<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 000-20873
CONNECT, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0431045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Indentification Number)
515 Ellis Street
Mountain View, California 94043-2242
(Address of principal executive offices) (Zip code)
(415) 254-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of October 31, 1996 there were 18,548,092 shares of the Registrant's Common
Stock outstanding.
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CONNECT, INC.
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of 3
September 30, 1996 and December 31, 1995.
Condensed Statements of Operations for the three months 4
and nine months ended September 30, 1996 and 1995.
Condensed Statements of Cash Flows for the 5
nine months ended September 30, 1996 and 1995.
Notes to Condensed Financial Statements. 6
ITEM 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations.
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to Vote of Security Holders. 13
ITEM 6. Exhibits and Reports on Form 8-K. 13
SIGNATURES
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONNECT, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,035 $ 12,929
Accounts receivable, net 1,732 1,009
Prepaid expenses and other current assets 448 472
------------ -----------
Total current assets 19,215 14,410
------------ -----------
Property and equipment, net 3,507 3,263
Deposits and other assets 163 389
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Total assets $ 22,885 $ 18,062
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable $ 59 $ 195
Accounts payable 1,816 622
Accrued payroll and related expenses 1,050 306
Other accrued liabilities 1,303 708
Deferred revenue 227 423
Current portion of long term debt 241 252
Obligations under capital leases 534 602
------------ -----------
Total current liabilities 5,230 3,108
Long-term liabilities:
Notes payable 22 67
Long-term portion of extended vendor liabilities 495 656
Long-term obligations under capital leases 506 913
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Total long-term liabilities 1,023 1,636
Stockholders' equity:
Preferred stock
Authorized shares-10,000,000 at - -
September 30, 1996
Issued and outstanding shares
- none
Convertible preferred stock:
Authorized shares none and
55,544,540 at September 30,
1996 and December 31, 1995,
respectively
Issued and outstanding shares-
none and 14,112,899 at
September 30, 1996 and
December 31, 1995, respectively - 37,041
Common Stock:
Authorized shares 40,000,000
and 50,000,000 at
September 30, 1996 and
December 31,1995, respectively
Issued and outstanding shares
18,548,092 and 398,624 shares
at September 30, 1996 and
December 31, 1995, respectively.
$.001 par value at September 30,
1996, no par value December 31,
1995 18 7,108
Additional paid-in capital 60,687 -
Deferred compensation (150) -
Accumulated deficit (43,923) (30,831)
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Total stockholders' equity 16,632 13,318
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Total liabilities and stockholders' equity $ 22,885 $ 18,062
============ ===========
</TABLE>
See accompanying notes.
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CONNECT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE:
License $ 1,227 $ 34 $ 2,738 $ 123
Service 1,710 693 4,187 6,157
--------- --------- --------- ---------
Total revenue 2,937 727 6,925 6,280
--------- --------- --------- ---------
COST OF REVENUE:
License 221 41 504 98
Service 2,084 842 6,382 4,218
--------- --------- --------- ---------
Total cost of revenue 2,305 883 6,886 4,316
--------- --------- --------- ---------
Gross profit (loss) 632 (156) 39 1,964
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 1,372 1,834 3,598 3,342
Sales and marketing 2,678 984 7,786 2,278
General and administrative 643 774 1,864 2,768
Termination of distribution rights - - - 4,057
--------- --------- --------- ---------
Total operating expenses 4,693 3,592 13,248 12,445
--------- --------- --------- ---------
Loss from operations (4,061) (3,748) (13,209) (10,481)
--------- --------- --------- ---------
Interest expense (79) (296) (261) (680)
Interest income and other income 175 11 378 27
--------- --------- --------- ---------
Loss before income taxes (3,965) (4,033) (13,092) (11,134)
--------- --------- --------- ---------
Provision (benefit) for income taxes - - - -
--------- --------- --------- ---------
Net loss $ (3,965) $ (4,033) $(13,092) $(11,134)
========= ========= ========= =========
Pro forma net loss per share $ (.23) $ (.23) $ (.74) $ (.63)
========= ========= ========= =========
Shares used in computing
pro forma net loss per share 17,320 17,810 17,613 17,812
========= ========= ========= =========
</TABLE>
See accompanying notes.
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CONNECT, INC.
CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
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1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(13,092) $(11,134)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,294 801
Amortization of deferred compensation 19 -
Termination of distribution rights - 1,418
settled in Series E Preferred stock
Deferred income taxes 0 77
Changes in assets and liabilities:
Accounts receivable (723) 259
Prepaid expenses and other current 24 (168)
assets
Deposits and other assets 226 5
Accounts payable, payroll and 2,360 1,518
related expenses, other accrued
expenses and extended vendor
liabilities
Deferred revenue (195) (2,710)
-------- --------
Net cash used in operating activities (10,085) (9,934)
INVESTING ACTIVITIES:
Purchases of property and equipment (1,525) (1,677)
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Net cash used in investing activities (1,525) (1,677)
FINANCING ACTIVITIES:
Proceeds from sale and leaseback of
equipment at net book value - 1,197
Proceeds from issuance of convertible 3,901 -
preferred stock
Proceeds from initial public offering 12,422 -
Proceeds from issuance of common stock 63 9
Proceeds from issuance of notes payable - 9,560
Repayment of principal under capital (489) (349)
lease obligations
Repayment of principal on notes payable (181) (314)
-------- --------
Net cash provided by financing 15,716 10,103
activities
Net increase (decrease) in cash and 4,106 (1,508)
cash equivalents
Cash and cash equivalents at beginning of period 12,929 1,594
-------- --------
Cash and cash equivalents at end of period $ 17,035 $ 86
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 259 $ 317
Cash paid for income taxes $ 1 $ 5
Supplemental non-cash investing and financing information:
Notes payable to stockholders, including $ 0 $ 153
$27 of accrued interest, converted into
Series D preferred stock
Incurrence of capital lease obligations $ 14 $ 332
Conversion of convertible preferred stock $ 40,943 $ -
into common stock
</TABLE>
See accompanying notes.
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CONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1) THE COMPANY AND SIGNIFICANT ACCOUNTING P0LICIES
BASIS OF PRESENTATION
CONNECT, Inc. ("CONNECT" or the "Company"), is a leading provider of
Internet-based interactive commerce and order management application software.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The financial information should be read in
conjunction with the financial statements and notes thereto included in the
Company's Registration Statement on Form S-1 (the "Prospectus"), which was
declared effective August 14, 1996 by the Securities and Exchange Commission.
The results of operations for such interim periods are not necessarily
indicative of the results that may be expected for the full fiscal year or for
any future periods.
2) NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Except as noted below, net loss per share is based on the weighted
average number of shares of common stock outstanding during the period
presented. Common equivalent shares from convertible preferred stock (using
the if-converted 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
initial public offering price during the twelve-month period prior to the
initial public offering have been included in the calculation as if they were
outstanding for all periods presented through June 30, 1996 (using the treasury
stock method at a per share price of $6.00, the initial public offering price).
Per share information calculated on this basis is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Net loss per share $ (0.41) $ (0.30) $ (1.06) $ (0.81)
Shares used in computing 9,737 13,663 12,321 13,665
net loss per share
Pro forma net loss per share presented in the Statements of Operations
has been computed as described above and also gives retroactive effect, even if
anti-dilutive, to common equivalent shares from convertible preferred stock
that were automatically converted to common stock upon the closing of the
initial public offering (using the if-converted method).
3) INITIAL PUBLIC OFFERING
In August 1996, the Company completed its initial public offering of
2,400,000 shares of common stock. The Company received net proceeds of
approximately $12.4 million after deducting expenses and underwriting
discounts. Upon closing of the offering, all then outstanding preferred stock
converted into approximately 15,503,000 shares of common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ significantly from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed under the caption, "Risk
Factors" in the Prospectus as well as elsewhere in this Quarterly Report on
Form 10-Q. In particular such factors include: the Company's ability to
implement its products; acceptance by the marketplace of the Company's products
and services; the Company's ability to develop new products and services to
meet market demand or incorporate evolving industry standards; the Company's
ability to compete effectively; acceptance of the Internet as a medium for
electronic commerce and order management; the Company's dependence on the
Internet infrastructure; the Company's dependence on certain third party
software and services vendors; and the Company's ability to protect its
intellectual property. Readers are cautioned not to place undue reliance on
these forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Prospectus, the Annual Report
on Form 10-K to be filed by the Company for the fiscal year ended December 31,
1996, the Quarterly Reports on Form 10-Q to be filed by the Company in 1996 and
1997 and any Current Reports on Form 8-K filed by the Company.
OVERVIEW
The Company designs, develops, markets and supports packaged application
software for Internet-based interactive commerce. The Company was founded in
1987 to provide on-line information services to businesses. During the period
1987 through 1992, the Company's primary business was the operation and
management of a private on-line service and the licensing of related client
software. In 1993 and 1994, the Company also offered software for creation,
access and operation of custom on-line systems. In late 1994, the Company began
to shift its focus from providing on-line 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 pre-configured implementation of OneServer, which was commercially
released in June 1996. (OneServer, OrderStream are trademarks of the Company).
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 on-line 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.
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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 on-line
services. License revenue is recognized on shipment of the application
software provided there are no significant remaining obligations and the
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 materially from management's estimates
and such differences could have a material adverse effect on the Company's
operating results and financial conditions.
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 on-line 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 its
inception and as of September 30, 1996, has an accumulated deficit of $43.9
million. The Company's operating expenses have increased substantially since
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 and continue to develop and
upgrade its products and technologies. There can be no assurance that the
Company will succeed in addressing any or all these risks. See "Risk Factors" in
the Prospectus.
REVENUE
Total revenue was $2,937,000 for the three months ended September 30,
1996, compared to $727,000 for the three months ended September 30, 1995.
Total revenue for the nine months ended September 30, 1996 was $6,925,000,
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compared to $6,280,000 for the nine months ended September 30, 1995. Three
customers represented approximately 11%, 13%, and 16% of total revenue for the
first nine months of 1996. One customer contributed 29% of total revenue
during the third quarter of 1996. In 1995, two customers accounted for 64% of
total revenue for the nine months, and 19% during the third quarter.
License revenue was $1,227,000, or 42% of total revenue, for the quarter
ended September 30, 1996 and $2,738,000, or 40% of total revenue, for the nine
months ended September 30, 1996. License revenue was $34,000, or 5% of total
revenue, for the third quarter ended September 30, 1995 and $123,000, or 2% of
total revenue, for the nine months ended September 30, 1995. The increase in
license revenue as a percentage of total revenue was due primarily to the
introduction of the OneServer and OrderStream products in September 1995 and
June 1996, respectively. Prior to the introduction of these products the
Company's primary business was the operation and management of on-line
services.
Service revenue was $1,710,000, or 58% of total revenue, for the quarter
ended September 30, 1996 and $4,187,000, or 60% of total revenue, for the nine
months ended September 30, 1996. Service revenue was $693,000, or 95% of total
revenue, for the quarter ended September 30, 1995 and $6,157,000, or 98% of
total revenue, for the nine months ended September 30, 1995. In the first six
months of 1995 service revenue consisted primarily of revenue associated with
contract software development projects with AT&T Corp. and a subsidiary of IDG
Corporation. Both contracts were completed in June of 1995. The Company expects
that service revenue will continue to decline as a percent of total revenue due
to the Company's focus on licensing the Company's OneServer and OrderStream
products versus professional services development contracts and on-line
services.
COST OF REVENUE
Cost of license revenue was approximately $221,000, or 18% of license
revenue, for the quarter ended September 30, 1996 and $504,000, or 18% of
license revenue, for the nine months ended September 30, 1996. Comparable
numbers for 1995 were approximately $41,000, or 121% of license revenue, for
the quarter ended September 30, 1995 and approximately $98,000, or 80% of
license revenue, for the nine months ended September 30, 1995. Cost of license
revenue includes sublicense fees and expenses relating to product media. The
relatively high cost as a percentage of license revenue in 1995 is primarily
attributable to the cost of media and documentation associated with the
introduction of OneServer.
Cost of service revenue was approximately $2,084,000, or 122% of service
revenue, for the quarter ended September 30, 1996 and $6,382,000, or 152% of
service revenue, for the nine months ended September 30, 1996. Comparable
numbers for 1995 were approximately $842,000, or 122% of service revenue, for
the quarter ended September 30, 1995 and $4,218,000, or 69% of service revenue,
for the nine months ended September 30, 1995. Cost as a percentage of service
revenue for the first nine months of 1996 are higher than the comparable prior
year period due to the timing and extent of professional services rendered to
OneServer and OrderStream customers in 1996.
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OPERATING EXPENSES
Research and development expenses consist primarily of personnel and
equipment costs. Research and development expenses decreased 25% to $1,372,000
for the quarter ended September 30, 1996 from $1,834,000 during the third
quarter ended September 30, 1995 due to reduced research and development
staffing in 1996 following OneServer's introduction in September 1995 and
OrderStream's introduction in June 1996. For the nine month period ended
September 30, 1996 research and development expenses increased approximately 8%
to $3,598,000 from $3,342,000 in the similar prior year period.
Sales and marketing expenses consist primarily of salaries and sales
commissions of sales and marketing personnel and travel, marketing and
promotional expenses. Sales and marketing expenses were approximately
$2,678,000 for the quarter ended September 30, 1996 and $7,786,000 for the nine
months ended September 30, 1996. Comparable numbers for 1995 were $984,000 for
the quarter ended September 30, 1995 and $2,278,000 for the nine months ended
September 30, 1995. This represents a 172% and a 242% increase, respectively,
from comparable periods in the prior year due to increased staffing and
commissionable sales.
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 17% to $643,000 for the quarter ended September 30, 1996 from
$774,000 during the third quarter ended September 30, 1995. For the nine
months ended September 30, 1996 general and administrative expenses decreased
33% to $1,864,000 from $2,768,000 in the similar prior year period. This
reduction is due, in part, to reduced staffing and consulting in the general
and administrative area.
Termination of Distribution Rights reflects the one-time expense of
$4,057,000 in the first nine months of 1995 related to the Company's
termination of exclusive European distribution rights of its former European
distributor. The distributor had acquired exclusive rights for distributing
certain of the Company's software and services in Europe. The Company decided
to negotiate the termination of the distributor's rights primarily because the
distributor was not performing to the Company's standards and the Company
wanted to re-establish control over it European distribution channel.
Interest expense consists primarily of interest incurred on equipment
lease financing and on bridge loans from shareholders. Interest expense
decreased 73% to $79,000 for the quarter ended September 30, 1996 from $296,000
during the third quarter ended September 30, 1995. For the nine month period
ended September 30, 1996 interest expenses decreased 62% to $261,000 from
$680,000 in the similar prior year period primarily due to the bridge loans
converting to preferred stock in December 1995.
Interest income consists primarily of interest earned on cash and cash
equivalents and short term investments. Interest income increased to
approximately $175,000 and $378,000 for the three and nine month periods ended
September 30, 1996 respectively, from negligible levels for the same three and
nine month periods ended September 30, 1995. This increase is attributable to
higher average cash, cash equivalents, and short term investment balances as a
result of the December 1995 and July 1996 preferred stock financings and the
Company's initial public offering of common stock in August 1996.
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The Company has a tax loss carry forward and is currently posting losses
for tax purposes. Accordingly, there is no provision for income taxes.
FACTORS AFFECTING 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, non-renewal 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 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
Prior to its initial public offering, the Company financed its
operations primarily through the private sale of equity securities and the use
of capital
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leases for equipment. On July 3, 1996 the Company raised approximately $3
million, net of issuance costs, with the issuance of convertible preferred
stock, which was subsequently converted into shares of common stock at the time
of the initial public offering. On August 15, 1996 the Company completed its
initial public offering, raising net proceeds of approximately $12.4 million.
As of September 30, 1996 the Company had working capital of approximately $14
million.
The Company anticipates that its available cash resources are sufficient
to meet its presently anticipated working capital and capital expenditure
requirements through the end of 1997. This estimate is a forward-looking
statement that involves risks and uncertainties, and actual results may vary as
a result of a number of factors, including those discussed under "Risk Factors"
in the Prospectus and those discussed elsewhere herein. The Company may need to
raise additional funds in order to support more rapid expansion, develop new or
enhanced services, respond to competitive pressures, acquire complementary
businesses or technologies, or respond to unanticipated requirements. The
Company may seek to raise additional funds through private or public sales of
securities, strategic relationships, bank or lease financings, or otherwise. If
additional funds are raised through the issuance of equity securities,
stockholders of the Company may experience dilution, or the securities may have
rights, preferences, or privileges senior to those of the holders of the
Company's Common Stock. There can be no assurances that additional financing
will be available on acceptable terms, if at all. If adequate funds are not
available or are not available on acceptable terms, the Company may be unable to
develop or enhance its products, take advantage of future opportunities, or
respond to competitive pressures or unanticipated requirements, which could have
a material adverse effect on the Company's business, operating results and
financial condition.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1. In July 1996, the Company solicited and received stockholder
approval by written consent for the amendment of the Certificate of
Incorporation of the Company in connection with the sale of convertible
preferred stock by the Company. With respect to this matter, 12,952,944 shares
(on a post-reincorporation, as-converted basis) were voted in favor of such
proposal and no shares were voted against such proposal.
2. In July 1996, in connection with the Company's initial public
offering, the Company solicited and received stockholder approval by written
consent for (i) the Company's reincorporation from the State of California to
the State of Delaware, (ii) approval of the adoption of the 1996 Employee Stock
Purchase Plan, (iii) approval of the 1996 Directors' Stock Option Plan, and (iv)
approval of an amendment of the 1996 Stock Option Plan to comply with certain
requirements of Rule 16b-3 of the Securities Exchange Act of 1934. With respect
to these matters, 14,221,835 shares (on a post-reincorporation, as-converted
basis) were voted in favor of such proposals and no shares were voted against
such proposals.
3. In August 1996, the Company solicited and received stockholder
approval by written consent for the amendment of the Certificate of
Incorporation of the Company in connection with the Company's initial public
offering. With respect to this matter, 15,455,036 shares (on a post-
reincorporation, as-converted basis) were voted in favor of such proposal and no
shares were voted against such proposal.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
three months ending September 30, 1996.
a) Exhibits
ITEM DESCRIPTION
---- -----------
11.1 Computation of Earnings Per Share
27 Financial Data Schedule
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONNECT, Inc.
Date: November 14, 1996 /s/ Thomas P. Kehler
- ------------------------- --------------------------
Thomas P. Kehler
President and Chief Executive
Officer
(Principal Executive Officer)
Date: November 14, 1996 /s/ Joseph Girata
- ------------------------- --------------------------
Joseph Girata
Vice President, Finance &
Administration and
Chief Financial Officer
(Principal Financial and
Accounting officer)
-14-
<PAGE>
EXHIBIT 11.1
CONNECT, INC.
STATEMENT REGARDING COMPUTATION OF PROFORMA NET LOSS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Loss $ (3,965) $ (4,033) $ (13,092) $ (11,134)
Weighted average common shares 9,737 378 3,552 379
outstanding:
Shares related to SAB No. 64 and 83 0 13,285 8,769 13,286
(Topic 4, Sec. D)
Conversion of preferred stock to 7,583 4,147 5,292 4,147
common stock not included
in shares related to SAB
No. 64 and 83
(Topic 4, Sec D)
--------- --------- --------- ---------
Total shares used in 17,320 17,810 17,613 17,812
Pro forma net loss per share ========= ========= ========= =========
Net Loss per share $ (0.23) $ (0.23) $ (0.74) $ (0.63)
========= ========= ========= =========
</TABLE>
* Not included as effects are anti-dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 17,035
<SECURITIES> 0
<RECEIVABLES> 1,732
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,215
<PP&E> 6,157
<DEPRECIATION> 2,650
<TOTAL-ASSETS> 22,885
<CURRENT-LIABILITIES> 5,230
<BONDS> 0
0
0
<COMMON> 60,555
<OTHER-SE> (43,923)
<TOTAL-LIABILITY-AND-EQUITY> 22,885
<SALES> 1,227
<TOTAL-REVENUES> 2,937
<CGS> 221
<TOTAL-COSTS> 2,305
<OTHER-EXPENSES> 4,693
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> (3,965)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,965)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,965)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
