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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 000-20873
CONNECT, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0431045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
515 Ellis Street
Mountain View, California 94043-2242
(Address of principal executive offices) (Zip code)
(415) 254-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of July 31, 1997 there were 18,987,113 shares of the Registrant's Common
Stock outstanding.
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CONNECT, INC.
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of 3
June 30, 1997 and December 31, 1996
Condensed Statements of Operations for the three months 4
and six months ended June 30, 1997 and 1996
Condensed Statements of Cash Flows for the 5
six months ended June 30, 1997 and 1996
Notes to Condensed Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 12
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 12
ITEM 2 Changes in Securities 12
ITEM 3 Defaults Upon Senior Securities 12
ITEM 4. Submission of Matters to Vote of Security Holders. 12
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on Form 8-K. 13
SIGNATURES
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ITEM 1. FINANCIAL STATEMENTS
CONNECT, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 5,587 $ 12,214
Accounts receivable, less allowances for doubtful
accounts of $336 at June 30, 1997 and $222 at December 31, 1996.......... 2,814 2,533
Prepaid expenses and other current assets.................................. 676 606
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Total current assets........................................................... 9,077 15,353
Property and equipment, net.................................................... 3,153 3,647
Deposits and other assets...................................................... 126 154
-------- --------
Total assets............................................................... $ 12,356 $ 19,154
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.............................................................. $ 511 $ 61
Accounts payable........................................................... 1,220 1,688
Accrued payroll and related expenses....................................... 1,060 941
Other accrued liabilities.................................................. 1,656 1,321
Deferred revenue........................................................... 131 189
Current portion of extended vendor liabilities............................. 266 261
Obligations under capital leases........................................... 580 548
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Total current liabilities...................................................... 5,424 5,009
Notes payable.............................................................. 1,110 9
Long-term portion of extended vendor liabilities........................... 329 417
Long-term obligations under capital leases................................. 67 364
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Authorized shares--10,000,000
Issued and outstanding shares--none...................................... -- --
Common stock: $.001 par value
Authorized shares--40,000,000
Issued and outstanding shares--18,973,841 at
June 30, 1997 and 18,531,467 at December 31, 1996........................ 19 19
Additional paid-in capital................................................. 60,859 60,448
Deferred compensation...................................................... (118) (139)
Accumulated deficit........................................................ (55,334) (46,973)
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Total stockholders' equity..................................................... 5,426 13,355
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Total liabilities and stockholders' equity..................................... $ 12,356 $ 19,154
======== ========
</TABLE>
See accompanying notes.
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CONNECT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except loss per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
REVENUE:
License............................................ $ 1,479 $ 1,107 $ 1,882 $ 1,511
Service............................................ 1,701 1,418 3,185 2,477
------- ------- ------- -------
Total revenue................................. 3,180 2,525 5,067 3,988
COST OF REVENUE:
License............................................ 218 149 394 283
Service............................................ 2,113 2,089 4,796 4,298
------- ------- ------- -------
Total cost of revenue......................... 2,331 2,238 5,190 4,581
------- ------- ------- -------
Gross profit (loss)................................ 849 287 (123) (593)
OPERATING EXPENSES:
Research and development........................... 1,214 1,052 2,622 2,226
Sales and marketing................................ 2,136 2,628 4,354 5,108
General and administrative......................... 691 675 1,342 1,221
------- ------- ------- -------
Total operating expenses...................... 4,041 4,355 8,318 8,555
------- ------- ------- -------
LOSS FROM OPERATIONS............................... (3,192) (4,068) (8,441) (9,148)
Interest expense....................................... (76) (84) (146) (181)
Interest income and other income, net.................. 105 90 226 202
------- ------- ------- -------
LOSS BEFORE INCOME TAXES............................... (3,163) (4,062) (8,361) (9,127)
Provision (benefit) for income taxes................... -- -- -- --
------- ------- ------- -------
NET LOSS............................................... $(3,163) $(4,062) $(8,361) $(9,127)
======= ======= ======= =======
PRO FORMA NET LOSS PER SHARE........................... ($0.17) ($0.23) ($0.45) ($0.51)
======= ======= ======= =======
Shares used in computing pro forma net loss per share.. 18,859 17,880 18,757 17,893
======= ======= ======= =======
</TABLE>
See accompanying notes.
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CONNECT, INC.
CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
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1997 1996
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OPERATING ACTIVITIES
Net loss..................................................................... $(8,361) $(9,127)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization........................................... 912 808
Amortization of deferred compensation................................... 21 8
Changes in operating assets and liabilities:
Accounts receivable................................................. (281) (649)
Prepaid expenses and other current assets........................... (70) (374)
Deposits and other assets........................................... 28 65
Accounts payable, accrued payroll and related expenses, other accrued
liabilities, and extended vendor liabilities........................ (97) 2,461
Deferred revenue.................................................... (58) (32)
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Net cash provided by (used in) operating activities....................... (7,906) (6,840)
INVESTING ACTIVITIES
Purchases of property and equipment.......................................... (418) (830)
-------- -------
Net cash used in investing activities..................................... (418) (830)
FINANCING ACTIVITIES
Proceeds from issuance of common stock....................................... 411 59
Proceeds from issuance of preferred stock.................................... -- 938
Proceeds from issuance of notes payable...................................... 1,750 --
Repayment of principal on notes payable...................................... (199) (145)
Repayment of principal under capital lease obligations....................... (265) (317)
-------- -------
Net cash provided by financing activities................................. 1,697 535
-------- -------
Net increase (decrease) in cash and cash equivalents......................... (6,627) (7,135)
Cash and cash equivalents at beginning of period............................. 12,214 12,929
-------- -------
Cash and cash equivalents at end of period................................ $ 5,587 $ 5,794
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest....................................................... $ 146 $ 181
SUPPLEMENTAL NONCASH INVESTING AND FINANCING INFORMATION
Incurrence of capital lease obligations...................................... $ -- $ 14
See accompanying notes.
</TABLE>
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CONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1) THE COMPANY AND SIGNIFICANT ACCOUNTING P0LICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The financial information should be read in conjunction with the
financial statements and notes thereto included in CONNECT, Inc.'s ("CONNECT" or
the "Company") Annual Report on Form 10-K for the year ended December 31, 1996
(the "Annual Report"). The results of operations for the three and six month
periods ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the full fiscal year or for any future periods.
2) NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Except as noted below, net loss per share is based on the weighted
average number of shares of common stock outstanding during the period
presented. Common equivalent shares from convertible preferred stock (using the
if-converted method) have been included in the computation when dilutive.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent shares issued by the Company at prices below the
initial public offering price during the twelve-month period prior to the
initial public offering have been included in the calculation as if they were
outstanding for all periods presented through June 30, 1996 (using the treasury
stock method at a per share price of $6.00, the initial public offering price).
Per share information calculated on this basis is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net loss per share $(0.17) $(0.30) $(0.45) $(0.66)
Shares used in computing net loss per share 18,859 13,733 18,757 13,746
</TABLE>
Pro forma net loss per share presented in the Statements of Operations has been
computed as described above and also gives retroactive effect, even if
anti-dilutive, to common equivalent shares from convertible preferred stock that
were automatically converted to common stock upon the closing of the initial
public offering (using the if-converted method).
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
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method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. There is no impact of
Statement 128 on the calculation of net loss per share for the quarter and six
month period ended June 30, 1997 and 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under the caption,
"Risk Factors" in the Annual Report as well as the risks discussed elsewhere in
this Quarterly Report. In particular such factors include: the Company's ability
to sell and implement its products; acceptance by the marketplace of the
Company's products and services; the Company's ability to obtain working capital
on terms favorable to the Company, or at all; the Company's ability to develop
new products and services to meet market demand or incorporate evolving industry
standards; the Company's ability to compete effectively; acceptance of the
Internet as a medium for electronic commerce and order management; the Company's
dependence on the Internet infrastructure; the Company's dependence on certain
third party software and services vendors; and the Company's ability to protect
its intellectual property. Readers are cautioned not to place undue reliance on
these forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers should carefully review the risk factors described
in other documents the Company files from time to time with the Securities and
Exchange Commission, including, the Annual Report on Form 10-K, the Quarterly
Reports on Form 10-Q, and any Current Reports on Form 8-K filed by the Company.
OVERVIEW
The Company designs, develops, markets and supports application software
for Internet-based interactive commerce. The Company was founded in 1987 to
provide on-line information services to businesses. During the period 1987
through 1992, the Company's primary business was the operation and management of
a private on-line service and the licensing of related client software. In 1993
and 1994, the Company also offered software for creation, access and operation
of custom on-line systems. In late 1994, the Company began to shift its focus
from providing on-line services to developing packaged software applications for
Internet-based interactive commerce. During 1994 and 1995, the Company derived a
significant portion of its revenue from contract software development projects
with two companies under which the Company retained ownership of the technology
developed. These projects formed the foundation for the development of
OneServer, the Company's core software application, which was commercially
released in September 1995, and OrderStream, the first pre-configured
implementation of OneServer, which was commercially released in June 1996.
During the quarter ended June 30, 1997 the Company announced its newest
product, PurchaseStream. The PurchaseStream application is an Internet-based
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purchasing system that simplifies and streamlines acquisition of indirect goods
and services. With PurchaseStream, end-user requisitioners are empowered to
place secure online orders for routine transactions through an electronic mall
of approved suppliers. PurchaseStream, the Company's newest product, is
available on a limited basis. General Availability of the product is not
expected until the fourth quarter of 1997. (OneServer, OrderStream, and
PurchaseStream are trademarks of the Company).
The Company believes that the majority of the remainder of its 1997 revenue will
continue to be from licenses of OneServer and OrderStream and the performance of
related services. PurchaseStream is expected to reflect only modest revenue
during the fiscal year. The Company expects that revenue from the operation of
private on-line services will constitute a decreasing portion of the Company's
overall revenue in the future.
The Company derives revenue from software license fees and services.
License fees primarily consist of revenue from licenses of the Company's
application software. Service revenue consists of fees from implementation
(including customization of licensed software), training, maintenance and
support, contract software development projects, and system hosting and on-line
services. License revenue is recognized on shipment of the application software
provided there are no significant remaining obligations and the collectability
is deemed probable by the Company. License fees under contracts requiring
significant implementation, including customization, of licensed application
software are recognized on a percentage-of-completion basis. Revenue from
implementation services is recognized as the services are performed, except for
revenue from certain fixed price contracts which is recognized on a
percentage-of-completion basis. Actual costs and gross margins on fixed price
contracts could differ materially from management's estimates and such
differences could have a material adverse effect on the Company's operating
results and financial conditions.
The Company also typically enters into maintenance agreements in
connection with licenses of its application software under which revenue is
recognized ratably over the term of the agreement, generally one year. Usage
fees related to the Company's training, system hosting services, private on-line
services and consulting services are recognized as the services are performed.
The Company has incurred net losses in each fiscal year since its
inception and as of June 30, 1997, has an accumulated deficit of $55.3 million.
The Company's operating expenses have increased substantially since 1994 as the
Company made investments related to the development and introduction of
OneServer and its related products. 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 exceed revenues for the foreseeable future
as it continues to develop its technology, 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
its products by the market, and must be evaluated in light of the risks and
uncertainties frequently encountered by companies dependent upon such early
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stage products. In addition, the Company's markets are new and rapidly evolving,
which heightens these risks and uncertainties. To address these risks, the
Company must, among other things, successfully implement its marketing strategy,
respond to competitive developments and continue to develop and upgrade its
products and technologies. During the quarter ended June 30, 1997 the Company
took steps to control its expenses through reductions in staffing and tighter
controls over other costs in recognition of current business expectations. These
reductions may affect the Company's ability to respond to competitive
developments and implement its sales and marketing strategy. There can be no
assurance that the Company will succeed in addressing any or all these risks.
See "Risk Factors" in the Annual Report, as well as the risks discussed
elsewhere in this Quarterly Report.
REVENUE
Total revenue was $3,180,000 for the three months ended June 30, 1997,
compared to $2,525,000 for the three months ended June 30, 1996. Total revenue
for the six months ended June 30, 1997 was $5,067,000, compared to $3,988,000
for the six months ended June 30, 1996. Three customers represented
approximately 16%, 13%, and 22% of total revenue for the quarter ended June 30,
1997. These same three customers represented approximately 10%, 14%, and 16% of
total revenue for the first six months of 1997, respectively. No other customers
contributed more than 10% during the quarter or on a year to date basis.
License revenue was $1,479,000, or 47% of total revenue, for the quarter
ended June 30, 1997 and $1,882,000, or 37% of total revenue, for the six months
ended June 30, 1997. License revenue was $1,107,000, or 44% of total revenue,
for the second quarter ended June 30, 1996 and $1,511,000, or 38% of total
revenue, for the six months ended June 30, 1996. For the quarter ended June 30,
1997, license revenue grew 34% over the same period one year ago. For the six
month period ended June 30, 1997, license revenue has grown 25% over the same
six month period in 1996. This growth of license revenue year over year is due
in part to a more mature customer pipeline and to more referenceable accounts
today, versus last year, supporting the Company's selling efforts. The Company
launched a reseller program during the second half of 1996 and is in the process
of expanding this activity both within and outside the United States. The
Company expects increased revenue in 1997 compared to 1996 through these
channels. A portion of the Company's revenue in the second quarter ended June
30, 1997 was derived from sales to resellers of the Company's products.
Service revenue was $1,701,000, or 53% of total revenue, for the quarter
ended June 30, 1997 and $3,185,000, or 63% of total revenue, for the six months
ended June 30, 1997. Service revenue was $1,418,000, or 56% of total revenue,
for the quarter ended June 30, 1996 and $2,477,000, or 62% of total revenue, for
the six months ended June 30, 1996. The growth in year over year revenue is
primarily due to increased hosting, maintenance and professional services
related to the OneServer and OrderStream product lines.
COST OF REVENUE
Cost of license revenue was approximately $218,000, or 15% of license
revenue, for the quarter ended June 30, 1997 and $394,000, or 21% of license
revenue, for the six months ended June 30, 1997. Cost of license revenue was
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$149,000, or 13% of license revenue for the quarter ended June 30, 1996 and
$283,000, or 19% of license revenue, for the six months ended June 30, 1996.
Cost of license revenue includes sublicense fees and expenses relating to
product media. The current versions of OneServer related products include
Netscape's Enterprise Server, which modestly increases licensing costs as a
percentage of sales due to sublicensing fees.
Cost of service revenue was $2,113,000, or 124% of service revenue, for
the quarter ended June 30, 1997 and $4,796,000, or 151% of service revenue, for
the six months ended June 30, 1997. Cost of service revenue was $2,089,000, or
147% of service revenue, for the quarter ended June 30, 1996 and $4,298,000, or
174% of service revenue, for the six months ended June 30, 1996. The cost as a
percent of revenue declined due to cost reduction steps taken in the Company's
on-line services business and lower charges due to implementation of three fixed
price contracts the Company entered into in prior years. These reductions were
partially offset by an increase in costs associated with the increase in volume
of revenue.
OPERATING EXPENSES
Research and development expenses consist primarily of personnel and
equipment costs. Research and development expenses increased 15% to $1,214,000
for the quarter ended June 30, 1997 from $1,052,000 for the quarter ended June
30, 1996. For the six month period ended June 30, 1997 research and development
expenses increased approximately 18% to $2,622,000 from $2,226,000 in the same
prior year period. This increase is primarily due to management information
system charges.
Sales and marketing expenses consist primarily of salaries and sales
commissions of sales and marketing personnel and travel, marketing and
promotional expenses. Sales and marketing expenses were approximately $2,136,000
for the quarter ended June 30, 1997 and $4,354,000 for the six months ended June
30, 1997. Comparable numbers for 1996 were $2,628,000 for the quarter ended June
30, 1996 and $5,108,000 for the six months ended June 30, 1996. Sales and
marketing expenses declined 19% and a 15% in current year periods, respectively,
from comparable periods in the prior year. This is partially due to higher
public relation costs in the first quarter of 1996 as the Company changed public
relations firms, creating a temporary overlap in coverage. It also reflects
lower charges of providing sales and marketing services to the Company's online
business and preselling activities for the professional services group.
General and administrative expenses consist primarily of salaries of
financial, administrative and management personnel and related travel expenses,
as well as legal, accounting and public company related expenses. General and
administrative expenses increased 2% to $691,000 for the quarter ended June 30,
1997 from $675,000 during the second quarter ended June 30, 1996. For the six
months ended June 30, 1997 general and administrative expenses increased 10% to
$1,342,000 from $1,221,000 in the similar prior year period. This increase is
primarily due to the added costs of being a public company during 1997.
Interest expense consists primarily of interest incurred on equipment
financing. Interest expense decreased 10% to $76,000 for the quarter ended June
30, 1997 from $84,000 during the second quarter ended June 30, 1996. For
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the six month period ended June 30, 1997 interest expenses decreased 19% to
$146,000 from $181,000 in the similar prior year period primarily due to the
retirement of an equipment lease line of credit in August of 1996.
Interest income and other income consists primarily of interest earned
on cash and cash equivalents and short term investments. Interest income and
other income increased to $105,000 and $226,000 for the three and six month
periods ended June 30, 1997, respectively, from $90,000 and $202,000 for the
same three and six month periods ended June 30, 1996, respectively.
The Company has a tax loss carry forward and is currently incurring
losses for tax purposes. Accordingly, there is no provision for income taxes.
FACTORS AFFECTING QUARTERLY OPERATING RESULTS
The Company has experienced and expects to continue to experience
significant fluctuations in quarterly operating results that may be caused by
many factors including, among others, the number, timing and significance of
product enhancements and new product announcements by the Company or its
competitors, the ability of the Company to develop, introduce and market new and
enhanced versions of the Company's products on a timely basis, the length of the
Company's sales cycle, market acceptance of and demand for the Company's
products, the pace of development of electronic commerce conducted on the
Internet, the mix of the Company's products sold, customer order deferrals in
anticipation of enhancements or new products offered by the Company or its
competitors, non-renewal of service agreements, software defects and other
product quality problems, the Company's ability to attract and retain key
personnel, the extent of international sales, changes in the level of operating
expenses and general economic conditions. The Company anticipates that a
significant portion of its revenue will be derived from a limited number of
orders placed by large corporations, and the timing of receipt and fulfillment
of any such orders is expected to cause material fluctuations in the Company's
operating results, particularly on a quarterly basis. The Company expects to
recognize the majority of its license revenue in the last month of each quarter.
As a result, any delay in delivery of products at the end of a quarter could
materially adversely affect operating results for that quarter. 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. 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,
the Company's future operating results may be below the expectations of
securities analysts and investors as happened in the quarters ended March 31,
1997 and December 31, 1996. 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" in the Company's Annual Report.
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LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1997 the Company obtained a commitment for a
$2,000,000 line of credit to be secured by equipment, furniture and fixtures.
The Company had drawn $1,750,000 against this line of credit as of June 30,
1997.
During the quarter ended June 30, 1997 the Company has taken additional
steps to control its expenses through reductions in staffing and tighter
controls over other costs in recognition of current business expectations. While
these steps may help reduce certain business and financial risks by lowering
expenses, the steps also may make it more difficult for the Company to grow its
business. Management is closely monitoring its cash requirements. The Company
anticipates that its available cash resources are sufficient to meet presently
anticipated working capital and capital expenditure requirements through the end
of 1997, assuming the Company meets its internal revenue and cash flow
projections. This estimate is a forward-looking statement that involves risks
and uncertainties, and actual results may vary materially as a result of a
number of factors, including those discussed under "Risk Factors" in the Annual
Report and those discussed elsewhere in the Quarterly Report. If the Company is
unable in any material way to meets its internal revenue and cash flow
objectives, the Company will need to raise additional funds in order to support
its operations. The Company is presently seeking to raise additional funds
through private or public sales of securities, strategic relationships, bank or
lease financings, or otherwise. If additional funds are raised through the
issuance of equity securities, stockholders of the Company may experience
dilution, or the securities may have rights, preferences, or privileges senior
to those of the holders of the Company's Common Stock. There can be no
assurances that additional financing will be available on acceptable terms, if
at all. If adequate funds are not available or are not available on acceptable
terms, the Company may be unable to develop or enhance its products, take
advantage of future opportunities, or respond to competitive pressures or
other requirements, any of which would have a material adverse effect on the
Company's business, operating results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held May
29, 1997 at the Company's offices in Mountain View,
California, the following matters were submitted to a
vote of the stockholders, with the results as noted
below.
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1. Election of six (6) directors to serve until the 1998
Annual Meeting of Stockholders or until their respective
successors are elected and qualified;
For Against Abstain
Gordon J. Bridge 14,031,009 -0- 38,481
Promod Haque 14,031,505 -0- 37,985
Richard H. Lussier 14,005,805 -0- 63,685
Rory T. O'Driscoll 14,032,605 -0- 36,885
Richard W. Weening 14,030,905 -0- 38,585
William B. Welty 14,030,305 -0- 39,185
2. Approval of amendment to the 1996 Stock Option Plan to
increase the number of shares of Common Stock reserved for
issuance thereunder on the first trading day of each
fiscal year during the period beginning January 1, 1998
and ending December 31, 2002 by an amount equal to the
lessor of: (x) three percent (3%) of the total number of
shares of the Company's Common Stock issued and
outstanding as of the last business day of the immediately
preceding fiscal year, or (y) 700,000 shares;
For Against Abstain Withheld
13,665,383 208,464 128,262 67,381
3. Ratified the appointment of Ernst & Young LLP as the
independent auditors of the Company for the year ending
December 31, 1997.
For Against Abstain
14,043,575 19,096 6,819
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
three months ending June 30, 1997.
a) EXHIBITS
ITEM DESCRIPTION
---- -----------
10.26 Form of Change of Control Agreement between each
executive officer of the Company (other than Gordon
Bridge) and the Company
10.27 Change of Control Agreement dated June 11, 1997 between Gordon
Bridge and the Company
10.28 Letter Agreement dated April 28, 1997 between the Company and
Gordon Bridge
11.1 Computation of Earnings Per Share
27 Financial Data Schedule
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONNECT, Inc.
Date: August 13, 1997 /s/ Gordon J. Bridge
- ------------------------- --------------------------
Gordon J. Bridge
President, Chief Executive
Officer, and Chairman
(Principal Executive Officer)
Date: August 13, 1997 /s/ Joseph Girata
- ------------------------- --------------------------
Joseph Girata
Vice President, Finance &
Administration, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-14-
<PAGE>
EXHIBIT 10.26
FORM OF CHANGE OF CONTROL AGREEMENT BETWEEN EACH EXECUTIVE OFFICER OF THE
COMPANY (OTHER THAN GORDON BRIDGE) AND THE COMPANY
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "Agreement") is made and entered
into effective as of June 11, 1997, by and between Employee (the "Employee") and
CONNECT, Inc., a Delaware corporation (the "Company").
RECITALS
A. It is expected that another company or other entity may from time
to time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors (the "Board"). The Board recognizes that such consideration can be
a distraction to the Employee, an executive corporate officer of the Company,
and can cause the Employee to consider alternative employment opportunities. The
Board has determined that it is in the best interests of the Company and its
shareholders to assure that the Company will have the continued dedication and
objectivity of the Employee, notwithstanding the possibility, threat or
occurrence of a Hostile Takeover or a Change of Control (as defined below) of
the Company.
B. The Board believes that it is in the best interests of the
Company and its shareholders to provide the Employee with an incentive to
continue his or her employment with the Company.
C. The Board believes that it is imperative to provide the Employee
with certain benefits upon a Hostile Takeover and, under certain circumstances,
upon termination of the Employee's employment in connection with a Change of
Control, which benefits are intended to provide the Employee with financial
security and provide sufficient income and encouragement to the Employee to
remain with the Company notwithstanding the possibility of a Hostile Takeover or
a Change of Control.
D. To accomplish the foregoing objectives, the Board of Directors
has directed the Company, upon execution of this Agreement by the Employee, to
agree to the terms provided in this Agreement.
E. The Board, for the reasons set forth above, authorized the Company
to enter into Change of Control Agreements ("Agreements") with each of its
executive corporate officers substantially in the form hereof.
F. Certain capitalized terms used in the Agreement are defined in
Section 4 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. At-Will Employment. The Company and the Employee
------------------
acknowledge that the Employee's employment is and shall continue to be at-will,
as defined under applicable law. If the Employee's employment terminates for any
reason, including (without
-1-
<PAGE>
limitation) any termination prior to a Change of Control, the Employee shall not
be entitled to any payments or benefits, other than as provided by this
Agreement, or as may otherwise be available in accordance with the terms of
Employee's offer letter from the Company and the Company's established employee
plans and written policies at the time of termination. The terms of this
Agreement shall terminate upon the earlier of (i) the date on which Employee
ceases to be employed as an executive corporate officer of the Company, (ii) the
date that all obligations of the parties hereunder have been satisfied, or (iii)
two (2) years after a Change of Control. A termination of the terms of this
Agreement pursuant to the preceding sentence shall be effective for all
purposes, except that such termination shall not affect the payment or provision
of compensation or benefits on account of a termination of employment occurring
prior to the termination of the terms of this Agreement.
2. Hostile Takeover. Subject to Section 7(l) below, in the
----------------
event of a Hostile Takeover and regardless of whether the Employee's employment
with the Company is terminated in connection with such takeover, each stock
option granted for the Company's securities held by the Employee shall become
immediately exercisable and vested, and shall be considered "Vested Shares"
under each such stock option, on the effective date of the Hostile Takeover as
to 100% of the shares issuable upon exercise of such option and shall be
exercisable in full in accordance with the provisions of the Option Agreement
and Plan pursuant to which such option was granted; and the Company's right of
repurchase with respect to such shares and any shares previously issued upon
exercise of stock options held by the Employee shall immediately lapse on such
date.
3. Change of Control.
-----------------
(a) Termination Following A Change of Control. Subject to
-----------------------------------------
Section 7(l) below, if the Employee's employment with the Company is terminated
at any time within two (2) years after a Change of Control, then the Employee
shall be entitled to receive severance benefits as follows:
(i) Voluntary Resignation. If the Employee
---------------------
voluntarily resigns from the Company (other than as an Involuntary Termination
(as defined below), or if the Company terminates the Employee's employment for
Cause (as defined below), then the Employee shall not be entitled to receive
severance payments. The Employee's benefits will be terminated under the
Company's then existing benefit plans and policies in accordance with such plans
and policies in effect on the date of termination or as otherwise determined by
the Board of Directors of the Company.
(ii) Involuntary Termination. If the Employee's
-----------------------
employment is terminated as a result of an Involuntary Termination other than
for Cause, the Employee shall be entitled to receive the following benefits: (i)
monthly severance payments during the period from the date of the Employee's
termination
-2-
<PAGE>
until the date 12 months after the effective date of the termination (the
"Severance Period") equal to the monthly salary which the Employee was receiving
immediately prior to the Change of Control; (ii) monthly severance payments
during the Severance Period equal to 1/12th of the Employee's "target bonus" (as
defined below) for the fiscal year in which the termination occurs (iii)
continuation of health and life insurance benefits through the end of the
Severance Period substantially identical to those to which the Employee was
entitled immediately prior to the Change of Control; (iv) each stock option held
by the Employee shall become immediately exercisable and vested, and shall be
considered "Vested Shares" under each such stock option, on the date of
termination as to 100% of the shares issuable upon exercise of such option and
shall be exercisable in full in accordance with the provisions of the Option
Agreement and Plan pursuant to which such option was granted; and the Company's
right of repurchase with respect to such shares and any shares previously issued
upon exercise of stock options held by the Employee shall immediately lapse on
such date; and (v) outplacement services with a total value not to exceed
$15,000. The severance payments described in subsections (i) and (ii) above
shall be paid during the Severance Period in accordance with the Company's
standard payroll practices. For purposes of this Agreement, the term "target
bonus" shall mean that percentage of the Employee's base salary that is
prescribed by the Company under its Management Bonus Program as the percentage
of such base salary payable to the Company as a bonus if the Company pays
bonuses at one-hundred percent (100%) of its operating plan.
(iii) Involuntary Termination for Cause. If the
---------------------------------
Employee's employment is terminated for Cause, then the Employee shall not be
entitled to receive severance payments. The Employee's benefits will be
terminated under the Company's then existing benefit plans and policies in
accordance with such plans and policies in effect on the date of termination.
(b) Termination Apart from A Change of Control. In the
------------------------------------------
event the Employee's employment terminates for any reason, either prior to the
occurrence of a Change of Control or after the two year period following the
effective date of a Change of Control, then the Employee shall not be entitled
to receive any severance payments under this Agreement. The Employee's benefits
will be terminated under the terms of the Company's then existing benefit plans
and policies in accordance with such plans and policies in effect on the date of
termination or as otherwise determined by the Board of Directors of the Company.
4. Definition of Terms. The following terms referred to in
-------------------
this Agreement shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the
-----------------
occurrence of any of the following events:
(i) Ownership. Any "Person" (as such term is used
---------
in Sections 13(d) and 14(d) of the Securities Exchange Act of
-3-
<PAGE>
1934, as amended) is or becomes the "Beneficial Owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the total voting power represented
by the Company's then outstanding voting securities without the approval of the
Board of Directors of the Company; or
(ii) Change in Board Composition. A change in the
---------------------------
composition of the Board of Directors of the Company, as a result of which fewer
than a majority of the directors are Incumbent Directors. "Incumbent Directors"
shall mean directors who either (A) are directors of the Company as of the date
of this Agreement or (B) are elected, or nominated for election, to the Board of
Directors of the Company with the affirmative votes of at least a majority of
the Incumbent Directors at the time of such election or nomination (but shall
not include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company).
(b) Cause. "Cause" shall mean (i) gross negligence or
-----
willful misconduct in the performance of the Employee's duties to the Company
where such gross negligence or willful misconduct has resulted or is likely to
result in substantial and material damage to the Company or its subsidiaries
(ii) repeated unexplained or unjustified absence from the Company, (iii) a
material and willful violation of any federal or state law; (iv) commission of
any act of fraud with respect to the Company; or (v) conviction of a felony or a
crime involving moral turpitude causing material harm to the standing and
reputation of the Company, in each case as determined in good faith by the Board
of Directors of the Company.
(c) Hostile Takeover. "Hostile Takeover" shall mean a
----------------
transaction or series of transactions that results in any person becoming the
Beneficial Owner, directly or indirectly, of securities of the Company
representing more than fifty percent (50%) of the total voting power represented
by the Company's then outstanding voting securities without the approval of the
Board of Directors of the Company.
(d) Involuntary Termination. "Involuntary Termination"
-----------------------
shall include any termination by the Company other than for Cause and the
Employee's voluntary termination, following (i) a material reduction or change
in job duties, responsibilities and requirements inconsistent with the
Employee's position with the Company and the Employee's prior duties,
responsibilities and requirements; (ii) any reduction of the Employee's base
compensation (other than in connection with a general decrease in base salaries
for most officers of the Company and any successor corporation); or (iii) the
Employee's refusal to relocate to a facility or location more than 50 miles from
the Company's current location.
-4-
<PAGE>
5. Successors. Any successor to the Company (whether direct or
----------
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and/or assets
shall assume the obligations under this Agreement and agree expressly to perform
the obligations under this Agreement in the same manner and to the same extent
as the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of the Employee's rights
hereunder shall inure to the benefit of, and be enforceable by, the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
6. Notice. Notices and all other communications contemplated
------
by this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or certified
mail, return receipt requested and postage prepaid. Mailed notices to the
Employee shall be addressed to the Employee at the home address which the
Employee most recently communicated to the Company in writing. In the case of
the Company, mailed notices shall be addressed to its corporate headquarters,
and all notices shall be directed to the attention of its Secretary.
7. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Employee shall not be
-------------------
required to mitigate the amount of any payment contemplated by this Agreement
(whether by seeking new employment or in any other manner), nor, except as
otherwise provided in this Agreement, shall any such payment be reduced by any
earnings that the Employee may receive from any other source.
(b) Waiver. No provision of this Agreement shall be
------
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
---------------
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
supersedes any agreement of the same title and concerning similar subject matter
dated prior to the date of this Agreement, and by execution of this Agreement
both parties agree that any such predecessor agreement shall be deemed null and
void.
(d) Choice of Law. The validity, interpretation,
-------------
construction and performance of this Agreement shall be governed
-5-
<PAGE>
by the laws of the State of California without reference to conflict of laws
provisions.
(e) Severability. If any term or provision of this
------------
Agreement or the application thereof to any circumstance shall, in any
jurisdiction and to any extent, be invalid or unenforceable, such term or
provision shall be ineffective as to such jurisdiction to the extent of such
invalidity or unenforceability without invalidating or rendering unenforceable
the remaining terms and provisions of this Agreement or the application of such
terms and provisions to circumstances other than those as to which it is held
invalid or unenforceable, and a suitable and equitable term or provision shall
be substituted therefor to carry out, insofar as may be valid and enforceable,
the intent and purpose of the invalid or unenforceable term or provision.
(f) Arbitration. Any dispute or controversy arising under
-----------
or in connection with this Agreement may be settled at the option of either
party by binding arbitration in the County of Santa Clara, California, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. Punitive damages shall not be awarded.
(g) Legal Fees and Expenses. The parties shall each bear
-----------------------
their own expenses, legal fees and other fees incurred in connection with this
Agreement.
(h) No Assignment of Benefits. The rights of any person to
-------------------------
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (h) shall be
void.
(i) Employment Taxes. All payments made pursuant to this
----------------
Agreement will be subject to withholding of applicable income and employment
taxes.
(j) Assignment by Company. The Company may assign its
---------------------
rights under this Agreement to an affiliate, and an affiliate may assign its
rights under this Agreement to another affiliate of the Company or to the
Company; provided, however, that no assignment shall be made if the net worth of
the assignee is less than the net worth of the Company at the time of
assignment. In the case of any such assignment, the term "Company" when used in
a section of this Agreement shall mean the corporation that actually employs the
Employee.
(k) Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
-6-
<PAGE>
(l) Limitation on Payments. In the event that the
----------------------
severance and other benefits provided for in this Agreement to the Employee (i)
constitute "parachute payments" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this
Section, would be subject to the excise tax imposed by Section 4999 of the Code,
then the Employee's benefits under Sections 2 and 3 shall be payable either:
(a) in full, or
(b) as to such lesser amount which would result in no
portion of such severance benefits being subject to excise tax under Section
4999 of the Code, whichever of the foregoing amounts, taking into account the
applicable federal, state and local income taxes and the excise tax imposed by
Section 4999, results in the receipt by the Employee on an after-tax basis, of
the greatest amount of benefits under Sections 2 and 3, notwithstanding that all
or some portion of such benefits may be taxable under Section 4999 of the Code.
Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 7(l) shall be made in writing by the
Company's independent public accountants (the "Accountants"), whose
determination shall be conclusive and binding upon the Employee and the Company
for all purposes. For purposes of making the calculations required by this
Section 7(l), the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Section 280G and 4999 of the Code.
The Company and the Employee shall furnish to the Accountants such information
and documents as the Accountants may reasonably request in order to make a
determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 7(l).
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
CONNECT, INC EMPLOYEE
-7-
<PAGE>
EXHIBIT 10.27
CHANGE OF CONTROL AGREEMENT DATED JUNE 11, 1997 BETWEEN GORDON BRIDGE AND
THE COMPANY
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "Agreement") is made and entered
into effective as of June 11, 1997, by and between Gordon Bridge (the
"Employee") and CONNECT, Inc., a Delaware corporation (the "Company").
RECITALS
A. It is expected that another company or other entity may from time
to time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors (the "Board"). The Board recognizes that such consideration can be
a distraction to the Employee, an executive corporate officer of the Company,
and can cause the Employee to consider alternative employment opportunities. The
Board has determined that it is in the best interests of the Company and its
shareholders to assure that the Company will have the continued dedication and
objectivity of the Employee, notwithstanding the possibility, threat or
occurrence of a Hostile Takeover or a Change of Control (as defined below) of
the Company.
B. The Board believes that it is in the best interests of the
Company and its shareholders to provide the Employee with an incentive to
continue his or her employment with the Company.
C. The Board believes that it is imperative to provide the Employee
with certain benefits upon a Hostile Takeover and, under certain circumstances,
upon termination of the Employee's employment in connection with a Change of
Control, which benefits are intended to provide the Employee with financial
security and provide sufficient income and encouragement to the Employee to
remain with the Company notwithstanding the possibility of a Hostile Takeover or
a Change of Control.
D. To accomplish the foregoing objectives, the Board of Directors
has directed the Company, upon execution of this Agreement by the Employee, to
agree to the terms provided in this Agreement.
E. The Board, for the reasons set forth above, authorized the Company
to enter into Change of Control Agreements ("Agreements") with each of its
executive corporate officers substantially in the form hereof.
F. Certain capitalized terms used in the Agreement are defined in
Section 4 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. At-Will Employment. The Company and the Employee
------------------
acknowledge that the Employee's employment is and shall continue to be at-will,
as defined under applicable law. If the Employee's employment terminates for any
reason, including (without limitation) any termination prior to a Change of
Control, the
-1-
<PAGE>
Employee shall not be entitled to any payments or benefits, other than as
provided by this Agreement, or as may otherwise be available in accordance with
the terms of Employee's offer letter from the Company and the Company's
established employee plans and written policies at the time of termination. The
terms of this Agreement shall terminate upon the earlier of (i) the date on
which Employee ceases to be employed as an executive corporate officer of the
Company, (ii) the date that all obligations of the parties hereunder have been
satisfied, or (iii) two (2) years after a Change of Control. A termination of
the terms of this Agreement pursuant to the preceding sentence shall be
effective for all purposes, except that such termination shall not affect the
payment or provision of compensation or benefits on account of a termination of
employment occurring prior to the termination of the terms of this Agreement.
2. Hostile Takeover. Subject to Section 7(l) below, in the
----------------
event of a Hostile Takeover and regardless of whether the Employee's employment
with the Company is terminated in connection with such takeover, each stock
option granted for the Company's securities held by the Employee shall become
immediately exercisable and vested, and shall be considered "Vested Shares"
under each such stock option, on the effective date of the Hostile Takeover as
to 100% of the shares issuable upon exercise of such option and shall be
exercisable in full in accordance with the provisions of the Option Agreement
and Plan pursuant to which such option was granted; and the Company's right of
repurchase with respect to such shares and any shares previously issued upon
exercise of stock options held by the Employee shall immediately lapse on such
date.
3. Change of Control.
-----------------
(a) Termination Following A Change of Control. Subject to
-----------------------------------------
Section 7(l) below, if the Employee's employment with the Company is terminated
at any time within two (2) years after a Change of Control, then the Employee
shall be entitled to receive severance benefits as follows:
(i) Voluntary Resignation. If the Employee
---------------------
voluntarily resigns from the Company (other than as an Involuntary Termination
(as defined below), or if the Company terminates the Employee's employment for
Cause (as defined below), then the Employee shall not be entitled to receive
severance payments. The Employee's benefits will be terminated under the
Company's then existing benefit plans and policies in accordance with such plans
and policies in effect on the date of termination or as otherwise determined by
the Board of Directors of the Company.
(ii) Involuntary Termination. If the Employee's
-----------------------
employment is terminated as a result of an Involuntary Termination other than
for Cause, the Employee shall be entitled to receive the following benefits: (i)
monthly severance payments during the period from the date of the Employee's
termination until the date 12 months after the effective date of the
-2-
<PAGE>
termination (the "Severance Period") equal to the monthly salary which the
Employee was receiving immediately prior to the Change of Control; (ii) monthly
severance payments during the Severance Period equal to 1/12th of the Employee's
"target bonus" (as defined below) for the fiscal year in which the termination
occurs (iii) continuation of health and life insurance benefits through the end
of the Severance Period substantially identical to those to which the Employee
was entitled immediately prior to the Change of Control; (iv) each stock option
held by the Employee shall become immediately exercisable and vested, and shall
be considered "Vested Shares" under each such stock option, on the date of
termination as to 100% of the shares issuable upon exercise of such option and
shall be exercisable in full in accordance with the provisions of the Option
Agreement and Plan pursuant to which such option was granted; and the Company's
right of repurchase with respect to such shares and any shares previously issued
upon exercise of stock options held by the Employee shall immediately lapse on
such date; and (v) outplacement services with a total value not to exceed
$15,000. The severance payments described in subsections (i) and (ii) above
shall be paid during the Severance Period in accordance with the Company's
standard payroll practices. For purposes of this Agreement, the term "target
bonus" shall mean that percentage of the Employee's base salary that is
prescribed by the Company under its Management Bonus Program as the percentage
of such base salary payable to the Company as a bonus if the Company pays
bonuses at one-hundred percent (100%) of its operating plan.
(iii) Involuntary Termination for Cause. If the
---------------------------------
Employee's employment is terminated for Cause, then the Employee shall not be
entitled to receive severance payments. The Employee's benefits will be
terminated under the Company's then existing benefit plans and policies in
accordance with such plans and policies in effect on the date of termination.
(b) Termination Apart from A Change of Control. In the
------------------------------------------
event the Employee's employment terminates for any reason, either prior to the
occurrence of a Change of Control or after the two year period following the
effective date of a Change of Control, then the Employee shall not be entitled
to receive any severance payments under this Agreement. The Employee's benefits
will be terminated under the terms of the Company's then existing benefit plans
and policies in accordance with such plans and policies in effect on the date of
termination or as otherwise determined by the Board of Directors of the Company.
4. Definition of Terms. The following terms referred to in
-------------------
this Agreement shall have the following meanings:
(a) Change of Control. "Change of Control" shall mean the
-----------------
occurrence of any of the following events:
(i) Ownership. Any "Person" (as such term is used
---------
in Sections 13(d) and 14(d) of the
-3-
<PAGE>
Securities Exchange Act of 1934, as amended) is or becomes the "Beneficial
Owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of
securities of the Company representing fifty percent (50%) or more of the total
voting power represented by the Company's then outstanding voting securities
without the approval of the Board of Directors of the Company; or
(ii) Merger/Sale of Assets. A merger or
---------------------
consolidation of the Company, whether or not approved by the Board of Directors
of the Company, other than a merger or consolidation which would result in
holders of more than fifty percent (50%) of the voting power represented by the
voting securities of the Company outstanding immediately prior thereto
continuing to hold (either by the voting securities remaining outstanding or by
being converted into voting securities of the surviving entity) more than fifty
percent (50%) of the total voting power represented by the voting securities of
the Company, or such surviving entity outstanding immediately after such merger
or consolidation, or the Company sells all substantially all of the Company's
assets.
(iii) Change in Board Composition. A change in the
---------------------------
composition of the Board of Directors of the Company, as a result of which fewer
than a majority of the directors are Incumbent Directors. "Incumbent Directors"
shall mean directors who either (A) are directors of the Company as of the date
of this Agreement or (B) are elected, or nominated for election, to the Board of
Directors of the Company with the affirmative votes of at least a majority of
the Incumbent Directors at the time of such election or nomination (but shall
not include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company).
(b) Cause. "Cause" shall mean (i) gross negligence or
-----
willful misconduct in the performance of the Employee's duties to the Company
where such gross negligence or willful misconduct has resulted or is likely to
result in substantial and material damage to the Company or its subsidiaries
(ii) repeated unexplained or unjustified absence from the Company, (iii) a
material and willful violation of any federal or state law; (iv) commission of
any act of fraud with respect to the Company; or (v) conviction of a felony or a
crime involving moral turpitude causing material harm to the standing and
reputation of the Company, in each case as determined in good faith by the Board
of Directors of the Company.
(c) Hostile Takeover. "Hostile Takeover" shall mean a
----------------
transaction or series of transactions that results in any person becoming the
Beneficial Owner, directly or indirectly, of securities of the Company
representing more than fifty percent
-4-
<PAGE>
(50%) of the total voting power represented by the Company's then outstanding
voting securities without the approval of the Board of Directors of the Company.
(d) Involuntary Termination. "Involuntary Termination"
-----------------------
shall include any termination by the Company other than for Cause and the
Employee's voluntary termination, following (i) a material reduction or change
in job duties, responsibilities and requirements inconsistent with the
Employee's position with the Company and the Employee's prior duties,
responsibilities and requirements; (ii) any reduction of the Employee's base
compensation (other than in connection with a general decrease in base salaries
for most officers of the Company and any successor corporation); or (iii) the
Employee's refusal to relocate to a facility or location more than 50 miles from
the Company's current location.
5. Successors. Any successor to the Company (whether direct or
----------
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and/or assets
shall assume the obligations under this Agreement and agree expressly to perform
the obligations under this Agreement in the same manner and to the same extent
as the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of the Employee's rights
hereunder shall inure to the benefit of, and be enforceable by, the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
6. Notice. Notices and all other communications contemplated
------
by this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or certified
mail, return receipt requested and postage prepaid. Mailed notices to the
Employee shall be addressed to the Employee at the home address which the
Employee most recently communicated to the Company in writing. In the case of
the Company, mailed notices shall be addressed to its corporate headquarters,
and all notices shall be directed to the attention of its Secretary.
7. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Employee shall not be
-------------------
required to mitigate the amount of any payment contemplated by this Agreement
(whether by seeking new employment or in any other manner), nor, except as
otherwise provided in this Agreement, shall any such payment be reduced by any
earnings that the Employee may receive from any other source.
(b) Waiver. No provision of this Agreement shall be
------
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the
-5-
<PAGE>
Employee). No waiver by either party of any breach of, or of compliance with,
any condition or provision of this Agreement by the other party shall be
considered a waiver of any other condition or provision or of the same condition
or provision at another time.
(c) Whole Agreement. No agreements, representations or
---------------
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
supersedes any agreement of the same title and concerning similar subject matter
dated prior to the date of this Agreement, and by execution of this Agreement
both parties agree that any such predecessor agreement shall be deemed null and
void; provided, however, that this Agreement does not supersede the Letter
Agreement between the Company and Employee dated April 28, 1997 (the "April
Agreement") and the Offer Letter to Employee dated October 19, 1995 (the
"October Offer Letter"), as clarified in the Letter dated June 6, 1996 from the
Company to Employee (the "June Letter"). Notwithstanding the other terms of this
Agreement, the benefits provided by this Agreement are in addition to the
benefits provided to Employee under the April Agreement and October Offer
Letter, as clarified in the June Letter.
(d) Choice of Law. The validity, interpretation,
-------------
construction and performance of this Agreement shall be governed by the laws of
the State of California without reference to conflict of laws provisions.
(e) Severability. If any term or provision of this
------------
Agreement or the application thereof to any circumstance shall, in any
jurisdiction and to any extent, be invalid or unenforceable, such term or
provision shall be ineffective as to such jurisdiction to the extent of such
invalidity or unenforceability without invalidating or rendering unenforceable
the remaining terms and provisions of this Agreement or the application of such
terms and provisions to circumstances other than those as to which it is held
invalid or unenforceable, and a suitable and equitable term or provision shall
be substituted therefor to carry out, insofar as may be valid and enforceable,
the intent and purpose of the invalid or unenforceable term or provision.
(f) Arbitration. Any dispute or controversy arising under
-----------
or in connection with this Agreement may be settled at the option of either
party by binding arbitration in the County of Santa Clara, California, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. Punitive damages shall not be awarded.
(g) Legal Fees and Expenses. The parties shall each bear
-----------------------
their own expenses, legal fees and other fees incurred in connection with this
Agreement.
-6-
<PAGE>
(h) No Assignment of Benefits. The rights of any person to
-------------------------
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (h) shall be
void.
(i) Employment Taxes. All payments made pursuant to this
----------------
Agreement will be subject to withholding of applicable income and employment
taxes.
(j) Assignment by Company. The Company may assign its
---------------------
rights under this Agreement to an affiliate, and an affiliate may assign its
rights under this Agreement to another affiliate of the Company or to the
Company; provided, however, that no assignment shall be made if the net worth of
the assignee is less than the net worth of the Company at the time of
assignment. In the case of any such assignment, the term "Company" when used in
a section of this Agreement shall mean the corporation that actually employs the
Employee.
(k) Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
(l) Limitation on Payments. In the event that the
----------------------
severance and other benefits provided for in this Agreement to the Employee (i)
constitute "parachute payments" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this
Section, would be subject to the excise tax imposed by Section 4999 of the Code,
then the Employee's benefits under Sections 2 and 3 shall be payable either:
(a) in full, or
(b) as to such lesser amount which would result in no
portion of such severance benefits being subject to excise tax under Section
4999 of the Code, whichever of the foregoing amounts, taking into account the
applicable federal, state and local income taxes and the excise tax imposed by
Section 4999, results in the receipt by the Employee on an after-tax basis, of
the greatest amount of benefits under Sections 2 and 3, notwithstanding that all
or some portion of such benefits may be taxable under Section 4999 of the Code.
Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 7(l) shall be made in writing by the
Company's independent public accountants (the "Accountants"), whose
determination shall be conclusive and binding upon the Employee and the Company
for all purposes. For purposes of making
-7-
<PAGE>
the calculations required by this Section 7(l), the Accountants may make
reasonable assumptions and approximations concerning applicable taxes and may
rely on reasonable, good faith interpretations concerning the application of
Section 280G and 4999 of the Code. The Company and the Employee shall furnish to
the Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section. The Company shall
bear all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this Section 7(l).
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
CONNECT, INC. /s/ Gordon J. Bridge
/s/ Joseph Girata ------------------------
- --------------------------
Joseph Girata
Vice President, Finance &
Administration, and
Chief Financial Officers
-8-
<PAGE>
EXHIBIT 10.28
LETTER AGREEMENT DATED APRIL 28, 1997 BETWEEN THE COMPANY AND GORDON BRIDGE
April 28, 1997
Mr. Gordon J. Bridge
CONNECT, Inc.
515 Ellis Street
Mountain View, CA 94043
Dear Gordon:
The Board of Directors of CONNECT, Inc. is pleased to offer you
the position as Chairman and President and Chief Executive Officer commencing as
of April 8, 1997. You will report directly to the Board and all CONNECT officers
will report to you.
Your salary will be $225,000 per annum, payable in accordance with
CONNECT's standard payroll policy, commencing April 1, 1997. In addition, over
CONNECT's next four fiscal quarters, you will be eligible to receive aggregate
bonus payments of up to $285,000 on a quarterly basis and at the end of the 1997
fiscal year as follows:
1. A bonus of $25,000 payable June 30, 1997.
2. A bonus of $12,500 payable during the month following each fiscal
quarter beginning with the third quarter of 1997 and ending March
31, 1998, provided that you meet the quarterly revenue plan set
and approved by the Board of Directors.
3. A bonus of $12,500 payable during the month following each fiscal
quarter beginning with the third quarter of 1997 and ending March
31, 1998, provided that you meet the quarterly operating income
plan set and approved by the Board of Directors.
4. A bonus of $42,500 payable in January of 1998, provided that you
meet the 1997 revenue plan set and approved by the Board of
Directors.
5. A bonus of $42,500 payable in January 1998 provided that you meet
the 1997 operating income plan set and approved by the Board of
Directors.
6. A bonus of $100,000, payable when, in the good faith judgment of
the Board, you have met the strategic objectives set by the Board
of Directors.
The Company will loan to you $150,000 at the minimum AFR in effect
(currently 5.91%) pursuant to CONNECT's standard, full recourse promissory note.
The note will become due an payable upon the earlier of April 1, 2,000 or the
termination of your employment and any subsequent consulting relationship with
the Company. At the time of repayment, you may pay off the note and accrued
interest in cash or request that the Company offset amounts due under the note
with earned and unpaid bonus payments, or the repayment may occur in accordance
with any other mutually agreed to arrangement.
The Company also has granted you a nonstatutory option to purchase
400,000 shares of CONNECT Common Stock at the price of $1.25 per share, which is
the closing price on April 28, 1997, the date of the Board action approving the
grant. As a nonstatutory stock option, any difference between the fair market
value of CONNECT Common Stock on the
-1-
<PAGE>
date of exercise and the date of grant will be treated as ordinary income and
withholding tax will be due from you. The option will vest at the rate of 1/8th
of the shares issuable upon exercise of the option on October 1, 1997, and the
remaining shares will vest in 42 equal monthly installments thereafter for so
long as you remain an employee of, or consultant to, CONNECT. The stock option
will be subject to the execution by you of an Option Agreement setting forth
these terms in detail. Under the Option Agreement you will be entitled to
exercise the stock option with respect to the shares that have vested as of the
date of termination for 30 days after such date. In addition, in the event that
your employment with the Company is terminated by the Company without cause
(which the Company shall have the right to do because your employment is on an
at-will basis) during the one year period following any such termination, you
will be entitled to act as a consultant to the Company, and vesting will
continue to occur during such consulting period.
In addition, under the terms of the Stock Option Agreements issued
to you over the course of your employment with the Company, you were granted
options to purchase 195,000 (the "November Options"), 125,000 (the "January
Options") and 50,000 (the "April Options") shares (on a post-split basis),
respectively, of the Company's Common Stock under the Company's 1989 Stock
Option Plan and 1996 Stock Option Plan. As of the date you became President and
CEO of the Company, the Company's repurchase rights under the November, January
Options and April Options shall have lapsed to the extent of 92,018, 39,062 and
7,812 shares, respectively. Pursuant to the terms of Section 1(g) of the Stock
Option Agreement for each of the January Options and April Options, the Board of
Directors of the Company has determined that the Performance Objectives set
forth therein have been satisfied and that, as a result, the Company's
repurchase rights under the January and April Options shall hereafter be treated
as having lapsed, and shall continue to lapse, at the rate of 12/48 of the
option shares on the Initial Vesting Date (i.e., January 1, 1997) and 1/48 of
such shares on the last day of each full calendar month thereafter. In
accordance with the terms of the Stock Option Agreements for the November
Options, January Options and April Options, the Company's repurchase rights
under the November Options, January Options and April Options shall continue to
lapse at the rate of 1/36 per month for the November Options and 1/48 per month
for the January Options and April Options, in accordance with the terms of the
Stock Option Agreements covering the November, January and April Options.
This letter supersedes our previous letters and emails relating to
the subject matter of this letter, as well as any current employment and
consulting agreements you may have with CONNECT, except that the Stock Option
Agreements covering the November, January and April Options shall remain in
effect and the Offer Letter to you dated October 19, 1995, as clarified in the
letter dated June 7, 1996, shall also remain in effect to the extent that such
letters relate to termination of employment or the vesting of options on the
occurrence of a change of control (it being understood that the acceleration
provisions of such letters relating to the occurrence of a termination of
employment or change of control shall not apply to the 400,000 options described
above as being granted in April 1997).
-2-
<PAGE>
Regards,
/s/ William B. Welty
- ---------------------------
William B. Welty
For the Board of Directors
CONNECT, Inc.
I accept this offer. /s/ Gordon J. Bridge 4/28/97
----------------------- -------
Gordon Bridge Date
-3-
<PAGE>
EXHIBIT 11.1
CONNECT, INC.
STATEMENT REGARDING COMPUTATION OF PRO FORMA NET LOSS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30,
JUNE 30,
------------------------------ -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(3,163) $(4,062) $(8,361) $(9,127)
Weighted average common shares outstanding 18,859 447 18,757 460
Shares related to SAB No. 64 and 83 ---- 13,286 ---- 13,286
(Topic 4, Sec. D)
Conversion of preferred stock to common stock not ---- 4,147 ---- 4,147
included in shares related to SAB No. 64 and
83 (Topic 4, Sec. D)
----------------------------------------------------------
Total shares used in pro forma net loss per share 18,859 17,880 18,757 17,893
==========================================================
Pro forma net loss per share $(0.17) $(0.23) $(0.45) $(0.51)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,587
<SECURITIES> 0
<RECEIVABLES> 2,814
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,077
<PP&E> 7,024
<DEPRECIATION> (3,871)
<TOTAL-ASSETS> 12,356
<CURRENT-LIABILITIES> 5,424
<BONDS> 0
0
0
<COMMON> 60,878
<OTHER-SE> (118)
<TOTAL-LIABILITY-AND-EQUITY> 12,356
<SALES> 1,479
<TOTAL-REVENUES> 3,180
<CGS> 218
<TOTAL-COSTS> 2,331
<OTHER-EXPENSES> 4,041
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76
<INCOME-PRETAX> (3,163)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,163)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
