<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1996
REGISTRATION NO. 333-05391
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4
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
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
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 ANTHONY M. ALLEN
EDWARD Y. KIM CRAIG M. SCHMITZ
VENTURE LAW GROUP GUNDERSON DETTMER STOUGH VILLENEUVE
A PROFESSIONAL CORPORATION FRANKLIN & HACHIGIAN, LLP
2800 SAND HILL ROAD 600 HANSEN WAY
MENLO PARK, CA 94025 PALO ALTO, CA 94304
(415) 854-4488 (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. [_]
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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
Counsel....................... Not Applicable
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 29, 1996
PROSPECTUS
2,750,000 SHARES
[LOGO OF CONNECT(R)]
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 $8.00 and $10.00 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." Upon completion of the offering, affiliates of the Company
will beneficially own approximately 69.8% of the Company's Common Stock.
-------------
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)............... $ $ $
===============================================================================
</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 (which Forrester
Research, Inc. does not separately estimate), will grow from less than $1.0
million in 1995 to over $1.7 billion in 1999.
CONNECT's core product, OneServer, which was commercially released in
September 1995, 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. During the six
months ended June 30, 1996, Fruit of the Loom, Inc. and Time Warner Cable
accounted for approximately 25% and 17%, respectively, of the Company's total
revenue. No other customer accounted for more than 10% of the Company's total
revenue during the first six months of 1996.
The Company was incorporated under the laws of the State of California in
April 1987 and was reincorporated in Delaware in July 1996. 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 18,786,742 shares(1)
the offering............................
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).. 17,814 17,811 17,893
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 5,794 $27,537
Working capital ......................................... 2,787 24,530
Total assets............................................. 11,922 33,664
Long-term debt........................................... 1,214 1,214
Stockholders' equity .................................... 5,196 26,938
</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 $1.78
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 $9.00 per share. See "Use of
Proceeds."
----------------
Except as otherwise noted herein, all information in this Prospectus assumes
(i) 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 primarily as a result of increased research and development
expenses relating to the development of OrderStream and Version 1.2 of
OneServer and increased sales and marketing expenses attributable to the
building of a direct sales force and development of a position in the emerging
Internet-based packaged application software market. 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 due to increasing adoption of Windows NT by the
Company's potential customers. The Company has not begun the development work
necessary to port its software to Windows NT. 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
6
<PAGE>
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 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. Although the Company did not experience significant delays in
implementing its applications for the three customers currently commercially
operating OneServer, the Company has limited experience with implementing its
applications, and most of the Company's other OneServer and OrderStream
customers are at an early stage in the process of implementing the
application. 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
13
<PAGE>
or preventing a change of control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the
holders of Common Stock. The Company has no present plans to issue shares of
Preferred Stock. Further, certain provisions of the Company's charter
documents, including provisions eliminating the ability of stockholders to
take action by written consent and limiting the ability of stockholders to
raise matters at a meeting of stockholders without giving advance notice, may
have the effect of delaying or preventing changes in control or management of
the Company, which could have an adverse effect on the market price of the
Company's Common Stock. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
offering or the anticipation of such sales could materially affect then
prevailing market prices. All of the 2,750,000 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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<PAGE>
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 $21,742,500 ($25,195,125 if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $9.00 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 $9.00.
<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 67,038
Deferred compensation......................... (161) (161) (161)
Accumulated deficit........................... (39,958) (39,958) (39,958)
-------- -------- --------
Total stockholders' equity................... 5,196 5,196 26,938
-------- -------- --------
Total capitalization......................... $ 7,323 $ 7,323 $ 29,065
======== ======== ========
</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 $1.78
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 $9.00 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 $26,900,000 or $1.45 per share of Common Stock.
This represents an immediate increase in net tangible book value of $1.12 per
share to existing stockholders and an immediate dilution of $7.55 per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $9.00
Pro forma net tangible book value per share before the
offering..................................................... $0.33
Increase attributable to new investors........................ 1.12
-----
Pro forma net tangible book value after the offering........... 1.45
-----
Dilution per share to new investors............................ $7.55
=====
</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% $46,293,319 65.2% $2.94
New investors.......... 2,750,000 14.9 24,750,000 34.8 9.00
---------- ----- ----------- -----
Total................. 18,513,992 100.0% $71,043,319 100.0%
========== ===== =========== =====
</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 $1.78 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..... 17,814 17,811 17,893
======== ======= =======
</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 $1.4 million of revenue from private online services
and $1.0 million of 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. The contract obligations
related to agreements with two customers under which the Company licensed its
OneServer software and agreed to perform certain implementation services for a
fixed price. The charges recorded related to implementation costs which are
projected to exceed the implementation fees due under the agreements. The
charges were recorded in the first quarter of 1996 in accordance with
generally accepted accounting principles which provide that such charges must
be recorded when they are probable and reasonably estimable. From time to time
the Company may continue to enter into fixed price arrangements for its
implementation services and currently has three arrangements, including the
two described above. Such fixed price arrangements also could result in losses
if there are delays or cost increases in implementation services or
complexities associated with completion of the projects. See "Risk Factors--
Risks Associated with Complex Software Products; Lengthy Sales and
Implementation Cycles."
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.
21
<PAGE>
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
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. 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
reestablish control over its European distribution channel.
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. Service revenue from online
services in 1993, 1994 and 1995 was $2.7 million, $3.5 million and $3.0
million, respectively. 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.
22
<PAGE>
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.
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. 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 reestablish control over its European
distribution channel.
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.
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<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, (which Forrester does not separately
estimate), 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.
[CHART APPEARS HERE]
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:
LOGO
[DIGITIZED ARTWORK OF ONESERVER FUNCTIONALITY]
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.
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<PAGE>
Maintenance and Support. The Company provides software maintenance including
product updates and technical support to its customers and Solutions Partners.
The Company offers two levels of support which differ in the hours that the
customer may access support personnel. Fees charged depend upon the support
level and size of the customer's application.
Hosting Services. CONNECT offers system hosting services for its customers'
OneServer and OrderStream applications. These services include installing the
application on a remote server located at CONNECT's headquarters or a Solution
Partner's site, maintaining and administering the database, and other system
management services. The Company provides these services on a fee basis to
customers who do not want to operate and manage their own Internet-based
applications. The Company is actively recruiting Solutions Partners to provide
such hosting services.
Online Services. Since 1988, the Company has provided private online
services to various businesses and other organizations. These services include
e-mail, user forums and access to public and private information resources and
are marketed under the 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. The Company and PhotoDisc have entered into a software license
agreement pursuant to which PhotoDisc received a non-exclusive, non-
transferable, perpetual license to use OneServer on a designated platform in
exchange for paying certain one-time license fees to CONNECT. The agreement
also provides for additional fees to be paid for optional training, software
support and other professional services.
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<PAGE>
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 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." The
Company and Fruit of the Loom have entered into a software license agreement
pursuant to which Fruit of the Loom received a non-exclusive, non-
transferable, perpetual license to use OneServer on a designated platform in
exchange for paying certain one-time license fees to CONNECT. The agreement
also provides for additional fees to be paid for optional training, software
support and other professional services.
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. The Company and ENTEX have entered into a
software license agreement pursuant to which ENTEX received a non-exclusive,
non-transferable, perpetual license to use OrderStream on a designated
platform in exchange for paying certain one-time license fees to CONNECT. The
agreement also provides that for a fixed fee CONNECT will perform
implementation services for ENTEX in connection with ENTEX's deployment of
OrderStream. The agreement provides for additional fees to be paid for
optional training, software support and other professional services.
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. The Company and Time Warner Cable have entered
into a software development and license agreement pursuant to which Time
Warner Cable received a non-exclusive, non-transferable, perpetual license to
use OneServer on a designated platform in exchange for paying certain one-time
license fees to Connect. The agreement also provides that for a fixed fee
Connect will perform implementation and custom software development services
for Time Warner Cable in connection with the deployment of DreamShop. The
agreement provides for additional fees to be paid for optional training,
software support and other professional services.
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:
[DIGITIZED ARTWORK OF MULTI-LAYER ARCHITECTURE]
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), an encryption-based security protocol. In addition,
for more complex applications, OneServer supports Microsoft's Visual Basic
and Visual C++ programming languages, as well as Sun Microsystems' Java,
a network-specific programming language.
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, a standard for interfacing
external applications with information servers) 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
client/server protocol for handling transactions, as well as 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
---- --- --------
<C> <C> <S>
Gordon J. Bridge 53 Chairman of the Board and
Director
Thomas P. Kehler 49 President, Chief Executive
Officer and Director
Joseph G. Girata 52 Vice President of Finance and
Administration, Chief Financial
Officer and Secretary
Kenneth M. Ross 43 Chief Technical Officer and
Executive Vice President of
Development
Barton S. Foster 31 Vice President of Marketing
Paul A. Lansky 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. Since August 1988, Mr. Welty has been a stockholder of the General
Partner of Volpe, Welty & Company, an investment banking firm, and since
January 1993, has been 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."
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
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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 stockholder of the 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. In January 1996, the Company granted options to
purchase 95,000 shares and 125,000 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 $0.50 per share. Pursuant to the terms of such options,
2.78% of the shares issuable under such options vest in equal monthly
installments following the grant date. In June 1996, the Company issued an
option to purchase 175,000 shares at
47
<PAGE>
an exercise price of $9.60 per share to Joseph G. Girata, Vice President of
Finance and Administration and Chief Financial Officer. Of the shares issuable
under such option 25% vest on the first anniversary of the vesting
commencement date, with the remaining shares vesting in equal monthly
installments over the three years thereafter. 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
February 16 and August 16 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 August 15, 1998, with the first purchase date occurring on February
15, 1997, 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, the
Company has adopted 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 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 stockholder of the 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."
Upon completion of the offering, 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 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 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 contains 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 currently do not
intend to release any shares from the lock-up arrangements set forth above.
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 Rule 2720 of the Conduct Rules of the
National Association of Securities Dealers, Inc. ("Rule 2720"). Consequently,
this offering will be conducted in accordance with the provisions of Rule 2720
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 Rule 2720, 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. Further, in accordance with Rule 2720, the
Underwriters will comply with the suitability requirements of subsection (k)
of such Rule 2720 and will not make sales of shares of Common Stock offered
hereby to customers' discretionary accounts without the prior specific written
approval of such customers.
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.
Ernst & Young LLP
San Jose, California
February 23, 1996,
except for Note 14, as to which the date is
July 15, 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..... 17,813,739 17,811,348 17,892,545
============ =========== ===========
</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..... 13,515,192 13,593,574 13,667,081 13,664,690 13,745,887
========== ========== ========== ========== ==========
</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. The amount paid was
negotiated between the Company and its European distributor on an arm's-length
basis. The Company received an opinion from an independent financial advisor
as to the fair market value of the shares of Series E preferred stock at the
time of the negotiation to support its determination as to the value of the
amount paid.
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. The reincorporation of the Company and related
actions were completed in July 1996.
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
SCALABLE
TRANSACTION
MODEL
ADAPTABLE
BUSINESS
OBJECT
MODEL
WWW BROWSERS
HTTP, SSL, ETC.
TCP/IP
FUTURE
LISTENER
S-HTTP
LISTENER
SSL LISTENER
HTTP LISTENER
COMMON
GATEWAY INTERFACE
PERL
API
C/C++
API
DATA TRANSACTIONS
JAVA APPLETS
THE INTERNET
HTML TEMPLATE ENGINE
RAMP (REPRIORITIZABLE ASYNCHRONOUS MULTI-THREADED PROTOCOL)
TRANSACTION DISPATCHER
TRANSACTION MONITOR
TRACKING
TRANSACTIONS
DYNAMIC BUSINESS MODEL
OBJECT MANAGER
UNIX OPERATING SYSTEM
CUSTOM CLIENTS
CLIENT CODE
(C, C++ OR VB)
VB API(VBX)
CLASS API (C++)
RAMP API (C)
NETWORK LAYER
RAMP
LISTENER
USAGE TRACKING
SERVICE
EXTERNAL
TRANSACTION SYSTEM
CUSTOM TRANSACTIONS
ORACLE 7 RDBMS
THE ONESERVER PRODUCT ARCHITECTURE.
UNIX FILE SYSTEM
RSA ENCRYPTION
FULCRUM TEXT SEARCH
<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(R) 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 $3.13
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.
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+# Software License Agreement dated February 5, 1996 between the
Registrant and Entex Information Services Inc.
10.10**# Software License Agreement dated March 26, 1996 between the
Registrant and Union Underwear Company, Inc.
10.11+# Software License Agreement dated November 7, 1995 between the
Registrant and PhotoDisc, Inc.
10.12+# Amendment to Software License Agreement dated March 29, 1996
between the Registrant and PhotoDisc, Inc.
10.13+# Software Development and Distribution License Agreement dated
September 16, 1994 between the Registrant and Fulcrum
Technologies Inc. and related Amending Agreement, Amending
Agreement No. 2 and Amending Agreement No. 3.
10.14+# OEM Master License Agreement dated June 30, 1995 between the
Registrant and RSA Data Security, Inc.
10.15+ Letter Agreement dated May 10, 1995 between the Registrant and
Hambrecht & Quist Incorporated and related mutual release dated
June 6, 1996.
10.16+ Option agreement dated January 16, 1996 between the Registrant
and Thomas P. Kehler.
10.17+ Option agreement dated January 16, 1996 between the Registrant
and Gordon J. Bridge.
10.18+ Option agreement dated April 24, 1996 between the Registrant and
Gordon J. Bridge.
10.19+ Letter agreement dated October 19, 1995 between the Registrant
and Gordon J. Bridge, and related interpretive letter.
10.20+ Consulting Agreement dated March 9, 1992 between the Registrant
and Quaestus Limited Partnership.
10.21+ Form of Common Stock Warrant issued to Hambrecht & Quist LLC and
Volpe, Welty & Company on December 27, 1995.
10.22**# 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+# 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.
27+ Financial Data Schedule.
</TABLE>
- --------
**Supercedes exhibit previously filed.
+Previously filed.
#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. 4 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 29,
1996.
CONNECT, INC.
/s/ Thomas P. Kehler
By: __________________________________
THOMAS P. KEHLER, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
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
- ------------------------------------ Board, Director July 29, 1996
(GORDON J. BRIDGE)
/s/ Thomas P. Kehler President, Chief
- ------------------------------------ Executive Officer July 29, 1996
(THOMAS P. KEHLER) and Director
(Principal Executive
Officer)
/s/ Joseph G. Girata* Vice President of
- ------------------------------------ Finance and July 29, 1996
(JOSEPH G. GIRATA) Administration and
Secretary (Chief
Financial Officer
and Principal
Accounting Officer)
/s/ Promod Haque* Director
- ------------------------------------ July 29, 1996
(PROMOD HAQUE)
/s/ Rory T. O'Driscoll* Director
- ------------------------------------ July 29, 1996
(RORY T. O'DRISCOLL)
/s/ Richard H. Lussier* Director
- ------------------------------------ July 29, 1996
(RICHARD H. LUSSIER)
/s/ Terry R. McGowan* Director
- ------------------------------------ July 29, 1996
(TERRY R. MCGOWAN)
/s/ Richard W. Weening* Director
- ------------------------------------ July 29, 1996
(RICHARD W. WEENING)
/s/ William B. Welty* Director
- ------------------------------------ July 29, 1996
(WILLIAM B. WELTY)
</TABLE>
/s/ Thomas P. Kehler
*By: _______________________________
ATTORNEY-IN-FACT
II-5
<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+# Software License Agreement dated February 5, 1996
between the Registrant and Entex Information Services
Inc.
10.10**# Software License Agreement dated March 26, 1996
between the Registrant and Union Underwear Company,
Inc.
10.11+# Software License Agreement dated November 7, 1995
between the Registrant and PhotoDisc, Inc.
10.12+# Amendment to Software License Agreement dated March
29, 1996 between the Registrant and PhotoDisc, Inc.
10.13+# Software Development and Distribution License
Agreement dated September 16, 1994 between the
Registrant and Fulcrum Technologies Inc. and related
Amending Agreement, Amending Agreement No. 2 and
Amending Agreement No. 3.
10.14+# OEM Master License Agreement dated June 30, 1995
between the Registrant and RSA Data Security, Inc.
10.15# Letter Agreement dated May 10, 1995 between the
Registrant and Hambrecht & Quist Incorporated and
related mutual release dated June 6, 1996.
10.16+ Option agreement dated January 16, 1996 between the
Registrant and Thomas P. Kehler.
10.17+ Option agreement dated January 16, 1996 between the
Registrant and Gordon J. Bridge.
10.18+ Option agreement dated April 24, 1996 between the
Registrant and Gordon J. Bridge.
</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**# 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+# 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.
27+ Financial Data Schedule.
</TABLE>
- --------
**Supercedes exhibit previously filed.
+Previously filed.
#Confidential treatment requested.
<PAGE>
EXHIBIT 1.1
2,500,000 Shares
CONNECT, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
July __, 1996
LEHMAN BROTHERS INC.
VOLPE, WELTY & COMPANY
UBS SECURITIES LLC
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Ladies and Gentlemen:
CONNECT, INC., a Delaware corporation (the "Company"), proposes to
sell an aggregate of 2,750,000 shares (the "Firm Stock") of the Company's common
stock, par value $.001 per share (the "Common Stock"). In addition, the Company
proposes to grant to the Underwriters named in Schedule 1 hereto (the
"Underwriters") an option to purchase up to an additional 375,000 shares of the
Common Stock on the terms and for the purposes set forth in Section 2 (the
"Option Stock"). The Firm Stock and the Option Stock, if purchased, are
hereinafter collectively called the "Stock." This is to confirm the agreement
concerning the purchase of the Stock from the Company by the Underwriters named
in Schedule 1 hereto (the "Underwriters").
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1, and amendments thereto,
with respect to the Stock has (i) been prepared by the Company in
conformity in all material respects with the requirements of the
United States Securities Act of 1933 (the "Securities Act") and the
rules and regulations (the "Rule and Regulations") of the United
States Securities and Exchange Commission (the "Commission")
thereunder, (ii) been filed with the Commission under the Securities
Act and (iii) become effective under the Securities Act. Copies of
such registration statement and the amendment thereto have been
delivered by the Company to you as the representatives (the
"Representatives") of the Underwriters. As used in this Agreement,
"Effective Time" means the date and the time as of which such
registration statement, or the most recent post-effective amendment
thereto, if any, was declared effective by the Commission; "Effective
Date" means the date of the
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Effective Time; "Preliminary Prospectus" means each prospectus
included in such registration statement, or amendments thereof, before
it became effective under the Securities Act and any prospectus filed
with the Commission by the Company with the consent of the
Representatives pursuant to Rule 424(a) of the Rules and Regulations;
"Registration Statement" means such registration statement, as amended
at the Effective Time, including all information contained in the
final prospectus filed with the Commission pursuant to Rule 424(b) of
the Rules and Regulations in accordance with Section 5 hereof and
deemed to be a part of the registration statement as of the Effective
Time pursuant to paragraph (b) of Rule 430A of the Rules and
Regulations; and "Prospectus" means such final prospectus, as first
filed with the Commission pursuant to paragraph (1) or (4) of Rule
424(b) of the Rules and Regulations. The Commission has not issued any
order preventing or suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or
the Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all material respects to
the requirements of the Securities Act and the Rules and Regulations
and do not and will not, as of the applicable effective date (as to
the Registration Statement and any amendment thereto) and as of the
applicable filing date (as to the Prospectus and any amendment or
supplement thereto) contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided that
no representation or warranty is made as to information contained in
or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with written information furnished to
the Company through the Representatives by or on behalf of any
Underwriter specifically for inclusion therein.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in
which its ownership or lease of property or the conduct of its
business requires such qualification, and the failure to be so
qualified would cause a material adverse effect upon the Company, and
has all corporate power and corporate authority necessary to own or
hold its properties and to conduct the business in which it is
engaged; and the Company has no subsidiaries other than Connect
Worldwide, Inc., an inactive wholly-owned subsidiary.
(d) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully
paid and non-assessable and conform to the description thereof
contained in the Prospectus.
(e) The unissued shares of the Stock to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly
authorized and, when issued and delivered against payment therefor as
provided herein, will
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be duly and validly issued, fully paid and non-assessable; and the
Stock will conform to the description thereof contained in the
Prospectus.
(f) This Agreement has been duly authorized, executed and
delivered by the Company.
(g) The execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated
hereby will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which the Company is a party or by which the Company
is bound or to which any of the property or assets of the Company is
subject, nor will such actions result in any violation of the
provisions of the charter or by-laws of the Company or any statute or
any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its properties or
assets; and except for the registration of the Stock under the
Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Exchange
Act and applicable state securities laws in connection with the
purchase and distribution of the Stock by the Underwriters, no
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is
required for the execution, delivery and performance of this Agreement
by the Company and the consummation of the transactions contemplated
hereby.
(h) Except as described in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right (other than rights that have
been waived or satisfied) to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Securities Act.
(i) Except as described in the Prospectus, the Company has not
sold or issued any shares of Common Stock during the six-month period
preceding the date of the Prospectus, including any sales pursuant to
Rule 144A under, or Regulations D or S of, the Securities Act, other
than shares issued pursuant to employee benefit plans, qualified stock
options plans or other employee compensation plans or pursuant to the
exercise of outstanding options, rights or warrants.
(j) Neither the Company nor any of its subsidiaries has
sustained, since the date of the latest audited financial statements
included in the Prospectus, any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
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contemplated in the Prospectus; and, since such date, there has not
been any material change in the capital stock or long-term debt of the
Company or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general
affairs, management, financial position, stockholders' equity or
results of operations of the Company, otherwise than as set forth or
contemplated in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or
included in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown thereby,
at the dates and for the periods indicated, and have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved.
(l) Ernst & Young LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and
who have delivered the initial letter referred to in Section 7(g)
hereof, are independent public accountants as required by the
Securities Act and the Rules and Regulations.
(m) The Company has good and marketable title in fee simple to
all real property and good and marketable title to all personal
property owned by it, in each case free and clear of all liens,
encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not materially interfere with the use made and
proposed to be made of such property by the Company; and all real
property and buildings held under lease by the Company are held under
valid, subsisting and enforceable leases, with such exceptions as are
not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company.
(n) The Company carries, or is covered by, insurance in such
amounts and covering such risks as is adequate for the conduct of its
business and the value of its properties and as is customary for
companies engaged in similar businesses in similar industries.
(o) Except as set forth in the Prospectus, the Company owns or
possesses adequate rights to use all material patents, patent
applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights and licenses
necessary for the conduct of its business and has no reason to believe
that the conduct of its business will conflict with, and have not
received any notice of any claim of conflict with, any such rights of
others.
(p) There are no legal or governmental proceedings pending to
which the Company is a party or of which any property or assets of the
Company is the subject which, if determined adversely to the Company,
might have a material adverse effect on the consolidated financial
position, stockholders' equity, results of operations, business or
prospects of the Company and its subsidiaries; and to
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the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened
by others.
(q) There are no contracts or other documents that are required
to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations that have not been described in the Prospectus or filed as
exhibits to the Registration Statement or incorporated therein by
reference as permitted by the Rules and Regulations.
(r) No relationship, direct or indirect, exists between or among
the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other hand,
that is required to be described in the Prospectus that is not so
described.
(s) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company would have any liability;
the Company has not incurred and does not expect to incur any material
liability under (i) Title IV of ERISA with respect to termination of,
or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of
the Internal Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder (the "Code"); and
each "pension plan" for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Code is
so qualified in all material respects and nothing has occurred,
whether by action or by failure to act, that would cause the loss of
such qualification.
(t) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and
has paid all taxes due thereon, and no tax deficiency has been
determined adversely to the Company that has had (nor does the Company
have any knowledge of any tax deficiency that, if determined adversely
to the Company, might have a material adverse effect on the
consolidated financial position, stockholders' equity, results of
operations, business or prospects of the Company.
(u) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, the Company has not (i) issued or granted
any securities, (ii) incurred any liability or obligation, direct or
contingent, other than liabilities and obligations that were incurred
in the ordinary course of business, (iii) entered into any transaction
not in the ordinary course of business or (iv) declared or paid any
dividend on its capital stock.
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(v) The Company (i) makes and keeps accurate books and records
and (ii) maintains internal accounting controls that provide
reasonable assurance that (A) transactions are executed in accordance
with management's authorization, (B) transactions are recorded as
necessary to permit preparation of its financial statements and to
maintain accountability for its assets, (C) access to its assets is
permitted only in accordance with management's authorization and (D)
the reported accountability for its assets is compared with existing
assets at reasonable intervals.
(w) The Company (i) is not in violation of its charter or by-
laws, (ii) is not in default in any material respect, and no event has
occurred which, with notice or lapse of time or both, would constitute
such a default, in the due performance or observance of any term,
covenant or condition contained in any material indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to
which it is a party or by which it is bound or to which any of its
properties or assets is subject or (iii) is not in violation in any
material respect of any law, ordinance, governmental rule, regulation
or court decree to which it or its property or assets may be subject
or has failed to obtain any material license, permit, certificate,
franchise or other governmental authorization or permit necessary to
the ownership of its property or to the conduct of its business.
(x) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes,
medical wastes, hazardous wastes or hazardous substances by the
Company or any of its subsidiaries (or, to the knowledge of the
Company, any of their predecessors in interest) at, upon or from any
of the property now or previously owned or leased by the Company or
its subsidiaries in violation of any applicable law, ordinance, rule,
regulation, order, judgment, decree or permit or which would require
remedial action under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for any violation or
remedial action which would not have, or could not be reasonably
likely to have, singularly or in the aggregate with all such
violations and remedial actions, a material adverse effect on the
general affairs, management, financial position, stockholders' equity
or results of operations of the Company and its subsidiaries; there
has been no material spill, discharge, leak, emission, injection,
escape, dumping or release of any kind onto such property or into the
environment surrounding such property of any toxic wastes, medical
wastes, solid wastes, hazardous wastes or hazardous substances due to
or caused by the Company or any of its subsidiaries or with respect to
which the Company or any of its subsidiaries have knowledge, except
for any such spill, discharge, leak, emission, injection, escape,
dumping or release which would not have or would not be reasonably
likely to have, singularly or in the aggregate with all such spills,
discharges, leaks, emissions, injections, escapes, dumpings and
releases, a material adverse effect on the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; and the terms
"hazardous wastes", "toxic wastes", "hazardous substances" and
"medical wastes" shall have the meanings specified in
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any applicable local, state, federal and foreign laws or regulations
with respect to environmental protection.
(y) The Company is not an "investment company" within the meaning
of such term under the Investment Company Act of 1940 and the rules
and regulations of the Commission thereunder.
2. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 2,750,000 shares of
the Firm Stock, severally and not jointly, to the several Underwriters and each
of the Underwriters, severally and not jointly, agrees to purchase the number of
shares of the Firm Stock set opposite that Underwriter's name in Schedule 1
hereto. The respective purchase obligations of the Underwriters with respect to
the Firm Stock shall be rounded among the Underwriters to avoid fractional
shares, as the Representatives may determine.
In addition, the Company grants to the Underwriters an option to
purchase up to 412,000 shares of Option Stock. Such option is granted solely
for the purpose of covering over-allotments in the sale of Firm Stock and is
exercisable as provided in Section 4 hereof. Shares of Option Stock shall be
purchased severally for the account of the Underwriters in proportion to the
number of shares of Firm Stock set opposite the name of such Underwriters in
Schedule 1 hereto. The respective purchase obligations of each Underwriter with
respect to the Option Stock shall be adjusted by the Representatives so that no
Underwriter shall be obligated to purchase Option Stock other than in 100 share
amounts. The price of both the Firm Stock and any Option Stock shall be $_____
per share.
The Company shall not be obligated to deliver any of the Stock to be
delivered on the First Delivery Date or the Second Delivery Date (as hereinafter
defined), as the case may be, except upon payment for all the Stock to be
purchased on such Delivery Date as provided herein.
3. Offering of Stock by the Underwriters.
Upon authorization by the Representatives of the release of the Firm
Stock, the several Underwriters propose to offer the Firm Stock for sale upon
the terms and conditions set forth in the Prospectus.
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4. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the office of Lehman Brothers Inc., at 10:00
A.M., New York City time, on the [fourth] full business day following the date
of this Agreement or at such other date or place as shall be determined by
agreement between the Representatives and the Company. This date and time are
sometimes referred to as the "First Delivery Date." On the First Delivery Date,
the Company shall deliver or cause to be delivered certificates representing the
Firm Stock to the Representatives for the account of each Underwriter against
payment to or upon the order of the Company of the purchase price by certified
or official bank check or checks payable in immediately available funds. Time
shall be of the essence, and delivery at the time and place specified pursuant
to this Agreement is a further condition of the obligation of each Underwriter
hereunder. Upon delivery, the Firm Stock shall be registered in such names and
in such denominations as the Representatives shall request in writing not less
than two full business days prior to the First Delivery Date. For the purpose of
expediting the checking and packaging of the certificates for the Firm Stock,
the Company shall make the certificates representing the Firm Stock available
for inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to the First Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement the option granted in Section 2 may be exercised by written notice
being given to the Company by the Representatives. Such notice shall set forth
the aggregate number of shares of Option Stock as to which the option is being
exercised, the names in which the shares of Option Stock are to be registered,
the denominations in which the shares of Option Stock are to be issued and the
date and time, as determined by the Representatives, when the shares of Option
Stock are to be delivered; provided, however, that this date and time shall not
be earlier than the First Delivery Date nor earlier than the second business day
after the date on which the option shall have been exercised nor later than the
fifth business day after the date on which the option shall have been exercised.
The date and time the shares of Option Stock are delivered are sometimes
referred to as the "Second Delivery Date" and the First Delivery Date and the
Second Delivery Date are sometimes each referred to as a "Delivery Date".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 4
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on the
Second Delivery Date. On the Second Delivery Date, the Company shall deliver or
cause to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by certified or official bank
check or checks payable in
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immediately available funds. Time shall be of the essence, and delivery at the
time and place specified pursuant to this Agreement is a further condition of
the obligation of each Underwriter hereunder. Upon delivery, the Option Stock
shall be registered in such names and in such denominations as the
Representatives shall request in the aforesaid written notice. For the purpose
of expediting the checking and packaging of the certificates for the Option
Stock, the Company shall make the certificates representing the Option Stock
available for inspection by the Representatives in New York, New York, not later
than 2:00 P.M., New York City time, on the business day prior to the Second
Delivery Date.
5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b)
under the Securities Act not later than Commission's close of business
on the second business day following the execution and delivery of
this Agreement or, if applicable, such earlier time as may be required
by Rule 430A(a)(3) under the Securities Act; to make no further
amendment or any supplement to the Registration Statement or to the
Prospectus except as permitted herein; to advise the Representatives,
promptly after it receives notice thereof, of the time when any
amendment to the Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish the Representatives with
copies thereof; to advise the Representatives, promptly after it
receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, of the suspension of the
qualification of the Stock for offering or sale in any jurisdiction,
of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for
additional information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or suspending any such
qualification, to use promptly its best efforts to obtain its
withdrawal;
(b) To furnish promptly to each of the Representatives and to
counsel for the Underwriters a signed copy of the Registration
Statement as originally filed with the Commission, and each amendment
thereto filed with the Commission, including all consents and exhibits
filed therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request:
(i) conformed copies of the Registration Statement as originally filed
with the Commission and each amendment thereto (in each case excluding
exhibits other than this Agreement and the computation of per share
earnings) and (ii) each Preliminary Prospectus, the Prospectus and any
amended or supplemented Prospectus; and, if the delivery of a
prospectus is required at any time after the
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Effective Time in connection with the offering or sale of the Stock or
any other securities relating thereto and if at such time any events
shall have occurred as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary to amend
or supplement the Prospectus in order to comply with the Securities
Act, to notify the Representatives and, upon their request, to prepare
and furnish without charge to each Underwriter and to any dealer in
securities as many copies as the Representatives may from time to time
reasonably request of an amended or supplemented Prospectus which will
correct such statement or omission or effect such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the
Representatives, be required by the Securities Act or requested by the
Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any
Prospectus pursuant to Rule 424 of the Rules and Regulations, to
furnish a copy thereof to the Representatives and counsel for the
Underwriters and obtain the consent of the Representatives to the
filing;
(f) As soon as practicable after the Effective Date (it being
understood that the Company shall have until at least 410 days after
the end of the Company's current fiscal quarter), to make generally
available to the Company's security holders and to deliver to the
Representatives an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Securities Act and the Rules and Regulations (including, at the
option of the Company, Rule 158);
(g) For a period of five years following the Effective Date, to
furnish to the Representatives copies of all materials furnished by
the Company to its shareholders and all public reports and all reports
and financial statements furnished by the Company to the principal
national securities exchange upon which the Common Stock may be listed
pursuant to requirements of or agreements with such exchange or to the
Commission pursuant to the Exchange Act or any rule or regulation of
the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for
offering and sale under the securities laws of such jurisdictions as
the Representatives may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the
distribution of the Stock;
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(i) For a period of 180 days from the date of the Prospectus, not
to, directly or indirectly, offer for sale, sell or otherwise dispose
of (or enter into any transaction or device that is designed to, or
could be expected to, result in the disposition by any person at any
time in the future of) any shares of Common Stock (other than the
Stock and shares issued pursuant to employee benefit plans, qualified
stock option plans or other employee compensation plans existing on
the date hereof or pursuant to currently outstanding options, warrants
or rights), or sell or grant options, rights or warrants with respect
to any shares of Common Stock (other than the grant of options
pursuant to option plans existing on the date hereof), without the
prior written consent of Lehman Brothers Inc.; and to cause each
officer and director of the Company to furnish to the Representatives,
prior to the First Delivery Date, a letter or letters, in form and
substance satisfactory to counsel for the Underwriters, pursuant to
which each such person shall agree not to, directly or indirectly,
offer for sale, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected to,
result in the disposition by any person at any time in the future of)
any shares of Common Stock for a period of 180 days from the date of
the Prospectus, without the prior written consent of Lehman Brothers
Inc.;
(j) Prior to the Effective Date, to apply for the listing of the
Stock on the Nasdaq National Market System and to use its best efforts
to complete that listing, subject only to official notice of issuance,
prior to the First Delivery Date;
(k) Prior to filing with the Commission any reports on Form SR
pursuant to Rule 463 of the Rules and Regulations, to furnish a copy
thereof to the counsel for the Underwriters and receive and consider
its comments thereon, and to deliver promptly to the Representatives a
signed copy of each report on Form SR filed by it with the Commission;
and
(l) To apply the net proceeds from the sale of the Stock being
sold by the Company as set forth in the Prospectus.
6. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock to the Underwriters and
any taxes payable in that connection; (b) the costs incident to the preparation,
printing and filing under the Securities Act of the Registration Statement and
any amendments and exhibits thereto; (c) the costs of distributing the
Registration Statement as originally filed and each amendment thereto and any
post-effective amendments thereof (including, in each case, exhibits), any
Preliminary Prospectus, the Prospectus and any amendment or supplement to the
Prospectus, all as provided in this Agreement; (d) the costs of producing and
distributing this Agreement and any other related documents in connection with
the offering, purchase, sale and delivery of the Stock; (e) the filing fees
incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of sale of the Stock; (f) any applicable
listing or other fees; (g) the fees and expenses of qualifying the Stock under
the securities laws of the several jurisdictions as provided in Section 5(h) and
of preparing, printing and distributing a Blue Sky Memorandum (including related
fees and expenses of counsel to the Underwriters);
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and (h) all other costs and expenses incident to the performance of the
obligations of the Company under this Agreement; provided that, except as
provided in this Section 6 and in Section 11 the Underwriters shall pay their
own costs and expenses, including the costs and expenses of their counsel, any
transfer taxes on the Stock that they may sell and the expenses of advertising
any offering of the Stock made by the Underwriters.
7. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
contained herein, to the performance by the Company of its obligations
hereunder, and to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 5; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall
have been issued and no proceeding for that purpose shall have been
initiated or threatened by the Commission; and any request of the
Commission for inclusion of additional information in the Registration
Statement or the Prospectus or otherwise shall have been complied
with.
(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to such Delivery Date that the Registration
Statement or the Prospectus or any amendment or supplement thereto
contains an untrue statement of a fact which, in the opinion of
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel
for the Underwriters, is material or omits to state a fact which, in
the opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to
the authorization, form and validity of this Agreement, the Stock, the
Registration Statement and the Prospectus, and all other legal matters
relating to this Agreement and the transactions contemplated hereby
shall be reasonably satisfactory in all material respects to counsel
for the Underwriters, and the Company shall have furnished to such
counsel all documents and information that they may reasonably request
to enable them to pass upon such matters.
(d) Venture Law Group, A Professional Corporation, shall have
furnished to the Representatives its written opinion, as counsel to
the Company, addressed to the Underwriters and dated such Delivery
Date, in form and substance reasonably satisfactory to the
Representatives, to the effect that:
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(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in
which its ownership or lease of property or the conduct of its
business requires such qualification and the failure to be so
qualified would cause a material adverse effect upon the Company and
has all corporate power and corporate authority necessary to own or
hold its properties and to conduct the business in which it is
engaged; and to such counsel's knowledge the Company has no
subsidiaries other than Connect Worldwide, Inc.;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock
of the Company (including the shares of Stock being delivered on such
Delivery Date) have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description thereof
contained in the Prospectus;
(iii) There are no preemptive or other rights to subscribe
for or to purchase, nor any restriction upon the voting or transfer
of, any shares of the Stock pursuant to the Company's charter or by-
laws or any agreement or other instrument known to such counsel;
(iv) All real property and buildings held under lease by the
Company are held under valid, subsisting and enforceable leases, with
such exceptions as are not material and do not interfere with the use
made and proposed to be made of such property and buildings by the
Company;
(v) To the best of such counsel's knowledge and other than
as set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is
a party or of which any property or assets of the Company or any of
its subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, might have a material adverse
effect on the consolidated financial position, stockholders' equity,
results of operations, business or prospects of the Company and its
subsidiaries; and, to the best of such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others;
(vi) The Registration Statement was declared effective under
the Securities Act as of the date and time specified in such opinion,
the Prospectus was filed with the Commission pursuant to the
subparagraph of Rule 424(b) of the Rules and Regulations specified in
such opinion on the date specified therein and no stop order
suspending the effectiveness of the Registration Statement has been
issued and, to the knowledge of such counsel, no proceeding for that
purpose is pending or threatened by the Commission;
(vii) The Registration Statement and the Prospectus and any
further amendments or supplements thereto made by the Company prior to
such Delivery Date (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
comply as to form in all material
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<PAGE>
respects with the requirements of the Securities Act and the Rules and
Regulations;
(viii) To the best of such counsel's knowledge, there are
no contracts or other documents that are required to be described in
the Prospectus or filed as exhibits to the Registration Statement by
the Securities Act or by the Rules and Regulations that have not been
described or filed as exhibits to the Registration Statement or
incorporated therein by reference as permitted by the Rules and
Regulations;
(ix) This Agreement has been duly authorized, executed and
delivered by the Company; and constitutes a valid and binding
agreement of the Company enforceable against the Company in accordance
with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or
at law) or an implied covenant of good faith and fair dealing;
provided, however, that no opinion is expressed as to the
enforceability of the indemnification and contribution provisions set
forth herein under applicable state and federal securities laws on the
bases of public policy or otherwise;
(x) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance by
the Company with all of the provisions of this Agreement and the
consummation of the transactions contemplated hereby will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument known
to such counsel to which the Company is a party or by which the
Company is bound or to which any of the property or assets of the
Company is subject, in each case which is filed as an exhibit to the
Registration Statement, nor will such actions result in any violation
of the provisions of the charter or by-laws of the Company or any
statute or any order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction over the
Company or any of their properties or assets; and, except for the
registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state securities laws
in connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental agency or
body is required for the execution, delivery and performance of this
Agreement by the Company and the consummation of the transactions
contemplated hereby; and
(xi) To the best of such counsel's knowledge, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right (other than rights which have
been waived or satisfied) to require the Company to include such
securities in the securities registered pursuant to the Registration
Statement.
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In rendering such opinion, such counsel may state that its
opinion is limited to matters governed by the Federal laws of the
United States of America, the laws of the State of California and the
General Corporation Law of the State of Delaware. Such counsel shall
also have furnished to the Representatives a written statement,
addressed to the Underwriters and dated such Delivery Date, in form
and substance satisfactory to the Representatives, to the effect that
no facts have come to the attention of such counsel which lead it to
believe that the Registration Statement, as of the Effective Date,
contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to
make the statements therein not misleading, or that the Prospectus
contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading when they were filed with the
Commission. The foregoing opinion and statement may be qualified by a
statement to the effect that such counsel does not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus.
(e) Townsend and Townsend and Crew, LLP, patent counsel for the
Company, shall have furnished to the Representatives its written
opinion, addressed to the Underwriters and dated the First Delivery
Date, in form and substance reasonably satisfactory to the
Representatives, to the effect that such counsel is familiar with the
technology used by the Company in its business and the manner of its
use thereof and has read the Registration Statement and the
Prospectus, including particularly the portions of the Registration
Statement and the Prospectus referring to patents, trade secrets,
trademarks, and service marks, and:
(i) The statements in the Registration Statement and the
Prospectus under the captions "Risk Factors-Dependence on Certain
Licenses," "Risk Factors-Dependence on Proprietary Rights; Risks of
Infringement," and "Business--Proprietary Rights," to the best of such
counsel's knowledge, are accurate and complete statements or summaries
of the matters therein set forth and nothing has come to such
counsel's attention that causes such counsel to believe that the
above-described portions of the Registration Statement and the
Prospectus contain any untrue statement of a material fact or omit to
state a material fact
15
<PAGE>
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading;
(ii) to the best of such counsel's knowledge and except as
set forth in the Prospectus under the captions "Risk Factors-
Dependence on Certain Licenses," "Risk Factors-Dependence on
Proprietary Rights; Risks of Infringement," and "Business--Proprietary
Rights," there are no legal or governmental proceedings pending
relating to patent rights, trade secrets, trademarks, service marks or
other proprietary information or materials of the Company, and to the
best of such counsel's knowledge, no such proceedings are threatened
or contemplated by governmental authorities or others;
(iii) such counsel does not know of any contracts or other
documents relating to the Company's patents, trade secrets,
trademarks, or service marks of a character required to be filed as an
exhibit to the Registration Statement or required to be described in
the Registration Statement or the Prospectus that are not filed or
described as required; and
(iv) except as set forth in the Prospectus, to the best of
such counsel's knowledge, the Company is not infringing or otherwise
violating any patents, trade secrets, trademarks, or service marks of
others, and, to the best of such counsel's knowledge, there are no
infringements by others of any of the Company's patents, trade
secrets, trademarks, or service marks, which in the judgment of such
counsel could affect materially the use thereof by the Company.
(f) The Representatives shall have received from Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for the
Underwriters, such opinion or opinions, dated such Delivery Date, with
respect to the issuance and sale of the Stock, the Registration
Statement, the Prospectus and other related matters as the
Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they reasonably request
for the purpose of enabling them to pass upon such matters.
(g) At the time of execution of this Agreement, the
Representatives shall have received from Ernst & Young, LLP a letter,
in form and substance satisfactory to the Representatives, addressed
to the Underwriters and dated the date hereof (i) confirming that they
are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission, (ii) stating, as of the date hereof
(or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is
given in the Prospectus, as of a date not more than five days prior to
the date hereof), the conclusions and findings of such firm with
respect to the financial information and other matters ordinarily
covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
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<PAGE>
(h) With respect to the letter of Ernst & Young, LLP referred to
in the preceding paragraph and delivered to the Representatives
concurrently with the execution of this Agreement (the "initial
letter"), the Company shall have furnished to the Representatives a
letter (the "bring-down letter") of such accountants, addressed to the
Underwriters and dated such Delivery Date (i) confirming that they are
independent public accountants within the meaning of the Securities
Act and are in compliance with the applicable requirements relating to
the qualification of accountants under Rule 2-01 of Regulation S-X of
the Commission, (ii) stating, as of the date of the bring-down letter
(or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is
given in the Prospectus, as of a date not more than five days prior to
the date of the bring-down letter), the conclusions and findings of
such firm with respect to the financial information and other matters
covered by the initial letter and (iii) confirming in all material
respects the conclusions and findings set forth in the initial letter.
(i) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board,
its President or a Vice President and its chief financial officer
stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery Date;
the Company has complied with all its agreements contained herein; and
the conditions set forth in Section 7(a) have been fulfilled; and
(ii) They have carefully examined the Registration Statement
and the Prospectus and, in their opinion (A) as of the Effective Date,
the Registration Statement and Prospectus did not include any untrue
statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (B) since the Effective Date no event has
occurred which should have been set forth in a supplement or amendment
to the Registration Statement or the Prospectus.
(j) (i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference with
its business from fire, explosion, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus or (ii) since such date there shall not
have been any change in the capital stock or long-term debt of the
Company or any of its subsidiaries or any change, or any development
involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, otherwise than as set
forth or contemplated in the Prospectus, the effect of which, in any
such case described in clause (i) or (ii), is, in the judgment of the
Representatives, so material and adverse as to make it impracticable
or inadvisable to proceed with the
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<PAGE>
public offering or the delivery of the Stock being delivered on such
Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(k) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American
Stock Exchange or in the over-the-counter market, or trading in any
securities of the Company on any exchange or in the over-the-counter
market, shall have been suspended or minimum prices shall have been
established on any such exchange or such market by the Commission, by
such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have
been declared by Federal or state authorities, (iii) the United States
shall have become engaged in hostilities, there shall have been an
escalation in hostilities involving the United States or there shall
have been a declaration of a national emergency or war by the United
States or (iv) there shall have occurred such a material adverse
change in general economic, political or financial conditions (or the
effect of international conditions on the financial markets in the
United States shall be such) as to make it, in the judgment of a
majority in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the
Stock being delivered on such Delivery Date on the terms and in the
manner contemplated in the Prospectus.
(l) The Nasdaq National Market System shall have approved the
Stock for listing, subject only to official notice of issuance and
evidence of satisfactory distribution.
All opinions, letters, evidence and certificates mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance
with the provisions hereof only if they are in form and substance
reasonably satisfactory to counsel for the Underwriters.
8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each
Underwriter (including any Underwriter in its role as qualified
independent underwriter pursuant to the rules of the National
Association of Securities Dealers, Inc.), its officers and employees
and each person, if any, who controls any Underwriter within the
meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage,
liability or action relating to purchases and sales of Stock), to
which that Underwriter, officer, employee or controlling person may
become subject, under the Securities Act or otherwise, insofar as such
loss, claim, damage, liability or action arises out of, or is based
upon, (i) any untrue statement or alleged untrue statement of a
material fact contained (A) in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or
supplement thereto or (B) in any blue sky application or other
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<PAGE>
document prepared or executed by the Company (or based upon any
written information furnished by the Company) specifically for the
purpose of qualifying any or all of the Stock under the securities
laws of any state or other jurisdiction (any such application,
document or information being hereinafter called a "Blue Sky
Application"), or (ii) the omission or alleged omission to state in
any Preliminary Prospectus, the Registration Statement or the
Prospectus, or in any amendment or supplement thereto, or in any Blue
Sky Application any material fact required to be stated therein or
necessary to make the statements therein not misleading, and shall
reimburse each Underwriter and each such officer, employee or
controlling person promptly upon demand for any legal or other
expenses reasonably incurred by that Underwriter, officer, employee or
controlling person in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that the
Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of, or is
based upon, any untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any such amendment or
supplement, or in any Blue Sky Application, in reliance upon and in
conformity with written information concerning such Underwriter
furnished to the Company through the Representatives by or on behalf
of any Underwriter specifically for inclusion therein. The foregoing
indemnity agreement is in addition to any liability which the Company
may otherwise have to any Underwriter or to any officer, employee or
controlling person of that Underwriter.
(b) Each Underwriter, severally and not jointly, shall indemnify
and hold harmless the Company, its officers and employees, each of its
directors, and each person, if any, who controls the Company within
the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect
thereof, to which the Company or any such director, officer or
controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained (A) in any Preliminary
Prospectus, the Registration Statement or the Prospectus or in any
amendment or supplement thereto, or (B) in any Blue Sky Application or
(ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any
19
<PAGE>
amendment or supplement thereto, or in any Blue Sky Application any
material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent
that the untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with
written information concerning any Underwriter furnished to the
Company through the Representatives by or on behalf of any Underwriter
specifically for inclusion therein, and shall reimburse the Company
and any such director, officer or controlling person for any legal or
other expenses reasonably incurred by the Company or any such
director, officer or controlling person in connection with
investigating or defending or preparing to defend against any such
loss, claim, damage, liability or action as such expenses are
incurred. The foregoing indemnity agreement is in addition to any
liability which any Underwriter may otherwise have to the Company or
any such director, officer, employee or controlling person.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of any claim or the commencement of any action,
the indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under this Section 8, notify the
indemnifying party in writing of the claim or the commencement of that
action; provided, however, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have under
this Section 8 except to the extent it has been materially prejudiced
by such failure and, provided further, that the failure to notify the
indemnifying party shall not relieve it from any liability which it
may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein and, to
the extent that it wishes, jointly with any other similarly notified
indemnifying party, to assume the defense thereof with counsel
reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to
assume the defense of such claim or action, the indemnifying party
shall not be liable to the indemnified party under this Section 8 for
any legal or other expenses subsequently incurred by the indemnified
party in connection with the defense thereof other than reasonable
costs of investigation; provided, however, that the Representatives
shall have the right to employ counsel to represent jointly the
Representatives and those other Underwriters and their respective
officers, employees and controlling persons who may be subject to
liability arising out of any claim in respect of which indemnity may
be sought by the Underwriters against the Company under this Section 8
if, in the reasonable judgment of the Representatives, it is advisable
for the Representatives and those Underwriters, officers, employees
and controlling persons to be jointly represented by separate counsel,
and in that event the fees and expenses of such separate counsel shall
be paid by the Company. No indemnifying party shall (i) without the
prior written consent of the indemnified parties (which consent shall
not be unreasonably withheld), settle or compromise or consent to the
entry of any judgment with
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<PAGE>
respect to any pending or threatened claim, action, suit or proceeding
in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement,
compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim,
action, suit or proceeding, or (ii) be liable for any settlement of
any such action effected without its written consent (which consent
shall not be unreasonably withheld), but if settled with the consent
of the indemnifying party or if there be a final judgment of the
plaintiff in any such action, the indemnifying party agrees to
indemnify and hold harmless any indemnified party from and against any
loss or liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall
for any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 8(a) or 8(b) in respect of any loss,
claim, damage or liability, or any action in respect thereof, referred
to therein, 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 loss, claim,
damage or liability, or action in respect thereof, (i) in such
proportion as shall be appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the
other from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault
of the Company on the one hand and the Underwriters on the other with
respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as
any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the
other with respect to such offering shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Stock
purchased under this Agreement (before deducting expenses) received by
the Company, on the one hand, and the total underwriting discounts and
commissions received by the Underwriters with respect to the shares of
the Stock purchased under this Agreement, on the other hand, bear to
the total gross proceeds from the offering of the shares of the Stock
under this Agreement, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined
by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters,
the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Company and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this Section 8 were to
be determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an
indemnified party as a result
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<PAGE>
of the loss, claim, damage or liability, or action in respect thereof,
referred to above in this Section 8 shall be deemed to include, for
purposes of this Section 8(d), any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of
this Section 8(d), no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Stock underwritten by it and distributed to the public was offered to
the public exceeds the amount of any damages which such Underwriter
has otherwise paid or become liable to pay by reason of any untrue or
alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section
8(d) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section
8(d) are several in proportion to their respective underwriting
obligations and not joint.
(e) The Underwriters severally confirm and the Company
acknowledges that the statements with respect to the public offering
of the Stock by the Underwriters set forth on the cover page of, the
paragraph in which the legend concerning over-allotments on the inside
front cover page of and the concession and reallowance figures
appearing under the caption "Underwriting" in, and the penultimate and
final paragraphs (other than the information relating to William B.
Welty and Volpe, Welty & Company) under the caption "Underwriting" in,
the Prospectus are correct and constitute the only information
concerning such Underwriters furnished in writing to the Company by or
on behalf of the Underwriters specifically for inclusion in the
Registration Statement and the Prospectus.
9. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining non-
defaulting Underwriters shall be obligated to purchase the Stock that the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock that the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining non-
defaulting Underwriter shall not be obligated to purchase more than 110% of the
number of shares of the Stock which it agreed to purchase on such Delivery Date
pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the
remaining non-defaulting Underwriters, or those other underwriters satisfactory
to the Representatives who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them, all
the Stock to be purchased on such Delivery Date. If the remaining Underwriters
or other underwriters satisfactory to the Representatives do not elect to
purchase the shares that the defaulting Underwriter or Underwriters agreed but
failed to purchase on such Delivery Date, this Agreement (or, with
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<PAGE>
respect to the Second Delivery Date, the obligation of the Underwriters to
purchase, and of the Company to sell, the Option Stock) shall terminate without
liability on the part of any non-defaulting Underwriter or the Company, except
that the Company will continue to be liable for the payment of expenses to the
extent set forth in Sections 6 and 11. As used in this Agreement, the term
"Underwriter" includes, for all purposes of this Agreement unless the context
requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to
this Section 9, purchases Firm Stock which a defaulting Underwriter agreed but
failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company for damages caused by its default. If
other underwriters are obligated or agree to purchase the Stock of a defaulting
or withdrawing Underwriter, either the Representatives or the Company may
postpone the Delivery Date for up to seven full business days in order to effect
any changes that in the opinion of counsel for the Company or counsel for the
Underwriters may be necessary in the Registration Statement, the Prospectus or
in any other document or arrangement.
10. Termination. The obligations of the Underwriters hereunder may
be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Firm Stock if, prior to that
time, any of the events described in Sections 7(k) or 7(l), shall have occurred
or if the Underwriters shall decline to purchase the Stock for any reason
permitted under this Agreement.
11. Reimbursement of Underwriters' Expenses. If (a) the Company
shall fail to tender the Stock for delivery to the Underwriters by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the Company is
not fulfilled, the Company will reimburse the Underwriters for all reasonable
out-of-pocket expenses (including fees and disbursements of counsel) incurred by
the Underwriters in connection with this Agreement and the proposed purchase of
the Stock, and upon demand the Company shall pay the full amount thereof to the
Representatives. If this Agreement is terminated pursuant to Section 9 by reason
of the default of one or more Underwriters, the Company shall not be obligated
to reimburse any Underwriter on account of those expenses.
12. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission to Lehman Brothers Inc., Three World
Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-526-6588), with a copy, in the case of any notice
pursuant to Section 8(c), to the Director of Litigation, Office of the
General Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th
Floor, New York, NY 10285;
(b) if to the Company, shall be delivered or sent by mail, telex
or facsimile transmission to the address of the Company set forth in
the Registration Statement, Attention: Thomas Kehler (Fax: 415-254-
4800);
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<PAGE>
provided, however, that any notice to an Underwriter pursuant to
Section 8(c) shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its
acceptance telex to the Representatives, which address will be
supplied to any other party hereto by the Representatives upon
request. Any such statements, requests, notices or agreements shall
take effect at the time of receipt thereof. The Company shall be
entitled to act and rely upon any request, consent, notice or
agreement given or made on behalf of the Underwriters by Lehman
Brothers Inc.
13. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company, and
their respective successors. This Agreement and the terms and provisions hereof
are for the sole benefit of only those persons, except that (A) the
representations, warranties, indemnities and agreements of the Company contained
in this Agreement shall also be deemed to be for the benefit of the person or
persons, if any, who control any Underwriter within the meaning of Section 15 of
the Securities Act and (B) the indemnity agreement of the Underwriters contained
in Section 8(b) of this Agreement shall be deemed to be for the benefit of
directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the persons referred to in
this Section 13, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
14. Survival. The respective indemnities, representations,
warranties and agreements of the Company and the Underwriters contained in this
Agreement or made by or on behalf on them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Stock and shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any of them or any person controlling any of them.
15. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
16. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of New York.
17. Consent to Jurisdiction. Each party irrevocably agrees that any
legal suit, action or proceeding arising out of or based upon this Agreement or
the transactions contemplated hereby ("Related Proceedings") may be instituted
in the federal courts of the United States of America located in the City of New
York or the courts of the State of New York in each case located in the Borough
of Manhattan in the City of New York (collectively, the "Specified Courts"), and
irrevocably submits to the exclusive jurisdiction (except for proceedings
instituted in regard to the enforcement of a judgment of any such court (a
"Related Judgment"), as to which such jurisdiction is non-exclusive) of such
courts in any such suit, action or proceeding. The parties further agree that
service of any process, summons, notice or document by mail to such
24
<PAGE>
party's address set forth above shall be effective service of process for any
lawsuit, action or other proceeding brought in any such court. The parties
hereby irrevocably and unconditionally waive any objection to the laying of
venue of any lawsuit, action or other proceeding in the Specified Courts, and
hereby further irrevocably and unconditionally waive and agree not to plead or
claim in any such court that any such lawsuit, action or other proceeding
brought in any such court has been brought in an inconvenient forum.
18. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
19. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
If the foregoing correctly sets forth the agreement between the
Company and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
CONNECT, INC.
By:_____________________________________
Thomas P. Kehler
President and Chief Executive Officer
Accepted:
LEHMAN BROTHERS INC.
By:_____________________________________
Authorized Representative
For itself and as Representative of the several
Underwriters named in Schedule 1 hereto
25
<PAGE>
SCHEDULE 1
<TABLE>
<S> <C>
Underwriters Number of Shares
- ------------ ----------------
Lehman Brothers Inc................. __________
Volpe, Welty & Company.............. __________
UBS Securities LLC.................. __________
Total............................. __________
</TABLE>
<PAGE>
CONNECT, INC.
SOFTWARE LICENSE AGREEMENT
This Software License Agreement ("AGREEMENT") is entered into as of March 26
1996____ (the "EFFECTIVE DATE") by and between Connect, Inc., a California
corporation, with principal offices at 515 Ellis Street, Mountain View, CA
94043-2242 ("CONNECT") and Union Underwear Company, Inc. a New York corporation,
------------------------------
with principal offices at One, Fruit of the Loom Drive, Bowling Green, Kentucky
-------------------------------------------------------
42102 ("Customer")
- -----
CONNECT and Customer are entering into a Software License Agreement for CONNECT
to license its OneServer(TM) Software and OneManager(TM) Software to Customer
and to sub-license certain third-party-owned software to Customer. In addition,
Customer may request CONNECT to develop additional Customer Application Software
for Customer's use with the CONNECT Software on a "work for hire" basis, as
described herein or as defined in Exhibit B (Scope of Work) attached to this
---------
Agreement, with Supplemental terms and conditions applying only to such Customer
Application Software and Maintenance Services as defined in Exhibit C ,with
----------
supplemental terms and conditions applying only to such services.
CONNECT and Customer, therefore, agree as follows:
SECTION 1 - DEFINITIONS
The following defined terms shall govern the interpretation of this Agreement:
1.1 "CONNECT SOFTWARE" means the OneServer Software and the OneManager
Software, and associated Documentation. The OneServer and OneManager products
are built on the ORACLE relational database, Fulcrum text search engine, RSA
encryption software and provide an application platform for on-line business
services over public and private networks. The OneServer platform functions as
a world-wide-web server, a private network server, or a combination of both.
OneServer Software offers a modular framework with access control, usage
tracking, and reference counts. Creation and maintenance of all OneServer data
types is possible either from a UNIX command line, from within common gateway
interface ("CGI") scripts, or from the OneManager client.. The OneServer
Software is based on a data type called a node model that is both relational and
highly structured. The standard ways to manage data, such as setting
permissions, retrieving and labeling, can be done on an entire node or on a part
of the data contained in the node. The node model allows a number of
operations, including a sophisticated querying method. SIGNIFICANT NODES FOR THE
PURPOSES OF CUSTOMER'S APPLICATION, INCLUDE THE FOLLOWING NODES,
PROCESSES, AND FEATURES:-
PRODUCT/SKU
ORDER/SHOPPING CART NODE
BULLETIN BOARD/EMAIL NODE
USER PROFILE NODE
CREDIT CARD AUTHORIZATION PROCESS
USER REGISTRATION PROCESS
TEMPLATE ENGINE
USAGE TRACKING
MULTI-THREADING CONCURRENT ACCESS TO ONESERVER DATABASE
1.2 "DESIGNATED PLATFORM" means the computer "Platform" (meaning a series of
computers that support the Licensed Software) and operating system software
located at the installed location designated on EXHIBIT A to this Agreement,
---------
which will be the only Platform and operating system on which, and the single
location at which, the Licensed Software is licensed for installation and use
under this Agreement. Notwithstanding anything herein to the contrary, CONNECT
agrees that the "development/staging server" Platform and the "OneServer with
transaction engine, ORACLE, Fulcrum, RSA" Platform may be in separate physical
locations. In the event that Customer designates a location change for a
Platform, CONNECT will provide 48 hour overlap service at the designated site
location.
1.3 "DOCUMENTATION" means any user documentation provided by CONNECT to
Customer for use in connection with the Licensed Software, including without
limitation an overview of the software, including a clear and detailed narrative
of the organization of the Licensed Software. Such documentation is
incorporated herein and made a part hereof.
<PAGE>
1.4 "LICENSED SOFTWARE" means the CONNECT SOFTWARE and the THIRD PARTY
SOFTWARE.
1.5 "TERRITORY" means the United States of America and its territories and
possessions.
1.6 "THIRD PARTY SOFTWARE" means the number of copies of the third party owned
software sublicensed to Customer by CONNECT as specified in Exhibit A.
---------
1.7 "CUSTOMER APPLICATION SOFTWARE" means software developed by CONNECT as a
"work made for hire "or "commissioned work" for Customer in conformance with
section 2.7 stated below and a mutually agreed Scope of Work outlined in Exhibit
-------
B, and supplemental terms and conditions solely relating to such services.
- -
SECTION 2 - LICENSE GRANTS AND OWNERSHIP
2.1 CONNECT SOFTWARE LICENSE. SUBJECT TO THE TERMS AND CONDITIONS OF THIS
AGREEMENT, CONNECT GRANTS CUSTOMER (1) A NON-EXCLUSIVE, PERPETUAL, NON-
TRANSFERABLE LICENSE, WITHOUT RIGHT OF SUBLICENSE, TO INSTALL AND EXECUTE THE
CONNECT SOFTWARE IN OBJECT CODE FORMAT, SOLELY ON THE DESIGNATED PLATFORM OR
OTHER SINGLE COMPARABLE PLATFORM AND SOLELY FOR REMOTE ACCESS.
2.2 [ DELETED ]
2.3 THIRD PARTY SOFTWARE LICENSE. Subject to the terms and conditions of this
Agreement, CONNECT grants to Customer a non-exclusive, perpetual , non-
transferable license, without right of sublicense, to use Third Party Software,
solely on the Designated Platform or other comparable platform, solely for the
permitted number of processors. Customer may not make any use of the Third
Party Software on its own or with any other program besides the CONNECT
Software. Customer acknowledges and agrees that CONNECT's licensors for such
Third Party Software are intended third party beneficiaries of the terms of this
Agreement relating to Customer's use of the Third Party Software and as such
have the right to enforce such terms directly against Customer in their own
names.
2.4 DOCUMENTATION LICENSE. Subject to the terms and conditions of this
Agreement, CONNECT grants Customer the right to copy and distribute three (3)
copies of the User Documentation for each copy of the CONNECT Software licensed
to Customer. Further User Documentation reproduction rights may be negotiated.
Customer may request Documentation in electronic format subject to current
availability from CONNECT.
2.5 ARCHIVAL COPIES; COPYING; MARKINGS. Customer may make one (1) copy of the
Licensed Software for archival purposes. Each copy of the Licensed Software and
User Documentation is subject to the provisions of this Agreement. Customer may
not copy the User Documentation except as stated in Section 2.4 or to replace
lost or destroyed copies. Additional copies of the User Documentation are
available from CONNECT for a separate fee. All titles, trademarks, copyright
notices and other proprietary markings must be reproduced on all permitted
copies of the Licensed Software and User Documentation, in whatever format, and
Customer will not cause or permit the removal of same.
2.6. OWNERSHIP OF LICENSED SOFTWARE. Except for the limited licenses and right
granted herein, all right, title, and interest in the Licensed Software, Third
Party Software and User Documentation, including without limitation all patent,
rights, copyrights, trade secrets, know-how, and other intellectual property
rights, will remain the property of CONNECT or CONNECT's licensors. All aspects
of the Licensed Software and Third Party Software, including without limitation
programs, methods of processing, specific design and structure of individual
programs and their interaction and unique programming techniques employed
therein, as well as screen formats, will remain the sole and exclusive property
of CONNECT or its licensors. Customer may not rent, lease, loan, sell or
otherwise distribute the Licensed Software, Third Party Software, or User
Documentation or any derivative works based thereon in whole or in part.
Customer acknowledges that the Licensed Software, Third Party Software and User
Documentation are proprietary and contain confidential and valuable trade
secrets of CONNECT and its licensors, which Customer agrees to safeguard as
provided for under Section 10.1 Confidentiality, below.
2.7 OWNERSHIP OF CUSTOMER APPLICATION SOFTWARE. Customer shall own and hold
title to the Customer Application Software as defined in Exhibit B and all
---------
reproductions, and modifications thereof or derivative works of the Customer
Application Software made by any person, including without limitation all patent
rights copyrights, trade secrets, know how and other intellectual property
rights. CONNECT acknowledges the Customer Application Software is a "work made
for hire" and "commissioned work" and CONNECT and its employees and agents
hereby assign all right, title, and interest therein to
Page 2
<PAGE>
Customer and agree to take any and all actions and execute all necessary
documents and agreements requested by Customer to effectuate such assignment.
The Customer Application Software will be delivered free and clear of any
claims, liens or agents of CONNECT, its employees and rights and third parties.
CONNECT, except as may be agreed to in writing by Customer, shall have no right
to disclose or use the Customer Application Software for any purpose whatsoever
and CONNECT acknowledges and agrees that such software and its source code and
documentation is proprietary to Customer and has been specifically developed for
Customer's use. CONNECT shall certify to Customer that it has no copies of the
software, source code, and documentation, other than those Customer agrees in
writing to permit CONNECT to retain. CONNECT agrees to deliver to Customer the
source code and object code versions and all documentation and programmer notes,
including an overview of the Customer Application Software, a description of its
organizations, operations and database structures, security systems, help
messages and error codes of the Customer Application Software or their
equivalents in any computer languages concurrently with the delivery of the
Customer Application Software on or before June 30, 1996. Customer acknowledges
that CONNECT shall be responsible only for the creation and delivery of Customer
Application Software written by CONNECT and that Customer will contract for any
supplemental application software from third parties independent of CONNECT.
CONNECT agrees that the representations and warranties contained in Section 7
and indemnification rights contained in section 8 apply to this provision.
2.8 REVERSE ENGINEERING. As to all Licensed Software provided to Customer in
object code format only, Customer agrees not to (i) reverse engineer, decompile,
or otherwise attempt to obtain the source code corresponding to such object
code, or (ii) modify or create derivative works of the Software except as
specifically permitted by CONNECT.
2.9 COMPETITIVE PRODUCTS. Nothing herein shall be construed to prevent either
party from developing or marketing other applications, software, or components
thereof, either alone or with others, which are comparable to or competitive
with those licensed under this Agreement, provided that such development and
marketing does not infringe the Proprietary Rights of the other party and does
not involve any unauthorized use of any Confidential Information of the other
party under this Agreement and has been reduced to writing in a mutually agreed
upon non-disclosure agreement. [*]
2.10 BACKUP HARDWARE. Customer may use a single back-up or replacement
Platform as a substitute for a Designated Platform server at any time, provided
- --------
that Customer provides CONNECT with written notice of such hardware
substitution, including the information required for the Designated Platform CPU
---
in Exhibit A within three (3) business days after such substitution.
---------
2.11 CUSTOMER'S ENHANCEMENTS OF CUSTOMER APPLICATION SOFTWARE
CONNECT agrees that any and all improvements, updates, revisions, enhancements,
modification s and additions to the Customer Application Software which may be
made from time to time hereafter by Customer or any of its employees,
independent contractors or agents shall not be deemed to be part of the Licensed
Software, and CONNECT hereby disclaims releases and agrees to transfer to
Licensee any and all rights and interests which such party may have or acquire
in and of Customer's Enhancements to the Customer Application Software other
than as expressly provided herein. Customer agrees that , if CONNECT shall have
performed all of its obligations hereunder strictly in accordance with the terms
thereof, Customer shall engage in good faith bargaining concerning any proposed
licensing to CONNECT from Customer of any of Customer's enhancement s to the
Customer Application Software or interests therein.
SECTION 3 - SOFTWARE MAINTENANCE/ UPDATES
3.1 LICENSED SOFTWARE TECHNICAL AND CUSTOMER SUPPORT. Customer, at its sole
option, may order yearly maintenance services with respect to the Licensed
Software pursuant to the supplemental terms and conditions of CONNECT's standard
Software Maintenance exhibit executed and attached hereto as Exhibit C.. The
---------
yearly fees for maintenance services are set forth in Exhibit A. Such fees
---------
shall include the right to updates of the Licensed Software.
Page 3
- ---------------------
*Confidential Treatment requested
<PAGE>
SECTION 4 - PAYMENT
4.1 LICENSE FEES. THE FEES FOR THE LICENSE AND OTHER SERVICES GRANTED UNDER
THIS AGREEMENT ARE SET FORTH ON EXHIBIT A. PAYMENT TERMS WILL BE NET 30
RECEIPT OF INVOICE, BUT TWO (2%) DISCOUNT IF PAYMENT RECEIVED BY MARCH 29,
1996. CUSTOMER SHALL WIRE ALL PAYMENTS DUE UPON EXECUTION OF THIS AGREEMENT TO
THE MERCHANT ACCOUNT LISTED BELOW. All other fees and charges will be invoiced
by CONNECT to Customer and must be paid in full within thirty (30) days after
receipt of invoice or as otherwise specified on EXHIBIT A to this Agreement.
---------
All payments are due in United States dollars. CONNECT reserves the right to
apply a service charge to any unpaid balance at the rate of 1% per month (but in
no event more than the maximum rate allowed by law) for any fee or charge not
paid within thirty (30) days after receipt of invoice. If Customer fails to
pay any invoice when due, CONNECT will have the right to institute collection
procedures to recover same, and Customer will be responsible for all reasonable
costs of collection incurred by CONNECT, including without limitation litigation
costs, reasonable attorneys' fees and court costs. CONNECT also reserves the
right to discontinue or suspend any services to Customer, including the
termination of this Agreement for Customer's failure to make timely payment of
applicable fees or charges, without penalty to CONNECT.
WIRING INSTRUCTIONS:
Bank of America
Attn.: Janet Velez
Sunnyvale Main Office 0041
444 South Mathilda Avenue
Sunnyvale, CA 94086
ABA: 121-000-0358
Telephone No.: (408) 991-8303
CONNECT Inc.
515 Ellis Street
Mountain View, CA 94043-2242
Merchant Account #: 00415-20739
4.2 TAXES. All sales, use, value-added, personal property, and other taxes
(other than CONNECT income tax), customs and duties arising out of the licenses
granted or services provided under this Agreement will be paid by Customer, or,
if CONNECT is required to pay any of the same, will be reimbursed to CONNECT by
Customer.
4.3 AUDIT. During the term of this Agreement, and for a period of two (2)
years thereafter, Customer will maintain books and records in connection with
its use and distribution of the Licensed Software pursuant to this Agreement in
sufficient detail to permit CONNECT to verify Customer's compliance with the
terms and conditions of this Agreement. CONNECT will have the right upon ten
business days prior written notice through its independent auditors to inspect
Customer's facilities (including its computers) and records to verify compliance
with the terms and conditions of this Agreement, including the amount of license
fees, and other amounts payable to CONNECT hereunder. Any such audit will be
conducted during regular business hours at Customer's offices and will not
interfere unreasonably with Customer's business activities. Audits will be made
no more than once annually. If an audit reveals that Customer has underpaid
fees and/or charges to CONNECT in excess of five percent (5%), then Customer
will pay CONNECT's reasonable costs of conducting the audit, in addition to the
underpaid amounts, plus interest as provided in Section 4.1 above.
SECTION 5 - TERM AND TERMINATION
5.1 TERM AND TERMINATION. This Agreement is effective until terminated. Upon
prior written notice, either party may terminate this Agreement if the other
party becomes insolvent, ceases doing business in the regular course, files a
petition in bankruptcy or is subject to the filing of an involuntary petition
for bankruptcy which is not rescinded within a period of forty-five (45) days,
or fails to cure a material breach of any term or condition of this Agreement
within thirty (30) days after receipt of written notice specifying such breach.
In addition, Customer may terminate this Agreement upon ninety (90) days prior
written notice to CONNECT.
5.2 EFFECT OF TERMINATION. Termination of this Agreement or any license
granted hereunder will not limit either party from pursuing any other remedies
available to it, including injunctive relief, nor will termination relieve
Customer of its obligation
Page 4
<PAGE>
to pay all fees and charges that accrued prior to the effective date of
termination. The following provisions will survive any termination of this
Agreement: Sections, 5.2, 7.3 , 8, 9, and sections 10.1 through 10.12,
inclusive.
5.3 RETURN OF LICENSED SOFTWARE. Upon termination of this Agreement or any
license granted hereunder, Customer will make no further use of the applicable
Licensed Software and Documentation. Within thirty (30) days after such
termination, Customer will either destroy or return to CONNECT the originals and
all copies of the Licensed Software and Documentation and any source code in
the possession or under the control of Customer and will certify to CONNECT that
Customer has complied with the foregoing requirements.
SECTION 6 - DELIVERY, TESTING, ACCEPTANCE
6.1 LICENSED SOFTWARE
6.1(a) DELIVERY. All initial deliverables of Licensed Software and
Documentation are listed in EXHIBIT A of this Agreement and will be delivered to
---------
the shipping destination on or about a mutually agreed shipping date not to be
later than March 31, 1996. CONNECT will deliver one copy of the Licensed
Software for each Designated Platform specified on EXHIBIT A to this Agreement
---------
in the form of a tape of the Licensed Software and related User Documentation.
Customer will have 15 days from receipt of the shipment to verify that all
deliverables have been received
6.1(b) ACCEPTANCE. Licensed Software will be accepted by Customer if it
performs substantially as described in this Agreement and the then current
applicable User Documentation. Failure of Customer to inform CONNECT of
acceptance or non-acceptance within the fifteen(15)) day period following
completed delivery will constitute acceptance.
6.2 CUSTOMER APPLICATION SOFTWARE. If Customer has requested that CONNECT
provide Customer Application Software, CONNECT will provide such software as
defined in accordance with any executed Scope of Work and Supplemental Terms and
Conditions relating to testing, acceptance, and delivery outlined in any
executed Exhibit B, applicable only to such Customer Application Software.
---------
SECTION 7 - LIMITED WARRANTY (LICENSED SOFTWARE ONLY)
7.1 RIGHT TO LICENSE. CONNECT warrants (1) that it has the right to license
the Licensed Software and user Documentation to Customer on the terms and
conditions set forth in this Agreement, and (2) that the Licensed Software
contains no viruses, or implanted bugs, or other programming designed by
Licensor to cause the Licensed Software to cease to properly function at
CONNECT's instruction. and (3) that CONNECT's execution of this Agreement, and
delivery of the Licensed Software, nor its performance of its obligations
hereunder shall violate or conflict with any agreement, statute, court order,
administrative order or ruling , regulation or other federal, state or local
law, , which is binding upon Licensor, nor the provisions of the Universal
Copyright Convention, (4) that CONNECT is a corporation which is duly
organized, validly existing and in good standing under the laws of the State of
California, and that CONNECT has all the necessary corporate power and
authority to grant the rights granted hereunder and to enter into this
Agreement, (5)CONNECT's services hereunder will be performed in a timely and
professional manner by qualified professionals and equal or exceed standards
generally observed in the software services industry, and (6) that CONNECT
understands the general purpose of electronic commerce Customer intends for the
Licensed Software and represents that the Licensed Software will meet such
general requirements.
7.2 LICENSED SOFTWARE. WARRANTY OBLIGATIONS CONNECT warrants (1) that, during
the period of ninety (90) days following delivery of the Licensed Software (the
"WARRANTY PERIOD"), the Licensed Software (other than as modified by Customer)
will perform substantially and materially in accordance with the provisions
hereof and CONNECT's then current applicable Documentation, when properly
installed and used on the applicable Designated Platform, and (2) CONNECT will
replace without charge tapes, diskettes or other media embodying the Licensed
Software that are defective under normal use and (3) CONNECT will at its expense
promptly correct defects and programming errors to keep the Licensed Software
operating in accordance with this warranty provision.
7.3 LIMITED WARRANTY. OTHER THAN THE WARRANTIES EXPRESSLY STATED ABOVE, THERE
ARE NO EXPRESS OR IMPLIED WARRANTIES RELATING TO THE LICENSED SOFTWARE, THE
DOCUMENTATION OR THE SERVICES COVERED BY THIS AGREEMENT, AND CONNECT EXPRESSLY
DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE AND NONINFRINGEMENT.
Page 5
<PAGE>
SECTION 8 - INDEMNIFICATION
8.1 INFRINGEMENT INDEMNIFICATION BY CONNECT. CONNECT agrees to indemnify, hold
harmless ,defend or settle any claim or suit for loss, liability, damage, or
expense , including without limitation attorney's fees (collectively "claims"),
brought against Customer, or pay any final judgment awarded by a court of
competent jurisdiction related to any claims to the extent such claims arise
from Customer's reasonable reliance upon CONNECT's limited warranty and
representations as provided for in sections 7.1 and 7.2, Customer's liability
based solely upon CONNECT's negligent errors or omissions, or any claims which
are based on a claim that the Licensed Software or Documentation furnished and
used within the scope of the licenses granted under this Agreement infringes any
third party's patent, copyright, trademark, trade secret, copyright, or
proprietary right or rights; provided that (i) Customer shall give CONNECT in
writing within five (5) days after receiving written notice of the claim or suit
giving rise to such infringement action, (ii) CONNECT has sole control of the
defense of such action and all related settlement negotiations, and (iii)
Customer provides CONNECT with all reasonable assistance, information and
authority necessary to carry forth such defense and settlement negotiations.
Reasonable "out-of-pocket" expenses incurred by Customer in providing such
assistance as may be requested by CONNECT will be reimbursed by CONNECT.
CONNECT's obligation to indemnify and defend Customer hereunder shall survive
termination or expiration of this Agreement.
8.2 [DELETED]
8.3 CONNECT OPTIONS. In the event that any such final judgment of infringement
is entered, or CONNECT believes is likely to be entered, CONNECT may at its sole
option and expense: (i) modify the Licensed Software and/or Documentation to be
non-infringing, (ii) functionally equivalent software reasonably acceptable to
Customer and related documentation or (iii) terminate the applicable license and
provide Customer a full refund of all fees paid hereunder.
8.4 ENTIRE LIABILITY. THE FOREGOING STATES THE ENTIRE LIABILITY AND OBLIGATION
OF CONNECT WITH RESPECT TO INFRINGEMENT OR ALLEGED INFRINGEMENT OF ANY KIND OF
THIRD PARTY INTELLECTUAL PROPERTY RIGHTS BY THE LICENSED SOFTWARE OR
DOCUMENTATION OR ANY PART THEREOF.
8.5[DELETED]
SECTION 9 - LIMITATION OF LIABILITY
9.1 IN NO EVENT WILL CONNECT OR ITS LICENSORS BE LIABLE FOR ANY INDIRECT,
INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT,
INCLUDING WITHOUT LIMITATION LOSS OF PROFITS, REVENUES, DATA OR USE, WHETHER IN
AN ACTION IN CONTRACT OR TORT OR ANY OTHER FORM OF ACTION, EVEN IF CONNECT HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THESE LIMITATIONS SHALL APPLY
NOTWITHSTANDING THE FAILURE OF THE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
9.2 CONNECT'S TOTAL LIABILITY FOR DAMAGES IN CONNECTION WITH THIS AGREEMENT,
WHETHER IN AN ACTION IN CONTRACT OR TORT OR ANY OTHER FORM OF ACTION, WILL IN NO
EVENT EXCEED THE AMOUNT OF FEES ACTUALLY PAID BY CUSTOMER TO CONNECT UNDER THIS
AGREEMENT.
9.3 No action may be brought by Customer for any dispute arising out of or in
connection with this Agreement at any time more than twelve (12) months after
the facts occurred giving rise to the cause of action or dispute.
9.4 Notwithstanding anything to the contrary; nothing in sections 9.1, and 9.2
shall in any way limit Customer's rights of indemnification hereunder.
SECTION 10 - GENERAL
10.1 CONFIDENTIALITY. Both parties acknowledge that, in the course of dealings
between them, each party will acquire information, about the other party, its
business activities and operations, its technical information and trade secrets,
of a highly confidential and proprietary nature. Each party will hold such
information, to be confidential. The parties further agree to hold the
Licensed Software and Documentation and the terms of this Agreement in strict
confidence. Neither party to this Agreement
Page 6
<PAGE>
shall use the name of the other in any publicity or advertising or promotional
materials without securing the prior written consent of the other party.
10.2 NOTICES. All notices, including notices of address change, given under
this Agreement must be in writing and will be deemed effective when delivered in
person or by a reputable "next day guaranteed" courier service, by facsimile (if
a confirming copy is dispatched by one of the other permitted means of dispatch
under this Section 10.2) after being delivered via certified mail, return
receipt requested, to the appropriate contact points and addresses shown below
in the signature block and/or Exhibit A.
---------
10.3 ASSIGNMENT AND SUCCESSORS. Except as specifically provided for herein,
neither party shall assign, transfer or convey any of its rights or licenses
under this Agreement without the other's prior written consent, which will not
be unreasonably withheld. Subject to the foregoing, this Agreement will bind
and inure to the benefit of each party's respective successors and permitted
assigns.
10.4 EXPORT. Customer will only export, re-export or otherwise transfer the
Licensed Software or Documentation to a country other than the United States in
full compliance with the provisions of the United States Export Administration
Act and the rules and regulations thereunder, and both the Licensed Software and
the Documentation will be deemed "technical data" for purposes thereof.
10.5 GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of the United States and the State of California, and
the parties expressly submit to such jurisdiction. The parties agree that the
United Nations Convention on Contracts for the International Sale of Goods
(1980) is specifically excluded from application to this Agreement
10.6 FORCE MAJEURE. Except for the obligation to make payments, nonperformance
of either party shall be excused to the extent that performance is rendered
impossible by strike, fire, flood, governmental acts, orders or restrictions,
failure of suppliers, or any other reason where failure to perform is beyond the
control and not caused by the negligence of the non-performing party.
10.7 [*] CONNECT represents that the [*} and [*] of [*] are [*] than those
[*] to its [*] for similar products and similar services as follows: (a) with
regard to the [*], for a [*]; and (b) with regard to [*] and [*] hereunder, for
[*].
10.8 WAIVER AND SEVERABILITY. The waiver by either party of a breach or right
under this Agreement will not constitute a waiver of any other or subsequent
breach or right. In the event any provision of this Agreement is held invalid
or unenforceable, the remaining provisions will continue in full force and
effect.
10.9 AMENDMENT. This Agreement may be amended or modified only in a written
document signed by an authorized representative of CONNECT and Customer.
10.10 CUSTOMER OFFER. This Agreement is binding upon execution by an
authorized representative of Customer and execution by an authorized
representative of CONNECT.
10.11 U.S. GOVERNMENT RESTRICTED RIGHTS. All software is provided with
RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject
to restrictions as set forth in subparagraph (c)(1)(ii) of the Rights in
Technical Data and Computer Software Clause at 252.227-7013 or subparagraphs
(c)(1)(2) of the Commercial Software--Restricted Rights at 48 CFR 52.227-19, as
applicable. Contractor/manufacturer is Connect, Inc., 515 Ellis Street,
Mountain View, CA 94043-2242.
10.12 INSURANCE. CONNECT shall maintain during the term hereof the following
insurance: workman's compensation, public liability, product liability, and
property damage against all loss, claims, demands, proceedings, damages, costs
and expenses for injuries or damages to any person or property arising out of or
in connection with this Agreement which are directly or indirectly caused by
CONNECT.
10.13 ENTIRE AGREEMENT. This Agreement, together with any executed exhibits
attached hereto, is the complete and exclusive statement of the agreement
between the parties and supersedes all previous and contemporaneous agreements,
proposals and communications, written or oral, with respect to this subject
matter. In particular, the preprinted terms and conditions of any
* Confidential treatment requested
<PAGE>
purchase order issued or to be issued by Customer with respect to Licensed
Software or related CONNECT services are hereby expressly and superseded by this
Agreement. A Customer purchase order that references this Agreement and that is
accepted by CONNECT may serve as a supplement to this Agreement with respect to
Customer's order of additional Licensed Software or related services; provided
that such purchase order will be effective only as to product or services
identification, quantity and price, and otherwise will be governed by terms and
conditions of this Agreement.
<TABLE>
<CAPTION>
CONNECT, INC. UNION UNDERWEAR COMPANY, INC.
<S> <C>
By: /s/ Thomas P. Kehler By: /s/ Charles m. Kirk
----------------------------- --------------------------
Name: Tom Kehler Name: Charles M.. Kirk
--------------------------- -----------------------
Title: CEO/President Title: Senior Vice President and Chief Information Officer
-------------------------- ---------------------------------------------------
Date: March 28, 1996 Date: March 26, 1996
----------------------------- -----------------------
Telephone: (415) 254-4000 Telephone: 502/781-6400
-------------- -------------------
Fax: (415) 254-4800 Fax: 502/781-6493
-------------- -------------------------
</TABLE>
Page 8
<PAGE>
SOFTWARE LICENSE AGREEMENT
EXHIBIT A
1. CONNECT'S ONESERVER SOFTWARE LICENSE
------------------------------------
<TABLE>
<CAPTION>
===================================================================================================================================
LICENSE DESCRIPTION MACHINE LIST PRICE DISCOUNT AMOUNT IF EXTENDED AMOUNT IF
COMMITTED BY 3/29/96 COMMITTED BY 3/29/96
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Development/ Staging Server SPARC 20 $ [ * ] $ [ * ] $ [ * ]
(Up to 2 Processors)
- -----------------------------------------------------------------------------------------------------------------------------------
OneServer with Transaction SPARC 1000 $ [ * ] $ [ * ] $ [ * ]
Engine, Oracle, Fulcrum, (Up to 4 Processors)
RSA
- -----------------------------------------------------------------------------------------------------------------------------------
OneServer Web Component SPARC 20 $ [ * ] $ [ * ] $ [ * ]
Server (Up to 2 Processors)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTALS $ [ * ] $ [ * ] $ [ * ]
===================================================================================================================================
</TABLE>
2. SOFTWARE MAINTENANCE AND SUPPORT SERVICES FEE
---------------------------------------------
(a) Fee for Licensed Software Maintenance Services
as described in Exhibit C the Software Maintenance
---------
Addendum (exclusive of per diem and out-of-pocket
expenses) $ [ * ]
(b) Fee for Update Releases as described in Exhibit C the
---------
Software Maintenance Addendum (exclusive of per diem
and out-of-pocket expenses) $ [ * ]
TOTAL SOFTWARE MAINTENANCE AND SUPPORT FEES $[ * ]
===========
Maintenance is offered at 18% of the license price which half is for License
Software Maintenance Service and the other half is for Optional Update
Releases. Subject to any reduction by CONNECT per section 10.7 of the Agreement,
the parties agree that CONNECT will not increase the Maintenance and Suport
Services Fee prior to the third anniversary date of the Agreement and thereafter
CONNECT may increase such fees to account for inflation no more than once per
agreement year and not to exceed the Consumer Price Index Average for all Urban
Consumers for the Nashville, TN Metropolitan Statistical Area (base year 1982-
4=100) published by the Bureau of Labor Statistics of the U.S. Department of
Labor. In addition, Customer may elect not to pay the update release portion of
such fees,commencing upon renewal of the second yearly maintenance period subect
to section 3.1 of Exhibit C, the Software Maintenance Addendum.
3. ONESERVER TRAINING
------------------
The following standard training rates apply for training. CONNECT will invoice
according to the payment provision listed on this Agreement and as services are
rendered by CONNECT.
<TABLE>
<CAPTION>
======================================================================================
NUMBER OF DAYS PER COURSE LIST PRICE PER STUDENT
- --------------------------------------------------------------------------------------
<S> <C> <C>
Client Administration Course 2 $ 700.00
- --------------------------------------------------------------------------------------
Host Administration Course 2 $ 700.00
- --------------------------------------------------------------------------------------
Developer Course 5 $1,750.00
- --------------------------------------------------------------------------------------
</TABLE>
4. DESIGNATED PLATFORM AND INSTALLATION LOCATION
---------------------------------------------
a. Brand and model: Sparc 20, Sparc 1000, Sparc 20
------------------------------
b. RAM and CPU
c. Designated Platform Operating System: As specified by Customer
in writing.
d. Designated Platform Location: As notified in writing by Customer
from time to time.
* Confidential treatment requested.
Page 9
<PAGE>
5. PAYMENT ATTACHMENT
------------------
See payment schedule listed on Attachment A to this Exhibit A attached hereto
and incorporated herein.
CONNECT, INC UNION UNDERWEAR COMPANY,
------------------------
Initial: /s/ Connect, Inc. Initial: /s/ Union Underwear Company
----------------- ---------------------------
Date: March 28, 1996 Date: March 26, 1996
-------------- --------------
ATTACHMENT A TO EXHIBIT A
<TABLE>
<CAPTION>
ITEM DESCRIPTION MACHINE AMOUNT DUE PAYMENT
DUE DATE
<S> <C> <C> <C>
Development/ Staging Server SPARC 20 $ [ * ] March 29, 1996
(Up to 2
Processors)
OneServer w/Transaction SPARC 1000 $ [ * ] March 29, 1996
Engine, Oracle, Fulcrum, (Up to 4
RSA Processors)
OneServer Web Component SPARC 20 $ [ * ] March 29, 1996
Server (Up to 2
Processors)
TOTAL SOFTWARE $ [ * ]
Additional 2% Software $ [ * ] March 29, 1996
Discount if Payment is
Transferred via wire by
3/29/96
Software Maintenance and MAINTENANCE: (a) [ * ] March 29, 1996
Support calculated as 18%
of discounted of $[ * ].
UPDATES: (b) [ * ] March 29, 1996
TOTAL MAINTENANCE $ [ * ]
CONNECT Professional $ [ * ] Billed two
Services as referenced on weeks net 30
Exhibit B attached hereto. after receipt
of invoice
</TABLE>
*Confidential treatment requested.
Page 10
<PAGE>
SOFTWARE LICENSE AGREEMENT
EXHIBIT B
SCOPE OF WORK AND SUPPLEMENTAL TERMS AND CONDITIONS FOR
CUSTOMER APPLICATION SOFTWARE ONLY
In the event both Customer and CONNECT have executed this Exhibit B, then the
---------
following terms and conditions will apply to the development of Customer
Application Software:
1.1 ACCEPTANCE TEST PLAN. After CONNECT completes development of the Customer
Application Software such that CONNECT believes it substantially conforms with
the Scope of Work outlined in this Exhibit, CONNECT will prepare and present to
Customer an Acceptance Test Plan on or before June 30, 1996, specifying testing
and acceptance procedures for the Customer Application Software. The Acceptance
Test Plan when accepted by Customer will enable CONNECT and Customer to verify
on or before June 30, 1996 that the Customer Application Software performs
substantially in accordance with the specifications contained in the Scope of
Work.
1.2 ACCEPTANCE TESTING BY CONNECT. After Customer approves the Acceptance Test
Plan, CONNECT will follow the Acceptance Test Plan to establish that the
Customer Application Software, as tested or after further development and
testing by CONNECT, conforms to the Scope of Work. After CONNECT is satisfied
that the Customer Application Software conforms to the Scope of Work, CONNECT
will deliver the Customer Application Software together with CONNECT's written
results of its testing, to Customer.
1.3 ACCEPTANCE TESTING BY CUSTOMER. Customer will have ten (10) business days
to test the Customer Application Software using the Acceptance Test Plan.
Customer shall perform the tests contained in the Acceptance Test Plan and
report the results to CONNECT in the format requested by CONNECT. CONNECT will
provide to Customer, its representatives and consultants such documentation and
assistance as may reasonably be needed by Customer to perform such testing. If
Customer determines at any time during the acceptance testing period that the
Customer Application Software does not conform to the Scope of Work or otherwise
demonstrates Major Errors, Customer shall notify CONNECT of the nature and
specifics of the nonconformity or Major Errors. Customer shall also notify
CONNECT of all Minor Errors, which CONNECT will use reasonable efforts to
correct in a timely and prompt manner. For the purposes of this exhibit, "Major
Error" means any system error in the Customer Application Software which (a) is
demonstrable on either the host computer installed at CONNECT's facility or on
the Customer's computer system and which in the environment for which it was
designed that causes the Customer Application Software to halt, (b) causes or is
likely to cause data to be lost or destroyed, (c) prevents the Customer
Application Software from being installed or executed on the host computer in a
properly configured environment or consistently prevents the Customer
Application Software from running or being accessed by a substantial number of
client computer systems, or (d) prevents the user from running any major
subsystem of the Customer Application Software. "Minor Error" means any system
error which is demonstrable in the Customer Application Software which does not
rise to the level of a Major Error. Customer's failure to provide CONNECT with
a written acceptance or written statement of nonconformity or Major Errors
within the 10 business day period shall be deemed an acceptance of the Customer
Application Software.
1.4 CHANGES IN THE SCOPE OF WORK. Any changes in the Customer Application
Software after Customer's approval of the Scope of Work must be requested by
Customer in writing. Upon CONNECT's receipt of the change order request, CONNECT
will review the impact of the requested change on the development project,
including possible revisions to the Scope of Work and/or completed programming,
and reassess the estimated charges for development of the Customer Application
Software as so changed. CONNECT reserves the right not to accept changes
because of possible cost, feasibility factors, resource limitations, or
potential interference with the performance of the Customer Application
Software. Upon completion of its review, CONNECT will submit proposed changes
to the Scope of Work and any additional charges to Customer for approval. If
Customer approves the changes and any additional charges, Customer shall provide
CONNECT with written notice of the approval and payment of the additional
charges. Such charges, as outlined in section 2.2, will remain at the hourly
rate referred to therein. If Customer does not approve the proposed changes,
CONNECT shall not be responsible for implementation of the proposed changes.
1.5 LIMITED WARRANTY (FOR CUSTOMER APPLICATION SOFTWARE ONLY. CONNECT warrants
that for a period of ninety(90) days after Customer acceptance; the Customer
Application Software, when integrated with the Licensed
Page 11
<PAGE>
Software and operated on the Designated Platform for which it is licensed, will
perform substantially in accordance with the Scope of Work. CONNECT will correct
all Major Errors identified by Customer prior to or during this warranty period,
subject to CONNECT being able to reproduce the defect or error. CONNECT does not
warrant that the Customer Application Software will meet any of Customer's
particular requirements, or that operation of the Customer Application Software
will be error-free.
1.6 WARRANTY OBLIGATIONS. CONNECT's sole obligations are: (i) to replace
without charge tapes, diskettes or other media embodying the Customer
Application Software that are defective under normal use, and (ii) to use
reasonable commercial efforts to correct any Major Error as defined in Section
1.3 above reported by Customer to CONNECT in the Customer Application Software
that is reproducible by CONNECT on a similarly configured CPU and operating
system. If, after using reasonable commercial efforts, CONNECT is unable to
make the Customer Application Software operate as warranted, Customer will be
entitled, upon return of all copies of the Customer Application Software, to a
full refund of all fees paid to CONNECT for the Customer Application Software.
1.7 LIMITED WARRANTY. OTHER THAN THE WARRANTIES EXPRESSLY STATED ABOVE, THERE
ARE NO EXPRESS OR IMPLIED WARRANTIES RELATING TO THE CUSTOMER APPLICATION
SOFTWARE, , OR RELATED SERVICES, AND CONNECT EXPRESSLY DISCLAIMS ANY IMPLIED
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND
NONINFRINGEMENT.
2. SCOPE OF WORK. (TO BE NEGOTIATED)
2.1. DELIVERY SCHEDULE. (TO BE NEGOTIATED)
2.2. LABOR RATES
This Agreement is a Time and Material Contract. The following hourly rates apply
for all worked performed. CONNECT will invoice every two weeks and Customer
shall pay net 30 after receipt of invoice.
<TABLE>
<CAPTION>
Resource Unit Labor Rate
<S> <C> <C>
Project Manager/Senior Engineer hourly $187.00
</TABLE>
2.3. OTHER RATES
Customer shall be responsible for all reasonable travel, living, and out-of-
pocket expenses incurred in the performance of services pursuant to this
Agreement.
CONNECT, INC. UNION UNDERWEAR COMPANY, INC.
-----------------------------
Initial: /s/ Connect, Inc. Initial: /s/ Union Underwear Company, Inc.
----------------- --------------------------------
Date: March 28, 1996 Date: March 26, 1996
-------------- --------------
Page 12
<PAGE>
SOFTWARE LICENSE AGREEMENT
EXHIBIT C
SUPPLEMENTAL TERMS AND CONDITIONS FOR MAINTENANCE ONLY
In the event Customer has initialed this Exhibit, then the following terms and
conditions will apply solely for yearly Maintenance services for Licensed
Software and Maintenance Updates and Releases thereto. The Fees for such
maintenance are outlined in Exhibit A of this Agreement. THIS EXHIBIT DOES NOT
---------
APPLY TO MAINTENANCE OR SUPPORT SERVICES FOR CUSTOMER APPLICATION SOFTWARE WHICH
MAY BE REQUESTED FROM CONNECT UNDER A SEPARATE EXHIBIT OR AGREEMENT.
SECTION 1 - DEFINITIONS
The following defined terms, and other capitalized terms defined herein, shall
govern the interpretation of this Exhibit. Capitalized terms that are used and
not otherwise defined shall have the meaning set forth in the Software License
Agreement.
1.1 "ERROR" means a material failure of the Licensed Software to conform to its
functional specifications as described in the applicable User Documentation,
which failure is demonstrable in the environment for which the Licensed Software
was designed and causes it to be inoperable, to operate improperly in the
environment for which it was designed, or produces results different from those
described in the applicable User Documentation. Failures resulting from
Customer's negligence or improper use of the Licensed Software, modifications or
damage to the Licensed Software by Customer, and Customer's use of the Licensed
Software on a CPU or with an operating system other than the Designated Platform
or in combination with any third party software not provided by CONNECT or
identified as compatible by CONNECT, are not considered Errors.
1.2 "ERROR CORRECTION" means either a modification or addition that, when made
or added to the Licensed Software, brings the Licensed Software into material
conformity with its functional specifications, or a procedure or routine that,
when observed in the regular operation of the Licensed Software, avoids the
practical adverse effect of such nonconformity.
1.3 "MAJOR ERROR" means any Error in the Licensed Software which (a) is
demonstrable in the environment for which it was designed that causes the
Licensed Software to halt, (b) causes cause data to be lost or destroyed, (c)
prevents the Licensed Software from being installed or executed on the properly
configured environment, or (d) prevents the user from running any major
subsystem of the Licensed Software.
1.4 "MINOR ERROR" means any Error which is demonstrable in the Licensed
Software that does not rise to the level of a Major Error.
1.5 "MAINTENANCE UPDATE" means an updated revision of the Licensed Software
that includes Error Corrections. Maintenance Updates are normally provided to
Customer on diskette or tapes.
SECTION 2- MAINTENANCE SERVICES
2.1 ERROR CORRECTION.
(a) Major Errors. CONNECT shall, within twenty four (24)) hours of the receipt
-------------
of written notice of any Major Error, via email or fax initiate work to verify
such Major Error. If the Major Error is reproduced, then CONNECT will initiate
work to correct such Major error within the twenty four (24) hour period and
use its best efforts to correct the Major Error, including any necessary
modification to the Licensed Software. In the event that CONNECT is unable to
provide correction for any Major Error within such twenty four (24)) hour
period, Customer shall have the right to request written assurances from CONNECT
that it is using its best efforts to provide correction for the Major Error and
is likely to do so within a commercially reasonable time. In the event that
CONNECT is unable to correct any Major Error within sixty (60) calendar days
after receipt of notice of the Major Error,
Page 13
<PAGE>
Customer shall have the right to terminate this Agreement, including all
licenses, rights, and obligations hereunder and receive a full refund of
maintenance fees paid hereunder
(b) Minor Errors. CONNECT may or may not at its sole discretion correct Minor
--------------
Errors.
2.2 CUSTOMER RESPONSIBILITIES. Customer agrees to notify CONNECT in writing
promptly following the discovery of any Error. Further, upon discovery of an
Error, Customer agrees, if requested by CONNECT, to submit to CONNECT a listing
of output and any other data that CONNECT may require in order to reproduce the
Error and the operating conditions under which the Error occurred or was
discovered. In addition, if the Licensed Software is not hosted on a CONNECT
CPU, under the terms of a separate Hosting Agreement or Exhibit to the License
Agreement, Customer is responsible for procuring, installing, and maintaining
all equipment, telephone lines, communications interfaces, and other hardware
necessary for CONNECT to provide maintenance services to Customer.
2.3 TELEPHONE SUPPORT. At all times, on a five day basis, Monday through
Friday from 7.00 a.m. to 6:00 p.m. PST, CONNECT will make a member of its
maintenance staff available by telephone to Customer's designated support
coordinator (Customer's named employee responsible for liaison with CONNECT
relating to the Software Maintenance requested hereunder) to assist Customer's
use of the Licensed Software. Customer's System Administrator will be
responsible for daily maintenance of the Licensed Software per the applicable
Documentation. Additional extended service plans are available from CONNECT at
Customer's request.
2.4 FIELD MAINTENANCE. Upon request, CONNECT will provide field support and
maintenance services at any Customer field sites at CONNECT's then current
hourly field maintenance rates, together with reimbursement of applicable travel
and related expenditures, at CONNECT's cost.
2.5 ADDITIONAL TRAINING. Subject to space availability, Customer may enroll
its employees in additional or advanced training classes at CONNECT's hourly
rates listed on Exhibit A of this Agreement.
---------
2.6 EXCLUSIONS FROM MAINTENANCE SERVICES. Maintenance services under this
Exhibit do not include initial installation support, system administration
training, operations training, network management setup for the Licensed
Software, travel and living expenses for installation and training, file
conversion costs, optional products and services, directories, consulting
services, shipping charges, or the costs of any recommended hardware.
This Exhibit also does not cover maintenance services for any failure or defect
in the Licensed Software caused by any of the following:
(a) the improper use, alteration, or damage of the Licensed Software by
Customer or persons other than CONNECT employees;
(b) modifications to the Licensed Software not made or authorized by CONNECT;
(c) Software other than the Licensed Software;
(d) application interfacing between the Licensed Software and other software;
(e) use of Licensed Software (i) with hardware that has not been approved by
CONNECT, or (ii) other than the Designated Platform; or
(f) Errors in any version of the Licensed Software other than the most recent
Update.
SECTION 3 - MAINTENANCE AND MAJOR RELEASES AND RELATED SUPPORT
3.1 MAINTENANCE RELEASES. CONNECT may, from time to time, issue maintenance
updates of the Licensed Software containing Error Corrections. CONNECT will
provide Customer with one (1) copy of each Maintenance Update for each copy of
the Licensed Software being maintained under this Agreement, without additional
charge. CONNECT will provide reasonable assistance to Customer by telephone to
install and operate each Maintenance Update. CONNECT provides both major and
minor maintenance releases. Major releases are bundled with documentation and
shipped to customer. For maintenance release, Customer will be notified that the
release is available and CONNECT will ship the release. Major releases are
numbered as 1.2,
Page 14
<PAGE>
1.3, or 2.0, 2.1. Maintenance releases will be numbered 1.1.1 or 1.1.2 or 2.0.1.
or 2.11. Major releases will include enhancements and bug fixes, and will be on
a release cycle. With each major release new documentation will be shipped along
with software releases. Each software module will be replaced at that time.
Upgrade scripts will be provided if required to migrate from the prior release
to the new release. CONNECT will not support upgrade scripts from other than the
current release to the new release. Maintenance releases will be for bug fixes
only, and will be scheduled by CONNECT. CONNECT will notify customers of each
new maintenance release. Because maintenance updates are cumulative, the
Customer may not apply only a partial update. [EXAMPLE] 1.1.1 is a bug fix for
1.1 and can replace the binaries for 1.1, Release 1.1.2 will include all bug
fixes done for 1.1.1 and the new fixes for 1.1.2.] Customer may not selectively
choose which fixes to apply. Release documentation will accompany all
maintenance releases. CONNECT will support the current release until superseded
and replaced. The previous release will be supported for six months after the
release of the current release, however such support will be for priority 1. bug
fixes only on a commercially reasonable basis and subject to availability of
support staff.
3.2. DISCONTINUATION OF SERVICES. Notwithstanding anything herein to the
contrary, Customer shall have the right after the first agreement year to
discontinue maintenance and support services herunder, without terminating the
underlying license for the Licensed Software, on 30 days prior written notice to
CONNECT.
CONNECT, INC. UNION UNDERWEAR COMPANY, INC.
-----------------------------
By: /s/ Thomas P. Kehler By: /s/ Charles M. Kirk
-------------------- -------------------
Name: Tom Kehler Name: Charles M. Kirk
-------------------- -------------------
Title: CEO/President Title: Senior VP & CIO
-------------------- -------------------
Date: March 28, 1996 Date: March 26, 1996
-------------------- -------------------
Telephone: (415) 254-4000 Telephone: 502/781-6400
-------------- ------------
Fax: (415) 254-4800 Fax: 502/781-6493
-------------- ------------
Page 15
<PAGE>
EXHIBIT 10.22
BUSINESS ALLIANCE PROGRAM AGREEMENT
This Business Alliance Program Agreement (the "Agreement") is between
Oracle Corporation with its principal place of business at 500 Oracle Parkway,
Redwood City, California 94065 ("Oracle") and Connect, Inc. (legal name) with
its principal place of business at 515 Ellis Street, Mountain View CA 94043
(the "Alliance Member"). The terms of this Agreement shall apply to each
Program license granted and to all services provided by Oracle under this
Agreement. When completed and executed by both parties, an Order Form shall
evidence the Program licenses granted and the services that are to be provided.
1. DEFINITIONS
1.1 "Commencement Date" shall mean the date on which the Programs are
delivered by Oracle, or if no delivery is necessary, the Effective Date set
forth on the relevant Order Form.
1.2 "Designated System" shall mean the computer hardware and
operating system designated on the relevant Order Form or Sublicense report for
use in conjunction with a Sublicensed Program, Development License, or Marketing
Support License.
1.3 "Order Form" shall mean the document by which the Alliance Member
orders Program licenses, Sublicenses, and services, and which is agreed to by
the parties. The Order Form shall reference the Effective Date of this
Agreement.
1.4 "Price List" shall mean Oracle's standard commercial fee schedule
that is in effect when a Program license, Sublicense, or services are ordered by
the Alliance Member.
1.5 "Program" shall mean the computer software in object code form
owned or distributed by Oracle for which the Alliance Member is granted a
license or grants a Sublicense pursuant to this Agreement; the user guides and
manuals for use of the software ("Documentation"); and Updates. "Limited
Production Program" shall mean a Program not specified on the Price List or
which is designated as Limited Production by Oracle.
1.6 "Sublicense Addenda" shall mean the addenda to this Agreement
specifying additional Sublicense terms and Sublicense rates and fees for the
various types of Sublicenses which may be granted by the Alliance Member.
1.7 "Sublicense" shall mean a nonexclusive, nontransferable right
granted by or through the Alliance Member to an end user to use an object code
copy of the Programs with the Value-Added Package under authority of a
Sublicense Addendum. "Sublicensee" shall mean a third party who is granted a
Sublicense of the Programs with the Value-Added Package for such party's own
internal data processing purposes and not for purposes of any further
distribution.
1.8 "Supported Program License" shall mean a Development License or
Marketing Support License for which the Alliance Member has ordered Technical
Support for the relevant time period. "Technical Support" shall mean Program
support provided under Oracle's policies in effect on the date Technical Support
is ordered.
<PAGE>
1.9 "Update" shall mean a subsequent release of a program which is
generally made available for Supported Program Licenses at no additional charge,
other than media and handling charges. Update shall not include any release,
option or future product which Oracle licenses separately.
1.10 "User," unless otherwise specified in the Order Form or
Sublicense report for a user type specified in the Price List in effect when the
Program is Sublicensed, shall mean a specific individual employed by the
Alliance Member or Sublicensee (as the case may be) who is authorized by such
party to use the Programs, regardless of whether the individual is actively
using the Programs at any given time.
1.11 "Value-Added Package" shall mean the hardware or software
products or services having added value which are developed, sold, and/or
licensed with the Programs to a Sublicensee by the Alliance Member, as provided
under the applicable Sublicense Addenda.
2. LICENSES GRANTED
2.1 Development Licenses and Trial Licenses
A. Oracle grants to the Alliance Member a nonexclusive license to use
the Development Licenses the Alliance Member obtains under this Agreement and
applicable Sublicense Addenda, as follows:
1. to develop or prototype the Value-Added Package on the Designated
System or on a backup system if the Designated System is inoperative, up to any
applicable maximum number of designated Users or other such limitation as may be
applicable;
2. to demonstrate the Programs to potential Sublicensees solely in
conjunction with the Value-Added Package;
3. to provide training and technical support to employees and to
customers solely in conjunction with the Value-Added Package;
4. to use the Documentation provided with the Programs in support of
the Alliance Member's authorized use of the Programs; and
5. to copy the Programs for archival or backup purposes; no other
copies shall be made without Oracle's prior written consent. All titles,
trademarks, and copyright and restricted rights notices shall be reproduced in
such copies. All archival and backup copies of the Programs are subject to the
terms of this Agreement.
B. The Alliance Member may order temporary trial licenses ("Trial
Licenses") for its evaluation purposes only and not for development or prototype
purposes, for use during a period specified in the Order Form. Each Order Form
for Trial Licenses shall clearly state the trial period and shall identify that
the order is for a Trial License.
<PAGE>
2.2 Marketing Support Licenses
Oracle grants to the Alliance Member a nonexclusive license to
use the Marketing Support Licenses the Alliance Member obtains under this
Agreement and applicable Sublicense Addenda, as follows:
A. to demonstrate the Programs to potential Sublicensees solely in
conjunction with the Value-Added Package, up to any applicable maximum number of
designated Users or other such limitation as may be applicable;
B. to develop customized prototypes of the Value-Added Package for
prospective Sublicensees on the Designated System if the Alliance Member does
not receive any fees related to the development of such customized prototypes;
C. to use the Documentation provided with the Programs in support of
the Alliance Member's authorized use of the Programs; and
D. to copy the Programs for archival or backup purposes; no other
copies shall be made without Oracle's prior written consent. All titles,
trademarks, and copyright and restricted rights notices shall be reproduced in
such copies. All archival and backup copies of the Programs are subject to the
terms of this Agreement.
2.3 Sublicensing
A. License to Sublicense Programs
As further set forth in the applicable Sublicense Addenda, Oracle
hereby grants the Alliance Member a nonexclusive, nontransferable license to
market and grant Sublicenses as set forth in such Sublicense Addenda and at the
rates and fees set forth in such Sublicense Addenda. The Alliance Member shall
only have the right to Sublicense Programs pursuant to an effective Sublicense
Addendum between the parties hereto.
The Alliance Member shall Sublicense the Programs solely through
a written Sublicense agreement as provided under Section 2.3.B. Upon Oracle's
request, the Alliance Member shall provide Oracle with a copy of the Alliance
Member's standard Sublicense agreement.
B. Sublicense Agreement
Every Sublicense Agreement shall include, at a minimum,
contractual provisions which:
1. Restrict use of the Programs to object code, subject to the
restrictions provided under the applicable Sublicense Addenda and consistent
with the Sublicense fees payable to Oracle;
<PAGE>
2. Prohibit (a) transfer of the Programs except for temporary
transfer in the event of computer malfunction; (b) assignment, timesharing and
rental of the Programs; and (c) title to the Programs from passing to the
Sublicensee or any other party;
3. Prohibit the reverse engineering, disassembly or decompilation of
the Programs and prohibit duplication of the Programs except for a single backup
or archival copy;
4. Disclaim, to the extent permitted by applicable law, Oracle's
liability for any damages, whether direct, indirect, incidental or
consequential, arising from the use of the Programs;
5. Require the Sublicensee, at the termination of the Sublicense, to
discontinue use and destroy or return to the Alliance Member all copies of the
Programs and Documentation;
6. Prohibit publication of any results of benchmark tests run on the
Programs;
7. Require the Sublicensee to comply fully with all relevant export
laws and regulations of the United States to assure that neither the Programs,
nor any direct product thereof, are exported, directly or indirectly, in
violation of United States law; and
8. Specify Oracle as a third party beneficiary of the Sublicense
agreement to the extent permitted by applicable law.
C. Marketing/Sublicensing Practices
In marketing and Sublicensing the Programs, the Alliance
member shall:
1. Not engage in any deceptive, misleading, illegal, or
unethical practices that may be detrimental to Oracle or to the Programs;
2. Not make any representations, warranties, or guarantees to
Sublicensees concerning the Programs that are inconsistent with or in addition
to those made in this Agreement or by Oracle; and
3. Comply with all applicable federal, state, and local laws
and regulations in performing its duties with respect to the Programs.
2.4 Acceptance of Programs
For each Program license for which delivery from Oracle is
required under this Agreement, the Alliance Member shall have a 15 day
Acceptance Period, beginning on the Commencement Date, in which to evaluate the
Program. During the Acceptance Period, the Alliance Member may cancel the
license by giving written notice to Oracle and returning the
<PAGE>
Program in accordance with Section 6.6 below. Unless such cancellation notice is
given, the license will be deemed to have been accepted by the Alliance Member
at the end of the Acceptance Period.
2.5 Limitations on Use
The Alliance Member shall not use or duplicate the Programs
(including the Documentation) for any purpose other than as specified in this
Agreement or make the Programs available to unauthorized third parties. The
Alliance member shall not (a) use the Programs for its internal data processing
or for processing customer data; (b) rent, electronically distribute, or
timeshare the Programs or market the Programs by interactive cable or remote
processing services or otherwise distribute the Programs other than as specified
in this Agreement; or (c) cause or permit the reverse engineering, disassembly,
or decompilation of the Programs.
2.6 Title
Oracle shall retain all title, copyright, and other proprietary
rights in the Programs and any modifications or translations thereof. The
Alliance Member and its Sublicensees do not acquire any rights in the Programs
other than those specified in this Agreement.
2.7 Transfer of Programs
The Alliance Member may transfer a Development License or
Marketing Support License within its organization upon notice to Oracle;
transfers are subject to the terms and fees specified in Oracle's transfer
policy in effect at the time of the transfer.
2.8 Use of Programs by Agents
The Alliance Member and each Sublicensee (as the case may be)
shall have the right to allow each such party's own third party agents to use
each such party's licensed Programs as licensed or Sublicensed under this
Agreement so long as the applicable party endures that its agents use the
Programs in accordance with the terms of this Agreement or the applicable
Sublicense agreement.
2.9 Pre-Production Programs
As an accommodation to the Alliance Member, Oracle may supply the
Alliance Member with pre-production releases of Programs (which may be labeled
"Alpha" or "Beta"). These products are not suitable for production use.
<PAGE>
3. TECHNICAL SERVICES
3.1 Technical Support Services
Oracle shall provide Technical Support services ordered by the
Alliance Member under Oracle's Technical Support policies in effect on the date
Technical Support is ordered, subject to the payment by the Alliance Member of
the applicable fees. Reinstatement of lapsed Technical Support services is
subject to Oracle's Technical Support reinstatement fees in effect on the date
Technical Support is re-ordered. The Alliance Member may obtain Technical
Support services for Limited Production Programs and pre-production releases of
Programs on a time and materials basis.
3.2 Training Services
Oracle will provide training services agreed to by the parties
under the terms of this Agreement. For any on-site services requested by the
Alliance Member, the Alliance Member shall reimburse Oracle for actual,
reasonable travel and out-of-pocket expenses incurred.
4. FEES AND PAYMENTS
4.1 License Fees and Sublicense Fees
The Alliance Member may order Development Licenses or Marketing
Support Licenses at the standard Program license fees set forth in the Price
List or at the fees otherwise provided in a Sublicense Addendum. For each
Sublicense granted by the Alliance Member, the Alliance Member agrees to pay
Oracle a Sublicense fee as set forth in the applicable Sublicense Addenda. The
Alliance Member shall not be relived of its obligation to pay Sublicense fees
owed to Oracle by the nonpayment of such fees by the Sublicensee.
The Alliance Member is free to determine unilaterally its own
license fees to its Sublicensees. If the Alliance Member or a Sublicensee
upgrades the Programs to a larger computer, transfers the Programs outside the
United States and/or to another operating system, or increases the licensed
number of Users, the Alliance Member will pay additional Sublicense fees to
Oracle as provided under Oracle's transfer policies and rates in effect at the
time the Program is upgraded or transferred.
4.2 Technical Support Fees
Technical Support services ordered by the Alliance Member for
Development Licenses and Marketing Support Licenses will be provided under
Oracle's Technical Support policies and rates in effect on the date Technical
Support is ordered.
4.3 General Payment Terms
Except as otherwise provided in a Sublicense Addendum, invoices
for payment of license fees shall be payable 30 days from the Commencement Date.
Technical Support fees for Sublicenses shall be payable as specified in the
applicable Sublicense Addendum.
<PAGE>
Technical Support fees for Development Licenses and Marketing Support Licenses
shall be payable annually in advance, net 30 days from the renewal date; such
fees will be those in effect at the beginning of the period for which the fees
are paid. All payments made shall be in United States currency and shall be made
without deductions based on any taxes or withholdings, except where such
deduction is based on gross income. Any amounts payable by the Alliance Member
hereunder which remain unpaid after the due date shall be subject to a late
charge equal to 1.5% per month from the due date until such amount is paid. The
Alliance Member agrees to pay applicable media and shipping charges. The
Alliance Member shall issue a purchase order, or alternative document acceptable
to Oracle, on or before the Effective Date of the applicable Order Form.
4.4 Taxes
The fees listed in this Agreement do not include taxes; if Oracle
is required to pay sales, use, property, value-added, or other federal, state or
local taxes based on the licenses granted under this Agreement or the
Sublicenses granted by the Alliance Member, then such taxes shall be billed to
and paid by the Alliance Member. This shall not apply to taxes based on Oracle's
income .
5. RECORDS
5.1 Records Inspection
The Alliance Member shall maintain adequate books and records in
connection with activity under this Agreement. Such records shall include,
without limitation, executed Sublicense agreements, the information required in
or related to the Sublicense reports required under a Sublicense Addendum, the
number of copies of Programs used or Sublicensed by the Alliance Member , the
computers on which the Programs are installed, and the number of Users using the
Programs. Oracle may audit the relevant books and records of the Alliance
Member to ensure compliance with the terms of this Agreement upon reasonable
notice to the Alliance Member. Any such audit shall be conducted during regular
business hours at the Alliance Member's offices and shall not interfere
unreasonably with the Alliance Member's business activities. If an audit
reveals that the Alliance Member has underpaid fees to Oracle, the Alliance
Member shall be invoiced for such underpaid fees based on the Price List in
effect at the time the audit is completed. If the underpaid fees exceed five
percent (5%) of the applicable license fees or Sublicense fees paid, then the
Alliance Member shall pay Oracle's reasonable costs of conducting the audit.
Audits shall be made no more than once annually.
5.2 Notice of Claim
The Alliance Member will notify the Oracle legal department
promptly in writing of: (a) any claim or proceeding involving the Programs that
comes to its attention; and (b) any material change in the management or control
of the Alliance Member.
<PAGE>
6. TERM AND TERMINATION
6.1 Term
This Agreement shall become effective on the Effective Date and
shall be valid until the expiration or termination of all Sublicense Addenda
hereunder, unless terminated earlier as set forth herein. If not otherwise
specified on the Order Form, each Program license granted under this Agreement
shall remain in effect perpetually under the terms of this Agreement unless the
license or this Agreement is terminated as provided in this Article 6 below. The
term of each Sublicense Addendum hereunder shall be as set forth in each such
Addendum.
6.2 Termination by the Alliance Member
The Alliance Member may terminate any Program license, any
Sublicense Addenda, or this Agreement at any time; however, termination shall
not relieve the Alliance Member's obligations specified in Sections 6.5 and 6.6.
6.3 Termination by Oracle
Oracle may terminate any Program license, any Sublicense Addenda,
or this Agreement upon written notice if the Alliance Member breaches this
Agreement and fails to correct the breach within 30 days following written
notice specifying the breach.
6.4 Force Majeure
Neither party shall be liable to the other for failure or delay
in the performance of a required obligation if such failure or delay is caused
by strike, riot, fire, flood, natural disaster, or other similar cause beyond
such party's control, provided that such party gives prompt written notice of
such condition and resumes its performance as soon as possible, and provided
further that the other party may terminate this Agreement if such condition
continues for a period of one hundred eighty (180) days.
6.5 Effect of Termination
Upon expiration or termination of a Sublicense Addendum or this
Agreement, all the Alliance Member's rights to market and Sublicense the
Programs as set forth in such Sublicense Addendum or this Agreement shall cease.
The termination of this Agreement, a Sublicense Addendum, or any
license shall not limit either party from pursuing any other remedies available
to it, including injunctive relief, nor shall such termination relieve the
Alliance Member's obligation to pay all fees that have accrued or that the
Alliance Member has agreed to pay under a Sublicense Addendum or any Order Form,
other similar ordering document under this Agreement, or that appear in a
Sublicense report. The parties' rights and obligations under Sections 2.5, 2.6,
2.7 and Articles 4, 5, 6, 7, and 8 shall survive termination of this Agreement.
<PAGE>
6.6 Handling of Programs Upon Termination
If a license granted under this Agreement expires or otherwise
terminates, the Alliance Member shall: (a) cease using the applicable Programs;
and (b) certify to Oracle within one month after expiration or termination that
the Alliance Member has destroyed or has returned to Oracle the Programs and all
copies. This requirement applies to copies in all forms, partial and complete,
in all types of media and computer memory, and whether or not modified or merged
into other materials. Before returning Programs to Oracle, the Alliance Member
shall acquire a Return Material Authorization ("RMA") number from Oracle.
7. INDEMNITY, WARRANTIES, REMEDIES
7.1 Infringement Indemnity
Oracle will defend and indemnify the Alliance Member against a
claim that Programs infringe a copyright or patent, provided that: (a) the
Alliance Member notifies Oracle in writing within 30 days of the claim; (b)
Oracle has sole control of the defense and all related settlement negotiations;
and (c) the Alliance Member provides Oracle with the assistance, information and
authority necessary to perform Oracle's obligations under this Section.
Reasonable out-of-pocket expenses incurred by the Alliance Member in providing
such assistance will be reimbursed by Oracle.
Oracle shall have no liability for any claim of infringement based
on use of a superseded or altered release of Programs if the infringement would
have been avoided by the use of a current unaltered release of the Programs
which Oracle provides to the Alliance Member.
In the event the Programs are held or are believed by Oracle to
infringe, Oracle shall have the option, at its expense, to (a) modify the
Programs to be noninfringing; (b) obtain for the Alliance Member a license to
continue using the Programs; or (c) terminate the license for the infringing
Programs and refund the license fees paid for those Programs, prorated over a
five-year term from the Commencement Date. This Section 7.1 states Oracle's
entire liability and the Alliance Member's exclusive remedy for infringement.
7.2 Warranties and Disclaimers
A. Program Warranty
Oracle warrants for a period of one year from the Commencement Date
that each unmodified Program for which the Alliance Member has a Supported
Program License will perform the functions described in the Documentation
provided by Oracle when operated on the Designated System.
B. Media Warranty
Oracle warrants the tapes, diskettes or other media to be free of
defects in materials and workmanship under normal use for 90 days from the
Commencement Date.
<PAGE>
C. Services Warranty
Oracle warrants that its Technical Support and training services
will be performed consistent with generally accepted industry standards. This
warranty shall be valid for 90 days from performance of service.
D. Disclaimers
THE WARRANTIES ABOVE ARE EXCLUSIVE AND IN LIEU OF ALL OTHER
WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
Oracle does not warrant that the Programs will run properly on all
Hardware, that the Programs will meet requirements of the Alliance Member or the
Sublicensees or operate in the combinations which may be selected for use by the
Alliance Member or the Sublicensees, that the operation of the Programs will be
uninterrupted or error free, or that all Program errors will be corrected.
Limited Production Programs, Pre-Production Releases of Programs, and Computer-
Based Training Products are Distributed "As is."
The Alliance Member shall not make any warranty on Oracle's behalf.
7.3 Exclusive Remedies
For any breach of the warranties contained in Section 7.2 above, the
Alliance Member's exclusive remedy, and Oracle's entire liability, shall be:
A.For Programs
The correction of Program errors that cause breach of the warranty,
or if Oracle is unable to make the Program operate as warranted, the Alliance
Member shall be entitled to recover the fees paid to Oracle for the Program
license.
B.For Media
The replacement of defective media returned within 90 days of the
Commencement Date.
C.For Services
The reperformance of the services, or if Oracle is unable to perform
the services as warranted, the Alliance Member shall be entitled to recover the
fees paid to Oracle for the unsatisfactory services.
<PAGE>
7.4 Indemnification of Oracle
The Alliance Member agrees to enforce the terms of its Sublicense
agreements required by this Agreement and to notify Oracle of any known breach
of such terms. The Alliance Member will defend and indemnify Oracle against:
A. All claims and damages to Oracle arising from any use by the
Alliance Member or its Sublicensees of any product not provided by Oracle but
used in combination with the Programs if such claim would have been avoided by
the exclusive use of the Programs;
B. All claims and damages to Oracle caused by the Alliance Member's
failure to include the required contractual terms set forth in Section 2.3.B
hereof in each Sublicense agreement; and
C. All claims and damages to Oracle caused by Sublicensees' breach
of any of the applicable provisions required by Section 2.3 hereof.
7.5 Equitable Relief
The Alliance Member acknowledges that any breach of its
obligations with respect to proprietary rights of Oracle will cause Oracle
irreparable injury for which there are inadequate remedies at law and that
Oracle shall be entitled to equitable relief in addition to all other remedies
available to it.
8. GENERAL TERMS AND CONDITIONS
8.1 Nondisclosure
Neither party shall, without first obtaining the written consent
of the other party disclose the terms and conditions of this Agreement, except
as may be required to implement and enforce the terms of this Agreement, or as
may be required by legal procedures or by law. No other information exchanged
between the parties shall be deemed confidential unless the parties otherwise
agree in writing. The Alliance Member shall not disclose the results of
benchmark tests or other evaluation of the Programs to any third party without
Oracle's prior written approval.
8.2 Copyrights
The Programs are copyrighted by Oracle. The Alliance Member shall
retain all Oracle copyright notices on the Programs used by the Alliance Member
under its Development Licenses or Marketing Support Licenses. The Alliance
Member shall include the following on all copies of the Programs in software
Value-Added Packages incorporating the Programs distributed by the Alliance
Member:
A. A reproduction of Oracle's copyright notice; or
<PAGE>
B. A copyright notice indicating that the copyright is vested in
the Alliance Member containing the following:
1. A "c" in a circle and the word "copyright";
2. The Alliance Member's name;
3. The date of copyright; and
4. The words "All Rights Reserved."
Such notices shall be placed on the Documentation, the sign-
on screen for any software Value-Added Package incorporating the Programs, and
the diskette or tape labels. Notwithstanding any copyright notice by the
Alliance Member to the contrary, the copyright to the Program included in any
such application package shall remain in Oracle. Other than as specified above,
on any reproduction or translation of any Programs, Documentation, or promotion
material, the Alliance Member agrees to reproduce Oracle's copyright notices
intact.
8.3 Trademarks
"Oracle" and any other trademarks and service marks adopted by
Oracle to identify the Programs and other Oracle products and services belong to
Oracle; the Alliance Member will have no rights in such marks except as
expressly set forth herein and as specified in writing from time to time. The
Alliance Member's use of Oracle's trademarks shall be under Oracle's trademark
policies and procedures in effect from time-to-time. The Alliance Member agrees
not to use the trademark "ORACLE," or any mark beginning with the letters "Ora,"
or any other mark likely to cause confusion with the trademark "ORACLE" as any
portion of the Alliance Member's tradename, trademark for the Alliance Member's
Value-Added Package, or trademark for any other products of the Alliance Member.
The Alliance Member shall have the right to use the trademark "ORACLE" and other
Oracle trademarks solely to refer to Oracle's Programs, products and services.
The Alliance Member agrees with respect to each registered
trademark of Oracle, to include in each advertisement, brochure, or other such
use of the trademark, the trademark symbol "circle R" and the following
statement:
________________________ is a registered trademark of Oracle
Corporation, Redwood City, California.
Unless otherwise notified in writing by Oracle, the Alliance
Member agrees, with respect to every other trademark of Oracle, to include in
each advertisement, brochure, or other such use of the trademark, the symbol
"TM" and the following statement:
________________________ is a trademark of Oracle Corporation,
Redwood City, California.
<PAGE>
The Alliance Member shall not market the Oracle Programs in any
way which implies that the Oracle Programs are the proprietary product of the
Alliance Member or of any party other than Oracle. Oracle shall not have any
liability to the Alliance Member for any claims made by third parties relating
to the Alliance Member's use of Oracle's trademarks.
8.4 Relationships between Parties
In all matters relating to this Agreement, the Alliance Member
will act as an independent contractor. The relationship between Oracle and the
Alliance Member is that of licensor/licensee. Neither party will represent that
it has any authority to assume or create any obligation, express or implied, on
behalf of the other party, nor to represent the other party as agent, employee,
franchisee, or in any other capacity. Nothing in this Agreement shall be
construed to limit either party's right to independently develop or distribute
software which is functionally similar to the other party's product, so long as
proprietary information of the other party is not included in such software.
8.5 Assignment
The Alliance Member may not assign or otherwise transfer any
rights under this Agreement without Oracle's prior written consent.
8.6 Notice
All notices, including notices of address change, required to be
sent hereunder shall be in writing and shall be deemed to have been given when
deposited in first class mail to the first address listed in the relevant Order
Form (if to the Alliance Member) or to the Oracle address on the Order Form (if
to Oracle).
To expedite order processing, the Alliance Member agrees that
Oracle may treat documents faxed by the Alliance Member to Oracle as original
documents; nevertheless, either party may require the other to exchange original
signed documents.
8.7 Governing Law/Jurisdiction
This Agreement, and all matters arising out of or relating to
this Agreement, shall be governed by the substantive and procedural laws of the
State of California and shall be deemed to be executed in Redwood City,
California. The parties agree that any legal action or proceeding relating to
this Agreement shall be instituted in any state or federal court in San
Francisco or San Mateo County, California. Oracle and the Alliance Member agree
to submit to the jurisdiction of, and agree that venue is proper in, these
courts in any such legal action or proceeding.
8.8 Severability
In the event any provision of this Agreement is held to be
invalid or unenforceable, the remaining provisions of this Agreement will remain
in full force and effect.
<PAGE>
8.9 Export
The Alliance Member agrees to comply fully with all relevant
export laws and regulations of the United States ("Export Law") to assure that
neither the Programs, nor any direct product thereof, are (a) exported, directly
or indirectly, in violation of Export Laws; or (b) are intended to be used for
any purposes prohibited by the Export Laws, including, without limitation,
nuclear, chemical, or biological weapons proliferation.
8.10 Limitation of Liability
In no event shall either party be liable for any indirect,
incidental, special or consequential damages, or damages for loss of profits,
revenue, data or use, incurred by either party or any third party, whether in an
action in contract or to, even if the other party or any other person has been
advised of the possibility of such damages. Oracle's liability for damages
hereunder shall in no event exceed the amount of fees paid by the Alliance
Member under this Agreement, and if such damages result from the Alliance
Member's use of the Program or services, such liability shall be limited to fees
paid for the relevant Program or services giving rise to the liability, prorated
over a five-year term from the Commencement Date of the applicable license or
the date of performance of the applicable services.
The provisions of this Agreement allocate the risks between
Oracle and the Alliance Member. Oracle's pricing reflects this allocation of
risk and the limitation of liability specified herein.
8.11 Federal Government Sublicenses.
If the Alliance Member grants a Sublicense to the United States
government, the Programs shall be provided with "Restricted Rights" and the
Alliance Member will place a legend, in addition to applicable copyright
notices, on the documentation, and on the tape or diskette label, substantially
similar to the following:
RESTRICTED RIGHTS LEGEND
"Use, duplication or disclosure by the Government is subject to
restriction as set forth in subparagraph (c)(1)(ii) of the Department of Defense
Regulations Supplement ("DFARS") 252.227-7013, Rights in Technical Data and
Computer Software (October 1988) and Federal Acquisition Regulation ("FAR")
52.227-14, Rights in Data-General, including Alternate III (June 1987), as
applicable. Oracle Corporation, 500 Oracle Parkway, Redwood City, CA 94065."
8.12 Waiver
The waiver by either party of any default or breach of this
Agreement shall not constitute a waiver of any other or subsequent default or
breach. Except for actions for non-payment or breach of Oracle's proprietary
rights in the Programs, no action, regardless of form, arising out of this
Agreement may be brought by either party more than one year after the cause of
action has accrued.
<PAGE>
8.13 Entire Agreement
This Agreement constitutes the complete agreement between the
parties and supersedes all prior or contemporaneous agreements or
representations, written or oral, concerning the subject matter of this
Agreement. This Agreement may not be modified or amended except in a writing
signed by a duly authorized representative of each party; no other act,
document, usage or custom shall be deemed to amend or modify this Agreement.
This Agreement may be executed in any number of counterparts, each of which
shall be an original and all of which shall constitute together but one and the
same document.
It is expressly agreed that the terms of this Agreement and any
Order Form shall superseded the terms in any Alliance Member purchase order or
other ordering document. This Agreement shall also supersede the terms of any
shrink-wrap or break-the-seal license agreement included in any package for
Oracle-furnished software, except terms contained in such license agreement that
grant specific use rights for the Programs.
The Effective Date of this Agreement shall be June 11, 1996.
Executed by Connect, Inc.: Executed by Oracle Corporation:
Authorized signature: Authorized Signature:
/s/ Henry V. Morgan /s/ Lloyd Alexander
- ------------------- -------------------
Name: Hank Morgan Name: Lloyd Alexander
------------ ----------------
Title: CFO Title: Manager - Western Region
----- ---------------------------
Channels Sales Support
----------------------
Oracle Corporation
500 Oracle Parkway
Redwood Shores, CA 94065
(415) 506-7000
Oracle is a registered trademark of Oracle Corporation
1-95
<PAGE>
RUNTIME SUBLICENSE ADDENDUM
This document (the "Addendum") is between Oracle Corporation ("Oracle") and
Connect, Inc. (the "Alliance Member") and shall be governed by the terms of the
Business Alliance Program Agreement between the Alliance Member and Oracle
effective __________, 19__ (the "Agreement") and the terms set forth below.
1. SUBLICENSES
1.1 Sublicense Programs and Terms
The Alliance Member may only sublicense Runtime Programs for
which the Alliance Member has previously acquired a Supported Development
License for the applicable Designated System. Notwithstanding any other
provision of this Agreement, the Alliance Member shall have no right to
Sublicense Programs designated as Oracle Applications Programs, Oracle Express
Programs, Limited Production Programs, or other Programs specified by Oracle
from time-to-time without the prior written consent of Oracle.
The Alliance Member shall have the right to market and grant
Sublicenses of Runtime Programs under the conditions set forth in the Agreement
and under the following restrictions:
A. Sublicense Runtime Programs with the Application Program in the
Application Package for use on Designated systems to Sublicensees. Each copy of
the runtime Programs distributed shall be for the Sublicensee's own internal use
in the Territory only on a single Designated System limited to a maximum number
of Users; and
B. Make and deliver to the sublicensee a single copy of the Runtime
Programs in the Application Package for each Sublicense granted.
The Alliance Member shall use all practical means available, both
contractual and technical, to control the restricted use of each Runtime Program
Sublicense. If a Sublicensee uses the Runtime Program beyond the limited
functionality described in Section 1.2 hereof, the Alliance Member or
Distributor shall immediately notify the Sublicensee of such unauthorized use
and if the Sublicensee fails to discontinue such unauthorized use following
notification either terminate the Sublicense or forward to Oracle one hundred
percent (100%) of the applicable Full Use standard Program license fees in
effect at the time the payment is made to Oracle together with a written request
by the Sublicensee for a Full Use Program license from Oracle. Oracle must
approve, in writing, the Sublicensee's request before continued use of the
Programs by the Sublicensee shall be deemed authorized.
1.2 Runtime Programs
For the purposes of this Addendum, "Runtime Program(s)" shall
mean Programs which shall be limited to use solely for the purpose of running
the Alliance Member's Application Program, and may not be used to create or
alter tables or reports except as necessary
<PAGE>
for operating the Alliance Member's Application Program. "Full Use Programs"
shall mean unaltered versions of the Programs with all functions intact.
1.3 Value-Added Package
For the purposes of this Addendum, "Application Program(s)" shall
mean the Alliance Member's value-added application software, described in the
attached Application Package Attachment with which the Runtime Programs are to
be coupled. "Application Package(s)" shall mean the runtime Programs coupled
with the Application Programs. for purposes of the Agreement, the Application
Program shall be regarded as the Alliance Member's Value-Added Package.
1.4 Trial Sublicenses
The Alliance Member and its distributors shall be entitled to
grant, at no charge, up to a maximum combined total of ten (10) temporary Trial
Sublicenses of the Application Package at any one time. Such Sublicenses shall
be for evaluation purposes only and shall be for a period not to exceed thirty
(30) days. The Alliance Member shall pay Oracle sublicense fees for any Trial
Sublicenses in excess of thirty (30) days. Each such Trial Sublicense shall be
Sublicensed under a Sublicense agreement which provides for such trial use.
1.5 Distributors
Oracle grants the Alliance Member the right to appoint third
parties ("Distributors") to market and Sublicense the Runtime Programs in the
Territory, under the terms of the Agreement and this Addendum. However,
Distributors shall have no right to make copies of the Programs for Sublicensing
and shall obtain all such Programs from the Alliance member. Each Distributor
shall execute a written agreement with the Alliance Member binding the
Distributor provisions substantially similar to those contained in Sections 2.3,
2.5, 2.6, 5.1, 5.2, 6.1, 6.3, 6.4, 6.5, 7.2.D, 7.5, 8.1, 8.2, 8.3, 8.5, 8.7,
8.9, and 8.11 of the Agreement and to those contained in Sections 1 (except
1.5), 3, 4, 5, and 6 of this Addendum. Each obligation of the Alliance Member
under such provisions shall also be applicable to each Distributor. Each
Distributor agreement shall also contain any other provisions necessary for the
Alliance Member to satisfy its commitments under the Agreement. The Alliance
Member shall notify Oracle promptly in writing of the appointment of each such
Distributor.
In addition, the Alliance Member shall keep executed Distributor
agreements and records of the Distributor information required under the
Alliance Member's Sublicense reports, and shall allow Oracle to inspect such
information as specified under the agreement. The Alliance Member will defend
and indemnify Oracle against all damages to Oracle caused by (i) the
Distributors' failure to include the required contractual terms set forth in
Section 2.3.B of the Agreement in each Sublicense agreement, and (ii) the
Distributors' breach of any of the applicable provisions required in its
Distributor agreement.
<PAGE>
1.6 Documentation
The Alliance Member shall be responsible for providing
documentation for Sublicensees. The Alliance Member shall have the right to
incorporate portions of the Documentation into the Alliance Member's
documentation, subject to the provisions of Section 8.2 of the Agreement.
2. SUBLICENSE FEES
2.1 Sublicense Fees and Rate
For each copy of the Programs Sublicensed by the Alliance Member
or its Distributor in the Application Package, the Alliance Member agrees to pay
Oracle a Sublicense fee equal to [*]
([*] of the applicable license fee for each
such Program, as specified in the applicable Price List and Alliance Member
Price list supplement to such Price List in effect at the time the applicable
Programs are Sublicensed.
As further specified in Section 6 of this Addendum, Sublicense
fees shall be due and payable within twenty (20) days of the last day of each
month. The Alliance Member shall not be relieved of its obligation to pay
Sublicense fees owed to Oracle by the nonpayment of such fees by the
Sublicensee.
On or after each anniversary during the Term of this Addendum,
Oracle may amend the Sublicense fee percentage rate set forth above based on
Oracle's then-current standard Sublicense fee percentage rate schedule and the
actual amount of Sublicense fees received by Oracle hereunder.
2.2 Price List for Sublicenses
Notwithstanding any other provision of the Agreement, the
applicable Price List for determining Sublicense fees shall be the standard
Oracle Alliance Member Price List in effect at the time the Applicable Package
is Sublicensed.
Notwithstanding any other provision of this Agreement, if the
Alliance Member issues a written Sublicense quote and such quote is accepted by
the applicable Sublicensee, for a period of ninety (90) days after the date of
submission of the quote to the Sublicensee, the Sublicense fee applicable to the
Programs identified in the quote shall be based on the Price List in effect on
such date.
2.3 Users
The Sublicense fees for a Program shall be based and priced on
the applicable User Level for the maximum number of Users for such Program, as
specified in the Price List. The Alliance Member shall have the right to
Sublicense Programs on any User basis specified in the Price List in effect at
the time the applicable Program is Sublicensed.
* Confidential treatment requested
<PAGE>
3. TERM
This Addendum shall become effective on the Effective Date of this
Addendum and shall be valid for three (3) years (the "Term") from the Effective
Date, unless terminated as provided in the Agreement. Any renewal of this
Addendum shall be subject to renegotiation of terms and fees.
Unless the expiration or termination is for default by the Alliance
Member, the Alliance Member may continue using the release of the Programs then
in the Alliance Member's possession on the Designated Systems for which
Development Licenses were granted, solely for the purpose of continuing
technical support for Sublicenses granted prior to termination. Such continued
use of the Programs shall be subject to all the provisions of this agreement,
including, without limitation, payment of the Technical Support Fees specified
herein.
4. TERRITORY
The Alliance Member shall have the right to market and grant
Sublicense of Programs in the United States only (the "Territory").
5. TECHNICAL SUPPORT
5.1 Technical Support for Sublicensees
A. Installation
The Alliance Member or its Distributors will be responsible
for any assistance needed to install the Application Package at Sublicensee
sites.
B. Sublicensing Support
The Alliance Member is responsible for providing all
technical support, training and consultations to its Sublicensees and
Distributors. In consideration of the payments specified in Section 5.2, the
Alliance Member shall have the right to use the Oracle Technical Support
services acquired for its Supported Development Licenses to provided technical
support services to its Sublicensees as further set forth in the Agreement. The
Alliance Member shall continuously maintain Oracle Technical Support services
for the Development Licenses during the period during which the Alliance Member
provides technical support services to any Sublicensees. Any questions from the
Alliance Member's Sublicensees or Distributors will be referred by Oracle to the
Alliance Member.
5.2 Technical Support Fees
For Technical Support services for Sublicensees, each year the
Alliance Member agrees to pay Oracle annual Technical Support Fees for each
Runtime Program Sublicensed under this Addendum, a previous Alliance Member
Addendum, or previous distribution agreement between the parties hereto where
the Sublicensee received technical support services for such Runtime Program
during the applicable support period. Annual
<PAGE>
Technical Support Fees for a Program shall be equal to the applicable Technical
Support percentage rate for the highest Technical Support services level
selected by the Alliance Member for Technical Support services for any
Development License used under this Addendum of the cumulative Sublicense fees
accrued to Oracle for such supported Program.
Upon December 31 of each year, the Alliance Member shall provide
Oracle a report setting forth all of the Alliance Members' Sublicenses and those
Sublicensed Programs which were supported by the Alliance Member during the
calendar year. The report shall also include the applicable Technical Support
Fees due and payable to Oracle for such calendar year. The Alliance Member
shall provide Oracle with payment of all Technical Support Fees for such
calendar year required under the applicable December 31 report with such report
in the form of a check made out in the amount of such fees. All Technical
Support Fees paid to Oracle are noncancelable and nonrefundable.
6. SUBLICENSE REPORTS
Within twenty (20) days of the last day of each month, the
Alliance Member shall send Oracle a report detailing for that month:
A. For each Sublicensed Application Package shipped during the prior
month, Sublicensee name, address, make/model and operating system of the
Designated System, date of shipment, Runtime Programs shipped, maximum number of
licensed Users, whether the Sublicense is a Trial Sublicense, and total
Sublicense fees and Technical Support Fees due to Oracle;
B. For each Application Program licensed to end-users to be used with
previously installed software licensed by Oracle in conjunction with the
Application Program, Sublicensee name, address, make/model and operating system
of the computer, and date of installation; and
C. The Distributor agreements executed during the prior month,
including names and addresses of the Distributors.
The Alliance Member shall require its Distributors to report this
information to the Alliance Member on a monthly basis and will include it in the
report for the month in which the Alliance Member received the information. The
Alliance Member shall provide Oracle with payment of all fees required under the
monthly report with such report in the form of a check made out in the amount of
such fees.
7. ADDITIONAL LICENSES
During the Term, the Alliance Member may order production release
versions of Oracle off-the-shelf Programs available as production release as of
the Effective Date of this Addendum and listed on the Price List in effect as of
such date. The license fee for Development Licenses shall be equal to Oracle's
standard list license fees in effect when an order is placed. The Alliance
Member shall have the right to order Programs for use as Marketing Support
Licenses at [*] to the Alliance Member. The Alliance Member may obtain Technical
Support
*Confidential treatment requested
<PAGE>
services from Oracle for such Programs under Oracle's applicable Technical
Support fees and policies in effect when such services are ordered.
The Effective Date of this Agreement shall be June 11, 1996.
Executed by Connect, Inc.: Executed by Oracle Corporation:
Authorized signature: Authorized Signature:
/s/ Henry V. Morgan /s/ Lloyd Alexander
- ------------------------- ----------------------------------
Name: Hank Morgan Name: Lloyd Alexander
-------------------- -----------------------------
Title: CFO Title: Manager - Western Region
------------------- ----------------------------
Channels Sales Support
----------------------------------
Oracle Corporation
500 Oracle Parkway
Redwood Shores, CA 94065
(415) 506-7000
Oracle is a registered trademark of Oracle Corporation
8-95
<PAGE>
AMENDMENT ONE
TO THE
RUNTIME SUBLICENSE ADDENDUM
to the
BUSINESS ALLIANCE PROGRAM AGREEMENT
between
CONNECT, INC.
and
ORACLE CORPORATION
This Amendment One shall serve to amend the Runtime Sublicense Addendum
dated June 11, 1996 (the "Addendum") to the Business Alliance Program Agreement
between Connect, Inc. (the "Alliance Member") and Oracle Corporation ("Oracle")
effective June 11, 1996 (the "Agreement").
The Addendum is hereby amended as follows:
1. After the first paragraph of Section 2.2 insert the following new
paragraph:
"All Sublicense fees for Sublicenses installed outside the
United States shall be based on Oracle's Global Price List."
2. Delete the body of Section 4 in its entirety and insert the following:
"4. TERRITORY
The Alliance Member shall have the right to market and grant
Sublicenses of Programs in the Application Package in all countries
worldwide (the "Territory") subject to the terms of this Section.
Oracle may from time to time deny the Alliance Member the right
to Sublicense in certain countries in the Territory in order to
protect Oracle's interests if, in the reasonable opinion of Oracle's
counsel, such countries (i) do not provide adequate protection for
Oracle's proprietary rights through copyright, trade secret, patent,
or other laws; or (ii) have laws or regulations or the government has
committed acts which in the opinion of Oracle's counsel, are injurious
to Oracle's interests in the programs.
The Alliance Member acknowledges that the Programs are subject to
export controls imposed on Oracle and the Alliance Member by the U.S.
Export Administration Act, United States Departments of Commerce,
Treasury, and State regulations and directives, and other United
States law ("Export laws"). The Alliance Member certifies that
neither the Programs nor any direct product thereof are (i) exported,
directly or indirectly, in violation of Export laws; or (ii) are
intended to be used for any purposes prohibited by the Export laws,
including, without limitation, nuclear, chemical, or biological
weapons proliferation. Furthermore, the Alliance Member shall not
transfer the Programs outside of the territory for which the Alliance
Member has Sublicense rights under this Agreement.
<PAGE>
Furthermore, the Alliance Member shall not transfer the Programs
outside of the territory for which the Alliance Member has Sublicense
rights under this Agreement.
Other than the addition of the foregoing, the Addendum remains unchanged
and in full force and effect.
The Effective Date of this Amendment One is June 11, 1996.
CONNECT, INC. ORACLE CORPORATION
By: /s/ Henry V. Morgan By: /s/ Lloyd Alexander
--------------------- -------------------------------
Name: Hank Morgan Name: Lloyd Alexander
------------------- -----------------------------
Title: CFO Title: Manager - Western Region
------------------ ----------------------------
Channels Sales Support
----------------------------------
-2-
<PAGE>
AMENDMENT TWO
to the
RUNTIME SUBLICENSE ADDENDUM
to the
BUSINESS ALLIANCE PROGRAM AGREEMENT
between
CONNECT, INC.
and
ORACLE CORPORATION
This Amendment Two shall serve to amend the Runtime Sublicense Addendum
dated June 11, 1996 (the "Addendum") to the business Alliance Program Agreement
between Connect, Inc. (the "Alliance Member") and Oracle Corporation ("Oracle")
effective June 11, 1996 (the "Agreement").
The Addendum is hereby amended as follows:
1. Notwithstanding any provision in the Addendum, until March 20, 1997,
the Alliance Member shall have the right to Sublicense Runtime versions of the
Program designated in the Price List as "Oracle 7 Server" ("Oracle 7") to
Sublicensees for use in conjunction with the Oneserver Application Package
("Oneserver") for use and installation in the Territory under the terms and
conditions of the Addendum and the Agreement at the fees specified herein. For
each Sublicense of Oracle 7 in conjunction with Oneserver, the Alliance shall
pay to Oracle a Sublicense fee [*] Designated System for which the Application
Package is Sublicensed, as set forth in the below table.
<TABLE>
<S> <C>
[*] of [*] Sublicense fee
- ---------- --------------
[*] - [*] $[*]
[*] - [*] $[*]
[*] and [*] $[*]
</TABLE>
The rates specified above are for Sublicenses of Oracle 7 for the
applicable Designated System [*]. Notwithstanding any other provision of the
Addendum, the Sublicense Fee for Sublicenses of Oracle 7 for use and
installation outside the U.S., shall be equal to [*] of the Sublicense Fees set
forth above.
The Alliance Member shall not disclose to Sublicensees or potential
Sublicensees the price of Oracle 7 as a component of Oneserver. The Alliance
Member shall present to such Sublicensees or potential Sublicensees only the
price of the Oneserver Application Package as a whole. The Alliance Member
agrees that the pricing terms of such Oracle Programs shall be deemed
confidential information of Oracle and shall not be revealed of any third party.
Failure to keep such information confidential shall be deemed a material breach
of the Agreement.
The Alliance Member warrants that neither it nor its Distributors will
grant Sublicenses in or ship any Programs to a country until it (or the
Distributor) has completed all necessary government formalities in such country
and upon reasonable request by Oracle, the Alliance Member (or its Distributor)
provides evidence of completion of such formalities to Oracle. The Alliance
Member will indemnify Oracle for any losses, costs, liability, and damages
incurred by Oracle as a result of a failure by the Alliance Member or its
Distributors to comply with tthe necessary government requirements in any
country. The obligations under this Section shall survive the expiration or
termination of this Addendum. Upon Oracle's reasonable request, the Alliance
Member shall make records available to Oracle to allow to confirm the Alliance
Member's compliance with this Section.
Other than the addition of the foregoing, the Addendum remains unchanged
and in full force and effect.
* Confidential treatment requested
<PAGE>
The Effective Date of this Amendment Two is June 11, 1996.
CONNECT, INC. ORACLE CORPORATION
By: /s/ Henry V. Morgan By: /s/ Lloyd Alexander
---------------------- ------------------------------
Name: Hank Morgan Name: Lloyd Alexander
-------------------- ----------------------------
Title: CFO Title: Manager - Western Region
------------------- ---------------------------
Channels Sales Support
---------------------------------
-2-
<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. 64 and 83
(Topic 4 Sec. D) 13,285,550 13,285,550 13,285,550 13,285,550 13,285,550
----------- ----------- ----------- ---------- ----------
Total shares used in primary net loss per
share 13,515,192 13,593,574 13,667,081 13,664,690 13,745,887
Primary net loss per share $(.14) $(.13) $(1.03) $(.52) $(.66)
Total per above 13,667,081 13,664,690 13,745,887
Conversion of preferred stock not included 4,146,658 4,146,658 4,146,658
in shares related to SAB No. 64, and 83 (Topic 4 Sec. D) --------- --------- ---------
Total shares used in pro forma net loss per 17,813,739 17,811,348 17,892,545
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 15, 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 29, 1996
