<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1996
REGISTRATION NO. 333-05391
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
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 22, 1996
PROSPECTUS
2,750,000 SHARES
[LOGO OF CONNECT APPEARS HERE]
COMMON STOCK
-------------
All of the shares of Common Stock offered in the United States and Canada are
being sold by CONNECT, Inc. ("CONNECT" or the "Company"). Prior to the
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be
between $12.00 and $14.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Common Stock has been approved for listing on the Nasdaq National Market under
the symbol "CNKT." 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, 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
the offering............................ 18,786,742 shares(1)
Nasdaq National Market symbol........... CNKT
Use of proceeds......................... Working capital and general corporate
purposes.
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
License................ $ 222 $ 212 $ 1,015 $ 1,627 $ 288 $ 89 $ 1,511
Service................ 2,419 2,617 2,847 6,345 8,285 5,464 2,477
------- ------- ------- ------- -------- ------- -------
Total revenue......... 2,641 2,829 3,862 7,972 8,573 5,553 3,988
Loss from
operations(2).......... (2,135) (2,691) (1,648) (1,540) (13,194) (6,733) (9,148)
Net loss(2)............. $(2,268) $(2,932) $(1,921) $(1,765) $(14,139) $(7,101) $(9,127)
Pro forma net loss per
share(3)............... $ (0.79) $ (0.40) $ (0.51)
Shares used in computing
pro forma
net loss per share(3).. 17,864 17,861 17,942
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 5,794 $37,767
Working capital ......................................... 2,787 34,760
Total assets............................................. 11,922 43,894
Long-term debt........................................... 1,214 1,214
Stockholders' equity .................................... 5,196 37,168
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1996, plus 272,750
shares issued in July 1996 in a private placement to a wholly-owned
subsidiary of Fruit of the Loom, Inc., one of the Company's customers.
Excludes (i) an aggregate of 3,037,056 shares subject to outstanding
options as of June 30, 1996 at a weighted average exercise price of $1.88
per share under the Company's 1989 Stock Option Plan and 1996 Stock Option
Plan, and (ii) 219,155 shares issuable upon exercise of warrants
outstanding as of June 30, 1996 at a weighted average exercise price of
$3.30 per share (of which the Company expects warrants to purchase 200,236
shares will be exercised immediately prior to completion of the offering).
See "Capitalization," "Management--Stock Plans" and Notes 8 and 14 of Notes
to Financial Statements.
(2) Includes a one-time expense of $4.1 million in the first quarter of 1995
from the Company's termination of exclusive distribution rights of its
European distributor. See Note 10 of Notes to Financial Statements.
(3) See Note 2 of Notes to Financial Statements.
(4) As adjusted to give effect to the sale of 2,750,000 shares of Common Stock
at an assumed initial public offering price of $13.00 per share. See "Use
of Proceeds."
----------------
Except as otherwise noted herein, all information in this Prospectus assumes
(i) the 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. The Company believes that rapid implementation is critical to success
in the Internet-based interactive commerce applications market. Significant
delays in implementation, whether or not such delays are within the Company's
control, could materially adversely affect its business, operating results and
financial condition. From time to time, the Company enters into fixed price
arrangements for its implementation services and currently has three such
arrangements. Fixed price arrangements have resulted in the past, and could in
the future result in, losses primarily due to delays in the implementation
process or other complexities associated with completion of the project. Such
losses could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, delays in license
transactions due to lengthy sales cycles or delays in customer production or
deployment of a system could have a material adverse effect on the Company's
business, operating results and financial condition and could be expected to
cause the Company's operating results to vary significantly from quarter to
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Marketing and Sales."
The marketability and acceptance of OneServer and OrderStream also will be
highly dependent on the success of initial implementations of these products
by the Company's customers. Problems or delays experienced by the Company's
initial customers in the installation and use of OneServer or OrderStream,
even if such problems or delays are not attributable to the Company or its
products, or a failure of the Company's customers to successfully attract
purchasers to interactive commerce Web sites, could slow the rate of adoption
of the Company's products by other potential customers. Moreover, products as
complex as those offered by the Company may contain undetected errors when
first introduced or when new versions are released. There can be no assurance
that, despite testing by the Company, errors will not occur in current or new
products after commencement of commercial shipments, resulting in adverse
publicity, in loss of or delay in market acceptance, or in claims by the
customer against the Company, which would have a material adverse effect on
the Company's business, operating results and financial condition.
DEPENDENCE UPON SERVICE PROVIDERS
The Company expects that its customers will typically rely on professional
services organizations, such as consulting firms and systems integrators, as
well as design firms to assist with implementation of the Company's products.
If the Company is unable to adequately train a sufficient number of such firms
or if for any reason a large number of such firms support or promote competing
products or technologies, the Company's business, operating results and
financial condition could be materially adversely affected. Many of these
relationships are not subject to formal agreements and none of such providers
are under any obligation to provide services to the Company or its customers.
Failure of the Company to develop and maintain relationships with leading
service providers and design firms could adversely impact the Company's
ability to successfully market, sell and deploy its products, which would have
a material adverse effect on the Company's business, operating results and
financial condition. See "Business--Marketing and Sales," "--Solution
Partners," "--Competition" and "--Proprietary Rights."
DEPENDENCE UPON CERTAIN LICENSES
The Company relies on certain technology that it licenses from third
parties, including a relational database management system from Oracle, a text
search engine from Fulcrum Technologies Inc. ("Fulcrum"), encryption
9
<PAGE>
technology from RSA Data Security, Inc. ("RSA") and other software that is
integrated with internally developed software and used in the Company's
software to perform key functions. Oracle also offers products that are
competitive with those offered by the Company. There can be no assurance that
the Company's third-party technology licenses will continue to be available to
the Company on commercially reasonable terms, or at all. The loss or inability
to maintain any of these technology licenses could result in delays in
introduction of the Company's products and services until equivalent
technology, if available, is identified, licensed and integrated, which could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--Solution Partners" and "--Proprietary
Rights."
RSA is currently in litigation with Cylink Corporation ("Cylink") pursuant
to which Cylink alleges that RSA's encryption technology infringes certain
Cylink patents and asserts that RSA has no right to sublicense such
technology. If it is determined that RSA is unable to sublicense this
technology to the Company, the Company may be deemed to be infringing Cylink's
patent rights. The Company is unable to predict the outcome of the dispute
between RSA and Cylink, but if the Company were deemed to be infringing
Cylink's patent rights, the Company could be required to pay damages to Cylink
and possibly enter into a royalty or licensing agreement with Cylink. Such
royalty or licensing agreement, if required, may not be available on terms
acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Business--Products and Services," "--Technology" and "--Proprietary
Rights."
DEPENDENCE UPON THE INTERNET INFRASTRUCTURE
The use of the Company's products and services will depend in large part
upon the continued development of the infrastructure for providing Internet
access and services. Because global commerce and online exchange of
information on the Internet is new and evolving, it is difficult to predict
with any assurance whether the Internet will prove to be a viable commercial
marketplace. The Internet has experienced, and is expected to continue to
experience, substantial growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In
addition, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased
levels of Internet activity, or due to increased governmental regulation.
Further, the costs of use of the Internet could increase to a degree which
reduces its attraction as a platform for electronic commerce. As a result,
there can be no assurance that the infrastructure or complementary services
necessary to make the Internet a viable commercial marketplace will be
developed, or, if developed, that the Internet will become a viable commercial
marketplace for products and services such as those offered by the Company. If
the necessary infrastructure or complementary services or facilities are not
developed, or if the Internet does not become a viable commercial marketplace,
the Company's business, operating results and financial condition would be
materially adversely affected.
RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION
To date, the Company has sold its products through a direct sales force. The
Company's ability to achieve revenue growth in the future will depend in large
part upon its success in recruiting and training sufficient direct sales
personnel and establishing and maintaining relationships with distributors,
resellers, systems integrators and other third parties. Although the Company
is currently investing, and plans to continue to invest, significant resources
to expand its sales force and to develop distribution relationships with
third-party distributors and resellers, the Company may at times experience
difficulty in recruiting qualified sales personnel and in establishing
necessary third-party alliances. In addition, as the Company hires new sales
personnel it is anticipated that there will be a delay before such personnel
become productive. There can be no assurance that the Company will be able to
successfully expand its direct sales force or other distribution channels or
that any such expansion will result in an increase in revenues. Any failure by
the Company to expand its direct sales force or other distribution channels
would materially adversely affect the Company's business, operating results
and financial condition. See "Business--CONNECT Strategy" and "--Marketing and
Sales."
10
<PAGE>
RISKS ASSOCIATED WITH SECURITY, SYSTEM DISRUPTIONS AND COMPUTER INFRASTRUCTURE
Despite the implementation in the Company's products of various security
mechanisms, the Company's products may be vulnerable to break-ins and similar
disruptive problems caused by Internet users. The level of security provided
by the Company's products is dependent upon the level of security selected by
the Company's customers and the proper configuration and use of the products'
security mechanisms. Such computer break-ins and other disruptions would
jeopardize the security of information stored in and transmitted through the
computer systems of users of the Company's products, which may result in
significant liability to the Company and may also deter potential customers.
Persistent security problems continue to plague public and private data
networks. Recent break-ins reported in the press and otherwise have included
incidents involving hackers bypassing firewalls by posing as authorized
computers and involving the theft of confidential information. Alleviating
problems caused by third parties may require significant expenditures of
capital and resources by the Company. Such expenditures could have a material
adverse effect on the Company's business, operating results and financial
condition. Moreover, the security and privacy concerns of existing and
potential customers, as well as concerns related to computer viruses, may
inhibit the growth of the Internet marketplace generally, and the Company's
customer base and revenues in particular. There can be no assurance that the
Company's attempts to limit its liability to customers, including liability
arising from a failure of the security feature contained in the Company's
products, through contractual provisions will be enforceable. The Company
currently does not have product liability insurance to protect against these
risks and there can be no assurance that such insurance will be available to
the Company on commercially reasonable terms, or at all.
As part of the Company's services, the Company operates and manages online
networks for certain of its customers on a seven day per week, 24-hour basis,
and provides hosting for certain customers' OneServer applications. These
services depend upon the Company's ability to protect the computer equipment
and the information stored in its data center against damage that may be
caused by fire, earthquakes, power loss, telecommunications failures,
unauthorized entry and other similar events. Any such damage or failure that
causes interruptions in the Company's operations could materially adversely
affect the businesses of the Company's customers, which could expose the
Company to liability for these adverse effects.
DEPENDENCE UPON PROPRIETARY RIGHTS; RISKS OF INFRINGEMENT
The Company relies on trademark, copyright and trade secret laws, employee
and third-party non-disclosure agreements and other methods to protect its
proprietary rights. The Company does not currently have any patents or pending
patent applications. The Company believes that, due to the rapid pace of
technological innovation for Internet products, the Company's ability to
establish and maintain a position of technology leadership in the industry
depends more on the skills of its development personnel, new product
developments, frequent product enhancements, and name recognition than upon
the legal protections afforded its existing technology. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights as
fully as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights in the United States or
abroad will be adequate. There can be no assurance that its agreements with
employees, consultants and others who participate in the development of its
software will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors. Furthermore, there can be
no assurance that the Company's efforts to protect its rights through
trademark and copyright laws will not fail to prevent the development and
design by others of products or technology similar to or competitive with
those developed by the Company.
11
<PAGE>
The Company expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps and there can be no assurance that third
parties will not assert infringement claims against the Company. Any such
claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. In the event of a
successful claim of product infringement against the Company and failure or
inability of the Company to license the infringed or similar technology, the
Company's business, operating results and financial condition would be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
On March 25, 1996, PhotoDisc, Inc. ("PhotoDisc"), one of the Company's
licensees of OneServer, was sued, along with 21 other defendants including
AGFA Division-Miles Inc. ("AGFA"), Axcis Information Network, Inc. ("Axcis"),
Software Publishing Corporation ("SPC"), and others, in the Federal District
Court in Connecticut, by E-data Corporation ("E-data"). In the litigation
against PhotoDisc, E-data alleges that PhotoDisc is infringing E-data's U.S.
Patent No. 4,528,643 issued July 9, 1985, entitled "System for Reproducing
Information in Material Objects at Point of Sale Location," in connection with
electronic distribution of images on the Internet. E-data has also sued other
defendants including Broderbund Software, Inc. ("Broderbund"), CompuServe Inc.
("CompuServe"), Adobe Systems Incorporated ("Adobe") and others in the Federal
District Court in New York City alleging infringement of the same patent.
PhotoDisc recently tendered the defense of its E-data litigation to the
Company.
The Company is currently reviewing the infringement claims made by E-data
against PhotoDisc. Based upon its initial review of the E-data patent and the
nature of the claims and the Company's indemnity obligations, and after
consultation with counsel, management believes that the resolution of this
matter will not have a material adverse effect on the Company's business,
operating results and financial condition. However, given the early stage of
the litigation and the complex technical issues and uncertainties in patent
litigation, the results of these proceedings, including any potential
settlement, are uncertain and there can be no assurance that E-data will not
prevail in the current litigation or that it will not bring similar claims
against other licensees of the Company. If E-data were to prevail, PhotoDisc
could be required to pay damages to E-data for the infringement of its patent
and enter into a licensing or royalty arrangement in order to continue to
conduct its online business in the same manner. There can be no assurance that
the amount of such damages would not be material or that such license or
royalty arrangement would be available on acceptable terms. Under the terms of
its license with PhotoDisc, the Company may be required to defend against the
E-data claim and to indemnify PhotoDisc for some or all of its losses in
connection with the litigation, any settlement or judgment and any ongoing
license fees or royalties. In addition, whether or not the Company were to
prevail in any defense of PhotoDisc, such litigation could be time consuming
and costly to defend.
LACK OF PRIOR MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained. The initial offering price for the Common Stock to be
sold by the Company will be established by negotiations among the Company and
the Underwriters and may bear no relationship to the price at which the Common
Stock will trade after completion of this offering. See "Underwriting" for
factors to be considered in determining such offering price. The market price
of the Common Stock could be subject to significant fluctuations in response
to quarter-to-quarter variations in the Company's operating results,
announcements of technological innovations or new products and services by the
Company or its competitors, and other events or factors. For example, any
shortfall in revenue or net income, or increase in losses or expenses from
levels expected by securities analysts, could have an immediate and
significant adverse effect on the market price of the Company's Common Stock.
In addition, the stock market in recent years, and in particular the market
for stocks relating to the Internet, has experienced extreme price and
12
<PAGE>
volume fluctuations that have particularly affected the market prices of many
high technology companies and that have often been unrelated or
disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the market price for the Common Stock.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there
are currently few laws or regulations directly applicable to access to, or
commerce on, the Internet. However, due to the increasing popularity and use
of the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, covering issues such as user privacy,
pricing and characteristics and quality of products and services. The
Telecommunications Reform Act of 1996 was recently enacted and imposes
criminal penalties on anyone who distributes obscene, lascivious or indecent
communications on the Internet. The adoption of any such laws or regulations
may decrease the growth of the Internet, which could in turn adversely affect
the Company's business, operating results or financial condition. Moreover,
the applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain. Further, due to
the encryption technology contained in the Company's products, such products
are subject to U.S. export controls. There can be no assurance that such
export controls, either in their current form or as may be subsequently
enacted, will not delay the introduction of new products or limit the
Company's ability to distribute products outside of the United States or
electronically. While the Company intends to take precautions against unlawful
exportation, the global nature of the Internet makes it difficult to
effectively control the distribution of the Company's products. In addition,
federal or state legislation or regulation may further limit levels of
encryption or authentication technology. Further, various countries regulate
the import of certain encryption technology and have adopted laws relating to
personal privacy issues which could limit the Company's ability to distribute
products in those countries. Any such export or import restrictions, new
legislation or regulation or government enforcement of existing regulations
could have a material adverse impact on the Company's business, operating
results and financial condition.
BROAD LATITUDE AS TO USE OF PROCEEDS
The Company has not designated any specific use for the net proceeds from
the sale of Common Stock described in this Prospectus. Rather, the Company
expects to use the net proceeds primarily for working capital and general
corporate purposes. Consequently, the Board of Directors and management of the
Company will have significant discretion in applying the net proceeds of the
offering. See "Use of Proceeds."
CONTROL BY EXISTING SECURITY HOLDERS
Upon completion of this offering, the Company's officers and directors,
together with entities affiliated with them, will own approximately 69.8% of
the outstanding Common Stock of the Company. Such persons will have sufficient
power to control the outcome of many matters (including the election of
directors, and any merger, consolidation or sale of all or substantially all
of the Company's assets) submitted to the stockholders for approval. As a
result, certain transactions will not be possible without the approval of
these stockholders. These transactions include proxy contests, mergers
involving the Company, tender offers, open-market purchase programs or other
purchases of Common Stock that could give stockholders of the Company the
opportunity to realize a premium over the then-prevailing market price for
their shares of Common Stock. See "Management" and "Principal Stockholders."
ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
After completion of the offering, the Board of Directors will have the
authority to issue up to 10,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may
have the effect of delaying, deferring
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<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 $31,972,500 ($36,959,625 if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $13.00 per share. The Company currently
expects to use the net proceeds for working capital and general corporate
purposes. The working capital purposes for which the offering proceeds will be
used include, among other uses, funding the Company's operations in general
and, in particular, expenditures for product development and marketing.
The Company may from time to time seek to acquire complementary businesses,
products, services or technologies. The Company may use a portion of the net
proceeds for one or more of such transactions, although the Company has no
current plans or agreements with respect to any such transactions. The exact
cost, timing and amount of funds required for specific uses by the Company
cannot be precisely determined at this time. Pending such uses, the Company
intends to invest such funds in short-term, investment grade, interest-bearing
obligations.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends in the foreseeable future,
but intends instead to retain future earnings for reinvestment in its
business. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such
other factors as the Board of Directors deems relevant.
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CAPITALIZATION
The following table sets forth the Company's (i) actual capitalization at
June 30, 1996, (ii) pro forma capitalization after conversion of all
outstanding shares of Preferred Stock into shares of Common Stock upon the
closing of this offering, and (iii) adjusted capitalization as of such date to
give effect to the receipt of the net proceeds from the sale by the Company of
2,750,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $13.00.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt.............. $ 913 $ 913 $ 913
-------- -------- --------
Long-term debt, less current portion........... 1,214 1,214 1,214
-------- -------- --------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; authorized:
36,140,498 shares
actual, 10,000,000 pro forma and as adjusted;
outstanding:
14,472,899 actual, none pro forma or as
adjusted..................................... 14 -- --
Common Stock, $0.001 par value; authorized:
40,000,000 shares
actual, pro forma and as adjusted;
outstanding: 533,442 actual,
15,763,992 pro forma and 18,513,992 as
adjusted(1).................................. 1 16 19
Additional paid-in capital.................... 45,300 45,299 77,268
Deferred compensation......................... (161) (161) (161)
Accumulated deficit........................... (39,958) (39,958) (39,958)
-------- -------- --------
Total stockholders' equity................... 5,196 5,196 37,168
-------- -------- --------
Total capitalization......................... $ 7,323 $ 7,323 $ 39,295
======== ======== ========
</TABLE>
- --------
(1) Excludes (i) an aggregate of 3,037,056 shares subject to outstanding
options as of June 30, 1996 at a weighted average exercise price of $1.88
per share under the Company's 1989 Stock Option Plan and 1996 Stock Option
Plan, (ii) 219,155 shares issuable upon exercise of warrants outstanding
as of June 30, 1996 at a weighted average exercise price of $3.30 per
share (of which the Company expects warrants to purchase 200,236 shares
will be exercised immediately prior to completion of the offering), (iii)
an additional 1,848,053 shares reserved for issuance upon exercise of
options that may be granted subsequent to June 30, 1996 under the 1989
Stock Option Plan and the 1996 Stock Option Plan, (iv) 250,000 shares
reserved for issuance upon exercise of options that may be granted under
the 1996 Directors' Stock Option Plan, and (v) 500,000 shares reserved for
issuance under the 1996 Employee Stock Purchase Plan. Also excludes
272,750 shares issued in July 1996 in a private placement to a wholly-
owned subsidiary of Fruit of the Loom, Inc., one of the Company's
customers. See "Management--Stock Plans," "Certain Relationships and
Related Transactions" and Notes 8 and 14 of Notes to Financial Statements.
16
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996 was
approximately $5,200,000 or $0.33 per share of Common Stock. "Net tangible
book value" per share represents the amount of total tangible assets of the
Company reduced by the amount of its total liabilities and divided by the
total number of shares of Common Stock outstanding. After giving effect to the
sale of the 2,750,000 shares of Common Stock offered by the Company at an
assumed initial public offering price of $13.00 per share, and the adjustments
set forth above, the pro forma net tangible book value of the Company as of
June 30, 1996 would have been $37,200,000 or $2.01 per share of Common Stock.
This represents an immediate increase in net tangible book value of $1.68 per
share to existing stockholders and an immediate dilution of $10.99 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Pro forma net tangible book value per share before the
offering.................................................... $0.33
Increase attributable to new investors....................... 1.68
-----
Pro forma net tangible book value after the offering.......... 2.01
------
Dilution per share to new investors........................... $10.99
======
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 1996, the
differences between the existing stockholders and new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 15,763,992 85.1% $46,293,319 56.4% $ 2.94
New investors.......... 2,750,000 14.9 35,750,000 43.6 13.00
---------- ----- ----------- -----
Total................. 18,513,992 100.0% $82,043,319 100.0%
========== ===== =========== =====
</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 $1.88 per share, 1,848,053
shares are reserved for issuance upon exercise of options that may be granted
subsequent to June 30, 1996 under the 1989 Stock Option Plan and the 1996
Stock Option Plan, 250,000 shares are reserved for issuance upon exercise of
options that may be granted under the 1996 Directors' Stock Option Plan and
500,000 shares are reserved for issuance under the 1996 Employee Stock
Purchase Plan. The issuance of Common Stock under these plans will result in
further dilution to new investors. Also excludes 272,750 shares issued in July
1996 in a private placement to a wholly-owned subsidiary of Fruit of the Loom,
Inc., one of the Company's customers. See "Management--Stock Plans," "Certain
Relationships and Related Transactions" and Notes 8 and 14 of Notes to
Financial Statements.
17
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and
should be read in conjunction with the Financial Statements and related Notes
thereto appearing elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The selected
statement of operations data for the years ended December 31, 1993, 1994 and
1995 and the balance sheet data as of December 31, 1994 and 1995 are derived
from the Financial Statements of the Company which have been audited by Ernst
& Young LLP, independent auditors, and included herein. The selected statement
of operations data for the year ended December 31, 1991 and the balance sheet
data as of December 31, 1991 are derived from unaudited financial statements
not included herein. The selected statement of operations data for the year
ended December 31, 1992 and the balance sheet data at December 31, 1992 and
1993 are derived from audited financial statements not included herein. The
financial data as of June 30, 1996 and for the six months ended June 30, 1995
and 1996 are derived from the Company's unaudited financial statements
included elsewhere in this Prospectus. Historically, results of operations for
any interim period are not necessarily indicative of results to be expected
for the full fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
License................ $ 222 $ 212 $ 1,015 $ 1,627 $ 288 $ 89 $ 1,511
Service................ 2,419 2,617 2,847 6,345 8,285 5,464 2,477
------- ------- ------- ------- -------- ------- -------
Total revenue......... 2,641 2,829 3,862 7,972 8,573 5,553 3,988
Cost of revenue:
License................ 83 68 134 162 140 57 283
Service................ 1,092 1,422 1,641 4,426 5,452 3,376 4,298
------- ------- ------- ------- -------- ------- -------
Total cost of
revenue.............. 1,175 1,490 1,775 4,588 5,592 3,433 4,581
Operating expenses:
Research and
development........... 1,909 1,884 1,573 1,622 4,810 1,508 2,226
Sales and marketing.... 831 607 859 1,355 3,978 1,294 5,108
General and
administrative........ 862 1,539 1,303 1,947 3,330 1,994 1,221
Termination of
distribution rights... -- -- -- -- 4,057 4,057 --
------- ------- ------- ------- -------- ------- -------
Total operating
expenses............. 3,602 4,030 3,735 4,924 16,175 8,853 8,555
------- ------- ------- ------- -------- ------- -------
Loss from operations.... (2,136) (2,691) (1,648) (1,540) (13,194) (6,733) (9,148)
Other income (expense).. (133) (241) (273) (199) (971) (368) 21
------- ------- ------- ------- -------- ------- -------
Loss before income
taxes.................. (2,269) (2,932) (1,921) (1,739) (14,165) (7,101) (9,127)
Provision (benefit) for
income taxes........... -- -- -- 26 (26) -- --
------- ------- ------- ------- -------- ------- -------
Pro forma net loss...... $(2,269) $(2,932) $(1,921) $(1,765) $(14,139) $(7,101) $(9,127)
======= ======= ======= ======= ======== ======= =======
Pro forma net loss per
share.................. $ (0.79) $ (0.40) $ (0.51)
======== ======= =======
Shares used in computing
pro forma
net loss per share..... 17,864 17,861 17,942
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............. $ 24 $ 142 $ 64 $ 1,594 $12,929 $ 5,794
Working capital
(deficit)............... (3,338) (2,814) (1,045) (2,786) 11,302 2,787
Total assets............. 738 814 1,743 5,161 18,063 11,922
Long-term debt........... -- 1,125 1,570 1,167 1,636 1,214
Stockholders' equity
(deficit)............... (3,041) (3,724) (1,979) (1,538) 13,318 5,196
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Prospectus. This
discussion contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including, but not limited to those discussed in "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
CONNECT designs, develops, markets and supports packaged application
software for Internet-based interactive commerce. The Company was founded in
1987 to provide online information services to businesses. During the period
1987 through 1992, the Company's primary business was the operation and
management of a private online service and the licensing of related client
software. In 1993 and 1994, the Company also offered software for creation,
access and operation of custom online systems. In late 1994, the Company began
to shift its focus from providing online services to developing packaged
software applications for Internet-based interactive commerce. During 1994 and
1995, the Company derived a significant portion of its revenue from contract
software development projects with two companies under which the Company
retained ownership of the technology developed. These projects formed the
foundation for the development of OneServer, the Company's core software
application, which was commercially released in September 1995, and
OrderStream, the first preconfigured implementation of OneServer, which was
commercially released in June 1996.
As of June 30, 1996, the Company had licensed OneServer to nine customers,
three of which are operating OneServer commercially, while the others are in
the process of implementing the application. OrderStream has been licensed to
two customers, both of which are in the process of implementing the
application. The Company believes that the majority of its 1996 revenue will
be generated through licenses of OneServer and OrderStream, and the
performance of related services. The Company expects that revenue from the
operation of private online services will constitute a decreasing portion of
the Company's overall revenue in the future. As a result of the recent
transition in the Company's business, the Company's results of operations
prior to fiscal 1996 should not be relied upon as indicative of future
results.
The Company derives revenue from software license fees and services. License
fees primarily consist of revenue from licenses of the Company's application
software. Service revenue consists of fees from implementation (including
customization of licensed software), training, maintenance and support,
contract software development projects, and system hosting and online
services. License revenue is recognized on shipment of the application
software provided there are no significant remaining obligations and
collectability is deemed probable by management. License fees under contracts
requiring significant implementation, including customization, of licensed
application software are recognized on a percentage-of-completion basis.
Revenue from implementation services is recognized as the services are
performed, except for revenue from certain fixed price contracts which is
recognized on a percentage-of-completion basis. Actual costs and gross margins
on fixed price contracts could differ from management's estimates and such
differences could be material to the financial statements.
The Company also enters into maintenance agreements in connection with
licenses of its application software under which revenue is recognized ratably
over the term of the agreement, generally one year. Usage fees related to the
Company's training, system hosting services, private online services and
consulting services are recognized as the services are performed.
Additionally, service revenue from contract software development projects, in
which the Company develops specific technology for its customers, has been
recognized on a percentage-of-completion basis.
The Company has incurred net losses in each fiscal year since inception and,
as of June 30, 1996, had an accumulated deficit of $40.0 million. The
Company's operating expenses have increased substantially since
19
<PAGE>
1994 as the Company made investments related to the development and
introduction of OneServer. To date, all research and development costs have
been expensed as incurred and have not been capitalized because capitalizable
costs have not been material. The Company anticipates that operating expenses
will continue to increase for the foreseeable future as it continues to
develop its technology, increase sales and marketing efforts and establish and
expand distribution channels. Accordingly, the Company expects to incur
additional losses on a quarterly and annual basis for the foreseeable future.
The Company's prospects are dependent upon the successful acceptance of
OneServer and OrderStream by the market, and must be evaluated in light of the
risks and uncertainties frequently encountered by companies dependent upon
such early stage products. In addition, the Company's markets are new and
rapidly evolving, which heightens these risks and uncertainties. To address
these risks, the Company must, among other things, successfully implement its
marketing strategy, respond to competitive developments, continue to develop
and upgrade its products and technologies more rapidly than its competitors,
and commercialize its products and services incorporating these enhanced
technologies. There can be no assurance that the Company will succeed in
addressing any or all of these risks. See "Risk Factors."
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenue, items from
the Company's statements of operations for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -----------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
License................ 26% 20% 3% 2% 38%
Service................ 74 80 97 98 62
------- ------- -------- ------- -------
Total revenue......... 100 100 100 100 100
Cost of revenue:
License................ 4 2 2 1 7
Service................ 42 56 63 61 108
------- ------- -------- ------- -------
Total cost of
revenue.............. 46 58 65 62 115
Operating expenses:
Research and
development........... 41 20 56 27 56
Sales and marketing.... 22 17 47 23 128
General and
administrative........ 34 24 39 36 31
Termination of
distribution rights... -- -- 47 73 --
------- ------- -------- ------- -------
Total operating
expenses............. 97 61 189 159 215
------- ------- -------- ------- -------
Loss from operations.... (43) (19) (154) (121) (230)
Other income (expense).. (7) (3) (11) (7) 1
------- ------- -------- ------- -------
Loss before income
taxes.................. (50) (22) (165) (128) (229)
Provision (benefit) for
income taxes........... -- -- -- -- --
------- ------- -------- ------- -------
Net loss................ (50)% (22)% (165)% (128)% (229)%
======= ======= ======== ======= =======
Gross margin:
License................ 87% 90% 51% 36% 81%
Service................ 42 30 34 38 (74)
</TABLE>
20
<PAGE>
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Revenue
License. License revenue increased from $89,000 in the first six months of
1995 to $1.5 million in the first six months of 1996, primarily as a result of
fees from licenses of the Company's OneServer application software which was
first licensed in the fourth quarter of 1995. See "Business--Customers."
Service. Service revenue decreased 55% from $5.5 million in the first six
months of 1995 to $2.5 million in the first six months of 1996. In the first
six months of 1995 service revenue consisted primarily of revenue associated
with contract software development projects with AT&T Corporation ("AT&T") and
Electronic Marketplace Systems, Inc., both of which terminated in June 1995
(the "Development Projects"). Service revenue in the first six months of 1996
consisted primarily of $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, will grow from less than $1.0 million in
1995 to over $1.7 billion in 1999 (excluding browsers, servers, development
tools and applets).
CONNECT SOLUTION
CONNECT offers a comprehensive software and services solution that is
designed to enable businesses to quickly, securely and cost effectively
implement an Internet-based interactive commerce capability. This sales,
marketing and order capture channel complements existing sales channels and
enables customers to seek to capture new revenue by leveraging the
capabilities of the Internet. CONNECT refers to this complementary new channel
as the Virtual Sales Channel.
The CONNECT Solution
--------------------
[Graphic displaying customers, trading partners, the Internet, CONNECT products
- -------------------------------------------------------------------------------
and enterprise systems and their logical position in the CONNECT Solution]
--------------------------------------------------------------------------
The Virtual Sales Channel(TM)
-----------------------------
29
<PAGE>
CONNECT's core product, OneServer, is a cross-industry packaged software
application for Internet-based interactive commerce, including sales,
marketing and order capture. In addition, in June 1996, the Company
commercially released OrderStream, its first preconfigured implementation of
OneServer for business-to-business interactive commerce in selected vertical
markets. The Company and its Solution Partners also offer a broad range of
services to support its applications. The Company's products and services
offer the following benefits:
. Faster Time to Market. The Company believes that rapid implementation is
critical to success in the Internet-based interactive commerce
applications market. The Company's software incorporates key functions
designed to permit rapid implementation, including user registration,
advertising, multimedia catalog and content management, dynamic
merchandising, browsing and searching, order capture, order management,
usage tracking, security, payment processing, enterprise integration, and
system administration. OneServer's HTML (Hypertext Markup Language)
template engine and business object architecture minimize the need for
custom software code, allowing rapid implementation to meet a company's
specific requirements. To further accelerate time to market, the Company
intends to develop a series of preconfigured implementations of OneServer
tailored to meet the interactive commerce requirements of selected
vertical markets. The Company's first such application, OrderStream, was
commercially released in June 1996.
. Lower Cost of Ownership. CONNECT's solution is designed to reduce the
overall cost of deploying and maintaining an Internet-based interactive
commerce application. The Company's open architecture, pre-built
functions and integrated approach limit custom coding, thereby reducing
implementation and ongoing maintenance costs.
. Industrial Strength, Scaleable Applications. The Company's applications
are designed to support large numbers of purchasers, products and
transactions and are based on a foundation of industry-standard
technology. The Company's software can be integrated with existing
enterprise systems and business processes, offers state-of-the-art
security and supports the critical requirements for high capacity
interactive commerce.
CONNECT STRATEGY
The Company's goal is to be the leading provider of packaged applications
software for Internet-based interactive commerce. The key elements of the
Company's strategy are as follows:
Provide Comprehensive Solutions. The Company's strategy is to provide the
software and services necessary for businesses to quickly, securely and cost-
effectively implement an Internet-based interactive commerce channel.
CONNECT's application software provides the broad range of functions necessary
for interactive commerce including marketing, merchandising, sales, order
management, administration and integration with enterprise systems. The
Company's comprehensive solution complements customers' existing sales
channels.
Target Large Corporations in Selected Vertical Markets. In order to expand
market share and establish a leadership position, the Company plans to target
specific vertical markets. The Company has identified a number of market
segments that it believes have a current need for packaged Internet-based
interactive commerce applications, including: (i) business-to-business
suppliers such as resellers and distributors of computer hardware and
software, electronic components and office equipment and supplies; (ii)
consumer retailers, such as specialty and direct mail retailers and general
merchandisers; and (iii) industries employing multi-tier distribution
including apparel, food and beverage and consumer appliance and electronics
manufacturers. The Company intends to leverage existing customer relationships
in order to expand its business into each of these areas. In addition, the
Company intends to develop a series of preconfigured implementations of
OneServer, tailored to meet the specific requirements of these vertical
markets. OrderStream, the first such application, targets catalog-based
business-to-business suppliers.
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<PAGE>
Exploit Technology Leadership. The Company believes its significant
technology base is one of its core competitive differentiators. The Company
plans to continue to invest significant resources to maintain its technology
leadership position and to provide industry-leading interactive commerce
solutions. The Company's software applications integrate a powerful
transaction manager, object-oriented architecture and sophisticated HTML
template engine with an industry standard relational database management
system. The Company believes it was among the first to integrate a
comprehensive client/server architecture with Web-based technology. For
example, in addition to universal browser support, OneServer's architecture
supports client software developed with standard tools such as Java, Visual
Basic and C/C++. In addition, the Company will continue to support and
integrate relevant Internet and client/server software standards as they
emerge.
Leverage Third-Party Providers. A key element of the Company's strategy is
to continue to expand its strategic relationships with third-party software,
service and hardware providers. The Company believes that such relationships
increase the visibility of its application software in the marketplace and
enable the Company to supplement its core products and services to provide a
comprehensive solution to customers. As part of this strategy, the Company
integrates into its software applications certain software from Oracle,
Fulcrum and RSA. Solution Partners also include platform providers such as
hardware companies, solution enhancement providers such as software companies,
professional service providers to assist with development and implementation
of the CONNECT solution, and design firms that participate in Web site
development.
Expand Sales and Distribution Capability. The Company intends to expand its
sales and distribution infrastructure domestically and internationally to
increase sales coverage and capture market share. The Company plans to
leverage its direct sales efforts by pursuing sales prospects generated by
Solution Partners and by selling through value-added resellers, as well as
establishing other indirect sales channels.
PRODUCTS AND SERVICES
OneServer
CONNECT's core product, OneServer, is a software application for Internet-
based interactive commerce. OneServer integrates the key features and
functions necessary to implement a Virtual Sales Channel. CONNECT's customers
license OneServer and, using the Company's professional services capabilities
or those of a Solution Partner, tailor OneServer to the specific needs of
their businesses. OneServer is designed to enable CONNECT's customers to
quickly, securely and cost-effectively implement an Internet-based sales,
marketing, and order capture capability. For sellers, benefits include more
control over order execution, customer specific promotions, better product and
pricing information and tighter relationships with purchasers. The key
business benefits for purchasers include expedited purchasing, lower cost and
24-hour availability.
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<PAGE>
OneServer Version 1.0 was commercially released in September 1995, and
Version 1.2 was commercially released in June 1996. OneServer has been
licensed to nine customers, three of which have implemented OneServer
commercially. OneServer offers the following key functionality:
OneServer Functionality
[Graphic showing Logical position of OneServer functionality]
The Company has licensed its OneServer software to customers for fees
ranging from approximately $100,000 to approximately $800,000. Fees for
professional services and annual fees for maintenance and support are
additional. The amount of revenue derived from a particular sale depends upon
a number of factors including the number of computer processors, complexity of
the customer application supported, amount of necessary customization and
other factors.
32
<PAGE>
OrderStream
OrderStream is a preconfigured implementation of OneServer tailored for
business-to-business interactive commerce in selected vertical markets. These
vertical markets include resellers and distributors of computer hardware and
software, electronic components and office equipment and supplies. OrderStream
includes pre-built OneServer business objects and a set of preconfigured HTML
templates (Web pages) designed to support the specific requirements of these
markets. OrderStream was commercially released in June 1996. OrderStream has
been licensed to two customers, neither of which is operating OrderStream
commercially.
OrderStream includes the following features in addition to those provided by
its OneServer foundation:
<TABLE>
<CAPTION>
BUSINESS PROCESS ADDITIONAL ORDERSTREAM FUNCTIONALITY
--------------------------------------------------------------------------------
<S> <C>
Marketing and
Merchandising . Customer-specific catalog and pricing
. Feature-specific product search
. Automated catalog creation and update through
bulk data importation
. User interface screens for catalog, SKU and
product management
. Seller-branded product catalogs
. Custom product designations (e.g., preferred
items and required approvals)
--------------------------------------------------------------------------------
Sales and Order Management . Real-time inventory availability checking
. User interface screens for customer service and
order capture
. Order review, routing, approval and rejection
. Order status tracking
. Purchase controls by buyer, frequency and dollar
amount
--------------------------------------------------------------------------------
Administration and . OrderStream-specific APIs (e.g., inventory
Integration availability and order status)
. Electronic data interchange (EDI)
</TABLE>
The Company licenses OrderStream at a premium to OneServer license fees.
Each OrderStream license includes a OneServer run-time sublicense. As with
OneServer, the Company charges separately for professional services and annual
fees for maintenance and support. The amount of revenue derived from a
particular sale depends on a number of factors, including the number of
computer processors, complexity of the customer application supported, amount
of necessary customization and other factors.
Services
The Company provides a full range of services to support the licensing of
its software applications. These services include project implementation and
training, maintenance and support, system hosting and online services. To
retain its focus on technology and software development, the Company leverages
its own capabilities through relationships with leading third-party providers
of systems integration and design services. The Company believes that the
quality and breadth of these services are an important competitive advantage.
Implementation and Training. The Company offers fee-based services to help
customers design and implement OneServer and OrderStream applications. The
Company and its Solution Partners work closely with customers to clarify the
project business case, define project scope and establish a project plan and
schedule. In addition, the Company offers fee-based education and training on
the use of its products to customers and third-party implementation partners.
33
<PAGE>
Maintenance and Support. The Company provides software maintenance including
product updates and technical support to its customers and Solutions Partners.
The Company offers two levels of support which differ in the hours that the
customer may access support personnel. Fees charged depend upon the support
level and size of the customer's application.
Hosting Services. CONNECT offers system hosting services for its customers'
OneServer and OrderStream applications. These services include installing the
application on a remote server located at CONNECT's headquarters or a Solution
Partner's site, maintaining and administering the database, and other system
management services. The Company provides these services on a fee basis to
customers who do not want to operate and manage their own Internet-based
applications. The Company is actively recruiting Solutions Partners to provide
such hosting services.
Online Services. Since 1988, the Company has provided private online
services to various businesses and other organizations. These services include
e-mail, user forums and access to public and private information resources and
are marketed under the CONNECT Online brand name. These services may be
accessed by registered users through the Web or proprietary client software.
As of June 30, 1996, approximately 15,000 users in multiple organizations were
using these services.
Licensing and Third-Party Software
The Company typically provides its software products to its customers under
nonexclusive object code licenses. Generally, CONNECT sublicenses to its
customers third-party software integrated in the Company's software, including
a relational database management system from Oracle, a text search engine from
Fulcrum and encryption technology from RSA. The Company's customers also may
obtain such licenses directly from such third-party software vendors. See
"Risk Factors--Dependence upon Certain Licenses."
CUSTOMERS
As of June 30, 1996, CONNECT had licensed OneServer or OrderStream to the
following customers: Ameritech Corporation; ARI Network Services, Inc.; Compaq
Computer Corporation; ENTEX Information Services ("ENTEX"); Evergreen, Inc.;
First Data Corporation; Fruit of the Loom, Inc. ("Fruit of the Loom");
PhotoDisc; Reader's Digest; Time Warner Cable; and World Merchandise Exchange
("Womex"). Three customers are operating OneServer commercially, while the
other OneServer licensees are in the process of implementing OneServer
applications. The Company commenced marketing its OrderStream product in May
1996 and released it commercially in June 1996. The OrderStream product has
been licensed to two customers, neither of which is operating OrderStream
commercially.
Below are examples of how customers are using or expect to use CONNECT's
application software and services to create Internet-based sales, marketing
and order capture capability. These customers also have retained certain of
CONNECT's Solution Partners to assist with systems integration and user
interface design.
PhotoDisc. PhotoDisc is a leading distributor of digital stock photography
for the marketing, publishing and multimedia markets. In October 1995,
PhotoDisc introduced PhotoDisc Online, a custom application based on OneServer
that supports a fully-automated sales and distribution channel over the
Internet for its digital photographs. The application features a searchable
database of more than 15,000 images representing 60,000 individual resolutions
organized in multiple catalogs. PhotoDisc customers may browse individual
catalogs, or search by categories or text description in each or all catalogs.
Customers can select, download and license photos and images. Purchases can be
made online using a PhotoDisc account or by credit card. The system also
provides for promotional campaigns and new customer registration. PhotoDisc
Online was launched in October 1995. The PhotoDisc site has won multiple
awards, including USA Today Web Site of the Week and a NewMedia INVISION Gold
Award. 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). In addition, for more complex applications,
OneServer supports Microsoft's Visual Basic and Visual C++, and Sun
Microsystems' Java clients.
HTML Template Engine. The OneServer HTML Template Engine separates the
management of database content from the presentation format. The HTML
Template Engine combined with the Object Manager reduces the amount of
custom code and CGI (Common Gateway Interface) scripting needed to
dynamically create HTML pages, thereby improving time to market, lowering
maintenance costs and improving system performance.
Transaction Manager. OneServer's Transaction Manager offers robust
security and authentication protection. The Transaction Manager features
multi-processing and multi-threading, thereby enabling OneServer and
OrderStream to scale across multiple processors to accommodate large
numbers of purchasers, products and transactions. In addition, the
Transaction Manager ensures application-wide data consistency regardless of
data type (e.g., text, graphic and structured), and includes the Company's
RAMP (Reprioritizable Asynchronous Multi-threaded Protocol), a transaction
dispatcher and monitor.
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Business Objects. OneServer includes pre-packaged business functionality
or objects designed for use in interactive commerce. Customers can extend
these objects or build new objects quickly and easily to match precise
business requirements. The pre-packaged objects support common sales and
marketing and other business functions including user registration,
advertising, multimedia catalog and content management, dynamic
merchandising, browsing and searching, order management, security and
authorization, transaction processing, enterprise integration and system
administration.
Object Manager. The OneServer Object Manager defines and manages objects
thereby extending the capabilities of the Oracle 7 database to handle
custom and predefined objects, including multimedia objects. These
capabilities are designed to allow customers to create robust, complex and
flexible data models. The Object Manager hides storage and access
complexities, allowing the customer to focus on automating business
processes. The Object Manager allows objects to be extended by inheriting
characteristics from multiple parent objects, reducing data redundancies
and extraneous coding requirements. An object's attributes can be accessed
through the Internet-based URL reference instead of custom code.
Industry Standard Technology. OneServer incorporates industry-leading
technology as part of its architecture, including the Oracle 7 relational
database management system, the Fulcrum text search engine and RSA
encryption. The tight integration between the Oracle 7 database and
OneServer results in increased system performance and transaction capacity.
The Company's software applications run on the HP-UX 10 and Sun Solaris
2.4/2.5 versions of the UNIX operating system.
MARKETING AND SALES
CONNECT's marketing efforts are focused on increasing awareness of CONNECT
and its products in selected target markets, and positioning CONNECT as a
leading interactive commerce software provider. CONNECT marketing programs
have three primary goals: market education and awareness, sales effectiveness
and product management. The Company's market education and awareness
activities include seminars, speaking engagements and sponsorship of market
studies by leading industry analysts. In addition, CONNECT utilizes direct
mail, public relations, trade shows, telemarketing and innovative sales tools
to disseminate its marketing message and improve sales effectiveness.
CONNECT's product management staff works with customers and industry experts
to ensure that the Company's products will satisfy market requirements.
The Company currently sells its products and related services using two
channels: a direct sales model and a "leveraged" direct sales model (using
leads referred by Solution Partners). The Company's selling efforts generally
focus on senior level executives in large corporations. The Company intends to
expand distribution of its OneServer product in the future to include indirect
sales channels, such as value-added resellers (VARs). In addition, the Company
engages in joint marketing efforts with Fruit of the Loom.
The Company markets and sells its products and services through an
organization consisting of 32 employees as of June 30, 1996, based at the
Company's corporate office in Mountain View, California, and offices in Lisle,
Illinois and Stamford, Connecticut. Currently, all international sales
activity is coordinated through the Company's headquarters.
SOLUTION PARTNERS
A key element of the Company's strategy is to continue to expand its
strategic alliances with Solution Partners. The Company believes that such
relationships promote the visibility of the OneServer application and enable
the Company to supplement its core products and services to provide a complete
solution. The Company's Solution Partners can be segmented into the following
four categories:
Technology Providers. CONNECT has incorporated industry-leading software
into its products. The Company licenses and resells software from Oracle
(relational database management system), Fulcrum (text search engine) and RSA
(encryption). The Company also engages in joint marketing activities with
other technology companies, including Hewlett-Packard and Sun Microsystems.
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Solution Enhancement. CONNECT is working with other companies that offer
additional complementary solution elements. These include First Data
Corporation (payment processing), CyberCash, Inc. (payment processing),
Verisign, Inc. (authentication), Brio Technology, Inc. (reporting tools),
Media Share (content management tools) and BBN Planet Corporation (Internet
access).
Professional Services. CONNECT works with a group of leading professional
services organizations to assist customers in implementing OneServer and
OrderStream. These organizations include Cambridge Technology Partners,
ClearSystems, Inc. Computer Sciences Corporation, Compuware Corporation,
Logica plc, Sage Solutions, Inc. and Sapient Technologies, Inc. These
providers perform services such as business process reengineering and
integration, database design and application development.
Creative Partners. CONNECT works with organizations that specialize in the
creative aspects of developing Web sites. These organizations include CKS
Partners Ltd., Eagle River Interactive Inc., Poppe Tyson Advertising & Public
Relations, Ikonic Interactive Inc., Organic Online, Studio Archetype (formerly
Clement Mok Designs, Inc.) and Thomas Nicholson. These firms frequently are an
important initial contact point for companies exploring interactive commerce
applications and are important sources of referrals for the Company.
RESEARCH AND DEVELOPMENT
Since inception, the Company has made substantial investments in research
and product development. The Company spent $1.6 million in 1993, $1.6 million
in 1994, $4.8 million in 1995 and $2.2 million in the first six months of
1996, and expects to increase research and development expenses in 1996. The
Company's current software products have been developed primarily by its
internal product development staff. A significant portion of the Company's
development efforts during 1994 and 1995 were performed under the Development
Projects. In general, under these Development Projects the Company retained
ownership of the technology being developed subject, in certain cases, to
nonexclusive licenses granted to the Company's customers. The Company's
research and development efforts are currently focused primarily on adding
functionality to the Company's OneServer application and developing new
implementations of OneServer for selected vertical markets. The Company's
research and development staff consisted of 32 employees as of June 30, 1996.
In the future, the Company intends to increase its development staff. The
level of research and development costs will vary, however, depending upon the
amount of development work being performed by the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's success will depend upon its ability to develop new products
and provide new services that meet changing customer requirements. The market
for the Company's products is characterized by rapidly changing technology,
evolving industry standards and customer requirements, emerging competition
and frequent new product and service introductions. As a result, the Company
may be required to change and improve its products in response to changes in
operating systems, application and networking software, computer and
communications hardware, programming tools and computer language technology.
There can be no assurance that the Company can successfully respond to
changing technology, identify new product opportunities or develop and bring
new products and services to market in a timely manner. Failure of the
Company, for technological or other reasons, to develop and introduce new
products and product enhancements and new services that are compatible with
industry standards and that satisfy customer requirements would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Risk Factors--Dependence upon Product Development;
Risks of Technological Change and Evolving Industry Standards."
COMPETITION
The market for interactive commerce software is new, rapidly evolving and
intensely competitive. The Company expects competition to intensify in the
future.
The Company competes with vendors of prepackaged electronic commerce
software, vendors of software tools for developing electronic commerce
applications, system integrators and providers of business application
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software. In addition, potential customers may elect to develop their own
interactive commerce solutions. The Company's competitors include OMI,
Illustra, BroadVision and Netscape. The Company expects additional competition
from other emerging and established companies, including Microsoft and Oracle,
both of which have announced products for Internet-based electronic commerce.
In addition, in June 1996 Microsoft announced that it has entered into an
agreement to acquire eShop Inc., a provider of software programming tools for
creating electronic commerce applications. The Company's potential competitors
also include a number of successful client/server applications software
companies, such as Baan, PeopleSoft and SAP, and EDI solution vendors,
including Sterling Commerce and GEIS.
Many of these competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than the Company
and thus may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and potential
competitors have greater name recognition and more extensive customer bases
that could be leveraged, thereby gaining market share to the Company's
detriment. Such competitors may be able to undertake more extensive
promotional activities, adopt more aggressive pricing policies and offer more
attractive terms to purchasers than the Company and to bundle their products
in a manner that may discourage users from purchasing products offered by the
Company. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to enhance their products. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. There can be no assurance that the Company will be able to compete
effectively with competitors or that the competitive pressures faced by the
Company will not have a material adverse effect on the Company's business,
operating results and financial condition.
The Company believes that rapid implementation of software applications is
critical to success in the Internet-based interactive commerce applications
market. The Company has a limited history in implementing its products and
there can be no assurance that the Company will be able to meet customer needs
and expectations in this regard. Additional competitive factors affecting the
market for the Company's services and software products include vendor and
product reputation, architecture, functionality and features, ease of use,
time-to-market, quality of support, product quality, performance and price.
Based on these factors, the Company believes that it has competed effectively
to date. In order to be successful in the future, the Company must continue to
respond promptly and effectively to the challenges of technical change and
competitors' innovations. Performance in these areas will, in turn, depend
upon the Company's ability to attract and retain highly qualified technical
and sales personnel in a competitive market for experienced and talented
software developers, sales representatives and managers.
PROPRIETARY RIGHTS
The Company relies on trademark, copyright and trade secret laws, employee
and third-party non-disclosure agreements and other methods to protect its
proprietary rights. The Company does not currently have any patents or pending
patent applications. The Company believes that, due to the rapid pace of
technological innovation for Internet products, the Company's ability to
establish and maintain a position of technology leadership in the industry
depends more on the skills of its development personnel, new product
developments, frequent product enhancements, and name recognition than upon
the legal protections afforded its existing technology. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights as
fully as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights in the United States or
abroad will be adequate. There can be no assurance that its agreements with
employees, consultants and others who participate
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in the development of its software will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known to or independently developed by competitors.
Furthermore, there can be no assurance that the Company's efforts to protect
its rights through trademark and copyright laws will not fail to prevent the
development and design by others of products or technology similar to or
competitive with those developed by the Company.
The Company expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps and there can be no assurance that third
parties will not assert infringement claims against the Company. Any such
claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. In the event of a
successful claim of product infringement against the Company and failure or
inability of the Company to license the infringed or similar technology, the
Company's business, operating results and financial condition would be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
On March 25, 1996, PhotoDisc, one of the Company's licensees of OneServer,
was sued, along with 21 other defendants including AGFA, Axcis, SPC and
others, in the Federal District Court in Connecticut, by E-data. In the
litigation against PhotoDisc, E-data alleges that PhotoDisc is infringing E-
data's U.S. Patent No. 4,528,643 issued July 9, 1985, entitled "System for
Reproducing Information in Material Objects at Point of Sale Location," in
connection with electronic distribution of images on the Internet. E-data has
also sued other defendants including Broderbund, CompuServe, Adobe and others
in the Federal District Court in New York City. PhotoDisc recently tendered
the defense of its E-data litigation to the Company.
The Company is currently reviewing the infringement claims made by E-data
against PhotoDisc. Based upon its initial review of the E-data patent and the
nature of the claims and the Company's indemnity obligations, and after
consultation with counsel, management believes that the resolution of this
matter will not have a material adverse effect on the Company's business,
operating results and financial condition. However, given the early stage of
the litigation and the complex technical issues and uncertainties in patent
litigation, the results of these proceedings, including any potential
settlement, are uncertain and there can be no assurance that E-data will not
prevail in the current litigation or that it will not bring similar claims
against other licensees of the Company. If E-data were to prevail, PhotoDisc
could be required to pay damages to E-data for the infringement of its patent
and enter into a licensing or royalty arrangement in order to continue to
conduct its business in the same manner. There can be no assurance that the
amount of such damages would not be material or that such license or royalty
arrangement would be available on acceptable terms. Under the terms of its
license with PhotoDisc, the Company may be required to defend against the E-
data claim and to indemnify PhotoDisc for some or all of its losses in
connection with the litigation, any settlement or judgement and any ongoing
license or royalty fees. In addition, whether or not the Company were to
prevail in any defense of PhotoDisc, such litigation could be time consuming
and costly to defend.
The Company relies in part on certain technology which it licenses from
third parties, including encryption technology from RSA. RSA is currently in
litigation with Cylink pursuant to which Cylink alleges that RSA's encryption
technology infringes certain Cylink patents and asserts that RSA has no right
to sublicense such technology. If it is determined that RSA is unable to
sublicense this technology to the Company, the Company may be deemed to be
infringing Cylink's patent rights. The Company is unable to predict the
outcome of the dispute between RSA and Cylink, but if the Company were deemed
to be infringing Cylink's patent rights, the Company could be required to pay
damages to Cylink and possibly enter into a royalty or licensing agreement
with Cylink. Such royalty or licensing agreement, if required, may not be
available on terms acceptable to the Company or at all, which could have a
material adverse effect upon the Company's business, operating results and
financial condition. See "Risk Factors--Dependence upon Proprietary Rights;
Risks of Infringement."
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EMPLOYEES
At June 30, 1996, CONNECT employed 130 people full time, of whom 32 were
involved in sales and marketing, 37 were involved in services, 32 were
involved in research and development and 29 were involved in finance,
administration and operations. The Company has not experienced any work
stoppages and considers its employee relations to be good.
FACILITIES
The Company is headquartered in Mountain View, California, where it leases
an aggregate of approximately 30,000 square feet of space which houses
administrative, sales and marketing, customer service and product development
activities. The Company's field operations occupy leased facilities in Lisle,
Illinois (an aggregate of approximately 2,000 square feet) and Stamford,
Connecticut (an aggregate of approximately 2,700 square feet). The Company
believes that its existing facilities are adequate to meet current needs, but
that the Company may need to lease additional space in 1997. There can be no
assurance additional space will be available on reasonable terms.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of July 3, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gordon J. Bridge 53 Chairman of the Board and
Director
Thomas P. Kehler 49 President, Chief Executive
Officer and Director
Joseph G. Girata 52 Vice President of Finance and
Administration, Chief Financial
Officer and Secretary
Kenneth M. Ross 43 Chief Technical Officer and
Executive Vice President of
Development
Barton S. Foster 31 Vice President of Marketing
Paul A. Lansky 53 Vice President of Operations
Craig D. Norris 48 Vice President of Professional
Services
Patrick D. Quirk 39 Vice President of Sales
Promod Haque(1)(2) 48 Director
Richard H. Lussier 58 Director
Terry R. McGowan 49 Director
Rory T. O'Driscoll(1) 31 Director
Richard W. Weening(2) 50 Director
William B. Welty(2) 54 Director
</TABLE>
- --------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
Gordon J. Bridge joined the Company in November 1995 as the Chairman of the
Board of Directors. Since November 1995 Mr. Bridge has also served as the
chief business development officer of the Company. Mr. Bridge is also an
Executive Vice President and director of Quaestus Management Corporation
("Quaestus"), a venture capital investment and private equity fund management
company, which funds, collectively, are a principal stockholder of the
Company, although Mr. Bridge does not hold an equity interest in the Quaestus
funds. From 1988 to 1995, Mr. Bridge held executive management positions with
AT&T Corporation, a telecommunications company, including President of AT&T
Computer Systems, President of EasyLink Services, President of AT&T Consumer
Interactive Services and most recently Vice President, Corporate Strategy
responsible for Emerging Services and Products. Prior to joining AT&T
Corporation in 1988, he served for 23 years with IBM Corporation in various
positions, including Vice President of Marketing and Vice President of U.S.
Sales. Mr. Bridge is a director of ARI Network Services, Inc., an electronic
commerce services provider. Mr. Bridge holds a B.A. in Mathematics from
Bradley University.
Thomas P. Kehler joined the Company in July 1992 as the President and Chief
Executive Officer and a member of the Board of Directors. Prior to joining the
Company, from January 1986 to October 1991 he was Chairman and Chief Executive
Officer of IntelliCorp, a software company. Prior to his employment with
IntelliCorp, Mr. Kehler was a manager with Texas Instruments Incorporated, an
electronics manufacturer. Mr. Kehler holds a B.S.E.E., a M.S.E.E. and a Ph.D.
in Electrical Engineering/Applied Physics from Drexel University.
Joseph G. Girata joined the Company in June 1996 as Vice President of
Finance and Administration and Chief Financial Officer. Prior to joining the
Company, Mr. Girata was an independent consultant from September 1995 to June
1996. From September 1994 to August 1995, Mr. Girata was Vice President and
Chief Financial Officer of Wind River Systems, Inc., a software company, and
from October 1989 to August 1994, he was Senior
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Vice President and Chief Financial Officer of Walker Interactive Systems,
Inc., a software company. In addition, Mr. Girata has held executive financial
management positions with Data Design Associates, a software company, Atlantic
Financial, a thrift institution holding company, and Signetics Corporation, a
semiconductor company. Mr. Girata holds a B.S. in Finance from California
State University, Hayward and is a Certified Public Accountant.
Kenneth M. Ross joined the Company in July 1993 as Chief Technical Officer
and Executive Vice President of Development. From January 1991 to September
1991, Mr. Ross served as Executive Vice President of Development and
Engineering and as a director at Hunter Systems, a software applications
company, and from September 1991 to July 1993, he was Vice President of
Development and Operations and General Manager of the Software Publishing
Division of Woodside Technologies/UNIX Central, a developer and distributor of
UNIX software tools and utilities. Mr. Ross also held senior management
positions at IntelliCorp from 1983 to 1987, and from 1988 to 1991, he held
several director-level software development management roles at Oracle
Corporation, a software company ("Oracle"). Mr. Ross holds a B.S. in
Mathematics from Massachusetts Institute of Technology and a Ph.D. in
Linguistics from the University of Massachusetts at Amherst.
Barton S. Foster joined the Company in March 1996 as Vice President of
Marketing. Prior to joining the Company, Mr. Foster held various management
positions with Oracle, from July 1994 to March 1996, including Vice President,
Applications and Industry Marketing and Director, Applications Business
Development. Prior to joining Oracle, Mr. Foster held various positions with
Booz, Allen & Hamilton, a management consulting firm, from 1987 to 1994. Mr.
Foster holds a B.A. in Economics and Political Science from Stanford
University and a M.B.A. from the Harvard University Graduate School of
Business.
Paul A. Lansky became Vice President of Operations of the Company in March
1996, after joining the Company in September 1994 as Vice President of Sales.
In addition, from July 1995 to November 1995, Mr. Lansky served as Vice
President of Professional Services, and from December 1995 to March 1996, he
was Vice President of Strategic Accounts of the Company. Prior to joining the
Company, he held various sales management positions with other software
companies, including Vice President of Highland Digital, from June 1994 to
August 1994, and Executive Vice President of Highland Software from April 1992
to March 1994. From September 1991 to March 1992, Mr. Lansky served as Vice
President of Sales of BusinessWise, Inc., a software company. Mr. Lansky holds
a B.S. in Electrical Engineering from the University of Michigan and a M.B.A.
from Wayne State University.
Craig D. Norris joined the Company in January 1996 as Vice President of
Professional Services. Prior to joining the Company, Mr. Norris was a
management consultant with Gemini Consulting Inc., a consulting firm, from
October 1992 to December 1995. From October 1988 to October 1992, Mr. Norris
was Vice President, West Area at Cap Gemini America, a consulting firm. Mr.
Norris holds a B.A. in Economics from Macalester College and a M.B.A. from
Fairleigh Dickenson University.
Patrick D. Quirk joined the Company in July 1995 as Vice President of Sales.
Prior to joining the Company, from May 1993 to May 1995, Mr. Quirk was Vice
President of the Americas at Avalon Software, Inc. From April 1989 to May
1993, Mr. Quirk held several positions with Oracle, including Group Sales
Manager. Prior to his employment with Oracle, from January 1983 to April 1989,
Mr. Quirk was a Global Sales manager of the Yield Management Systems division
of Control Data Corporation, a computer hardware and software company. Mr.
Quirk holds a B.S. in Industrial Engineering from the University of Wisconsin-
Madison.
Promod Haque became a member of the Board of Directors of the Company in
December 1995. Mr. Haque joined Norwest Venture Capital Management, Inc., a
venture capital investment firm, in November 1990 and currently serves as its
Vice President. He is also a partner of two general partnerships that are the
general partners of Norwest Equity Partners V, L.P., a principal stockholder
of the Company. Mr. Haque currently serves as a director of Forte Software,
Inc., Raster Graphics, Inc., Transaction Systems Architects, Inc., Optical
Sensors, Inc., Prism Solutions, Inc. and several privately held companies. Mr.
Haque holds a B.S.E.E. from the University of Delhi, India, and a Ph.D.E.E.
and a M.B.A. from Northwestern University.
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<PAGE>
Richard H. Lussier became a director of the Company in June 1992. Mr.
Lussier is President and Chief Executive Officer of Siemens Nixdorf
Information Systems Inc., a computer company and a subsidiary of Siemens
Nixdorf Informationssysteme AG ("Siemens"). From November 1986 to March 1995
he was Chairman and Chief Executive Officer of Pyramid Technology Corporation,
a computer company, which was acquired by Siemens in March 1995. Mr. Lussier
holds a B.A. in Economics from College of the Holy Cross and completed
coursework from Boston College Graduate School of Business.
Terry R. McGowan became a director of the Company in May 1993. Since May
1995, Mr. McGowan has been Chief Executive Officer of Action Technologies,
Inc., a software company. From September 1991 to May 1995, he was a management
consultant to computer software companies in the areas of strategy, sales,
marketing and business operations, and from 1984 to September 1991, Mr.
McGowan was employed by KnowledgeWare, Inc., an application development tools
software company. Mr. McGowan served as Vice President of Sales and Marketing
of KnowledgeWare, Inc. until 1985 and then as President and Chief Operating
Officer until his departure in September 1991. Mr. McGowan also is a member of
the Board of Directors of Boole & Babbage, Inc., a software company. Mr.
McGowan holds a B.S. in Political Science and Economics from the University of
Southern Mississippi.
Rory T. O'Driscoll became a member of the Board of Directors of the Company
in December 1995. Mr. O'Driscoll is a Principal of BankAmerica Ventures, a
venture capital firm, and a General Partner of BA Venture Partners I. Prior to
joining BankAmerica Ventures in September 1993, Mr. O'Driscoll served in the
Corporate Development department of BankAmerica Corporation from March 1992 to
September 1993. Before his employment with BankAmerica Corporation, he worked
as a financial advisor to a number of privately-held companies in the United
Kingdom from March 1991 to December 1991. Mr. O'Driscoll also serves as a
director of several private companies. Mr. O'Driscoll holds a B.Sc. in
Economics from the London School of Economics.
Richard W. Weening became a member of the Board of Directors of the Company
in March 1992. Since 1990, Mr. Weening has served as Chief Executive Officer
and Chairman of Quaestus. Previously, from 1981 to 1989, Mr. Weening was
President and Chief Executive Officer of AgriData Resources Inc., a business
information magazine and newsletter publishing company, and from 1972 to 1985,
he was President and Publisher of Raintree Publishers Inc., a multimedia
educational publishing company. In addition, Mr. Weening is currently
President and Chief Executive Officer of RPI Holdings Inc. ("RPI"), the
managing general partner of Quaestus Limited Partnership, a principal
stockholder of the Company. Mr. Weening currently serves as Chairman of the
Board and a director of ARI Network Services, Inc., and several other private
information services and media companies. Mr. Weening holds a B.A. in
Economics and Philosophy from St. John's University.
William B. Welty became a member of the Board of Directors of the Company in
July 1994. 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 1,136,363 7.1% 6.0%
BankAmerica Ventures(8)......
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..... 17,863,668 17,861,277 17,942,474
============ =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONNECT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
---------------------- ------------------ DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT EQUITY (DEFICIT)
---------- ----------- ------- ---------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992................... 1,118,080 $ 2,248,713 213,222 $7,034,217 $ -- $(13,006,530) $ (3,723,600)
Issuance of Series D
preferred stock for
cash................... 244,231 635,000 -- -- -- -- 635,000
Exercise of employee
stock options.......... -- -- 26,302 5,989 -- -- 5,989
Conversion of notes
payable to stockholders
to Series D preferred
stock, net of issuance
costs of $2,681........ 1,157,581 3,007,030 -- -- -- -- 3,007,030
Common stock issued for
services............... -- -- 6,538 17,000 -- -- 17,000
Net loss................ -- -- -- -- -- (1,920,583) (1,920,583)
---------- ----------- ------- ---------- --------- ------------ ------------
Balance at December 31,
1993................... 2,519,892 5,890,743 246,062 7,057,206 -- (14,927,113) (1,979,164)
Issuance of Series E
preferred stock for
cash................... 437,715 1,532,001 -- -- -- -- 1,532,001
Exercise of employee
stock options.......... -- -- 123,923 36,351 -- -- 36,351
Conversion of notes
payable to stockholders
to Series E preferred
stock, net of issuance
costs of $30,856....... 190,857 637,144 -- -- -- -- 637,144
Net loss................ -- -- -- -- -- (1,764,535) (1,764,535)
---------- ----------- ------- ---------- --------- ------------ ------------
Balance at December 31,
1994................... 3,148,464 8,059,888 369,985 7,093,557 -- (16,691,648) (1,538,203)
Conversion of notes
payable to stockholders
and accrued interest
for Series D preferred
stock.................. 58,821 152,933 -- -- -- -- 152,933
Termination of
distribution rights
settled in Series E
preferred stock........ 175,000 1,417,500 -- -- -- -- 1,417,500
Issuance of Series F
preferred stock for
cash and notes, net of
issuance costs of
$917,888............... 10,730,614 27,410,938 -- -- -- -- 27,410,938
Exercise of employee
stock options and
other.................. -- 28,639 13,917 -- -- 13,917
Net loss................ -- -- -- -- -- (14,138,931) (14,138,931)
---------- ----------- ------- ---------- --------- ------------ ------------
Balance at December 31,
1995................... 14,112,899 37,041,259 398,624 7,107,474 -- (30,830,579) 13,318,154
Issuance of Series F
preferred stock for
cash (unaudited)....... 360,000 937,849 -- -- -- -- 937,849
Exercise of employee
stock options
(unaudited)............ -- -- 134,818 58,998 -- -- 58,998
Deferred compensation
related to grant of
stock options
(unaudited)............ -- -- -- 169,433 (169,433) -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- -- 8,345 -- 8,345
Net loss (unaudited).... -- -- -- -- -- (9,127,209) (9,127,209)
---------- ----------- ------- ---------- --------- ------------ ------------
Balance at June 30, 1996
(unaudited)............ 14,472,899 $37,979,108 533,442 $7,335,905 $(161,088) $(39,957,788) $ 5,196,137
========== =========== ======= ========== ========= ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONNECT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(1,920,583) $(1,764,535) $(14,138,931) $(7,100,787) $(9,127,209)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 279,787 473,351 987,829 512,977 808,315
Amortization of
deferred
compensation......... -- -- -- -- 8,345
Common stock issued
for services......... 17,000 -- -- -- --
Termination of
distribution rights
settled in Series E
preferred stock...... -- -- 1,417,500 1,417,500 --
Deferred income tax... -- (77,000) 77,000 77,000 --
Changes in assets and
liabilities:
Accounts
receivable......... (405,746) 77,059 (280,679) 222,701 (648,556)
Prepaid expenses and
other current as-
sets............... (179,588) (111,038) (124,503) 1,065 (374,208)
Deposits and other
assets............. -- (173,263) (215,882) 4,158 64,974
Accounts payable,
accrued payroll and
related expenses,
other accrued
liabilities, and
extended vendor
liabilities........ 63,268 65,162 (52,153) 1,242,118 2,460,666
Deferred revenue.... 98,628 2,887,190 (2,562,834) (2,756,385) (31,646)
----------- ----------- ------------ ----------- -----------
Net cash provided by
(used in) operating
activities............. (2,047,234) 1,376,926 (14,892,653) (6,379,653) (6,839,319)
INVESTING ACTIVITIES
Purchases of property
and equipment.......... (38,588) (1,627,126) (1,772,591) (1,043,037) (830,272)
Purchase of equipment
for sale and
leaseback.............. (609,229) -- -- -- --
----------- ----------- ------------ ----------- -----------
Net cash used in
investing activities... (647,817) (1,627,126) (1,772,591) (1,043,037) (830,272)
FINANCING ACTIVITIES
Proceeds from sale and
leaseback of equipment
at net book value...... 573,657 -- 1,197,393 1,197,393 --
Proceeds from issuance
of common stock........ 5,989 36,351 13,917 13,041 58,998
Proceeds from issuance
of preferred stock..... 635,000 1,532,001 28,328,826 -- 937,849
Issuance costs
associated with
conversion of notes
payable and issuance of
preferred stock........ (2,681) (30,856) (917,888) -- --
</TABLE>
See accompanying notes.
F-6
<PAGE>
CONNECT, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Proceeds from issuance
of notes payable
converted into Series E
preferred stock........ $ -- $ 668,000 $ -- $ -- $ --
Proceeds from issuance
of notes payable....... 2,163,509 43,090 133,534 5,200,790 --
Repayment of principal
on notes payable....... (654,058) (149,677) (180,974) (107,609) (144,809)
Repayment of principal
under capital lease
obligations............ (103,796) (318,987) (574,524) (364,937) (317,041)
---------- ---------- ----------- ----------- -----------
Net cash provided by
financing activities... 2,617,620 1,779,922 28,000,284 5,938,678 534,997
---------- ---------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (77,431) 1,529,722 11,335,040 (1,484,012) (7,134,594)
Cash and cash
equivalents at
beginning of period.... 141,580 64,149 1,593,871 1,593,871 12,928,911
---------- ---------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 64,149 $1,593,871 $12,928,911 $ 109,859 $ 5,794,317
========== ========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION
Cash paid during the
year for interest...... $ 241,777 $ 239,943 $ 373,948 $ 343,842 $ 180,579
Cash paid for income
taxes.................. $ -- $ 8,500 $ -- $ -- $ --
SUPPLEMENTAL NONCASH
INVESTING AND FINANCING
INFORMATION
Notes payable to
stockholders, including
$40,116 of accrued
interest, converted
into Series D preferred
stock.................. $3,009,711 $ -- $ -- $ -- $ --
Notes payable to
stockholders, including
$26,583 of accrued
interest, converted
into Series D preferred
stock.................. $ -- -- $ 152,933 $ 152,933 $ --
Incurrence of capital
lease obligations...... $ 627,071 $ 355,955 $ 332,084 $ 332,084 $ 14,003
</TABLE>
See accompanying notes.
F-7
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION
CONNECT, Inc. (the "Company") was incorporated in the state of California in
April 1987. The Company designs, develops, markets, and supports industrial
strength, scaleable software applications for Internet-based interactive
commerce. The Company's application software and support services are designed
to reduce the time and overall cost for businesses to implement and maintain a
secure sales, marketing and order capture capability on the World Wide Web.
The Company's software supports key functions necessary for large-scale
interactive commerce, including user registration, multimedia catalog and
content management, dynamic merchandising, order capture and management,
security, payment processing, enterprise integration and systems
administration.
The Company has recently initiated a new business strategy focused on
providing packaged software applications for Internet-based interactive
commerce. As a result, the Company is decreasing its reliance on historical
sources of revenue and its current and future business prospects are dependent
upon the successful development, market acceptance and sales of two recently
developed products. The Company's business must be considered in light of the
risks, expenses and problems frequently encountered by companies in an early
stage of development, particularly companies in new and rapidly evolving
markets such as the Internet. Specifically, such risks include the lack of
acceptance of the Company's products and services by its target customers,
development of equal or superior products or services by competitors, the
failure of electronic commerce in general, and Internet-based electronic
commerce in particular, to be broadly adopted as a sales, marketing and
distribution medium, the Company's inability to develop and enhance
competitive products or to successfully commercialize any such products, and
the inability to identify, attract, retain and motivate qualified personnel.
There can be no assurance that the Company will succeed in addressing such
risks.
Basis of Presentation
For the year ended December 31, 1995 and six months ended June 30, 1996, the
Company had net losses of approximately $14,139,000 and $9,127,000,
respectively, and has incurred substantial losses to date.
The Company plans to raise additional funds through public or private equity
financings or other sources. However, there can be no assurance that such
funds will be available or available on terms favorable to the Company or its
stockholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Interim Financial Information
The financial statements at June 30, 1996 and for the six months ended June
30, 1995 and 1996 are unaudited but include all adjustments (consisting only
of normal recurring adjustments) that the Company considers necessary for a
fair presentation of financial position and operating results. Operating
results for the six months ended June 30, 1996 are not necessarily indicative
of the results that may be expected for any future periods.
F-8
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
Concentration of Credit Risk
The Company licenses products and provides services to a variety of
customers. The Company generally does not perform credit evaluations or require
collateral on individual customer service or license transactions that involve
relatively small amounts. However, credit worthiness on larger service or
license transactions are evaluated on a case-by-case basis. At December 31,
1994, 1995, and June 30, 1996, the Company had an allowance for potential
credit losses of approximately $174,000, $320,000 and $372,000, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
(at the date of purchase) of three months or less to be the equivalent of cash
for the purpose of the balance sheet presentation and statement of cash flows.
The Company has classified all debt securities as available-for-sale.
Available-for-sale securities are carried at an amount which approximates fair
value. Unrealized gains and losses, if material, are reported in a separate
component of stockholders' equity. Realized gains and losses and declines in
value judged to be other-than-temporary are included in interest expense, net.
All available-for-sale securities mature in three months or less and are
included in cash and cash equivalents. Available for sale securities at
December 31, 1994 and 1995, and June 30, 1996, totaled $999,773, $12,314,990
and $4,859,448, respectively, and are comprised of certain U.S. government
obligations. At December 31, 1994 and 1995 and at June 30, 1996, gross
unrealized gains and losses were not significant. There were no gross realized
gains or losses on available-for-sale securities for the year ended December
31, 1994, 1995, and for the six months ended June 30, 1995 and 1996.
Property and Equipment
Property and equipment are stated at cost and are depreciated on a straight-
line basis over their estimated useful lives of three to seven years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or the estimated useful life of the improvements.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Computer equipment........................ $2,063,044 $2,184,932 $2,061,781
Equipment under capital leases............ 979,562 2,589,818 3,484,704
Furniture and fixtures.................... 130,741 173,206 201,884
Leasehold improvements.................... 70,256 400,322 444,184
---------- ---------- ----------
3,243,603 5,348,278 6,192,553
Accumulated depreciation and amortiza-
tion..................................... 1,097,419 2,085,248 2,893,563
---------- ---------- ----------
$2,146,184 $3,263,030 $3,298,990
========== ========== ==========
</TABLE>
Revenue Recognition and Deferred Revenue
The Company derives revenue from software license fees and services. License
fees primarily consist of revenue from licenses of the Company's application
software. Service revenue consists of fees from
F-9
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
implementation (including customization of licensed software products),
training, maintenance and support, contract software development projects, and
system hosting and online services.
The Company's revenue recognition policy is in compliance with the
provisions of the American Institute of Certified Public Accountants'
Statements of Position 91-1, "Software Revenue Recognition."
License Revenue
The Company licenses application software to end-users under non-cancelable
license agreements. License revenue is recognized on shipment of the
application software provided there are no significant remaining obligations
and collectability is deemed probable by management. License fees under
contracts requiring significant implementation, including customization, of
licensed software products are recognized on the percentage-of-completion
method based on the ratio of incurred costs to total estimated costs. Actual
costs and gross margins on such contracts could differ from management's
estimates and such differences could be material to the financial statements.
Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined.
Service Revenue
Fees for implementation services are recognized as the services are
performed, except for such fees under fixed price contracts which are
recognized on the percentage-of-completion method as noted above. A provision
for estimated losses of $1,223,000 was made in the period ended June 30, 1996
in connection with certain fixed price contracts entered into during the
period of which $867,000 is included in other accrued liabilities at June 30,
1996. At December 31, 1994, 1995, and at June 30, 1996, the Company had an
excess of billings over costs incurred and estimated earnings on uncompleted
implementation services of approximately $0, $295,000, and $200,000,
respectively, which is included in deferred revenue.
The Company also enters into maintenance agreements in connection with
licenses of its application software under which revenue is recognized ratably
over the term of the agreement, generally one year. Usage fees related to the
Company's private online services, system hosting services, training and other
consulting services are recognized as the services are performed.
Revenue from contract software development projects, in which the Company
developed specific technology for its customers, has been recognized on the
percentage-of-completion method based on the ratio of incurred costs to total
estimated costs. The Company entered into two such contracts in 1994 for the
development of certain technology. These contracts were terminated in 1995.
The Company recognized service revenue in connection with these contracts of
approximately $2,551,000 and $4,867,000 for the years ended December 31, 1994
and 1995, respectively. Related cost of service revenue in connection with
these contracts was approximately $1,725,000 and $1,615,000, for the years
ended December 31, 1994 and 1995, respectively. At December 31, 1994 and 1995,
the Company had an excess of billings over costs incurred and estimated
earnings on the two uncompleted contract software development projects of
approximately $2,590,000 and $0, respectively, which is included in deferred
revenue.
Deferred Revenue
Deferred revenue includes billings or collections in excess of revenue
recognized on development arrangements, deferred maintenance, and other
payments received in advance of services to be performed.
F-10
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
Research and Development
Research and development expenditures are generally charged to operations as
incurred. The Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent
to the establishment of technological feasibility. Based on the Company's
product development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between the
completion of the working model and the point at which the product is ready
for general release have been insignificant. Accordingly, the Company has
charged all such costs to research and development expenses in the
accompanying statements of operations.
Advertising and Promotion Costs
The Company's policy is to expense advertising and promotion costs as they
are incurred. The Company's advertising and promotion expenses were
approximately $0, $238,706, and $372,000, in 1993, 1994, and 1995,
respectively, and $164,763 and $499,480 for the six months ended June 30, 1995
and 1996, respectively.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Net Loss Per Share
Except as noted below, net loss per share is computed using the weighted
average number of shares of common stock outstanding. Common equivalent shares
from convertible preferred stock (using the if-converted method) and from
stock options and warrants (using the treasury stock method) have been
included in the computation when dilutive. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued by the Company at prices below the assumed public offering price
during the twelve-month period prior to the offering have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method at the assumed initial public offering price.) The
difference between primary and fully diluted earnings per share is not
material for all periods presented.
Per share information calculated on the above noted basis is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net loss................ $ (0.14) $ (0.13) $ (1.03) $ (0.52) $ (0.66)
========== ========== ========== ========== ==========
Shares used in computing
net loss per share..... 13,565,121 13,643,503 13,717,010 13,714,619 13,795,816
========== ========== ========== ========== ==========
</TABLE>
F-11
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
Pro Forma Net Loss Per Share and Unaudited Pro Forma Stockholders' Equity
Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from
convertible preferred stock that will automatically convert upon the closing
of the Company's initial public offering (using the if-converted method). If
the offering contemplated by this Prospectus is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into an aggregate of 15,230,550 shares of common
stock, based on the number of shares of convertible preferred stock
outstanding at June 30, 1996.
Unaudited pro forma stockholders' equity at June 30, 1996, as adjusted for
the assumed conversion of the convertible preferred stock, is disclosed on the
balance sheet.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The Company will be required to adopt SFAS 123 in the year
ending December 31, 1996. It is the Company's intention to continue to account
for employee stock options in accordance with Accounting Principles Board
Opinion No. 25 and to adopt the "disclosure only" alternative described in
SFAS 123.
3. NOTES PAYABLE
The Company has a $450,000 promissory note with a financing company.
Principal and interest are payable monthly over three years, and the note
matures on August 1, 1996. The note bears interest at the rate of 20.2%. At
December 31, 1994, 1995, and at June 30, 1996, the principal outstanding was
$266,297, $108,056, and $14,675 respectively. The note is guaranteed by a
stockholder and officer of the Company.
The Company has three additional notes payable with remaining principal
balances outstanding of $32,450, $23,863, and $97,578 at December 31, 1995 and
$7,316, $18,739 and $76,408 outstanding at June 30, 1996. These unsecured
notes bear interest at 9.19%, 11%, and 11% and mature on December 16, 1996,
December 15, 1997, and March 1, 1998, respectively.
4. EXTENDED VENDOR LIABILITIES
During 1992 and 1993, the Company renegotiated payment terms with a number
of its largest vendors. The resulting agreements bear interest at rates
ranging from 0% to 8%, and certain of the repayment agreements extend beyond
one year.
In April 1994, the Company terminated its service and license agreement with
a vendor, resulting in a reduction of $253,656 in extended vendor liabilities.
In addition, the repayment terms for certain amounts due the vendor were
extended from three to five years. Beginning in December 1994, the total
liability due the vendor of $1,000,000 will be due in monthly installments,
plus interest, at an annual rate of 6% through November 1999.
F-12
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
Principal payments due in each calendar year as of December 31, 1995 and
June 30, 1996 relating to the above agreements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
1996................................................... $252,192 $141,644
1997................................................... 256,468 256,468
1998................................................... 212,624 212,624
1999................................................... 187,177 187,177
-------- --------
$908,461 $797,913
======== ========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
The lease agreement for the Company's primary facility expires December 9,
1999. At December 31, 1995 and June 30, 1996, the future minimum lease
payments related to operating lease agreements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
1996................................................. $ 392,317 $ 206,045
1997................................................. 400,334 411,338
1998................................................. 317,891 328,895
1999................................................. 308,125 319,129
---------- ----------
$1,418,667 $1,265,407
========== ==========
</TABLE>
Rental expense charged to operations for the years ended December 31, 1993,
1994, and 1995, were approximately $240,300, $307,058, $317,690, respectively,
and $193,438 and $183,591 for the six months ended June 30, 1995 and 1996,
respectively.
Capital Leases
The Company leases certain equipment under capital leases having terms of 36
to 42 months. Accumulated depreciation on these assets was approximately
$231,000, $988,848 and $1,245,039 at December 31, 1994, 1995, and June 30,
1996, respectively.
The following is a schedule by year of future minimum lease payments under
capital leases as of December 31, 1995 and June 30, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
1996................................................ $ 852,132 $ 426,066
1997................................................ 707,896 707,896
1998................................................ 384,650 384,650
---------- ----------
Total minimum lease payments........................ 1,944,678 1,518,612
Amount representing interest........................ 429,484 306,456
---------- ----------
1,515,194 1,212,156
Less current portion................................ 602,292 580,147
---------- ----------
$ 912,902 $ 632,009
========== ==========
</TABLE>
F-13
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
Contingencies
On March 25, 1996, one of the Company's licensees of OneServer (the
Customer) was sued, along with 21 other defendants in the Federal District
Court in Connecticut, by E-data Corporation ("E-data"), in which E-data
alleges that each defendant is infringing E-data's U.S. patent in connection
with electronic distribution of images on the Internet. The Customer recently
tendered the defense of this litigation to the Company. The Company is
currently reviewing the infringement claims made by E-data against the
Customer. Based upon its initial review of the E-data patent and the nature of
the claims and the Company's indemnity obligations, and after consultation
with counsel, management believes that the resolution of this matter will not
have a material adverse on the Company's business, operating results and
financial condition. However, given the early stage of the litigation and the
complex technical issues and uncertainties in patent litigation, the results
of these proceedings, including any potential settlement, are uncertain and
there can be no assurance that E-data will not prevail in the current
litigation or that it will not bring similar claims against other licensees of
the Company. If E-data were to prevail, the Customer could be required to pay
damages to E-data for the infringement of its patent and enter into a
licensing or royalty arrangement. There can be no assurance that the amount of
such damages would not be material or that such license or royalty arrangement
would be available on acceptable terms. Under the terms of its license with
the Customer, the Company may be required to defend against the E-data claim
and to indemnify the Customer for some or all of its losses in connection with
the litigation and any settlement or judgement, including ongoing license
fees. In addition, whether or not the Company were to prevail in any defense
of the Customer, such litigation could be time consuming and costly to defend.
The Company relies in part on certain technology which it licenses from
third parties, including encryption technology from RSA Data Security, Inc.
("RSA"). RSA is currently in litigation with Cylink Corporation ("Cylink")
pursuant to which Cylink alleges that RSA's encryption technology infringes
certain Cylink patents and asserts that RSA has no right to sublicense such
technology. If it is determined that RSA is unable to sublicense this
technology to the Company, the Company may be deemed to be infringing Cylink's
patent rights. The Company is unable to predict the outcome of the dispute
between RSA and Cylink, but if the Company were deemed to be infringing
Cylink's patent rights, the Company could be required to pay damages to Cylink
and possibly enter into a royalty or licensing agreement with Cylink. Such
royalty or licensing agreement, if required, may not be available on terms
acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
F-14
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
6. CONVERTIBLE PREFERRED STOCK
Convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Authorized shares--55,544,540
Series C preferred stock:
Authorized shares--2,240,130
Issued and outstanding shares--1,118,080
(Aggregate liquidation preference at June
30, 1996--$3,018,081).................... $2,248,713 $ 2,248,713 $ 2,248,713
Series D preferred stock:
Authorized shares--2,921,266
Issued and outstanding shares--1,401,812
at December 31, 1994 and 1,460,633 at
December 31, 1995 and June 30, 1996
(Aggregate liquidation preference at June
30, 1996--$4,766,257).................... 3,642,030 3,794,963 3,794,963
Series E preferred stock:
Authorized shares--1,757,144
Issued and outstanding shares--628,572 at
December 31, 1994, and 803,572 at
December 31, 1995 and June 30, 1996
(Aggregate liquidation preference at June
30, 1996--$3,261,578).................... 2,169,145 3,586,645 3,586,645
Series F preferred stock:
Authorized shares--24,313,000 and
22,181,228 at December 31, 1995 and June
30, 1996, respectively
Issued and outstanding shares--10,730,614
and 11,090,614 at December 31, 1995 and
June 30, 1996, respectively
(Aggregate liquidation preference at June
30, 1996--$59,712,758)................... -- 27,410,938 28,348,787
Series F-a preferred stock:
Authorized shares--24,313,000 and
22,181,228 at December 31, 1995 and June
30, 1996, respectively
Issued and outstanding shares--none....... -- -- --
---------- ----------- -----------
Convertible preferred stock................. $8,059,888 $37,041,259 $37,979,108
========== =========== ===========
</TABLE>
Commencing January 1, 1996, the holders of Series C, D, E, and F convertible
preferred stock are entitled to receive cumulative dividends, when and if
declared by the Board of Directors, out of legally available funds, at a per
annum rate of $0.16 per share for Series C preferred stock, $0.208 per share
for Series D preferred stock, $0.28 per share for Series E preferred stock,
and $0.212 per share for Series F preferred stock, payable before any
dividends may be paid on common stock. Such dividends shall accumulate
quarterly on each share whether or not earned or declared.
F-15
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
The preferred stock is convertible at any time to common stock by
multiplying the number of preferred shares outstanding with the conversion
ratio in effect for such series. As of December 31, 1995, the conversion ratio
for Series C, D, E, and F is 1.31, 1.22, 1.12, and 1.00, respectively. The
conversion price may also be adjusted if there are changes in capitalization
or certain subsequent sales of stock occur at prices per share lower than the
conversion price of the Series C, D, E, and F preferred stock in effect at the
time of such sale. The conversion of Series C, D, E, and F preferred stock is
automatic upon an underwritten public offering of the Company's common stock,
subject to certain minimum aggregate gross proceeds. As of December 31, 1995
and June 30, 1996, an adequate amount of shares of common stock have been
reserved for issuance upon conversion. Preferred stockholders are entitled to
vote in the same manner and with the same effect as if their stock had been
converted into common stock.
In the event of liquidation, the preferred stockholders are entitled to a
per share liquidation preference distribution of $2.62 per share for Series C
preferred stock, $3.16 per share for Series D preferred stock, $3.92 per share
for Series E preferred stock, and $5.28 per share for Series F preferred
stock, plus all accumulated and unpaid dividends.
7. EMPLOYEE BENEFIT PLAN
The Company maintains an employee savings plan that qualifies under Section
401(k) of the Internal Revenue Code (the "Code") for all of its full-time
employees. The plan allows employees to make specified percentage pretax
contributions up to the maximum dollar limitation prescribed by the Code. The
Company has the option to contribute to the plan; however, there have been no
contributions to date.
8. STOCK OPTION PLAN
The Company has a 1989 Stock Option Plan (the "Plan") under which the
committee, as appointed by the Board of Directors, may grant incentive or
nonqualified stock options. The Plan authorizes the issuance of up to
2,700,000 shares of common stock. Options are generally granted at an exercise
price of no less than the fair value per share of the common stock on the date
of grant as determined by the Board of Directors. The options issued under the
Plan are immediately exercisable; however, shares acquired pursuant to the
exercise of these options generally vest over four years, expiring no later
than ten years from the date of grant. Unvested shares may be repurchased by
the Company at the original purchase price.
F-16
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
The Company accounts for its stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
In February 1996, the Company offered to each employee with stock options
having an exercise price greater than $0.50 per share the opportunity to amend
the terms of such options and reduce the exercise price to $0.50 per share (an
amount not less than fair market value, as deemed by the Board of Directors,
as of the offer date). The new options will have the same vesting terms as the
surrendered options. Options representing 386,018 shares of common stock were
repriced, and have been included in option grants and cancellations in the
period ended June 30, 1996. A summary of the activity under the Plan is as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES -------------------------
AVAILABLE NUMBER OF PRICE
FOR GRANT SHARES PER SHARE
---------- --------- --------------
<S> <C> <C> <C>
Balance at December 31, 1992.......... 440,067 246,881 $0.20 - $ 2.00
Options granted..................... (298,159) 298,159 $0.20 - $ 0.26
Options exercised................... -- (26,302) $0.20 - $ 2.00
Options canceled.................... 45,462 (45,463) $0.20 - $ 2.00
---------- --------- --------------
Balance at December 31, 1993.......... 187,370 473,275 $0.20 - $ 2.00
Additional shares reserved.......... 164,000
Options granted..................... (397,651) 397,651 $0.26 - $ 4.00
Options exercised................... -- (123,923) $0.20 - $ 0.70
Options canceled.................... 99,981 (99,981) $0.20 - $ 2.00
---------- --------- --------------
Balance at December 31, 1994.......... 53,700 647,022 $0.20 - $ 4.00
Additional shares reserved.......... 1,845,000
Options granted..................... (475,500) 475,500 $0.50 - $13.00
Options exercised................... -- (25,795) $0.20 - $ 4.00
Options canceled.................... 59,595 (59,595) $0.26 - $13.00
---------- --------- --------------
Balance at December 31, 1995.......... 1,482,795 1,037,132 $0.20 - $13.00
Additional shares reserved.......... 2,500,000
Options granted..................... (2,677,218) 2,677,218 $0.50 - $10.80
Options exercised................... -- (134,818) $0.20 - $ 0.50
Options canceled.................... 542,476 (542,476) $0.20 - $13.00
---------- --------- --------------
Balance at June 30, 1996.............. 1,848,053 3,037,056 $0.20 - $10.80
========== ========= ==============
</TABLE>
At December 31, 1995 and June 30, 1996, options to purchase 358,354 and
480,295 common shares, respectively, were vested and unexercised.
Additionally, at December 31, 1995 and June 30, 1996, 34,184 and 74,592
shares, respectively, from exercised options were subject to repurchase by the
Company.
In connection with certain of the Company's stock options granted in 1996,
the Company has recorded deferred compensation expense of $169,433 for the
difference between the option grant price and the deemed fair value of the
Company's common stock at the date of grant. The amount is being amortized
over the vesting period of the individual options, generally a 48 month
period. Deferred compensation expense recognized for the six months ended June
30, 1996 was $8,345.
F-17
<PAGE>
CONNECT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(INFORMATION FOR THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996 IS UNAUDITED)
9. STOCK WARRANTS
In October 1992, the Company issued a warrant to purchase 13,919 shares of
common stock at $4.12 per share to bank in connection with a note payable that
was paid in 1993. The warrant expires October 15, 1997.
In November 1992, the Company issued a warrant to an investor to purchase
1,985 shares of Series C preferred stock (which may be converted into 2,600
shares of common stock) at $2.00 per share in exchange for certain services
related to the issuance of Series C preferred stock. The warrant expires
November 30, 1997.
In December 1992, the Company issued a warrant to a vendor to purchase 5,000
shares of common stock at $20.00 per share. The warrant expires October 1,
1997.
In June 1994, the Company issued a warrant to purchase 75,000 shares of
Series E preferred stock, (which may be converted into 84,000 shares of common
stock), at $3.50 per share to certain officers/stockholders in exchange for
services rendered in conjunction with the issuance of Series E preferred
stock. The warrant expires June 30, 1999.
In December 1995, the Company issued warrants to purchase 113,636 shares of
common stock at $2.64 per share to certain stockholders in exchange for
services rendered in conjunction with the issuance of Series F preferred
stock. The warrants expire on December 27, 2000.
10. TERMINATION OF DISTRIBUTION RIGHTS
In December 1994, the Company signed an agreement that provided the Company
the option to terminate the marketing and distribution rights of its European
distributor. In connection with this option agreement, the Company paid its
European distributor a nonrefundable $250,000 fee which the Company expensed
in 1994. The Company exercised its option on March 13, 1995 and paid its
European distributor approximately $2,640,000 in cash and issued 175,000
shares of its Series E preferred stock. Due to impairment of the net
realizable value of the European distribution rights, the Company expensed all
payments made in connection with the transaction in 1995. 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, INC. 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+D Software License Agreement dated February 5, 1996 between the
Registrant and Entex Information Services Inc.
10.10+D Software License Agreement dated March 26, 1996 between the
Registrant and Union Underwear Company, Inc.
10.11+D Software License Agreement dated November 7, 1995 between the
Registrant and PhotoDisc, Inc.
10.12+D Amendment to Software License Agreement dated March 29, 1996
between the Registrant and PhotoDisc, Inc.
10.13+D Software Development and Distribution License Agreement dated
September 16, 1994 between the Registrant and Fulcrum
Technologies Inc. and related Amending Agreement, Amending
Agreement No. 2 and Amending Agreement No. 3.
10.14+D OEM Master License Agreement dated June 30, 1995 between the
Registrant and RSA Data Security, Inc.
10.15+ Letter Agreement dated May 10, 1995 between the Registrant and
Hambrecht & Quist Incorporated and related mutual release dated
June 6, 1996.
10.16+ Option agreement dated January 16, 1996 between the Registrant
and Thomas P. Kehler.
10.17+ Option agreement dated January 16, 1996 between the Registrant
and Gordon J. Bridge.
10.18+ Option agreement dated April 24, 1996 between the Registrant and
Gordon J. Bridge.
10.19+ Letter agreement dated October 19, 1995 between the Registrant
and Gordon J. Bridge, and related interpretive letter.
10.20+ Consulting Agreement dated March 9, 1992 between the Registrant
and Quaestus Limited Partnership.
10.21+ Form of Common Stock Warrant issued to Hambrecht & Quist LLC and
Volpe, Welty & Company on December 27, 1995.
10.22+D Business Alliance Program Agreement dated June 11, 1996 between
the Registrant and Oracle Corporation and related Runtime
Sublicense Addendum, and Amendments One and Two to Runtime
Sublicense Addendum.
10.23+ Agreement and Mutual Release dated May 24, 1996 between the
Registrant and Henry V. Morgan.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.24**D Development and License Agreement dated March 29, 1996 between
the Registrant and Time Warner Cable.
11.1** Statement Regarding Computation of Per Share Earnings.
23.1 Consent of Independent Auditors.
23.2+ Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney.
27+ Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** Supercedes exhibit previously filed.
+ Previously filed.
D Confidential treatment requested.
(b) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification is against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part if this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registration pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of Prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE UNDERSIGNED
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 3 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 22,
1996.
CONNECT, INC.
By: /s/ Thomas P. Kehler
----------------------------------
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 July 22, 1996
- ------------------------------------ Board, Director
(GORDON J. BRIDGE)
/s/ Thomas P. Kehler President, Chief July 22, 1996
- ------------------------------------ Executive Officer
(THOMAS P. KEHLER) and Director
(Principal Executive
Officer)
/s/ Joseph G. Girata* Vice President of July 22, 1996
- ------------------------------------ Finance and
(JOSEPH G. GIRATA) Administration and
Secretary (Chief
Financial Officer
and Principal
Accounting Officer)
/s/ Promod Haque* Director July 22, 1996
- ------------------------------------
(PROMOD HAQUE)
/s/ Rory T. O'Driscoll* Director July 22, 1996
- ------------------------------------
(RORY T. O'DRISCOLL)
/s/ Richard H. Lussier* Director July 22, 1996
- ------------------------------------
(RICHARD H. LUSSIER)
/s/ Terry R. McGowan* Director July 22, 1996
- ------------------------------------
(TERRY R. MCGOWAN)
/s/ Richard W. Weening* Director July 22, 1996
- ------------------------------------
(RICHARD W. WEENING)
/s/ William B. Welty* Director July 22, 1996
- ------------------------------------
(WILLIAM B. WELTY)
*By: /s/ Thomas P. Kehler
--------------------------
ATTORNEY-IN-FACT
</TABLE>
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+D Software License Agreement dated February 5, 1996
between the Registrant and Entex Information Services
Inc.
10.10+D Software License Agreement dated March 26, 1996 between
the Registrant and Union Underwear Company, Inc.
10.11+D Software License Agreement dated November 7, 1995
between the Registrant and PhotoDisc, Inc.
10.12+D Amendment to Software License Agreement dated March 29,
1996 between the Registrant and PhotoDisc, Inc.
10.13+D Software Development and Distribution License Agreement
dated September 16, 1994 between the Registrant and
Fulcrum Technologies Inc. and related Amending
Agreement, Amending Agreement No. 2 and Amending
Agreement No. 3.
10.14+D OEM Master License Agreement dated June 30, 1995
between the Registrant and RSA Data Security, Inc.
10.15+ Letter Agreement dated May 10, 1995 between the
Registrant and Hambrecht & Quist Incorporated and
related mutual release dated June 6, 1996.
10.16+ Option agreement dated January 16, 1996 between the
Registrant and Thomas P. Kehler.
10.17+ Option agreement dated January 16, 1996 between the
Registrant and Gordon J. Bridge.
10.18+ Option agreement dated April 24, 1996 between the
Registrant and Gordon J. Bridge.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
------- ------------
<C> <S> <C>
10.19+ Letter agreement dated October 19, 1995 between the
Registrant and Gordon J. Bridge, and related
interpretive letter.
10.20+ Consulting Agreement dated March 9, 1992 between the
Registrant and Quaestus Limited Partnership.
10.21+ Form of Common Stock Warrant issued to Hambrecht &
Quist LLC and Volpe, Welty & Company on December 27,
1995.
10.22+D Business Alliance Program Agreement dated June 11,
1996 between the Registrant and Oracle Corporation
and related Runtime Sublicense Addendum, and
Amendments One and Two to Runtime Sublicense
Addendum.
10.23+ Agreement and Mutual Release dated May 24, 1996
between the Registrant and
Henry V. Morgan.
10.24**D Development and License Agreement dated March 29,
1996 between the Registrant and Time Warner Cable.
11.1** Statement Regarding Computation of Per Share
Earnings.
23.1 Consent of Independent Auditors.
23.2+ Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney.
27+ Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
** Supercedes exhibit previously filed.
+ Previously filed.
D Confidential treatment requested.
<PAGE>
EXHIBIT 10.4
CONNECT, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1996 Employee Stock Purchase
Plan of CONNECT, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal
Revenue Code of 1986, as amended. The provisions of the Plan shall,
accordingly, be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean CONNECT, Inc., a California corporation.
-------
(e) "Compensation" shall mean all regular straight time gross earnings
------------
and shall not include payments for overtime, shift premium, incentive
compensation, incentive payments, commissions, bonuses and other compensation.
(f) "Continuous Status as an Employee" shall mean the absence of any
--------------------------------
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
agreed to in writing by the Company, provided that such leave is for a period of
not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
(g) "Contributions" shall mean all amounts credited to the account of
-------------
a participant pursuant to the Plan.
(h) "Designated Subsidiaries" shall mean the Subsidiaries which have
-----------------------
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(i) "Employee" shall mean any person, including an Officer, who is
--------
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
<PAGE>
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(k) "Purchase Date" shall mean the last day of each Purchase Period of
-------------
the Plan.
(l) "Offering Date" shall mean the first business day of each Offering
-------------
Period of the Plan.
(m) "Offering Period" shall mean a period of twenty-four (24) months
---------------
commencing on Feburary 16 and August 16 of each year, except for the first
Offering Period as set forth in Section 4(a).
(n) "Officer" shall mean a person who is an officer of the Company
-------
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(o) "Plan" shall mean this Employee Stock Purchase Plan.
----
(p) "Purchase Period" shall mean a period of six (6) months within an
---------------
Offering Period, except for the first Purchase Period as set forth in Section
4(b).
(q) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
3. Eligibility.
-----------
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own stock and/or
hold outstanding options to purchase stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Company or of any subsidiary of the Company or (ii) if such option would permit
his or her rights to purchase stock under all employee stock purchase plans
(described in Section 423 of the Code) of the Company and its Subsidiaries to
accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair
market value of such stock (determined at the time such option is granted) for
each calendar year in which such option is outstanding at any time.
-2-
<PAGE>
4. Offering Periods and Purchase Periods.
--------------------------------------
(a) Offering Periods. The Plan shall be implemented by a series of
----------------
Offering Periods of twenty-four (24) months duration, with new Offering Periods
commencing on or about February 16 and August 16 of each year and ending on the
second February 15 and August 15, respectively, occurring thereafter (or at such
other time or times as may be determined by the Board of Directors). The first
Offering Period shall commence on the beginning of the effective date of the
Registration Statement on Form S-1 for the initial public offering of the
Company's Common Stock (the "IPO Date") and continue until August 15, 1998. The
Plan shall continue until terminated in accordance with Section 19 hereof. The
Board of Directors of the Company shall have the power to change the duration
and/or the frequency of Offering Periods with respect to future offerings
without shareholder approval if such change is announced at least fifteen (15)
days prior to the scheduled beginning of the first Offering Period to be
affected. Eligible employees may not participate in more than one Offering
Period at a time.
(b) Purchase Periods. Each Offering Period shall consist of four (4)
----------------
consecutive purchase periods of six (6) months duration. The last day of each
Purchase Period shall be the "Purchase Date" for such Purchase Period. A
Purchase Period commencing on February 16 shall end on the next August 15. A
Purchase Period commencing on August 16 shall end on the next February 15. The
first Purchase Period shall commence on the IPO Date and shall end on February
15, 1997. The Board of Directors of the Company shall have the power to change
the duration and/or frequency of Purchase Periods with respect to future
purchases without shareholder approval if such change is announced at least
fifteen (15) days prior to the scheduled beginning of the first Purchase Period
to be affected.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's payroll office prior to the applicable Offering
Date, unless a later time for filing the subscription agreement is set by the
Board for all eligible Employees with respect to a given offering. The
subscription agreement shall set forth the percentage of the participant's
Compensation (which shall be not less than 1% and not more than 10%) to be paid
as Contributions pursuant to the Plan.
(b) Payroll deductions shall commence on the first payroll following
the Offering Date and shall end on the last payroll paid on or prior to the last
Purchase Period of the Offering Period to which the subscription agreement is
applicable, unless sooner terminated by the participant as provided in Section
9.
6. Method of Payment of Contributions.
----------------------------------
(a) The participant shall elect to have payroll deductions made on
each payday during the Offering Period in an amount not less than one percent
(1%) and not more than ten percent (10%) of such participant's Compensation on
each such payday. All payroll deductions
-3-
<PAGE>
made by a participant shall be credited to his or her account under the Plan. A
participant may not make any additional payments into such account.
(b) A participant may discontinue his or her participation in the Plan
as provided in Section 9, or, on one occasion only during the Offering Period,
may decrease the rate of his or her Contributions during the Offering Period by
completing and filing with the Company a new subscription agreement. The change
in rate shall be effective as of the beginning of the next calendar month
following the date of filing of the new subscription agreement, if the agreement
is filed at least ten (10) business days prior to such date and, if not, as of
the beginning of the next succeeding calendar month.
(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's
payroll deductions may be decreased to 0% at such time during any Offering
Period which is scheduled to end during the current calendar year that the
aggregate of all payroll deductions accumulated with respect to such Offering
Period and any other Offering Period ending within the same calendar year equal
$21,250. Payroll deductions shall re-commence at the rate provided in such
participant's subscription Agreement at the beginning of the first Offering
Period which is scheduled to end in the following calendar year or the next
Purchase Period, as applicable, unless terminated by the participant as provided
in Section 9.
7. Grant of Option.
---------------
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Purchase Date a number of shares of the Company's Common Stock
determined by dividing such Employee's Contributions accumulated prior to such
Purchase Date and retained in the participant's account as of the Purchase Date
by the lower of (i) eighty-five percent (85%) of the fair market value of a
share of the Company's Common Stock on the Offering Date, or (ii) eighty-five
percent (85%) of the fair market value of a share of the Company's Common Stock
on the Purchase Date; provided however, that the maximum number of shares an
Employee may purchase during each calendar year for which an option is
outstanding shall be determined by dividing $25,000 by the fair market value of
a share of the Company's Common Stock on the Offering Date, and provided further
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 12. The fair market value of a share of the Company's Common Stock
shall be determined as provided in Section 7(b).
(b) The option price per share of the shares offered in a given
Offering Period shall be the lower of: (i) 85% of the fair market value of a
share of the Common Stock of the Company on the Offering Date; or (ii) 85% of
the fair market value of a share of the Common Stock of the Company on the
Purchase Date. The fair market value of the Company's Common Stock on a given
date shall be determined by the Board in its discretion based on the closing
price of the Common Stock for such date (or, in the event that the Common Stock
is not traded on such date, on the immediately preceding trading date), as
reported by the National Association of Securities Dealers Automated Quotation
(Nasdaq) National Market or, if such price is not reported, the mean of the bid
and asked prices per share of the Common Stock as reported by
-4-
<PAGE>
Nasdaq or, in the event the Common Stock is listed on a stock exchange, the fair
market value per share shall be the closing price on such exchange on such date
(or, in the event that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported in The Wall Street Journal. For
purposes of the Offering Date under the first Offering Period under the Plan,
the fair market value of a share of the Common Stock of the Company shall be the
Price to Public as set forth in the final prospectus filed with the Securities
and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933,
as amended.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in paragraph 10, his or her option for the purchase of shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of full shares subject to the option will be purchased at the
applicable option price with the accumulated Contributions in his or her
account. The shares purchased upon exercise of an option hereunder shall be
deemed to be transferred to the participant on the Purchase Date. During his or
her lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
As promptly as practicable after each Purchase Date of each Offering
Period, the Company shall arrange the transfer of the shares purchased upon
exercise of options under the Plan to the participant's account with the broker
selected by the Company for administration of the stock issuances. Stock
certificates representing the shares purchased shall not be issued to plan
participants. Any cash remaining to the credit of a participant's account under
the Plan after a purchase by him or her of shares at the termination of each
Purchase Period, or which is insufficient to purchase a full share of Common
Stock of the Company, shall be carried over to the next Purchase Period if the
Employee continues to participate in the Plan, or if the Employee does not
continue to participate, shall be returned to said participant.
9. Voluntary Withdrawal; Termination of Employment.
-----------------------------------------------
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
each Purchase Date by giving written notice to the Company. All of the
participant's Contributions credited to his or her account will be paid to him
or her promptly after receipt of his or her notice of withdrawal and his or her
option for the current period will be automatically terminated, and no further
Contributions for the purchase of shares will be made during the Offering
Period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death, the Contributions credited to his or her account
will be returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto under Section 14, and his or her option will
be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Plan and the Contributions credited to his
or her account will be returned to him or her and his or her option terminated.
-5-
<PAGE>
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company.
10. Automatic Withdrawal. If the fair market value of the shares on any
--------------------
Purchase Date of an Offering Period, other than the final Purchase Date of such
Offering Period, is less than the fair market value of the shares on the
Offering Date for such Offering Period, then every participant shall
automatically (i) be withdrawn from such Offering Period at the close of such
Purchase Date and after the acquisition of shares for such Purchase Period, and
(ii) be enrolled in the Offering Period commencing on the first business day
subsequent to such Purchase Period.
11. Interest. No interest shall accrue on the Contributions of a
--------
participant in the Plan.
12. Stock.
-----
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be 1,000,000, subject to
adjustment upon changes in capitalization of the Company as provided in Section
18. If the total number of shares which would otherwise be subject to options
granted pursuant to Section 7(a) on the Offering Date of an Offering Period
exceeds the number of shares then available under the Plan (after deduction of
all shares for which options have been exercised or are then outstanding), the
Company shall make a pro rata allocation of the shares remaining available for
option grant in as uniform a manner as shall be practicable and as it shall
determine to be equitable. In such event, the Company shall give written notice
of such reduction of the number of shares subject to the option to each Employee
affected thereby and shall similarly reduce the rate of Contributions, if
necessary.
(b) The participant will have no interest or voting right in shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
13. Administration. The Board, or a committee named by the Board, shall
--------------
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan. The composition of the committee shall be in accordance with the
requirements to obtain or retain any available exemption from the operation of
Section 16(b) of the Exchange Act pursuant to Rule 16b-3 promulgated thereunder.
-6-
<PAGE>
14. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end of a
Purchase Period but prior to delivery to him or her of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the Purchase Date of an Offering Period.
If a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
(and his or her spouse, if any) at any time by written notice. In the event of
the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such shares and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its discretion, may deliver such shares and/or cash to the spouse or to any
one or more dependents or relatives of the participant, or if no spouse,
dependent or relative is known to the Company, then to such other person as the
Company may designate.
15. Transferability. Neither Contributions credited to a participant's
---------------
account nor any rights with regard to the exercise of an option or to receive
shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 14) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 9.
16. Use of Funds. All Contributions received or held by the Company under
------------
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
17. Reports. Individual accounts will be maintained for each participant
-------
in the Plan. Statements of account will be given to participating Employees
promptly following the Purchase Date, which statements will set forth the
amounts of Contributions, the per share purchase price, the number of shares
purchased and the remaining cash balance, if any.
18. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the shareholders of
----------
the Company, the number of shares of Common Stock covered by each option under
the Plan which has not yet been exercised and the number of shares of Common
Stock which have been authorized for issuance under the Plan but have not yet
been placed under option (collectively, the "Reserves"), as well as the price
per share of Common Stock covered by each option under the Plan which has not
yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse
-7-
<PAGE>
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration". Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issue by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an option.
(b) Corporate Transactions. In the event of the proposed dissolution
----------------------
or liquidation of the Company, the Offering Period will terminate immediately
prior to the consummation of such proposed action, unless otherwise provided by
the Board. In the event of a proposed sale of all or substantially all of the
assets of the Company, or the merger of the Company with or into another
corporation, each option under the Plan shall be assumed or an equivalent option
shall be substituted by such successor corporation or a parent or subsidiary of
such successor corporation, unless the Board determines, in the exercise of its
sole discretion and in lieu of such assumption or substitution, to shorten the
Offering Period then in progress by setting a new Purchase Date (the "New
Purchase Date"). If the Board shortens the Offering Period then in progress in
lieu of assumption or substitution in the event of a merger or sale of assets,
the Board shall notify each participant in writing, at least ten (10) days prior
to the New Purchase Date, that the Purchase Date for his or her option has been
changed to the New Purchase Date and that his or her option will be exercised
automatically on the New Purchase Date, unless prior to such date he or she has
withdrawn from the Offering Period as provided in Section 9. For purposes of
this paragraph, an option granted under the Plan shall be deemed to be assumed
if, following the sale of assets or merger, the option confers the right to
purchase, for each share of option stock subject to the option immediately prior
to the sale of assets or merger, the consideration (whether stock, cash or other
securities or property) received in the sale of assets or merger by holders of
Common Stock for each share of Common Stock held on the effective date of the
transaction (and if such holders were offered a choice of consideration, the
type of consideration chosen by the holders of a majority of the outstanding
shares of Common Stock); provided, however, that if such consideration received
in the sale of assets or merger was not solely common stock of the successor
corporation or its parent (as defined in Section 424(e) of the Code), the Board
may, with the consent of the successor corporation and the participant, provide
for the consideration to be received upon exercise of the option to be solely
common stock of the successor corporation or its parent equal in fair market
value to the per share consideration received by holders of Common Stock and the
sale of assets or merger.
The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, and in the event of the Company being consolidated with or merged into
any other corporation.
-8-
<PAGE>
19. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time terminate or
amend the Plan. Except as provided in Section 18, no such termination may
affect options previously granted, nor may an amendment make any change in any
option theretofore granted which adversely affects the rights of any
participant. In addition, to the extent necessary to comply with Rule 16b-3
under the Exchange Act, or under Section 423 of the Code (or any successor rule
or provision or any applicable law or regulation), the Company shall obtain
shareholder approval in such a manner and to such a degree as so required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods and Purchase
Periods, limit the frequency and/or number of changes in the amount withheld
during an Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld from
the participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.
20. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
22. Term of Plan; Effective Date. The Plan shall become effective upon
----------------------------
the earlier to occur of its adoption by the Board of Directors or its approval
by the shareholders of the Company. It shall continue in effect for a term of
twenty (20) years unless sooner terminated under Section 19.
-9-
<PAGE>
23. Additional Restrictions of Rule 16b-3. The terms and conditions of
-------------------------------------
options granted hereunder to, and the purchase of shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
-10-
<PAGE>
CONNECT, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
New Election
------
Change of Election
------
1. I, , hereby elect to participate in the
------------------------
CONNECT, INC. 1996 Employee Stock Purchase Plan (the "Plan") for the Offering
Period , 19 to , 19 , and subscribe to purchase
-------------- -- --------------- --
shares of the Company's Common Stock in accordance with this Subscription
Agreement and the Plan.
2. I elect to have Contributions in the amount of % of my
----
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 10% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Purchase
Date my participation in the Plan as provided in Section 9 of the Plan. I also
understand that I can decrease the rate of my Contributions to not less than 1%
on one occasion only during any Offering Period by completing and filing a new
Subscription Agreement with such decrease taking effect as of the beginning of
the calendar month following the date of filing of the new Subscription
Agreement, if filed at least ten (10) business days prior to the beginning of
such month. Further, I may change the rate of deductions for future Offering
Periods by filing a new Subscription Agreement, and any such change will be
effective as of the beginning of the next Offering Period. In addition, I
acknowledge that, unless I discontinue my participation in the Plan as provided
in Section 9 of the Plan, my election will continue to be effective for each
successive Offering Period.
<PAGE>
5. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "CONNECT, INC. 1996 Employee Stock Purchase
Plan." I understand that my participation in the Plan is in all respects
subject to the terms of the Plan.
6. Shares purchased for me under the Plan should be issued in the name(s)
of (name of employee or employee and spouse only):
------------------------------------
------------------------------------
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print)
-------------------------------------
(First) (Middle) (Last)
- ---------------------- -------------------------------------
(Relationship) (Address)
-------------------------------------
8. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Offering Date (the first day of the Offering
Period during which I purchased such shares) or within 1 year after the Purchase
Date, I will be treated for federal income tax purposes as having received
ordinary compensation income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares on the Purchase Date over
the price which I paid for the shares, regardless of whether I disposed of the
shares at a price less than their fair market value at the Purchase Date. The
remainder of the gain or loss, if any, recognized on such disposition will be
treated as capital gain or loss.
I hereby agree to notify the Company in writing within 30 days after
--------------------------------------------------------------------
the date of any such disposition, and I will make adequate provision for
- ------------------------------------------------------------------------
federal, state or other tax withholding obligations, if any, which arise upon
- -----------------------------------------------------------------------------
the disposition of the Common Stock. The Company may, but will not be obligated
- -----------------------------------
to, withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the 2-year
and 1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received compensation income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I paid for
the shares under the option, or (2) 5% of the fair market value of the shares
-2-
<PAGE>
on the Offering Date. The remainder of the gain or loss, if any, recognized on
such disposition will be treated as capital gain or loss.
I understand that this tax summary is only a summary and is subject to
----------------------------------------------------------------------
change. I further understand that I should consult a tax advisor concerning the
- ------
tax implications of the purchase and sale of stock under the Plan.
10. I hereby agree to be bound by the terms of the Plan. The
effectiveness of this Subscription Agreement is dependent upon my eligibility to
participate in the Plan.
SIGNATURE:
---------------------------
SOCIAL SECURITY #:
-------------------
DATE:
--------------------------------
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
- ---------------------------------------
(Signature)
- ---------------------------------------
(Print name)
-3-
<PAGE>
CONNECT, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, , hereby elect to withdraw my participation in
--------------------------
the CONNECT, INC. 1996 Employee Stock Purchase Plan (the "Plan") for the
Offering Period . This withdrawal covers all Contributions credited to
---------
my account and is effective on the date designated below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
If the undersigned is an Officer or Director of CONNECT, INC. or other
person subject to Section 16 of the Securities Exchange Act of 1934, the
undersigned further understands that under rules promulgated by the U.S.
Securities and Exchange Commission he or she may not re-enroll in the Plan for a
period of six (6) months after withdrawal.
Dated:
------------------- ------------------------------------
Signature of Employee
------------------------------------
Social Security Number
<PAGE>
EXHIBIT 10.24
DEVELOPMENT AND LICENSE AGREEMENT
This Development and License Agreement (this "Agreement") is made
as of March 29, 1996 (the "Effective Date") by and between Time Warner
Cable, a division of Time Warner Entertainment Company, L.P., a Delaware
limited partnership ("TWC"), and Connect, Inc., a California corporation
("Connect").
RECITALS
A. TWC has undertaken the development and operation of one or more
World Wide Web shopping sites currently operating under the name
DreamShop(TM) (including any successors or substitutes, "DreamShop").
B. TWC wishes to have, and Connect wishes to provide, Connect's
OneServer software to serve as a platform for DreamShop and Connect's
OneManager software to serve as a means of managing and administering
the OneServer software.
C. TWC wishes to engage Connect to develop, and Connect wishes to
develop on behalf of TWC, applications software for DreamShop conforming
to the requirements of this Agreement.
Accordingly, the parties agree as follows:
AGREEMENT
1. Definitions.
1.1 "Additional Platform" has the meaning set forth in Section 5.2
of this Agreement.
1.2 "Affiliate," with respect to a patty, means a corporation,
partnership or other entity controlling, controlled by or under common
control with such party. For purposes of this Section 1.2, "control"
means ownership, directly or indirectly, of at least fifty percent (50%)
of the voting rights in such entity (or, in the case of a noncorporate
entity, equivalent rights).
1.3 "Applications Software" means the applications software
developed by or for Connect that is described in the Specifications
referenced in Exhibit A.
---------
1.4 "Cable Modem Platform" means a server hardware and related
operating system as are necessary or desirable to connect the Designated
Platform with a cable modem.
1.5 "Concurrent Users" means the maximum number of OneServer
Transactions that may execute at a given point in time.
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1.6 "Connect Software" means the OneServer Software and the
OneManager Software.
1.7 "Deliverables" means the deliverables referenced in Exhibit B,
---------
and any other materials delivered or required to be delivered to TWC under
this Agreement.
1.8 "Delivery Date," with respect to any Deliverables, means the
delivery date for such Deliverables on the Delivery Schedule or otherwise
agreed to in writing by the parties.
1.9 "Delivery Schedule" means the schedule for delivery of the
Deliverables referenced in Exhibit B.
---------
1.10 "Designated Platform" means the server hardware and related
operating system and network software as designated on Exhibit A
---------
together with client systems networked with such server and may include,
without limitation, (i) primary server hardware and related operating
system, (ii) a back-up server hardware and related operating system with
functions synchronized to the primary computer network and operating
systems software provided that the primary server and backup server will at
no time concurrently operate the Connect Software or the Third Party
Software, and (iii) three Cable Modem Platforms, which Cable Modem
Platforms may operate the web server portion of the Connect Software but
will at no time operate any other portion of the Connect Software or the
Third Party Software. TWC may change the Designated Platform or substitute
an alternative computer network or networks pursuant to Section 5.2 of this
Agreement.
1.11 "Documentation" means (i) all documentation customarily provided
to Connect customers in connection with the use, operation and development
of the Connect Software and the Third Party Software, including, without
limitation, manuals, product templates and data models, and (ii)
commercially reasonable materials (including an electronic version of such
materials), based on an updated version of the Specifications, prepared by
Connect to support the use and continued development by TWC of the
Applications Software, including without limitation manuals, product
templates and data models.
1.12 "Maximum Number of Concurrent Users" means the Maximum
Number of Concurrent Users set forth in Exhibit A, provided that TWC
---------
may change the Maximum Number of Concurrent Users pursuant to Section 5.1
of this Agreement.
1.13 "Non-exclusive Applications Software" means the portion of
the Applications Software which has been specifically designated as
non-exclusive in Exhibit A.
---------
1.14 "OneManager Software" means the software made generally
commercially available to Connect customers under the name OneManager, but
excluding the Applications Software.
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1.15 "OneServer Transactions" means a request of the OneServer
Software to perform an action in the node data base, such actions to
include, without limitation, retrieving data from the node data base,
querying the node data base or writing data to the node data base.
1.16 "OneServer Software" means the software made generally
commercially available to Connect customers under the name OneServer, but
excluding the Applications Software.
1.17 "Project Manager" has the meaning set forth in Section 8.1
of this Agreement.
1.18 "Project Team" has the meaning set forth in Section 8.2 of
this Agreement.
1.19 "Server Class" means the Server Class set forth on Exhibit A.
---------
1.20 "Software" means the Connect Software, the Third Party
Software and the Applications Software.
1.21 "Specifications" means the functionality, performance and
other specifications referenced in Exhibit A and the Documentation,
---------
and any other requirements agreed to in writing by the parties.
1.22 "Third-Party Software" means the software licensed by Connect
from third parties to operate in connection with the Connect Software as
set forth in Exhibit A.
---------
1.23 "TWC Exclusive Software" means the Applications Software other
than the Non-exclusive Applications Software, including without limitation
the Applications Software designated as exclusive in Exhibit A.
---------
2. Development and Delivery of Software.
2.1 Development. Connect will develop the Applications Software for
TWC pursuant to the Delivery Schedule. The OneServer Software will serve as
the platform for the Applications Software. The OneManager Software will
provide a means of managing and administering the OneServer Software.
2.2 Delivery. Connect will deliver and install the Deliverables in
accordance with the Delivery Schedule. Except as otherwise specified in
Exhibit A for Third-Party Software, all Software will be delivered in both
---------
object code and source code versions and will be delivered together with
relevant Documentation, provided that the source code for the Connect
Software will be delivered to the escrow agent as set forth in the Escrow
Agreement attached hereto as Exhibit C. The Deliverables will be without
---------
material errors or defects, and will conform in all material respects to
the Specifications and other requirements of this Agreement. The amount of
professional services payments which are due with respect to Deliverables
delivered late shall be reduced by ten percent (10%)
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for each month (pro rated for each portion of a month) such Deliverables
are delivered after the date one month following the Delivery Date for such
Deliverables. TWC will have no right to reduce payment as the result of a
delay in delivery to the extent the delay is caused by TWC or Clement Mok
Design acting as TWC's agent.
2.3 Mutual Cooperation. The parties will cooperate and communicate in
connection with the development and delivery of the Deliverables. At TWC's
request, Connect will provide TWC with reasonable progress reports,
including descriptions of work completed and problems encountered, and
supply copies of work in progress.
2.4 Modification of Specifications. TWC may from time to time, prior
to or after delivery of Deliverables, modify the Specifications. In such
event, Connect will, at TWC's request, make changes to the Deliverables to
comply with the modified Specifications, provided that the fees and the
Delivery Date will be adjusted to reflect the actual cost and actual time
of making the changes. Any such revision to the fees and Delivery Date will
be agreed to in writing before Connect commences any work on the changes.
2.5 Review and Testing. Upon delivery to TWC of Deliverables, TWC
will review and test the Deliverables to determine whether the Deliverables
comply with the Specifications. If TWC rejects the Deliverables, TWC will
provide written notice to Connect of the manner in which the Deliverables
fall to comply with the Specifications. If TWC does not respond to Connect
in writing within twenty (20) business days after receipt of Deliverables,
the Deliverables will be deemed accepted.
2.6 Rejection of Deliverables. In the event that TWC rejects any
Deliverables for failure to comply with the Specifications, Connect will
have an additional twenty (20) business days to submit a corrected version.
If Connect fails to submit a corrected version conforming to the
Specifications within such twenty (20) day period, TWC will have the right,
at TWC's option:
(a) to terminate this Agreement, and be refunded all amounts
other than the amounts designated on Exhibit B as
---------
non-refundable; or
(b) to provide Connect with an additional twenty (20) day
period to submit a corrected version, provided that the
professional services payments due with respect to such
Deliverables will be reduced by [*] percent [*] for
each month (pro rated for each portion of a month)
that the Deliverables are late beyond the original date
of rejection.
The process set forth in this Section 2.6 will continue until TWC accepts
the Deliverables or elects to terminate this Agreement in accordance with
Section 2.6(a). TWC will have no right to terminate this Agreement or
reduce payment as the result of a delay in delivery to the extent the delay
is caused by TWC or Clement Mok Design acting as TWC's agent.
* Confidential Treatment Requested
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3. Licenses.
3.1 Exclusive Applications Software. Connect hereby grants TWC an
irrevocable, perpetual, paid-up, exclusive, transferable, worldwide right
and license (with right to sublicense) to use, reproduce, distribute, make,
sell, perform and display (whether publicly or otherwise), and prepare
derivative works based on and otherwise modify all or any portions of the
Exclusive Applications Software and derivative works thereof, and any
patents, copyrights, trade secrets and other intellectual property rights
relating thereto and products, process and other subject matter based
thereon.
3.2 Non-exclusive Applications Software. Connect hereby grants TWC an
irrevocable, perpetual, paid-up, non-exclusive, transferable, worldwide
right and license (with right to sublicense) to use, reproduce, distribute,
make, sell, perform and display (whether publicly or otherwise), and
prepare derivative works based on and otherwise modify all or any portions
of the Non-exclusive Applications Software and derivative works thereof,
and any patents, copyrights, trade secrets and other intellectual property
rights relating thereto and products, process and other subject matter
based thereon.
3.3 Connect Software. Connect hereby grants TWC an irrevocable,
perpetual, non-exclusive, non-transferable (except as set forth in Section
17.5) right and license to install and use, and to perform and display
(whether publicly or otherwise) the Connect Software on the Designated
Platform for access by the Maximum Number of Concurrent Users.
3.4 Connect Software Source Code; Escrow Agreement. Connect hereby
grants TWC an irrevocable, perpetual, non-exclusive, non-transferable
(except as set forth in Section 17.5), right and license to use and to
create derivative works based on, and otherwise modify, the Connect
Software source code when delivered to TWC pursuant to the Escrow Agreement
attached hereto as Exhibit C.
---------
3.5 Third-Party Software. Connect hereby grants to TWC an
irrevocable, perpetual, non-exclusive, non-transferable sub-license to
install and use, and to perform and display (whether publicly or otherwise)
the Third-Party Software for use on the Designated Platform solely in
connection with TWC's use of the Connect Software.
3.6 Archival Copies. TWC may make five (5) copies of the Connect
Software for archival purposes. Each copy of the Connect Software will be
subject to the terms of this Agreement All titles, trademarks, copyright
notices and other proprietary markings (collectively, the "Marks") will be
reproduced on all copies of the Connect Software, and TWC will not cause or
permit removal of the Marks.
3.7 Documentation. Connect hereby grants to TWC an irrevocable,
perpetual, paid-up, non-exclusive, transferable, worldwide right and
license (with right to sublicense) to use, reproduce, distribute, make,
sell and prepare derivative works based on and otherwise modify all or any
portions of the Documentation as reasonably required for TWC's internal use
in operating DreamShop.
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4. Moral Rights; Patent Rights.
4.1 Moral Rights. The rights and licenses granted in Section 3
include, without limitation, the license to modify (including without
limitation making additions and deletions from) the Applications Software,
regardless of the medium into which such Applications Software may be
modified and regardless of the effect of such modifications on the
integrity of the Applications Software. Connect (on behalf of itself and
its contractors and suppliers) further hereby waives and agrees not to
assert any "moral right" Connect or its contractors or suppliers may have
with respect to the Applications Software.
4.2 Patent Rights. The licenses granted in Section 3 include, without
limitation, the license under any patents of Connect to use, reproduce and
distribute all or any portion of the Connect Software, the Applications
Software and any derivative works thereof, whether alone or in combination
with other software or hardware, provided that such patent license with
respect to the Connect Software will apply only to the extent the Connect
Software is to be used in accordance with the limitations set forth in
Section 3.3.
5. Maximum Number of Concurrent Users; Substitute Platforms;
Additional Platforms
5.1 Maximum Number of Concurrent Users; Server Class. TWC may, from
time to time, in its sole discretion, increase the Maximum Number of
Concurrent Users and upgrade the Server Class, provided that the TWC shall
pay to Connect an additional licensing fee in an amount no greater than to
the difference between the licensing fee charged generally by Connect for a
license of the Connect Software and the Third Party Software for the
upgraded Server Class for access by the increased Maximum Number of
Concurrent Users and any amount already paid by TWC pursuant to this
Agreement as a licensing fee for the Connect Software and the Third Party
Software.
5.2 Substitute Platforms. TWC may from time to time, in its sole
discretion, change the Designated Platform (including the location thereof)
or replace the Designated Platform with an alternative server hardware and
related operating system and network software within the Server Class (a
"Substitute Platform"), provided that TWC will provide Connect with written
notice within thirty (30) business days after such change or replacement.
5.3 Additional Platforms. TWC may from time to time, in its sole
discretion, designate additional server hardware and related operating
system and network software (in addition to the Designated Platform) to
serve as a platform or platforms for the Software (each an "Additional
Platform"). In such event, Connect will grant a license to TWC for
installation and use of the Connect Software and the Third Party Software
on each Additional Platform. The licensing fees payable by TWC for such
license will be no greater than the fees charged by Connect for licenses of
the Connect Software and Third Party Software generally for installation
and use on similar platforms.
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5.4 Substitute Version of Software; Porting. If requested by TWC,
Connect will provide TWC with a substitute version of the Connect Software
which is compatible with a Substitute Platform or an Additional Platform
(provided that a version of the Connect Software exists which is compatible
with the computer network and related operating system and network software
underlying such Additional Platform or Substitute Platform). TWC will pay
Connect a servicing fee for such substitute version in an amount no greater
than the servicing fee charged by Connect to customers generally.
Furthermore, if requested by TWC, Connect will exercise its best efforts to
port the Software to a Substitute Platform or an Additional Platform
provided that a version of the Connect Software exists which is compatible
with the computer network and related operating system and network software
underlying such Additional Platform or Substitute Platform). The scheduling
of such porting services will be subject to availability of Connect staff,
provided that TWC will be granted priority no less favorable than other
Connect customers. TWC will pay Connect a fee for such porting services in
an amount no greater than an amount computed on the basis of Connect's
hourly rate for contract services charged to customers generally.
6. Payments by TWC.
6.1 Payment. In addition to the payments in the aggregate of [*]
already made by TWC, TWC will pay Connect [*] for professional services and
[*] as a down payment for the Connect Software upon execution of this
Agreement. TWC will make further payments in amounts set forth on the
Delivery Schedule. All payments will be due upon acceptance by TWC of the
Deliverables set forth opposite such payments. All payments will be paid in
full within thirty (30) days after such due date and will be in United
States Dollars.
6.2 Taxes. TWC will be responsible for all duties, freight, and
sales or use taxes relating to the Software.
7. Technical Training; Support; Correction of Defects.
7.1 Training of TWC Personnel. Connect will provide employees and/or
contractors of TWC, for a fee in an amount no greater than an amount
computed on the basis of Connect's hourly rate charged to Connect's
customers generally, with customized technical and operational training
with respect to the use of the Software and the use and further development
of the Applications Software. In addition, TWC shall be entitled to enroll
two TWC employees in and/or contractors in the OneServer Client
Administration Class [*] and additional employees and/or contractors at a
charge of [*] per person per two (2) day OneServer Client Administration or
OneServer Host Administration class, [*] per five (5) day Introduction to
OneServer Development class, or a group rate of [*] per two (2) day One
Server Client Administration or OneServer Host Administration class of up
to eight (8) people or $[*] per five (5) day Introduction to OneServer
Development class of up to eight (8)
* Confidential treatment requested
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people. All training will be conducted at the Connect Regional Office in
Stamford, Connecticut.
7.2 Correction of Defects. For a period of one hundred eighty (180)
days after the acceptance of the final portion Software, Connect will
promptly correct any defect or error in such Software, or any failure of
any such Software to operate substantially in accordance with and further
to comply in all material respects with the Specifications, and Connect
will thereupon promptly deliver to TWC the corrected Software. Connect will
exercise its best efforts to make the corrections, and deliver the
corrected Software, within twenty (20) days after notice from TWC of any
defect, error or failure. In addition, Connect will replace without charge
tapes, diskettes or other media embodying the Deliverables that are
defective under normal use.
7.3 Annual Maintenance Agreement. TWC may, at its sole option, order
yearly maintenance services pursuant to the terms of the form of Annual
Maintenance Agreement attached hereto as Exhibit D (any such agreement the
---------
"Annual Maintenance Agreement"). TWC's failure to exercise such option in
any given year will not in any way impair its rights hereunder. However, in
the event that TWC fails to exercise such option in any given year, TWC
will not be entitled to exercise such option in any following year unless
TWC pays to Connect all fees due under the Annual Maintenance Agreement for
the years during which such option was not exercised.
7.4 Technical Support. Connect shall make technical support available
to TWC as set forth in the Annual Maintenance Agreement attached hereto as
Exhibit D.
---------
8. Project Managers; Staffing; Agreements with Personnel; Travel
Expenses.
8.1 Project Managers. Each party will designate one or more employees
(each a "Project Manager") to serve as a liaison with respect to the other
party. Each party will notify the other after a change in the designated
Project Managers.
8.2 Staffing, Connect will identify to TWC in writing the employees
and contractors assigned to the development of the Applications Software
(collectively, the "Project Team"), and will promptly notify TWC of any
change in the Project Team. Furthermore, TWC will be entitled to suspend or
terminate this Agreement at any time, in the event that TWC is not
reasonably satisfied that he Project team possesses sufficient technical or
design resources to satisfy the obligations of Connect hereunder.
8.3 Connect's Agreements with Personnel. Connect will obtain and
maintain in effect written agreements with all personnel who participate in
the development of the Applications Software. Such agreements will contain
terms sufficient for Connect to comply with the terms of this Agreement.
including, without limitation terms (a) assigning to Connect all right,
title and interest in and to the Applications Software, and (b) agreeing to
maintain in confidence all Confidential Information and proprietary
information provided by or assigned to TWC.
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8.4 Travel Expenses. Following submission of receipts TWC will reimburse
Connect for reasonable out-of-pocket travel expenses, provided that TWC has
granted Connect prior written approval of such expenses.
9. Ownership and Proprietary Right Notices.
9.1 Non-exclusive Applications Software; Connect Software. TWC
acknowledges that, as between TWC and Connect, Connect is the owner of all
right, title and interest in and to the Connect Software and the Non-exclusive
Applications Software, including any copyright, trademark and patent rights
therein. TWC will not decompile or disassemble the Connect Software.
9.2 Exclusive Applications Software; DreamShop. Connect acknowledges
that, as between Connect and TWC, TWC holds an exclusive license to the TWC
Exclusive Software, and Connect will not use, reproduce, distribute, make, sell,
perform, display or prepare derivative works from such Software. Furthermore,
Connect acknowledges that, as between Connect and TWC, TWC is the owner of all
right, title and interest to all trademarks (registered or unregistered),
tradenames and logos included in DreamShop, including, without limitation,
"DreamShop," and any copyright, trademark and patent rights therein.
10. Term and Termination.
10.1 Termination. Either party may terminate this agreement for cause by
giving written notice to the other party. For purposes of this Section 10,
"termination for cause" shall include termination pursuant to Sections 2.6 and
8.2 of this Agreement. In addition, "termination for cause" shall include
termination by either party, by giving written notice to the other party, upon
the occurrence of any of the following events: (a) there occurs a material
breach of this Agreement by the other party and such breach remains uncured for
thirty (30) days after receipt of written notice thereof by the other party, or
(b) the other party petitions for or consents to any relief under any
bankruptcy, reorganization or similar statute, makes an assignment for the
benefit of its creditors, or petitions for the appointment of a receiver,
liquidator, trustee or custodian of all or a substantial part of its assets, or
a receiver, liquidator, trustee or custodian is appointed for all or a
substantial part of its assets and is not discharged within thirty (30) days
after the date of such appointment. A party's right to terminate for cause will
be in addition to any other remedies it may have under this Agreement or under
applicable law.
10.2 Effect of Termination. Upon termination of this Agreement, both
parties' rights and obligations under this Agreement will terminate, provided
that Sections 3,4, 5.1, 7.2, 9-13 and 15-17, inclusive, will survive termination
of this Agreement, and, in the event that TWC has terminated the Agreement
without cause, Section 6.1 will survive termination to the extent that TWC will
remain obligated to pay amounts which have become due and payable at the time of
termination. In this event this Agreement is terminated by TWC for cause, TWC
shall be refunded all fees paid hereunder, except the fees designated on
Exhibit B as "non-refundable."
- ---------
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11. Warranties.
11.1 Connect Warranties. Connect represents, warrants and covenants
that (a) Connect has full corporate power to enter into this Agreement and
to perform its obligations hereunder; (b) Connect has the right to grant
the rights, licenses and sub-licenses contemplated by this Agreement, and
Connect owns or has obtained all necessary licenses, releases, assignments
or other rights necessary therefor, (c) the Software, during the period of
one hundred eighty (180) days following acceptance by TWC, will operate
substantially in accordance with and further comply in all material
respects with the Specifications; and (d) the Software and the
Documentation and the use thereof as contemplated by this Agreement do not
infringe or misappropriate any copyright, trademark, trade secret, patent,
publicity, privacy or other rights of any person, and are not and will not
be defamatory or obscene, and Connect has no knowledge of any basis for a
claim of such infringement, misappropriation, defamation or obscenity.
Connect warranties do not apply to any modifications made by TWC.
11.2 No Other Warranties. THE WARRANTIES IN THIS SECTION 11 ARE IN
LIEU OF ALL OTHER WARRANTIES, AND EACH PARTY DISCLAIMS ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE.
12. Limitation of Liability. Neither party will, under any
circumstances, be liable to the other party for loss of profits, loss of
revenue, or any special, indirect or consequential damages of whatever
nature arising from or relating to this Agreement, even if the party has
been notified of the possibility of such damages, provided that this
limitation of liability will not affect the parties' obligations under
Section 13.
13. Indemnification.
13.1 Connect Obligations. Connect will indemnify, hold harmless and
defend TWC and its Affiliates against any claim, suit or proceeding and any
damages or liability therefrom or settlement thereof (including reasonable
fees of attorneys and related costs) to the extent (a) based on a claim
that the Software or the Documentation infringes any copyright, trademark,
patent, trade secret, publicity, privacy or other rights of any person,
provided that Connect will have no liability for any modifications to the
Software made by TWC or its Affiliates, or (b) resulting from a breach, or
based on a claim that, if true, would be a breach, of this Agreement by
Connect, including, without limitation, a breach of the representations,
warranties and covenants of Section 11.1.
13.2 TWC Obligations. TWC will indemnify, hold harmless and defend
Connect against any claim, suit or proceeding and any damages or liability
therefrom or settlement thereof (including reasonable fees of attorneys and
related costs) to the extent (a) based on a claim that, as a result of
modifications to the Software or the Documentation made by TWC or its
Affiliates, the Software infringes any copyright, trademark, trade secret,
patent, publicity, privacy, or other rights of any person, or
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(b) resulting from a breach, or based on a claim that, if true, would be a
breach, of this Agreement by TWC.
13.3 Indemnification Procedures. A party ("indemnifying party") will
not be obligated to indemnify, hold harmless or defend the other party
("indemnified party") unless the indemnified party (a) provides prompt
notice of the commencement of the claim, suit or proceeding for which
indemnification is sought, (b) cooperates with the indemnifying party, and
(c) allows the indemnifying party to control the defense, provided that (i)
the indemnified party may, at its option and expense, participate and
appear on an equal footing with the indemnifying party in the claim, suit
or proceeding and (ii) neither party may settle a claim, suit or proceeding
without approval of the other party, which approval will not be
unreasonably withheld or delayed. If there is a finding of infringement or
misappropriation of any copyright, trademark, trade secret, patent,
publicity, privacy, or other rights of any person, or of defamation or
obscenity, the indemnifying party will have the right, at its option, to
the extent practicable, to mitigate its liability by replacing the affected
products with noninfringing products that offer substantially the same
functionality performance and other benefits as the affected products.
14. Insurance. Connect will at all times maintain liability insurance
in an amount sufficient to satisfy its potential liability hereunder and in
no event less than Two Million Dollars ($2,000,000).
15. Confidential Information. "Confidential Information" of each party
means information that is disclosed by such party to the other party in
connection with this Agreement and conveyed (a) in written, graphic,
machine-readable or other tangible form and conspicuously marked
"confidential," "proprietary" or in some other manner to indicate its
confidential nature; or (b) orally, provided that such information is
designated as confidential or proprietary at the time of such oral
disclosure and is confirmed in writing as confidential within ten (10) days
after the oral disclosure (collectively, "Confidential Information").
Confidential Information includes, without limitation, the terms and
conditions of this Agreement and the Specifications relating to the
Exclusive Applications Software. A party will not use, or disclose to a
third party, the Confidential Information of the other party, except for
the purposes contemplated by, or in exercise of the rights and licenses
granted under, this Agreement. Notwithstanding the above, information will
not be deemed Confidential Information if the information (i) is or becomes
generally known to the public through no unlawful act of the recipient;
(ii) was known to the recipient at the time of disclosure; (iii) was
independently developed by the recipient; or (iv) becomes known to the
recipient from a source other than the disclosing party without breach of
the disclosing party's rights. A party may also disclose Confidential
Information of the other party to the extent (A) authorized in writing by
the other party, or (B) required by applicable law or a court of competent
jurisdiction.
16. Publicity. Connect will not make any public announcement
concerning the existence of this Agreement without the prior written
consent of TWC. TWC will have
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the right to approve the text of any such public announcement in its sole
discretion, which approval will not be unreasonably withheld.
17. Miscellaneous.
17.1 Rights of Affiliates. TWC may have its rights and licensed under
this Agreement exercised by, and to sublicense its rights and licenses
hereunder to, Affiliates of TWC, provided that (a) such Affiliates acting
hereunder will be subject to the terms and conditions of this Agreement,
and (b) no act or omission of an Affiliate will affect TWC's obligations
under this Agreement.
17.2 Governing Law. This Agreement will be interpreted according to
the laws of the State of New York (except for its choice-of-law rules).
17.3 Relationship of Parties. The relationship of the parties will be
that of independent contractors. Neither party will have the right to bind,
represent or act for the other party. The parties will have no agency,
partnership, joint venture or fiduciary duties to each other. Except as
otherwise expressly provided herein, each party will bear its own costs and
expenses, including travel expenses, in connection with performing its
obligations and exercising its rights in connection with this Agreement.
The parties acknowledge that TWC will have no right to control the manner,
means or method by which Connect performs the services called for by this
Agreement. Rather, TWC will be entitled only to direct Connect with respect
to the elements of services to be performed by Connect and the results to
be derived by TWC, to inform Connect as to such services by Connect for the
limited purposes of assuring that such services have been performed and
confirming that such results were satisfactory.
17.4 Hyper-text Links. As long as TWC uses the Connect Software in
connection with DreamShop, TWC will maintain an active hyper-text link on
the World Wide Web site www.dreamshop.com to www.connectinc.com and Connect
will maintain an active hyper-text link on the customer page of the World
Wide Web site www.connectinc.com to www.dreamshop.com.
17.5 Joint Marketing. The parties agree to cooperate with respect to
jointly marketing and selling the Application Software to third parties
under terms and conditions to be negotiated. In the event that TWC enters
into an agreement for license of the Applications Software to a third party
and TWC has provided Connect with written notice setting forth the identity
and address of such third party no less than ten (10) business days prior
to entering into such an agreement, Connect shall license the Connect
Software to such third party for license fees no greater than the license
fees charged by Connect to Connect's customer generally for the Connect
Software, and pursuant to terms and conditions no less favorable than the
terms and conditions offered to Connect's customers generally.
Notwithstanding the foregoing, Connect shall not be required to provide a
license to the Connect Software to any third party that is engaged in the
business of the engineering and development of World Wide Web server
platform software for electronic commerce applications. Nothing in this
Section 17.5 shall require
12
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Connect to bear responsibility for compatibility between the Connect
Software and the Applications Software to the extent such Applications
Software has been modified by TWC or any third party subsequent to delivery
to TWC by Connect.
17.6 Assignment. This Agreement may not be assigned or delegated by
either party without the prior written approval of the other party, except
that (a) either party may assign all its rights, and delegate all its
obligations, as part of a merger, reorganization or sale of all or
substantially all the assets of the business to which this Agreement
relates, and (b) TWC may assign all its rights, and delegate all its
obligations, to an Affiliate. Subject to the foregoing, this Agreement is
binding on the parties and their successors and assigns.
17.7 Waiver. Waiver by either party of a breach by the other party of
any provision contained herein will be in writing. The waiver of a breach
will in no way be construed as a waiver of any succeeding breach of such
provision or a waiver of the provision itself.
17.8 Severability. If any provision of this Agreement is
unenforceable or invalid under any applicable law or is so held by
applicable court decision, such unenforceability or invalidity will not
render this Agreement unenforceable or invalid as a whole, and, in such
event, such provision will be changed and interpreted so as to best
accomplish the objectives of such provision within the limits of applicable
law or applicable court decision.
17.9 U.S. Government Rights. All software is provided with restricted
rights. Use, duplication, or disclosure by the U.S. Government is subject
to restrictions as set forth in subparagraph (c)(l)(ii) of the Rights in
Technical Data and Computer Software at 252.227-7013 or subparagraph
(c)(l)-(2) of the Commercial Software-Restricted Rights Clause at
48 CFR 52.227-19, as applicable. Contractor/manufacturer is Connect, Inc.,
515 Ellis Street, Mountain View, CA 94043-2242.
17.10 Force Majeure. Non-performance of either party will be excused
to the extent that performance is rendered impossible by strike, fire,
flood, government act or similar causes, beyond the control, and not caused
by the negligence, of the non-performing party.
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17.11 Entire Agreement. This Agreement constitutes the entire
agreement between the parties relating to the subject matter hereof and
supersedes all prior or contemporaneous representations, discussions,
negotiations, conditions and agreements, whether written or oral. This
Agreement may be amended only by a writing signed by an authorized
representative of the party against which enforcement is sought.
The foregoing Agreement is hereby executed as of the date first
written above.
TIME WARNER CABLE, a division of CONNECT, INC.
TIME WARNER ENTERTAINMENT
COMPANY.
By: /s/ Jennifer Carney By: /s/ Thomas P. Kehler
------------------------------- ------------------------------
Name: Jennifer Carney Name: Thomas P. Kehler
---------------------------- ----------------------------
Title: Vice President Title: President & CEO
--------------------------- ---------------------------
Digital Marketing Group 515 Ellis Street
Time Warner Entertainment Company Mountain View, CA 94043-2242
1271 Avenue of the Americas Attention:
New York, NY 10020 Fax: (415) 254-4800
Attention: Jennifer Carney
Telephone: (212) 522-2692
Fax: (212) 522-0556
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<PAGE>
EXHIBIT A
DESIGNATED PLATFORM
The models and locations of the servers which constituted the initial
Designated Platform are:
Sun:
[*]
[*] mhz processors
[*]MB of RAM
Operating System: [*]
[*]
(Model numbers to be determined)
The initial designated platform may be located at the following locations:
Connect's Data Center
515 Ellis St.
Mountain View, CA 94043
Time, Inc. New Media
1251 Avenue of the Americas
Rockefeller Center
New York, NY 10020
Paragon Cable
3311 South Main Street
Horseheads, NY 14845
Warner Cable
1655 Brittain Road
Akron, OH 44310-3998
Time Warner Southwestern Cable TV
8949 Ware Court
San Diego, CA 92121
* Confidential treatment requested
1
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SERVER CLASS
The Server class consists of the following [*]. The Server Class further
consists of the following [*].
MAXIMUM NUMBER OF CONCURRENT USERS
The initial maximum number of concurrent users is [*].
THIRD-PARTY SOFTWARE
Title/Owner
-----------
Oracle (RDBMS Runtime version 7.1)
Fulcrum (Searchtools version 2)
RSA (BSafe version 2.1)
DREAMSHOP SPECIFICATIONS
The overall scope of the Software is set forth in the [*]. The following
documents (the "Additional Documents") set forth the detailed design and
implementation of the Software: [*] To the degree, if any, that
there is a conflict between the Specifications set forth in the NDOFS and
Specifications set forth in the Additional Documents, the Specifications set
forth in the Additional Documents shall govern.
TWC EXCLUSIVE SOFTWARE
The following components of the Applications Software are TWC Exclusive
Software:
a. the "look and feel" of DreamShop, including any "look and feel"
provided by [*],
* Confidential treatment requested
2
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b. HTML text and directives used to implement the [*]
c. the actual DreamShop [*] hierarchy,
---------
d. the [*] DreamShop departments,
---------
e. any DreamShop [*] defined by DreamShop production
---------
personal
f. the DreamShop specific lists of [*]
---------
g. the DreamShop specific [*]
---------
h. the DreamShop specific formats for [*]
---------
i. the DreamShop specific lists of available [*]
---------
j. the DreamShop specific, substantive [*]
---------
k. the DreamShop specific, substantive [*]
---------
l. the actual DreamShop [*]
---------
m. the DreamShop specific assets loaded into the database, that is the [*]
---------
n. the DreamShop specific defined [*]
---------
associated with [*] of products as defined in the DreamShop [*] and
o. the DreamShop [*]
--------
NON-EXCLUSIVE APPLICATIONS SOFTWARE
Connect must own and protect those components of the application software
which are generalized software mechanisms. The following application elements
are included in this category:
*Confidential treatment requested
3
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a. OneServer node definitions incorporated into the Applications software,
other than as set forth in this Exhibit A under heading "TWC EXCLUSIVE
SOFTWARE."
b. override methods installed on nodes incorporated into the Applications
software, other than as set forth in this Exhibit A under heading "TWC
EXCLUSIVE SOFTWARE;"
c. hierarchical relations between nodes incorporated into the Applications
software, other than as set forth in this Exhibit A under heading "TWC
EXCLUSIVE SOFTWARE;" and
d. access control of functionality by user type incorporated into the
Applications software, other than as set forth in this Exhibit A under
heading "TWC EXCLUSIVE SOFTWARE."
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EXHIBIT B
DELIVERY SCHEDULE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Date Deliverables Payment
- ---- ------------ -------
- --------------------------------------------------------------------------------
<S> <C> <C>
Deposit upon execution of $[*] professional
letter of intent services - non-
refundable)(paid)
- --------------------------------------------------------------------------------
Paid on [*] The Specifications $[*] professional
services - non-
refundable)(paid)
- --------------------------------------------------------------------------------
[*] data conversion $[*]
tables; intermediate (professional
design formats services - non-
refundable)(paid)
- --------------------------------------------------------------------------------
[*] $[*]
(professional
services)(paid)
- --------------------------------------------------------------------------------
Execution of Contract $[*] (down
payment for
the Connect
Software and
the Third Party
Software)
- --------------------------------------------------------------------------------
[*] The Specifications
</TABLE>
1
* Confidential Treatment Requested
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
[*] The Software - Sections $[*] (license
IA lB, IIA of Delivery fee for the Connect
Schedule dated Software and the
February 20, 1996 Third Party
Software)
$[*]
(professional
services)
- --------------------------------------------------------------------------------
[*] The Specifications for
the Software set forth
on Section IIB of the
Delivery Schedule dated
February 20, 1996.
- --------------------------------------------------------------------------------
Date to be determined The Software - Section $[*]
IIB of the Delivery (professional
Schedule dated services)
February 20, 1996
- --------------------------------------------------------------------------------
Date to be determined Three additional web $0
server elements of the
Connect Software to
operate on the
Cable Modem Platforms
- --------------------------------------------------------------------------------
</TABLE>
* Confidential treatment requested
2
<PAGE>
EXHIBIT D
ANNUAL MAINTENANCE AGREEMENT
This Annual Maintenance Agreement (this "Agreement") is made as of
_____________ (the "Effective Date") by and between Time Warner Cable, a
division of Time Warner Entertainment Company, L.P., a Delaware limited
partnership ("TWC"), and Connect, Inc., a California corporation ("Connect").
RECITALS
A. TWC and Connect have entered into the Development and License Agreement
dated March 29, 1996 (the "License Agreement") pursuant to which TWC has
licensed the Connect Software (as defined in the License Agreement) from
Connect.
B. In connection with the License Agreement, TWC and Connect have entered
into an Escrow Agreement dated March 29, 1996 (the "Escrow Agreement").
C. TWC wishes to have, and Connect wishes to provide, support and
maintenance services with respect to the Connect Software.
Accordingly, the parties agree as follows:
AGREEMENT
l. DEFINITIONS. The following defined terms, and other capitalized terms,
defined herein, will govern the interpretation of this agreement. Capitalized
terms that are used and not otherwise defined will have the meaning set forth in
the License Agreement.
1.1 "COMPATIBLE SOFTWARE" means any third party software designated by
Connect as compatible for use in combination with the Connect Software. In the
event that TWC provides Connect with notice of its intention to use specified
third party software in combination with the Connect Software and Connect does
not respond to Time Warner in writing within thirty (30) days of such notice,
such specified software shall be Compatible Software.
1.2 "EFFECTIVE DATE" has the meaning set forth in the preamble of
this Agreement.
1.3 "ERROR" means a material failure of the Connect Software to comply
with the Specifications which causes a substantial negative impact on the
operation of DreamShop. A failure resulting from modifications or damage to the
Connect Software by TWC, or TWC's use of the Connect Software on a CPU or with
an operating system other than the Designated Platform or in combination with
any third party software other than Compatible Software, is not considered an
Error.
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1.4 "ERROR CORRECTION" means either a modification or addition that, when
made or added to the Connect Software, brings the Connect Software into
compliance with the Specifications.
1.5 "MAJOR ERROR" means any Error in the Connect Software which (a) causes
the Connect Software to halt, (b) causes data to be lost or destroyed, (c)
prevents the Connect Software from being installed or executed on the properly
configured environment, (d) prevents the user from running any major sub-system
of the Connect Software, or (e) prevents end-users from accessing DreamShop.
1.6 "MINOR ERROR" means any Error which is not a Major Error.
1.7 "MAINTENANCE UPDATE" means an updated revision of the Connect
Software that includes Error Corrections.
2. MAINTENANCE SERVICES
2.1 ERROR CORRECTION.
(a) Major Errors. Connect will, within twenty-four (24) hours of the
receipt of notice of any Major Error, initiate work to correct such Major Error
and use its best efforts to correct the Major Error, including any necessary
modification to the Connect Software. In the event that Connect is unable to
replicate the Major Error within five (5) business days of receiving notice of
such Major Error from TWC, Connect will, at Connect's expense, dispatch to the
site of the Designated Platform a skilled, knowledgeable and experienced
technical person or team to work on-site to diagnose and resolve the error and
TWC will cooperate with such person in the diagnosis and resolution of the
error. In the event that Connect is unable to correct any Major Error within ten
(10) business days of receipt of notice of the Major Error, TWC may, at its
option: (i) terminate this Agreement and be refunded all amounts paid hereunder
or (ii) request that Connect provide TWC with the Source Code for the Connect
Software. In the event that Connect fails to provide TWC with the Source Code
within ten (10) business days of TWC's written request, TWC may obtain the
source code from the escrow agent designated pursuant to the Escrow Agreement.
(b) Minor Errors. In the event of a Minor Error TWC will provide
Connect with notice of such Minor Error. Connect will exercise its best efforts
to include an Error Correction for such Minor Error in the first Maintenance
Update issued following notice of such Minor Error. In the event that Connect
has not issued a Maintenance Update within ninety (90) days of receipt of notice
of the Minor Error which includes an Error Correction for such Minor Error, TWC
will be entitled to terminate this Agreement and be refunded all amounts paid
hereunder.
2
<PAGE>
2.2 TWC RESPONSIBILITIES. TWC agrees to notify Connect in writing promptly
following the discovery of any Error. Further, upon discovery of an Error, TWC
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.
2.3 TELEPHONE SUPPORT. At all times, Connect will make a member of its
maintenance staff available by telephone to TWC's Project Manager to assist
TWC's installation, use or modification of the Connect Software.
2.4 FIELD MAINTENANCE. Upon request, Connect will provide field support and
maintenance services at any TWC sites.
2.5 DOCUMENTATION. Connect will provide TWC with reasonably complete
information from time to time on the operation, administration, maintenance,
diagnosis of problems with, provisioning, modification and other support of the
Connect Software, in accordance with standards generally observed in the
industry. The information will be in documentation and supplemented by telephone
consultation with Connect personnel.
2.6 EXCLUSIONS FROM MAINTENANCE SERVICES. This Exhibit also does not cover
maintenance services for any failure or defect in the Connect Software caused by
any of the following:
(a) modifications to the Connect Software not made or authorized by
Connect;
(b) software other than the Connect Software;
(c) application interfacing between the Connect Software and other
software;
(d) use of Connect Software (i) with hardware that has not been
approved by Connect, or (ii) on a CPU other than the Designated Platform; or
(e) Errors in any version of the Connect Software other than the most
recent installed and accepted version and the version installed and accepted
immediately prior to the most recent installed and accepted version.
2.7 PAYMENT. In consideration for the maintenance services, TWC shall pay
Connect a fee in an amount computed as [*] percent [*] of the licensing
fee of the Connect Software and the Third Party Software under the License
Agreement, which sum shall be due and payable in twelve equal monthly
installments commencing on the Effective Date.
* Confidential treatment requested
3
<PAGE>
3. SOURCE CODE
3.1 SOURCE CODE LICENSE. In the event that TWC requests that Connect
provide TWC with Connect Software source code ("Source Code") pursuant to
Section 2.1(a) of this Agreement, Connect will provide TWC with one (1) copy of
such Source Code and will grant TWC a non-exclusive, non-assignable license to
use, boot, load, execute, modify, translate, and disassemble such Source Code
for the sole purpose of correcting any Major Error.
3.2 OWNERSHIP OF COPYRIGHT; RESTRICTIONS ON USE OR TRANSFER. TWC
acknowledges that the source code is copyrighted and contains trade secrets and
proprietary information of Connect. TWC may not copy or otherwise reproduce any
part of the Source Code except that TWC may load the Source Code into the
Designated Platform in connection with correcting any Major Error. TWC may not
boot, load, execute, use, transfer, promote, market, distribute, sublicense,
sell, modify, translate, reverse engineer, reverse compile, or disassemble the
Source Code, or any copy, modification, or merged portion, in whole or in part,
except as expressly provided in this Section 3.
3.3 NON-DISCLOSURE OF SOURCE CODE. TWC will not use the Source Code for its
own use except as provided in this Section 3. TWC will not disclose the Source
Code to third parties or to any employees of TWC, except TWC may disclose the
Source Code to employees or contractors in connection with the correction of any
Major Error. TWC shall require all employees or contractors to whom the Source
Code is disclosed to execute a non-disclosure agreement in content substantially
similar to this Section 3.3. TWC agrees that it shall protect the
confidentiality of and take all reasonable steps to prevent disclosure or use of
the Source Code to prevent them from falling into the public domain or the
possession of unauthorized persons, including placing any source tapes and
listings for the Source Code in a secure location or vault at all reasonable
times.
3.4 PROTECTION AND SECURITY OF LICENSED MATERIALS. TWC will take
appropriate action, by instruction, agreement or otherwise, with any persons
permitted access to the Source Code so as to enable TWC to satisfy its
obligations under this Section 3.4. TWC will not remove any legal notice,
copyright notice, trademark or trade name which may appear on, or in, the Source
Code.
3.5 TERMINATION OF LICENSE. The license granted pursuant to Section 3.1
will terminate upon the earliest to occur of the following:
(a) there is no outstanding Major Error; or
(b) the filing of an Order for Relief against TWC by a Federal Court
under Title 11 of the United States Code; the appointment of a receiver for TWC
due to TWC's insolvency; or the general assignment of the assets and business of
TWC for the benefit of its creditors.
4
<PAGE>
Upon termination of the license granted pursuant to Section 3.1, TWC will
immediately return to Connect the Source Code and will certify in writing to
Connect that it has complied with this Section 3.5.
4. MAINTENANCE UPDATES/RELEASES
4.1 MAINTENANCE UPDATES. Connect may, from time to time, issue Maintenance
Updates of the Connect Software containing Error Corrections. Without charge,
Connect will provide TWC with one (1) copy of each Maintenance Update for each
copy of the Connect Software being maintained under this Agreement and will
provide assistance to TWC to install and operate each Maintenance Update, which
assistance will include, if necessary, the dispatching of a skilled,
knowledgeable and experienced technical person to the site of the Designated
Platform for a fee in an amount no greater than an amount computed on the basis
of Connect's standard hourly rates charged to Connect's customers generally. The
parties acknowledge that each Maintenance Update is functional only if TWC has
obtained and installed all prior applicable Maintenance Updates. If TWC chooses
not to install any Maintenance Update, Connect will maintain back-level support
of the previous version to the current update accordingly on a best efforts
basis.
4.2 RELEASES. During the term of this Agreement, TWC will be entitled to
any new release of the Connect Software (each a "New Release") [*].
4.3 DIAGNOSTICS AND DOCUMENTATION. Each Maintenance Update and New Release
will be accompanied by diagnostics and documentation, including, without
limitation, installation and operations information and release notes, in
accordance with standards generally observed in the industry.
5. TERM. The term of this Agreement is one year commencing on the Effective
Date.
6. DISPUTES. All disputes relating to whether an Error constitutes a Major Error
or a Minor Error shall be resolved by binding arbitration pursuant to this
Section 6. All such disputes shall be resolved by binding arbitration according
to the then-current Commercial Arbitration Association Rules of the American
Arbitration Association ("AAA") as modified by this Section 6. There shall be
one arbitrator who shall be appointed by the AAA and who shall be a licensed
attorney. The location of the arbitration shall be New York, New York. There
will be such discovery as the arbitrator determines to be necessary for a just
and speedy resolution of the dispute. The sole issue to be resolved will be
whether an error in the Software constitutes a Major Error or a Minor Error.
Hearings shall commence within ten (10) business days after the appointment of
the arbitrator. The arbitrator shall provide their decision to the parties
within ten (10) business days after conclusion of the evidentiary hearings. The
decision of the arbitrator shall be binding upon the parties. If there is no
final decision by the
* Confidential treatment requested
5
<PAGE>
arbitrator within thirty (30) days after the request for arbitration is filed
with the AAA, TWC will be entitled to the Source Code and the license described
in Section 3, unless the arbitrator's delay in reaching a decision is caused by
TWC.
7. MISCELLANEOUS. TWC may have its rights and licensed under this Agreement
exercised by, and to sublicense its rights and licenses hereunder to, Affiliates
of TWC, provided that (a) such Affiliates acting hereunder will be subject to
the terms and conditions of this Agreement, and (b) no act or omission of an
Affiliate will affect TWC's obligations under this Agreement. This Agreement
will be interpreted according to the laws of the State of New York (except for
its choice-of-law rules). The relationship of the parties will be that of
independent contractors. Except as otherwise expressly provided herein, each
party will bear its own costs and expenses, including travel expenses, in
Connection with performing its obligations and exercising its rights in
Connection with this Agreement. Waiver by either party of a breach by the other
party of any provision contained herein will be in writing. The waiver of a
breach will in no way be construed as a waiver of any succeeding breach of such
provision or a waiver of the provision itself. If any provision of this
Agreement is unenforceable or invalid under any applicable law or is so held by
applicable court decision, such unenforceability or invalidity will not render
this Agreement unenforceable or invalid as a whole, and, in such event, such
provision will be changed and interpreted so as to best accomplish the
objectives of such provision within the limits of applicable law or applicable
court decision. This Agreement constitutes the entire agreement between the
parties relating to the subject matter hereof and supersedes all prior or
contemporaneous representations, discussions, negotiations, conditions and
agreements, whether written or oral.
The foregoing Agreement is hereby executed as of the date first written
above.
Time Warner Cable Connect
By:______________________________ By:______________________________
Name: ___________________________ Name: ___________________________
Title: ____________________________ Title: __________________________
6
<PAGE>
EXHIBIT C
PREFERRED REGISTRATION
TECHNOLOGY ESCROW AGREEMENT
Account Number ___________
This Agreement is March 29, l996, among Data Securities International, Inc.
("DSI"), Connect, Inc. ("Depositor"), and Time Warner Cable, a division of Time
Warner Entertainment Company, L.P. ("Preferred Registrant"), who collectively
may be referred to in this Agreement as "the parties."
A. Depositor and Preferred Registrant have entered into that certain
Development and License Agreement, dated as of March 29, 1996 ("License
Agreement") regarding certain proprietary technology of Depositor.
B. Depositor desires to avoid disclosure of its proprietary technology
except under certain limited circumstances.
C. The availability of the proprietary technology of Depositor is critical
to Preferred Registrant in the conduct of its business and, therefore, Preferred
Registrant needs access to the proprietary technology under limited
circumstances.
D. Depositor and Preferred Registrant desire to establish an escrow with
DSI to provide for the retention, administration and controlled access of the
proprietary technology materials of Depositor.
E. The parties desire this Agreement to be supplementary to the License
Agreement pursuant to 11 United States Bankruptcy Code, Section 365(n).
ARTICLE 1 -- DEPOSITS
1.1 Obligation to Make Deposit. Pursuant to the terms of the License
--------------------------
Agreement by the parties, Depositor shall deliver to DSI the proprietary
information and other materials ("deposit materials") required to be deposited
by the License Agreement, including those set forth in Exhibit A hereto.
1.2 Identification of Tangible Media. Prior to the delivery of
--------------------------------
the deposit materials to DSI, Depositor shall conspicuously label for
identification each document, magnetic tape, disk, or other tangible media upon
which the deposit materials are written or stored. Additionally, Depositor shall
complete an Exhibit B to list each such tangible media by the item label
description, the type of media and the quantity. The Exhibit B must be signed by
Depositor and delivered to DSI with the deposit materials. Unless and until
Depositor makes the initial deposit with DSI, DSI shall have no obligation with
respect to this Agreement, except the obligation to notify the parties regarding
the status of the deposit account as required in Section 2.2 below.
1
<PAGE>
EXHIBIT C
1.3 Deposit Inspection. When DSI receives the deposit materials
------------------
and the Exhibit B, DSI will conduct a deposit inspection by visually matching
the labeling of the tangible media containing the deposit materials to the item
descriptions and quantity listed on the Exhibit B. In addition to the deposit
inspection, Preferred Registrant may elect to cause a verification of the
deposit materials in accordance with Section 1.6 below.
1.4 Acceptance of Deposit. At completion of the deposit inspection, if DSI
---------------------
determines that the labeling of the tangible media matches the item descriptions
and quantity on Exhibit B, DSI will sign the Exhibit B and mail a copy thereof
to Depositor and Preferred Registrant. If DSI determines the labeling does not
match the item descriptions or quantity on the Exhibit B, DSI will (a) note the
discrepancies in writing on the Exhibit B; (b) sign the Exhibit B with the
exceptions noted; and (c) provide a copy of the Exhibit B to Depositor and
Preferred Registrant. DSI's acceptance of the deposit occurs upon the signing of
the Exhibit B by DSI. Delivery of the signed Exhibit B to Preferred Registrant
is Preferred Registrant's notice that the deposit materials have been received
and accepted by DSI.
1.5 Depositor's Representations. Depositor represents as follows as to
---------------------------
each deposit of the deposit materials:
a. Depositor lawfully possesses all title, rights, and interest in
and to all of the deposit materials deposited with DSI;
b. With respect to all of the deposit materials, Depositor has the
right and authority to grant to DSI and Preferred Registrant the
rights as provided in this Agreement;
c. The deposit materials are not subject to any lien or other
encumbrance; and
d. The deposit materials consist of the proprietary information and
other materials required by the License Agreement to be deposited
with DSI.
1.6 Verification. Preferred Registrant shall have the right at any time,
------------
at Preferred Registrant's expense, to verify any deposit materials, including
inspection and testing of the deposit materials. A verification determines, in
different levels of detail, the accuracy, completeness, sufficiency and quality
of the deposit materials.
1.7 Deposit Updates. Depositor shall deposit any updates, modifications
---------------
and enhancements to the deposit materials on a quarterly basis, within thirty
(30) days after the end of the quarter, unless Preferred Registrant agrees in
writing that less frequent deposits are acceptable, provided that in no event
will updates be made less frequently than once a year. Such updates will be
added to the existing deposit. All deposit updates shall be listed on a new
Exhibit B, and the new Exhibit B shall be signed by Depositor. The processing of
all deposit updates shall be in accordance with Sections 1.2 through 1.6 above.
All references in this Agreement to the deposit materials shall include the
initial deposit materials and any updates.
2
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EXHIBIT C
1.8 Removal of Deposit Materials. The deposit materials may be removed,
----------------------------
exchanged and/or destroyed only on written instructions signed by Depositor and
Preferred Registrant, or as otherwise provided in this Agreement.
ARTICLE 2 -- CONFIDENTIALITY AND RECORD KEEPING
2.1 Confidentiality. DSI shall maintain the deposit materials in a secure,
---------------
environmentally safe, locked receptacle which is accessible only to authorized
employees of DSI. DSI shall have the obligation to reasonably protect the
confidentiality of the deposit materials. Except as provided in this Agreement,
DSI shall not disclose, transfer, make available, or use the deposit materials.
DSI shall not disclose the content of this Agreement to any third party. If DSI
receives a subpoena or other order of a court or other judicial tribunal
pertaining to the disclosure or release of the deposit materials, DSI will
immediately notify the parties to this Agreement. It shall be the responsibility
of Depositor and/or Preferred Registrant to challenge any such order; provided,
however, that DSI does not waive its rights to present its position with respect
to any such order. DSI will not be required to disobey any court or other
judicial tribunal order. (See Section 7.5 below for notices of requested
orders.)
2.2 Status Reports. DSI will issue to Depositor and Preferred
--------------
Registrant a report profiling the account history at least semi-annually. DSI
may provide copies of the account history pertaining to this Agreement upon the
request of any party to this Agreement.
2.3 Audit Rights. During the term of this Agreement, Depositor
------------
and Preferred Registrant shall each have the right to inspect the written
records of DSI pertaining to this Agreement. Any inspection shall be held during
normal business hours and following reasonable prior notice.
ARTICLE 3 -- GRANT OF RIGHTS TO DSI
3.1 Title to Media. Depositor hereby transfers to DSI the title to the
--------------
media upon which the proprietary information and materials are written or
stored. However, this transfer does not include the ownership of the proprietary
information and materials contained on the media such as any copyright, trade
secret, patent or other intellectual property rights.
3.2 Right to Make Copies. DSI shall have the right to make copies of the
--------------------
deposit materials as reasonably necessary to perform this Agreement. DSI shall
copy all copyright, nondisclosure, and other proprietary notices and titles
contained on the original deposit materials onto any copies made by DSI.
3.3 Right to Sublicense Upon Release. As of the effective date of this
--------------------------------
Agreement, Depositor hereby grants to DSI a non-exclusive, irrevocable,
perpetual, and royalty-free license to sublicense the deposit materials to
Preferred Registrant upon the release, if any, of the deposit materials in
accordance with Section 4.5 below. Except upon such a release, DSI shall not
sublicense or otherwise transfer the deposit materials.
3
<PAGE>
EXHIBIT C
ARTICLE 4 -- RELEASE OF DEPOSIT
4.1 Release Conditions. As used in this Agreement, "Release Conditions"
------------------
shall mean the following:
a. Depositor abandons its business relating to the Connect Software
(as defined in the License Agreement) in the ordinary course of
business; a receiver, trustee, or other custodian is applied for,
consented to, or appointed for Depositor or its property;
Depositor becomes insolvent or unable to pay its debts as they
mature in the ordinary course or makes an assignment for the
benefit of its creditors; Depositor is liquidated or dissolved;
or any proceedings are commenced by or against Depositor under
any bankruptcy, insolvency or debtor's relief law; or
b. Depositor materially breaches its obligations under this
Agreement to make deposits and updates and does not cure such
breach within thirty (30) days alter receiving written notice of
such breach from Preferred Registrant;
c. Preferred Registrant becomes entitled to the Source Code pursuant
to the Annual Maintenance Agreement; or
d. Preferred Registrant otherwise has rights to the deposit
materials in accordance with the terms and conditions of the
License Agreement.
4.2 Filing For Release. If Preferred Registrant believes in good faith
------------------
that a Release Condition has occurred, Preferred Registrant may provide to DSI
written notice of the occurrence of the Release Condition and a request for the
release of the deposit materials. Upon receipt of such notice, DSI shall provide
a copy of the notice to Depositor by Federal Express or other recognized
commercial courier.
4.3 Release. Ten business days after the date DSI mails the notice
-------
requesting release of the deposit materials, DSI is authorized and shall release
the deposit materials to Preferred Registrant. However, DSI is entitled to
receive any fees due DSI before making the release. This Agreement will
terminate upon the release of the deposit materials held by DSI.
4.4 Use License Following Release. Upon release of the deposit materials
-----------------------------
in accordance with this Article 4, Preferred Registrant shall have the rights
and licenses set forth in the License Agreement. Preferred Registrant shall
remain subject to the confidentiality obligations of Section 15 of the License
Agreement.
ARTICLE 5 -- TERM AND TERMINATION
5.1 Term of Agreement. The initial term of this Agreement is for a period
-----------------
of one year. Thereafter, this Agreement shall automatically renew from year to
year unless (a) Depositor and Preferred Registrant jointly instruct DSI in
writing at any time after one year that the Agreement is terminated; or (b) the
Agreement is terminated by DSI for nonpayment in accordance with
4
<PAGE>
EXHIBIT C
Section 5.2. If the deposit materials are subject to another escrow agreement
with DSI, DSI reserves the right, after the initial one-year term, to adjust the
anniversary date of this Agreement to match the then prevailing anniversary date
of such other escrow arrangements.
5.2 Termination for Nonpayment. In the event of the nonpayment of fees
--------------- ----------
owed to DSI, DSI shall provide written notice of delinquency to all parties to
this Agreement. Any party to this Agreement shall have the right to make the
payment to DSI to cure the default. If the past-due payment is not received in
full by DSI within one month of the date of such notice, then DSI shall have the
right to terminate this Agreement 10 days thereafter by sending written notice
of termination to all parties, unless the past-due payment is made during such
l0-day period. DSI shall have no obligation to take any other action under this
Agreement so long as any payment due to DSI remains unpaid.
5.3 Disposition of Deposit Materials Upon Termination. Upon any
-------------------------------------------------
termination of this Agreement by joint instruction of Depositor and Preferred
Registrant, DSI shall destroy, return, or otherwise deliver the deposit
materials in accordance with such instructions. Upon any termination for
nonpayment, DSI may, at its sole discretion, destroy the deposit materials or
return them to Depositor. DSI shall have no obligation to return or destroy the
deposit materials if the deposit materials are subject to another escrow
agreement with DSI.
5.4 Survival of Terms Following Termination. Upon any termination of this
---------------------------------------
Agreement, the following provisions of this Agreement shall survive:
a. Depositor's Representations (Section 1.5)
b. The obligations of confidentiality described herein with respect
to the deposit materials.
c. The licenses granted in the sections entitled Right to Sublicense
Upon Release (Section 3.3) and Use License Following Release
(Section 4.4), if a release of the deposit materials has occurred
prior to termination.
d. The obligation to pay DSI any fees and expenses due.
e. The provisions of Article 7.
f. Any provisions in this Agreement which specifically state they
survive the termination or expiration of this Agreement.
ARTICLE 6 -- DSI'S FEES
6.1 Fee Schedule. Preferred Registrant shall pay DSI its standard fees and
------------
expenses applicable to the services provided. The fees shall be the standard
fees charged by DSI from time to time. DSI shall notify the parties at least 90
days prior to any increase in fees. For any service not listed on DSI's standard
fee schedule, DSI will provide a quote prior to rendering the service, if
requested.
5
<PAGE>
EXHIBIT C
6.2 Payment Terms. DSI shall not be required to perform any service unless
-------------
the payment for such service and any outstanding balances owed to DSI are paid
in full. All other fees are due upon receipt of invoice. If invoiced fees are
not paid, DSI may terminate this Agreement in accordance with Section 5.2. Late
fees on past-due amounts shall accrue at the rate of one and one-half percent
per month (18% per annum) from the date of the invoice.
ARTICLE 7 -- LIABILITY AND DISPUTES
7.1 Right to Rely on Instructions. DSI may act in reliance upon any
-----------------------------
instruction, instrument, or signature reasonably believed by DSI to be genuine.
DSI may assume that any employee of a party to this Agreement who gives any
written notice, request, or instruction has the authority to do so. DSI shall
not be responsible for failure to act as a result of causes beyond the
reasonable control of DSI.
7.2 Indemnification. DSI shall be responsible to perform its obligations
---------------
under this Agreement and to act in a reasonable and prudent manner with regard
to this escrow arrangement. Provided DSI has acted in the manner stated in the
preceding sentence, Depositor and Preferred Registrant each agree to indemnify,
defend and hold harmless DSI from any and all claims, actions, damages,
arbitration fees and expenses, costs, attorney's fees and other liabilities
incurred by DSI relating in any way to this escrow arrangement.
7.3 Dispute Resolution. Any dispute relating to or arising from this
------------------
Agreement shall be brought in, and shall be subject to the exclusive
jurisdiction of the U.S. District Court for the Southern District of New York,
sitting in New York, NY.
7.4 Controlling Law. This Agreement is to be governed and construed in
---------------
accordance with the laws of the State of New York, without regard to its
conflict of law provisions.
7.5 Notice of Requested Order. If any party intends to obtain an order
-------------------------
from any court of competent jurisdiction which may direct DSI to take, or
refrain from taking, any action, that party shall:
a. Give DSI at least two business days' prior notice of the hearing;
b. Include in any such order that, as a precondition to DSI's
obligation, DSI be paid in full for any past-due fees and be paid
for the reasonable value of the services to be rendered pursuant
to such order; and
c. Ensure that DSI not be required to deliver the original (as
opposed to a copy) of the deposit materials if DSI may need to
retain the original in its possession to fulfill any of its other
escrow duties.
7.6 Method of Notice. Unless otherwise provided in this Agreement, all
----------------
documents and communications may be delivered by First Class Mail.
6
<PAGE>
EXHIBIT C
ARTICLE 8 -- GENERAL PROVISIONS
8.1 Entire Agreement. This Agreement, which includes the Exhibits
----------------
described herein, embodies the entire understanding between all of the parties
with respect to its subject matter and supersedes all previous communications,
representations or understandings, either oral or written. No amendment or
modification of this Agreement shall be valid or binding unless signed by all
parties hereto, except Exhibit A need not be signed by DSI and Exhibit B need
not be signed by Preferred Registrant.
8.2 Notices. All notices, invoices, payments, deposits and other documents
-------
and communications shall be given to the parties at the addresses specified in
the attached Exhibit C. It shall be the responsibility of the parties to notify
each other as provided in this Section in the event of a change of address. The
parties shall have the right to rely on the last known address of the other
parties. Any notice provided for or permitted under this Agreement shall be in
writing and will be treated as having been given (i) when delivered personally,
(ii) when sent by confirmed facsimile, (iii) three days after sent by a
recognized commercial courier with written verification of receipt, or (iv) one
week after mailed postage prepaid by certified or registered mail, return
receipt requested, to the party to be notified, at the address and to the person
set forth in Exhibit C, or at such other place of which, and to the attention of
such person of whom, the other party has been notified in accordance with the
provisions of this Section.
8.3 Severability. In the event any provision of this Agreement is found to
------------
be invalid, voidable or unenforceable, the parties agree that unless it
materially affects the entire intent and purpose of this Agreement, such
invalidity, voidability or unenforceability shall affect neither the validity
of this Agreement nor the remaining provisions herein, and the provision in
question shall be deemed to be replaced with a valid and enforceable provision
most closely reflecting the intent and purpose of the original provision.
7
<PAGE>
EXHIBIT C
8.4 Successors. This Agreement shall be binding upon and shall inure to
----------
the benefit of the successors and assigns of the parties. However, DSI shall
have no obligation in performing this Agreement to recognize any successor of
Depositor or Preferred Registrant unless DSI receives clear, authoritative and
conclusive written evidence of the change of parties.
CONNECT, INC. TIME WARNER CABLE, a division of
Depositor Time Warner Entertainment Company, L.P.
Preferred Registrant
By: /s/ Thomas P. Kehler By: /s/ Jennifer Carney
---------------------------- ----------------------------
Name: Thomas P. Kehler Name: Jennifer Carney
-------------------------- ---------------------------
Title: President & CEO Title: Vice President
------------------------- --------------------------
Date: 4/8/96 Date: March 29, 1996
-------------------------- ---------------------------
DATA SECURITIES INTERNATIONAL, INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
Date:
---------------------------
8
<PAGE>
<PAGE>
EXHIBIT C
EXHIBIT A
DEPOSIT MATERIALS
All Source Code for all Connect Software (capitalized terms as defined in
the Licensed Agreement), in each case in its updated form as of the time of the
deposit.
9
<PAGE>
EXHIBIT C
EXHIBIT B
DESCRIPTION OF DEPOSIT MATERIAL
Deposit Account Number ________________________________________________________
Depositor Company Name ________________________________________________________
DEPOSIT TYPE: ________ Initial _______ Supplemental
ENVIRONMENT:
Host System CPU/OS_________ Version _________ Backup __________
Source System CPU/OS_______ Version ______ Compiler ____________
Special Instructions:__________________________________________________________
_______________________________________________________________________________
DEPOSIT MATERIAL:
Exhibit B Name____________________________________________ Version_____________
Item label description Media Quantity
For Depositor, I certify that the above For DSI, I certify that the
described deposit materials have been deposit inspection has been
transmitted to DSI: completed (any exceptions are
noted above):
By__________________________________ By______________________________
Print Name__________________________ Print Name______________________
Date________________________________ Date____________________________
ISE________ EX.B#_______
10
<PAGE>
EXHIBIT C
DESIGNATED CONTACT
Account Number_________________
Notices, Deposit Material returns and Invoices to Depositor
communications, including delinquencies should be addressed to:
to Depositor, should addressed to:
Company Name: CONNECT, INC.
Address: 515 Ellis Street
Mountain View, CA 94043-2242
Designated Contact: [__________________________] Invoices to Preferred
Telephone: (415) 254A863 Registrant should be
Facsimile: (415) 2544800 addressed to:
TIME WARNER CABLE
State of Incorporation: ______________________ Digital Marketing Group
1271 Avenue of the Americas
Notices and communications, including delinquencies New York, NY 10020
to Preferred Registrants should be addressed to: Designated
Contact: Jennifer Carney
Company Name: TIME WARNER CABLE Telephone: (212)522-6359
Digital Marketing Group Facsimile: (212)522-0556
1271 Avenue of the Americas
New York, NY 10020
Designated Contact: Jennifer Carney
Telephone: (212) 522-2692
Facsimile: (212) 5224)556
Requests from Depositor or Preferred Registrant to change the Designated Contact
should be given in writing by the Designated Contact or an authorized employee
of Depositor or Preferred Registrant.
Contracts, Deposit Material and notices Invoice inquiries and fee
to DSI should be addresses to: remittance to DSI should be
addressed to:
DSI
Contract Administration DSI
Suite 200 Accounts Receivable
9555 Chesapeake Drive Suite 1450
San Diego, CA 92123 425 California Street
San Francisco, CA 94104
Telephone: (619) 694-1900
Facsimile: (619) 694-1919 (415) 398-7900
(415) 398-7914
Date:____________________________________
1
<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) 13,335,479 13,335,479 13,335,479 13,335,479 13,335,479
----------- ----------- ----------- ---------- ----------
Total shares used in primary net loss per
share 13,565,121 13,643,503 13,717,010 13,714,619 13,795,816
Primary net loss per share $(.14) $(.13) $(1.03) $(.52) $(.66)
Total per above 13,717,010 13,714,619 13,795,816
Conversion of preferred stock not included 4,146,658 4,146,658 4,146,658
in shares related to SAB No. 64, and 83 (Topic 4 Sec. D) --------- --------- ---------
Total shares used in pro forma net loss per 17,863,668 17,861,277 17,942,474
share
Pro forma net loss per share $(.79) $(.40) $(.51)
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated February 23,
1996, except for Note 14, as to which the date is July 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 19, 1996
