<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 8, 1996
REGISTRATION NO. 333-05391
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
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
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE(3)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share....... 3,162,500 shares $14.00 $44,275,000.00 $15,268
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 412,500 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.
(3) $13,880.00 of this amount has been previously paid.
----------------
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.
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- -------------------------------------------------------------------------------
<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
Cover Page of Prospectus...... Outside Front Cover Page
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
to Fixed Charges.............. Prospectus Summary; Risk Factors;
The Company
4. Use of Proceeds................ Prospectus Summary; Use of Proceeds
5. Determination of Offering
Price......................... Outside Front Cover Page; Underwriting
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
Registered.................... Prospectus Summary; Dividend Policy;
Capitalization; Description of Capital
Stock
10. Interests of Named Experts and Not Applicable
Counsel.......................
11. Information with Respect to the
Registrant.................... Outside Front and Inside Front Cover
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
for Securities Act
Liabilities................... Not Applicable
</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 July 8, 1996
PROSPECTUS
2,750,000 SHARES
[LOGO OF CONNECT APPEARS HERE]
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. The
Common Stock has been 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
412,500 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 and Fruit of the Loom are 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 packaged software
application for Internet-based interactive commerce, including sales, marketing
and order capture. In addition, the Company offers 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 OneServer or
OrderStream to 11 customers including Ameritech Corporation, Compaq Computer
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.). Three customers are operating OneServer
commercially, while the other OneServer licensees are in the process of
implementing OneServer applications. Two customers have licensed OrderStream,
neither of which is operating the application commercially.
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, CONNECT Online 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..... 2,750,000 shares
Common Stock to be outstanding after
the offering............................ 18,786,742 shares(1)
Nasdaq National Market symbol...... CNKT
Use of proceeds......................... Working capital and general corporate
purposes.
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- ----------------
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 $ 89 $ 1,511
Service................ 2,419 2,617 2,847 6,345 8,285 5,464 2,477
------- ------- ------- ------- -------- ------- -------
Total revenue......... 2,641 2,829 3,862 7,972 8,573 5,553 3,988
Loss from
operations(2).......... (2,135) (2,691) (1,648) (1,540) (13,194) (6,733) (9,148)
Net loss(2)............. $(2,268) $(2,932) $(1,921) $(1,765) $(14,139) $(7,101) $(9,127)
Pro forma net loss per
share(3)............... $ (0.79) $ (0.40) $ (0.51)
Shares used in computing
pro forma
net loss per share(3).. 17,864 17,861 17,942
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 5,794 $37,767
Working capital ......................................... 2,787 34,760
Total assets............................................. 11,922 43,894
Long-term debt........................................... 1,214 1,214
Stockholders' equity .................................... 5,196 37,168
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1996, plus 272,750
shares issued in July 1996 in a private placement to a wholly-owned
subsidiary of Fruit of the Loom, Inc., one of the Company's customers.
Excludes (i) an aggregate of 3,037,056 shares subject to outstanding
options as of June 30, 1996 at a weighted average exercise price of $1.88
per share under the Company's 1989 Stock Option Plan and 1996 Stock Option
Plan, and (ii) 219,155 shares issuable upon exercise of warrants
outstanding as of June 30, 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. See Note 10 of Notes to Financial Statements.
(3) See Note 2 of Notes to Financial Statements.
(4) As adjusted to give effect to the sale of 2,750,000 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, released in June 1996. 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, the
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, the inability of the Company to
develop and enhance competitive products or to successfully commercialize any
such products, and the inability of the Company 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 nine customers, three of
which are operating OneServer commercially, while the others are in the
process of implementing the application. OrderStream was released recently and
has been licensed to only two customers, neither of which is operating the
application commercially. 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 June 30, 1996
had an accumulated deficit of approximately $40.0 million. In 1995 and the
first six months 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 six months 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 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
Operations."
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, in June 1996 Microsoft 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. See "Business--Competition."
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 be able to 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 UPON 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 is unable to adequately train a sufficient number of such firms
or if for any reason a large number of such firms 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 UPON 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 upon 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 "--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 upon 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, 24-hour basis,
and provides hosting for certain customers' OneServer applications. These
services depend upon 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 UPON 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 working capital and general
corporate purposes. 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 69.8% 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 Stock 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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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 2,750,000 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 700,446 additional shares (as well as an additional 3,037,056
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
3,176,504 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, 12,059,792 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 15,722,384 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 2,750,000 shares of
Common Stock offered hereby are estimated to be $31,972,500 ($36,959,625 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
June 30, 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
2,750,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $13.00.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt.............. $ 913 $ 913 $ 913
-------- -------- --------
Long-term debt, less current portion........... 1,214 1,214 1,214
-------- -------- --------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; authorized:
36,140,498 shares
actual, 10,000,000 pro forma and as adjusted;
outstanding:
14,472,899 actual, none pro forma or as
adjusted..................................... 14 -- --
Common Stock, $0.001 par value; authorized:
40,000,000 shares
actual, pro forma and as adjusted;
outstanding: 533,442 actual,
15,763,992 pro forma and 18,513,992 as
adjusted(1).................................. 1 16 19
Additional paid-in capital.................... 45,300 45,299 77,268
Deferred compensation......................... (161) (161) (161)
Accumulated deficit........................... (39,958) (39,958) (39,958)
-------- -------- --------
Total stockholders' equity................... 5,196 5,196 37,168
-------- -------- --------
Total capitalization......................... $ 7,323 $ 7,323 $ 39,295
======== ======== ========
</TABLE>
- --------
(1) Excludes (i) an aggregate of 3,037,056 shares subject to outstanding
options as of June 30, 1996 at a weighted average exercise price of $1.88
per share under the Company's 1989 Stock Option Plan and 1996 Stock Option
Plan, (ii) 219,155 shares issuable upon exercise of warrants outstanding
as of June 30, 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)
an additional 1,848,053 shares reserved for issuance upon exercise of
options that may be granted subsequent to June 30, 1996 under the 1989
Stock Option Plan and the 1996 Stock Option Plan, (iv) 250,000 shares
reserved for issuance upon exercise of options that may be granted under
the 1996 Directors' Stock Option Plan, and (v) 500,000 shares reserved for
issuance under the 1996 Employee Stock Purchase Plan. Also excludes
272,750 shares issued in July 1996 in a private placement to a wholly-
owned subsidiary of Fruit of the Loom, Inc., one of the Company's
customers. See "Management--Stock Plans," "Certain Relationships and
Related Transactions" 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 June 30, 1996 was
approximately $5,200,000 or $0.33 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 2,750,000 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
June 30, 1996 would have been $37,200,000 or $2.01 per share of Common Stock.
This represents an immediate increase in net tangible book value of $1.68 per
share to existing stockholders and an immediate dilution of $10.99 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.................................................... $0.33
Increase attributable to new investors....................... 1.68
-----
Pro forma net tangible book value after the offering.......... 2.01
------
Dilution per share to new investors........................... $10.99
======
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 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.. 15,763,992 85.1% $46,301,665 56.4% $ 2.94
New investors.......... 2,750,000 14.9 35,750,000 43.6 13.00
---------- ----- ----------- -----
Total................. 18,513,992 100.0% $82,051,665 100.0%
========== ===== =========== =====
</TABLE>
The information presented with respect to existing stockholders assumes no
exercise of warrants to purchase 219,555 shares that were outstanding on June
30, 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 June 30, 1996, options to purchase 3,037,056 shares were
outstanding under the Company's 1989 Stock Option Plan and 1996 Stock Option
Plan with a weighted average exercise price of $1.88 per share, 1,848,053
shares are reserved for issuance upon exercise of options that may be granted
subsequent to June 30, 1996 under the 1989 Stock Option Plan and 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. Also excludes 272,750 shares issued in July
1996 in a private placement to a wholly-owned subsidiary of Fruit of the Loom,
Inc., one of the Company's customers. See "Management--Stock Plans," "Certain
Relationships and Related Transactions" 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 June 30, 1996 and for the six months ended June 30, 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>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- ----------------
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 $ 89 $ 1,511
Service...................... 2,419 2,617 2,847 6,345 8,285 5,464 2,477
------- ------- ------- ------- -------- ------- -------
Total revenue............... 2,641 2,829 3,862 7,972 8,573 5,553 3,988
Cost of revenue:
License...................... 83 68 134 162 140 57 283
Service...................... 1,092 1,422 1,641 4,426 5,452 3,376 4,298
------- ------- ------- ------- -------- ------- -------
Total cost of revenue........ 1,175 1,490 1,775 4,588 5,592 3,433 4,581
Operating expenses:
Research and development...... 1,909 1,884 1,573 1,622 4,810 1,508 2,226
Sales and marketing.......... 831 607 859 1,355 3,978 1,294 5,108
General and administrative... 862 1,539 1,303 1,947 3,330 1,994 1,221
Termination of
distribution rights......... -- -- -- -- 4,057 4,057 --
------- ------- ------- ------- -------- ------- -------
Total operating expenses.... 3,602 4,030 3,735 4,924 16,175 8,853 8,555
------- ------- ------- ------- -------- ------- -------
Loss from operations.......... (2,136) (2,691) (1,648) (1,540) (13,194) (6,733) (9,148)
Other income (expense)........ (133) (241) (273) (199) (971) (368) 21
------- ------- ------- ------- -------- ------- -------
Loss before income taxes...... (2,269) (2,932) (1,921) (1,739) (14,165) (7,101) (9,127)
Provision (benefit) for
income taxes................. -- -- -- 26 (26) -- --
------- ------- ------- ------- -------- ------- -------
Pro forma net loss............ $(2,269) $(2,932) $(1,921) $(1,765) $(14,139) $(7,101) $(9,127)
======= ======= ======= ======= ======== ======= =======
Pro forma net loss per share.. $ (0.79) $ (0.40) $ (0.51)
======== ======= =======
Shares used in computing pro
forma net loss per share..... 17,864 17,861 17,942
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- JUNE 30,
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 $ 5,794
Working capital
(deficit)............... (3,338) (2,814) (1,045) (2,786) 11,302 2,787
Total assets............. 738 814 1,743 5,161 18,063 11,922
Long-term debt........... -- 1,125 1,570 1,167 1,636 1,214
Stockholders' equity
(deficit)............... (3,041) (3,724) (1,979) (1,538) 13,318 5,196
</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 core software
application, which was commercially released in September 1995, and
OrderStream, the first preconfigured implementation of OneServer, which was
commercially released in June 1996.
As of June 30, 1996, the Company had licensed OneServer to nine customers,
three of which are operating OneServer commercially, while the others are in
the process of implementing the application. OrderStream has been licensed to
two customers, both of which are in the process of implementing the
application. The Company believes that the majority of its 1996 revenue will
be generated through licenses of OneServer and OrderStream, and the
performance of related services. 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.
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 develops 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 June 30, 1996, had an accumulated deficit of $40.0 million. The
Company's operating expenses have increased substantially since
19
<PAGE>
1994 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>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
License................ 26% 20% 3% 2% 38%
Service................ 74 80 97 98 62
------- ------- -------- ------- -------
Total revenue......... 100 100 100 100 100
Cost of revenue:
License................ 4 2 2 1 7
Service................ 42 56 63 61 108
------- ------- -------- ------- -------
Total cost of
revenue.............. 46 58 65 62 115
Operating expenses:
Research and
development........... 41 20 56 27 56
Sales and marketing.... 22 17 47 23 128
General and
administrative........ 34 24 39 36 31
Termination of
distribution rights... -- -- 47 73 --
------- ------- -------- ------- -------
Total operating
expenses............. 97 61 189 159 215
------- ------- -------- ------- -------
Loss from operations.... (43) (19) (154) (121) (230)
Other income (expense).. (7) (3) (11) (7) 1
------- ------- -------- ------- -------
Loss before income
taxes.................. (50) (22) (165) (128) (229)
Provision (benefit) for
income taxes........... -- -- -- -- --
------- ------- -------- ------- -------
Net loss................ (50)% (22)% (165)% (128)% (229)%
======= ======= ======== ======= =======
Gross margin:
License................ 87% 90% 51% 36% 81%
Service................ 42 30 34 38 (74)
</TABLE>
20
<PAGE>
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Revenue
License. License revenue increased from $89,000 in the first six months of
1995 to $1.5 million in the first six months of 1996, primarily as a result of
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 55% from $5.5 million in the first six
months of 1995 to $2.5 million in the first six months of 1996. In the first
six months 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., both of which terminated in June 1995
(the "Development Projects"). Service revenue in the first six months of 1996
consisted primarily of revenue from private online services and, to a lesser
extent, revenue from implementation services in connection with OneServer and
OrderStream licenses. 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.
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 $57,000 in the first six months of 1995 to $0.3 million
in the first six months of 1996, and decreased as a percentage of license
revenue from 64% to 19%.
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 costs and depreciation related to hosting
services and the operation of the Company's private online service. Cost of
service revenue increased from $3.4 million in the first six months of 1995 to
$4.3 million in the first six months of 1996, and increased as a percentage of
service revenue from 62% to 174%. The cost of service revenue in the first six
months of 1995 was comprised primarily of costs associated with the
Development Projects and the Company's private online service. In the first
six months of 1996, cost of service revenue was impacted by charges totaling
approximately $1.2 million in connection with certain fixed price contract
obligations to implement the Company's software for customers, and costs
associated with the Company's private online service.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of personnel and equipment costs. Research and development expenses
increased 48% from $1.5 million in the first six months of 1995 to $2.2
million in the first six months of 1996, and increased as a percentage of
total revenue from 27% to 56%. 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
295% from $1.3 million in the first six months of 1995 to $5.1 million in the
first six months of 1996, and increased as a percentage of total revenue from
23% to 128%. 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
21
<PAGE>
marketing and sales costs related to increased promotional activities and
increased commission expense associated with licenses.
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 39% from $2.0 million in the first six
months of 1995 to $1.2 million in the first six months of 1996 due primarily
to higher professional service fees in the 1995 period. General and
administrative expenses decreased as a percentage of total revenue from 36% in
the first six months of 1995 to 31% in the first six months of 1996 due to
lower total costs incurred compared to total revenue generated in the latter
period. In the foreseeable future, the Company expects general and
administrative expenses to increase in absolute dollars.
Termination of Distribution Rights. The Company incurred a one-time expense
of $4.1 million in the first six months 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 $0.3 million in the first six months 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 a 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 was 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 six 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, JUNE 30,
1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
License................ $ 35 $ 54 $ 34 $ 165 $ 404 $ 1,107
Service................ 3,009 2,455 693 2,128 1,059 1,418
------- ------- ------- -------- ------- -------
Total revenue......... 3,044 2,509 727 2,293 1,463 2,525
Cost of revenue:
Cost of license........ 40 17 41 42 134 149
Cost of service........ 1,913 1,463 842 1,233 2,209 2,089
------- ------- ------- -------- ------- -------
Total cost of
revenue.............. 1,953 1,480 883 1,275 2,343 2,238
Operating expenses:
Research and
development........... 449 1,059 1,834 1,468 1,174 1,052
Sales and marketing.... 590 704 984 1,700 2,480 2,628
General and
administrative........ 693 1,301 774 563 546 675
Termination of
distribution rights... 4,057 -- -- -- -- --
------- ------- ------- -------- ------- -------
Total operating
expenses............. 5,789 3,064 3,592 3,731 4,200 4,355
------- ------- ------- -------- ------- -------
Loss from operations.... (4,698) (2,035) (3,748) (2,713) (5,080) (4,068)
Other income (expense).. (139) (229) (285) (318) 15 6
------- ------- ------- -------- ------- -------
Loss before income
taxes.................. (4,837) (2,264) (4,033) (3,031) (5,065) (4,062)
Benefit for income
taxes.................. -- -- -- (26) -- --
------- ------- ------- -------- ------- -------
Net loss................ $(4,837) $(2,264) $(4,033) $ (3,005) $(5,065) $(4,062)
======= ======= ======= ======== ======= =======
</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, JUNE 30,
1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
License................ 1% 2% 5% 7% 28% 44%
Service................ 99 98 95 93 72 56
---- --- ---- ---- ---- ----
Total revenue......... 100 100 100 100 100 100
Cost of revenue:
Cost of license........ 1 1 5 2 9 6
Cost of service........ 63 58 116 54 151 83
---- --- ---- ---- ---- ----
Total cost of
revenue.............. 64 59 121 56 160 89
Operating expenses:
Research and
development........... 15 42 252 64 80 42
Sales and marketing.... 19 28 135 74 170 104
General and
administrative........ 23 52 107 24 37 27
Termination of
distribution rights... 133 -- -- -- -- --
---- --- ---- ---- ---- ----
Total operating
expenses............. 190 122 494 162 287 173
---- --- ---- ---- ---- ----
Loss from operations.... (154) (81) (515) (118) (347) (162)
Other income (expense).. (5) (9) (39) (14) 1 1
---- --- ---- ---- ---- ----
Loss before income
taxes.................. (159) (90) (554) (132) (346) (161)
Benefit for income
taxes.................. -- -- -- (1) -- --
---- --- ---- ---- ---- ----
Net loss................ (159)% (90)% (554)% (131)% (346)% (161)%
==== === ==== ==== ==== ====
</TABLE>
The Company has experienced and expects to continue to experience
significant fluctuations in 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
25
<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 $2.8 million at June
30, 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 six months of 1996 was $6.8
million resulting primarily from a net loss, offset in part by an increase in
accrued liabilities related in part to the $1.2 million charges taken in the
first six months of 1996 and increased bonus accruals.
During 1993, 1994, 1995 and for the six months ended June 30, 1996, the
Company used $0.6 million, $1.6 million, $1.8 million and $0.8 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 activities was $0.5 million in the first six months of 1996
resulting primarily from a second closing of the Company's private equity
financing in the first quarter of 1996. In addition, in July 1996, the Company
issued in a private placement 272,750 shares of Series G Preferred Stock
(convertible into an equal number of shares of Common Stock upon completion of
the offering) to a wholly-owned subsidiary of Fruit of the Loom, Inc., one of
the Company's customers, for an aggregate purchase price of $3.0 million. See
"Certain Relationships and Related Transactions."
The Company believes that the proceeds from the offering, existing cash
balances 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.
26
<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 "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 packaged software
application for Internet-based interactive commerce, including sales,
marketing and order capture. In addition, the Company offers 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 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.
27
<PAGE>
EDI is a set of uniform formats for commercial documents such as invoices
and purchase orders that allows 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.
28
<PAGE>
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 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)
-----------------------------
Business Customers . OneServer Enterprise Systems
Consumers . 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 packaged software
application for Internet-based interactive commerce, including sales,
marketing and order capture. In addition, in June 1996, the Company
commercially released OrderStream, its first preconfigured implementation of
OneServer for business-to-business interactive commerce in selected vertical
markets. 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>
CONNECT's core product, OneServer, is a cross-industry packaged software
application for Internet-based interactive commerce, including sales,
marketing and order capture. In addition, in June 1996, the Company
commercially released OrderStream, its first preconfigured implementation of
OneServer for business-to-business interactive commerce in selected vertical
markets. 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 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, was
commercially released in June 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 and electronics
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, the first such application, targets catalog-based
business-to-business suppliers.
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<PAGE>
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 C/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 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 the Company's professional services capabilities or those
of a Solution Partner, tailor OneServer to the specific needs of their
businesses. 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 was commercially released in June 1996. OneServer has been
licensed to nine customers, three of which have implemented OneServer
commercially. 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 . Tax and shipping
calculation
Multimedia Product
Consumers Marketing and Catalog
Business Merchandising
Customers Internet . Catalog management Enterprise
Distributors . Product database Systems
Suppliers management
. Dynamic content
. Multimedia content
. Advertising Enterprise Integration
. User registration . APIs
. Usage tracking . Electronic mail
. Dynamic merchandising interface
. Support for
Administration industry standards
. Security
. System administration
</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 upon
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 was commercially released in June 1996. OrderStream has
been licensed to two customers, neither of which is operating OrderStream
commercially.
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 licenses OrderStream at a premium to OneServer license fees.
Each OrderStream license includes a OneServer run-time sublicense. As with
OneServer, the Company charges separately for professional services and annual
fees for maintenance and support. 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.
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.
33
<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 CONNECT Online brand name. These services may be
accessed by registered users through the Web or proprietary client software.
As of June 30, 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 upon Certain Licenses."
CUSTOMERS
As of June 30, 1996, CONNECT had licensed OneServer or OrderStream to the
following customers: Ameritech Corporation; ARI Network Services, Inc.; Compaq
Computer Corporation; 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"). Three customers are 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 and released it commercially in June 1996. The OrderStream product has
been licensed to two customers, neither of which is operating OrderStream
commercially.
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
34
<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's application has operated
commercially since June 15, 1996. See "Certain Relationships and Related
Transactions."
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 the applications that have not yet been
implemented 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 Cycles."
During 1995, AT&T accounted for 52% of the Company's revenue pursuant to a
contract software development project. During the first six months of 1996,
Fruit of the Loom, Time Warner Cable and HandsNet, Inc., accounted for 25%,
17% and 11%, respectively, of the Company's revenue. No other customer
accounted for more than 10% 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
software 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
. Concurrency
. 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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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). In addition, the Company
engages in joint marketing efforts with Fruit of the Loom.
The Company markets and sells its products and services through an
organization consisting of 32 employees as of June 30, 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, $4.8 million in 1995 and $2.2 million in the first six months of
1996, 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 32 employees as of June 30, 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, in June 1996 Microsoft 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
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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 upon Proprietary Rights;
Risks of Infringement."
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EMPLOYEES
At June 30, 1996, CONNECT employed 130 people full time, of whom 32 were
involved in sales and marketing, 37 were involved in services, 32 were
involved in research and development and 29 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 July 3, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
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 53 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
Richard H. Lussier 58 Director
Terry R. McGowan 49 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 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., a 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 a M.B.A. from the 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 a 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 a 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 a M.B.A. from Northwestern University.
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<PAGE>
Richard H. Lussier became a director of the Company in June 1992. Mr.
Lussier is President and Chief Executive Officer of Siemens Nixdorf
Information Systems Inc., a computer company and a subsidiary of Siemens
Nixdorf Informationssysteme AG ("Siemens"). From November 1986 to March 1995
he was Chairman and Chief Executive Officer of Pyramid Technology Corporation,
a computer company, which was acquired by Siemens in March 1995. Mr. Lussier
holds a B.A. in Economics from College of the Holy Cross and completed
coursework from Boston College Graduate School of Business.
Terry R. McGowan became a director of the Company in May 1993. Since May
1995, Mr. McGowan has been Chief Executive Officer of Action Technologies,
Inc., a software company. From September 1991 to May 1995, he was a management
consultant to computer software companies in the areas of strategy, sales,
marketing and business operations, and from 1984 to September 1991, Mr.
McGowan was employed by KnowledgeWare, Inc., an application development tools
software company. Mr. McGowan served as Vice President of Sales and Marketing
of KnowledgeWare, Inc. until 1985 and then as President and Chief Operating
Officer until his departure in September 1991. Mr. McGowan also is a member of
the Board of Directors of Boole & Babbage, Inc., a software company. Mr.
McGowan holds a B.S. in Political Science and Economics from the University of
Southern Mississippi.
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. ("RPI"), 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., and several other private
information services and media companies. Mr. Weening 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,
Lussier, McGowan, 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 July
3, 1996. 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
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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.
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, 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., 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
45
<PAGE>
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 Series 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.
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.
46
<PAGE>
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
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 certain 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 an option to purchase 50,000 shares to Mr. Norris at an
exercise price of
47
<PAGE>
$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
addition, in April 1996, the Company granted an option to purchase 197,500
shares to Barton S. Foster, Vice President of Marketing, at an exercise price
of $0.50 per share. 6.25% of the shares issuable under Mr. Foster's option
vest three months following the grant date, with the remaining shares vesting
in equal monthly installments over the following 45 months.
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, Henry V. Morgan, the former Executive Vice President of
Finance and Administration and Chief Financial Officer of the Company,
resigned as an officer of the Company pursuant to an agreement between the
Company and Mr. Morgan. 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 canceled or forfeited.
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(3)....... -- -- 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 schedule for each
option is determined by the Administrator of the 1989 Stock Option Plan.
48
<PAGE>
(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 June 30, 1996 options to purchase a total of 316,052 shares of Common Stock
had been exercised and options to purchase a total of 2,284,056 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 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 June 30, 1996 no options issued under the 1996
Option Plan had been exercised and options to purchase a total of 753,000 were
outstanding.
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.
49
<PAGE>
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 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 was approved by the
Company's stockholders 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.
50
<PAGE>
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 was approved 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 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 10 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 10 years.
51
<PAGE>
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 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 business
development services. 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.
52
<PAGE>
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 July 3, 1996 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 at $2.14 per share in April 1993, July 1993 and October 1993,
convertible into an aggregate of 1,775,253 shares of Common Stock; shares of
Series E Preferred Stock at $3.13 per share in June 1994 and March 1995,
convertible into an aggregate of 899,999 shares of Common Stock; shares of
Series F Preferred Stock at $2.64 per share of Common Stock in December 1995
and January 1996, convertible into an aggregate of 11,090,612 shares of Common
Stock; and shares of Series G Preferred Stock at $11.00 per share in July 1996,
convertible into an aggregate of 272,750 shares of Common Stock.
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 T. 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(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.
53
<PAGE>
(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 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."
In July 1996, the Company issued in a private placement 272,750 shares of
Series G Preferred Stock (convertible into an equal number of shares of Common
Stock upon completion of the offering) to a wholly-owned subsidiary of Fruit
of the Loom, one of the Company's customers, for an aggregate purchase price
of $3.0 million.
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 July 3, 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 of
Common Stock, (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
Quaestus Management
Corporation(3)............... 6,239,630 37.9% 32.5%
330 E. Kilbourn Avenue
Milwaukee, WI 53202
Entities affiliated with
Volpe, Welty & Company(4).... 2,508,968 15.6% 13.3%
One Maritime Plaza
San Francisco, CA 94111
Norwest Equity Partners,
V(5)......................... 1,818,182 11.3% 9.7%
245 Lytton Ave.
Suite 250
Palo Alto, CA 94301
Entities affiliated with 21st
Century Communications
Partnerships(6).............. 1,515,150 9.4% 8.1%
GM Building
767 Fifth Avenue
New York, NY 10153
Michael Muller(7)............. 1,179,099 7.4% 6.3%
RRE Connect Investors, L.P. .. 1,174,242 7.3% 6.3%
126 East 56th St., 22nd Floor
New York, NY 10022
Entities affiliated with
BankAmerica Ventures(8)...... 1,136,363 7.1% 6.0%
950 Tower Lane, Suite 700
Foster City, CA 94404
Gordon J. Bridge(9)........... 345,000 2.1% 1.8%
Promod Haque(5)............... 1,818,182 11.3% 9.7%
Thomas P. Kehler(10).......... 609,864 3.7% 3.1%
Paul A. Lansky(11)............ 56,500 * *
Kathleen Gladney(12).......... 18,988 * *
Richard H. Lussier(13)........ 38,732 * *
Terry R. McGowan(14).......... 39,857 * *
Rory T. O'Driscoll(8)......... 1,136,363 7.1% 6.0%
Kenneth M. Ross(15)........... 243,499 1.5% 1.3%
Richard W. Weening(16)........ 5,884,955 36.5% 31.2%
William B. Welty(4)........... 2,508,968 15.6% 13.3%
All officers and directors as
a group (17 persons)(17).... 14,610,958 80.3% 69.8%
</TABLE>
- --------
* Less than 1%.
55
<PAGE>
(1) Applicable percentage of beneficial ownership is based on 16,036,742
shares of Common Stock outstanding as of July 3, 1996 and 18,786,742
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 July
3, 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. 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 July 3,
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.
(7) 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, for
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, for 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.
56
<PAGE>
(8) 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.
(9) Includes 345,000 shares issuable upon exercise of stock options
exercisable within 60 days of July 3, 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 31,250 shares issued upon exercise of stock options and 578,614
shares issuable upon exercise of stock options exercisable within 60 days
of July 3, 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 4,500 shares issued upon exercise of stock options and 52,000
shares issuable upon exercise of stock options exercisable within 60 days
of July 3, 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.
(12) Includes 18,988 shares issued upon exercise of stock options. Ms. Gladney
resigned from the Company in February 1996.
(13) Includes 38,732 shares issuable upon exercise of stock options
exercisable within 60 days of July 3, 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 as a director, which repurchase right lapses over time.
(14) Includes 2,469 shares held directly and 39,857 shares issuable upon
exercise of stock options exercisable within 60 days of July 3, 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 as a director, which repurchase right lapses
over time.
(15) Includes 243,499 shares issuable upon exercise of stock options
exercisable within 60 days of July 3, 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.
(16) 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. 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.
(17) Includes 177,500 shares issued upon exercise of stock options and
2,029,559 shares issuable upon exercise of stock options exercisable
within 60 days of July 3, 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 July 3, 1996, there were 16,036,742
shares held by 122 record holders of the Company's Common Stock assuming no
exercise of options or warrants after June 30, 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 30, 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. In addition, of these warrants, warrants to purchase an
aggregate of 120,621 shares will terminate upon the completion of the offering
unless exercised prior to closing. The Company expects that substantially all
of these warrants will be exercised.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of approximately 15,722,384 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 18,786,742 shares of
Common Stock outstanding, assuming no exercise of options or warrants after
June 30, 1996. Of these shares, the 2,750,000 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 16,036,742 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 3,876,950 additional Restricted Shares (as well as an additional
3,037,056 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 12,059,792 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 5,135,109 shares of
Common Stock subject to outstanding options or reserved for issuance under the
1989 and 1996 Option Plans and the Directors' Plan and 500,000 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 30, 1996, options to purchase 2,284,056
shares were issued and outstanding under the 1989 Option Plan, options to
purchase 753,000 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.......................................................... 2,750,000
=========
</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 412,500 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 16,036,742 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 July __, 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 July 5, 1996
F-2
<PAGE>
CONNECT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
-------------------------- JUNE 30, JUNE 30,
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 $ 5,794,317
Accounts receivable,
net.................. 728,945 1,009,624 1,658,180
Prepaid expenses and
other current as-
sets................. 347,316 471,819 846,027
Deferred tax assets... 77,000 -- --
------------ ------------ ------------
Total current assets.... 2,747,132 14,410,354 8,298,524
Property and equipment,
net.................... 2,146,184 3,263,030 3,298,990
Deposits and other as-
sets................... 267,763 389,145 324,171
------------ ------------ ------------
Total assets........ $ 5,161,079 $ 18,062,529 $ 11,921,685
============ ============ ============
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Current liabilities:
Notes payable......... $ 193,565 $ 194,938 $ 79,463
Notes payable to
stockholders......... 126,350 -- --
Accounts payable...... 756,668 621,806 1,899,170
Accrued payroll and
related expenses..... 237,634 305,772 733,044
Other accrued liabili-
ties................. 499,656 708,211 1,574,789
Deferred revenue...... 2,985,818 422,984 391,338
Current portion of
extended vendor
liabilities.......... 419,565 252,192 253,394
Obligations under cap-
ital leases.......... 313,389 602,292 580,147
------------ ------------ ------------
Total current liabili-
ties................... 5,532,645 3,108,195 5,511,345
Notes payable......... 115,822 67,009 37,675
Long-term portion of
extended vendor
liabilities.......... 803,963 656,269 544,519
Long-term obligations
under capital
leases............... 246,852 912,902 632,009
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 June
30, 1996,
respectively, with
an aggregate
liquidation
preference at June
30, 1996 of
$70,758,674 (none
issued and
outstanding pro
forma).............. 8,059,888 37,041,259 37,979,108 --
Common stock:
Authorized shares--
50,000,000,
(40,000,000 pro
forma)
Issued and
outstanding shares--
369,985, 398,624 and
533,442 (unaudited)
at December 31, 1994
and 1995 and June
30, 1996,
respectively ($.001
par value,
15,763,992 shares
pro forma).......... 7,093,557 7,107,474 7,335,905 15,764
Additional paid-in
capital (pro forma).. -- -- -- 45,299,249
Deferred compensa-
tion................. -- -- (161,088) (161,088)
Accumulated deficit... (16,691,648) (30,830,579) (39,957,788) (39,957,788)
------------ ------------ ------------ ------------
Total stockholders' eq-
uity (deficit)......... (1,538,203) 13,318,154 5,196,137 $ 5,196,137
------------ ------------ ------------ ============
Total liabilities and
stockholders' equity... $ 5,161,079 $ 18,062,529 $ 11,921,685
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONNECT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License............... $ 1,014,687 $ 1,627,294 $ 287,471 $ 89,759 $ 1,511,299
Service............... 2,847,246 6,344,746 8,285,427 5,462,854 2,477,497
----------- ----------- ------------ ----------- -----------
Total revenue....... 3,861,933 7,972,040 8,572,898 5,552,613 3,988,796
Cost of revenue:
License............... 134,260 162,471 139,961 56,635 283,062
Service............... 1,640,888 4,425,893 5,451,893 3,376,449 4,298,305
----------- ----------- ------------ ----------- -----------
Total cost of
revenue............ 1,775,148 4,588,364 5,591,854 3,433,084 4,581,367
Operating expenses:
Research and
development.......... 1,573,090 1,622,081 4,810,166 1,507,780 2,226,049
Sales and marketing... 858,740 1,354,844 3,978,361 1,294,006 5,108,332
General and
administrative....... 1,303,134 1,946,731 3,329,400 1,993,863 1,221,308
Termination of
distribution rights.. -- -- 4,057,292 4,057,292 --
----------- ----------- ------------ ----------- -----------
Total operating
expenses........... 3,734,964 4,923,656 16,175,219 8,852,941 8,555,689
----------- ----------- ------------ ----------- -----------
Loss from operations.... (1,648,179) (1,539,980) (13,194,175) (6,733,412) (9,148,260)
Interest expense........ (205,459) (239,943) (1,002,761) (343,842) (181,320)
Interest income and
other income (expense),
net.................... (66,945) 41,388 32,005 (23,533) 202,371
----------- ----------- ------------ ----------- -----------
Loss before income
taxes.................. (1,920,583) (1,738,535) (14,164,931) (7,100,787) (9,127,209)
Provision (benefit) for
income taxes........... -- 26,000 (26,000) -- --
----------- ----------- ------------ ----------- -----------
Net loss................ $(1,920,583) $(1,764,535) $(14,138,931) $(7,100,787) $(9,127,209)
=========== =========== ============ =========== ===========
Pro forma net loss per
share.................. $ (0.79) $ (0.40) $ (0.51)
============ =========== ===========
Shares used in computing
pro forma
net loss per share..... 17,863,668 17,861,277 17,942,474
============ =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONNECT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
---------------------- ------------------ DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT EQUITY (DEFICIT)
---------- ----------- ------- ---------- ------------ ------------ ----------------
<S> <C> <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)....... 360,000 937,849 -- -- -- -- 937,849
Exercise of employee
stock options
(unaudited)............ -- -- 134,818 58,998 -- -- 58,998
Deferred compensation
related to grant of
stock options
(unaudited)............ -- -- -- 169,433 (169,433) -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- -- 8,345 -- 8,345
Net loss (unaudited).... -- -- -- -- -- (9,127,209) (9,127,209)
---------- ----------- ------- ---------- --------- ------------ ------------
Balance at June 30, 1996
(unaudited)............ 14,472,899 $37,979,108 533,442 $7,335,905 $(161,088) $(39,957,788) $ 5,196,137
========== =========== ======= ========== ========= ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONNECT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(1,920,583) $(1,764,535) $(14,138,931) $(7,100,787) $(9,127,209)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 279,787 473,351 987,829 512,977 808,315
Amortization of
deferred
compensation......... -- -- -- -- 8,345
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) 222,701 (648,556)
Prepaid expenses and
other current as-
sets............... (179,588) (111,038) (124,503) 1,065 (374,208)
Deposits and other
assets............. -- (173,263) (215,882) 4,158 64,974
Accounts payable,
accrued payroll and
related expenses,
other accrued
liabilities, and
extended vendor
liabilities........ 63,268 65,162 (52,153) 1,242,118 2,460,666
Deferred revenue.... 98,628 2,887,190 (2,562,834) (2,756,385) (31,646)
----------- ----------- ------------ ----------- -----------
Net cash provided by
(used in) operating
activities............. (2,047,234) 1,376,926 (14,892,653) (6,379,653) (6,839,319)
INVESTING ACTIVITIES
Purchases of property
and equipment.......... (38,588) (1,627,126) (1,772,591) (1,043,037) (830,272)
Purchase of equipment
for sale and
leaseback.............. (609,229) -- -- -- --
----------- ----------- ------------ ----------- -----------
Net cash used in
investing activities... (647,817) (1,627,126) (1,772,591) (1,043,037) (830,272)
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 13,041 58,998
Proceeds from issuance
of preferred stock..... 635,000 1,532,001 28,328,826 -- 937,849
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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
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 5,200,790 --
Repayment of principal
on notes payable....... (654,058) (149,677) (180,974) (107,609) (144,809)
Repayment of principal
under capital lease
obligations............ (103,796) (318,987) (574,524) (364,937) (317,041)
---------- ---------- ----------- ----------- -----------
Net cash provided by
financing activities... 2,617,620 1,779,922 28,000,284 5,938,678 534,997
---------- ---------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (77,431) 1,529,722 11,335,040 (1,484,012) (7,134,594)
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 $ 109,859 $ 5,794,317
========== ========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION
Cash paid during the
year for interest...... $ 241,777 $ 239,943 $ 373,948 $ 343,842 $ 180,579
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 $ 14,003
</TABLE>
See accompanying notes.
F-7
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 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 six months ended June 30, 1996, the
Company had net losses of approximately $14,139,000 and $9,127,000,
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 June 30, 1996 and for the six months ended June
30, 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 six months ended June 30, 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 SIX MONTHS ENDED
JUNE 30, 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 June 30, 1996, the Company had an allowance for potential
credit losses of approximately $174,000, $320,000 and $372,000, 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 June 30, 1996, totaled $999,773, $12,314,990
and $4,859,448, respectively, and are comprised of certain U.S. government
obligations. At December 31, 1994 and 1995 and at June 30, 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 six months ended June 30, 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,
--------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Computer equipment........................ $2,063,044 $2,184,932 $2,061,781
Equipment under capital leases............ 979,562 2,589,818 3,484,704
Furniture and fixtures.................... 130,741 173,206 201,884
Leasehold improvements.................... 70,256 400,322 444,184
---------- ---------- ----------
3,243,603 5,348,278 6,192,553
Accumulated depreciation and amortiza-
tion..................................... 1,097,419 2,085,248 2,893,563
---------- ---------- ----------
$2,146,184 $3,263,030 $3,298,990
========== ========== ==========
</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 SIX MONTHS ENDED
JUNE 30, 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.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined.
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. A provision
for estimated losses of $1,223,000 was made in the period ended June 30, 1996
in connection with certain fixed price contracts entered into during the
period of which $867,000 is included in other accrued liabilities at June 30,
1996. At December 31, 1994, 1995, and at June 30, 1996, the Company had an
excess of billings over costs incurred and estimated earnings on uncompleted
implementation services of approximately $0, $295,000, and $200,000,
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 SIX MONTHS ENDED
JUNE 30, 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 $164,763 and $499,480 for the six months ended June 30, 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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net loss................ $ (0.14) $ (0.13) $ (1.03) $ (0.52) $ (0.66)
========== ========== ========== ========== ==========
Shares used in computing
net loss per share..... 13,565,121 13,643,503 13,717,010 13,714,619 13,795,816
========== ========== ========== ========== ==========
</TABLE>
F-11
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 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 June 30, 1996.
Unaudited pro forma stockholders' equity at June 30, 1996, as adjusted for
the assumed conversion of the convertible 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 "disclosure 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 June 30, 1996, the principal outstanding was
$266,297, $108,056, and $14,675 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
$7,316, $18,739 and $76,408 outstanding at June 30, 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 SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
Principal payments due in each calendar year as of December 31, 1995 and
June 30, 1996 relating to the above agreements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
1996................................................... $252,192 $141,644
1997................................................... 256,468 256,468
1998................................................... 212,624 212,624
1999................................................... 187,177 187,177
-------- --------
$908,461 $797,913
======== ========
</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 June 30, 1996, the future minimum lease
payments related to operating lease agreements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
1996................................................. $ 392,317 $ 206,045
1997................................................. 400,334 411,338
1998................................................. 317,891 328,895
1999................................................. 308,125 319,129
---------- ----------
$1,418,667 $1,265,407
========== ==========
</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 $193,438 and $183,591 for the six months ended June 30, 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 $1,245,039 at December 31, 1994, 1995, and June 30,
1996, respectively.
The following is a schedule by year of future minimum lease payments under
capital leases as of December 31, 1995 and June 30, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
1996................................................ $ 852,132 $ 426,066
1997................................................ 707,896 707,896
1998................................................ 384,650 384,650
---------- ----------
Total minimum lease payments........................ 1,944,678 1,518,612
Amount representing interest........................ 429,484 306,456
---------- ----------
1,515,194 1,212,156
Less current portion................................ 602,292 580,147
---------- ----------
$ 912,902 $ 632,009
========== ==========
</TABLE>
F-13
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 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"), in which E-data
alleges that each defendant is infringing E-data's U.S. patent in connection
with electronic distribution of images on the Internet. 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 Data Security, Inc.
("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 SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
6. CONVERTIBLE PREFERRED STOCK
Convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
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 June
30, 1996--$3,018,081).................... $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 June 30, 1996
(Aggregate liquidation preference at June
30, 1996--$4,766,257).................... 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 June 30, 1996
(Aggregate liquidation preference at June
30, 1996--$3,261,578).................... 2,169,145 3,586,645 3,586,645
Series F preferred stock:
Authorized shares--24,313,000 and
22,181,228 at December 31, 1995 and June
30, 1996, respectively
Issued and outstanding shares--10,730,614
and 11,090,614 at December 31, 1995 and
June 30, 1996, respectively
(Aggregate liquidation preference at June
30, 1996--$59,712,758)................... -- 27,410,938 28,348,787
Series F-a preferred stock:
Authorized shares--24,313,000 and
22,181,228 at December 31, 1995 and June
30, 1996, respectively
Issued and outstanding shares--none....... -- -- --
---------- ----------- -----------
Convertible preferred stock................. $8,059,888 $37,041,259 $37,979,108
========== =========== ===========
</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.
F-15
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
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 Company's common stock,
subject to certain minimum aggregate gross proceeds. As of December 31, 1995
and June 30, 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 SIX MONTHS ENDED
JUNE 30, 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 June 30, 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
Additional shares reserved.......... 2,500,000
Options granted..................... (2,677,218) 2,677,218 $0.50 - $10.80
Options exercised................... -- (134,818) $0.20 - $ 0.50
Options canceled.................... 542,476 (542,476) $0.20 - $13.00
---------- --------- --------------
Balance at June 30, 1996.............. 1,848,053 3,037,056 $0.20 - $10.80
========== ========= ==============
</TABLE>
At December 31, 1995 and June 30, 1996, options to purchase 358,354 and
480,295 common shares, respectively, were vested and unexercised.
Additionally, at December 31, 1995 and June 30, 1996, 34,184 and 74,592
shares, respectively, from exercised options were subject to repurchase by the
Company.
In connection with certain of the Company's stock options granted in 1996,
the Company has recorded deferred compensation expense of $169,433 for the
difference between the option grant price and the deemed fair value of the
Company's common stock at the date of grant. The amount is being amortized
over the vesting period of the individual options, generally a 48 month
period. Deferred compensation expense recognized for the six months ended June
30, 1996 was $8,345.
F-17
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
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.
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>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------
1993 1994 1995 1995 1996
-------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Company A................... -- 22% 52% 64% --
Company B................... 10% 12% -- -- --
Company C................... -- 12% * * --
Company D................... * * * * 11%
Company E................... -- -- -- -- 17%
Company F................... -- -- -- -- 25%
</TABLE>
* Revenue less than 10%.
F-18
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 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 SIX MONTHS ENDED
JUNE 30, 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 $258,500 and $0 for the
six months ended June 30, 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 26,140,498 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.
On July 3, 1996, the Company issued 272,750 shares of Series G convertible
preferred stock to a customer of the Company for approximately $3,000,000. The
holders of Series G convertible preferred stock are entitled to receive
cumulative dividends at a per annum rate of $0.88 per share. The Series G
preferred stock conversion ratio is 1.00 and in the event of liquidation,
Series G preferred stockholders are entitled to a liquidation preference of
$22.00 per share.
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 SCALEABLE 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 SERVER
EXTERNAL TRANSACTION SYSTEM
CUSTOM TRANSACTIONS
ORACLE 7 RDBMS
UNIX FILE SYSTEM
RSA ENCRYPTION
FULCRUM TEXT SEARCH
THE ONESERVER PRODUCT ARCHITECTURE.
[CONNECT LOGO]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
------------------
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........................... 53
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,750,000 SHARES
[LOGO OF CONNECT APPEARS HERE]
COMMON STOCK
------------------
PROSPECTUS
, 1996
------------------
LEHMAN BROTHERS
VOLPE, WELTY & COMPANY
UBS SECURITIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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.......................................... $ 15,268
NASD Filing Fee............................................... 4,928
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................................................. 49,804
----------
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, the Registrant 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 $3.50
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) In July 1996 the Registrant issued and sold shares of Series G
Preferred Stock convertible into an aggregate of 272,750 shares of Common
Stock to a wholly-owned subsidiary of Fruit of the Loom, Inc., one of the
Registrant's customers, for an aggregate purchase price of $3,000,250.
(9) As of June 30, 1996, 314,890 shares of Common Stock had been issued
upon exercise of options and 3,037,056 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)(8) 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)(9) 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 July 3, 1996 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 July 3,
1996 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+D Software License Agreement dated February 5, 1996 between the
Registrant and Entex Information Services Inc.
10.10+D Software License Agreement dated March 26, 1996 between the
Registrant and Union Underwear Company, Inc.
10.11+D Software License Agreement dated November 7, 1995 between the
Registrant and PhotoDisc, Inc.
10.12+D Amendment to Software License Agreement dated March 29, 1996
between the Registrant and PhotoDisc, Inc.
10.13+D 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+D 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.
10.22+D Business Alliance Program Agreement dated June 11, 1996 between
the Registrant and Oracle Corporation and related Runtime
Sublicense Addendum, and Amendments One and Two to Runtime
Sublicense Addendum.
10.23+ Agreement and Mutual Release dated May 24, 1996 between the
Registrant and Henry V. Morgan.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.24+D 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 (included on page II-5).
27 Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** Supercedes exhibit previously filed.
+ Previously filed.
D Confidential treatment requested.
(b) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
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 is 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 if this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registration 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 AMENDMENT NO. 2 TO THE 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 JULY 8, 1996.
CONNECT, INC.
/s/ Thomas P. Kehler
By: __________________________________
THOMAS P. KEHLER, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
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 THE REGISTRATION
STATEMENT (INCLUDING POST-EFFECTIVE AMENDMENTS) AND ANY AND ALL REGISTRATION
STATEMENTS FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, 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 AMENDMENT TO
THE REGISTRATION STATEMENT ON FORM S-1 HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gordon J. Bridge Chairman of the July 8, 1996
- ------------------------------------ Board, Director
(GORDON J. BRIDGE)
/s/ Thomas P. Kehler President, Chief
- ------------------------------------ Executive Officer July 8, 1996
(THOMAS P. KEHLER) and Director
(Principal Executive
Officer)
/s/ Joseph G. Girata Vice President of
- ------------------------------------ Finance and July 8, 1996
(JOSEPH G. GIRATA) Administration and
Secretary (Principal
Financial Officer)
Director
/s/ Promod Haque July 8, 1996
- ------------------------------------
(PROMOD HAQUE)
Director
/s/ Rory T. O'Driscoll July 8, 1996
- ------------------------------------
(RORY T. O'DRISCOLL)
/s/ Richard H. Lussier Director
- ------------------------------------ July 8, 1996
(RICHARD H. LUSSIER)
/s/ Terry R. McGowan Director
- ------------------------------------ July 8, 1996
(TERRY R. MCGOWAN)
/s/ Richard W. Weening Director
- ------------------------------------ July 8, 1996
(RICHARD W. WEENING)
/s/ William B. Welty Director
- ------------------------------------ July 8, 1996
(WILLIAM B. WELTY)
</TABLE>
II-5
<PAGE>
CONNECT, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1993, 1994, 1995, AND SIX MONTHS ENDED JUNE 30, 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
Six months ended June 30, 1996
Allowance for doubtful accounts.... 320,000 52,000 -- 372,000
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
------- ------------
<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 July 3, 1996 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 July 3, 1996 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+D Software License Agreement dated February 5, 1996
between the Registrant and Entex Information Services
Inc.
10.10+D Software License Agreement dated March 26, 1996 between
the Registrant and Union Underwear Company, Inc.
10.11+D Software License Agreement dated November 7, 1995
between the Registrant and PhotoDisc, Inc.
10.12+D Amendment to Software License Agreement dated March 29,
1996 between the Registrant and PhotoDisc, Inc.
10.13+D 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+D 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
------- ------------
<C> <S> <C>
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+D Business Alliance Program Agreement dated June 11,
1996 between the Registrant and Oracle Corporation and
related Runtime Sublicense Addendum, and Amendments
One and Two to Runtime Sublicense Addendum.
10.23+ Agreement and Mutual Release dated May 24, 1996
between the Registrant and
Henry V. Morgan.
10.24+D 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 (included on page II-5).
27 Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** Supercedes exhibit previously filed.
+ Previously filed.
D Confidential treatment requested.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
OF CONNECT, INC.,
A DELAWARE CORPORATION,
AND
CONNECT, INC.,
A CALIFORNIA CORPORATION
THIS AGREEMENT AND PLAN OF MERGER dated as of ___________________ _____,
1996 (the "Agreement"') is between Connect, Inc., a California corporation
("Connect California"'), and Connect, Inc., a Delaware corporation and a wholly-
owned subsidiary of Connect California ("Connect Delaware"). Connect Delaware
and Connect California are sometimes referred to herein as the "Constituent
Corporations."
RECITALS
A. Connect Delaware is a corporation duly organized and existing under the
laws of the State of Delaware and has an authorized capital of 76,140,498
shares, $0.001 par value, 40,000,000 of which are designated "Common Stock," and
36,140,498 of which are designated "Preferred Stock." Of such authorized shares
of Preferred Stock, 1,120,065 shares are designated "Series C Preferred Stock,"
1,460,633 shares are designated "Series D Preferred Stock," 878,572 shares are
designated "Series E Preferred Stock," 11,090,614 shares are designated "Series
F Preferred Stock," 11,090,614 shares are designated "Series F-a Preferred
Stock" and 500,000 shares are designated as "Series G Prefered Stock." As
of________________ _____, 1996, 100 shares of Connect Delaware Common Stock were
issued and outstanding, all of which are held by Connect California, and no
shares of Preferred Stock were issued and outstanding.
B. Connect California is a corporation duly organized and existing under
the laws of the State of California and has an authorized capital of 102,280,996
shares, 50,000,000 of which are designated "'Common Stock," and 52,280,996 of
which are designated "Preferred Stock." Of such authorized shares of Preferred
Stock, 2,240,130 shares are designated "Series C Preferred Stock," 2,921,266
shares are designated "Series D Preferred Stock," 1,757,144 shares are
designated "Series E Preferred Stock," 22,181,228 shares are designated Series F
Preferred Stock, 22,181,228 shares are designated Series F-a Preferred Stock and
1,000,000 shares are designated as "Series G Preferred Stock."
C. The Board of Directors of Connect California has determined that, for
the purpose of effecting the reincorporation of Connect California in the State
of Delaware, it is advisable and in the best interests of Connect California and
its shareholders that Connect California merge with and into Connect Delaware
upon the terms and conditions herein provided.
D. The respective Boards of Directors of Connect Delaware and Connect
California, the shareholders of Connect California and the sole shareholder of
Connect Delaware have approved this Agreement and have directed that this
Agreement be executed by the undersigned officers.
<PAGE>
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, Connect Delaware and Connect California hereby agree, subject to
the terms and conditions hereinafter set forth, as follows:
I.
MERGER
1.1 Merger. In accordance with the provisions of this Agreement, the
------
Delaware General Corporation Law and the California General Corporation Law,
Connect California shall be merged with and into Connect Delaware (the
"Merger"), the separate existence of Connect California shall cease and Connect
Delaware shall be, and is herein sometimes referred to as, the "Surviving
Corporation," and the name of the Surviving Corporation shall be Connect, Inc.
1.2 Filing and Effectiveness. The Merger shall become effective when the
------------------------
following actions shall have been completed:
(a) This Agreement and the Merger shall have been adopted and approved
by the shareholders of each Constituent Corporation in accordance with the
requirements of the Delaware General Corporation Law and the California General
Corporation Law;
(b) All of the conditions precedent to the consummation of the Merger
specified in this Agreement shall have been satisfied or duly waived by the
party entitled to satisfaction thereof;
(c) An executed Certificate of Merger or an executed counterpart of
this Agreement meeting the requirements of the Delaware General Corporation Law
shall have been filed with the Secretary of State of the State of Delaware; and
(d) An executed Certificate of Merger or an executed counterpart of
this Agreement meeting the requirements of the California General Corporation
Law shall have been filed with the Secretary of State of the State of
California.
The date and time when the Merger shall become effective, as aforesaid, is
herein called the "Effective Date of the Merger."
1.3 Effect of the Merger. Upon the Effective Date of the Merger, the
--------------------
separate existence of Connect California shall cease and Connect Delaware, as
the Surviving Corporation, (a) shall continue to possess all of its assets,
rights, powers and property as constituted immediately prior to the Effective
Date of the Merger, (b) shall be subject to all actions previously taken by its
and Connect California's Boards of Directors, (c) shall succeed, without other
transfer, to all of the assets, rights, powers and property of Connect
California in the manner as more fully set forth in Section 259 of the Delaware
General Corporation Law, (d) shall continue to be subject to all of its debts,
liabilities and obligations as constituted immediately prior to the Effective
Date of the Merger, and (e) shall succeed, without other transfer, to all of the
debts, liabilities and obligations of Connect California in the same manner as
if Connect Delaware had
<PAGE>
itself incurred them, all as more fully provided under the applicable provisions
of the Delaware General Corporation Law and the California General Corporation
Law.
II.
CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
2.1 Certificate of Incorporation. The Certificate of Incorporation of
----------------------------
Connect Delaware shall be the Certificate of Incorporation of the Surviving
Corporation until duly amended in accordance with the provisions thereof and
applicable law.
2.2 Bylaws. The Bylaws of Connect Delaware as in effect immediately prior
------
to the Effective Date of the Merger shall continue in full force and effect as
the Bylaws of the Surviving Corporation until duly amended in accordance with
the provisions thereof and applicable law.
2.3 Directors and Officers. The directors and officers of Connect
----------------------
Delaware immediately prior to the Effective Date of the Merger shall be the
directors and officers of the Surviving Corporation until their successors shall
have been duly elected and qualified or until as otherwise provided by law, the
Certificate of Incorporation of the Surviving Corporation or the Bylaws of the
Surviving Corporation.
III.
MANNER OF CONVERSION OF STOCK
3.1 Connect California Common Stock. Upon the Effective Date of the
-------------------------------
Merger, each two shares of Connect California Common Stock issued and
outstanding immediately prior thereto shall, by virtue of the Merger and without
any action by the Constituent Corporations, the holder of such share or any
other person, be converted into and exchanged for one fully paid and
nonassessable share of Common Stock, $0.001 par value, of the Surviving
Corporation.
3.2 Connect California Preferred Stock. Upon the Effective Date of the
----------------------------------
Merger, each two shares of Connect California Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Series F Preferred Stock, Series F-a
Preferred Stock and Series G Preferred Stock issued and outstanding immediately
prior thereto shall, by virtue of the Merger and without any action by the
Constituent Corporations, the holder of such shares or any other person, be
converted into and exchanged for one fully paid and nonassessable share of
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock,
Series F Preferred Stock, Series F-a Preferred Stock and Series G Preferred
Stock of the Surviving Corporation, $0.001 par value, respectively, having such
rights, preferences and privileges as set forth in the Certification of
Incorporation of the Surviving Corporation, which shares of Preferred Stock
shall be convertible into shares of the Surviving Corporation's Common Stock,
$.001 par value, on the terms of the Certificate of Incorporation of the
Surviving Corporation.
3.3 Connect California Options, Stock Purchase Rights, Convertible
--------------------------------------------------------------
Securities and Warrants. Upon the Effective Date of the Merger, the Surviving
- -----------------------
Corporation shall assume the obligations of Connect California under Connect
California's 1989 Stock Option Plan, 1996 Stock
<PAGE>
Option Plan and all other employee benefit plans of Connect California,
including outstanding stock options of Connect California (including options
outstanding under Connect California's 1989 Stock Option Plan and 1996 Stock
Option Plan). Each outstanding and unexercised option, other right to purchase
or security convertible into Connect California Common Stock or Preferred Stock
or warrant to purchase Connect California Common Stock or Preferred Stock shall
become an option, right to purchase, security convertible into or warrant to
purchase the Surviving Corporation's Common Stock or Preferred Stock,
respectively, on the basis of one share of the Surviving Corporation's Common
Stock or Preferred Stock, for each two shares of Connect California Common Stock
or Preferred Stock, respectively, issuable pursuant to any such option, stock
purchase right, convertible security or warrant, on the same terms and
conditions and at an aggregate exercise price equal to the exercise price
applicable to any such Connect California option, stock purchase right, other
convertible security or warrant at the Effective Date of the Merger, with the
per share exercise price approximately adjusted to reflect the exchange ratio
set forth in this paragraph.
A number of shares of the Surviving Corporation's Common Stock and
Preferred Stock shall be reserved for issuance upon the exercise of options,
stock purchase rights, convertible securities and warrants (including Preferred
Stock) on the basis of one share of Connect Delaware Common Stock and Preferred
Stock for two shares of Connect California Common Stock and Preferred Stock so
reserved immediately prior to the Effective Date of the Merger.
3.4 Connect Delaware Common Stock. Upon the Effective Date of the Merger,
-----------------------------
each share of Common Stock, $0.001 par value, of Connect Delaware issued and
outstanding immediately prior thereto shall, by virtue of the Merger and without
any action by Connect Delaware, the holder of such shares or any other person,
be canceled and returned to the status of authorized but unissued shares.
3.5 Exchange of Certificates. After the Effective Date of the Merger,
------------------------
each holder of an outstanding certificate representing shares of Connect
California Common Stock or Preferred Stock may, at such stockholder's option,
surrender the same for cancellation to the transfer agent and registrar for the
Common Stock of the Surviving Corporation, as exchange agent (the "Exchange
Agent"), and each such holder shall be entitled to receive in exchange therefor
a certificate or certificates representing the number of shares of the
appropriate class and series of the Surviving Corporation's capital stock into
which the surrendered shares were converted as herein provided. Until so
surrendered, each outstanding certificate theretofore representing shares of
Connect California capital stock shall be deemed for all purposes to represent
the number of whole shares of the appropriate class and series of the Surviving
Corporation's capital stock into which such shares of Connect California capital
stock were converted in the Merger.
The registered owner on the books and records of the Surviving Corporation
or the Exchange Agent of any such outstanding certificate shall, until such
certificate shall have been surrendered for transfer or conversion or otherwise
accounted for to the Surviving Corporation or the Exchange Agent, have and be
entitled to exercise any voting and other rights with respect to and to receive
dividends and other distributions upon the shares of capital stock of the
Surviving Corporation represented by such outstanding certificate as provided
above.
<PAGE>
Each certificate representing capital stock of the Surviving Corporation so
issued in the Merger shall bear the same legends, if any, with respect to the
restrictions on transferability as the certificates of Connect California so
converted and given in exchange therefor, unless otherwise determined by the
Board of Directors of the Surviving Corporation in compliance with applicable
laws.
If any certificate for shares of Connect Delaware stock is to be issued in
a name other than that in which the certificate surrendered in exchange therefor
is registered, it shall be a condition of issuance thereof that the certificate
so surrendered shall be properly endorsed and otherwise in proper form for
transfer, that such transfer otherwise be proper and that the person requesting
such transfer pay to the Exchange Agent any transfer or other taxes payable by
reason of the issuance of such new certificate in a name other than that of the
registered holder of the certificate surrendered or establish to the
satisfaction of Connect Delaware that such tax has been paid or is not payable.
3.6 Fractional Shares. Notwithstanding any other term or provision
-----------------
hereof, no fractional shares of Surviving Corporation's Common Stock and
Preferred Stock shall be issued, but in lieu thereof each holder of Connect
California Common Stock or Preferred Stock who would otherwise be entitled to
receive a fraction of a share of Surviving Corporation's Common Stock and
Preferred Stock shall receive from Surviving Corporation an amount of cash equal
to the per share market value of Surviving Corporation's Common Stock and
Preferred Stock (deemed to be $12) multiplied by the fraction of a share of
Surviving Corporation's Common Stock and Preferred Stock to which such holder
would otherwise be entitled.
IV.
GENERAL
4.1 Covenants of Connect Delaware. Connect Delaware covenants and agrees
-----------------------------
that it will, on or before the Effective Date of the Merger:
(a) File any and all documents with the California Franchise Tax Board
necessary for the assumption by Connect Delaware of all of the franchise tax
liabilities of Connect California; and
(b) Take such other actions as may be required by the California
General Corporation Law.
4.2 Further Assurances. From time to time, as and when required by
------------------
Connect Delaware or by its successors or assigns, there shall be executed and
delivered on behalf of Connect California such deeds and other instruments, and
there shall be taken or caused to be taken by Connect Delaware and Connect
California such further and other actions as shall be appropriate or necessary
in order to vest or perfect in or conform of record or otherwise by Connect
Delaware the title to and possession of all the property, interests, assets,
rights, privileges, immunities, powers, franchises and authority of Connect
California and otherwise to carry out the purposes of this Agreement, and the
officers and directors of Connect Delaware are
<PAGE>
fully authorized in the name and on behalf of Connect California or otherwise to
take any and all such action and to execute and deliver any and all such deeds
and other instruments.
4.3 Abandonment. At any time before the Effective Date of the Merger,
-----------
this Agreement may be terminated and the Merger may be abandoned for any reason
whatsoever by the Board of Directors of either Connect California or Connect
Delaware, or both, notwithstanding the approval of this Agreement by the
shareholders of Connect California or by the sole shareholder of Connect
Delaware, or by both.
4.4 Amendment. The Boards of Directors of the Constituent Corporations
---------
may amend this Agreement at any time prior to the filing of this Agreement (or
certificate in lieu thereof) with the Secretaries of State of the States of
California and Delaware, provided that an amendment made subsequent to the
adoption of this Agreement by the shareholders of either Constituent Corporation
shall not: (a) alter or change the amount or kind of shares, securities, cash,
property and/or rights to be received in exchange for or on conversion of all or
any of the shares of any class or series thereof of such Constituent
Corporation, (b) alter or change any term of the Certificate of Incorporation of
the Surviving Corporation to be effected by the Merger, or (c) alter or change
any of the terms and conditions of this Agreement if such alteration or change
would adversely affect the holders of any class of shares or series of capital
stock of such Constituent Corporation.
4.5 Registered Office. The registered office of the Surviving Corporation
-----------------
in the State of Delaware is located at The Prentice-Hall Corporation System,
Inc., 1013 Centre Road, in the City of Wilmington, Delaware 19801, County of New
Castle, and The Prentice-Hall Corporation System is the registered agent of the
Surviving Corporation at such address.
4.6 FIRPTA Notification.
-------------------
(a) On or before the Effective Date of the Merger, Connect California
shall deliver to Connect Delaware, as agent for the shareholders of Connect
California, a properly executed statement in such form as reasonably requested
by counsel for Connect California and conforming to the requirements of Treasury
Regulation Section 1.897-2(h)(1)(i) (the "Statement"). Connect Delaware shall,
upon request, provide a copy thereof to any person that was a shareholder of
Connect California immediately prior to the Merger. In consequence of the
approval of the Merger by the shareholders of Connect California, as provided in
Recital D hereof, (i) such shareholders shall be considered to have requested
that the Statement be delivered to Connect Delaware as their agent and (ii)
Connect Delaware shall be considered to have received a copy of the Statement at
the request of the Connect California shareholders for purposes of satisfying
Connect Delaware's obligations under Treasury Regulation Section 1.1445-2(c)(3).
(b) Connect California shall deliver to the Internal Revenue Service a
notice regarding the Statement in accordance with the requirements of Treasury
Regulation Section 1.897-2(h)(2).
<PAGE>
4.7 Expenses. Each party to the transactions contemplated by this
--------
Agreement (including, without limitation, Connect California, Connect Delaware
and their respective shareholders) shall pay its own expenses, if any, incurred
in connection with such transactions.
4.8 Tax Opinion a Condition Precedent. The Merger shall not be
---------------------------------
consummated unless, on or prior to the Effective Date of the Merger, Connect
California receives from Venture Law Group, A Professional Corporation ("VLG"),
a written opinion that the Merger will qualify as a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Such opinion shall be contingent on receipt by VLG of (a) certain
representations from Connect California and Connect Delaware requested by VLG
and (b) delivery by Connect California's shareholders as shall be designated by
VLG of "Shareholder Continuity of Interest Certificates" in such form as
requested by VLG.
4.9 Agreement. Executed copies of this Agreement will be on file at the
---------
principal place of business of the Surviving Corporation at 515 Ellis Street,
Mountain View, California 94043 and copies thereof will be furnished to any
shareholder of either Constituent Corporation, upon request and without cost.
4.10 Governing Law. This Agreement shall in all respects be construed,
-------------
interpreted and enforced in accordance with and governed by the laws of the
State of Delaware and, so far as applicable, the merger provisions of the
California General Corporation Law.
4.11 Counterparts. In order to facilitate the filing and recording of
------------
this Agreement, the same may be executed in any number of counterparts, each of
which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, this Agreement, having first been approved by
resolutions of the Boards of Directors of Connect Delaware and Connect
California, is hereby executed on behalf of each of such two corporations and
attested by their respective officers thereunto duly authorized.
CONNECT, INC., a Delaware corporation
By:_____________________________
Name:___________________________
Title:____________________________
ATTEST:
__________________________
Joseph G. Girata, Secretary
CONNECT, INC., a California corporation
By:______________________________
Name:___________________________
Title:____________________________
ATTEST:
__________________________
Joseph G. Girata, Secretary
<PAGE>
CONNECT, INC.
(California Corporation)
OFFICERS' CERTIFICATE
Thomas P. Kehler and Joseph G. Girata certify that:
1. They are the President and Chief Executive Officer and the Secretary,
respectively, of Connect, Inc., a corporation organized under the laws of the
State of California.
2. The corporation has authorized two classes of stock, designated "Common
Stock" and "Preferred Stock." Five series of Preferred Stock have been
authorized, designated "Series C Preferred," "Series D Preferred," "Series E
Preferred Stock," "Series F Preferred Stock," "Series F-a Preferred Stock" and
"Series G Preferred Stock."
3. There were _____________ shares of Common Stock, 2,236,160 shares of
Series C Preferred Stock, 2,921,266 shares of Series D Preferred Stock,
1,607,144 shares of Series E Preferred Stock, 22,181,228 shares of Series F
Preferred Stock, no shares of Series F-a Preferred Stock and __________ shares
of Series G Preferred Stock, outstanding as of the record date (the "Record
Date") of the shareholders' meeting at which the Agreement and Plan of Merger
attached hereto (the "Merger Agreement") was approved.
4. The principal terms of the Merger Agreement were approved by the Board
of Directors and by the vote of a number of shares of each class and series of
stock which equaled or exceeded the vote required.
5. The number of shares voting in favor of the amendment equaled or
exceeded the vote required, such required vote being (i) a majority of the
outstanding shares of Common Stock, (ii) a majority of the outstanding shares of
Common Stock and Preferred Stock, (iii) a majority of the outstanding shares of
Preferred Stock, (iv) a majority of the outstanding shares of Preferred Stock
(excluding the Series E Preferred Stock, Series F and Series G Preferred Stock),
(v) a majority of the outstanding shares of Series E Preferred Stock voting as a
separate class and (vi) eighty percent (80%) of the outstanding shares of Series
F and Series G Preferred Stock, voting together as a separate class.
<PAGE>
Thomas P. Kehler and Joseph G. Girata further declare under penalty of
perjury under the laws of the State of California that each has read the
foregoing certificate and knows the contents thereof and that the same is true
of their own knowledge.
Executed in Mountain View, California on ___________________________ ,
1996.
- -------------------------------
Thomas P. Kehler, President and
Chief Executive Officer
- -------------------------------
Joseph G. Girata, Secretary
<PAGE>
CONNECT, INC.
(Surviving Corporation)
OFFICERS' CERTIFICATE
Thomas P. Kehler and Joseph G. Girata certify that:
1. They are the President and Chief Executive Officer and the Secretary,
respectively, of Connect, Inc., a corporation organized under the laws of the
State of Delaware.
2. The corporation has authorized two classes of stock, designated
"Common Stock" and "Preferred Stock."
3. There are 100 shares of Common Stock outstanding and entitled to vote
on the Agreement and Plan of Merger attached hereto (the "Merger Agreement").
There are no shares of Preferred Stock outstanding.
4. The principal terms of the Merger Agreement were approved by the Board
of Directors and by the vote of a number of shares of each class and series of
stock which equaled or exceeded the vote required.
5. The percentage vote required was more than 50% of the votes entitled to
be cast by holders of outstanding shares of Common Stock.
Thomas P. Kehler and Joseph G. Girata further declare under penalty of
perjury under the laws of the State of Delaware that each has read the foregoing
certificate and knows the contents thereof and that the same is true of their
own knowledge.
Executed in Mountain View, California on ________________________, 1996.
- -------------------------------
Thomas P. Kehler, President and
Chief Executive Officer
- -------------------------------
Joseph G. Girata, Secretary
<PAGE>
EXHIBIT 3.3
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 36,140,498 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 six 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, "Series F-a Preferred Stock" comprised of 11,090,614 shares
--------------------------
and "Series G Preferred Stock" comprised of 500,000 shares. As used hereafter
------------------------
in this Amended and Restated Certificate 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, Series F-a Preferred Stock and Series G 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
<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.
-2-
<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 and Series G Preferred Stock. The holders of shares of
-------------------------------------
Series F and Series G 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 rates of $0.2112 and $0.88 per share per annum,
respectively. Such dividends shall cumulate quarterly on each share of Series F
Preferred Stock beginning January 1, 1996 and on each share of Series G
Preferred Stock beginning July 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 or Series G Preferred Stock shall not bear interest. Cumulative
dividends with respect to a share of Series F or Series G 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 this Amended and Restated
Certificate, 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 and Series G 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
-3-
<PAGE>
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 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 Subsections A.1 and A.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, F and G 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 $2.62 per share of Series C
Preferred Stock, plus all accumulated and unpaid dividends
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<PAGE>
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 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, 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, and an amount equal to $22.00 per share of Series G 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 and Series G 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 and Series G
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, Series F Preferred Stock and Series G Preferred
Stock, in accordance with the procedure set forth in Subsection B.2 below.
2. Common Stock, Series F Preferred Stock and Series G 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, Series F Preferred Stock and Series G Preferred Stock pro rata based on
the number of shares of Common Stock held by each (assuming conversion of all
such Series F and Series G 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 (other than a reincorporation transaction), 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
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<PAGE>
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:
(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 and Series G
Preferred Stock, voting together as a single class, provided that if the
corporation and the holders of not less than a majority of the outstanding
shares of Series F and Series G Preferred Stock, voting together as a single
class, 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 not less than a majority of the outstanding shares of Series F and
Series G Preferred Stock, voting together as a single class.
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
B.3 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 Series F and Series G Preferred Stock, voting
together as a single class.
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<PAGE>
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' 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 this Amended and Restated Certificate 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 this Amended and Restated Certificate 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
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<PAGE>
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; and
(c) As to the Series F and Series G Preferred Stock, the date on which
the holders of eighty percent (80%) of the outstanding shares of Series F and
Series G Preferred Stock, voting together as a single class, 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. The number of shares of
Common Stock into which each share of Series G Preferred Stock may be converted
shall be determined by dividing (i) $11.00 by (ii) the Conversion Price for the
Series G 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, $2.6 in the case of Series D Preferred Stock, $3.50 in the case
of Series E Preferred Stock, $2.64 in the case of the Series F Preferred Stock
and $11.00 in the case of Series G 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
-8-
<PAGE>
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 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
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<PAGE>
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.
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, Series F or Series G
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, Series E or Series G 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
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<PAGE>
(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, Series E or Series G Preferred Stock resulting from such
issuance).
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
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<PAGE>
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);
(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 forthwith 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 Series F-a Preferred Stock, and each
other series of Preferred Stock, issued pursuant to Article IV, Section I below;
(C) 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);
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<PAGE>
(D) shares of Common Stock issuable or issued to
employees, consultants, directors or vendors of this corporation directly or
pursuant to the corporation's 1989 Stock Option Plan, the corporation'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 5,950 shares;
(E) 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 G Preferred Stock Purchase Agreement executed in July 1996
(the "Series G Purchase Agreement") by and between the corporation and certain
---------------------------
purchasers of Series G Preferred Stock;
(F) all shares of Series G Preferred Stock issued
pursuant to Section 2.2 under the Series G Purchase Agreement, and all shares of
Common Stock issuable upon conversion of such shares of Series G Preferred
Stock; and
(G) all shares of Common Stock issued in a Qualifying
IPO.
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.
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<PAGE>
(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 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
--------------------
-14-
<PAGE>
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 corporation 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 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 Amended and Restated Certificate 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 Amended and Restated Certificate of Incorporation
in accordance with applicable law 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.
-15-
<PAGE>
F. Protective Provisions.
---------------------
1. General. In addition to any other class or series vote that
-------
may be required by law or this Amended and Restated Certificate 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 Series C and Series D Preferred Stock, voting together 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 and
Series G Preferred Stock, voting together as a single class:
(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
(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 Amended and Restated Certificate 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; or
(g) Increase or decrease the number of authorized shares of
Preferred Stock; or
(h) Use of Assets. Apply any of its assets for (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
-16-
<PAGE>
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.
----------
1. 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 and Series G Preferred Stock, voting together as
a single class, 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 and Series G 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 and Series G 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, redeem the remaining one-third of the shares of Series F and
Series G Preferred Stock requested to be redeemed. The redemption shall be in
accordance with the provisions of this Section H.
2. Redemption Price. The Redemption Price per share shall be (i) an
----------------
amount equal to $2.64 plus any accumulated and unpaid dividends on the date of
redemption of the Series F Preferred Stock, and (ii) an amount equal to $11.00
plus any accumulated and unpaid dividends on the date of redemption of the
Series G Preferred Stock.
3. Notice. At least thirty (30) days prior to the date fixed for any
------
redemption of Series F or Series G 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 and Series G 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
or Series G Preferred Stock being redeemed (the "Redemption Notice").
-----------------
-17-
<PAGE>
4. Mechanics of Redemption. On or after the applicable Redemption
-----------------------
Date, each holder of Series F or Series G 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.
5. 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 and Series G Preferred Stock as holders of such series of
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 and Series G Preferred Stock on any Redemption Date are insufficient to redeem
all outstanding Series F and Series G 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 and Series G
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 herein. At any time thereafter when
additional funds of the corporation are legally available for the redemption of
Series F and Series G Preferred Stock, such funds will immediately be used to
redeem the balance of the redeemable shares of Series F and Series G Preferred
Stock that have not been redeemed.
6. 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 and Series G
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,
-18-
<PAGE>
upon proof of its ownership of Series F or Series G 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 Financing.
Upon conversion pursuant to this Section H, the shares of Series F Preferred
Stock so converted shall be canceled 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
Amended and Restated Certificate 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
-19-
<PAGE>
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
canceled 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 and Series G Preferred Stock) redeemed, the shares so converted or
redeemed shall be canceled, retired and eliminated from the shares which the
corporation is authorize to issue.
K. Restated Certificate.
--------------------
Upon conversion of all outstanding shares of the Preferred Stock, this
Article IV shall be of no further force or effect, and this Amended and 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.
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
-20-
<PAGE>
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 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
-21-
<PAGE>
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:
(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.
-22-
<PAGE>
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.
-23-
<PAGE>
EXHIBIT 4.1
NUMBER SHARES
[CONNECT LOGO]
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR STATEMENTS RELATING
THE STATE OF DELAWARE TO RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS, IF ANY
CUSIP
This Certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE $0.001 PER SHARE, OF
CONNECT, INC.
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated _________________________
[CONNECT, INC.
Corporate Seal]
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
---------------------------
AUTHORIZED SIGNATURE
<PAGE>
A statement of the powers, designations, preferences and 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 as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge at
the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- tenants in common UNIF GIFT MIN ACT -- _________ Custodian ________
(Cust) (Minor)
TEN ENT -- as tenants by the entireties under Uniform Gifts to Minors
JT TEN -- as joint tenants with right Act _________________________
of survivorship and not as (State)
tenants in common
UNIF TRF MIN ACT -- _________ Custodian (until age ___)
(Cust)
_________ under Uniform Transfers
(Minor)
to Minors Act ________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________ hereby sell, assign and transfer
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
_______________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated:
X
-------------------------------------------------
X
-------------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By___________________________________________________
THE SIGNATURES(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 9.1
CONNECT, INC.
-------------
AMENDED STOCKHOLDERS AGREEMENT
------------------------------
This AGREEMENT is made as of the 3rd day of July, 1996, among CONNECT,
INC., a Delaware 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"); 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"); H&Q MACNET INVESTORS, L.P.
-------
("H&Q"); AND FTL INVESTMENTS, INC., A DELAWARE CORPORATION, AND FARLEY
---
INDUSTRIES, INC. (COLLECTIVELY, "FTL").
---
WITNESSETH:
WHEREAS, the Quaestus Entities, the VW Entities, Muller, the BAV Entities,
21st Century, RRE, Norwest, H&Q, Ashford and FTL (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
December 27, 1995 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
<PAGE>
determined by the Board of Directors of the Company in good faith, excluding any
interested directors (the "Offered Price") and the terms upon which such
-------------
transfer will be made. Upon the request of any of the other Shareholders, the
selling Shareholder will promptly furnish such information to such Shareholder
as may be reasonably 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.
FTL Investments, Inc. and Farley Industries, Inc. shall, in any event, be deemed
to be Affiliates with respect to each other.
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 fifteen (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
-2-
<PAGE>
such Shareholder or within 15 days after the Subsequent Selling Shareholder's
Notice is received by such Shareholder, if applicable, or upon such other
payment terms, if more favorable than the terms offered to the Shareholders
hereunder, as are offered to the proposed transferees.
(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 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
-3-
<PAGE>
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.
(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, Connect GmbH Informations Systeme 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
-4-
<PAGE>
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 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 Amended and Restated
Certificate of Incorporation of the Company, the holders of the Series C, D, E,
F and G 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, Norwest and FTL 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, Norwest and FTL 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,
Norwest and FTL 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, the VW Entities
and FTL 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, RRE and FTL 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 (i)
(x) the holders of Series F Preferred Stock shall have the right to designate
two (2) representatives, one (1) of whom shall be designated by 21st Century and
one (1) of whom shall be designated by RRE, and (y) the holders of a majority of
the outstanding shares of Series G Preferred Stock shall have the right to
designate one (1) representative (any such designated person, a "Board
-----
Observer") and (ii) the holders of a majority of the then outstanding shares of
- --------
Series F Preferred Stock shall have the right to designate one (1) advisor to
the Board of Directors (any such designated person, a "Board Advisor"). Each
-------------
Board Observer and Board Advisor will be entitled to visitation rights to all
meetings of the Board of Directors.
(b) In the event there is an Equity Financing (as defined in Article
IV, Section I of the Company's Amended and Restated Certificate 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.
-5-
<PAGE>
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:
"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 JULY 3, 1996, 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 JULY 3, 1996,
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. 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, RRE or FTL 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
-6-
<PAGE>
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 (i) 75% of the then outstanding shares of Stock
or Common Stock issuable upon conversion thereof (other than Series F and Series
G Preferred Stock), and (ii) 80% of the then outstanding shares of Series F and
Series G 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.
(i) This Agreement replaces in its entirety the Stockholders Agreement
dated as of December 27, 1995 (the "Prior Agreement") between the Company, the
---------------
Quaestus Entities, the VW Entities, Muller, the BAV Entities, 21st Century, RRE,
Norwest, Ashford, and H&Q, 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
-7-
<PAGE>
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.
[Signature Pages to Follow]
-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
By /s/ THOMAS P. KEHLER Corporation
- ----------------------------
Thomas Kehler, President
/s/ MICHAEL MULLER By /s/ RICHARD WEENING
- ---------------------------- ----------------------------
Michael Muller Its President
----------------------------
QUAESTUS LIMITED PARTNERSHIP NETWORK PARTNERS, by its general
partner Quaestus Management Corporation
By /s/ RICHARD WEENING By /s/ RICHARD WEENING
- ---------------------------- ----------------------------
Its President, RPI Holdings, Inc., Its President
its General Partner ----------------------------
- ----------------------------
BANKAMERICA VENTURES BA VENTURE PARTNERS I
By /s/ RORY O'DRISCOLL By /s/ RORY O'DRISCOLL
- ---------------------------- ----------------------------
Its Principal Its 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 FUND MICHAEL AND ELKIE MULLER TRUSTEES OF THE
I SLP MULLER FAMILY TRUST DATED NOVEMBER 13,
1978, AMENDED APRIL 28, 1993
By /s/ WILLIAM B. WELTY By /s/ MICHAEL MULLER
- ---------------------------- ----------------------------
Its General Partner Michael Muller, Trustee
- ----------------------------
-9-
<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/ IRWIN LIEBER By /s/ STUART ELLIMAN
- ---------------------------- ----------------------------
Irwin Lieber, Treasurer Its Managing Director
----------------------------
NORWEST EQUITY PARTNERS, V THEODORE H. ASHFORD
a Minnesota Limited Liability
Partnership,
By: Itasca Partners V, L.L.P., ____________________________
General Partner
By /s/ PROMOD HAQUE
- ----------------------------
Promod Haque, Partner
H&Q MACNET INVESTORS, L.P.
By
- ----------------------------
Its
- ----------------------------
21ST CENTURY COMMUNICATIONS T-E 21ST CENTURY COMMUNICATIONS FOREIGN
PARTNERS L.P., by Infomedia PARTNERS L.P., by Infomedia Associates,
Associates, L.P., a general L.P., a general partner
partner
By /s/ IRWIN LIEBER
By /s/ IRWIN LIEBER ----------------------------
- ---------------------------- Irwin Lieber, Treasurer
Irwin Lieber, Treasurer
FTL INVESTMENTS, INC.
By /s/ BURGESS D. RIDGE
- ----------------------------
Its Sr. Vice President-Admin.
- ----------------------------
FARLEY INDUSTRIES, INC.
By /s/ BURGESS D. RIDGE
- ----------------------------
Its Sr. Vice President-Admin.
- ----------------------------
-10-
<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 as further amended on June 10,
1994 and December 27, 1995 (as amended, the "Prior 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 July 3, 1996
---------
(this "Agreement").
---------
R E C I T A L S :
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 G 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.
"1933 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.
-------------
"Form S-3" means such form under the 1933 Act as in effect on the date
--------
hereof or any registration form under the 1933 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.
"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
<PAGE>
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, F or G Preferred Stock of the Company or Common Stock into which such
shares are converted.
"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, Series F Preferred Stock
and/or Series G Preferred Stock which is issued and outstanding from time to
time, whether now or hereafter.
"Registrable Securities" shall mean (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) or (ii) 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.
"Series G Agreement" shall mean that certain Series G Preferred Stock
------------------
Purchase Agreement of even date herewith among the Company and the purchaser
named therein.
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, Norwest Equity Partners V or FTL Investments, Inc. (in either case,
the "Initiating Holders") that the Company file a registration statement under
------------------
the 1933 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
<PAGE>
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 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 1933 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 1933 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
<PAGE>
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.
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 1933 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 Section 4 and Section 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 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. The Holders shall not be entitled under this Section
4 to request inclusion of Registrable Securities held by them in the Company's
first underwritten public offering pursuant to an effective registration
statement under the 1933 Act provided the closing of such offering occurs on or
prior to September 30, 1996.
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
<PAGE>
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 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 1933 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 1933 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.
<PAGE>
(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 1933 Act, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a Material Fact or omits to state a Material Fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
(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
1933 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
<PAGE>
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.
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 1933 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 1933 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
1933 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
<PAGE>
not misleading; or (iii) any violation or alleged violation by the Company of
the 1933 Act, the 1934 Act, any other federal or state law or any rule or
regulation promulgated under the 1933 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 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 1933
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
<PAGE>
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 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 1933
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
<PAGE>
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 Connect
GmbH Informations Systeme quotaholders and certain shareholders of the Company
(the "GmbH Agreement"), the Company granted piggy-back 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. With respect to those
shares of the GmbH Shares which are being transferred (the "Transferred Series E
--------------------
Stock") pursuant to that certain Stock Transfer Agreement between certain of the
- -----
GmbH Holders and the Series E Purchaser named therein, such Stock Transfer
Agreement being of even date hereof and in the form attached as Exhibit A to the
---------
Series G Agreement, the Series E Purchaser shall, with respect to the
Transferred Series E Stock, have the rights set forth in this Agreement.
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 1933 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 1933 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 1933 Act
and any other rule or
<PAGE>
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;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 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 1933 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.
<PAGE>
(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.
(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
<PAGE>
(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 and Series G Preferred
Stock, voting together as a single class, (or the Common Stock issued upon
conversion thereof) then outstanding that are Registrable Securities.
(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) This Agreement replaces and supersedes in its entirety the Prior
Rights Agreement, and, as of the date hereof, the Prior Rights Agreement is
hereby terminated and of no further force and effect.
[Signature Pages Follow]
<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/ THOMAS P. KEHLER
-------------------------------------
Thomas P. Kehler, President
/s/ MICHAEL MULLER
-------------------------------------
Michael Muller
21ST CENTURY COMMUNICATIONS PARTNERS, L.P.,
by Infomedia Associates, L.P., a general
partner
By: /s/ IRWIN LIEBER
-------------------------------------
Irwin Lieber, Treasurer
RRE CONNECT INVESTORS, L.P.
By: RRE PARTNERS, L.L.C., its
general partner
By: /s/ STUART ELLIMAN
-------------------------------------
Its: /s/ Managing Director
-------------------------------------
QUAESTUS PARTNER FUND, by its managing
general partner Quaestus Management
Corporation
By: /s/ RICHARD WEENING
-------------------------------------
Its: President
-------------------------------------
<PAGE>
NETWORK PARTNERS, by its managing general
partner Quaestus Management Corporation
By: /s/ RICHARD WEENING
-------------------------------------
Its: President
-------------------------------------
QUAESTUS LIMITED PARTNERSHIP
By: /s/ RICHARD WEENING
-------------------------------------
Its: President, RPI Holdings, Inc.,
-------------------------------------
its General Partner
VOLPE, WELTY & COMPANY HYBRID FUND I
By: /s/ William B. Welty
-------------------------------------
Its: General Partner
-------------------------------------
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
-------------------------------------
<PAGE>
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/ RORY T. O'DRISCOLL
-------------------------------------
Its: Vice President
-------------------------------------
BA VENTURE PARTNERS I
By: /s/ RORY T. O'DRISCOLL
-------------------------------------
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
-------------------------------------
H&Q MACNET INVESTORS, L.P.
By:
-------------------------------------
Its:
-------------------------------------
<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
FTL INVESTMENTS, INC.
By /s/ BURGESS D. RIDGE
-------------------------------------
Its Sr. Vice President-Admin.
-------------------------------------
FARLEY INDUSTRIES, INC.
By /s/ BURGESS D. RIDGE
-------------------------------------
Its Sr. Vice President-Admin.
-------------------------------------
<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.
FTL Investments, Inc.
Farley Industries, Inc.
<PAGE>
Exhibit 11.1
<TABLE>
<CAPTION>
CONNECT, INC.
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
Six Months Ended
Year Ended December 31, June 30,
----------------------- ---------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net loss $(1,920,583) $(1,764,535) $(14,138,931) $(7,100,787) $(9,127,209)
Weighted average common shares
outstanding during the period 229,642 308,024 381,531 379,140 460,337
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 13,714,619 13,795,816
Primary net loss per share $(.14) $(.13) $(1.03) $(.52) $(.66)
Total per above 13,717,010 13,714,619 13,795,816
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 17,861,277 17,942,474
share
Pro forma net loss per share $(.79) $(.40) $(.51)
</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 July __, 1996, in the
Registration Statement (Form S-1) and related Prospectus of CONNECT, Inc. for
the registration of 3,162,500 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
July 5, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 12,928,911 5,794,317
<SECURITIES> 0 0
<RECEIVABLES> 1,329,624 2,030,180
<ALLOWANCES> 320,000 372,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 14,410,354 8,298,524
<PP&E> 5,348,278 6,192,553
<DEPRECIATION> 2,085,248 2,893,563
<TOTAL-ASSETS> 18,062,529 11,921,685
<CURRENT-LIABILITIES> 3,108,195 5,511,345
<BONDS> 0 0
0 0
37,041,259 37,979,108
<COMMON> 7,107,474 7,335,905
<OTHER-SE> 30,830,579 40,118,876<F1>
<TOTAL-LIABILITY-AND-EQUITY> 18,062,529 11,921,685
<SALES> 287,471 1,511,299
<TOTAL-REVENUES> 8,572,898 3,988,796
<CGS> 139,961 283,062
<TOTAL-COSTS> 5,591,854 4,581,367
<OTHER-EXPENSES> 16,175,219 8,555,689
<LOSS-PROVISION> 182,984 56,287
<INTEREST-EXPENSE> 1,002,761 181,320
<INCOME-PRETAX> (14,164,931) (9,127,209)
<INCOME-TAX> (26,000) 0
<INCOME-CONTINUING> (13,194,175) (9,148,260)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (14,138,931) (9,127,209)
<EPS-PRIMARY> (.79) (.51)
<EPS-DILUTED> 0 0
<FN>
<F1>Includes deferred compensation
</FN>
</TABLE>
