "Company"), and any present or future parent and/or
subsidiary corporations of such corporation (all of whom along with the Company
being individually referred to as a "Participating Company" and collectively
referred to as the "Participating Company Group"), to promote the financial
success and progress of the Participating Company Group. For purposes of the
Plan, a parent corporation and a subsidiary corporation shall be as defined in
Sections 425(e) and 425(f) of the Internal Revenue Code of 1986, as amended (the
"Code").
2. Administration. The Plan shall be administered by the Board of
--------------
Directors of the Company (the "Board") and/or by a duly appointed committee of
the board having such powers as shall be specified by the Board. Any subsequent
references herein to the Board shall also mean the committee if such committee
has been appointed and, unless the powers of the committee have been
specifically limited, the committee shall have all of the powers of the Board
granted herein, including, without limitation, the power to terminate or amend
the Plan at any time, subject to the terms of the Plan and any applicable
limitations imposed by law. All questions of interpretation of the Plan or of
any options granted under the Plan (an "Option") shall be determined by the
Board, and such determinations shall be final and binding upon all persons
having an interest in the Plan and/or any Option. Options may be either
incentive stock options as defined in Section 422A of the Code ("Incentive Stock
Options") or nonqualified stock options. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligations, or election which is the responsibility of or which
is allocated to the Company herein, provided the officer has apparent authority
with respect to such matter, right, obligation, or election.
3. Eligibility. The Options may be granted only to employees (including
-----------
officers) and directors of the Participating Company Group or to individuals who
are rendering services as consultants to the Participating Company Group. The
Board shall, in the Board's sole discretion, determine which persons shall be
granted Options (an "Optionee"). A director of the Company shall be eligible to
be granted only a nonqualified stock option unless the director is also an
employee of the Company. An individual who is rendering services as a
consultant or other independent contractor shall be eligible to be granted only
a nonqualified stock option. An Optionee may, if otherwise eligible, be granted
additional Options.
4. Shares Subject to Option. Options shall be options for the purchase of
------------------------
the authorized but unissued common stock of the Company (the "Stock"), subject
to adjustment as provided in paragraph 9 below. The maximum number of shares of
Stock which may be issued under the Plan shall be 5,400,000 shares. In the
event that any outstanding Option for any reason expires or is terminated or
canceled and/or shares of Stock subject to repurchase are repurchased by the
Company, the shares allocable to the unexercised portion of such Option, or such
repurchased shares, may again be subjected to an Option.
<PAGE>
5. Time for Granting Options. All Options shall be granted, if at all,
-------------------------
within ten (10) years from May 9, 1989.
6. Terms, Conditions and Form of Options. Subject to the provisions of
-------------------------------------
the Plan, the Board shall determine for each Option (which need not be
identical) the number of shares of Stock for which the Option shall be granted,
the option price of the Option, the exercisability of the Option, whether the
Option is to be treated as an Incentive Stock Option or as a nonqualified stock
option and all other terms and conditions of the Option not inconsistent with
the Plan. Options granted pursuant to the Plan shall be evidenced by written
agreements specifying the number of shares of Stock covered thereby, in such
form as the Board shall from time to time establish, and shall comply with and
be subject to the following terms and conditions:
(a) Option Price. The option price for each Option shall be
------------
established in the sole discretion of the Board; provided, however, that (i) the
option price per share for an Incentive Stock Option shall be not less than the
fair market value, as determined by the Board, of a share of Stock on the date
of the granting of the Option, (ii) the option price per share for a
nonqualified stock option shall not be less than eighty-five percent (85%) of
the fair market value, as determined by the Board, of a share of Stock on the
date of the granting of the Option and (iii) no Option granted to an Optionee
who at the time the Option is granted owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422A(b)(6) of the Code
and/or ten percent (10%) of the total combined value of all classes of stock of
a Participating Company (a "Ten Percent Owner Optionee") shall have an option
price per share less than one hundred ten percent (110%) of the fair market
value of a share of Stock on the date the Option is granted. Notwithstanding
the foregoing, an Option (whether an Incentive Stock Option or a nonqualified
stock option) may be granted with an exercise price lower than the minimum
exercise price set forth above if such Option is granted pursuant to an
assumption or substitution for another option in a manner qualifying with the
provisions of Section 425(a) of the Code.
(b) Exercise Period of Options. The Board shall have the power to set
--------------------------
the time or times within which each Option shall be exercisable or the event or
events upon the occurrence of which all or a portion of each Option shall be
exercisable and the term of each Option; provided, however, that (i) no Option
shall be exercisable after the expiration of ten (10) years after the date such
Option is granted and (ii) no Option granted to a Ten Percent Owner Optionee
shall be exercisable after the expiration of five (5) years after the date such
Option is granted.
(c) Payment of Option Price. Payment of the option price for the
-----------------------
number of shares of Stock being purchased pursuant to any Option shall be made
(i) in cash, by check, or cash equivalent, (ii) by tender to the Company of
shares of the Company's stock owned by the Optionee having a value, as
determined by the Board (but without regard to any restrictions on
transferability applicable to such stock by reason of federal or state
securities laws or agreements with an underwriter for the Company), not less
than the option price, (iii) by the Optionee's recourse promissory note, (iv) by
the assignment of the proceeds of a sale of some or all of the shares being
acquired upon the exercise of an Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the
-2-
<PAGE>
Board of Governors of the Federal Reserve System), or (v) by any combination
thereof. The Board may at any time or from time to time, by adoption of or by
amendment to either of the standard forms of stock option agreement described in
paragraph 7 below, or by other means, grant Options which do not permit all of
the foregoing forms of consideration to be used in payment of the option price
and/or which otherwise restrict one (1) or more forms of consideration.
Notwithstanding the foregoing, an Option may not be exercised by tender to the
Company of shares of the Company's stock to the extent such tender of stock
would constitute a violation of the provisions of any law, regulation and/or
agreement restricting the redemption of the Company's stock. Furthermore, no
promissory note shall be permitted if an exercise using a promissory note would
be a violation of any law. Any permitted promissory note shall be due and
payable not more than five (5) years after the Option is exercised and interest
shall be payable at least annually and be at least equal to the minimum interest
rate necessary to avoid imputed interest pursuant to all applicable sections of
the Code. The Board shall have the authority to permit or require the Optionee
to secure any promissory note used to exercise an Option with the shares of
Stock acquired on exercise of the Option and/or with other collateral acceptable
to the Company.
(x) Unless otherwise provided by the Board, an Option may not
be exercised by tender to the Company of shares of the Company's stock unless
such shares of the Company's stock either have been owned by the Optionee for
more than six (6) months or were not acquired, directly or indirectly, from the
Company.
(y) Unless otherwise provided by the Board, in the event the
Company at any time becomes subject to the regulations promulgated by the Board
of Governors of the Federal Reserve System or any other governmental entity
affecting the extension of credit in connection with the Company's securities,
any promissory note shall comply with such applicable regulations, and the
Optionee shall pay the unpaid principal and accrued interest, if any, to the
extent necessary to comply with such applicable regulations.
(z) The Company reserves, at any and all times, the right, in
the Company's sole and absolute discretion, to establish, decline to approve
and/or terminate any program and/or procedures for the exercise of Options by
means of an assignment of the proceeds of a sale of some or all of the shares of
Stock to be acquired upon such exercise.
7. Standard Forms of Stock Option Agreement.
----------------------------------------
(a) Incentive Stock Options. Unless otherwise provided for by the
-----------------------
Board, at the time an Option is granted, an Option designated as an "Incentive
Stock Option" shall comply with and be subject to the terms and conditions set
forth in the form of incentive stock option agreement incorporated herein by
reference.
(b) Nonqualified Stock Options. Unless otherwise provided for by the
--------------------------
Board at the time an Option is granted, an Option designated as a "Nonqualified
Stock Option" shall comply with and be subject to the terms and conditions set
forth in the form of nonqualified stock option agreement incorporated herein by
reference.
-3-
<PAGE>
(c) Standard Term for Options. Unless otherwise provided for by the
-------------------------
Board in the grant of an Option, any Option granted hereunder shall be
exercisable for a term of ten (10) years.
8. Authority to Vary Terms. The Board shall have the authority from time
-----------------------
to time to vary the terms of either of the standard forms of stock option
agreement described in paragraph 7 above either in connection with the grant of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of such revised
or amended standard form or forms of agreement shall be in accordance with the
terms of the Plan. Such authority shall include, but not be way of limitation,
the authority to grant Options which are not immediately exercisable.
9. Effect of Change in Stock Subject to Plan. Appropriate adjustments
-----------------------------------------
shall be made in the number and class of shares of Stock subject to the Plan and
to any outstanding Options and in the option price of any outstanding Options in
the event of a stock dividend, stock split, reverse stock split, combination,
reclassification, or like change in the capital structure of the Company.
10. Merger; Liquidation. In the event of the proposed dissolution or
-------------------
liquidation of the Company, the Board shall notify the Optionee at least fifteen
(15) days prior to such proposed action. To the extent it has not been
previously exercised, the Option will terminate immediately prior to the
consummation of such proposed action. In the event of a merger of the Company
with or into another corporation, the Option shall be assumed or an equivalent
option shall be substituted by such successor corporation or a parent or
subsidiary of such successor corporation. If the Board makes an Option fully
exercisable in lieu of assumption or substitution in the event of a merger, the
Board shall notify the Optionee that the Option shall be fully exercisable for a
period of fifteen (15) days from the date of such notice, and the Option will
terminate upon the expiration of such period. For the purposes of this
paragraph, the Option shall be considered assumed if, following the merger, the
option or right confers the right to purchase, for each share of Stock subject
to the Option immediately prior to the merger, the consideration (whether stock,
cash, or other securities or property) received in the merger by holders of
Common Stock for each share held on the effective date of the transaction (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding shares of Common Stock);
provided, however, that if such consideration received in the merger was not
solely common stock of the successor corporation or its parent, the Board may,
with the consent of the successor corporation and the participant, provide for
the consideration to be received upon the exercise of the Option, for each share
of Stock subject to the Option, to be solely common stock of the successor
corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger.
11. Provisions of Information. Each Optionee shall receive financial
-------------------------
statements of the Company on an annual basis.
12. Options Non-Transferable. During the lifetime of the Optionee, the
------------------------
Option shall be exercisable only by the Optionee. No Option shall be assignable
or transferable by the Optionee, except by will or by the laws of descent and
distribution.
-4-
<PAGE>
13. Transfer of Company's Rights. In the event any Participating Company
----------------------------
assigns, other than by operation of law, to a third person, other than another
Participating Company, any of the Participating Company's rights to repurchase
any shares of Stock acquired on the exercise of an Option, the assignee shall
pay to the assigning Participating Company the value of such right as determined
by the Company in the Company's sole discretion. Such consideration shall be in
such form, including, without limitation, the performance of future services, as
the Company shall determine in the Company's sole discretion. In the event such
repurchase right is exercisable at the time of such assignment, the value of
such right shall be not less than the fair market value of the shares of Stock
which may be repurchased under such right (as determined by the Company) minus
the repurchase price of such shares. The requirements of this paragraph 13
regarding the minimum consideration to be received by the assigning
Participating Company shall not inure to the benefit of the Optionee whose
shares of Stock are being repurchased. Failure of a Participating Company to
comply with the provisions of this paragraph 13 shall not constitute a defense
or otherwise prevent the exercise of the repurchase right by the assignee of
such right.
14. Termination or Amendment of Plan. The Board, including any duly
--------------------------------
appointed committee of the Board, may terminate or amend the Plan at any time;
provided, however, that without the approval of the Company's shareholders,
there shall be (a) no increase in the total number of shares of Stock covered by
the Plan (except by operation of the provisions of paragraph 9 above), (b) no
change in the class of persons eligible to receive Incentive Stock Options and
(c) no expansion in the class of persons eligible to receive nonqualified stock
options. In any event, no amendment may adversely affect any then outstanding
Option or any unexercised portion thereof, without the consent of the Optionee,
unless such amendment is required to enable an Option designated as an Incentive
Stock Option to qualify as an Incentive Stock Option.
-5-
<PAGE>
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY INTEREST
THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT
AS PERMITTED IN THE COMMISSIONER' S RULES.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED
OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR
RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE
COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
CONNECT, INC.
IMMEDIATELY EXERCISABLE
INCENTIVE STOCK OPTION AGREEMENT
CONNECT, Inc. (the "Company"), granted to the individual named below an
option to purchase certain shares of common stock of the Company, in the manner
and subject to the provisions of this Option Agreement.
1. Definitions:
-----------
(a) "Optionee" shall be (Optionee).
(b) "Date of Option Grant" shall mean (OptionGrant).
(c) "Number of Option Shares" shall mean (NumberofShares) shares of
common stock of the Company as adjusted from time to time pursuant to paragraph
9 below.
(d) "Exercise Price" shall mean (ExercisePrice) per share as adjusted
from time to time pursuant to paragraph 9 below.
(e) "Initial Exercise Date" shall be the date of Option Grant.
(f) "Initial Vesting Date" shall be (VestingDate).
(g) Determination of "Vested Ratio":
1
<PAGE>
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
On date of Option Grant 0
On Initial Vesting Date, provided the 12/48
Optionee is continuously employed by a
Participating Company from the Date of
Option Grant until the Initial Vesting
Date
Plus
- ----
For the last day of each full calendar 1/48
month of the Optionee's continuous
employment by a Participating Company
from the Initial Vesting Date
In no event shall the Vested Ratio
exceed 1/1.
</TABLE>
(h) "Option Term Date" shall mean ten (10) years after the Date of
Option Grant.
(i) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(j) "Company" shall mean Connect, Inc., a California corporation, and
any successor corporation thereto.
(k) "Participating Company" shall mean (i) the Company and (ii) any
present or future parent and/or subsidiary corporation of the Company while such
corporation is a parent or subsidiary of the Company. For purposes of this
Option Agreement, a parent corporation and a subsidiary corporation shall be as
defined in Sections 425(e) and 425(f) of the Code.
(l) "Participating Company Group" shall mean at any point in time all
corporations collectively which are then a Participating Company.
(m) "Plan" shall mean the Connect, Inc. 1989 Stock Option Plan.
2. Status of the Option. This Option is intended to be an incentive
--------------------
stock option as described in Section 422A of the Code, but the Company does not
represent or warrant that this Option qualifies as such. The Optionee should
consult with the Optionee's own tax advisors regarding the tax effects of this
Option and the requirements necessary to obtain favorable income
2
<PAGE>
tax treatment under Section 422A of the Code, including, but not limited to,
holding period requirements.
3. Administration. All questions of interpretation concerning this Option
--------------
Agreement shall be determined by the Board of Directors of the Company (the
"Board") and/or by a duly appointed committee of the Board having such powers as
shall be specified by the Board. Any subsequent references herein to the Board
shall also mean the committee if such committee has been appointed and, unless
the powers of the committee have been specifically limited, the committee shall
have all of the powers of the Board granted in the Plan, including, without
limitation, the power to terminate or amend the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law. All
determinations by the Board shall be final and binding upon all persons having
an interest in the Option. Any officer of a Participating Company shall have the
authority to act on behalf of the Company with respect to any matter, right,
obligation, or election which is the responsibility of or which is allocated to
the Company herein, provided the officer has apparent authority with respect to
such matter, right, obligation, or election.
4. Exercise of the Option.
----------------------
(a) Right to Exercise. The Option shall be immediately exercisable in
-----------------
its entirety on and after the Initial Exercise Date subject to the Optionee's
agreement that any shares purchased upon exercise are subject to the Company's
repurchase rights set forth in paragraph 11 and paragraph 12 below.
Notwithstanding the foregoing, except as provided in paragraph 16 below, the
aggregate fair market value of the stock with respect to which the Optionee may
exercise the Option for the first time during any calendar year, together with
any other incentive stock options which are exercisable for the first time
during any such year, as determined in accordance with Section 422A(d) of the
Code, shall not exceed One Hundred Thousand Dollars ($100,000). Such limitation
on exercise described in Section 422A(d) of the Code shall be referred to in
this Option Agreement as the "$100,000 Exercise Limitation." Notwithstanding the
foregoing, the Option may not be exercised more frequently than twice in any
continuous twelve (12) month period; provided, however, that the foregoing
restriction shall not apply so as to prevent an exercise (i) following the
Optionee's termination of employment as set forth in paragraph 7 below or (ii)
during the thirty (30) day periods immediately preceding and following an
Ownership Change as defined in paragraph 8 below.
(b) Method of Exercise. The Option shall be exercisable by written
------------------
notice to the Company which shall state the election to exercise the Option, the
number of shares for which the Option is being exercised and such other
representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. Such written notice shall be signed by the Optionee and shall
be delivered in person or by certified or registered mail, return receipt
requested, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in paragraph 6 below, accompanied by (i) full payment of
the exercise price for the number of shares being purchased and (ii) an executed
copy, if required herein, of the then current form of joint escrow instructions
referenced below.
3
<PAGE>
(c) Form of Payment of Option Price. Such payment shall be made in
-------------------------------
cash, by check, or cash equivalent.
(d) Withholding. At the time the Option is exercised, in whole or in
-----------
part, or at any time thereafter as requested by the Company, the Optionee shall
make adequate provision for foreign, federal and state tax withholding
obligations of the Company, if any, which arise in connection with the Option,
including, without limitation, obligations arising upon (i) the exercise, in
whole or in part, of the Option, (ii) the transfer, in whole or in part, of any
shares acquired on exercise of the Option, or (iii) the operation of any law or
regulation providing for the imputation of interest, or (iv) the lapsing of any
restriction with respect to any shares acquired on exercise of the Option.
(e) Certificate Registration. The certificate or certificates for the
------------------------
shares as to which the Option shall be exercised shall be registered in the name
of the Optionee, or, if applicable, the heirs of the Optionee.
(f) Restrictions on Grant of the Option and Issuance of Shares. The
----------------------------------------------------------
grant of the Option and the issuance of the shares upon exercise of the Option
shall be subject to compliance with all applicable requirements of federal or
state law with respect to such securities. The Option may not be exercised if
the issuance of shares upon such exercise would constitute a violation of any
applicable federal or state securities laws or other law or regulations. IT IS
UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY INTEREST
THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT
AS PERMITTED IN THE COMMISSIONER'S RULES. Section 260.141.11 of the Rules of
the Commissioner of Corporations of the State of California is set forth in
paragraph 17 herein. In addition, no Option may be exercised unless (i) a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), shall at the time of exercise of the Option be in effect with
respect to the shares issuable upon exercise of the Option or (ii) in the
opinion of legal counsel to the Company, the shares issuable upon exercise of
the Option may be issued in accordance with the terms of an applicable exemption
from the registration requirements of the Securities Act. THE OPTIONEE IS
CAUTIONED THAT THE OPTION MAY NOT BE EXERCISABLE UNLESS THE FOREGOING CONDITIONS
ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION
WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. As a condition to the exercise
of the Option, the Company may require the Optionee to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation and to make any representation or warranty with
respect thereto as may be requested by the Company.
(g) Fractional Shares. The Company shall not be required to issue
-----------------
fractional shares upon the exercise of the Option.
5. Non-Transferability of the Option. The Option may be exercised during
---------------------------------
the lifetime of the Optionee only by the Optionee and may not be assigned or
transferred in any manner except by will or by the laws of descent and
distribution.
4
<PAGE>
6. Termination of the Option. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Term Date as defined
above, (b) the last date for exercising the Option following termination of
employment as described in paragraph 7 below, or (c) upon a Transfer of Control
as described in paragraph 8 below.
7. Termination of Employment.
-------------------------
(a) Termination of the Option. If the Optionee ceases to be an
-------------------------
employee of the Participating Company Group for any reason except death or
disability within the meaning of Section 422A(c) of the Code, the Option, to the
extent unexercised and exercisable by the Optionee on the date on which the
Optionee ceased to be an employee, may be exercised by the Optionee within one
(1) month after the date on which the Optionee's employment terminates, but in
any event no later than the Option Term Date. If the Optionee's employment with
the Company is terminated because of the death of the Optionee or disability of
the Optionee, the Option may be exercised by the Optionee (or the Optionee's
legal representative) at any time prior to the expiration of twelve (12) months
from the date the Optionee's employment terminated, but in any event no later
than the Option Term Date. The Optionee's employment shall be deemed to have
terminated on account of death if the Optionee dies within one (1) month after
the Optionee's termination of employment. Notwithstanding the provisions of
this paragraph 7(a), the Option may not be exercised after the Optionee's
termination of employment if the shares acquired on exercise of the Option would
be Unvested Shares as that term is defined in paragraph 11 below.
(b) Termination of Employment Defined. For purposes of this paragraph
---------------------------------
7, the Optionee's employment shall be deemed to have terminated either upon an
actual termination of employment or upon the Optionee's employer ceasing to be a
Participating Company.
(c) Exercise Prevented by Law. Except as provided in this paragraph
-------------------------
7, the Option shall terminate and may not be exercised after the Optionee's
employment with the Participating Company Group terminates unless the exercise
of the Option in accordance with this paragraph 7 is prevented by the provisions
of paragraph 4(f) above. If the exercise of the Option is so prevented, the
Option shall remain exercisable until three (3) months after the date the
Optionee is notified by the Company that the Option is exercisable, but in any
event no later than the Option Term Date. The Company makes no representation
as to the tax consequences of any such delayed exercise. The Optionee should
consult with the Optionee's own tax advisors as to the tax consequences to the
Optionee of any such delayed exercise.
(d) Optionee Subject to Section 16(b). Notwithstanding the foregoing,
---------------------------------
if the exercise of the Option within the applicable time periods set forth above
would subject the Optionee to suit under Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Option shall remain
exercisable until the earliest to occur of (i) the tenth (10th) day following
the date on which the Optionee would no longer be subject to such suit, (ii) the
one hundred and ninetieth (190th) day after the Optionee's termination of
employment, or (iii) the Option Term Date. The Company makes no representation
as to the tax consequences of any such delayed exercise. The Optionee should
consult with the Optionee's own tax advisors as to the tax consequences to the
Optionee of any such delayed exercise.
5
<PAGE>
(e) Leave of Absence. For purposes hereof, the Optionee's employment
----------------
with the Participating Company Group shall not be deemed to terminate if the
Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave in excess of ninety (90) days, the Optionee's employment shall be deemed
to terminate on the ninety-first (91st) day of the leave unless the Optionee's
right to reemployment with the Participating Company Group remains guaranteed by
statute or contract. Notwithstanding the foregoing, however, a leave of absence
shall be treated as employment for purposes of determining the Optionee's Vested
Ratio if and only if the leave of absence is designated by the Company as (or
required by law to be) a leave for which vesting credit is given.
8. Ownership Change and Transfer of Control. For purposes hereof, the
----------------------------------------
"Control Company" shall mean the Participating Company whose stock is subject to
the Option. An "Ownership Change" shall be deemed to have occurred in the event
any of the following occurs with respect to the Control Company:
(a) the direct or indirect sale or exchange by the shareholders of the
Control Company of all or substantially all of the stock of the Control Company;
(b) a merger in which the Control Company is a party; or
(c) the sale, exchange, or transfer (including without limitation,
pursuant to a liquidation or dissolution) of all or substantially all of the
Control Company's assets (other than a sale, exchange, or transfer to one (1) or
more corporations where the shareholders of the Control Company before such
sale, exchange, or transfer retain, directly or indirectly, at least a majority
of the beneficial interest in the voting stock of the corporation(s) to which
the assets were transferred).
A "Transfer of Control" shall mean an Ownership Change in which the
shareholders of the Control Company before such Ownership Change do not retain,
directly or indirectly, at least a majority of the beneficial interest in the
voting stock of the Control Company.
In the event of a Transfer of Control, the surviving, continuing,
successor, or purchasing corporation, as the case may be (the "Acquiring
Corporation"), shall assume the Company's rights and obligations under this
Option Agreement or substitute an option for the Acquiring Corporation's stock
for the Option. In the event the Acquiring Corporation elects not to assume the
Company's rights and obligations under this Option Agreement or substitute for
the Option in connection with a Transfer of Control involving an Ownership
Change described in (b) or (c) above, the Board shall provide that all shares
acquired on exercise of the Option become Vested Shares for purposes of
paragraph 11 below effective upon the Transfer of Control. The Option shall
terminate effective as of the date of the Transfer of Control to the extent that
the Option is neither assumed by the Acquiring Corporation nor exercised as of
the date of the Transfer of Control.
9. Effect of Change in Stock Subject to the Option. Appropriate
-----------------------------------------------
adjustments shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event
6
<PAGE>
of a stock dividend, stock split, reverse stock split, combination,
reclassification, or like change in the capital structure of the Company. In the
event a majority of the shares which are of the same class as the shares that
are subject to the Option are exchanged for, converted into, or otherwise become
(whether or not pursuant to an Ownership Change) shares of another corporation
(the "New Shares"), the Company may unilaterally amend the Option to provide
that the Option is exercisable for New Shares. In the event of any such
amendment, the number of shares and the exercise price shall be adjusted in a
fair and equitable manner.
10. Rights as a Shareholder or Employee. The Optionee shall have no
-----------------------------------
rights as a shareholder with respect to any shares covered by the Option until
the date of the issuance of a certificate or certificates for the shares for
which the Option has been exercised. No adjustment shall be made for dividends
or distributions or other rights for which the record date is prior to the date
such certificate or certificates are issued, except as provided in paragraph 9
above. Nothing in the Option shall confer upon the Optionee any right to
continue in the employ of a Participating Company or interfere in any way with
any right of the Participating Company Group to terminate the Optionee's
employment at any time.
11. Unvested Share Repurchase Option.
--------------------------------
(a) Unvested Share Repurchase Option. In the event the Optionee's
--------------------------------
employment with the Participating Company Group is terminated for any reason,
with or without cause, or if the Optionee or the Optionee's legal representative
attempts to sell, exchange, transfer, pledge, or otherwise dispose of (other
than pursuant to an Ownership Change) any shares acquired upon exercise of the
Option which exceed the Optionee's Vested Shares as defined in paragraph 11(b)
below (the "Unvested Shares"), the Company shall have the right to repurchase
the Unvested Shares under the terms and subject to the conditions set forth in
this paragraph 11 (the "Unvested Share Repurchase Option").
(b) Vested Shares and Unvested Shares Defined. The total number of
-----------------------------------------
Option Shares multiplied by the Vested Ratio as set forth in paragraph 1 above
are Vested Shares. For purposes of this paragraph 11, the Unvested Shares are
the number of shares acquired upon exercise of the Option in excess of the
Vested Shares. Any additional shares acquired by the Optionee on exercise of
this Option would also be Unvested Shares.
(c) Exercise of Unvested Share Repurchase Option. The Company may
--------------------------------------------
exercise the Unvested Share Repurchase Option by written notice to the Optionee
within sixty (60) days after (i) such termination of employment (or exercise of
the Option, if later) or (ii) the Company has received notice of the attempted
disposition. If the Company fails to give notice within such sixty (60) day
period, the Unvested Share Repurchase Option shall terminate unless the Company
and the Optionee have extended the time for the exercise of the Unvested Share
Repurchase Option. The Unvested Share Repurchase Option must be exercised, if
at all, for all of the Unvested Shares, except as the Company and the Optionee
otherwise agree.
(d) Payment for Shares and Return of Shares. Payment by the Company
---------------------------------------
to the Optionee shall be made in cash within thirty (30) days after the date of
the mailing of the written notice of exercise of the Unvested Share Repurchase
Option. For purposes of the foregoing,
<PAGE>
cancellation of any indebtedness of the Optionee to any Participating Company
shall be treated as payment to the Optionee in cash to the extent of the unpaid
principal and any accrued interest canceled. The purchase price per share being
repurchased by the Company shall be an amount equal to the Optionee's original
cost per share, as adjusted pursuant to paragraph 9 above. The shares being
repurchased shall be delivered to the Company by the Optionee at the same time
as the delivery of the purchase price to the Optionee.
(e) Assignment of Unvested Share Repurchase Option. The Company shall
----------------------------------------------
have the right to assign the Unvested Share Repurchase Option at any time,
whether or not such Option is then exercisable, to one (1) or more persons as
may be selected by the Company.
(f) Ownership Change. In the event of an Ownership Change, the
----------------
Unvested Share Repurchase Option shall continue in full force and effect;
provided, however, that "employment with the Participating Company Group" for
purposes of this paragraph 11 shall include all service with any corporation
which was a Participating Company at the time the services were rendered,
whether or not the corporation was included within such term both before and
after the event constituting the Ownership Change.
12. Right of First Refusal.
----------------------
(a) Right of First Refusal. In the event the Optionee proposes to
----------------------
sell, pledge, or otherwise transfer any Vested Shares (the "Transfer Shares") to
any person or entity, including, without limitation, any shareholder of the
Participating Company Group, the Company shall have the right to repurchase the
Transfer Shares under the terms and subject to the conditions set forth in this
paragraph 12 (the "Right of First Refusal").
(b) Notice of Proposed Transfer. Prior to any proposed transfer of
---------------------------
the Transfer Shares, the Optionee shall give a written notice (the "Transfer
Notice") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee (the
"Proposed Transferee") and, if the transfer is voluntary, the proposed transfer
price. In the event of a bona fide gift or involuntary transfer, the proposed
transfer price shall be deemed to be the fair market value of the Transfer
Shares as determined by the Company in good faith. In the event the Optionee
proposes to transfer any Vested Shares to more than one (1) Proposed Transferee,
the Optionee shall provide a separate Transfer Notice for the proposed transfer
to each Proposed Transferee. The Transfer Notice shall be signed by both the
Optionee and the Proposed Transferee and must constitute a binding commitment of
the Optionee and the Proposed Transferee for the transfer of the Transfer Shares
to the Proposed Transferee subject only to the Right of First Refusal.
(c) Bona Fide Transfer. Within ten (10) days after receipt of the
------------------
Transfer Notice, the Company shall determine the bona fide nature of the
proposed voluntary transfer and give the Optionee written notice of the
Company's determination. If the proposed transfer is deemed not to be bona
fide, the Optionee shall be responsible for providing additional information to
the Company to show the bona fide nature of the proposed transfer. The Company
shall have the right to demand further assurances from the Optionee and the
Proposed Transferee (in a form satisfactory to the Company) that the Transfer
Notice fully and accurately sets forth all of the
<PAGE>
terms and conditions of the proposed transfer, including, without limitation,
assurance that the Transfer Notice fully and accurately sets forth the
consideration actually paid for the Transfer Shares and all transactions,
directly or indirectly, between the parties which may have affected the price
the Proposed Transferee was willing to pay for the Transfer Shares.
(d) Exercise of the Right of First Refusal. In the event the proposed
--------------------------------------
transfer is deemed to be bona fide, the Company shall have the right to purchase
all, but not less than all, of the Transfer Shares at the purchase price and on
the terms set forth in the Transfer Notice by delivery to the Optionee of a
notice of exercise of the Right of First Refusal within thirty (30) days after
the date the Transfer Notice is delivered to the Company or ten (10) days after
the Company has approved the proposed transfer as bona fide, whichever is later.
The Company's exercise or failure to exercise the Right of First Refusal with
respect to any proposed transfer described in a Transfer Notice shall not affect
the Company's ability to exercise the Right of First Refusal with respect to any
proposed transfer described in any other Transfer Notice, whether or not such
other Transfer Notice is issued by the Optionee or issued by a person other than
the Optionee with respect to a proposed transfer to the same Proposed
Transferee. If the Company exercises the Right of First Refusal, the Company
and the Optionee shall thereupon consummate the sale of the Transfer Shares to
the Company on the terms set forth in the Transfer Notice; provided, however,
that in the event the Transfer Notice provides for the payment for the Transfer
Shares other than in cash, the Company shall have the option of paying for the
Transfer Shares by the discounted cash equivalent of the consideration described
in the Transfer Notice as reasonably determined by the Company. For purposes of
the foregoing, cancellation of any indebtedness of the Optionee to any
Participating Company shall be treated as payment to the Optionee in cash to the
extent of the unpaid principal and any accrued interest canceled.
(e) Failure to Exercise Right of First Refusal. If the Company fails
------------------------------------------
to exercise the Right of First Refusal in full within the period specified in
paragraph 12(d) above, the Optionee may conclude a transfer to the Proposed
Transferee of the Transfer Shares on the terms and conditions described in the
Transfer Notice, provided such transfer occurs not later than one hundred twenty
(120) days following delivery to the Company of the Transfer Notice. The
Company shall have the right to demand further assurances from the Optionee and
the Proposed Transferee (in a form satisfactory to the Company) that the
transfer of the Transfer Shares was actually carried out on the terms and
conditions described in the Transfer Notice. No Transfer Shares shall be
transferred on the books of the Company until the Company has received such
assurances, if so demanded, and has approved the proposed transfer as bona fide,
pursuant to paragraph 12(c) above. Any proposed transfer on terms and
conditions different from those described in the Transfer Notice, as well as any
subsequent proposed transfer by the Optionee, shall again be subject to the
Right of First Refusal and shall require compliance by the Optionee with the
procedure described in this paragraph 12.
(f) Transferees of the Transfer Shares. All transferees of the
----------------------------------
Transfer Shares or any interest therein, other than the Company, shall be
required as a condition of such transfer to agree in writing (in a form
satisfactory to the Company) that such transferee shall receive and hold such
Transfer Shares or interests subject to the provisions of this paragraph 12
providing for the Right of First Refusal with respect to any subsequent
transfer. Any sale or transfer of any
<PAGE>
shares acquired upon exercise of the Option shall be void unless the provisions
of this paragraph 12 are met.
(g) Transfers Not Subject to the Right of First Refusal. The Right of
---------------------------------------------------
First Refusal shall not apply to any transfer or exchange of the shares acquired
pursuant to the exercise of the Option if such transfer is in connection with an
Ownership Change. If the consideration received pursuant to such transfer or
exchange consists of stock of a Participating Company, such consideration shall
remain subject to the Right of First Refusal unless the provisions of paragraph
12(i) below result in a termination of the Right of First Refusal.
(h) Assignment of the Right of First Refusal. The Company shall have
----------------------------------------
the right to assign the Right of First Refusal at any time, whether or not the
Optionee has attempted a transfer to one (1) or more persons as may be selected
by the Company.
(i) Early Termination of the Right of First Refusal. The other
-----------------------------------------------
provision of this paragraph 12 notwithstanding the Right of First Refusal shall
terminate, and be of no further force and effect upon (i) the occurrence of a
Transfer of Control, unless the surviving, continuing, successor, or purchasing
corporation, as the case may be, assumes the Company's rights and obligations
under the Plan, or (ii) the existence of a public market for the class of shares
subject to the Right of First Refusal. A "public market" shall be deemed to
exist if (x) such stock is listed on a national securities exchange (as that
term is used in the Exchange Act) or (y) such stock is traded on the over-the-
counter market and prices therefor are published daily on business days in a
recognized financial journal.
13. Escrow.
------
(a) Establishment of Escrow. To insure shares subject to the Unvested
-----------------------
Share Repurchase Option and the Right of First Refusal will be available for
repurchase, the Company may require the Optionee to deposit the certificate or
certificates evidencing the shares which the Optionee purchases upon exercise of
the Option with an escrow agent designated by the Company under the terms and
conditions of an escrow agreement approved by the Company. If the Company does
not require such deposit as a condition of exercise of the Option, the Company
reserves the right at any time to require the Optionee to so deposit the
certificate or certificates in escrow. The Company shall bear the expenses of
the escrow.
(b) Delivery of Shares to Optionee. As soon as practicable after the
------------------------------
expiration of the Unvested Share Repurchase Option and the Right of First
Refusal, but not more frequently than twice each calendar year, the escrow agent
shall deliver to the Optionee the shares no longer subject to such restrictions.
(c) Notices and Payments. In the event the shares held in escrow are
--------------------
subject to the Company's exercise of the Unvested Share Repurchase Option or the
Right of First Refusal, the notices required to be given to the Optionee shall
be given to the escrow agent and any payment required to be given to the
Optionee shall be given to the escrow agent. Within thirty (30) days after
payment by the Company, the escrow agent shall deliver the shares which the
<PAGE>
Company has purchased to the Company and shall deliver the payment received from
the Company to the Optionee.
14. Stock Dividends Subject to Option Agreement. If, from time to time,
-------------------------------------------
there is any stock dividend, stock split, or other change in the character or
amount of any of the outstanding stock of the corporation the stock of which is
subject to the provisions of this Option Agreement, then in such event any and
all new substituted or additional securities to which the Optionee is entitled
by reason of the Optionee's ownership of the shares acquired upon exercise of
the Option shall be immediately subject to the Unvested Share Repurchase Option
and the Right of First Refusal with the same force and effect as the shares
subject to the Unvested Share Repurchase Option and the Right of First Refusal
immediately before such event.
15. Notice of Sales Upon Disqualifying Disposition. The Optionee shall
----------------------------------------------
dispose of the shares acquired pursuant to the Option only in accordance with
the provisions of this Option Agreement. In addition, the Optionee shall
promptly notify the Chief Financial Officer of the Company if the Optionee
disposes of any of the shares acquired pursuant to the Option within one (1)
year from the date the Optionee exercises all or part of the Option or within
two (2) years of the date of grant of the Option. Until such time as the
Optionee disposes of such shares in a manner consistent with the provisions of
this Option Agreement, the Optionee shall hold all shares acquired pursuant to
the Option in the Optionee's name (and not in the name of any nominee) for the
one-year period immediately after exercise of the Option and the two-year period
immediately after grant of the Option. At the time during the one-year or two-
year periods set forth above, the Company may place a legend or legends on any
certificate or certificates representing shares acquired pursuant to the Option
requesting the transfer agent for the Company's stock to notify the Company of
any such transfers for the Company's stock to notify the Company of any such
transfers. The obligation of the Optionee to notify the Company of any such
transfer shall continue notwithstanding that a legend has been placed on the
certificate or certificates pursuant to the preceding sentence.
16. Exception to $100,000 Exercise Limitation. Notwithstanding any other
-----------------------------------------
provision of this Option Agreement, if compliance with the $100,000 Exercise
Limitation as set forth in paragraph 4(a) above will result in the
exercisability of any Vested Shares (as defined in paragraph 11(b) above) being
delayed more than thirty (30) days beyond the vesting date for such shares, the
Option shall be deemed to be two (2) options. The first option shall be for the
maximum number of shares subject to the Option that can comply with the $100,000
Exercise Limitation without causing the Option to be unexercisable as to Vested
Shares. The second option, which shall not be treated as an incentive stock
option as described in Section 422A(b) of the Code, shall be for the balance of
the shares subject to the Option and shall be exercisable on the same terms and
at the same time as set forth in this Option Agreement, provided, however, that
(a) the second sentence of paragraph 4(a) above shall not apply to the second
option and (b) such shares shall become Vested Shares on the same date or dates
as set forth in this Option Agreement without regard to this paragraph. Unless
the Optionee specifically elects to the contrary in the Optionee's written
notice of exercise, the first option shall be deemed to be exercised first to
the maximum possible extent and then the second option shall be deemed to be
exercised.
11
<PAGE>
17. Rules of the Commissioner of Corporations. The Optionee is hereby
-----------------------------------------
delivered a copy of Section 260.141.11 of the Rules of the Commissioner of
Corporations of the State of California, adopted pursuant to the California
Corporate Securities Act of 1968. References to the "Code" in the following
text are references to the California Corporations Code.
260.141.11. Restriction on Transfer.
-----------------------
(a) The issuer of any security upon which a restriction on transfer
has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall
cause a copy of this section to be delivered to each issuee or transferee of
such security at the time the certificates evidencing the security is delivered
to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of the rules) except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102
of the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants, or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or custodian
for the account of the transferee or the transferee's ancestors, descendants, or
spouse;
(5) to holders of securities of the same class of the same
issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the broker-
dealer, nor actually present in this state if the sale of such securities is not
in violation of any securities law of the foreign state, territory or country
concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required;
12
<PAGE>
(10) by way of a sale qualified under Sections 25111, 25112, 25113
or 25121 of the Code, of the securities to be transferred, provided that no
order under Section 25140 or subdivision (a) of Section 25143 is in effect with
respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or subdivision (a)
of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries
who are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property
Law or to the administrator of the unclaimed property law of another state;
(15) by the State Controller pursuant to the Unclaimed Property
Law or by the administrator of the unclaimed property law of another state if,
in either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does
not involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by subdivision
(f) of Section 25102; provided that any such transfer is on the condition that
any certificate evidencing the security issued to such transferee shall contain
the legend required by this Section.
(c) The certificates representing all such securities subject to such
a restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend prominently stamped or printed
thereon in capital letters of not less than 10-point size reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
18. Legends. The Company may at any time place legends referencing the
-------
Unvested Share Repurchase Option set forth in paragraph 11 above, the Right of
First Refusal set forth in paragraph 12 above and any applicable federal or
state securities law restrictions on all certificates representing shares of
stock subject to the provisions of this Option Agreement. The Optionee shall,
at the request of the Company, promptly present to the Company any and all
certificates representing shares acquired pursuant to the Option in the
possession of the Optionee in order to
13
<PAGE>
effectuate the provisions of this paragraph. Unless otherwise specified by the
Company, legends placed on such certificates may include, but shall not be
limited to, the following:
(a) "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT
OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SUCH ACT."
(b) Any legend required to be placed thereon by the Commissioner of
Corporations of the State of California.
(c) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
(d) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT
OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET FORTH IN
AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH HOLDER'S
PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF
THIS CORPORATION."
19. Initial Public Offering. The Optionee hereby agrees that in the event
-----------------------
of an initial public offering of stock made by the Company under the Securities
Act, the Optionee shall not offer, sell, contract to sell, pledge, hypothecate,
grant any option to purchase or make any short sale of, or otherwise dispose of
any shares of stock of the Company or any rights to acquire stock of the Company
for such period of time as may be established by the underwriter for such
initial public offering; provided, however, that such period of time shall not
exceed one hundred eighty (180) days from the effective date of the registration
statement to be filed in connection with such initial public offering. The
foregoing limitation shall not apply to shares registered under the Securities
Act and shall cease to apply once a registration statement is effective covering
shares issuable pursuant to options granted pursuant to the Plan, whether or not
such registration statement applies to any of the shares issued or issuable
pursuant to the Option.
20. Binding Effect. This Option Agreement shall inure to the benefit of
--------------
and be binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
14
<PAGE>
21. Termination or Amendment. The Board, including any duly appointed
------------------------
committee of the Board, may terminate or amend the Plan and/or the Option at any
time; provided, however, that no such termination or amendment may adversely
affect the Option or any unexercised portion hereof without the consent of the
Optionee unless such amendment is required to enable the Option to qualify as an
Incentive Stock Option.
22. Integrated Agreement. This Option Agreement constitutes the entire
--------------------
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Company other than those as set forth or provided for
herein. To the extent contemplated herein, the provisions of this Option
Agreement shall survive any exercise of the Option and shall remain in full
force and effect.
23. Applicable Law. This Option Agreement shall be governed by the laws
--------------
of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
24. Tax Consequences. The Optionee understands that any of the foregoing
----------------
references to taxation are based on federal income tax laws and regulations now
in effect. The Optionee has reviewed with the Optionee's own tax advisors the
federal, state, local and foreign tax consequences of the transactions
contemplated by this Agreement. The Optionee is relying solely on such advisors
and not on any statements or representations of the Company or any of its
agents. The Optionee understands that the Optionee (and not the Company) shall
be responsible for the Optionee's own tax liability that may arise as a result
of the transactions contemplated by this Agreement. Without limiting the
generality of the foregoing, the Optionee further agrees that the filing of
elections under Section 83(b) of the Code shall be the responsibility of the
Optionee, and shall not be the Company's responsibility.
CONNECT, INC.
By:
------------------------------
Title:
---------------------------
15
<PAGE>
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
SECTION l(g) HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR
CONSULTANT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING
GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER
ACKNOWLEDGES AND AGREES THAT THIS OPTION, THE COMPANY'S PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND
THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED
PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OR CONSULTANT FOR THE VESTING
PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT
OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTING
RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE.
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, including the Unvested Share Repurchase
Option set forth in paragraph 11 and the Right of First Refusal set forth in
paragraph 12 and hereby accepts the Option subject to all of the terms and
provisions thereof. The Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under this Option Agreement.
The undersigned acknowledges receipt of a copy of the Plan and a copy of
Section 260.141.11 of the Rules of the Commissioner of Corporations of the State
of California regarding restriction on transfer.
Dated:
------------------
--------------------------------
(Optionee), Optionee
Residence Address:
---------------
---------------------------------
---------------------------------
---------------------------------
Social Security No.
--------------
16
<PAGE>
EXHIBIT 10.4
CONNECT, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1996 Employee Stock Purchase
Plan of CONNECT, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal
Revenue Code of 1986, as amended. The provisions of the Plan shall,
accordingly, be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean CONNECT, Inc., a California corporation.
-------
(e) "Compensation" shall mean all regular straight time gross earnings
------------
and shall not include payments for overtime, shift premium, incentive
compensation, incentive payments, commissions, bonuses and other compensation.
(f) "Continuous Status as an Employee" shall mean the absence of any
--------------------------------
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
agreed to in writing by the Company, provided that such leave is for a period of
not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
(g) "Contributions" shall mean all amounts credited to the account of
-------------
a participant pursuant to the Plan.
(h) "Designated Subsidiaries" shall mean the Subsidiaries which have
-----------------------
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(i) "Employee" shall mean any person, including an Officer, who is
--------
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
<PAGE>
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(k) "Purchase Date" shall mean the last day of each Purchase Period of
-------------
the Plan.
(l) "Offering Date" shall mean the first business day of each Offering
-------------
Period of the Plan.
(m) "Offering Period" shall mean a period of twenty-four (24) months
---------------
commencing on January 1 and July 1 of each year, except for the first Offering
Period as set forth in Section 4(a).
(n) "Officer" shall mean a person who is an officer of the Company
-------
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(o) "Plan" shall mean this Employee Stock Purchase Plan.
----
(p) "Purchase Period" shall mean a period of six (6) months within an
---------------
Offering Period, except for the first Purchase Period as set forth in Section
4(b).
(q) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
3. Eligibility.
-----------
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own stock and/or
hold outstanding options to purchase stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Company or of any subsidiary of the Company or (ii) if such option would permit
his or her rights to purchase stock under all employee stock purchase plans
(described in Section 423 of the Code) of the Company and its Subsidiaries to
accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair
market value of such stock (determined at the time such option is granted) for
each calendar year in which such option is outstanding at any time.
-2-
<PAGE>
4. Offering Periods and Purchase Periods.
--------------------------------------
(a) Offering Periods. The Plan shall be implemented by a series of
----------------
Offering Periods of twenty-four (24) months duration, with new Offering Periods
commencing on or about January 1 and July 1 of each year and ending on the
second December 31 and June 30, respectively, occurring thereafter (or at such
other time or times as may be determined by the Board of Directors). The first
Offering Period shall commence on the beginning of the effective date of the
Registration Statement on Form S-1 for the initial public offering of the
Company's Common Stock (the "IPO Date") and continue until June 30, 1998. The
Plan shall continue until terminated in accordance with Section 19 hereof. The
Board of Directors of the Company shall have the power to change the duration
and/or the frequency of Offering Periods with respect to future offerings
without shareholder approval if such change is announced at least fifteen (15)
days prior to the scheduled beginning of the first Offering Period to be
affected. Eligible employees may not participate in more than one Offering
Period at a time.
(b) Purchase Periods. Each Offering Period shall consist of four (4)
----------------
consecutive purchase periods of six (6) months duration. The last day of each
Purchase Period shall be the "Purchase Date" for such Purchase Period. A
Purchase Period commencing on January 1 shall end on the next June 30. A
Purchase Period commencing on July 1 shall end on the next December 31. The
first Purchase Period shall commence on the IPO Date and shall end on December
31, 1996. The Board of Directors of the Company shall have the power to change
the duration and/or frequency of Purchase Periods with respect to future
purchases without shareholder approval if such change is announced at least
fifteen (15) days prior to the scheduled beginning of the first Purchase Period
to be affected.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's payroll office prior to the applicable Offering
Date, unless a later time for filing the subscription agreement is set by the
Board for all eligible Employees with respect to a given offering. The
subscription agreement shall set forth the percentage of the participant's
Compensation (which shall be not less than 1% and not more than 10%) to be paid
as Contributions pursuant to the Plan.
(b) Payroll deductions shall commence on the first payroll following
the Offering Date and shall end on the last payroll paid on or prior to the last
Purchase Period of the Offering Period to which the subscription agreement is
applicable, unless sooner terminated by the participant as provided in Section
9.
6. Method of Payment of Contributions.
----------------------------------
(a) The participant shall elect to have payroll deductions made on
each payday during the Offering Period in an amount not less than one percent
(1%) and not more than ten percent (10%) of such participant's Compensation on
each such payday. All payroll deductions
-3-
<PAGE>
made by a participant shall be credited to his or her account under the Plan. A
participant may not make any additional payments into such account.
(b) A participant may discontinue his or her participation in the Plan
as provided in Section 9, or, on one occasion only during the Offering Period,
may decrease the rate of his or her Contributions during the Offering Period by
completing and filing with the Company a new subscription agreement. The change
in rate shall be effective as of the beginning of the next calendar month
following the date of filing of the new subscription agreement, if the agreement
is filed at least ten (10) business days prior to such date and, if not, as of
the beginning of the next succeeding calendar month.
(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's
payroll deductions may be decreased to 0% at such time during any Offering
Period which is scheduled to end during the current calendar year that the
aggregate of all payroll deductions accumulated with respect to such Offering
Period and any other Offering Period ending within the same calendar year equal
$21,250. Payroll deductions shall re-commence at the rate provided in such
participant's subscription Agreement at the beginning of the first Offering
Period which is scheduled to end in the following calendar year or the next
Purchase Period, as applicable, unless terminated by the participant as provided
in Section 9.
7. Grant of Option.
---------------
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Purchase Date a number of shares of the Company's Common Stock
determined by dividing such Employee's Contributions accumulated prior to such
Purchase Date and retained in the participant's account as of the Purchase Date
by the lower of (i) eighty-five percent (85%) of the fair market value of a
share of the Company's Common Stock on the Offering Date, or (ii) eighty-five
percent (85%) of the fair market value of a share of the Company's Common Stock
on the Purchase Date; provided however, that the maximum number of shares an
Employee may purchase during each calendar year for which an option is
outstanding shall be determined by dividing $25,000 by the fair market value of
a share of the Company's Common Stock on the Offering Date, and provided further
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 12. The fair market value of a share of the Company's Common Stock
shall be determined as provided in Section 7(b).
(b) The option price per share of the shares offered in a given
Offering Period shall be the lower of: (i) 85% of the fair market value of a
share of the Common Stock of the Company on the Offering Date; or (ii) 85% of
the fair market value of a share of the Common Stock of the Company on the
Purchase Date. The fair market value of the Company's Common Stock on a given
date shall be determined by the Board in its discretion based on the closing
price of the Common Stock for such date (or, in the event that the Common Stock
is not traded on such date, on the immediately preceding trading date), as
reported by the National Association of Securities Dealers Automated Quotation
(Nasdaq) National Market or, if such price is not reported, the mean of the bid
and asked prices per share of the Common Stock as reported by
-4-
<PAGE>
Nasdaq or, in the event the Common Stock is listed on a stock exchange, the fair
market value per share shall be the closing price on such exchange on such date
(or, in the event that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported in The Wall Street Journal. For
purposes of the Offering Date under the first Offering Period under the Plan,
the fair market value of a share of the Common Stock of the Company shall be the
Price to Public as set forth in the final prospectus filed with the Securities
and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933,
as amended.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in paragraph 10, his or her option for the purchase of shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of full shares subject to the option will be purchased at the
applicable option price with the accumulated Contributions in his or her
account. The shares purchased upon exercise of an option hereunder shall be
deemed to be transferred to the participant on the Purchase Date. During his or
her lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
As promptly as practicable after each Purchase Date of each Offering
Period, the Company shall arrange the transfer of the shares purchased upon
exercise of options under the Plan to the participant's account with the broker
selected by the Company for administration of the stock issuances. Stock
certificates representing the shares purchased shall not be issued to plan
participants. Any cash remaining to the credit of a participant's account under
the Plan after a purchase by him or her of shares at the termination of each
Purchase Period, or which is insufficient to purchase a full share of Common
Stock of the Company, shall be carried over to the next Purchase Period if the
Employee continues to participate in the Plan, or if the Employee does not
continue to participate, shall be returned to said participant.
9. Voluntary Withdrawal; Termination of Employment.
-----------------------------------------------
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
each Purchase Date by giving written notice to the Company. All of the
participant's Contributions credited to his or her account will be paid to him
or her promptly after receipt of his or her notice of withdrawal and his or her
option for the current period will be automatically terminated, and no further
Contributions for the purchase of shares will be made during the Offering
Period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death, the Contributions credited to his or her account
will be returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto under Section 14, and his or her option will
be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Plan and the Contributions credited to his
or her account will be returned to him or her and his or her option terminated.
-5-
<PAGE>
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company.
10. Automatic Withdrawal. If the fair market value of the shares on any
--------------------
Purchase Date of an Offering Period, other than the final Purchase Date of such
Offering Period, is less than the fair market value of the shares on the
Offering Date for such Offering Period, then every participant shall
automatically (i) be withdrawn from such Offering Period at the close of such
Purchase Date and after the acquisition of shares for such Purchase Period, and
(ii) be enrolled in the Offering Period commencing on the first business day
subsequent to such Purchase Period.
11. Interest. No interest shall accrue on the Contributions of a
--------
participant in the Plan.
12. Stock.
-----
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be 1,000,000, subject to
adjustment upon changes in capitalization of the Company as provided in Section
18. If the total number of shares which would otherwise be subject to options
granted pursuant to Section 7(a) on the Offering Date of an Offering Period
exceeds the number of shares then available under the Plan (after deduction of
all shares for which options have been exercised or are then outstanding), the
Company shall make a pro rata allocation of the shares remaining available for
option grant in as uniform a manner as shall be practicable and as it shall
determine to be equitable. In such event, the Company shall give written notice
of such reduction of the number of shares subject to the option to each Employee
affected thereby and shall similarly reduce the rate of Contributions, if
necessary.
(b) The participant will have no interest or voting right in shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
13. Administration. The Board, or a committee named by the Board, shall
--------------
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan. The composition of the committee shall be in accordance with the
requirements to obtain or retain any available exemption from the operation of
Section 16(b) of the Exchange Act pursuant to Rule 16b-3 promulgated thereunder.
-6-
<PAGE>
14. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end of a
Purchase Period but prior to delivery to him or her of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the Purchase Date of an Offering Period.
If a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
(and his or her spouse, if any) at any time by written notice. In the event of
the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such shares and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its discretion, may deliver such shares and/or cash to the spouse or to any
one or more dependents or relatives of the participant, or if no spouse,
dependent or relative is known to the Company, then to such other person as the
Company may designate.
15. Transferability. Neither Contributions credited to a participant's
---------------
account nor any rights with regard to the exercise of an option or to receive
shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 14) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 9.
16. Use of Funds. All Contributions received or held by the Company under
------------
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
17. Reports. Individual accounts will be maintained for each participant
-------
in the Plan. Statements of account will be given to participating Employees
promptly following the Purchase Date, which statements will set forth the
amounts of Contributions, the per share purchase price, the number of shares
purchased and the remaining cash balance, if any.
18. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the shareholders of
----------
the Company, the number of shares of Common Stock covered by each option under
the Plan which has not yet been exercised and the number of shares of Common
Stock which have been authorized for issuance under the Plan but have not yet
been placed under option (collectively, the "Reserves"), as well as the price
per share of Common Stock covered by each option under the Plan which has not
yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse
-7-
<PAGE>
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration". Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issue by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an option.
(b) Corporate Transactions. In the event of the proposed dissolution
----------------------
or liquidation of the Company, the Offering Period will terminate immediately
prior to the consummation of such proposed action, unless otherwise provided by
the Board. In the event of a proposed sale of all or substantially all of the
assets of the Company, or the merger of the Company with or into another
corporation, each option under the Plan shall be assumed or an equivalent option
shall be substituted by such successor corporation or a parent or subsidiary of
such successor corporation, unless the Board determines, in the exercise of its
sole discretion and in lieu of such assumption or substitution, to shorten the
Offering Period then in progress by setting a new Purchase Date (the "New
Purchase Date"). If the Board shortens the Offering Period then in progress in
lieu of assumption or substitution in the event of a merger or sale of assets,
the Board shall notify each participant in writing, at least ten (10) days prior
to the New Purchase Date, that the Purchase Date for his or her option has been
changed to the New Purchase Date and that his or her option will be exercised
automatically on the New Purchase Date, unless prior to such date he or she has
withdrawn from the Offering Period as provided in Section 9. For purposes of
this paragraph, an option granted under the Plan shall be deemed to be assumed
if, following the sale of assets or merger, the option confers the right to
purchase, for each share of option stock subject to the option immediately prior
to the sale of assets or merger, the consideration (whether stock, cash or other
securities or property) received in the sale of assets or merger by holders of
Common Stock for each share of Common Stock held on the effective date of the
transaction (and if such holders were offered a choice of consideration, the
type of consideration chosen by the holders of a majority of the outstanding
shares of Common Stock); provided, however, that if such consideration received
in the sale of assets or merger was not solely common stock of the successor
corporation or its parent (as defined in Section 424(e) of the Code), the Board
may, with the consent of the successor corporation and the participant, provide
for the consideration to be received upon exercise of the option to be solely
common stock of the successor corporation or its parent equal in fair market
value to the per share consideration received by holders of Common Stock and the
sale of assets or merger.
The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, and in the event of the Company being consolidated with or merged into
any other corporation.
-8-
<PAGE>
19. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time terminate or
amend the Plan. Except as provided in Section 18, no such termination may
affect options previously granted, nor may an amendment make any change in any
option theretofore granted which adversely affects the rights of any
participant. In addition, to the extent necessary to comply with Rule 16b-3
under the Exchange Act, or under Section 423 of the Code (or any successor rule
or provision or any applicable law or regulation), the Company shall obtain
shareholder approval in such a manner and to such a degree as so required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods and Purchase
Periods, limit the frequency and/or number of changes in the amount withheld
during an Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld from
the participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.
20. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
22. Term of Plan; Effective Date. The Plan shall become effective upon
----------------------------
the earlier to occur of its adoption by the Board of Directors or its approval
by the shareholders of the Company. It shall continue in effect for a term of
twenty (20) years unless sooner terminated under Section 19.
-9-
<PAGE>
23. Additional Restrictions of Rule 16b-3. The terms and conditions of
-------------------------------------
options granted hereunder to, and the purchase of shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
-10-
<PAGE>
CONNECT, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
New Election
------
Change of Election
------
1. I, , hereby elect to participate in the
------------------------
CONNECT, INC. 1996 Employee Stock Purchase Plan (the "Plan") for the Offering
Period , 19 to , 19 , and subscribe to purchase
-------------- -- --------------- --
shares of the Company's Common Stock in accordance with this Subscription
Agreement and the Plan.
2. I elect to have Contributions in the amount of % of my
----
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 10% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Purchase
Date my participation in the Plan as provided in Section 9 of the Plan. I also
understand that I can decrease the rate of my Contributions to not less than 1%
on one occasion only during any Offering Period by completing and filing a new
Subscription Agreement with such decrease taking effect as of the beginning of
the calendar month following the date of filing of the new Subscription
Agreement, if filed at least ten (10) business days prior to the beginning of
such month. Further, I may change the rate of deductions for future Offering
Periods by filing a new Subscription Agreement, and any such change will be
effective as of the beginning of the next Offering Period. In addition, I
acknowledge that, unless I discontinue my participation in the Plan as provided
in Section 9 of the Plan, my election will continue to be effective for each
successive Offering Period.
<PAGE>
5. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "CONNECT, INC. 1996 Employee Stock Purchase
Plan." I understand that my participation in the Plan is in all respects
subject to the terms of the Plan.
6. Shares purchased for me under the Plan should be issued in the name(s)
of (name of employee or employee and spouse only):
------------------------------------
------------------------------------
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print)
-------------------------------------
(First) (Middle) (Last)
- ---------------------- -------------------------------------
(Relationship) (Address)
-------------------------------------
8. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Offering Date (the first day of the Offering
Period during which I purchased such shares) or within 1 year after the Purchase
Date, I will be treated for federal income tax purposes as having received
ordinary compensation income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares on the Purchase Date over
the price which I paid for the shares, regardless of whether I disposed of the
shares at a price less than their fair market value at the Purchase Date. The
remainder of the gain or loss, if any, recognized on such disposition will be
treated as capital gain or loss.
I hereby agree to notify the Company in writing within 30 days after
--------------------------------------------------------------------
the date of any such disposition, and I will make adequate provision for
- ------------------------------------------------------------------------
federal, state or other tax withholding obligations, if any, which arise upon
- -----------------------------------------------------------------------------
the disposition of the Common Stock. The Company may, but will not be obligated
- -----------------------------------
to, withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the 2-year
and 1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received compensation income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I paid for
the shares under the option, or (2) 5% of the fair market value of the shares
-2-
<PAGE>
on the Offering Date. The remainder of the gain or loss, if any, recognized on
such disposition will be treated as capital gain or loss.
I understand that this tax summary is only a summary and is subject to
----------------------------------------------------------------------
change. I further understand that I should consult a tax advisor concerning the
- ------
tax implications of the purchase and sale of stock under the Plan.
10. I hereby agree to be bound by the terms of the Plan. The
effectiveness of this Subscription Agreement is dependent upon my eligibility to
participate in the Plan.
SIGNATURE:
---------------------------
SOCIAL SECURITY #:
-------------------
DATE:
--------------------------------
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
- ---------------------------------------
(Signature)
- ---------------------------------------
(Print name)
-3-
<PAGE>
CONNECT, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, , hereby elect to withdraw my participation in
--------------------------
the CONNECT, INC. 1996 Employee Stock Purchase Plan (the "Plan") for the
Offering Period . This withdrawal covers all Contributions credited to
---------
my account and is effective on the date designated below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
If the undersigned is an Officer or Director of CONNECT, INC. or other
person subject to Section 16 of the Securities Exchange Act of 1934, the
undersigned further understands that under rules promulgated by the U.S.
Securities and Exchange Commission he or she may not re-enroll in the Plan for a
period of six (6) months after withdrawal.
Dated:
------------------- ------------------------------------
Signature of Employee
------------------------------------
Social Security Number
<PAGE>
CONNECT, INC.
1996 DIRECTORS' STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Directors' Stock Option
--------------------
Plan are to attract and retain the best available personnel for service as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
All options granted hereunder shall be "nonstatutory stock options".
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean CONNECT, INC., a California corporation.
-------
(e) "Continuous Status as a Director" shall mean the absence of any
-------------------------------
interruption or termination of service as a Director.
(f) "Director" shall mean a member of the Board.
--------
(g) "Employee" shall mean any person, including officers and
--------
directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(i) "Option" shall mean a stock option granted pursuant to the Plan.
------
All options shall be nonstatutory stock options (i.e., options that are not
intended to qualify as incentive stock options under Section 422 of the Code).
(j) "Optioned Stock" shall mean the Common Stock subject to an
--------------
Option.
(k) "Optionee" shall mean an Outside Director who receives an Option.
--------
(l) "Outside Director" shall mean a Director who is not an Employee.
----------------
(m) "Parent" shall mean a "parent corporation", whether now or
------
hereafter existing, as defined in Section 424(e) of the Code.
(n) "Plan" shall mean this 1996 Directors' Stock Option Plan.
----
<PAGE>
(o) "Share" shall mean a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(p) "Subsidiary" shall mean a "subsidiary corporation", whether now
----------
or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 500,000 Shares (the "Pool") of Common Stock. The Shares may
be authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. If Shares which were acquired upon exercise of an
Option are subsequently repurchased by the Company, such Shares shall not in any
event be returned to the Plan and shall not become available for future grant
under the Plan.
4. Administration of and Grants of Options under the Plan.
------------------------------------------------------
(a) Administrator. Except as otherwise required herein, the Plan
-------------
shall be administered by the Board.
(b) Procedure for Grants. All grants of Options hereunder shall be
--------------------
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an
Option to purchase 40,000 Shares (the "First Option") on the date on which such
person first becomes an Outside Director, whether through election by the
shareholders of the Company or appointment by the Board of Directors to fill a
vacancy.
(iii) Each Outside Director shall be automatically granted an
Option to purchase 10,000 Shares (a "Subsequent Option") on the date of each
Annual Meeting of the Company's shareholders following which such Outside
Director is serving on the Board, provided that, on such date, he or she shall
have served on the Board for at least six (6) months prior to the date of such
Annual Meeting.
(iv) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, in the event that a grant would cause the number of Shares subject to
outstanding Options plus the number of Shares previously purchased upon exercise
of Options to exceed the Pool, then each such automatic grant shall be for that
number of Shares determined by dividing the total number of Shares remaining
available for grant by the number of Outside Directors on the automatic grant
date. Any further grants shall then be deferred until such time, if any, as
additional Shares become
-2-
<PAGE>
available for grant under the Plan through action of the shareholders to
increase the number of Shares which may be issued under the Plan or through
cancellation or expiration of Options previously granted hereunder.
(v) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, any grant of an Option made before the Company has obtained shareholder
approval of the Plan in accordance with Section 17 hereof shall be conditioned
upon obtaining such shareholder approval of the Plan in accordance with Section
17 hereof.
(vi) The terms of each First Option granted hereunder shall be
as follows:
(1) the First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 hereof.
(2) the exercise price per Share shall be 100% of the fair
market value per Share at the beginning of the date of grant of the First
Option, determined in accordance with Section 8 hereof.
(3) the First Option shall become exercisable in
installments cumulatively as to 25% of the Shares subject to the First Option on
each of the first, second, third and fourth anniversaries of the date of grant
of the First Option.
(vii) The terms of each Subsequent Option granted hereunder shall
be as follows:
(1) the Subsequent Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Section 9 hereof.
(2) the exercise price per Share shall be 100% of the fair
market value per Share at the beginning of the date of grant of the Subsequent
Option, determined in accordance with Section 8 hereof.
(3) the Subsequent Option shall become exercisable as to
one hundred percent (100%) of the Shares subject to the Subsequent Option on the
first anniversary of the date of grant of the Subsequent Option.
(c) Powers of the Board. Subject to the provisions and restrictions
-------------------
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine
the exercise price per share of Options to be granted, which exercise price
shall be determined in accordance with Section 8(a) of the Plan; (iii) to
interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations
relating to the Plan; (v) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
-3-
<PAGE>
(d) Effect of Board's Decision. All decisions, determinations and
--------------------------
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(e) Suspension or Termination of Option. If the President or his or
-----------------------------------
her designee reasonably believes that an Optionee has committed an act of
misconduct, the President may suspend the Optionee's right to exercise any
option pending a determination by the Board of Directors (excluding the Outside
Director accused of such misconduct). If the Board of Directors (excluding the
Outside Director accused of such misconduct) determines an Optionee has
committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation
owed to the Company, breach of fiduciary duty or deliberate disregard of the
Company rules resulting in loss, damage or injury to the Company, or if an
Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair
competition, induces any Company customer to breach a contract with the Company
or induces any principal for whom the Company acts as agent to terminate such
agency relationship, neither the Optionee nor his or her estate shall be
entitled to exercise any option whatsoever. In making such determination, the
Board of Directors (excluding the Outside Director accused of such misconduct)
shall act fairly and shall give the Optionee an opportunity to appear and
present evidence on Optionee's behalf at a hearing before the Board or a
committee of the Board.
5. Eligibility. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. Term of Plan; Effective Date. The Plan shall become effective on the
----------------------------
effectiveness of the registration statement under the Securities Act of 1933, as
amended, relating to the Company's initial public offering of securities. It
shall continue in effect for a term of ten (10) years unless sooner terminated
under Section 13 of the Plan.
7. Term of Option. The term of each Option shall be ten (10) years from
--------------
the date of grant thereof.
8. Exercise Price and Consideration.
--------------------------------
(a) Exercise Price. The per Share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be 100% of the fair market value
per Share on the date of grant of the Option.
(b) Fair Market Value. The fair market value shall be determined by
-----------------
the Board in its discretion; provided, however, that where there is a public
market for the Common Stock, the fair market value per Share shall be the mean
of the bid and asked prices of the Common Stock in the over-the-counter market
on the date of grant, as reported in The Wall Street Journal (or, if not so
reported, as otherwise reported by the National Association of Securities
Dealers Automated
-4-
<PAGE>
Quotation ("NASDAQ" System) or, in the event the Common Stock is traded on the
NASDAQ National Market or listed on a stock exchange, the fair market value per
Share shall be the closing price on such system or exchange on the date of grant
of the Option (or, in the event that the Common Stock is not traded on such
date, on the immediately preceding trading date), as reported in The Wall Street
Journal. With respect to any Options granted hereunder concurrently with the
initial effectiveness of the Plan, the fair market value shall be the Price to
Public as set forth in the final prospectus relating to such initial public
offering.
(c) Form of Consideration. The consideration to be paid for the
---------------------
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised (which, if acquired from the Company, shall have been
held for at least six months), or any combination of such methods of payment
and/or any other consideration or method of payment as shall be permitted under
applicable corporate law.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) hereof; provided, however, that no Options shall be exercisable prior to
shareholder approval of the Plan in accordance with Section 17 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as a Director. If an Outside Director
-----------------------------------
ceases to serve as a Director, he or she may, but only within ninety (90) days
after the date he or she ceases to be a Director of the Company, exercise his or
her Option to the extent that he or she was entitled to exercise it at the date
of such termination. Notwithstanding the foregoing, in no event may the Option
be exercised after its term set forth in Section 7 has expired. To the extent
that such Outside Director was not entitled to exercise an Option at the date of
such termination, or does not
-5-
<PAGE>
exercise such Option (which he or she was entitled to exercise) within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of Section
----------------------
9(b) above, in the event a Director is unable to continue his or her service as
a Director with the Company as a result of his or her total and permanent
disability (as defined in Section 22(e)(3) of the Internal Revenue Code), he or
she may, but only within six (6) months from the date of such termination,
exercise his or her Option to the extent he or she was entitled to exercise it
at the date of such termination. Notwithstanding the foregoing, in no event may
the Option be exercised after its term set forth in Section 7 has expired. To
the extent that he or she was not entitled to exercise the Option at the date of
termination, or if he or she does not exercise such Option (which he or she was
entitled to exercise) within the time specified herein, the Option shall
terminate.
(d) Death of Optionee. In the event of the death of an Optionee:
-----------------
(i) During the term of the Option who is, at the time of his or her
death, a Director of the Company and who shall have been in Continuous Status as
a Director since the date of grant of the Option, the Option may be exercised,
at any time within six (6) months following the date of death, by the Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent of the right to exercise that would have
accrued had the Optionee continued living and remained in Continuous Status as
Director for six (6) months after the date of death. Notwithstanding the
foregoing, in no event may the Option be exercised after its term set forth in
Section 7 has expired.
(ii) Within three (3) months after the termination of Continuous
Status as a Director, the Option may be exercised, at any time within six (6)
months following the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of termination.
Notwithstanding the foregoing, in no event may the option be exercised after its
term set forth in Section 7 has expired.
10. Nontransferability of Options. The Option may not be sold, pledged,
-----------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution or pursuant to a qualified
domestic relations order (as defined by the Code or the rules thereunder). The
designation of a beneficiary by an Optionee does not constitute a transfer. An
Option may be exercised during the lifetime of an Optionee only by the Optionee
or a transferee permitted by this Section.
11. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustments. Subject to any required action by the shareholders
-----------
of the Company, the number of shares of Common Stock covered by each outstanding
Option, the number of shares of Common Stock which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, and the number of shares of Common Stock to be granted under the
provisions set forth in Section 4 of the Plan, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase
-6-
<PAGE>
or decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Corporate Transactions. In the event of (i) a dissolution or
----------------------
liquidation of the Company, (ii) a sale of all or substantially all of the
Company's assets, (iii) a merger or consolidation in which the Company is not
the surviving corporation, or (iv) any other capital reorganization in which
more than fifty percent (50%) of the shares of the Company entitled to vote are
exchanged, the Company shall give to the Optionee, at the time of adoption of
the plan for liquidation, dissolution, sale, merger, consolidation or
reorganization, either a reasonable time thereafter within which to exercise the
Option, including Shares as to which the Option would not be otherwise
exercisable, prior to the effectiveness of such liquidation, dissolution, sale,
merger, consolidation or reorganization, at the end of which time the Option
shall terminate, or the right to exercise the Option, including Shares as to
which the Option would not be otherwise exercisable (or receive a substitute
option with comparable terms), as to an equivalent number of shares of stock of
the corporation succeeding the Company or acquiring its business by reason of
such liquidation, dissolution, sale, merger, consolidation or reorganization.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4(b) hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the shareholders of the Company to Plan amendments to
the extent and in the manner required by such law or regulation.
Notwithstanding the foregoing, the provisions set forth in Section 4 of this
Plan (and any other Sections of this Plan that affect the formula award terms
required to be specified in this Plan by Rule 16b-3) shall not be amended more
than once every six months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan that would impair the rights of any Optionee shall not
affect Options already granted to such Optionee and such Options shall remain in
full force and effect as if this Plan had not been
-7-
<PAGE>
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance. As a
condition to the exercise of an Option, the Company may require the person
exercising such Option to represent and warrant at the time of any such exercise
that the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares, if, in the opinion of counsel for
the Company, such a representation is required by any of the aforementioned
relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
16. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
17. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company at or prior to the first annual
meeting of shareholders held subsequent to the granting of an Option hereunder.
If such shareholder approval is obtained at a duly held shareholders' meeting,
it may be obtained by the affirmative vote of the holders of a majority of the
outstanding shares of the Company present or represented and entitled to vote
thereon. If such shareholder approval is obtained by written consent, it may be
obtained by the written consent of the holders of a majority of the outstanding
shares of the Company. Options may be granted, but not exercised before such
shareholder approval.
-8-
<PAGE>
CONNECT, INC.
1996 DIRECTORS' STOCK OPTION PLAN
DIRECTOR NONSTATUTORY STOCK OPTION AGREEMENT
--------------------------------------------
Optionee:
Address:
Total Shares Subject to Option:
Exercise Price Per Share:
Date of Grant:
Expiration Date:
Type of Stock Option: Nonstatutory Stock Option
1. Grant of Option. CONNECT, Inc. (the "Company"), a California
---------------
corporation, hereby grants to the Optionee named above ("Optionee") an option
(the "Option") to purchase a total of up to ____________________ shares of
Common Stock of the Company (the "Shares") at the exercise price per share set
forth above (the "Exercise Price"), subject to all of the terms and conditions
of this Director Nonstatutory Stock Option Agreement ("Agreement") and the
Company's 1996 Directors' Stock Option Plan (the "Plan"). The terms defined in
the Plan shall have the same defined meanings herein.
A. Nature of the Option. This Option is a nonstatutory stock option
--------------------
and is not intended to qualify for any special tax benefits to the Optionee.
B. Exercise Price. The exercise price is ___________ for each share
--------------
of Common Stock, which is 100% of the Fair Market Value of the Common Stock as
determined on the date of grant of this Option.
2. Exercise Period of Option. Subject to the terms and conditions of the
-------------------------
Plan and this Grant, this Option shall become exercisable as follows:
____________________________________________
3. Restrictions on Exercise. Exercise of this Option is subject to the
------------------------
following limitations:
A. This Option may not be exercised unless such exercise is in
compliance with the Securities Act of 1933, as amended, and all applicable state
securities laws, as they are in effect on the date of exercise.
<PAGE>
B. If, at the time of the exercise of this Option, the Optionee is
subject to Section 16(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), then the Optionee must comply with Rule 16b-3 under the
Exchange Act and such additional conditions or restrictions as may be required
thereunder to qualify for the maximum exemption from Section 16 of the Exchange
Act with respect to Plan transactions.
4. Termination of Status as a Director. If an Outside Director ceases to
-----------------------------------
serve as a Director for any reason other than death or disability, he or she
may, but only within ninety (90) days after the date he or she ceases to be a
Director of the Company, exercise his or her Option to the extent that he or she
was entitled to exercise it at the date of such termination. To the extent that
he or she was not entitled to exercise an Option at the date of such
termination, or if he or she does not exercise such Option (which he or she was
entitled to exercise) within the time specified herein, the Option shall
terminate.
5. Disability of Director. Notwithstanding Section 4 above, in the event
----------------------
an Outside Director is unable to continue his or her service as a Director with
the Company as a result of total and permanent disability (as defined in Section
22(e)(3) of the Code), he or she may, but only within six (6) months from the
date of termination of such service (but in no event later than the date of
expiration of the term of this Option as set forth in the Notice of Stock Option
Grant), exercise the Option to the extent otherwise so entitled at the date of
such termination. To the extent that he or she was not entitled to exercise the
Option at the date of termination, or if he or she does not exercise such Option
(to the extent otherwise so entitled) within the time specified in this
Agreement, the Option shall terminate.
6. Death of Director. Notwithstanding Section 4 above, in the event of
-----------------
the death an Outside Director while serving as a Director of the Company or
within three (3) months of terminating such service, the Option may be
exercised, at any time within six (6) months following the date of death (but in
no event later than the date of expiration of the term of this Option as set
forth in the Notice of Stock Option Grant), by Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance to the
extent the Optionee was entitled to exercise such Option on the date of death,
provided, however, that if the Director dies while serving as a Director, the
Option will be exercisable to the extent of the right to exercise that would
have accrued had the Director continued living and serving as a Director for six
(6) months after the date of death.
7. Manner of Exercise.
------------------
A. This Option shall be exercisable by delivery to the Company of an
executed written Director Stock Option Exercise Notice and Agreement in the form
attached hereto as Exhibit A, or in such other form as may be approved by the
Company, which shall set forth Optionee's election to exercise this Option, the
number of Shares being purchased, any restrictions imposed on the Shares and
such other representations and agreements regarding Optionee's investment intent
and access to information as may be required by the Company to comply with
applicable securities laws.
B. The Director Stock Option Exercise Notice and Agreement shall be
accompanied by full payment of the Exercise Price for the Shares being purchased
(i) in cash, (ii) by
-2-
<PAGE>
check, (iii) by delivery of other shares of Common Stock having a fair market
value on the date of surrender equal to the aggregate exercise price of the
Shares being purchased (which, if acquired from the Company, shall have been
held for at least six months) or (iv) by any combination of the foregoing
methods of payment and/or any other method of payment as shall be permitted
under applicable corporate law.
C. Prior to the issuance of the Shares upon exercise of this Option,
Optionee must pay or make adequate provision for any applicable federal or state
withholding obligations of the Company.
D. Provided that such notice and payment are in form and substance
satisfactory to counsel for the Company, the Company shall issue the Shares
registered in the name of Optionee or Optionee's legal representative.
8. Compliance with Laws and Regulations. The issuance and transfer of
------------------------------------
Shares shall be subject to compliance by the Company and the Optionee with all
applicable requirements of federal and state securities laws and with all
applicable requirements of any stock exchange on which the Company's Common
Stock may be listed at the time of such issuance or transfer. Optionee
understands that the Company is under no obligation to register or qualify the
Shares with the Securities and Exchange Commission, any state securities
commission or any stock exchange to effect such compliance.
9. Nontransferability of Option. This Option may not be transferred in
----------------------------
any manner other than by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order (as defined by the Code or the
rules thereunder) and may be exercised during the lifetime of the Optionee only
by the Optionee or a transferee permitted by Section 10 of the Plan. The terms
of this option shall be binding upon the executors, administrators, successors
and assigns of the Optionee.
10. Federal Tax Consequences. Set forth below is a brief summary as of
------------------------
the date of this Option of some of the federal tax consequences of exercise of
this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE
SHOULD CONSULT HIS OR HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES. THIS SUMMARY DOES NOT DISCUSS STATE OR LOCAL TAX
CONSEQUENCES OF EXERCISE OF THIS OPTION AND DISPOSITION OF THE SHARES.
A. Taxation Upon Exercise of Option. Optionee understands that, upon
--------------------------------
exercise of this Option, he or she will recognize income for tax purposes in an
amount equal to the excess of the then fair market value of the Shares purchased
over the exercise price paid for such Shares. Since the Optionee is likely to
be subject to Section 16(b) of the Securities Exchange Act of 1934, as amended,
the measurement and timing of such income may be deferred, and the Optionee is
advised to contact a tax adviser concerning the desirability of filing an
election pursuant to Section 83(b) of the Code in connection with the exercise
of the Option. Upon a resale of such Shares by the Optionee, any difference
between the sale price and the exercise price of the Shares, to the extent not
included in income as described above, will be treated as capital gain or loss,
which will be long-term if the shares have been held for more than one year.
-3-
<PAGE>
11. Interpretation. Any dispute regarding the interpretation of this
--------------
agreement shall be submitted by Optionee or the Company forthwith to the
Company's Board of Directors or the committee thereof that administers the Plan,
which shall review such dispute at its next regular meeting. The resolution of
such a dispute by the Board or committee shall be final and binding on the
Company and on Optionee.
12. Entire Agreement. The Plan and the Director Stock Option Exercise
----------------
Notice and Agreement attached as Exhibit A are incorporated herein by reference.
This Grant, the Plan and the Director Stock Option Exercise Notice and Agreement
constitute the entire agreement of the parties regarding the Option and
supersede all prior undertakings and agreements with respect to the subject
matter hereof.
CONNECT, INC.
By:______________________________
Its:_____________________________
-4-
<PAGE>
ACCEPTANCE
Optionee hereby acknowledges receipt of a copy of the Plan, represents that
Optionee has read and understands the terms and provisions thereof, and accepts
this Option subject to all the terms and conditions of the Plan and this Grant.
Optionee acknowledges that there may be adverse tax consequences upon exercise
of this Option or disposition of the Shares and that Optionee should consult a
tax adviser prior to such exercise or disposition.
___________________________________
-5-
<PAGE>
EXHIBIT A
---------
DIRECTOR NONSTATUTORY STOCK OPTION EXERCISE NOTICE AND AGREEMENT
----------------------------------------------------------------
CONNECT, Inc.
515 Ellis Street
Mountain View, CA 94043
Attention: Chief Financial Officer
1. Exercise of Option. The undersigned ("Optionee") hereby elects to
------------------
exercise Optionee's option to purchase ______ shares of the Common Stock (the
"Shares") of CONNECT, Inc. (the "Company") under and pursuant to the Company's
1996 Directors' Stock Option Plan and the Director Nonstatutory Stock Option
Agreement dated _______________ (the "Grant Agreement").
2. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Grant Agreement.
3. Federal Restrictions on Transfer. Optionee understands that the Shares
--------------------------------
must be held indefinitely unless they are registered under the Securities Act of
1933, as amended (the "1933 Act") or unless an exemption from such registration
is available and that the certificate(s) representing the Shares may bear a
legend to that effect. Optionee understands that the Company is under no
obligation to register the Shares and that an exemption may not be available or
may not permit Optionee to transfer Shares in the amounts or at the times
proposed by Optionee.
4. Tax Consequences. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultant(s) Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
5. Delivery of Payment. Optionee herewith delivers to the Company the
-------------------
aggregate purchase price for the Shares that Optionee has elected to purchase
and has made provision for the payment of any federal or state withholding taxes
required to be paid or withheld by the Company.
<PAGE>
6. Entire Agreement. The Grant Agreement is incorporated herein by
----------------
reference. This Agreement and the Grant Agreement constitute the entire
agreement of the parties and supersede in their entirety all prior undertakings
and agreements of the Company and Optionee with respect to the subject matter
hereof. This Agreement and the Grant Agreement are governed by California law
except for that body of law pertaining to conflict of laws.
Submitted by: Accepted by:
OPTIONEE: CONNECT, INC.
_______________________________ By:__________________________________
Its:_________________________________
Address:
Dated:_________________________ Dated:_________________________________
-2-
<PAGE>
EXHIBIT 10.6
CONNECT, INC.
-------------
AMENDED AND RESTATED
--------------------
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This amendment and restatement of the Amended Rights Agreement dated March
9, 1992 among Connect, Inc. (the "Company"), Michael Muller, and the holders of
the then outstanding shares of Series A and Series B Preferred Stock of the
Company, as amended on November 12, 1992 and further amended on June 10, 1994
(as amended, the "Rights Agreement"), is entered into among the Company, Michael
Muller and the holders of the Company's stock listed on Exhibit A attached
---------
hereto and is effective as of December 27, 1995 (this "Agreement").
RECITALS:
A. The parties hereto wish to amend and restate the Rights Agreement to
add additional parties and to modify the provisions thereof in the manner set
forth herein.
NOW, THEREFORE, for and in consideration of the foregoing and the mutual
promises and covenants contained herein, and to induce certain parties to
purchase shares of Series F Preferred Stock to be issued by the Company, the
parties hereby agree as follows:
1. Definitions. The following terms shall have the meanings indicated:
-----------
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended,
--------
or any successor statute.
"Act" shall mean the Securities Act of 1933, as amended, or any
---
successor statute.
"Common Holders" shall mean the Persons listed under the heading
--------------
"Common Holders" on Exhibit A.
---------
"Common Stock" shall mean the Company's common stock which is issued
------------
and outstanding from time to time, whether now or hereafter.
"Demand Notice" shall have the meaning attributed thereto in Section
-------------
2.
"Fully Diluted Basis" shall mean that all outstanding shares of
-------------------
Preferred Stock shall be deemed to have been converted into shares of Common
Stock at the conversion prices in effect at the time the calculation in question
is being made and all outstanding options and warrants shall be deemed to have
been exercised.
"Holders" shall mean the Investors and the Common Holders.
-------
"Investors" shall mean all parties hereto who hold shares of Series C,
---------
D, E or F Preferred Stock of the Company or Common Stock into which such shares
are converted.
<PAGE>
"IPO" shall have the meaning attributed thereto in Section 2.
---
"Material Fact" means a fact which, alone or together with other
-------------
facts, would have a materially adverse effect on the assets, business or
financial condition of the Company and its subsidiaries taken as a whole.
"Person" shall mean a corporation, association, partnership,
------
individual, trust, unincorporated organization or a government or agency or
political subdivision thereof.
"Preferred Stock" shall mean the Company's Series C Preferred Stock,
---------------
Series D Preferred Stock, Series E Preferred Stock and/or Series F Preferred
Stock which is issued and outstanding from time to time, whether now or
hereafter.
"Registrable Securities" shall means (i) the Common Stock issuable or
----------------------
issued upon conversion of the Preferred Stock and (ii) any Common Stock the
Company has issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or distribution
with respect to, or in exchange for or in replacement of the shares referenced
in (i) above, excluding in all cases, however, any Registrable Securities sold
by a person in a transaction in which his rights under Section 2 are not
assigned.
"Form S-3" means such form under the Act as in effect on the date
--------
hereof or any registration form under the Act subsequently adopted by the
Securities and Exchange Commission ("SEC") which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the SEC.
2. Demand Registration. If the Company shall receive at any time after
-------------------
the earlier of (i) December 31, 1997, or (ii) one year after the effective date
of the first registration statement for a public offering (the "IPO") of
securities of the Company (other than a registration statement relating either
to the sale of securities to employees of the Company pursuant to a stock
option, stock purchase, or similar plan or a SEC Rule 145 transaction) but prior
to the fifth anniversary of the effective date of the IPO, a written request (a
"Demand Notice") from the Holders of (A) at least forty percent (40%) of the
Registrable Securities then outstanding or (B) at least three (3) of either 21st
Century Communications Partners, L.P., RRE Connect Investors, L.P., BankAmerica
Ventures or Norwest Equity Partners V (in either case, the "Initiating Holders")
that the Company file a registration statement under the Act covering the
registration of at least twenty-five percent (25%) of the Registrable Securities
then outstanding (or a lesser percent if the anticipated aggregate offering
price, net of underwriting discounts and commissions, would exceed $5,000,000)
then, upon receipt of a Demand Notice, the Company shall, within ten (10) days
of receipt of the Demand Notice, give written notice of such request to all
Holders (the "Registration Notification"). Each Holder who was not an
Initiating Holder shall have the right within twenty (20) days of receipt of the
Registration Notification to deliver to the Company a written request (the
"Carry Along Notice") for any or all of the Registrable Securities owned by it
to be included in the registration requested by the Initiating Holders. Upon
receipt of the Demand Notice, the Company shall also expeditiously prepare and
file a registration statement covering the shares subject to the Demand Notice
and any associated Carry Along Notice and shall use its best efforts to cause
such registration statement to be declared effective as soon as practicable
after the filing
-2-
<PAGE>
thereof. The Holders shall be entitled to two (2) registrations under this
Section 2, provided that: (a) the Company shall not be required to register in
any such registration an amount of Registrable Securities which represent less
than five percent (5%) of the issued and outstanding Common Stock of the Company
on a Fully Diluted Basis; (b) the Company will not be required to effect more
than one (1) such registration for the Holders in any twelve-month period; and
(c) the Company will not be required to register in any particular jurisdiction
in which the Company would be required to execute a general consent to service
of process in effecting such registration, qualification or compliance unless
the Company is already subject to service in such jurisdiction and except as may
be required by the Act.
Notwithstanding the foregoing, the Company shall not be required to
effect any such registration pursuant to this Section 2 within sixty (60) days
before or following the effective date of a Registration Statement filed
pursuant to the Act relating to any underwritten public offering of the
Company's securities. In addition, if the Company shall furnish to the
Initiating Holders a certificate signed by the Chief Executive Officer of the
Company stating that in the good faith judgment of the Board of Directors of the
Company based on demonstrable circumstances (e.g., a possible merger or
acquisition of the Company or a report by the Board of Directors discussing such
circumstance), it would be seriously detrimental to the Company and its
shareholders for such registration statement to be filed and it is therefore
essential to defer the filing of such registration statement, the Company shall
have the right to defer taking action with respect to such filing for a period
not more than six (6) months after receipt of the Demand Notice, provided,
however, that the Company may not utilize this right more than once in any
twelve (12) month period.
3. Underwritten Demand Registration. If the Initiating Holders intend to
--------------------------------
distribute the shares covered by the Demand Notice by means of an underwritten
offering, such Holders shall so advise the Company in their Demand Notice and
the Company shall include such information in the Registration Notification.
The selling Holders and the Company shall enter into an underwriting agreement
in customary form with the underwriter or underwriters of recognized standing
selected for such underwriting by the Company and acceptable to a majority of
the Initiating Holders. If, in the opinion of such underwriters, it would
adversely affect the distribution or price of the shares to be offered if all of
the shares covered by the Demand Notice and the Carry Along Notice were in fact
offered for sale then the Holders other than the Investors shall eliminate their
shares from the offering or reduce the number of such shares to a level which
satisfies the requirements of the underwriters, and to the extent the Holders
other than the Investors are required to reduce the number of such shares but
not eliminate them entirely, each of such Holders shall reduce the number of
shares which he is to offer for sale on a pro-rata basis based upon the number
of shares each has requested to be included in such registration. If the
Holders other than the Investors eliminate their shares from the offering as
aforesaid, and, in the opinion of the underwriters, it would adversely affect
the distribution or price of the securities to be offered if all of the shares
which the Investors wish to sell were in fact offered for sale, then the
Investors shall reduce the number of shares which they are to offer for sale to
a level which satisfies the requirements of the underwriters, and, subject to
Section 12 herein, each of the Investors shall reduce the number of shares which
he is to offer for sale on a pro-rata basis based upon the number of shares each
has requested to be included in such registration.
-3-
<PAGE>
4. Piggy-Back Rights. If (but without any obligation to do so) the
-----------------
Company proposes to register (including for this purpose a registration effected
by the Company for shareholders other than the Holders) any of its stock or
other securities under the Act in connection with the public offering of such
securities solely for cash (other than a registration statement relating either
to the sale of securities to employees of the Company pursuant to a stock
option, stock purchase, or similar plan or a SEC Rule 145 transaction), the
Company shall, at such time, promptly give the Holders written notice of such
registration, and each of the Holders may, by written notice to the Company
given within thirty (30) days of the Company's notice, request the Company to
include within such registration any or all of the shares of the Common Stock
held (or to be acquired upon conversion of Preferred Stock) by such Holder. If
any Holder shall so request, the Company shall expeditiously prepare and file a
registration statement covering the shares subject to such Holder's request and
use its best efforts to cause such registration statement to be declared
effective as soon as practicable after the filing thereof. The Company shall
have the right to terminate or withdraw any registration initiated by it under
this Sections 4 and 10 prior to the effectiveness of such registration whether
or not any Holder has elected to include securities in such registration. The
Company shall not grant any registration rights under this Section 4 which are
superior to or on parity with those of holders of Series F Preferred Stock other
than those rights set forth herein as of December 27, 1995 and those rights set
forth in the GmbH Agreement (as defined in Section 12 below), without the prior
written consent of the holders of eighty percent (80%) of the then outstanding
Series F Preferred Stock.
5. Form S-3 Registration. In case the Company shall receive from any
---------------------
Investor or Investors of the Registrable Securities a written request or
requests that the Company effect a registration on Form S-3 and any related
qualification or compliance with respect to all or a part of the Registrable
Securities owned by such Investor or Investors, the Company will promptly give
written notice of the proposed registration, and any related qualification or
compliance, to all other Holders and as soon as practicable, effect such
registration and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Investor's or Investor's Registrable Securities as are specified
in such request, together with all or such portion of the Registrable Securities
of any other Holder or Holders joining in such request as are specified in a
written request given within fifteen (15) days after receipt of such written
notice from the Company; provided, however, that the Company shall not be
obligated to effect any such registration, qualification or compliance, pursuant
to this Section 5, (i) if Form S-3 is not available for such offering by the
Holders; (ii) if the Holders, together with the holders of any other securities
of the Company entitled to inclusion in such registration, propose to sell
Registrable Securities and such other securities (if any) at an aggregate price
to the public (net of any underwriters' discounts or commissions) of less than
$1,000,000; (iii) if the Company shall furnish to the Holders a certificate
signed by the President of the Company stating that in the good faith judgment
of the Board of Directors of the Company based on demonstrable circumstances
(e.g., a possible merger or acquisition of the Company or a report by the Board
of Directors discussing such circumstance), it would be seriously detrimental to
the Company and its stockholders for such Form S-3 Registration to be effected
at such time, in which event the Company shall have the right to defer the
filing of the Form S-3 registration statement for a period of not more than six
(6) months after receipt of the request of the Investor or Investors
-4-
<PAGE>
under this Section 5. Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. Registrations effected pursuant to this
Section 5 shall not be counted as demands for registration effected pursuant to
Section 2.
6. Obligations of the Company. Whenever required under this Agreement to
--------------------------
effect the registration of any shares of Common Stock, the Company shall, as
expeditiously as reasonably possible do each of the following:
(a) Prepare and file with the Securities and Exchange Commission a
registration statement with respect to such shares (the "Registration Shares")
and use its best efforts to cause such registration statement to become
effective, and use its best efforts to keep effective such registration
statement and maintain the qualifications referred to in subsection (d) below
for such period, not exceeding nine (9) months, as may be necessary for the
selling Holders to dispose of the shares being sold.
(b) Prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the selling Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of shares owned by them.
(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 the selling
Holders; provided, however, that anything in this Agreement to the contrary
notwithstanding with respect to the bearing of expenses, if any jurisdiction in
which the securities shall be qualified shall require that expenses incurred in
connection with the qualification of the securities in that jurisdiction be
borne by selling Holders, then such expenses shall be payable by the selling
Holders and any other parties participating in such underwriting pro-rata to the
extent required by such jurisdiction.
(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, provided the selling
Holders shall also enter into and perform their respective obligations under
such an agreement.
(f) Notify the selling Holders, at any time when a prospectus relating
to the shares covered by the registration statement is required to be delivered
under the Act, of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a Material Fact or omits to state a Material Fact
-5-
<PAGE>
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
(g) Furnish, at the request of any selling Holder, on the date that
such shares are delivered to the underwriters for sale in connection with a
registration pursuant to this Agreement if such shares are being sold through
underwriters, or, if such securities are not being sold through underwriters, on
the date that the registration statement with respect to such shares becomes
effective, (i) an opinion, dated such date, of the counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters, if any, and to the selling Holders, and (ii) a letter dated
such date, from the independent certified public accountants of the Company, in
form and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to the selling Holders.
7. Furnish Information. The selling Holders shall furnish to the Company
-------------------
such information regarding themselves, the shares of the Company's capital stock
held by them, and the intended method of disposition of such shares as shall be
required to effect the registration of their Registrable Securities, together
with such other information as may be reasonably necessary to comply with the
Act, the 1934 Act and applicable state securities laws.
8. Expenses of Registration. Except as set forth below in Section 9, the
------------------------
Company shall pay all expenses in connection with any registration, filing or
qualification effected pursuant to Sections 2, 3, 4 and 5 including, without
limitation, all registration, filing and qualification fees, printers' bills,
accounting fees, and the fees and disbursements of counsel for the Company and
the reasonable fees and expenses of one special counsel to the Selling Holders
(but excluding underwriting discounts and commissions which shall be the sole
responsibility of the selling Holders (the "Registration Expenses")). Any
expense to be borne by the selling Holders shall be shared by the selling
Holders pro-rata, based upon the number of shares registered for each of the
selling Holders.
9. Withdrawn Registrations. Notwithstanding Section 8, the Company shall
-----------------------
not, however, be required to pay for expenses of any registration proceeding the
request for which has been subsequently withdrawn by the Holders unless (a) the
withdrawal is based upon material adverse information concerning the Company of
which the Holders were not aware at the time of such request or (b) the Holders
of a majority of Registrable Securities agree to forfeit their right to one
requested registration pursuant to Section 2 or Section 5, as applicable, in
which event such right shall be forfeited by all Holders. If the Holders are
required to pay the Registration Expenses, such expenses shall be borne by the
holders of securities (including Registrable Securities) requesting such
registration in proportion to the number of shares for which registration was
requested. If the Company is required to pay the Registration Expenses of a
withdrawn offering pursuant to clause (a) above, then the Holders shall not
forfeit their rights pursuant to Section 2 or Section 5 to a demand
registration.
-6-
<PAGE>
10. Underwriting Requirements.
-------------------------
(a) In connection with any offering involving an underwriting of
shares being issued by the Company, the Company shall not be required under
Section 4 to include the securities of the Holders in such underwriting unless
the Holders accept the terms of the underwriting as agreed upon between the
Company and the underwriters selected by the Company. If, in the opinion of
such underwriters, it would adversely affect the distribution or price of the
securities to be offered if all of the shares which the Holders and the Company
wish to sell were in fact offered for sale, then the Holders other than the
Investors shall eliminate their shares from the offering or reduce the number of
such shares to a level which satisfies the requirements of the underwriters, and
to the extent the Holders other than the Investors are required to reduce the
number of such shares but not eliminate them entirely, each of such Holders
shall reduce the number of shares which he is to offer for sale on a pro-rata
basis based upon the number of shares each has requested to be included in such
registration.
(b) If the Holders other than the Investors eliminate their shares
from the offering as aforesaid, and, in the opinion of the underwriters, it
would adversely affect the distribution or price of the securities to be offered
if all of the shares which the Investors and the Company wish to sell were in
fact offered for sale, then the Investors shall reduce the number of shares
which they are to offer for sale to a level which satisfies the requirements of
the underwriters, and, subject to Section 12 herein, each of the Investors shall
reduce the number of shares which he is to offer for sale on a pro-rata basis
based upon the number of shares each has requested to be included in such
registration.
11. Indemnification and Contribution. In the event any shares of Common
--------------------------------
Stock held by one or more Holders are included in a registration statement under
this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless the selling Holders, their officers, directors and partners, any
underwriter (as defined in the Act) for the selling Holders and each Person, if
any, who controls any selling Holder or any underwriter (collectively, the
"Interested Parties") within the meaning of the Act or the 1934 Act, against any
losses, claims, damages, or liabilities (joint or several) to which any of the
Interested Parties may become subject under the Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, liabilities (or
actions in respect thereto) arise out of or are based upon any of the following
statements, omissions or violations (individually, 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 Company of the Act, the 1934
Act, any other federal or state law or any rule or regulation promulgated under
the Act, the 1934 Act or any other federal or state law; and the Company will
reimburse each of the Interested Parties for 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 subsection 11(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of
-7-
<PAGE>
the Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by such Interested Party.
(b) To the extent permitted by law, each of the selling Holders,
severally and not jointly, will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed the registration statement,
each person, if any, who controls the Company within the meaning of the 1934 Act
and any underwriter or any of its directors or officers or any person who
controls such underwriter, against any losses, claims, damages or liabilities
(or actions in respect thereto) to which the Company or any such director,
officer, underwriter or controlling person may become subject, under the Act,
the 1934 Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are based
upon any Violation, in each case to the extent (and only to the extent) that
such violation occurs in reliance upon and in conformity with written
information furnished by such selling Holder expressly for use in connection
with such registration; and such selling Holder will reimburse any legal or
other expenses reasonably incurred by the Company or any such director, officer,
controlling person, underwriter or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this subsection
11(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of such selling Holder, which consent shall not be unreasonably withheld;
provided that in no event shall any indemnity under this subsection 11(b) exceed
the net proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
11 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 11, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties. An indemnified party shall have the right to
retain its own counsel, however, but the fees and expenses of such counsel shall
be at the expense of the indemnified party, unless (i) the employment of such
counsel has been specifically authorized in writing by the indemnifying party,
(ii) the indemnifying party has failed to assume the defense and employ counsel,
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 such
indemnified party, it being understood, however, that the indemnifying party
shall not, in connection with any one such action or separate substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys for all indemnified
parties). The failure to deliver written notice to the indemnifying
-8-
<PAGE>
party within a reasonable time of the commencement of any such action, only if
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
11, but the omission so to deliver written notice to the indemnifying
party will not relieve it of any liability that it may have to any indemnified
party otherwise than under this Section 11.
(d) If the indemnification provided for in subsections (a) and (b) of
this Section 11 is unavailable or insufficient to hold harmless an indemnified
party under such subsections in respect of any losses, claims, damages,
liabilities or actions, then each indemnifying party shall in lieu of
indemnifying such indemnified party contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages, liabilities
or actions in such proportion as is appropriate to reflect the relative fault of
the indemnified party, on the one hand, and the indemnifying party, on the
other, in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or actions as well as any other relevant
equitable considerations, including the failure to give the notice required
under such subsections. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact relates to information supplied by the indemnified party, on the one hand,
or the indemnifying party, on the other hand, and the parties' relative intent,
knowledge, access to information and an opportunity to correct or prevent such
statement or omission. The Company and the Holders agree that it would not be
just and equitable if contribution pursuant to this subsection (d) were
determined by pro-rata allocation (even if all of the selling parties were
treated as one entity for such purpose), by principles of joint rather than
several liability or by any other method of allocation which did not take
account of the equitable considerations referred to above in this subsection
(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or action in respect thereof, referred to
above in this subsection (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim; provided, however, that in
no event shall any amount payable by a Holder under this subsection 11(d) exceed
the net proceeds from the offering received by such Holder. No person guilty of
fraudulent misrepresentations (within the meaning of Section 12(f) of the Act),
shall be entitled to contribution from any person who is not also guilty of such
fraudulent misrepresentation.
(e) The obligations of the Company and the Holders under this Section
11 shall survive the completion of any offering of Registrable Securities in a
registration statement pursuant to this Agreement and otherwise.
(f) Notwithstanding the foregoing, to the extent 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 of the underwriting agreement shall
control.
12. Additional Shares. In connection with the issuance of shares of the
-----------------
Company's Series E Preferred Stock (the "GmbH Shares") under the Equity Exchange
Agreement dated December 13, 1994, between the Company, the individual GmbH
quotaholders and certain shareholders of the Company (the "GmbH Agreement"), the
Company granted piggy-back
-9-
<PAGE>
registration rights with respect to such GmbH Shares that are identical to those
under Section 4 herein. Notwithstanding Section 10 herein, in the event the
holders of GmbH Shares (the "GmbH Holders") are not allowed to exercise such
piggy-back registration rights in full due to reductions by the underwriters
pursuant to Section 10 herein, the GmbH Holders shall be allowed to participate
in such registration (unless registrable shares have been eliminated entirely)
on a pro-rata basis with the Investors based upon the total number of shares the
GmbH Holders and the Investors requested to be included in such registration.
13. Standoff Agreement. Each Holder shall agree, in connection with the
------------------
Company's initial public offering of the Company's securities, upon request of
the underwriters managing any such underwritten offering of the Company's
securities, not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any Common Stock of the Company (other than
those included in the registration) without the prior written consent of the
Company or such underwriters, as the case may be, for such period of time (not
to exceed one hundred eighty (180) days) from the effective date of such
registration as may be requested by the underwriters; provided, that each holder
of at least five percent (5%) of the Company's outstanding Common Stock,
calculated on a Fully Diluted Basis, and all of the officers and directors of
the Company who own Common or Preferred Stock of the Company, also agree to such
restrictions.
14. Termination of Registration Rights. The rights of the Holders set
----------------------------------
forth in this Agreement shall terminate on the fifth anniversary of the closing
of the Company's first underwritten public offering pursuant to an effective
registration statement under the Act. In addition, the right of any Holder to
request registration or inclusion in any registration pursuant to this
Agreement, shall terminate on the closing of the first registered public
offering of Common Stock of the Company if all shares of Common Stock held or
entitled to be held upon conversion by such Holder may immediately be sold under
Rule 144 (or any other rule) promulgated under the Act during any 90-day period,
or on such date after the closing of the first registered public offering of
Common Stock of the Company as all shares of Common Stock held or entitled to be
held upon conversion by such Holder may immediately be sold under Rule 144 (or
any other rule) during any 90-day period.
15. Reports Under Securities Exchange Act of 1934. With a view to making
---------------------------------------------
available to the Holders the benefits of Rule 144 promulgated under the Act and
any other rule or regulation of the SEC that may at any time permit a Holder to
sell securities of the Company to the public without registration or pursuant to
a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company for the offering of
its securities to the general public is declared effective;
-10-
<PAGE>
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
(d) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company 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 Company), the Act and the 1934 Act (at any time after it
has become subject to such reporting requirements), or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any time
after it so qualifies), (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
16. Miscellaneous.
-------------
(a) The rights of the Holders are assignable to any Person to whom a
Holder may transfer shares of Preferred Stock and/or shares of Common Stock as
long as (i) such assignee holds at least one hundred thousand (100,000) shares
of stock of the Company (as adjusted for stock splits, stock dividends and like
transactions) with registration rights under this Agreement, (ii) the Company is
promptly notified of such transfer, and (iii) such transferee agrees in writing
to be bound by and to become a party to this Agreement. This Agreement shall be
binding upon the parties hereto and their successors and permitted assigns.
Except as otherwise provided herein, the terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties (including transferees of any shares of Registrable
Securities). Nothing in this Agreement, express or implied, is intended to
confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations or liabilities under or
by reason of this Agreement, except as expressly provided in this Agreement.
(b) This Agreement shall be governed by and construed under the laws
of the State of California as applied to agreements among California residents
entered into and to be performed entirely within California.
(c) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
(d) The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
-11-
<PAGE>
(e) If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
(f) All shares of Registrable Securities held or acquired by
affiliated entities or persons shall be aggregated together for the purposes of
determining the availability of any rights under this Agreement.
(g) This Agreement constitutes the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
(h) All notices under this Agreement shall be in writing, and any
notice to the Investors shall be considered to be given and received in all
respects when it is personally delivered, when it is transmitted by facsimile or
other device providing a written record thereof, or on the second business day
following the date it is deposited in the United States mail, certified mail,
postage prepaid, return receipt requested, addressed to the Holders at the
address contained in the Company's shareholder records. Any notice to the
Company shall be considered to be given and received in all respects when it is
personally delivered, when it is transmitted by telex, facsimile or other device
providing a written record thereof, or on the second business day following the
date it is deposited in the united States mail, certified mail, postage prepaid,
return receipt requested, addressed as follows, or to such other address as
shall be designated by notice duly given:
CONNECT, Inc.
515 Ellis Street
Mountain View, California
Attention: President
Facsimile No.: (415) 254-4848
With a Copy To: Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, CA 94025
Attention: Donald M. Keller, Jr.
Facsimile No.: (415) 854-1121
(i) Neither the Agreement nor any term thereof may be amended, waived,
discharged or terminated without the written consent of (i) the Company, (ii)
the Holders of at least 66 2/3% of then outstanding Registrable Securities and
(iii) at least eighty percent (80%) of the Series F Preferred Stock (or the
Common Stock issued upon conversion thereof) then outstanding that are
Registrable Securities.
-12-
<PAGE>
(j) The rights and liabilities of the Company under this Agreement are
not assignable or deligable, in whole or in part, without the prior written
consent of the holders of a majority of the then outstanding Registrable
Securities.
(k) No Holder shall 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 this Agreement.
(l) Section 3 of the Stockholders Agreement dated as of June 10, 1994
between the Company and the stockholders named therein with respect to
registration rights is hereby terminated and of no further force and effect.
(m) This Agreement replaces and supersedes in its entirety the Amended
Rights Agreement dated March 9, 1992 among the Company and the shareholders
named therein, as amended on November 12, 1992 and June 10, 1994 (the "Prior
Rights Agreement"), and, as of the date hereof, the Prior Rights Agreement is
hereby terminated and of no further force and effect.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on one or more
counterparts, each of which shall be deemed an original and all of which when
executed, together or separately, shall constitute one and the same agreement as
of the date, month and year first above written.
CONNECT, INC.
By: /s/ Henry V. Morgan
--------------------------------
Henry V. Morgan, Chief Financial
Officer and Secretary
/s/ Michael Muller
------------------------------------
Michael Muller
21ST CENTURY COMMUNICATIONS
PARTNERS, L.P., by Infomedia
Associates L.P., a general partner
By: /s/ Irwin Lieber
---------------------------------
Irwin Leiber, Treasurer
---------------------------------
RRE CONNECT INVESTORS, L.P.
By: RRE PARTNERS, L.L.C. its
general partner
By: /s/ Stewart Elliman
---------------------------------
Its: Member of G. P.
--------------------------------
<PAGE>
21ST CENTURY COMMUNICATIONS
T-E PARTNERS, L.P., by Infomedia
Associates, L.P., a general partner
By: /s/ Irwin Lieber
---------------------------------
Irwin Lieber, Treasurer
21ST CENTURY COMMUNICATIONS
FOREIGN PARTNERS, L.P., by Infomedia
Associates, L.P., a general partner
By: /s/ Irwin Lieber
---------------------------------
Irwin Lieber, Treasurer
<PAGE>
QUAESTUS PARTNER FUND, by its
managing general partner Quaestus
Management Corporation
By: Quaestus Management Corporation
--------------------------------
Its: Vice President
--------------------------------
NETWORK PARTNERS, by its managing
general partner Quaestus Management
Corporation
By: Quaestus Management Corporation
--------------------------------
Its: Vice President
--------------------------------
QUAESTUS LIMITED PARTNERSHIP
By: Richard W. Weening
---------------------------------
Its: President, R.P.I. Holdings, Inc.
---------------------------------
General Partner
VOLPE, WELTY & COMPANY HYBRID
FUND I
By: /s/ William B. Welty
---------------------------------
Its: General Partner
---------------------------------
<PAGE>
VOLPE, WELTY & COMPANY HYBRID
FUND II
By: /s/ William B. Welty
--------------------------------
Its: General Partner
--------------------------------
VOLPE, WELTY & COMPANY HYBRID
FUND I SLP
By: /s/ William B. Welty
--------------------------------
Its: General Partner
--------------------------------
Michael and Elkie Muller Trustees of the
Muller Family Trust dated November 13,
1978, amended April 28, 1993
By: /s/ Michael Muller
--------------------------------
Michael Muller, Trustee
BANKAMERICA VENTURES
By: /s/ BankAmerica Ventures
________________________________
Its: Vice President
<PAGE>
BA VENTURE PARTNERS I
By: /s/ BA Venture Partners I
--------------------------------
Its: General Partner
--------------------------------
NORWEST EQUITY PARTNERS, V
a Minnesota Limited Liability Partnership,
By: Itasca Partners V, L.L.P., General
Partner
By /s/ Promod Haque
--------------------------------
Promod Haque, Partner
THEODORE H. ASHFORD
/s/ Theodore H. Ashford
--------------------------------
H&Q MACNET INVESTORS, L.P.
By: /s/ H & Q MACNOT INVESTORS, L.P.
---------------------------------
Its: Attorney-in-fact
<PAGE>
EXHIBIT A
COMMON HOLDERS
Diana Allen
Shayne Bradley
Brian L. Carter
Pamela L. Carter
Carter Trust
Michael Crawford
Jay Davis
Alfred Dentone
Dishmon CP
Erv Edge
James Faines
Brayton Fisher
William Hall
Loretta Ipolito
K&M Trust
Steve Langer
Suzanne Leonard
Rupert Lissner
Daniel Mannisto
Josephine Morrissey
Ann Morse
Muller Trust
William Nadel
Drew & Janet Pritsker
Robert H. Ralston
Reed CP
Eugene Richeson
Jonathan Sass
M. Joseph Schaller
Paul Schmidman
Amy Spanfelner
Stuppin CP
Mark Vermillion
W&F Partners
Walker Yormarck
Judith Wangelin
Williams Trust
Young CP
<PAGE>
PREFERRED HOLDERS
Quaestus Partner Fund
Quaestus Limited Partnership
Network Partners
Volpe Welty & Company Hybrid Fund I
Volpe Welty & Company Hybrid Fund II
Volpe Welty & Company Hybrid Fund I SLP
Muller Family Trust dated November 13, 1978,
amended April 23, 1993
BankAmerica Ventures
BA Venture Partners I
21st Century Communications Partners, L.P.
RRE Connect Investors, L.P.
Norwest Equity Partners V
Theodore H. Ashford
H&Q MacNet Investors, L.P.
21st Century Communications T-E Partners, L.P.
21st Century Communications Foreign Partners, L.P.
<PAGE>
EXHIBIT 10.7
LEASE AGREEMENT
between
BRE PROPERTIES, INC.
as "Landlord"
and
CONNECT, INC.
as "Tenant"
<PAGE>
LEASE
-----
Page
----
1. PREMISES................................................... 1
2. TERM; POSSESSION........................................... 1
3. RENT....................................................... 3
4. ADDITIONAL RENT: OPERATING COSTS AND TAXES................. 4
5. TENANT'S TAXES............................................. 7
6. USE OF PREMISES............................................ 7
7. ALTERATIONS................................................ 8
8. MAINTENANCE AND REPAIRS.................................... 9
9. TRADE FIXTURES............................................. 10
10. UTILITIES................................................. 10
11. EXCULPATION AND INDEMNIFICATION........................... 12
12. INSURANCE................................................. 12
13. DAMAGE AND DESTRUCTION.................................... 14
14. CONDEMNATION.............................................. 16
15. ASSIGNMENT AND SUBLETTING................................. 18
16. DEFAULT AND REMEDIES...................................... 21
17. LATE CHARGE; INTEREST..................................... 24
18. WAIVER.................................................... 25
19. ENTRY AND INSPECTION...................................... 25
i.
<PAGE>
20. SURRENDER, HOLDING OVER................................... 26
21. SUBORDINATION; ATTORNMENT; NONDISTURBANCE................. 26
22. MORTGAGEE PROTECTION...................................... 27
23. ESTOPPEL CERTIFICATES..................................... 27
24. NOTICES................................................... 27
25. ATTORNEYS' FEES........................................... 28
26. QUIET POSSESSION.......................................... 28
27. FORCE MAJEURE............................................. 28
28. RULE AND REGULATIONS...................................... 28
29. LANDLORD'S LIABILITY...................................... 29
30. CONSENTS AND APPROVALS.................................... 29
31. BROKERS................................................... 29
32. RIGHTS RESERVED BY LANDLORD............................... 30
33. HAZARDOUS MATERIALS....................................... 30
34. SECURITY DEPOSIT.......................................... 34
35. ANTENNA EQUIPMENT......................................... 35
36. ENTIRE AGREEMENT.......................................... 36
37. MISCELLANEOUS............................................. 36
38. AUTHORITY................................................. 37
EXHIBIT A: THE PREMISES
EXHIBIT B: CONSTRUCTION RIDER
EXHIBIT C: BUILDING
ii.
<PAGE>
LEASE AGREEMENT
---------------
THIS LEASE is made as of the 19th day of September, 1994, by and between
BRE PROPERTIES, INC., a Delaware corporation ("Landlord"), and CONNECT, INC., a
California corporation ("Tenant"). Landlord and Tenant hereby agree as follows:
1. PREMISES. Landlord hereby leases to Tenant, and Tenant hereby leases
--------
from Landlord, upon the terms and subject to the conditions of this Lease, all
of the space contained in the building located at 515 Ellis Street, Mountain
View, California (the "Building"), as depicted on Exhibit A attached hereto and
---------
made a part hereof (the "Premises"). The Premises contain approximately 29,842
square feet of space. The Building, the parking area on the Land (as
hereinafter defined) that serves the Building ("Parking Area"), the parcel(s) of
land on which the Building and Parking Area are situated (the "Land"), and the
other improvements on the Land, if any, are collectively referred to herein, as
the "Property."
2. TERM; POSSESSION.
----------------
2.1 Term. The term of this Lease (the "Term") shall commence on the
----
"Commencement Date" specified below and, unless sooner terminated pursuant to
the provisions of this Lease, shall expire five (5) years and seventy-five (75)
days after the Commencement Date ("Expiration Date"). The Commencement Date
shall be:
(a) The date on which Landlord has (i) "Substantially Completed" the
Improvements to be constructed and installed with respect to the Premises by
Landlord ("Improvements"), as provided in the Construction Rider attached hereto
as Exhibit B and made a part hereof ("Construction Rider"), and (ii) delivered
---------
possession of the Premises to Tenant; or
(b) Any earlier date upon which Tenant, with Landlord's permission,
actually occupies and conducts business in any portion of the Premises.
The parties anticipate that the Commencement Date will occur on or about October
15, 1994 ("Scheduled Commencement Date"). In the event the Commencement Date
has not occurred by the Scheduled Commencement Date, the Commencement Date shall
be determined in accordance with the provisions of the Construction Rider. When
the Commencement Date has been established, Landlord and Tenant shall confirm
the same in writing.
2.2 Extension Option. Provided no default by Tenant exists under the
----------------
Lease at the time of exercise or at any time thereafter until the beginning of
such extension of the Term, Tenant shall have the option to extend the Term of
the Lease ("Extension Option") for one additional consecutive period of three
(3) years ("Extension Period"), by giving written
1.
<PAGE>
notice to Landlord of the exercise of such Extension Option not earlier than
twelve (12) months and not later than six (6) months prior to the Expiration
Date. The exercise of the Extension Option by Tenant shall be irrevocable and
shall cover the entire Premises. Upon such exercise, the Term of the Lease shall
be extended for the Extension Period without the execution of any further
instrument by the parties; provided that Landlord and Tenant shall, if requested
by either party, execute and acknowledge an instrument confirming the exercise
of the Extension Option. The Extension Option shall terminate if not exercised
precisely in the manner provided herein. The extension of the Term shall be upon
all the terms and conditions set forth in the Lease and all Exhibits thereto,
except that:
(a) Tenant shall have no further options to extend the Term;
(b) The initial Base Rent for the Extension Period shall be equal
to the "Fair Market Base Rent", as hereinafter defined, for the term and
space involved, which shall be determined as set forth below. "Fair
Market Base Rent" shall mean the "fair market" Base Rent at the time or
times in question for the applicable space, based on the prevailing
rentals then being charged to new tenants in other buildings in the
south Mountain View, California area, of comparable size, location,
quality and age as the Building, taking into account the desirability,
location, size, quality and tenant finish allowance and/or tenant
improvements in the Building and of the buildings which are being used
for comparison. Fair Market Base Rent shall also reflect the then
prevailing rental structure for similar buildings in the general
vicinity of the Premises, so that if, for example, at the time Fair
Market Base Rent is being determined the prevailing rental structure for
comparable space and for comparable lease terms includes periodic rental
adjustments or escalations, Fair Market Base Rent shall reflect such
rental structure.
Landlord and Tenant shall endeavor to agree upon the Fair Market
Base Rent. If they are unable to so agree within thirty (30) days after
receipt by Landlord of Tenant's notice of exercise of its Extension
Option, Landlord and Tenant shall mutually designate a licensed real
estate broker who is active in the leasing of commercial space in the
general vicinity of the Premises and who has not previously acted on
behalf of either party. If the parties are unable to agree upon a real
estate broker within forty-five (45) days after Landlord receives
Tenant's Extension Option notice, a real estate broker meeting the
qualifications described above shall be appointed pursuant to California
Code of Civil Procedure (S)1281.6. Within three (3) days of the
appointment of the broker, the parties shall submit to the broker their
respective "final and best" Fair Market Base Rent determinations which
they had submitted to the other party prior to the appointment of the
broker. Within thirty (30) days of the appointment of the broker, the
broker shall then select one of the two determinations as the Fair
Market Base Rent, and such determination shall be binding on Landlord
and Tenant. Landlord and Tenant shall share equally the cost of the
broker.
2.
<PAGE>
In the event that Fair Market Base Rent for the Extension Period
has not been determined at such time as Tenant is obligated to pay Base
Rent for such Extension Period, Tenant shall pay as Base Rent, pending
such determination, the Base Rent in effect for such space immediately
prior to the Extension Period; provided, that upon the determination of
the applicable Fair Market Base Rent, any shortage of Base Rent paid,
together with interest at the rate set forth in Section 17.2 - "Interest
Rate," shall be paid to Landlord by Tenant.
In no event shall the monthly Base Rent during the Extension Period
be less than Eighty Cents ($0.80) per square foot of the Premises per
month, triple net.
3. RENT.
----
3.1 Base Rent. During the Term, Tenant shall pay to Landlord, as
monthly base rent for the Premises ("Base Rent"), without offset, deduction,
prior notice or demand, the amounts set forth below:
<TABLE>
<CAPTION>
Period Monthly Base Rent
------ -----------------
<S> <C>
Commencement Date through seventy-fifth (75th) $0.00
day after Commencement Day
Seventy-sixth (76th) day after Commencement $21,525.03
Date ("Base Rent Commencement Date")
through day preceding first (1st)
anniversary of Base Rent Commencement Date
First (1st) anniversary of Base Rent $22,420.29
Commencement Date through day
preceding second (2nd) anniversary of Base
Rent Commencement Date
Second (2nd) anniversary of Base Rent $23,315.55
Commencement Date through day preceding
third (3rd) anniversary of Base Rent
Commencement Date
Third (3rd) anniversary of Base Rent $24,210.81
Commencement Date through day preceding
fourth (4th) anniversary of Base Rent
Commencement Date
Fourth (4th) anniversary of Base Rent $25,106.07
Commencement Date through day preceding
fifth (5th) anniversary of Base Rent
Commencement Date
</TABLE>
3.
<PAGE>
Base Rent for the first month of the Term for which Base Rent is payable, in the
amount of Twenty-One Thousand Five Hundred Twenty-Five and 03/100 Dollars
($21,525.03), shall be payable in advance upon the execution of this Lease.
Thereafter, Base Rent shall be payable in advance on the first day of each
calendar month during the Term that follows the first month of the Term for
which Base Rent is payable. Base Rent for any partial month during the Term
shall be prorated, based upon the daily Base Rent then in effect and the number
of days during the month that the Term is in effect.
3.2 Payment of Rent. All amounts payable or reimbursable by Tenant
---------------
to Landlord under this Lease, including amounts payable as late charges or
interest, shall constitute "Rent" and shall be payable and recoverable as Rent
in the manner provided in this Lease. All sums payable to Landlord on demand
under the terms of this Lease shall be payable within five (5) days after
written notice from Landlord of the amounts due. All Rent shall be paid to
Landlord in lawful money of the United States at the address specified in
Section 24 - "Notices" or at such other place as Landlord may from time to time
designate in writing.
4. ADDITIONAL RENT: OPERATING COSTS AND TAXES.
-------------------------------------------
4.1 Definitions. For purposes of this Lease the following terms
-----------
shall be defined as follows:
(a) "Operating Costs" means all direct costs of managing, operating,
maintaining and repairing the Property, including, but not limited to: (1)
costs of maintenance and repair of any item that Landlord is obligated or
elects to maintain or repair under this Lease; (2) costs of any utilities
and services provided to the Property; (3) charges for the services of
independent contractors and compensation (including employment taxes and
fringe benefits) for persons who perform duties in connection with the
operation, maintenance and repair of the Property; (4) premiums for
property (including coverage for earthquake and flood if carried by
Landlord), liability, rental income and other insurance relating to the
Property, and co-insurance and deductible amounts under such insurance paid
in connection with the repair or restoration of the Property after damage
or destruction of the Property (provided, however, that any such amounts
incurred on account of expenses of a capital nature shall be amortized over
the useful life of such improvement); (5) fees and charges for licenses,
permits and inspections; (6) costs of capital improvements required to meet
new or changed governmental regulations or which are intended to reduce
Operating Costs or improve the appearance, efficiency or image of the
Building, such costs, together with interest on the unamortized balance at
the rate of eleven percent (11%) per annum or any higher rate paid by
Landlord on funds borrowed for the purpose of, constructing such capital
improvements, to be amortized over the useful life of such improvement; (7)
accounting fees in connection with the operation of the Property and the
calculation of
4.
<PAGE>
Operating Costs and Taxes, in the amount of $50.00 per month; (8) the
reasonable cost of contesting the validity or applicability of any
governmental enactments that may affect the Property; and (9) any other
expense or charge, whether or not hereinbefore described, which in
accordance with generally accepted property management practices incurred
in connection with the maintenance, repair, alteration, improvement,
remodeling, renovation, use or occupancy of any improvements on the
Premises, or any portion thereof, or the leasing, operation or management
thereof, except as may be expressly otherwise set forth in the exclusions
below.
Operating Costs shall not include (i) any expenses of managing, operating,
maintaining and repairing the Property that are paid by Tenant directly to
the vendor or supplier thereof; (ii) capital improvements subsequent to the
initial construction and development of the Property, other than those
specifically enumerated above in the definition of Operating Costs
(provided, further, that in all events any Operating Cost of a capital
nature shall be amortized over the useful life of such improvement); (iii)
interest and principal payments on loans or indebtedness secured by the
Property; (iv) depreciation or amortization, other than as specifically
enumerated above in the definition of Operating Costs; (v) the excess of
the cost of supplies and services provided by subsidiaries and affiliates
of Landlord over competitive costs by independent suppliers and contractors
of comparable buildings in the vicinity of the Property; (vi) the cost of
remediating any "Hazardous Materials" (as hereinafter defined) either
located on the Property as of the Commencement Date or that subsequently
migrate onto the Property from other property after the Commencement Date
(provided, however, that the term "migrate" shall not be deemed to include
any "Handling," as defined in Section 35 - "Hazardous Materials," by any
trespassers on the Property); or (vii) the cost of repairing any defect in
the initial construction of the Property or any building code violation in
effect on the Commencement Date.
(b) "Taxes" means all real property taxes and general, special or
district assessments or other governmental impositions, of whatever kind,
nature or origin, imposed on or by reason of the ownership or use of the
Property; governmental charges, fees or assessments for transit (including
without limitation, area-wide traffic improvement assessments and
transportation system management fees), housing, police, fire or other
governmental service or purported benefits to the Property; personal
property taxes assessed on the personal property of Landlord used in the
operation of the Property; service payments in lieu of taxes and taxes and
assessments of every kind and nature whatsoever levied or assessed in
addition to, in lieu of or in substitution for existing or additional real
or personal property taxes on the Property or the personal property
described above; taxes and assessments on the gross or net rental receipts
of Landlord derived from the Building (excluding, however, state and
federal personal or corporate income taxes measured by the income of
Landlord from all sources); and the reasonable cost of contesting by
appropriate proceedings the amount or validity of any taxes, assessments or
charges described above. The term "Taxes"
5.
<PAGE>
shall include any increase in Taxes resulting from a revaluation or
reassessment resulting from a "change of ownership," as defined in Sections
60, 61 and 64 of the California Revenue and Taxation Code and the
regulations issued by the Board of Equalization thereunder. The term
"Taxes" shall not include any "Tenant's Taxes" as defined in Section 5 -
"Tenant's Taxes."
4.2 Additional Rent. During the Term, Tenant shall pay to Landlord
---------------
"Additional Rent" in the amount of Operating Costs and Taxes accruing during the
Term.
4.3 Notice and Payment. Prior to the Commencement Date and,
------------------
thereafter, as close as reasonably possible to the end of each fiscal year of
Landlord (each such fiscal year commencing on August 1), Landlord shall notify
Tenant of Operating Costs and Taxes estimated by Landlord for the following
fiscal year. Commencing on the Commencement Date (notwithstanding the free Base
Rent period provided in Section 3 - "Base Rent" above) and on the first day of
every month thereafter in such fiscal year, Tenant shall pay to Landlord, as
Additional Rent, one-twelfth (1/12th) of Operating Costs and Taxes for such
fiscal year as estimated by Landlord. If at any time it appears to Landlord
that Operating Costs or Taxes for such year will vary from Landlord's estimate,
Landlord may, by written notice to Tenant, revise its estimate for such year and
the Additional Rent payments by Tenant for such year shall thereafter be
adjusted to reflect such revised estimate.
Within ninety (90) days after each fiscal year for which Tenant has made
estimated payments or is liable for Operating Costs and Taxes, Landlord shall
furnish Tenant a statement with respect to such year, certified by Landlord,
showing Operating Costs and Taxes, and the total payments made by Tenant on the
basis of any previous estimate. Unless Tenant raises any objections to
Landlord's statement within thirty (30) days after receipt of the same, such
statement shall conclusively be deemed correct and Tenant shall have no right
thereafter to dispute such statement or any item therein or the computation of
Operating Costs or Taxes. If Tenant does object to such statement, Landlord
shall provide Tenant with reasonable verification of the figures shown on the
statement and the parties agree to negotiate in good faith to resolve any
disputes. Any amounts due Landlord or Tenant shall be paid in the manner set
forth below. Any objection of Tenant to Landlord's statement and resolution of
any dispute shall not postpone the time for payment of any amounts due Tenant or
Landlord based on Landlord's statement, nor shall any failure of Landlord to
deliver Landlord's statement in a timely manner relieve Tenant of its obligation
to pay any amounts due Landlord based on Landlord's statement.
If Operating Costs and Taxes for the year as finally determined exceeds the
total payments made by Tenant based on Landlord's estimates, Tenant shall pay
Landlord the deficiency within thirty (30) days of Tenant's receipt of
Landlord's statement. If the total payments made by Tenant based on Landlord's
estimate of Operating Costs and Taxes exceed Operating Costs and Taxes, as
determined by Landlord, Tenant's excess payment shall be credited toward future
payments by Tenant of estimated Operating Costs and Taxes.
6.
<PAGE>
For any partial fiscal year at the commencement or termination of this
Lease, Operating Costs and Taxes for such year shall be prorated on the basis of
a 365-day year by computing of Operating Costs and Taxes for the entire year and
then prorating such amount for the number of days the term of this Lease was in
effect during such year. Notwithstanding the termination of this Lease, and
within thirty (30) days of Tenant's receipt of Landlord's statement regarding
the determination of Operating Costs and Taxes for the fiscal year in which this
Lease terminates, Tenant shall pay to Landlord or Landlord shall pay to Tenant,
as the case may be, an amount equal to the difference between Operating Costs
and Taxes for such year, as finally determined by Landlord, and the amount
previously paid by Tenant toward Operating Costs and Taxes.
5. TENANT'S TAXES.
--------------
(a) "Tenant's Taxes" shall mean all taxes, assessments, license
fees and other governmental charges or impositions, to the extent not otherwise
included in Real Property Taxes, levied or assessed against or with respect to
Tenant's personal property or Trade Fixtures installed, located or attached to
the Premises, whether levied directly against Tenant or levied against Landlord
or the Premises.
(b) Tenant shall pay all Tenant's Taxes before delinquency and, at
Landlord's request, shall furnish Landlord satisfactory evidence thereof. If
Tenant fails timely to pay any Tenant's Taxes levied directly against Tenant, if
any Tenant's Taxes are levied against Landlord or the Premises, or if the
assessed value of the Premises is increased by the inclusion of a value placed
on Tenant's personal property, Trade Fixtures or Alterations, Landlord may pay
the portion of Tenant's Taxes that is not paid by Tenant or that is levied or
assessed against Landlord or the Premises. Landlord may pay such Tenant's Taxes
regardless of the validity of their levy or assessment and whether or not Tenant
elects to contest the same if, in the reasonable judgment of Landlord, the
failure to pay such taxes will jeopardize the interest of Landlord in the
Premises. If Landlord pays Tenant's Taxes or any portion thereof, Tenant shall,
immediately upon demand by Landlord, reimburse Landlord for the amount of such
payment, together with interest at the Interest Rate from the date of Landlord's
payment to the date of Tenant's reimbursement.
6. USE OF PREMISES. The Premises shall be used for general office
---------------
purposes, and for no other business or purpose.
Tenant shall, at its sole expense, comply with all present and future
governmental laws, ordinances, rules and regulations relating to the Premises
and Tenant's use or occupancy thereof (collectively, "Legal Requirements") and
shall observe the "Building Rules" (as defined in Section 28 - "Rules and
Regulations"), but shall not be responsible for any failure of the Building to
comply, as of the Commencement Date, with respect to any Legal Requirements in
effect as of the Commencement Date. Tenant shall not do, bring, keep
7.
<PAGE>
or sell anything in or about the Premises that is prohibited by the standard
form of fire insurance policy or that will cause a cancellation of, or an
increase in the existing premium for, any insurance policy covering the Premises
or any part thereof. If Tenant does anything in or about the Premises that will
cause an increase in the existing premium for any insurance policy covering the
Premises, Tenant shall pay such increase within thirty (30) days of written
request therefor. Any breach of the foregoing covenants shall constitute a
default under this Lease.
Tenant shall not occupy or use the Premises, or permit the Premises to be
occupied or used, in any manner that will constitute waste or a nuisance.
Tenant shall not, without the prior consent of Landlord, bring into the Building
or use or incorporate in the Premises any apparatus, equipment or supplies that
may cause substantial vibration or overload the Building or any of its utility
or elevator systems or jeopardize the structural integrity of the Building or
any part thereof.
7. ALTERATIONS. All alterations, improvements or changes to the Premises
-----------
desired by Tenant after completion of the Improvements ("Alterations," which
term shall not be deemed to include Improvements) shall be made at Tenant's
expense and shall require Landlord's prior approval. If Tenant desires any
Alteration, Tenant shall submit to Landlord for its prior approval (which
approval shall not, provided such Alteration does not affect the structural
portions or the mechanical or utility systems of the Building, and subject to
other terms of this Lease, be unreasonably withheld or delayed) reasonably
detailed final plans and specifications and the name of the contractor proposed
by Tenant to make the Alteration. Tenant shall obtain all applicable permits,
authorizations and governmental approvals before commencement of the Alteration,
and the Alteration shall be completed with due diligence in compliance with the
plans and specifications approved by Landlord. In making any Alteration, Tenant
shall comply in all respects with the Building Rules and with Section 6 - "Use
of Premises."
All Alterations shall be made at such times and in such manner as Landlord
may designate, only by such contractors or mechanics as are approved by
Landlord, and subject to all other conditions which Landlord may in its
discretion impose. Tenant shall reimburse Landlord upon demand for any expenses
incurred by Landlord in connection with any Alterations made by Tenant,
including any reasonable fees charged by Landlord's contractors or consultants
to review plans and specifications prepared by Tenant and the cost of updating
the existing as-built plans and specifications of the Building to reflect the
Alterations.
All Alterations shall be the property of Landlord, and upon expiration or
termination of this Lease, Tenant shall remove all Alterations from the Premises
and restore the Premises to their original condition, normal wear and tear
excepted, unless Tenant obtains Landlord's express written consent to surrender
any such Alterations with the Premises.
8.
<PAGE>
Tenant shall obtain liability insurance, in form and amount and from an
insurance company acceptable to Landlord, insuring Tenant against damage to
person and property arising out of the construction of the Alteration. If the
cost of any Alteration exceeds $50,000, then Tenant shall obtain a completion
bond for the work, which bond shall be issued by a company acceptable to
Landlord. Tenant shall keep the Premises free and clear of all liens and
encumbrances of any nature whatsoever arising out of any work performed,
materials furnished or obligations incurred by Tenant, including mechanics' and
materialmen's liens. Tenant shall give Landlord at least five (5) business
days' notice prior to the commencement of any Alterations, whether or not
Landlord's consent is required for any such Alteration. Landlord may post and
record an appropriate notice of non-responsibility with respect to any
Alteration or the installation of any "Trade Fixtures" (as defined in Section 9
- - "Trade Fixtures"), and Tenant shall maintain any such notices posted by
Landlord in or on the Premises. In the event any such lien attaches to the
Premises, and Tenant does not cause the same to be released by payment, bonding
or otherwise, within ten (10) days after the attachment thereof, Landlord shall
have the right but not the obligation to cause the same to be released by such
means as it shall deem proper, and any reasonable sums expended by Landlord in
connection therewith shall be payable by Tenant on demand with interest thereon
from the date of expenditure by Landlord until reimbursed by Tenant, at the
Interest Rate.
8. MAINTENANCE AND REPAIRS.
-----------------------
8.1 Tenant's Obligations. By taking possession of the Property
--------------------
Tenant agrees that the Premises are then in a tenantable and good condition,
subject to latent defects in the initial construction of the Property or in the
construction of the Improvements. Subject to the provisions of Sections 8.2 -
"Landlord's Obligations," 13 - "Damage and Destruction," and 14 -
"Condemnation," Tenant shall, at Tenant's sole expense and at all times, keep
the Premises, the Building and the Property in good condition, order and repair,
except for Landlord's obligations under Sections 13 and 14 of this Lease (which
shall be the responsibility of Landlord), it being intended by the parties
hereto that this be a "net, net, net" lease and that Landlord have no other
obligations, in any manner whatsoever, to repair and maintain the Property, the
Building or the Premises, the improvements located thereon, or the equipment
therein, all of which obligations are intended to be that of the Tenant
(provided, however, that the expense of any improvement of a capital nature made
by Tenant in order to comply with its obligations under this Lease shall be
amortized over the useful life of such improvement, and Landlord shall be
responsible for the portion of the cost, if any, that would remain unamortized
beyond the expiration of this Lease). In the event that Tenant fails to comply
with any of its maintenance or repair obligations under this Lease, Landlord
reserves the right to perform the same on Tenant's behalf and at Tenant's
expense.
8.2 Waiver. As a material part of the consideration for this Lease,
------
Tenant hereby waives the provisions of California Civil Code Sections 1932(1),
1941 and 1942 or any other applicable existing or future law, ordinance or
governmental regulation permitting Tenant to make repairs at Landlord's expense.
9.
<PAGE>
9. TRADE FIXTURES. Subject to the provisions of Sections 6 - "Use of
--------------
Premises" and 7 - "Alterations," Tenant may install and maintain furnishings,
equipment, movable partitions, business machines and other trade futures ("Trade
Fixtures") in the Premises, provided that the Trade Fixtures do not become an
integral part of the Building. Tenant, if not then in default under this Lease,
may alter or remove any of its Trade Fixtures at any time during the Term or
upon its expiration or termination. Tenant shall promptly repair any damage to
the Building caused by such removal. If Tenant fails to make such repairs,
Landlord may do so at Tenant's expense, and any sums expended by Landlord in
connection therewith shall be payable by Tenant on demand with interest thereon
from the date of expenditure by Landlord until reimbursed by Tenant, at the
Interest Rate. Landlord acknowledges that Tenant shall have the right to
install, as Trade Fixtures, but subject to Tenant's compliance with the
provisions of Section 7 - "Alterations," the following: (a) a Uniform Power
Supply in the interior of the Premises; (b) an HVAC system under the computer
platform in the approximately 1,100 square foot computer room in the Premises
(the "Data Room"); and (c) further subject to provisions of Section 33 -
"Hazardous Materials," a diesel fuel generator, above-ground and outside, but
adjacent to, the Building, in a location to be approved by Landlord.
10. UTILITIES.
---------
Tenant shall directly contract with, and pay directly to the vendor
thereof, all water, gas, heat, electricity, light, power, telephone, trash
disposal, janitorial, security and any other utilities and services supplied to
the Premises, together with any taxes thereon. In the event of Tenant's failure
to pay timely for any such service, Landlord may, but shall not be obligated to,
pay for such service, the costs of which shall be payable by Tenant on demand by
Landlord, with interest thereon from the date of expenditure by Landlord until
reimbursed by Tenant, at the Interest Rate. Any lien placed on the Premises
relating to any service to the Premises during the Term shall be discharged by
Tenant (or Landlord, if Tenant fails to do so) in the same manner as provided in
Section 7 - "Alterations."
In the event of an interruption in, or failure or inability to provide any
of the services or utilities described in Section 10.1 - "Description of
Services" (a "Service Failure"), such Service Failure shall not, regardless of
its duration, constitute an eviction of Tenant, constructive or otherwise, or
impose upon Landlord any liability whatsoever, including, but not limited to,
liability for consequential damages or loss of business by Tenant or, except as
provided herein, entitle Tenant to an abatement of Rent or to terminate this
Lease.
(a) If any Service Failure not caused by Tenant or its
Representatives or Visitors prevents Tenant from reasonably using a material
portion of the Premises, and Tenant in fact ceases to use such portion of the
Premises, Tenant shall be entitled to an abatement of Base Rent with respect to
the portion of the Premises that Tenant
10.
<PAGE>
is prevented from using by reason of such Service Failure, then, provided that
Tenant has exercised best efforts to cause such Service Failure to be remedied,
if the Service Failure is nonetheless not remedied within ten (10) Business Days
following the occurrence of the Service Failure and Tenant in fact does not use
such portion of the Premises for an uninterrupted period of ten (10) Business
Days or more by reason of such Service Failure, the abatement of Rent shall
commence no later than the eleventh (11th) Business Day following the occurrence
of the Service Failure and continue for the balance of the period during which
Tenant is so prevented from using such portion of the Premises.
(b) Notwithstanding Tenant's entitlement to Rent abatement under
the preceding provisions, Tenant shall continue to pay Tenant's then current
Rent until such time as Landlord and Tenant agree on the amount of the Rent
abatement. If Landlord and Tenant are unable to agree on the amount of such
abatement within ten (10) Business Days of the date they commence negotiations
regarding the abatement, then either party may submit the matter to binding
arbitration pursuant to the rules of the American Arbitration Association.
(c) In addition to the foregoing provisions, if there is a Service
Failure not caused by Tenant or its Representatives or Visitors and such Service
Failure prevents Tenant from conducting its business in the Premises, then,
provided that Tenant has exercised best efforts to cause such Service Failure to
be remedied, if the Service Failure nonetheless is not remedied within nine (9)
months following its occurrence and Tenant in fact does not conduct any business
in the Premises for an uninterrupted period of nine (9) months or more, Tenant
shall have the right to terminate this Lease by written notice delivered to
Landlord within ten (10) days following such nine (9) month period.
(d) Tenant hereby waives the provisions of California Civil Code
Section 1932(1) or any other applicable existing or future law, ordinance or
governmental regulation permitting the termination of this Lease due to such
interruption in or failure of any service or utility.
In the event any governmental authority having jurisdiction over the
Premises or the Property promulgates or revises any law, ordinance or regulation
or building, fire or other code or imposes mandatory controls or guidelines on
Landlord, Tenant or the Premises or the Property relating to the use or
conservation of energy or utilities or the reduction of automobile or other
emissions (collectively "Controls"), Tenant shall comply with such Controls at
its sole expense. If Tenant fails to so comply, Landlord may, but shall not be
obligated to, comply with such Controls, the costs of which shall be payable by
Tenant on demand with interest thereon from the date of expiration until
reimbursed by Tenant, at the Interest Rate. Such compliance and the making of
any alterations in connection with such compliance shall not constitute an
eviction of Tenant, constructive or otherwise, or impose upon Landlord any
liability whatsoever, including, but not limited to, liability for consequential
damages or loss of business by Tenant.
11.
<PAGE>
11. EXCULPATION AND INDEMNIFICATION. Landlord shall not be liable to
-------------------------------
Tenant for any loss, injury or other damage to any person or property
(including, but not limited to, Tenant or Tenant's property) in, on or about the
Premises or the Property from any cause (including, but not limited to: defects
in the Premises or the Property or in any equipment in the Premises or the
Property, fire, explosion or other casualty; or bursting, rupture, leakage or
overflow of any plumbing or other pipes or lines, sprinklers, tanks, drains,
drinking fountains or washstands in, above, or about the Premises or the
Property). Tenant hereby waives all claims against Landlord for such damage and
the cost and expense of defending against claims relating to such damage, except
that Landlord shall indemnify and hold Tenant harmless from and against any
claims, liability, damages, costs or expenses, including reasonable attorneys'
fees and costs incurred in defending against the same ("Claims"), to the extent
the same are caused by the willful or negligent acts or omissions of Landlord or
its authorized representatives, or by any breach of default under this Lease by
Landlord. In no event, however, shall Landlord be liable to Tenant for any
punitive or consequential damages or damages for loss of business by Tenant.
Tenant shall indemnify and hold Landlord harmless from and against any
Claims arising from (a) the acts or omissions of Tenant or its Representatives
or Visitors in or about the Premises or the Property from and after the date
hereof, or (b) any construction or other work undertaken by Tenant on the
Premises or the Property from and after the date hereof, or (c) any breach or
default under this Lease by Tenant from and after the date hereof, or (d) any
accident, injury or damage, howsoever and by whomsoever caused, to any person or
property, occurring in or about the Premises or the Property during the Term;
excepting only such Claims to the extent they are caused by the negligent or
willful acts or omissions of Landlord or its authorized representatives, or by a
material breach of this Lease by Landlord.
The obligations of the parties under this Section 11 shall survive the
expiration or termination of this Lease.
12. INSURANCE.
---------
12.1 Tenant's Insurance. Tenant, at its sole expense, shall maintain
------------------
in full force during the Term, for the mutual benefit of Landlord and Tenant,
the following:
(a) a policy or policies of Commercial General Liability insurance,
provided on an occurrence form, with minimum limits of One Million Dollars
($1,000,000) General Aggregate, One Million Dollars ($1,000,000) Products-
Completed Operations Aggregate, One Million Dollars ($1,000,000) Personal
and Advertising Injury and One Million Dollars ($1,000,000) Each Occurrence
combined single limit bodily injury and property damage, together with a
corresponding Umbrella Excess Liability Insurance policy in an amount of
not less than Two Million Dollars ($2,000,000) over such underlying limits,
on an occurrence form, providing
12.
<PAGE>
coverage for all hazards and exposures covered on the underlying policy,
which policy shall be reasonably approved by Landlord and will be in
addition to and not in lieu of the underlying policy, insuring against the
liability of Tenant, Tenant's Representatives and Tenant's Visitors for
personal or bodily injury or property damage arising out of or incurred in
connection with Tenant's use or occupancy of the Premises. Such policy or
policies shall include a cross-liability endorsement and shall (as
extended, if necessary, by endorsement) provide broad blanket contractual
liability (including, without limitation, those indemnity obligations of
Tenant under this Lease that would normally be included in such coverage),
owner and contractor protective liability, completed operations and
products liability and such other coverage as prudent landlords and owners
of comparable properties may from time to time reasonably require based on
Tenant's use of the Premises;
(b) a policy or policies of property insurance with respect to
Tenant's Alterations and Trade Fixtures in an amount not less than the full
replacement cost thereof, on an agreed amount basis or such higher amount
as Tenant may require, without any deduction being made for depreciation,
as such replacement cost may increase from time to time (including, if
applicable, increases due to Tenant's Alterations), providing protection
against all perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, special extended perils (all risk)
and sprinkler leakage; and
(c) a policy or policies of Worker's Compensation Insurance, as
required by state law, including Employer's Liability Insurance, with a
limit of not less than One Million Dollars ($1,000,000).
During the Term (except for the final six (6) months thereof, at Tenant's
election) the proceeds from any such policies of casualty insurance shall be
used for the repair or replacement of the Alterations and Trade Fixtures so
insured to the extent deemed necessary by Tenant, in Tenant's reasonable
judgment, for the operation of its business in the Premises. Landlord shall
have no interest in such casualty insurance and shall sign all documents
reasonably necessary or proper in connection with the settlement of any claim or
loss by Tenant. Landlord will not carry insurance on Tenant's personal property
or Trade Fixtures. Any limits set forth in this Lease on the amount or type of
coverage required by this Section 12.1 shall not limit the liability of Tenant
under this Lease.
Each policy of insurance required under this Section 12.1 shall be with an
insurer licensed in the State of California, with an A.M. Best & Company
Policyholder Rating of "A" or better and Financial Size Category of "XIII" or
better, and shall require at least thirty (30) days' written notice to Landlord
prior to any termination or alteration of the policy. Each policy of liability
insurance shall name Landlord, its partners and its property manager and
Mortgagees as additional insureds and provide that it is primary to, and not
contributing with, any policy carried by Landlord covering the same loss.
Tenant shall
13.
<PAGE>
provide to Landlord, upon request, evidence that the insurance required to be
carried by Tenant pursuant to this Section 12.1 is in full force and effect and
the premiums therefor have been paid.
Not more frequently than once every year, Tenant shall increase the
amounts of insurance as reasonably required by Landlord's lender or insurance
broker if, in opinion of either of them, the amount of insurance then required
under this Lease is not adequate.
12.2 Landlord's Insurance. During the Term, Landlord shall maintain
--------------------
in effect insurance on the Building against fire, extended coverage perils and
vandalism and malicious mischief (to the extent such coverages are available),
with responsible insurers licensed to do business in the state in which the
Building is located, insuring the Building and the Improvements in an amount
equal to at least eighty percent (80%) of the replacement cost thereof,
excluding foundations, footings and underground installations. Landlord may,
but shall not be obligated to, carry insurance against additional perils and/or
in greater amounts.
12.3 Waiver of Subrogation. To the extent permitted by their
---------------------
respective policies of property insurance, Landlord and Tenant each hereby waive
any right of recovery against the other and the authorized representatives of
the other for any loss or damage that is covered by any policy of property
insurance maintained by either party with respect to the Premises or any
operation therein. If any policy of property insurance relating to this Lease
or to the Premises does not permit the foregoing waiver or if the coverage under
any such policy would be invalidated as a result of such waiver, the party
maintaining such policy shall, if possible, obtain from the insurer under such
policy a waiver of all right of recovery by way of subrogation against either
party in connection with any claim, loss or damage covered by such policy. If
either party is not able to obtain such waiver, then such party shall have the
other party named as an additional insured on all such policies of property
insurance.
13. DAMAGE AND DESTRUCTION.
----------------------
13.1 Landlord's Duty to Repair. If all or a substantial part of the
-------------------------
Premises are rendered untenantable or inaccessible by damage to all or any part
of the Premises from fire or other casualty then, unless either party is
entitled to and elects to terminate this Lease pursuant to Sections 13.2 -
"Landlord's Right to Terminate" or 13.3 - "Tenant's Right to Terminate," then
Landlord shall use reasonable efforts to repair and restore the Premises, to
substantially its former condition to the extent of insurance proceeds received
by Landlord therefor and as permitted by then applicable Legal Requirements;
provided, however, that in no event shall Landlord have any obligation to repair
or replace any of Tenant's personal property, Trade Fixtures or Alterations.
If Landlord is required or elects to repair damage to the Premises, this
Lease shall continue in effect but the Base Rent from the date of the casualty
through the date of substantial completion of the repair shall be abated with
regard to any portion of the Premises
14.
<PAGE>
that Tenant is prevented from using by reason of such damage or its repair, and
Landlord and Tenant hereby agree that in the event the Data Room is
substantially destroyed by such damage, the abatement of Base Rent shall be
fifty percent (50%); provided, however, that if the casualty is the result of
the willful misconduct or negligence of Tenant or Tenant's Representatives,
there will be no such rental abatement. Notwithstanding Tenant's entitlement to
rent abatement under the preceding provisions, Tenant shall continue to pay
Tenant's then current Rent until such time as Landlord and Tenant agree on the
amount of the rent abatement (except in the case of substantial destruction of
the Data Room, for which such rent abatement shall be as provided above). If
Landlord and Tenant are unable to agree on the amount of such abatement within
ten (10) business days of the date they commence negotiations regarding the
abatement, then either party may submit the matter to binding arbitration
pursuant to Sections 1280 et seq. of the California Code of Civil Procedure. In
-- ---
no event shall Landlord be liable to Tenant by reason of any injury to or
interference with Tenant's business or property arising from fire or other
casualty or by reason of any repairs to any part of the Premises made necessary
by such casualty.
13.2 Landlord's Right to Terminate. Landlord may elect to terminate
-----------------------------
this Lease, effective as of the date of the casualty, under the following
circumstances:
(a) Where, in the reasonable judgment of Landlord, the damage
cannot be substantially repaired and restored under applicable Legal
Requirements within nine (9) months from the date of the casualty;
(b) Where, in the reasonable judgment of Landlord, adequate
proceeds are not, for any reason, made available to Landlord from Landlord's
insurance policies to make the required repairs; or
(c) Where the Premises is damaged or destroyed to the extent that
the cost to repair and restore the Premises exceeds twenty-five percent (25%)
of the full replacement cost of the Premises, whether or not the Premises are at
all damaged or destroyed.
If any of the circumstances described in subparagraphs (a), (b) or (c) of
this subsection occur or arise, Landlord must notify Tenant in writing of that
fact within one hundred and twenty (120) days after the date of the casualty and
in such notice Landlord must also advise Tenant whether Landlord has elected to
terminate this Lease as of the date of the casualty.
13.3 Tenant's Right to Terminate. If all or a substantial part of
---------------------------
the Premises are rendered untenantable, inaccessible, or unusable for the
operation of Tenant's business by damage to all or any part of the Premises from
fire or other casualty, then Tenant may elect to terminate this Lease under the
following circumstances:
15.
<PAGE>
(a) Where Landlord has the right under Section 13.2 - "Landlord's
Right to Terminate" to terminate this Lease but has not elected to so terminate
and Landlord fails to commence the required repair within one hundred and twenty
(120) days after the date of the casualty, in which event Tenant may elect to
terminate this Lease upon notice to Landlord given within ten (10) days after
such one hundred and twenty (120)-day period, effective as of the next calendar
month following such notice to Landlord.
(b) In the circumstance described in Subsection 13.2(a) above; in
which event Tenant may elect to terminate this Lease as of the date of the
casualty by giving Landlord notice of such election to terminate within thirty
(30) days after Landlord's notice to Tenant pursuant to Section 13.2.
(c) In the event any such casualty is the result of the willful
misconduct or negligence of Tenant, Tenant's Representatives or Tenant's
Visitors, the termination rights described in Subsection 13.3(a) and 13.3(b)
shall not be available to Tenant
13.4 Waiver of Statutory Provisions. Landlord and Tenant each hereby
------------------------------
waive the provisions of California Civil Code Sections 1932(2), 1933(4) and any
other applicable existing or future law, ordinance or regulation with respect to
damage or destruction of leased premises or with respect to the termination of a
lease agreement in the event of such damage or destruction under any
circumstances other than as provided in Sections 13.2 and 13.3 above.
14. CONDEMNATION.
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14.1 Definitions. For purposes of this Section, the following terms
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shall be defined as follows:
(a) "Award" shall mean all compensation, sums, or anything of value
awarded, paid or received on a total or partial Condemnation.
(b) "Condemnation" shall mean (i) a permanent or temporary taking
of all or a portion of the Premises pursuant to the exercise by a Condemnor of
the power of condemnation or eminent domain, whether by legal proceedings or
otherwise, or (ii) a voluntary sale or transfer by Landlord of all or a portion
of the Premises to any Condemnor, either under threat of condemnation or while
legal proceedings for condemnation are pending.
(c) "Condemnor" shall mean any public or quasi-public authority,
private corporation or individual having the power of condemnation or eminent
domain.
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(d) "Date of Condemnation" shall mean the earlier of the date that
title to the property taken by the Condemnor is vested in the Condemnor or the
date the Condemnor has the right to possession of the property being condemned.
14.2 Condemnation. If any portion of the Premises is taken that
------------
renders the Premises permanently unusable for the operation of Tenant's
business, then at the election of either Landlord or Tenant, this Lease shall
terminate as of the Date of Condemnation. If this Lease is not so terminated,
this Lease shall remain in effect as to the portion of the Premises not taken.
If a temporary Condemnation prevents Tenant from reasonably using a material
portion of the Premises and Tenant in fact ceases to use such portion of the
Premises, Tenant shall be entitled to an abatement of Base Rent with respect to
the portion of the Premises that Tenant is prevented from using by reason of
such temporary Condemnation commencing upon the eleventh (11th) Business Day
following the Date of Condemnation. Upon the occurrence of any temporary
Condemnation whose duration will exceed six (6) months, then at the election of
either Landlord or Tenant, this Lease shall terminate as of the Date of
Condemnation.
14.3 Restoration. If this Lease is not terminated as provided in
-----------
Section 14.2 following a Condemnation, Landlord shall diligently proceed to
repair and restore the Premises to substantially their former condition (to the
extent permitted by the then applicable Legal Requirements) and/or repair and
restore the Building to an architecturally complete building; provided, however,
that Landlord's obligations to so repair and restore shall be limited to the
amount of any Award received by Landlord therefor and not required to be paid to
any Mortgagee. If the amount reasonably estimated to repair and restore the
Premises is greater than the amount of the Award received by Landlord (and/or
from Landlord's funds made available for such purpose, at Landlord's sole
option), then either party shall be entitled to terminate the Lease by written
notice given within thirty (30) days of the determination that such funds are
insufficient.
14.4 Abatement and Reduction of Rent. If any portion of the Premises
-------------------------------
is permanently taken in a Condemnation or is rendered permanently untenantable
by repairs necessitated by the Condemnation, and this Lease is not terminated,
the Base Rent payable under this Lease shall be proportionally reduced as of the
Date of Condemnation based upon the percentage of square feet in the Building so
taken or rendered permanently untenantable. In addition, if this Lease remains
in effect following a permanent Condemnation and Landlord proceeds to repair and
restore the Premises, the Base Rent payable under this Lease shall be abated
during the period of such repair or restoration to the extent such repairs
prevent Tenant's use of the Building.
14.5 Award. Except as provided below, any Award made shall be paid
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to Landlord, and Tenant hereby assigns to Landlord, and waives all interest in
or claim to, any such Award, including any claim for the value of the unexpired
term of this Lease. However, Tenant shall be entitled to receive, or to
prosecute a separate claim for, an Award for a
17.
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temporary Condemnation where this Lease is not terminated, or an Award or
portion thereof separately designated for relocation expenses or the
interruption of or damage to Tenant's business or as compensation for Tenant's
personal property, Trade Fixtures or Alterations.
14.6 Waiver. Landlord and Tenant each hereby waive the provisions of
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California Code of Civil Procedure Section 1265.130 and any other applicable
existing or future law, ordinance or governmental regulation providing for, or
allowing either party to petition the courts of the state in which the Premises
is located for, a termination of this Lease upon a partial taking of the
Premises.
15. ASSIGNMENT AND SUBLETTING.
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15.1 Landlord's Consent Required. Tenant shall not assign, transfer,
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mortgage, pledge, hypothecate or encumber this Lease or any interest therein
(each a "Transfer"), and shall not sublet the Premises or any part thereof,
without the prior written consent of Landlord and any attempt to do so without
such consent being first had and obtained shall be wholly void.
15.2 Reasonable Consent.
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(a) If Tenant complies with the following conditions, Landlord
shall not unreasonably withhold its consent to the subletting of the Premises or
any portion thereof or the assignment of this Lease. Tenant shall submit in
writing to Landlord (i) the name and legal composition of the proposed subtenant
or assignee; (ii) the nature of the business proposed to be carried on in the
Premises; (iii) the terms and provisions of the proposed sublease; (iv) such
reasonable financial information as Landlord may request concerning the proposed
subtenant or assignee; and (v) the form of the proposed sublease or assignment.
Within fifteen (15) days after Landlord receives all such information it shall
notify Tenant whether it approves such assignment or subletting or if it elects
to proceed under Section 15.8 - "Landlord's Right to Space" below.
(b) The parties hereto agree and acknowledge that, among other
circumstances for which Landlord could reasonably withhold its consent to a
sublease or assignment, it shall be reasonable for Landlord to withhold its
consent where (i) the Lease is proposed to be assigned with respect to less than
all of the Premises (it being acknowledged, however, that Tenant Shall be
permitted to sublease less than all of the Premises), (ii) the assignee or
subtenant (a "Transferee") will not occupy the entire Premises assigned or
sublet to such Transferee, as the case may be (which, in the case of a subtenant
subleasing less than all of the Premises, means that such subtenant must occupy
the entire portion of the Premises that it proposes to sublease), (iii) the
rental and other consideration payable by the Transferee is less than sixty
percent (60%) of that currently being paid by tenants under new leases of
comparable space in similar buildings, or (iv) Landlord reasonably disapproves
of the
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Transferee's reputation or creditworthiness or the character of the business to
be conducted by the Transferee at the Premises.
15.3 Excess Consideration. If Landlord consents to such sublease and
--------------------
does not exercise its recapture rights under Section 15.8 - "Landlord's Right to
Space," Landlord shall be entitled to receive, in the case of a sublease of less
than the entire Premises, fifty percent (50%) of the excess of the rent and
other consideration payable by the subtenant over the amount of Base Rent
payable hereunder applicable to the subleased space, net of the reasonable costs
incurred by Tenant, if any, in managing such sublease.
15.4 No Release Of Tenant. No consent by Landlord to any assignment
--------------------
or subletting by Tenant shall relieve Tenant of any obligation to be performed
by Tenant under this Lease, whether occurring before or after such consent,
assignment or subletting, and the Transferee shall be jointly and severally
liable with Tenant for the payment of Rent (or that portion applicable to the
subleased space in the case of a sublease) and for the performance of all other
terms and provisions of the Lease. The consent by Landlord to any assignment or
subletting shall not relieve Tenant and any such Transferee from the obligation
to obtain Landlord's express written consent to any subsequent assignment or
subletting. The acceptance of rent by Landlord from any other person shall not
be deemed to be a waiver by Landlord of any provision of this Lease or to be a
consent to any assignment, subletting or other transfer. Consent to one
assignment, subletting or other transfer shall not be deemed to constitute
consent to any subsequent assignment, subletting or other transfer.
15.5 Attorneys' Fees. Tenant shall pay Landlord's reasonable
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attorneys' fees incurred in connection with reviewing any proposed assignment or
sublease, not to exceed the sum of $2,000.00 in any one instance.
15.6 Transfer Of Ownership Interest. If Tenant is a business entity,
------------------------------
any direct or indirect transfer of forty-nine percent (49%) or more of the
ownership interest of the entity (whether all at one time or over the term of
the Lease) shall be deemed a Transfer; provided, however, that Tenant may assign
this Lease, without Landlord's consent, to any person or entity which controls
Tenant, to any entity resulting from a merger with Tenant or to any person or
entity which acquires substantially all the assets of Tenant as a going concern,
and which after such merger or acquisition has a net worth in excess of Tenant's
net worth immediately prior to such merger or acquisition (collectively, an
"Affiliate"), provided that the Affiliate assumes in writing all of Tenant's
obligations under this Lease; and provided further that the sale or issuance of
securities of Tenant in a public offering shall not be deemed to be a Transfer
that requires Landlord's consent.
15.7 Effectiveness of Transfer. No permitted assignment (whether or
-------------------------
not requiring Landlord's consent) shall be effective until Landlord has received
a counterpart of the assignment and an instrument in recordable form executed by
the assignee in which the assignee assumes all of Tenant's obligations under
this Lease arising on or after the date of
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assignment. No permitted subletting (whether or not requiring Landlord's
consent) by Tenant shall be effective until there has been delivered to Landlord
a counterpart of the sublease and an instrument in recordable form executed by
the subtenant in which the subtenant agrees to be and remain jointly and
severally liable with Tenant for the payment of Rent and for the performance of
all of the terms and provisions of this Lease; provided, however, that the
subtenant shall be liable to Landlord for Rent only in the amount set forth in
the sublease. The failure or refusal of an assignee or subtenant to execute any
such instrument shall not release or discharge the assignee or subtenant from
its liability set forth above. The voluntary, involuntary or other surrender of
this Lease by Tenant, or a mutual cancellation by Landlord and Tenant, shall not
work a merger, and any such surrender or cancellation shall, at the option of
Landlord, either terminate all or any existing subleases or operate as an
assignment to Landlord of any or all of such subleases.
15.8 Landlord's Right to Space. Notwithstanding any of the above
-------------------------
provisions of this Section 15 to the contrary, if Tenant notifies Landlord that
it desires to assign this Lease or sublet all of the Premises, Landlord, in lieu
of consenting to such assignment or sublease, may, by notice to Tenant within
fifteen (15) days after Landlord's receipt of Tenant's request for consent and
all information required to be provided by Tenant in connection with such
consent, elect to terminate this Lease. In such event, this Lease will
terminate on the date the assignment or sublease was to be effective, and
Landlord may lease such space to any party, including the prospective Transferee
identified by Tenant; provided, however, that Tenant shall have the right to
withdraw its notice of intent to assign or sublease by notice to Landlord within
ten (10) days of receiving Landlord's termination notice. Notwithstanding the
foregoing, however, Landlord acknowledges that it shall not have the right to
terminate this Lease in the event of an assignment or sublease to an Affiliate
pursuant to Section 15.6 - "Transfer of Ownership Interest."
15.9 Lease Options. Any options, rights of first refusal rights of
-------------
first offer, whether to extend, renew, lease or purchase this Lease, the
Premises or other property, granted in this Lease or any amendment thereto,
shall be personal to Tenant or any Affiliate to whom Tenant has assigned this
Lease, and shall terminate upon any assignment or subletting to an entity other
than an Affiliate.
15.10 Involuntary Assignment. In the event that Landlord consents,
----------------------
pursuant to Section 365 of the Federal Bankruptcy Code, to any assumption,
assignment or sublease ("transfer") of the rights or interest of Tenant under
this Lease, "adequate assurance of future performance" of this Lease by the
transferee shall include, but not be limited to, establishment by the transferee
of an impound account into which the transferee shall deposit, subject to
withdrawal solely by Landlord from time to time as the same becomes due, an
amount equal to the aggregate amount of all Rent which shall become due under
this Lease during the remainder of the Term.
20.
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16. DEFAULT AND REMEDIES.
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16.1 Events of Default. The occurrence of any of the following shall
-----------------
constitute an "Event of Default" by Tenant:
(a) Tenant fails to make any payment of Rent when due and such
failure is not cured within ten (10) days after notice to Tenant thereof.
(b) Tenant fails to timely make payments of Rent when due under
this Lease three (3) or more times during any twelve (12) month period
during the Term.
(c) Tenant abandons the Premises for thirty (30) consecutive
days, which failure shall be deemed an abandonment of the Premises by
Tenant.
(d) Tenant fails to deliver any estoppel certificate requested
by Landlord within the period described in Section 23 - "Estoppel
Certificates."
(e) Tenant fails to comply with any of the provisions of
Section 33 - "Hazardous Materials."
(f) Tenant ceases doing business as a going concern, makes an
assignment for the benefit of creditors, is adjudicated an insolvent, files
a petition (or files an answer admitting the material allegations of such
petition) seeking relief under any reorganization, arrangement,
consolidation, readjustment, liquidation, dissolution or similar
arrangement or proceeding under any state or federal bankruptcy or other
statute, law or regulation, or Tenant consents to or acquiesces in the
appointment, pursuant to any state or federal bankruptcy or other statute,
law or regulation, of a trustee, receiver or liquidator for the Premises,
for Tenant or for all or any substantial part of Tenant's assets.
(g) Tenant fails, within ninety (90) days after the
commencement of any proceedings against Tenant seeking relief under any
reorganization, arrangement, consolidation, readjustment, liquidation,
dissolution or similar arrangement or proceeding under any state or federal
bankruptcy or other statute, law or regulation, to have such proceedings
dismissed, or Tenant fails, within ninety (90) days after an appointment
pursuant to any state or federal bankruptcy or other statute, law or
regulation, without Tenant's consent or acquiescence, of any trustee,
receiver or liquidator for the Premises, for Tenant or for all or any
substantial part of Tenant's assets, to have such appointment vacated.
(h) Tenant fails to perform or comply with any provision of
this Lease other than those described in (a) through (f) above, and such
failure is not cured
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within fifteen (15) days after notice to Tenant or, if such failure cannot
be cured within such fifteen (15) business day period, Tenant fails within
such fifteen (15)-day period to commence, and thereafter diligently proceed
with, all actions necessary to cure such failure as soon as reasonably
possible but in all events within ninety (90) days of such notice. In the
case of any default that by its nature cannot be cured, such failure shall
constitute an Event of Default immediately upon such notice to Tenant by
Landlord.
16.2 Remedies. Upon the occurrence of an Event of Default, Landlord
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shall have the following remedies, which shall not be exclusive but shall be
cumulative and shall be in addition to any other remedies now or hereafter
allowed by law:
(a) Landlord may terminate Tenant's right to possession of the
Premises at any time by written notice to Tenant. Tenant expressly
acknowledges that in the absence of such written notice from Landlord, no
other act of Landlord, including its re-entry into the Premises, its
efforts to relet the Premises, its reletting of the Premises for Tenant's
account, its storage of Tenant's personal property and Trade Fixtures, its
acceptance of keys to the Premises from Tenant or its exercise of any other
rights and remedies under this Section 16.2, shall constitute an acceptance
of Tenant's surrender of the Premises or constitute a termination of this
Lease or of Tenant's right to possession of the Premises.
Under such termination in writing of Tenant's right to possession of
the Premises, as herein provided, this Lease shall terminate and Landlord
shall be entitled to recover damages from Tenant as provided in California
Civil Code Section 1951.2 or any other applicable existing or future law,
ordinance or regulation providing for recovery of damages for such breach,
including the following:
(1) The reasonable cost of recovering the Premises; plus
(2) The reasonable cost of removing Tenant's Alterations, Trade
Fixtures and Improvements; plus
(3) All unpaid Rent due or earned hereunder prior to the date of
termination, less the proceeds of any reletting or any rental received from
subtenants prior to the date of termination applied as provided in
subsection (b) below, together with interest at the Interest Rate, on such
sums from the date such Rent is due and payable until the date of the award
of damages; plus
(4) The amount by which the Rent which would be payable by Tenant
hereunder, as reasonably estimated by Landlord, from the date of
termination until the date of the award of damages exceeds the amount of
such rental loss as Tenant proves could have been reasonably avoided,
together with interest at the Interest Rate on such
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sums from the date such Rent is due and payable until the date of the award
of damages; plus
(5) The amount by which the Rent which would be payable by Tenant
hereunder, as reasonably estimated by Landlord, for the remainder of the then
Term, after the date of the award of damages exceeds the amount of such rental
loss as Tenant proves could have been reasonably avoided, San Francisco for
member banks at the time of the award plus one percent (1%); plus
(6) Such other amounts in addition to or in lieu of the foregoing as
may be permitted from time to time by applicable law.
(b) Landlord may continue this Lease in full force and effect and
may enforce all its rights and remedies under this Lease, including the right to
recover Rent as it becomes due. During the continuance of an Event of Default,
Landlord may enter the Premises without terminating this Lease and sublet all or
any part of the Premises for Tenant's account to any person, for such term
(which may be a period beyond the remaining Term of this Lease), at such rents
and on such other terms and conditions as Landlord deems advisable. In the event
of any such subletting, rents received by Landlord from such subletting shall be
applied (i) first, to the payment of the costs of maintaining, preserving,
altering and preparing the Premises for subletting and other costs of
subletting, including brokers' commissions, attorneys' fees and expenses of
removal of Tenant's personal property, Trade Fixtures, and Alterations; (ii)
second, to the payment of Rent then due and payable; (iii) third, to the payment
of future Rent as the same may become due and payable hereunder; and (iv)
fourth, the balance, if any, shall be paid to Tenant upon (but not before)
expiration of the Term. If the rents received by Landlord from such subletting,
after application as provided above, are insufficient in any month to pay the
Rent due and payable hereunder for such month, Tenant shall pay such deficiency
to Landlord monthly upon demand. Notwithstanding any such subletting for
Tenant's account without termination, Landlord may at any time thereafter, by
written notice to Tenant, elect to terminate this Lease by virtue of a previous
Event of Default.
During the continuance of an Event of Default, for so long as
Landlord does not terminate Tenant's right to possession of the Premises and
subject to Section 15 and the options granted to Landlord thereunder, Landlord
shall not unreasonably withhold its consent to an assignment or sublease of
Tenant's interest in the Premises or in this Lease.
(c) During the continuance of an Event of Default, Landlord may enter
the Premises without terminating this Lease and remove all Tenant's personal
property, Alterations and Trade Fixtures from the Premises. If Landlord removes
23.
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such property from the Premises and stores it at Tenant's risk and
expense, and if Tenant fails to pay the cost of such removal and storage
after written demand therefor and/or to pay any Rent then due, after the
property has been stored for a period of thirty (30) days or more
Landlord may sell such property at public or private sale, in the manner
and at such times and places as Landlord in its sole discretion deems
commercially reasonable following reasonable notice to Tenant of the
time and place of such sale. The proceeds of any such sale shall be
applied first to the payment of the expenses for removal and storage of
the property, preparation for and conducting such sale, and attorneys'
fees and other legal expenses incurred by Landlord in connection
therewith, and the balance shall be applied as provided in subsection
(b) above.
Tenant hereby waives all claims for damages that may be caused
by Landlord's reentering and taking possession of the Premises or
removing and storing Tenant's personal property pursuant to this
Section, and Tenant shall hold Landlord harmless from and against any
loss, cost or damage resulting from any such act. No reentry by Landlord
shall constitute or be construed as a forcible entry by Landlord.
(d) Landlord may require Tenant to remove any and all
Alterations, and the Data Room (in accordance with the provisions of
Section 20.1 -"Surrender") from the Premises or, if Tenant fails to do
so within ten (10) business days after Landlord's request, Landlord may
do so at Tenant's expense.
(e) Landlord may cure the Event of Default at Tenant's expense.
If Landlord pays any sum or incurs any expense in curing the Event of
Default, Tenant shall reimburse Landlord upon demand for the reasonable
mount of such payment or expense with interest at the Interest Rate from
the date the sum is paid or the expense is incurred until Landlord is
reimbursed by Tenant.
17. LATE CHARGE; INTEREST.
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17.1 Late Charge. Tenant acknowledges that the late payment of
-----------
any Rent due hereunder will cause Landlord to incur expenses not contemplated by
this Lease and that the exact amount of such expenses would be extremely
difficult and impracticable to fix. Such expenses include processing and
accounting charges, late charges that may be imposed on Landlord by the terms of
any encumbrance or note secured by the Premises and the loss of the use of
delinquent Rent. Therefore, if any payment of Rent is not received by Landlord
when due, Tenant shall pay to Landlord on demand as a late charge an additional
amount equal to five percent (5%) of the overdue sum, which amount represents a
fair and reasonable estimate of the costs that Landlord will incur by reason of
late payment. Acceptance of any late charge shall not constitute a waiver of
Tenant's default with respect to the overdue sum or prevent Landlord from
exercising any of its other rights and remedies under this Lease.
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17.2 Interest. In addition to the late charges referred to above,
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which are intended to defray Landlord's costs resulting from late payments, any
late payment of Rent shall, at Landlord's option, bear interest from the due
date of any such payment to the date same is paid at eleven percent (11%) per
annum (the "Interest Rate").
18. WAIVER. No provisions of this Lease shall be deemed waived by
------
Landlord unless such waiver is in a writing signed by Landlord. The waiver by
Landlord of any breach of any provision of this Lease shall not be deemed a
waiver of such provision or of any subsequent breach of the same or any other
provision of this Lease. No delay or omission in the exercise of any right or
remedy of Landlord upon any default by Tenant shall impair such right or remedy
or be construed as a waiver. Landlord's acceptance of any payments of Rent due
under this Lease shall not be deemed a waiver of any default by Tenant under
this Lease (including Tenant's recurrent failure to timely pay Rent) other than
Tenant's nonpayment of the accepted sums, and no endorsement or statement on any
check or accompanying any check or payment shall be deemed an accord and
satisfaction. Landlord's consent to or approval of any act by Tenant requiring
Landlord's consent or approval shall not be deemed to waive or render
unnecessary Landlord's consent to or approval of any subsequent act by Tenant.
19. ENTRY AND INSPECTION. Upon not less than twenty-four (24) hours'
--------------------
verbal or written notice to Tenant (except where in Landlord's judgment the
existence of an emergency necessitates an immediate entry into the Premises
without notice to avoid damage, loss or injury to persons or property or any
part of the Premises), Landlord and its authorized representatives may enter the
Premises, including the Building, at all reasonable times to determine whether
the Premises are in good condition, to determine whether Tenant is complying
with its obligations under this Lease, to perform any maintenance or repair of
the Premises that Landlord has the right or obligation to perform, to serve,
post or keep posted any notices required or allowed under the provisions of this
Lease, to show the Premises to prospective brokers, agents, buyers, transferees,
Mortgagees or tenants, or to do any other act or thing necessary for the safety
or preservation of the Premises, upon giving reasonable prior notice to Tenant.
Landlord shall not be liable in any manner for any inconvenience, loss
of business or other damage to Tenant or other persons arising out of Landlord's
entry on the Premises as provided in this Section. Landlord Shall conduct its
activities under this Section in a manner that will minimize inconvenience to
Tenant without incurring additional expense to Landlord. When necessary for
safety or emergency purposes, or as otherwise required by law, Landlord may
temporarily close entrances, doors, corridors, elevators or other facilities in
the Premises without liability to Tenant by reason of such closure and without
such action being construed as an eviction of Tenant or a release of Tenant from
its obligations under this Lease. In no event shall Tenant be entitled to an
abatement of rent on account of any entry by the Landlord.
25.
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20. SURRENDER, HOLDING OVER.
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20.1 Surrender. Upon the expiration or termination of this Lease,
---------
Tenant shall surrender the Premises and all Improvements to Landlord broom-clean
and in their original condition, except for reasonable wear and tear, damage
from casualty or condemnation and any changes resulting from approved
Alterations; provided, however, that prior to the expiration or termination of
this Lease, Tenant shall remove from the Premises all Alterations (subject to
the provisions of Section 7 - "Alterations"), shall remove the Data Room's
subfloor system, and the below-floor fire system and HVAC system, and any below-
floor cabling and electrical wiring to the Data Room, and shall also remove from
the Premises all Tenant's personal property and Trade Fixtures that Tenant has
the right to remove under the provisions of this Lease. If such removal is not
completed at the expiration or termination of this Lease, Landlord may remove
the same at Tenant's expense. Tenant shall, at its expense, restore the
Premises after such removal to the condition designated by Landlord and any
damage to the Building caused by such removal shall be repaired promptly by
Tenant or, if Tenant fails to do so, Landlord may do so at Tenant's expense.
Upon expiration or termination of this Lease or of Tenant's possession, Tenant
shall surrender all keys to the Premises or any other part of the Building and
shall make known to Landlord the combination of locks on all safes, cabinets and
vaults that may be located in the Premises. Tenant's obligations under this
Section shall survive the expiration or termination of this Lease.
20.2 Holding Over. If Tenant remains in possession of the Premises
------------
after the expiration or termination of this Lease, Tenant's continued possession
shall be on the basis of a tenancy at the sufferance of Landlord, and Tenant
shall continue to comply with or perform all the terms and obligations of the
Tenant under this Lease, except that the Base Rent during Tenant's holding over
shall be one hundred twenty-five percent (125%) of the greater of (i) Base Rent
payable in the last month prior to the expiration or termination hereof, or (ii)
the fair market rental, as reasonably determined by Landlord, for the Premises.
Tenant shall indemnify and hold Landlord harmless from and against all Claims
incurred by Landlord and arising directly or indirectly from Tenant's failure to
timely surrender the Premises, including (a) any rent payable by or any loss,
cost, or damages, including lost profits, claimed by any prospective tenant of
the Premises, and (b) Landlord's damages as a result of such prospective tenant
rescinding or refusing to enter into the prospective lease of the Premises by
reason of such failure to timely surrender the Premises.
21. SUBORDINATION; ATTORNMENT; NONDISTURBANCE. This Lease is expressly
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made subject and subordinate to any mortgage, deed of trust, ground lease,
underlying lease or like encumbrance affecting any pan of the Premises or any
interest of Landlord therein which is now existing or hereafter executed or
recorded ("Encumbrance"), and any memorandum of this Lease, whether or not
recorded in the public records of the county in which the Premises is located,
shall so state; provided, however, that such subordination shall only be
effective, as to future Encumbrances, if the holder of the Encumbrance agrees
that this Lease shall survive the termination of the Encumbrance by lapse
26.
<PAGE>
of time, foreclosure or otherwise so long as Tenant is not in default under this
Lease. Provided the conditions of the preceding sentence are satisfied, Tenant
covenants and agrees to execute and deliver, upon request by Landlord and in a
form reasonably requested by Landlord, any additional documents evidencing the
subordination of this Lease with respect to any such Encumbrance and the
nondisturbance agreement of the holder of any such Encumbrance. If the interest
of Landlord in the Premises is transferred to any person ("Purchaser") pursuant
to or in lieu of proceedings for enforcement of any Encumbrance, Tenant shall
immediately and automatically attorn to the Purchaser, and this Lease shall
continue in full force and effect as a direct lease between the Purchaser and
Tenant on the terms and conditions set forth in this Lease.
22. MORTGAGEE PROTECTION. Tenant agrees to give any holder of any
--------------------
Encumbrance covering any part of the Premises ("Mortgagee"), by registered mail,
a copy of any notice of default served upon Landlord, provided that prior to
such notice Tenant has been notified in writing (by way of notice of assignment
of rents and leases, or otherwise) of the address of such Mortgagee. If
Landlord shall have failed to cure such default within thirty (30) days from the
effective date of such notice of default, then Mortgagee shall have an
additional thirty (30) days within which to cure such default, or if such
default cannot be cured within that time, then such additional time as may be
necessary to cure such default (including the time necessary to foreclose or
otherwise terminate its Encumbrance, if necessary to effect such cure), and this
Lease shall not be terminated so long as such remedies are being diligently
pursued.
23. ESTOPPEL CERTIFICATES. Upon ten (10) days' notice from Landlord,
---------------------
Tenant shall execute and deliver to Landlord, in form provided by or
satisfactory to Landlord, a certificate stating that this Lease is in full force
and effect, describing any amendments or modifications hereto, acknowledging
that this Lease is Subordinate or prior, as the case may be, to any Encumbrance
and stating any other information Landlord may reasonably request, including the
term of this Lease, the monthly Base Rent, the date to which Rent has been paid,
the amount of any security deposit or prepaid Rent, whether either party hereto
is in default under the terms of the Lease, whether Landlord has completed its
construction obligations hereunder and any other information reasonably
requested by Landlord. Any person or entity purchasing, acquiring an interest
in or extending financing with respect to the Premises shall be entitled to rely
upon any such certificate. Tenant shall be liable to Landlord for any damages
incurred by Landlord including any profits or other benefits from any financing
of the Premises or any interest therein which are lost or made unavailable as a
result, directly or indirectly, of Tenant's failure or refusal to timely execute
or deliver such estoppel certificates.
24. NOTICES. Any notice, demand, request, consent, approval or
-------
communication that either party desires or is required to give to the other
party, under this Lease shall be in writing and shall be sent, transmitted or
delivered to such party by personal delivery, telecopy, independent messenger or
courier service, or sent by U.S. registered or certified
27.
<PAGE>
mail, return receipt requested, postage prepaid, addressed to the other party at
the address set forth below the respective signatures to this Lease. Either
party may change its address for notice by notifying the other party as provided
in this Section. In the event Tenant sublets the Premises, notices from Landlord
shall be effective on the subtenant when given to Tenant pursuant to this
Section. All notices will be effective (i) upon receipt if delivered personally
or by independent messenger or courier service or sent by telecopy, and (ii)
five (5) days after posting when sent via U.S. mail as provided above. In the
event a party requests dual notices hereunder, such party will be bound by such
notice from the earlier of the effective times of the dual notices.
25. ATTORNEYS' FEES.
---------------
(a) If Tenant or Landlord brings any action for the enforcement or
interpretation of this Lease, including any suit by Landlord for the recovery of
Rent or possession of the Premises, the losing party shall pay to the prevailing
party a reasonable sum for attorneys' fees. The "prevailing party" will be
determined by the court before whom the action was brought based upon an
assessment of which party's major arguments or positions taken in the suit or
proceeding could fairly be said to have prevailed over the other party's major
arguments or positions on major disputed issues in the court's decision.
(b) If Landlord, without fault on Landlord's part, is made a party to
any litigation instituted by Tenant or by any third party against Tenant, or by
or against any person holding under or using the Premises by license of Tenant
or otherwise arising out of or resulting from any act or transaction of Tenant
or of any such other person, Tenant covenants to hold Landlord harmless from any
judgment rendered against Landlord or the Premises or any part thereof, and
reimburse Landlord upon demand for all costs and expenses, including reasonable
attorneys' fees, incurred by Landlord in or in connection with such litigation.
26. QUIET POSSESSION. Subject to Tenant's full and timely performance of
----------------
all its obligations under this Lease and subject to the terms of this Lease,
Tenant shall have the quiet possession of the Premises throughout the term of
this Lease as against any persons or entities lawfully claiming by, through or
under Landlord.
27. FORCE MAJEURE. In the event Landlord or Tenant is delayed,
-------------
interrupted or prevented from performing any of its obligations under this
Lease, including its obligations under the Construction Rider, and such delay,
interruption or prevention is due to fire, act of God, governmental act, strike,
labor dispute, unavailability of materials or any other cause outside the
reasonable control of such party (financial inability excepted), then the time
for performance of the affected obligations of such party shall be extended for
a period equivalent to the period of such delay, interruption or prevention.
28. RULE AND REGULATIONS. Tenant shall be bound by and shall comply with
--------------------
the rules and regulations attached to and made a part of this Lease as
Exhibit C, as well
- ---------
28.
<PAGE>
as any reasonable rules and regulations hereafter adopted by Landlord
for the Building, to the extent those rules and regulations are not in conflict
with the terms of this Lease, upon notice to Tenant thereof (collectively, the
"Building Rules"). Tenant's failure to comply with such Building Rules shall
constitute a default under this Lease.
29. LANDLORD'S LIABILITY. The term "Landlord," as used in this Lease,
--------------------
shall mean only the owner or owners of the Premises at the time in question.
Notwithstanding any other term or provision of this Lease, the liability of
Landlord for its obligations under this Lease is limited solely to Landlord's
interest in the Premises as the same may from time to time be encumbered, and no
personal liability shall at any time be asserted or enforceable against any
other assets of Landlord or against Landlord's partners or their stockholders,
directors or officers on account of any of Landlord's obligations or actions
under this Lease. In addition, in the event of any conveyance of title to the
Building or the Premises, then from and after the date of such conveyance,
Landlord shall be relieved of all liability with respect to Landlord's
obligations to be performed under this Lease after the date of such conveyance.
Upon any conveyance of title to the Building or the Premises, the grantee or
transferee, by accepting such conveyance, shall be deemed to have assumed
Landlord's obligations to be performed under this Lease from and after the date
of transfer, subject to the limitations on liability set forth above in this
Section 29.
30. CONSENTS AND APPROVALS. Wherever the consent, approval, judgment or
----------------------
determination of Landlord is required or permitted under this Lease, such
consent, approval, judgment or determination shall be reasonably made. If it is
determined that Landlord failed to give its consent where it was required to do
so under this Lease, Tenant shall be entitled to specific performance but not to
monetary damages for such failure; provided, however, that in the event specific
performance cannot be granted as a remedy, then Tenant shall be entitled to
recover its actual out-of-pocket damages, but not consequential or loss of
business damages, for such failure.
The review and/or approval by Landlord of any item to be reviewed or
approved by Landlord under the terms of this Lease or any Exhibits hereto shall
not impose upon Landlord any liability for accuracy or sufficiency of any such
item or the quality or suitability of such item for its intended use. Any such
review or approval is for the sole purpose of protecting Landlord's interest in
the Premises under this Lease, and no third parties, including Tenant or the
Representatives and Visitors of Tenant or any person or entity claiming by,
through or under Tenant, shall have any rights hereunder.
31. BROKERS. Tenant warrants and represents to Landlord that in the
-------
negotiating or making of this Lease neither Tenant nor anyone acting on its
behalf has dealt with any real estate broker or finder who might be entitled to
a fee or commission for this Lease other than Grubb & Ellis Real Estate
Services, Colliers Parrish International, Inc., and Cornish & Carey, whose
commission is to be paid by Landlord. Tenant shall indemnify, defend and hold
Landlord harmless from and against any claim by any person or real estate broker
that it
29.
<PAGE>
is entitled to a commission in connection with this Lease as the result
of the Tenant's dealings with such person.
32. RIGHTS RESERVED BY LANDLORD. Landlord retains and shall have the
---------------------------
rights set forth below, exercisable without notice and without liability to
Tenant for damage or injury to property, person or business and without
effecting an eviction, constructive or actual, or disturbance of Tenant's use or
possession of the Premises or giving rise to any claim for set-off or abatement
of Rent, to install, affix and maintain any and all signs on the exterior of the
Building.
33. HAZARDOUS MATERIALS.
-------------------
33.1. Definitions.
-----------
(a) "Hazardous Materials" shall mean any substance that now or in the
future requires investigation or remediation under, or is regulated or defined
as a hazardous waste or hazardous substance, by any governmental authority or
instrumentality or any law, regulation, rule or order, or any amendment thereto,
including the Comprehensive Environmental Response Compensation and Liability
Act, 42 U.S.C. (S)9601 et seq., the Resource Conservation and Recovery Act, 42
-- ----
U.S.C. (S)6901 et seq., the California Health and Safety Code, and the
-- ----
California Water Code, or that is otherwise toxic, explosive, corrosive,
flammable, infectious, mutagenic, radioactive, carcinogenic, a pollutant or a
contaminant, including gasoline, diesel, petroleum hydrocarbons, polychlorinated
biphenyls (PCBs), asbestos, radon and urea formaldehyde foam insulation.
(b) "Environmental Requirements" shall mean all present and future
governmental laws, regulations, rules, orders, permits, licenses, approvals,
authorizations and other requirements of any kind applicable to Hazardous
Materials, including common law tort principles (such as public and private
nuisance and strict liability for conducting abnormally dangerous activities).
(c) "Handle," "Handled,' or "Handling" shall mean any installation,
handling, generation, storing, treatment, use, disposal, discharge, release,
manufacture, refinement, emission, abatement, removal, transportation, presence
or migration of any Hazardous Materials, or any other activity of any type in
connection with or involving Hazardous Materials.
(d) "Tenant's Representatives," as used in this Section, shall mean
all Tenant's officers, employees, contractors, representatives, assignees,
sublessees, agents, invitees, and any trespassers on the Property.
33.2 Tenant's Covenants. Tenant and Tenant's Representatives shall
------------------
not Handle any Hazardous Materials at or about the Premises without Landlord's
prior written
30.
<PAGE>
consent, which consent may be granted, denied, or conditioned upon
compliance with Landlord's requirements, all in Landlord's absolute discretion.
Notwithstanding the foregoing, normal quantities and use of those Hazardous
Materials customarily used in the conduct of general office activities (for
example, copier fluids and cleaning supplies), may be used and stored at the
Premises without Landlord's prior written consent.
Prior to the commencement of the term of the Lease, and again prior to the
execution of any agreement extending or renewing the Term or upon request by
Landlord, Tenant shall deliver to Landlord copies of all permits,
authorizations, plans and reports, and supporting documentation therefor,
including any Hazardous Materials Management Plan, which are required by law or
by any governmental authority with respect to Tenant's use or proposed use of
the Premises, including any Handling of Hazardous Materials. The provisions of
this Section shall apply to all Hazardous Materials, whether or not Landlord has
given Tenant its consent to Handle such Hazardous Materials. Tenant's and
Tenant's Representatives' Handling of all Hazardous Materials shall comply at
all times with all Environmental Requirements and Tenant shall, at its own
expense, promptly take all actions required by any governmental authority in
connection with Tenant's or Tenant's Representatives Handling of Hazardous
Materials at or about the Premises. Tenant shall keep Landlord fully and
promptly informed of all Handling of Hazardous Materials on the Premises,
including notifying Landlord within twenty-four (24) hours of any spill,
release, discharge, or emission.
Tenant shall maintain, at its own expense, a written program to ensure and
monitor Tenant's continued compliance with this Section and all Environmental
Requirements. At Landlord's request, Tenant shall provide Landlord with a copy
of such program, including monitoring results; provided, however, that Tenant
acknowledges that such program will be supplied to Landlord solely for
informational purposes, and that Landlord shall have no obligation to review the
information provided, shall not be deemed to have approved or consented to any
matter set forth therein, and shall have no liability for any deficiencies
therein.
Prior to the expiration or termination of the Lease, Tenant shall, at its
sole expense, promptly remove from the Premises, using the then best available
technology, all Hazardous Materials Handled by Tenant or Tenant's
Representatives ("Lease Closure"), notwithstanding any lesser standard of
removal or remediation which might be allowable under applicable law or
governmental policies, and perform or cause to be performed all actions
necessary, as determined by Landlord in its reasonable business judgment, to
ensure that Lease Closure has been completed, including inspection, testing and
post-Lease Closure monitoring. Tenant, at its sole expense, shall repair any
damage caused by such work and unless otherwise requested by Landlord, shall
close, at the completion of all testing and monitoring, in accordance with
applicable law, any and all monitoring and extraction wells and boreholes
installed as a result of or in connection with Tenant's occupancy of the
Premises or otherwise installed by Tenant, or at Tenant's direction. All
consultants or contractors performing work on behalf of Tenant pursuant to this
Section shall be qualified and licensed to undertake the applicable work and
31.
<PAGE>
shall be subject to Landlord's prior approval. All work required to be
performed under this Section, and Tenant's and Tenant's Representatives'
Handling of all Hazardous Materials, shall be performed in a good, safe and
workmanlike manner and in a manner that will not interfere with Landlord's use,
operation, leasing or sale of the Premises or the use or occupancy of any other
tenant of the Property.
Tenant shall be responsible and liable for the compliance with all of the
provisions of this Section by Tenant's Representatives.
33.3 Compliance. Tenant shall deliver to Landlord prior to delivery
----------
to, or promptly after receipt from, any governmental authority or other person
or entity copies of all permits, manifests, closure or remedial action plans,
notices, investigations, inquiries, claims, citations, summons, complaints,
writs, orders and all other communications or documents relating to (a) the
Handling of Hazardous Materials at or about the Premises or Property, (b) the
actual, alleged or threatened violation of Environmental Requirements or (c) the
liability of Tenant for Environmental Losses. Any communications, written or
oral, regarding any release, discharge, emission or any other occurrence posing
an imminent threat of damage or contamination to the Property or the environment
shall be delivered or, if oral, communicated, to Landlord within twenty-four
(24) hours of receipt; all other communications shall be delivered to Landlord
within five (5) days of receipt. Landlord shall have no obligation to review or
evaluate any such communication and shall not be deemed to have approved,
consented to or participated in any act or omission described or required by
such communication.
Tenant shall remove at its own expense, by bond or otherwise, all liens or
charges of any kind filed or recorded against the Premises in connection with
Tenant's or Tenant's Representatives' Handling of Hazardous Materials, within
ten (10) days after the filing or recording of such lien or charge, and if
Tenant fails to do so, Landlord shall have the right, but not the obligation, to
remove the lien or charge at Tenant's expense in any manner Landlord deems
expedient.
33.4 Landlord's Rights. Landlord and its representatives and
-----------------
consultants shall have the right, but not the obligation, to enter the Premises
at any reasonable time (a) to confirm Tenant's compliance with the provisions of
this Section, including the right to physically investigate the condition of the
Premises and review all permits, reports, plans, and other documents regarding
the Handling of Hazardous Materials, and (b) to perform Tenant's obligations
under this Section if Tenant has failed to timely do so. Tenant shall pay the
costs of Landlord's consultants' fees and all other costs incurred by Landlord
pursuant to clause (a) above if such investigation is undertaken because
Landlord reasonably believes Tenant has failed to provide full and complete
information regarding any release, discharge or other Handling of Hazardous
Materials and shall pay, in any case, all such costs incurred pursuant to clause
(b). Landlord shall use reasonable efforts to minimize any interference with
32.
<PAGE>
Tenant's business caused by Landlord's entry into the Premises, but Landlord
shall not be responsible for any interference caused thereby.
Landlord shall have the right, but not the obligation, to require, annually
during the term of the Lease and again within five (5) business days after the
termination or expiration of the Lease, that a detailed review ("Environmental
Audit") be undertaken to determine whether the Premises and Tenant and Tenant's
Representatives' Handling of all Hazardous Materials comply with this Section.
The Environmental Audit shall be conducted by independent, qualified, licensed
environmental consultants selected by Tenant and acceptable to Landlord. If the
consultants chosen by Tenant are unacceptable to Landlord, Landlord shall be
entitled to engage its own consultants to conduct the Environmental Audit, and
Tenant shall pay Landlord's consultants' fees and all costs incurred by Landlord
in performing the Environmental Audit. The Environmental Audit shall include an
inspection of the Premises, interviews with the occupants of the Premises and
any other matters which the consultants believe, in the exercise of their
professional judgment, are necessary to ascertain whether the Premises are in
compliance with this Section, including the installation of monitoring wells,
and soils and water testing. Tenant shall fully cooperate with the consultants
and comply with all information requests. After the completion of the
Environmental Audit, a written report shall be prepared and copies shall be
distributed to both Landlord and Tenant.
If the Premises are not in compliance with this Section, Tenant shall
promptly take all action necessary to bring the Premises into compliance with
this Section, including all testing, removal and remediation.
33.5 Tenant's Indemnification. In addition to, and not in derogation
------------------------
of any other indemnification contained in the Lease, Tenant agrees to indemnify,
defend and hold harmless Landlord, its successors and assigns, and its and their
trustees, beneficiaries, directors, officers, shareholders, employees, agents,
and partners from all costs, expenses, damages, liabilities, claims, lines,
penalties, interest, judgments, and losses of any kind arising from or in any
way related to Tenant's or Tenant's Representatives' Handling of Hazardous
Materials or failure to comply in full with this Section (collectively,
"Environmental Losses"), including consequential damages, damages for personal
or bodily injury, property damage, damage to natural resources occurring on or
off the Premises, encumbrances, liens, costs and expenses of investigations,
monitoring, clean up, removal or remediation of Hazardous Materials, defense
costs of any claims (whether or not such claim is ultimately defeated), good
faith settlements, attorneys' and consultants' fees and costs, and losses
attributable to the diminution of value, loss of use or adverse effects on
marketability or use of any portion of the Premises, whether or not such
Environmental Losses are contingent or otherwise, matured or unmatured,
foreseeable or unforeseeable; provided, however, that Tenant shall have no
obligation to indemnify Landlord for any Hazardous Materials not introduced by
Tenant or its Representatives on or about the Property (such exclusion from
Tenant's indemnification obligations including, without limitation, any
Hazardous Materials
33.
<PAGE>
EXHIBIT 10.8
MASTER EQUIPMENT LEASE NO. 9955
Under this Master Equipment Lease No. 9955 (the "Lease"), dated as of
January 19, 1995, Phoenix Leasing Incorporated ("Lessor") hereby leases to
Connect, Inc. ("Lessee"), and Lessee hereby leases from Lessor, the equipment
(herein called "Equipment") which is described on the schedule attached hereto
or any subsequently-executed schedule entered into by Lessor and Lessee and
which incorporates this Lease by reference. Any such schedules shall
hereinafter individually be referred to as a "Schedule" and collectively be
referred to as the "Schedules." Lessor hereby leases the Equipment to Lessee
upon the following terms and conditions:
1. TERM OF AGREEMENT. The term of this Lease begins on the date set forth
above and shall continue thereafter and be in effect so long as and at any time
any Schedule entered into pursuant to this Lease is in effect. The Initial
Term and rent payable with respect to each leased item of Equipment shall be as
set forth in and as stated in the respective Schedule(s). The terms of each
Schedule hereto are subject to all conditions and provisions of this Lease as
may at any time be amended. Each Schedule shall constitute separate and
independent lease and contractual obligation of Lessee and shall incorporate
the terms and conditions of this Master Equipment Lease and any additional
provisions contained in such Schedule. In the event of a conflict between the
terms and conditions of this Lease and any additional provisions of such
Schedule, the additional provisions of such Schedule shall prevail with respect
to such Schedule only.
2. NON-CANCELLABLE LEASE. This Lease and any Schedule cannot be cancelled
or terminated except as expressly provided herein. This Lease (including all
Schedules to this Lease) constitutes a net lease and Lessee agrees that its
obligations to pay all rent and other sums payable hereunder (and under any
Schedule) and the rights of Lessor and assignee in and to such rent and other
sums, are absolute and unconditional and are not subject to any abatement,
reduction, setoff, defense, counterclaim or recoupment due or alleged to be due
to, or by reason of, any past, present or future claims which Lessee may have
against Lessor, any assignee, the manufacturer or seller of the Equipment, or
against any person for any reason whatsoever.
3. LESSOR COMMITMENT. So long as no Event of Default or event which with
the giving of notice or passage of time, or both, could become an Event of
Default has occurred or is continuing, Lessor agrees to lease to Lessee the
groups of Equipment described on each Schedule, subject to the following
conditions: (i) that in no event shall Lessor be obligated to lease Equipment
to Lessee hereunder where the aggregate purchase price of all Equipment leased
to Lessee hereunder would exceed $1,500,000; (ii) the amount of Equipment
purchased by Lessor at any one time shall be at least equal to $50,000 except
for a final advance which may be less than $50,000; (iii) Lessor shall not be
obligated to purchase Equipment hereunder after December 31, 1995; (iv) all
Lease documentation required by Lessor has been executed by Lessee or provided
by Lessee no later than January 19, 1995; (v) the equipment described on the
Schedule is acceptable to Lessor; (vi) with respect to each funding Lessee has
provided to Lessor each of the closing documents and other items described in
Exhibit A hereto (which documents shall be in form and substance acceptable to
Lessor) and which list may be modified for each subsequent funding; (vii) there
is no material adverse change in Lessee's condition, financial or otherwise, as
determined by Lessor,and Lessee so certifies, from (yy) the date of the most
recent financial statements delivered by Lessee to Lessor prior to execution of
this Lease, to (zz) the date of the proposed lease of the Equipment; (viii)
Lessee is performing according to its business plan referred to as "Income
Statement, Balance Sheet, Business Plan, and Cash Flow sheets dated January 20,
1994 for calendar year 1994 and the same for calendar year 1995, referred to as
"2nd Draft version dated
-1-
<PAGE>
November 28, 1994 ("Business Plan"), as may be amended from time to time in
form and substance acceptable to Lessor; (ix) Lessor or its agent has inspected
and placed identification labels on the Equipment; and (x) Lessor has received
in form and substance acceptable to Lessor: (a) Lessee's interim financial
statements signed by a financial officer of Lessee; and (b) evidence of Lessee's
$2.5 million cash position as of October 31, 1994.
4. NO WARRANTIES BY LESSOR. (a) Lessee has selected both (i) the Equipment
and (ii) the suppliers (herein called "Vendor") from whom Lessor is to purchase
the Equipment. LESSOR MAKES NO WARRANTY EXPRESS OR IMPLIED AS TO ANY MATTER
WHATSOEVER, INCLUDING THE CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY OR ITS
FITNESS FOR ANY PARTICULAR PURPOSE, AND AS TO LESSOR, LESSEE LEASES THE
EQUIPMENT "AS IS"AND WITH ALL FAULTS. (b) If the Equipment is not properly
installed, does not operate as represented or warranted by Vendor or is
unsatisfactory for any reason, Lessee shall make any claim on account thereof
solely against Vendor and shall, nevertheless, pay Lessor all rent payable under
this Lease, Lessee hereby waiving any such claims as against Lessor. Lessor
hereby agrees to assign to Lessee solely for the purpose of making and
prosecuting any said claim, to the extent assignable, all of the rights which
Lessor has against Vendor for breach of warranty or other representation
respecting the Equipment. Lessor shall have no responsibility for delay or
failure to fill the order. (c) Lessee understands and agrees that neither the
Vendor nor any salesman or other agent of the Vendor is an agent of Lessor. No
salesman or agent of Vendor is authorized to waive or alter any term or
condition of this Lease, and no representations as to the Equipment or any other
matter by the Vendor shall in any way affect Lessee's duty to pay the rent and
perform its other obligations as set forth in this Lease. (d) Lessee hereby
requests Lessor to purchase Equipment from Vendor and to lease Equipment to
Lessee on the terms and conditions of the Lease set forth herein. (e) Lessee
hereby authorizes Lessor to insert in this Lease and each Schedule hereto the
serial numbers and other identification data of the Equipment when determined by
Lessor.
5. LESSEE'S REPRESENTATIONS AND WARRANTIES. Lessee represents and warrants
that (a) it is a corporation in good standing under the laws of the state of its
incorporation, and duly qualified to do business in each state where the
Equipment will be located; (b) it has full authority to execute and deliver this
Lease and perform the terms hereof, and this Lease has been duly authorized and
constitutes valid and binding obligations of Lessee enforceable in accordance
with its terms; (c) this Lease will not contravene any law, regulation or
judgment affecting Lessee or result in any breach of any agreement or other
instrument binding on Lessee; (d) no consent of Lessee's shareholders or holder
of any indebtedness, or filing with, or approval of, any governmental agency or
commission, is a condition to the performance of the terms hereof; (e) there is
no action or proceeding pending or threatened against Lessee before any court or
administrative agency which might have a materially adverse effect on the
business, financial condition or operations of Lessee; (f) no deed of trust,
mortgage or third party interest arising through Lessee will attach to the
Equipment or the Lease; (g) the Equipment will remain at all times under
applicable law, removable personal property, free and clear of any lien or
encumbrance in favor of Lessee or any other person, notwithstanding the manner
in which the Equipment may be attached to any real property; (h) all credit,
financial and any other information submitted to Lessor herewith or any other
time is true and correct; and (i) Lessee has provided, or will provide if
requested, Lessee's tax identification number.
6. EQUIPMENT ORDERING. Lessee shall be responsible for all packing,
rigging, transportation and installation charges for the Equipment and Lessor
may separately invoice Lessee for such charges. Lessee has selected the
Equipment itself and shall arrange for delivery of Equipment so that it can be
accepted in accordance with Section 7
-2-
<PAGE>
hereof. Lessee hereby agrees to indemnify and hold Lessor harmless from any
claims, liabilities, costs and expenses, including reasonable attorneys' fees,
incurred by Lessor arising out of any purchase orders or assignments executed by
Lessor with respect to any Equipment or services relating thereto.
7. LESSEE ACCEPTANCE. Lessee shall return to Lessor the signed and dated
Acceptance Notice attached to each Schedule hereto (a) acknowledging the
Equipment has been received, installed and is ready for use and (b) accepting
it as satisfactory in all respects for the purposes of this Lease. Lessor is
authorized to fill in the Rent Start Date on each Schedule in accordance with
the foregoing.
8. LOCATION; INSPECTION; LABELS. Equipment shall be delivered to and shall
not be removed from the Equipment "Location" shown on each Schedule without
Lessor's prior written consent. Lessor shall have the right to inspect Equipment
at any reasonable time. Lessee shall be responsible for all labor, material and
freight charges incurred in connection with any removal or relocation of such
Equipment which is requested by the Lessee and consented to by Lessor, as well
as for any charges due to the installation or moving of the Equipment. The
rental payments shall continue during any period in which the Equipment is in
transit during a relocation. Lessor or its agent shall mark and label Equipment,
which labels shall state Equipment is owned by Lessor, and Lessee shall keep
such labels on the Equipment as labeled by Lessor or its agent.
9. EQUIPMENT MAINTENANCE. (a) General. Lessee will locate or base each
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item of Equipment where designated in an Acceptance Notice and will reasonably
permit Lessor to inspect such item of Equipment and its maintenance records.
Lessee will at its sole expense comply with all applicable laws, rules,
regulations, requirements and orders with respect to the use, maintenance,
repair, condition, storage and operation of each item of Equipment. Except as
required herein, Lessee will not make any addition or improvement to any item
of Equipment that is not readily removable without causing material damage to
any item or impairing its original value or utility. Any addition or
improvement that is so required or cannot be so removed will immediately become
the property of Lessor. (b) Service and Repair. With respect to computer
------------------
equipment, other than personal computers, Lessee has entered into, and will
maintain in effect, Vendor's standard maintenance contract or another contract
satisfactory to Lessor for a period equal to the term of each Schedule and
extensions thereto which provides for the maintenance of the Equipment and
repairs and replacement parts thereof in good condition and working order, all
in accordance with the terms of such maintenance contract. Lessee shall have
the Equipment certified for the Vendor's standard maintenance agreement prior
to delivery to Lessor upon expiration of this Lease. With respect to any other
Equipment, Lessee will, at its sole expense, maintain and service, and repair
any damage to, each item of Equipment in a manner consistent with prudent
industry practice and Lessee's own practice so that such item of Equipment is
at all times (i) in the same condition as when delivered to Lessee, except for
ordinary wear and tear, (ii) in good operating order for the function intended
by its manufacturer's warranties and recommendations.
10. LOSS OR DAMAGE. Lessee assumes the entire risk of loss to the Equipment
through use, operation or otherwise. Lessee hereby indemnifies and holds
harmless Lessor from and against all claims, loss of rental payments, costs,
damages, and expenses relating to or resulting from any loss, damage or
destruction of the Equipment, any such occurrence being hereinafter called a
"Casualty Occurrence." On the first rental payment date following such Casualty
Occurrence, or, if there is no such rental payment date, thirty (30) days after
such Casualty Occurrence, Lessee shall (i) repair the Equipment, returning it to
good operating condition or (ii) replace the Equipment with identical equipment
in good condition and repair, the title to which shall vest in Lessor and which
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<PAGE>
thereafter shall be subject to the terms of this Lease; or (iii) pay to Lessor
(a) any unpaid amounts relating to such Equipment due Lessor under this Lease up
to the date of the Casualty Occurrence, and (b) a sum equal to the Casualty
Value as set forth in the Casualty Value table attached to each Schedule hereto
for such Equipment. Upon the making of such payment, the term of this Lease as
to each unit of Equipment with respect to which the Casualty Value was paid
shall terminate.
11. GENERAL INDEMNITY. Lessee will protect, indemnify and save harmless
Lessor from and against all liabilities, obligations, claims, damages,
penalties, causes of action, costs and expenses, imposed upon or incurred by or
asserted against Lessor or any assignee of Lessor by Lessee or any third party
by reason of the occurrence or existence (or alleged occurrence or existence)
of any act or event relating to or caused by the Equipment, including but not
limited to, consequential or special damages of any kind, or any failure on the
part of Lessee to perform or comply with any of the terms of this Lease. In
the event that any action, suit or proceeding is brought against Lessor by
reason of any such occurrence, Lessee, upon request of Lessor, will at Lessee's
expense resist and defend such action, suit or proceeding or cause the same to
be resisted and defended by counsel designated and approved by Lessor.
Lessee's obligations under this Section 11 shall survive the expiration of this
Lease with respect to acts or events occurring or alleged to have occurred
prior to the return of the Equipment to Lessor at the end of the Lease term.
12. INSURANCE. Lessee at its expense shall keep the Equipment insured for
the entire term and any extensions of this Lease against all risks for the
value of the Equipment and in no event for less than the Casualty Value of such
Equipment as specified on Exhibit C. Such insurance shall contain insurer's
agreement to give thirty (30) days written notice to Lessor before cancellation
or material change of any policy of insurance, and shall provide for (a) loss
payable endorsement to Lessor or any assignee of Lessor, and (b) public
liability and property damage insurance in an amount not less than $3,000,000,
naming Lessor as additional insured. Lessee will provide Lessor and any
assignee of Lessor with a certificate of insurance from the insurer evidencing
Lessor's or such assignee's interest in the policy of insurance. Such
insurance shall cover any Casualty Occurrence to any unit of Equipment.
Notwithstanding anything in Section 10 or this Section 12 to the contrary, this
Lease and Lessee's obligations hereunder and under each Schedule shall remain
in full force and effect with respect to any unit of Equipment which is not
subject to a Casualty Occurrence. If Lessee fails to provide or maintain
insurance as required herein, Lessor shall have the right, but shall not be
obligated to obtain such insurance. In that event, Lessee shall pay to Lessor
the cost thereof.
13. TAXES. Lessee agrees to reimburse Lessor for, (or pay directly if
instructed by Lessor), and agrees to indemnify and hold Lessor harmless from,
all fees (including, but not limited to, license, documentation, recording and
registration fees), and all sales, use, gross receipts, personal property,
occupational, value added or other taxes, levies, imposts, duties, assessments,
charges, or withholdings of any nature whatsoever, together with any penalties,
fines, additions to tax, or interest thereon (all of the foregoing being
hereafter referred to as "Impositions") except same as may be attributable to
Lessor's income, arising at any time prior to or during the term of this Lease,
or upon termination or early termination of this Lease and levied or imposed
upon Lessor directly or otherwise by any Federal, state or local government in
the United States or by any foreign country or foreign or international taxing
authority upon or with respect to (i) the Equipment, (ii) the exportation,
importation, registration, purchase, ownership, delivery, leasing, possession,
use, operation, storage, maintenance, repair, return, sale, transfer of title,
or other disposition thereof, (iii) the rentals, receipts, or earnings arising
from the Equipment, or any disposition of the rights to such rentals, receipts,
or
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<PAGE>
earnings, (iv) any payment pursuant to this Lease, and (v) this Lease or the
transaction or any part thereof. Lessee's obligations under this Section 13
shall survive the expiration of this Lease with respect to acts or events
occurring or alleged to have occurred prior to the return of the Equipment to
Lessor at the end of the Lease term.
14. PAYMENT BY LESSOR. If Lessee shall fail to make any payment or
perform any act required hereunder, than Lessor may, but shall not be required
to, after such notice to Lessee as is reasonable under the circumstances, make
such payment or perform such act with the same effect as if made or performed by
Lessee. Lessee will upon demand reimburse Lessor for all sums paid and all costs
and expenses incurred in connection with the performance of any such act.
15. SURRENDER OF EQUIPMENT. Upon termination or expiration of this
Lease, with respect to each group of Equipment, Lessee will forthwith surrender
the Equipment to Lessor delivered in as good order and condition as originally
delivered, reasonable wear and tear excepted. Lessor may, at its sole option,
arrange for removal and transportation of the Equipment provided that Lessee's
obligations under Sections 10, 11 and 12 shall not be released. Lessee shall
bear all expenses of returning (which include, but are not limited to, the
de-installation, insurance, packaging and transportation of) the Equipment to
Lessor's location or other location within the United States as Lessor may
request. In the event Lessee fails to return the Equipment as directed above,
all obligations of Lessee under this Lease, including rental payments, shall
remain in full force and effect until Lessee returns the Equipment to Lessor.
16. ASSIGNMENT. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, LESSEE SHALL
NOT (a) ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE OR OTHERWISE DISPOSE OF THIS
LEASE, EQUIPMENT, OR ANY INTEREST THEREIN, OR (b) SUBLET OR LEND EQUIPMENT OR
PERMIT IT TO BE USED BY ANYONE OTHER THAN LESSEE OR LESSEE'S EMPLOYEES. LESSOR
MAY ASSIGN THIS LEASE OR GRANT A SECURITY INTEREST IN ANY OR ALL EQUIPMENT, OR
BOTH, IN WHOLE OR IN PART TO ONE OR MORE ASSIGNEES OR SECURED PARTIES WITHOUT
NOTICE TO LESSEE. If Lessee is given notice of such assignment it agrees to
acknowledge receipt thereof in writing and Lessee shall execute such additional
documentation as Lessor's assignee shall require. Each such assignee and/or
secured party shall have all of the rights, but none of the obligations, of
Lessor under this Lease, unless such assignee or secured party expressly agrees
to assume such obligations in writing. Lessee shall not assert against any
assignee and/or secured party any defense, counterclaim or offset that Lessee
may have against Lessor. Notwithstanding any such assignment, and providing no
Event of Default has occurred and is continuing, Lessor, or its assignees,
secured parties, or their agents or assigns, shall not interfere with Lessee's
right to quietly enjoy use of Equipment subject to the terms and conditions of
this Lease. Subject to the foregoing, this Lease inures to the benefit of and is
binding upon the successors and assignees of the parties hereto. Lessee
acknowledges that any such assignment by Lessor will not materially change
Lessee's duties or obligations under the Lease or increase any burden of risk on
Lessee.
17. DEFAULT. (a) Event of Default. Any of the following events or
----------------
conditions shall constitute an "Event of Default" hereunder: (i) Lessee's
failure to pay any monies due to Lessor hereunder or under any Schedule beyond
the fifth (5th) day after the same is due; (ii) Lessee's failure to comply with
its obligations under Section 12 or Section 16; (iii) Lessee's failure to
comply with or perform any term, covenant, condition, warranty or
representation of this Lease or any Schedule hereto or under any other
agreement between Lessee and Lessor or under any lease of real property
covering the location of Equipment if such failure to comply or perform is not
cured by Lessee within five (5) days of receipt of notice thereof; (iv) seizure
of the Equipment under legal process; (v) the filing by or against Lessee of a
petition for reorganization or liquidation under the
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<PAGE>
Bankruptcy Code or any amendment thereto or under any other insolvency law
providing for the relief of debtors; (vi) the voluntary or involuntary making of
an assignment of a substantial portion of its assets by Lessee, or any guarantor
("Guarantor") under any guaranty executed in connection with this Lease
("Guaranty"), for the benefit of its creditors, the appointment of a receiver or
trustee for Lessee or any Guarantor for any of Lessee's or Guarantor's assets,
the institution by or against Lessee or any Guarantor of any formal or informal
proceeding for dissolution, liquidation, settlement of claims against or winding
up of the affairs of Lessee or any Guarantor; or (vii) the making by Lessee or
any Guarantor of a transfer of all or a material portion of Lessee's or
Guarantor's assets or inventory not in the ordinary course of business.
(b) Remedies. If any Event of Default shall have occurred:
--------
(i) Lessor may proceed by appropriate court action or actions either
at law or in equity to enforce performance by Lessee, of the applicable
covenants of this Lease, or to recover damages therefor; or
(ii) Lessee will, without demand, on the next rent payment date
following the Event of Default, pay to Lessor as liquidated damages which the
parties agree are fair and reasonable under the circumstances existing at the
time this Lease is entered into, and not as a penalty, an amount equal to the
Casualty Value of the Equipment set forth in Exhibit C together with any rent or
other amounts past due and owing by Lessee hereunder; and
(iii) Lessor may, without notice to or demand upon Lessee;
(a) Take possession of the Equipment and lease the same or
any portion thereof, for such period, amount, and to such entity as Lessor shall
elect. The proceeds of such lease will be applied by Lessor (A) first, to pay
all costs and expenses, including reasonable legal fees and disbursements,
incurred by Lessor as a result of the default and the exercise of its remedies
with respect thereto, (B) second, to pay Lessor an amount equal to any unpaid
rent or other amounts past due and payable plus the Casualty Value, to the
extent not previously paid by Lessee, and (C) third, to reimburse Lessee for the
Casualty Value to the extent previously paid. Any surplus remaining thereafter
will be retained by Lessor.
(b) Take possession of the Equipment and sell the same or any
portion thereof at public or private sale and without demand or notice of
intention to sell. The proceeds of such sale will be applied by Lessor (A)
first, to pay all costs and expenses, including reasonable legal fees and
disbursements, incurred by Lessor as a result of the default and the exercise of
its remedies with respect thereto, (B) second, to pay Lessor an amount equal to
any unpaid rent or other amounts past due and payable plus the Casualty Value,
to the extent not previously paid by Lessee, and (C) third, to reimburse Lessee
for the Casualty Value to the extent previously paid by Lessee. Any surplus
remaining thereafter will be retained by Lessor.
(c) Take possession of the Equipment and hold and keep idle
the same or any portion thereof.
Lessee agrees to pay all internal and out-of-pocket costs
of Lessor related to the exercise of its remedies, including direct costs of its
in-house counsel and out-of-pocket legal fees and expenses. At Lessor's request,
Lessee shall assemble the Equipment and make it available to Lessor at such
location as Lessor may designate. Lessee waives any right it may have to redeem
the Equipment.
-6-
<PAGE>
Repossession of any or all Equipment shall not terminate this Lease or
any Schedule unless Lessor notifies Lessee in writing. Any amount required to be
paid under this Section shall be increased by a service charge of 1.5% per
month, or the highest rate of interest permitted by applicable law, whichever is
less, accruing from the date the Casualty Value or other amounts are payable
hereunder until such amounts are paid.
None of the above remedies is intended to be exclusive, but each is
cumulative and in addition to any other remedy available to Lessor, and all may
be enforced separately or concurrently.
In addition to the foregoing remedies, if an Event of Default hereunder
shall have occurred and be continuing, Lessee shall promptly provide Lessor
with copies of the minutes of each meeting of Lessee's board of directors or
any committee thereof and copies of each written consent taken by the board or
such committees.
18. LATE PAYMENTS. A service charge of 1.5% per month, or the highest
service charge permitted by applicable law, whichever is less, shall be paid by
Lessee to Lessor on all funds owed Lessor by Lessee. If such funds have not
been received by Lessor at Lessor's place of business or by Lessor's designated
agent by the date such funds are due under this Lease, Lessor shall bill Lessee
for such charges. Lessee acknowledges that invoices for rentals due hereunder
are sent by Lessor for Lessee's convenience only. Lessee's non-receipt of an
invoice will not relieve Lessee of its obligation to make rent payments
hereunder.
19. LESSOR'S EXPENSE. Lessee shall pay Lessor all costs and expenses
including reasonable attorney's fees and the fees of the collection agencies,
incurred by Lessor in enforcing any of the terms, conditions or provisions
hereof.
20. OWNERSHIP; PERSONAL PROPERTY. The Equipment shall be and remain
personal property of Lessor, and Lessee shall have no right, title or interest
therein or thereto except as expressly set forth in this Lease, notwithstanding
the manner in which it may be attached or affixed to real property, and upon
termination or expiration of the Lease term, Lessee shall have the duty and
Lessor shall have the right to remove the Equipment from the premises where the
same be located whether or not affixed or attached to the real property or any
building, at the cost and expense of Lessee.
21. ALTERATIONS; ATTACHMENTS. No alterations or attachments shall be
made to the Equipment without Lessor's prior written consent, which shall not be
given for changes that will affect the reliability and utility of the Equipment
or which cannot be removed without damage to the Equipment, or which in any way
affect the value of the Equipment for purposes of resale or re-lease.
22. FINANCING STATEMENT. Lessee will execute financing statements
pursuant to the Uniform Commercial Code. Lessee authorizes Lessor to file
financing statements signed only by Lessor (where such authorization is
permitted by law) at all places where Lessor deems necessary.
23. MISCELLANEOUS. (a) Lessee shall provide Lessor with such corporate
resolutions, financial statements and other documents as Lessor shall request
from time to time. (b) Lessee represents that the Equipment is being leased
hereunder for business purposes. (c) Time is of the essence with respect to
this Lease. (d) Lessee shall keep its books and records in accordance with
generally accepted accounting principles and
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<PAGE>
practices consistently applied and shall deliver to Lessor its annual audited
financial statements, and specifically, Lessee shall provide its annual audited
financial statements for fiscal year 1994 within 120 days after the end of that
year, unaudited monthly financial statements to include any financial
information given to Lessee's Board of Directors, and signed by an officer of
Lessee and such other unaudited financial statements as may be reasonably
requested by Lessor. (e) Any action by Lessee against Lessor for any default by
Lessor under this Lease, including breach of warranty or indemnity, shall be
commenced within one (1 ) year after any such cause of action accrues.
24. NOTICES. All notices hereunder shall be in writing, by registered
mail, and shall be directed, as the case may be, to Lessor at 2401 Kerner
Boulevard, San Rafael, California 94901, Attention: Lease Administration, and to
Lessee at 515 Ellist Street Mountain View, CA 94043-2242, Attention: Emily
Martinez Stein.
25. ENTIRE AGREEMENT. Lessee acknowledges that Lessee has read this
Lease, understands it and agrees to be bound by its terms, and further agrees
that it and each Schedule constitute the entire agreement between Lessor and
Lessee with respect to the subject matter hereof and supersedes all previous
agreements, promises, or representations. The terms and conditions hereof shah
prevail notwithstanding any variance with the terms of any purchase order
submitted by the Lessee with respect to any Equipment covered hereby.
26. AMENDMENT. This Lease may not be changed, altered or modified
except by an instrument in writing signed by an officer of the Lessor and the
Lessee.
27. WAIVER. Any failure of Lessor to require strict performance by
Lessee or any waiver by Lessor of any provision herein shall not be construed as
a consent or waiver of any other breach of the same or any other provision.
28. SEVERABILITY. If any provision of this Lease is held invalid, such
invalidity shall not affect any other provisions hereof.
29. JURISDICTION AND WAIVER OF JURY TRIAL. This Lease shall be
governed by and construed under the laws of the State of California. It is
agreed that exclusive jurisdiction and venue for any legal action between the
parties arising out of this Lease shall be in the Superior Court for Marin
County, California, or, in cases where Federal diversity jurisdiction is
available, in the United States District Court for the Northern District of
California. LESSEE, TO THE EXTENT IT MAY LAWFULLY DO SO, HEREBY WAIVES ITS RIGHT
TO TRIAL BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS LEASE, ANY
SCHEDULE, OR ANY AGREEMENT EXECUTED IN CONNECTION HEREWITH.
30. NATURE OF TRANSACTION. Lessor makes no representation whatsoever,
express or implied, concerning the legal character of the transaction evidenced
hereby, for tax or any other purpose.
31. SECURITY INTEREST. (a) One executed copy of the Lease will be
marked "Original" and all other counterparts will be duplicates. To the extent,
if any, that this Lease constitutes chattel paper (as such term is defined in
the Uniform Commercial Code as in effect in any applicable jurisdiction) no
security interest in the lease may be created in any documents other than the
"Original." (b) There shall be only one original of each Schedule and it shall
be marked "Original," and all other counterparts will be duplicates. To the
extent, if any, that any Schedule(s) to this Lease constitutes chattel
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<PAGE>
paper (or as such term is defined in the Uniform Commercial Code as in effect in
any applicable jurisdiction) no security interest in any Schedule(s) may be
created in any documents other than the "Original."
32. SUSPENSION OF OBLIGATIONS. The obligations of Lessor hereunder
will be suspended to the extent that it is hindered or prevented from complying
therewith because of labor disturbances, including but not limited to strikes
and lockouts, acts of God, fires, storms, accidents, failure of the manufacturer
to deliver any item of Equipment, governmental regulations or interference, or
any cause whatsoever not within the sole and exclusive control of Lessor.
33. COMMITMENT FEE. Lessee has paid to Lessor a commitment fee
("Fee") of $15,000. The Fee shall be applied by Lessor first to reimburse Lessor
for all out-of-pocket UCC search costs, inspections and appraisal fees incurred
by Lessor, and then proportionally to the first month's rent for each Schedule
hereunder in the proportion that the purchase price of the Equipment leased
pursuant to the Schedule bears to Lessor's entire commitment. However, the
portion of the Fee which is not applied to rental shall be non-refundable except
if Lessor defaults in its obligations pursuant to Section 3.
37. FINANCE LEASE. The parties agree that this lease is a "Finance
Lease" as defined by Section 10-103(a)(7) of the California Commercial Code
(Cal.Com.C.). Lessee acknowledges either (a) that Lessee has reviewed and
approved any written Supply Contract (as defined by Cal.Com.C. Section
10-103(a)(25)) covering Equipment purchased from the "Supplier" (as defined by
Cal.Com.C. Section 10-103(a)(24)) thereof for lease to Lessee or (b) that Lessor
has informed or advised Lessee, in writing, either previously or by this Lease
of the following: (i) the identity of the Supplier; (ii) that the Lessee may
have rights under the Supply Contract; and (iii) that the Lessee may contact the
Supplier for a description of any such rights Lessee may have under the Supply
Contract. Lessee hereby waives any rights and remedies Lessee may have under
Cal.Com.C. Sections 10-508 through 522.
IN WITNESS WHEREOF, the parties hereto have executed this Lease.
PHOENIX LEASING INCORPORATED CONNECT, INC.
By: /s/ PHOENIX LEASING INCORPORATED By: /s/ PAUL COMMONS
-------------------------------- --------------------------------
Title: VP Title: VP
------------------------------ ------------------------------
Headquarters Location:
515 Ellis Street
------------------------------------
Street
Mountain View, CA 94043-2242
------------------------------------
City, State, Zip Code
Santa Clara
------------------------------------
County
Exhibit A - Closing Memorandum
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<PAGE>
CALIFORNIA ALL-PURPOSE ACKNOWLEDGMENT
State of CALIFORNIA
----------
County of SANTA CLARA
-----------
On 01/30/1995 before me, Joseph F. Rose, Notary Public.
---------- ------------------------------
DATE NAME, TITLE OF OFFICER-E.G.
"JANE DOE, NOTARY PUBLIC"
personally appeared Paul Commons,
-----------------------------------
NAME(S) OF SIGNER(S)
[X] personally known to me - OR - [ ] proved to me on the basis of
sastisfactory evidence to be the person
whose name is subscribed to the within
instrument and acknowledged to me that
he executed the same in his authorized
capacity, and that by his signature on
[NOTARY PUBLIC SEAL APPEARS HERE] the instrument the person or the entity
upon behalf of which the person acted,
executed the instrument.
WITNESS my hand and official seal.
/s/ Joseph F. Rose
---------------------------------------
SIGNATURE OF NOTARY
================================= OPTIONAL ===================================
Though the data below is not required by law, it may prove valuable to persons
relying on the document and could prevent fraudulent reattachment of this form.
CAPACITY CLAIMED BY SIGNER DESCRIPTION OF ATTACHED DOCUMENT
[ ] INDIVIDUAL
[X] CORPORATE OFFICER
C.F.O. - Secretary Master Equipment Lease
- -------------------------------- -------------------------------------
TITLE(S) TITLE OR TYPE OF DOCUMENT
[ ] PARTNER(S) [ ] LIMITED #9955 - Duplicate
[ ] GENERAL
Nine (9)
[ ] ATTORNEY-IN-FACT -------------------------------------
[ ] TRUSTEE(S) NUMBER OF PAGES
[ ] GUARDIAN/CONSERVATOR
[ ] OTHER:______________________ January 30, 1995
____________________________ -------------------------------------
____________________________ DATE OF DOCUMENT
SIGNER IS REPRESENTING:
NAME OF PERSON(S) OR ENTITY(IES)
Connect, Inc.
- -------------------------------- ---------- None -------------------
Mountain View, CA 94043 -------------------------------------
- -------------------------------- SIGNER(S) OTHER THAN NAMED ABOVE
<PAGE>
Exhibit A
to MASTER EQUIPMENT LEASE
Dated January 19, 1995
CLOSING MEMORANDUM
------------------
1.* Duly executed Master Equipment Lease marked "Original."
2. Duly executed Schedule marked "Original."
3. Duly executed Certificate of Acceptance.
4. Insurance Certificates.
5.* Resolutions of Lessee's Board of Directors, including an incumbency
certificate.
6.* Certificate from the Secretary of State of Lessee's state of
incorporation, and from the state in which Lessee's chief executive
office is located, if different, stating the Borrower is in good
standing or is authorized to transact business, as the case may be,
dated not more than thirty days prior to the first purchase of
Equipment.
7. Agreement to Allow Removal of Personal Property.**
8. Purchase Agreement Assignment.
9. UCC Financing Statements.
10. Bill of Sale (for Sale-Leaseback Equipment).
11. UCC search.
12.* Payment of Commitment Fee.
13. Equipment List, in form and substance satisfactory to Lessor.
14. Certificate of Chief Financial Officer stating that no event of default
has occurred, there is no material adverse change in the financial
condition of Lessee and that the Equipment is free of any encumbrances.
15. California Civil Code Section 3440 Filing and Published Notice.
16. See Section 3 of Master Equipment Lease for additional preconditions to
closing.
* First Schedule Only
** Required if any Equipment is a fixture, i.e., attached to real property.
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<PAGE>
EXHIBIT 10.15
May 10, 1995
Thomas P. Kehler
President & CEO
CONNECT, Inc.
515 Ellis Street
Mountain View, CA 94043-2242
Dear Tom:
Hambrecht & Quist Incorporated ("Hambrecht & Quist" or the "Lead Placement
Agent") and Volpe, Welty & Company ("Volpe, Welty" or the "Co-Placement Agent")
are pleased to represent CONNECT, Inc. ("CONNECT" or the "Company") in
connection with the proposed private placement of a new issue of Preferred Stock
or a similar financial security (the "Securities"). This letter sets forth the
arrangements under which the Company, the Lead Placement Agent and the Co-
Placement Agent (together the "Placement Agents") have agreed to work in
connection with the proposed sale of the Securities. This letter terminates and
supersedes all previous agreements between and among the Company, Hambrecht &
Quist and Volpe, Welty (including the letter dated March 29, 1995 between the
Company and Volpe, Welty), and the Company has no financial or other obligations
to Hambrecht & Quist or Volpe, Welty under those prior agreements.
The Placement Agents will use their best efforts to place approximately $10
million to $15 million of the Securities with strategic or financial investors
at such price and on such terms and conditions to which the Company and the
Placement Agents mutually agree. It is understood and agreed that under no
circumstances shall the Placement Agent or the Co-Placement Agent be liable for
failure to obtain or produce the proposed financing.
In connection with the proposed placement of the Securities, the Company agrees
to pay to the Placement Agents at each closing of the sale of Securities a cash
fee equal to 5.0% of the value of the Securities sold at such closing plus
warrants to purchase common stock of the Company equal in value to 2.0% of the
value of the Securities sold at the same exercise price per share as the
Securities sold. In the event that AT&T Corporation ("AT&T") purchases any of
the Securities, the Company will pay the Placement Agents a cash fee equal to
2.5% of the value of the Securities purchased by AT&T plus warrants to purchase
common stock equal in value to 2.0% of the value of the Securities purchased by
AT&T at the same exercise price per share as the Securities purchased by AT&T.
In lieu of an initial retainer, at the closing for the sale of the Securities,
the Company agrees to pay the Placement Agents an incremental amount of $50,000
in addition to the aforementioned fees. The Placement Agents will not receive a
fee with respect to any Securities purchased or bridge loans held and converted
by existing investors in the Company. Notwithstanding the foregoing, the
minimum aggregate consideration, in the event of a closing, to be paid to the
Placement Agents in connection with this engagement shall not be less than
$375,000. In the event the Placement Agents obtain bonafide "indications of
interest" from prospective investors, and the Company elects not to proceed with
a closing for the sale of the Securities, the Company agrees to pay the
Placement Agents a fee equal to the lesser of 5.0% of the value of the
Securities for which "indications of interest" have been received and $375,000.
<PAGE>
For the purposes hereof, "indications of interest" shall be evidenced by a term
sheet (or comparable materials) submitted or approved by prospective investors
or similar written evidence of investment interest customary in private
placement transactions involving financial or strategic investors, such terms to
be generally agreed upon by the Company and the Placement Agents.
Hambrecht & Quist and Volpe, Welty agree that the initial retainer and all other
fees, as described above and payable in connection with the proposed placement
are to be split equally between the Placement Agent and the Co-Placement Agent.
All fees will be payable to Hambrecht & Quist which, upon receipt of such fees,
shall promptly pay Volpe, Welty 50% of the amount received. The Company agrees
to satisfy any commitment, contract or agreement with respect to any other
engagements, separate and apart from any fees payable to the Placement Agents.
In the event that the Company pursues an initial public offering (an "IPO") of
its Common Stock, CONNECT hereby grants to Hambrecht & Quist the option to serve
as the lead managing underwriter and to Volpe, Welty the option to serve as the
co-managing underwriter of such an offering. Any such offering will be pursuant
to an underwriting agreement consistent with those typically employed by major
bracket underwriters.
In the event the Company is acquired by or merges with another corporation
instead of completing the proposed placement, the Company agrees to pay the
Placement Agents a cash fee for its services equal to the greater of (i) the fee
that the Placement Agents would have earned for the proposed placement, taking
into consideration the "indications of interest" received to the date of such
acquisition or merger and (ii) a fee set forth in Exhibit B hereto for acting as
financial advisor to the Company in connection with such acquisition or merger.
Notwithstanding the foregoing, in the event the Company is acquired by AT&T, the
Placement Agents shall receive a cash fee of $375,000.
At regular intervals, the Company will promptly reimburse the Placement Agents
for all out-of-pocket expenses, including the reasonable fees and expenses of
counsel to the Placement Agents; provided, however, that such expenses shall not
exceed $20,000 in the aggregate without the prior consent of the Company. It is
understood that Hambrecht & Quist shall have no responsibility for the legal
fees and expenses incurred through March 31, 1995, whether incurred in
connection with a potential IPO or sale of the Company and whether incurred on
behalf of the Company or any other financial advisor to the Company. As is
customary in private placements, the Company will also pay the fees and expenses
of one counsel for the purchasers of the Securities, such counsel to be mutually
acceptable to the Company and the Placement Agents.
The Company represents and agrees that it will not, directly or indirectly,
offer any of the Securities for sale to, or solicit any offers to buy from, any
person or persons otherwise than through the Placement Agents.
The Company hereby authorizes the Placement Agents to transmit to the
prospective purchasers of the Securities a Confidential Private Placement
Memorandum with attached exhibits and such supplements as may from time to time
be prepared or approved by the Company (collectively, the "Memorandum"). The
Memorandum will contain information and financial data concerning the Company
and will be prepared, reviewed, and approved by the management of the Company.
The documents comprising the Memorandum are the only documents that are to be
delivered to the prospective purchasers by the Placements Agents and the Company
in connection with the offering of the Securities.
<PAGE>
The Placement Agents agree not to distribute the Memorandum to any prospective
investors that the Company has requested not to be contacted. The Placement
Agents intend to inform all recipients of the Memorandum that, by accepting the
Memorandum, such recipient agrees to maintain in strict confidence the contents
of the Memorandum and all other confidential information regarding the Company.
The Company represents and warrants that the Memorandum 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, in light of the
circumstances under which they were made, not misleading. The Company agrees to
advise the Placement Agents immediately of the occurrence of any event or any
other change known to the Company which results in the Memorandum containing an
untrue statement of a material fact or omitting to state a material fact
required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading. The Company agrees to indemnify each of the Placement Agent and the
Co-Placement Agent in accordance with the Standard Form of Indemnification
Agreement set forth as Exhibit A hereto.
The Company agrees that the Placement Agents shall be entitled to rely upon all
reports of the Company and information, whether written or oral, supplied to the
Placement Agents by or on behalf of the Company, and the Placement Agents shall
not in any respect be responsible for the accuracy or completeness of any such
report or information or assume any obligation to verify the same. The
Placement Agents will not make any representation to any person which is
materially different from the information contained in the Memorandum.
The Placement Agent and the Co-Placement Agent may not, without their prior
written consent, be quoted or referred to in any document, release or
communication prepared, issued or transmitted by the Company (including any
entity controlled by, or under common control with, the Company and any
director, officer, employee or agent thereof). The Company agrees that the
Placement Agents shall have the right to place advertisements in financial and
other newspapers and journals at their own expense describing their services to
the Company hereunder subject to the Company's prior approval which shall not be
unreasonably withheld.
This agreement may be terminated by the Company and each of the Placement Agents
with or without cause, effective 20 days following receipt by the non-
terminating party of written notice of such termination. The Lead Placement
Agent or Co-Placement Agent may terminate its role in this agreement at any time
and in so doing will not terminate this agreement between the remaining parties.
Any such termination by the Company, the Placement Agent or the Co-Placement
Agent shall not affect the compensation, reimbursement or indemnification
provisions for any of the parties set forth herein, all of which will remain in
full force and effect. In addition, if any person introduced to the Company by
the Placement Agents during the term of this engagement purchases Securities
during the 12-month period following termination of this agreement, the Company
shall pay in the same manner the Placement Agents upon the closing of such sale,
a cash fee equal to the amount that would be payable had this agreement not been
terminated.
If the foregoing correctly sets forth our understanding, please so indicate by
executing this letter, together with the enclosed duplicate originals, in the
space indicated and returning two of these original letters to Hambrecht & Quist
and one original letter to Volpe, Welty. By so doing, the Company represents
and warrants that it has obtained, or within 15 calendar days will obtain,
<PAGE>
Board of Directors or other approval of this agreement necessary to cause this
agreement to be duly authorized, executed and delivered by the Company.
This agreement shall be binding upon the Company, the Placement Agent and the
Co-Placement Agent and their respective successors and assigns and shall be
governed by and construed in accordance with the laws of the State of California
without giving effect to the conflicts of laws principles hereof.
We look forward to working with you and your management team to conclude a
successful financing.
Cordially,
HAMBRECHT & QUIST INCORPORATED VOLPE, WELTY & COMPANY
/s/ Cristina M. Morgan /s/ Thomas S. Volpe
- ---------------------------- ---------------------------
By: Cristina M. Morgan By: Thomas S. Volpe
Title: Managing Director Title: General Partner
Accepted and agreed as of _____________, 1995:
CONNECT, INC.
/s/ Thomas P. Kehler
<PAGE>
MUTUAL RELEASE
This Mutual Release ("Agreement") is made by and between Connect,
Inc., a California corporation (the "Company"), and Hambrecht & Quist.
("H & Q").
WHEREAS, the Company and H & Q entered into an engagement letter dated
as of May 10, 1995 (the "Engagement Letter"), pursuant to which H & Q agreed to
perform certain services for the Company.
The Company and H & Q have mutually agreed to release each other from
any claims arising from or related to the Engagement Letter.
In consideration of the mutual promises made herein, the Company and H
& Q (collectively referred to as the "Parties") hereby agree as follows:
1. Release of Claims. Each of the parties agrees that the
-----------------
provisions of this Mutual Release represent full consideration for settlement in
full of all outstanding obligations owed to the other party. The Company and H &
Q, on behalf of themselves, and their respective executors, officers, directors,
investors, shareholders, administrators, predecessor and successors, and
assigns, hereby fully and forever release each other and their respective
executors, officers, directors, investors, shareholders, administrators,
predecessor and successors, and assigns, of and from any claim, duty, obligation
or cause of action relating to any matters of any kind, whether presently known
or unknown, suspected or unsuspected, that any of them may possess arising from
any omissions, acts or facts that have occurred up until and including the
effective date of this Agreement including, without limitation:
(a) any and all claims relating to or arising from the Engagement
Letter relating to the obligation of the Company to have H & Q act as an
underwriter for the Company's initial public offering, and this release includes
a release by H & Q of any such obligation of the Company;
(b) any and all claims for breach of contract, both express and
implied; breach of a covenant of good faith and fair dealing, both express and
implied; negligent or intentional misrepresentation; negligent or intentional
interference with contract or prospective economic advantage, and defamation;
(c) any and all claims for violation of any foreign, federal, state
or municipal statute; and
(d) any and all claims for attorneys' fees and costs.
The Company and H & Q agree that the release set forth in this section
shall be and remain in effect in all respects as a complete general release as
to the matters released. This release does not extend to any obligations
incurred under this Agreement or under
<PAGE>
any agreements relating to the ownership by H & Q and its affiliates of
securities of the Company (the "Equity Agreements") or to the Company's
indemnification obligations under the Engagement Letter.
2. No Admission of Liability. The Parties understand and
-------------------------
acknowledge that this Agreement constitutes a compromise and settlement. No
action taken by the Parties hereto, or either of them, either previously or in
connection with this Agreement shall be deemed or construed to be (a) an
admission of the truth or falsity of any claims heretofore made or (b) an
acknowledgment or admission by either party of any fault or liability whatsoever
to the other party or to any third party.
3. Miscellaneous. In the event that anyprovision hereof becomes
-------------
or is declared by a court of competent jurisdiction to be illegal, unenforceable
or void, this Agreement shall continue in full force and effect without said
provision. This Agreement represents the entire agreement and understanding
between the Company and H & Q concerning the Engagement Letter, and supersedes
and replaces any and all prior agreements and understandings concerning the
Company's relationship with H & Q (other than the Equity Agreements). This
Agreement shall be governed by the laws of the State of California. This
Agreement may be executed in counterparts, and each counterpart shall have the
same force and effect as an original and shall constitute an effective, binding
agreement on the part of each of the undersigned.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
respective dates set forth below.
Dated: June 6, 1996 Connect, Inc.
By: /s/ Thomas P. Kehler
--------------------
Name: Thomas P. Kehler
Title: Pres. & CEO
Dated: June 5, 1996 Hambrecht & Quist LLC
By: /s/ Cristina M. Morgan
----------------------
Name: Crristina M. Morgan
Title: Managing Director
-7-
<PAGE>
EXHIBIT 10.20
CONSULTING AGREEMENT
--------------------
THIS AGREEMENT, made and entered into as of this 9th day of March,
--- -----
1992, by and between CONNECT, INC., a California corporation (the "Company"),
and QUAESTUS LIMITED PARTNERSHIP, a Wisconsin limited partnership ("QLP").
W I T N E S S E T H :
WHEREAS, QLP has provided the Company and its affiliates with
consulting services in connection with business and financial planning; and
WHEREAS, the Company desires to retain QLP to provide consulting
services in the future, and QLP is willing to be so retained.
NOW,THEREFORE, in consideration of the mutual promises hereinafter set
forth, the parties hereby agree as follows:
1. Prior Services. The Company hereby acknowledges that QLP has
--------------
rendered valuable consulting services to the Company in connection with business
and financial planning. In consideration therefor, the Company has this day
issued to QLP 661,600 shares of its Series C Preferred Stock and paid the sum of
$25,500 to QLP. QLP acknowledges that the foregoing consideration is full
compensation for the services previously rendered by QLP.
2. Future Services. During the term of this Agreement QLP agrees to
---------------
make its personnel available to the Company to provide consultation regarding
business and financial planning. QLP personnel will not be obligated to provide
more than a total of ten (10) hours per week of services hereunder. All
services will be provided at the reasonable convenience of QLP personnel, it
being understood that QLP personnel may have other activities of an equal or
greater priority. Services performed by QLP personnel in the capacity of a
member of the Board of Directors of the Company or one of its affiliates will
not be considered to constitute services under this Agreement.
3. Fees. In consideration of the services to be provided hereafter
----
by QLP personnel, the Company will pay QLP a monthly fee of $6,500, payable in
advance on the first day of every month beginning March 1, 1992 (with the fee
for the month of February, 1992 to be pro-rated based on the number of days
elapsed and to be payable upon execution hereof).
<PAGE>
4. Term. This Agreement viii take effect as of the date hereof and
----
will continue through March 31, 1997, provided that QLP may at any time elect to
terminate this Agreement upon less than thirty (30) days prior written notice to
the Company.
5. Expense Reimbursement. The Company will pay or reimburse QLP upon
---------------------
demand for all out-of-pocket expenses incurred by QLP or QLP personnel in
rendering services hereunder. As a condition to receipt of reimbursement. QLP
will be required to submit to the Company reasonable substantiation that the
amount involved was expended and related to services rendered under this
Agreement.
6. Independent Contractor. QLP is an independent contractor and QLP
----------------------
personnel are not employees of the Company or affiliates. QLP will establish
the time and manner in which its personnel carry out QLP's obligations under
this Agreement.
7. Exculpatory Clause. Neither QLP nor its personnel will be liable
------------------
for any advice given, or any other act or omission, except for willful
misconduct The Company will indemnify and hold QLP and its personnel harmless,
upon demand, from and against any and all claims, obligations, liabilities,
costs and expenses (including actual attorneys' fees and expenses) incurred by
them as a result of, or in connection with, any services provided hereunder
(including without limitation advice given), except if caused solely by their
willful misconduct.
8. Assignment. This Agreement may not be assigned by the Company
----------
without the prior written consent of QLP.
9. Interest; Attorneys' Fees. All delinquent payments be made by the
-------------------------
Company hereunder will bear interest at the maximum rate permitted by law for
like indebtedness (or if no maximum rate is applicable, at the rate of 18% per
annum). The Company will be required to reimburse QLP for its costs and
expenses (including actual attorneys' fees and expenses) incurred in enforcing
QLP's rights under this Agreement.
10. Effect of Waiver. The waiver by a party of a breach of any
----------------
provision of this Agreement shall not be deemed a waiver of any other or
subsequent breach.
11. Notice. Any notice required or permitted to be given under this
------
Agreement shall be in writing and shall be hand-delivered or mailed, postage
prepaid, to the principal office of the Company or QLP, as the case may be.
2
<PAGE>
12. Governing Law. This Agreement and all questions arising in
-------------
connection herewith shall be governed by the internal laws of the State of
Wisconsin.
13. Severability. In the event that any portion of this Agreement
------------
shall be held to be invalid or unenforceable for any reason whatsoever, such
invalidity or unenforceability shall not affect any other portion of this
Agreement which shall remain in full force and effect.
14. Entire Agreement . All understandings and agreements between the
----------------
parties relating to the subject matter hereof are merged in this Agreement,
which alone fully and completely expresses the agreement of the parties relating
to such subject matter.
IN WITNESS WHEREOF, the parties have executed this consulting
Agreement as of the day, month and year first above written.
CONNECT, INC.
By /s/ MICHAEL MULLER
------------------
Michael Muller, President
QUAESTUS LIMITED PARTNERSHIP
By /s/ RICHARD WEENING
-------------------
(Title)
President, RPI Holdings, Inc.,
general partner
3
<PAGE>
EXHIBIT 10.21
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES
MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE
PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT
NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO
THE SECRETARY OF THE CORPORATION AT ITS PRINCIPAL EXECUTIVE OFFICE.
Issued:_____________ CSW-_____
CONNECT, INC.
COMMON STOCK WARRANT
1. Number and Price of Shares Subject to Warrant.
---------------------------------------------
(a) This Common Stock Warrant (the "Warrant") is executed and delivered
by Connect, Inc., a California corporation (the "Company"), in connection with
the transactions contemplated under that certain Series F Stock Purchase
Agreement, dated as of the date hereof (the "Agreement"), between the Company
and the purchasers named therein. All provisions of the Agreement applicable
hereto are incorporated herein by reference.
(b) Subject to the terms and conditions herein set forth, ___________
(the "Purchaser") is entitled to purchase from the Company at any time at the
option of Purchaser, up to _____________ shares (which number of shares is
subject to adjustment as described below) of fully paid and non-assessable
shares of Common Stock of the Company upon surrender hereof at the principal
office of the Company and, at the election of the holder hereof upon payment of
the purchase price at said office in cash or by check.
(c) Subject to adjustment as hereinafter provided, the purchase price of
one share of Common Stock (or such securities as may be substituted for one
share of Common Stock pursuant to the provisions hereinafter set forth) shall be
$1.32 per share. The purchase price of one share of Common Stock (or such
securities as may be substituted for one share of Common Stock pursuant to the
provisions hereinafter set forth) payable from time to time upon the exercise of
this Warrant (whether such price be the price specified above or an adjusted
price determined as hereinafter provided) is referred to herein as the "Warrant
Price."
2. Adjustment of Warrant Price and Number of Shares. The number and kind
------------------------------------------------
of securities issuable upon the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of certain events as follows:
<PAGE>
(a) Adjustment for Dividends in Stock or Other Securities or Property.
-----------------------------------------------------------------
In case at any time or from time to time on or after the date hereof
the holders of the Common Stock of the Company (or any shares of stock or other
securities at the time receivable upon the exercise of this Warrant) shall have
received, or, on or after the record date fixed for the determination of
eligible stockholders, shall have become entitled to receive, without payment
therefor, other or additional stock or other securities or property (other than
cash) of the Company by way of dividend, then and in each case, the holder of
this Warrant shall, upon the exercise hereof, be entitled to receive, in
addition to the number of shares of Common Stock receivable thereupon, and
without payment of any additional consideration therefor, the amount of such
other or additional stock or other securities or property (other than cash) of
the Company which such holder would hold on the date of such exercise had it
been the holder of record of such Common Stock on the date hereof and had
thereafter, during the period from the date hereof to and including the date of
such exercise, retained such shares and/or all other additional stock available
by it as aforesaid during such period, giving effect to all adjustments called
for during such period by paragraphs (b) and (c) of this Section 2.
(b) Adjustment for Reclassification, Reorganization or Merger. In
---------------------------------------------------------
case of any reclassification or change of the outstanding securities of the
Company or of any reorganization of the Company (or any other corporation the
stock or securities of which are at the time receivable upon the exercise of
this Warrant) or any similar corporate reorganization on or after the date
hereof, then and in each such case the holder of this Warrant, upon the exercise
hereof at any time after the consummation of such reclassification, change,
reorganization, merger or conveyance, shall be entitled to receive, in lieu of
the stock or other securities and property receivable upon the exercise hereof
prior to such consummation, the stock or other securities or property to which
such holder would have been entitled upon such consummation if such holder had
exercised this Warrant immediately prior thereto, all subject to further
adjustment as provided in paragraphs (a) and (c); and in each such case, the
terms of this Section 2 shall be applicable to the shares of stock or other
securities properly receivable upon the exercise of this Warrant after such
consummation.
(c) Stock Splits and Reverse Stock Splits. If at any time on or
-------------------------------------
after the date hereof the Company shall subdivide its outstanding shares of
Common Stock into a greater number of shares, the Warrant Price in effect
immediately prior to such subdivision shall thereby be proportionately reduced
and the number of shares receivable upon exercise of the Warrant shall thereby
be proportionately increased; and, conversely, if at any time on or after the
date hereof the outstanding number of shares of Common Stock shall be combined
into a smaller number of shares, the Warrant Price in effect immediately prior
to such combination shall thereby be proportionately increased and the number of
shares receivable upon exercise of this Warrant shall thereby be proportionately
decreased.
-2-
<PAGE>
3. No Fractional Shares. No fractional shares of Common Stock will be
--------------------
issued in connection with any exercise hereunder. In lieu of any fractional
shares which would otherwise be issuable, the Company shall pay cash equal to
the product of such fraction multiplied by the fair market value of one share of
Common Stock on the date of exercise, as determined in good faith by the
Company's Board of Directors.
4. No Stockholder Rights. This Warrant represents only the right to
---------------------
purchase shares of Common of the Company and shall not otherwise entitle its
holder to any of the rights of a stockholder of the Company.
5. Reservation of Stock. The Company covenants that during the period
--------------------
this Warrant is exercisable, the Company will reserve from its authorized and
unissued shares of capital stock a sufficient number of shares of Common Stock
to provide for the issuance of Common Stock upon the exercise of this Warrant.
The Company agrees that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the exercise of this Warrant.
6. Exercise of Warrant.
-------------------
(a) Method of Exercise. This Warrant may be exercised by the holder
------------------
hereof, in whole or in part and from time to time, by the surrender of this
Warrant at the principal office of the Company, accompanied by payment to the
Company, by check, of an amount equal to the then applicable Warrant Price per
share multiplied by the number of shares of Common Stock then being purchased.
This Warrant shall be deemed to have been exercised immediately prior to the
close of business on the date of its surrender for exercise as provided above,
and the person entitled to receive the shares of Common Stock issuable upon such
exercise shall be treated for all purposes as the holder of such shares of
record as of the close of business on such date. As promptly as practicable on
or after such date and in any event within five (5) business days thereafter,
the Company at its expense shall issue and deliver to the person or persons
entitled to receive the same a certificate or certificates for the number of
full shares of Common Stock issuable upon such exercise, together with cash in
lieu of any fraction of a share as provided above, and, unless this Warrant has
been fully exercised or has expired, a new Warrant representing the portion of
the shares of Common Stock, if any, with respect to which this Warrant shall not
have been exercised, shall also be issued to the holder hereof. The shares of
Common Stock issuable upon exercise hereof shall, upon their issuance, be fully
paid and nonassessable.
(b) Net Issue Exercise.
------------------
(i) In lieu of exercising this Warrant in the manner provided above in
Section 5(a), holder may elect to receive shares equal to the value of this
Warrant (or the portion thereof being canceled) by surrender of this Warrant at
the principal office of the Company together with notice of such election in
which event the Company shall issue to holder a number of shares of the
Company's Common Stock computed using the following formula:
-3-
<PAGE>
X = Y (A - B)
---------
A
Where: X = The number of shares of Common Stock to be issued to holder.
Y = The number of shares of Common Stock purchasable under this
Warrant (at the date of such calculation),
A = The Fair Market Value of one share of the Company's Common Stock
(at the date of such calculation).
B = The Warrant Price (as adjusted to the date of such calculation).
(ii) For purposes of this Section 6(b), the term "Fair Market Value"
means the value of the Company's Common Stock on the pertinent date, determined
as follows:
(a) If the Common Stock of the Company is traded on a stock
exchange on such date, then the Fair Market Value will be equal to the closing
price reported by the applicable composite-transactions report for the twenty
trading days prior to and including such date;
(b) If the Common Stock of the Company is traded on the NASDAQ
National Market System, then the Fair Market Value will be equal to the average
of the last-transaction price quoted by the NASDAQ system for the twenty trading
days prior to and including such date;
(c) If the Common Stock of the Company is traded over-the-
counter on such date but is not classified as a national market issue, then the
Fair Market Value will be equal to the mean between the last reported inside bid
and asked prices quoted by the NASDAQ system for the twenty trading days prior
to and including such date;
(d) If the exercise of this Warrant is to be effective as of
the closing of the Company's initial public offering of its Common Stock
pursuant to a registration statement filed pursuant to the Securities Act of
1933, then the Fair Market Value will be equal to the "price to public"
specified for such stock in the final prospectus for such public offering;
(e) If the exercise of this Warrant is to be effective as of
the closing of a Merger, then the Fair Market Value will be an amount consistent
with the value of the Common Stock implied by such transaction or transactions;
and
(f) If none of the foregoing provisions is applicable, then the
Fair Market Value will be determined by the Board of Directors of the Company in
good faith on such basis as it deems appropriate.
-4-
<PAGE>
7. Certificate of Adjustment. Whenever the Warrant Price or number or
-------------------------
type of securities issuable upon exercise of this Warrant is adjusted, as herein
provided, the Company shall promptly deliver to the record holder of this
Warrant a certificate of an officer of the Company setting forth the nature of
such adjustment and a brief statement of the facts requiring such adjustment.
8. Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any such loss, theft or destruction of any Warrant,
on delivery of an indemnity agreement or security reasonably satisfactory in
form and amount to the Company or, in the case of any such mutilation, on
surrender and cancellation of such Warrant, the Company at its expense will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
9. Miscellaneous. This Warrant shall be governed by the laws of the
-------------
State of California. The headings in this Warrant are for purposes of
convenience and reference only, and shall not be deemed to constitute a part
hereof. Neither this Warrant nor any term hereof may be changed, waived,
discharged or terminated orally but only by an instrument in writing signed by
the Company and the registered holder hereof. Unless otherwise provided, any
notice required or permitted under this Agreement shall be given in writing and
shall be deemed effectively given upon the earliest of (a) personal delivery or
facsimile to the party to be notified, (b) the business day after deposit with a
nationally recognized courier or overnight service including, without
limitation, Federal Express or Express Mail, or (c) three (3) business days
after deposit with the United States Post Office, by registered or certified
mail, postage prepaid and addressed to the party to be notified at the address
furnished to the Company in writing by the last holder of the Warrant who shall
have furnished an address to the Company in writing.
10. Termination. This Warrant (and the right to purchase securities upon
-----------
exercise hereof) shall terminate upon the earliest of (i) the fifth anniversary
of the date of this Warrant, (b) the closing of the Company's sale of all or
substantially all of its assets or the acquisition of the Company by another
entity by means of merger or other transaction as a result of which shareholders
of the Company immediately prior to such acquisition possess a minority of the
voting power of the acquiring entity immediately following such acquisition, or
(c) the closing of the initial public offering of shares of the Company's Common
Stock registered under the Securities Act of 1933, as amended.
11. Notice. The Company shall give Purchaser written notice of any cash
------
dividend declared on any of the Company's stock at least twenty (20) days prior
to the record date fixed for the determination of stockholders eligible for such
dividend.
-5-
<PAGE>
This Common Stock Warrant is issued as of the _______ day of _______________
CONNECT, INC.
By:___________________________
Title:________________________
<PAGE>
Exhibit 11.1
<TABLE>
<CAPTION>
CONNECT, INC.
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
Three Months Ended
Year Ended December 31, March 31,
----------------------- ---------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net loss $(1,920,583) $(1,764,535) $(14,138,931) $(4,837,362) $(5,065,395)
Weighted average common shares
outstanding during the period 229,642 308,024 381,531 376,701 423,785
Shares related to SAB No. 55, 64 and 83 13,335,479 13,335,479 13,335,479 13,335,479 13,335,479
----------- ----------- ----------- ---------- ----------
Total shares used in primary net loss per
share 13,565,121 13,643,503 13,717,010 13,712,180 13,759,264
Primary net loss per share $(.14) $(.13) $(1.03) $(.35) $(.37)
Total per above 13,717,010 13,712,180 13,759,264
Conversion of preferred stock not included 4,146,658 4,146,658 4,146,658
in shares related to SAB No. 55, 64, and 83 --------- --------- ---------
Total shares used in pro forma net loss per 17,863,668 17,858,838 17,905,922
share
Pro forma net loss per share $(.79) $(.27) $(.28)
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated February 23,
1996, except for Note 14, as to which the date is June , 1996, in the
Registration Statement (Form S-1) and related Prospectus of CONNECT, Inc. for
the registration of 2,875,000 shares of its common stock.
Our audits also included the financial statement schedule of CONNECT, Inc.
listed in Item 16(b) of this Registration Statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
San Jose, California
June 11, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 12,928,911 11,275,331
<SECURITIES> 0 0
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0 0
37,041,259 37,981,345
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<CHANGES> 0 0
<NET-INCOME> (14,138,931) (5,065,395)
<EPS-PRIMARY> (.79) (.28)
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</TABLE>
