<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 000-20873
CONNECT, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0431045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Indentification Number)
515 Ellis Street
Mountain View, California 94043-2242
(Address of principal executive offices) (Zip code)
(415) 254-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of April 30, 1997 there were 18,813,900 shares of the Registrant's Common
Stock outstanding.
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CONNECT, INC.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of 3
March 31, 1997 and December 31, 1996
Condensed Statements of Operations for the three months 4
ended March 31, 1997 and 1996
Condensed Statements of Cash Flows for the 5
three months ended March 31, 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 12
ITEM 6. Exhibits and Reports on Form 8-K. 12
SIGNATURES
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ITEM 1. FINANCIAL STATEMENTS
CONNECT, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 8,947 $ 12,214
Accounts receivable, less allowances for doubtful accounts of $242
at March 31, 1997 and $222 at December 31, 1996............... 1,804 2,533
Prepaid expenses and other current assets ........................ 645 606
-------- --------
Total current assets .................................................. 11,396 15,353
Property and equipment, net ........................................... 3,384 3,647
Deposits and other assets ............................................. 153 154
-------- --------
Total assets ................................................. $ 14,933 $ 19,154
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable .................................................... $ 396 $ 61
Accounts payable ................................................. 1,381 1,688
Accrued payroll and related expenses ............................. 696 941
Other accrued liabilities ........................................ 1,363 1,321
Deferred revenue ................................................. 163 189
Current portion of extended vendor liabilities ................... 263 261
Obligations under capital leases ................................. 562 548
-------- --------
Total current liabilities ............................................. 4,824 5,009
Notes payable .................................................... 1,019 9
Long-term portion of extended vendor liabilities.................. 382 417
Long-term obligations under capital leases ....................... 223 364
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Authorized shares--10,000,000
Issued and outstanding--none ................................. -- --
Common stock: $.001 par value
Authorized shares--40,000,000
Issued and outstanding shares--18,749,301 at March 31, 1997
and 18,531,467 at December 31, 1996 .......................... 19 19
Additional paid-in capital ....................................... 60,766 60,448
Deferred compensation ............................................ (129) (139)
Accumulated deficit .............................................. (52,171) (46,973)
-------- --------
Total stockholders' equity ............................................ 8,485 13,355
-------- --------
Total liabilities and stockholders' equity ............................ $ 14,933 $ 19,154
======== ========
</TABLE>
See accompanying notes.
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CONNECT, INC.
STATEMENTS OF OPERATIONS
(in thousands, except loss per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
---- ----
<S> <C> <C>
REVENUE:
License ........................................... $ 403 $ 404
Service ........................................... 1,484 1,059
-------- --------
Total revenue ................................. 1,887 1,463
COST OF REVENUE:
License ........................................... 176 134
Service ........................................... 2,683 2,209
-------- --------
Total cost of revenue ......................... 2,859 2,343
-------- --------
Gross profit (loss) ............................... (972) (880)
OPERATING EXPENSES:
Research and development .......................... 1,408 1,174
Sales and marketing ............................... 2,218 2,480
General and administrative ........................ 651 546
-------- --------
Total operating expenses ...................... 4,277 4,200
-------- --------
LOSS FROM OPERATIONS .............................. (5,249) (5,080)
Interest expense ....................................... (70) (97)
Interest income and other income, net .................. 121 112
-------- --------
LOSS BEFORE INCOME TAXES .......................... (5,198) (5,065)
Provision (benefit) for income taxes ................... -- --
-------- --------
NET LOSS ...................................... $ (5,198) $ (5,065)
======== ========
PRO FORMA NET LOSS PER SHARE ........................... ($ 0.28) ($ 0.28)
======== ========
Shares used in computing pro forma net loss per share... 18,655 17,856
======== ========
</TABLE>
See accompanying notes.
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CONNECT, INC.
CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ..................................................................... $ (5,198) $ (5,065)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization ........................................... 448 389
Amortization of deferred compensation ................................... 10 --
Changes in operating assets and liabilities:
Accounts receivable ................................................. 729 315
Prepaid expenses and other current assets ........................... (39) (134)
Deposits and other assets ........................................... 1 (82)
Accounts payable, accrued payroll and related expenses, other accrued
liabilities, and extended vendor liabilities........................ (543) 1,958
Deferred revenue .................................................... (26) 700
-------- --------
Net cash provided by (used in) operating activities ....................... (4,618) (1,919)
INVESTING ACTIVITIES
Purchases of property and equipment .......................................... (185) (462)
-------- --------
Net cash used in investing activities ..................................... (185) (462)
FINANCING ACTIVITIES
Proceeds from issuance of common stock ....................................... 318 19
Proceeds from issuance of preferred stock .................................... -- 938
Proceeds from issuance of notes payable ...................................... 1,437 --
Repayment of principal on notes payable ...................................... (92) (74)
Repayment of principal under capital lease obligations ....................... (127) (156)
-------- --------
Net cash provided by financing activities ................................. 1,536 727
-------- --------
Net increase (decrease) in cash and cash equivalents ......................... (3,267) (1,654)
Cash and cash equivalents at beginning of period ............................. 12,214 11,275
-------- --------
Cash and cash equivalents at end of period ................................ $ 8,947 $ 11,275
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ....................................................... $ 70 $ 97
</TABLE>
See accompanying notes.
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CONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
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 the three months ended March
31, 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
March 31,
--------------------
1997 1996
--------- -------
<S> <C> <C>
Net loss per share $ (0.28) $ (0.37)
Shares used in computing 18,655 13,709
net loss per share
</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
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December 31, 1997. At that time, the Company will be required to change the
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 ended
March 31, 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 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.
(OneServer, OrderStream are trademarks of the Company).
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The Company believes that the majority of its 1997 revenue will be generated
through licenses of OneServer and OrderStream and the performance of related
services. The Company expects that revenue from the operation of private on-
line services will constitute a decreasing portion of the Company's overall
revenue in the future.
The Company derives revenue from software license fees and services. License
fees primarily consist of revenue from licenses of the Company's application
software. Service revenue consists of fees from implementation (including
customization of licensed software), training, maintenance and support, contract
software development projects, and system hosting and on-line services. License
revenue is recognized on shipment of the application software provided there are
no significant remaining obligations and the collectability is deemed probable
by management. License fees under contracts requiring significant
implementation, including customization, of licensed application software are
recognized on a percentage-of-completion basis. Revenue from implementation
services is recognized as the services are performed, except for revenue from
certain fixed price contracts which is recognized on a percentage-of-completion
basis. Actual costs and gross margins on fixed price contracts could differ
materially from management's estimates and such differences could have a
material adverse effect on the Company's operating results and financial
conditions.
The Company also 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. Additionally,
service revenue from contract software development projects, in which the
Company develops specific technology for its customers, has been recognized on a
percentage-of-completion basis.
The Company has incurred net losses in each fiscal year since its inception
and as of March 31, 1997, has an accumulated deficit of $52.2 million. The
Company's operating expenses have increased substantially since 1994 as the
Company made investments related to the development and introduction of
OneServer. To date, all research and development costs have been expensed as
incurred and have not been capitalized because capitalizable costs have not been
material. The Company anticipates that operating expenses will continue to
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
OneServer and OrderStream by the market, and must be evaluated in light of the
risks and uncertainties frequently encountered by companies dependent upon such
early stage products. In addition, the Company's markets are new and rapidly
evolving, which heightens these risks and uncertainties. To address these
risks, the Company must, among other things, successfully implement its
marketing strategy, respond to competitive developments and continue to develop
and upgrade its products and technologies. Subsequent to March 31, 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. 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.
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REVENUE
Total revenue was $1,887,000 for the three months ended March 31, 1997,
compared to $1,463,000 for the three months ended March 31, 1996. One customer
accounted for approximately 15% of revenue for the quarter ending March 31,
1997. No other customer accounted for over 10% or more of revenue for the
quarter. While first quarter revenues are above those of the prior year, the
Company is disappointed with its overall results for the quarter. As previously
communicated by the Company, the immature market, when combined with the fact
that a significant portion of the Company's revenues are derived from a limited
and relatively small number of orders placed by large corporations, make the
Company's quarter-to-quarter revenues difficult to forecast. The Company
expects results to continue to fluctuate for the foreseeable future.
License revenue was $403,000, or 21% of total revenue, for the quarter ended
March 31, 1997 and $404,000, or 28% of total revenue, for the three months ended
March 31, 1996. License revenue fell short of expectations due in part to
several large customers either delaying or canceling planned purchases, and the
lengthening of the overall sales cycle.
Service revenue was $1,484,000, or 79% of total revenue, for the quarter
ended March 31, 1997 and $1,059,000, or 72% of total revenue, for the three
months ended March 31, 1996. In the longer term, the Company continues to
expect that service revenue will decline as a percent of total revenue due to
the Company's focus on licensing the Company's OneServer and OrderStream
products versus professional services development contracts and on-line
services. The increase in services revenues as an overall percentage of revenue
is due to the disappointing level of license revenue in the first quarter of
1997.
COST OF REVENUE
Cost of license revenue was approximately $176,000, or 44% of license
revenue, for the quarter ended March 31, 1997 and $134,000, or 33% of license
revenue, for the three months ended March 31, 1996. Cost of license revenue
includes sublicense fees and expenses relating to product media and
documentation. The increase in 1997 is primarily due to increased documentation
costs which are expensed as incurred.
Cost of service revenue was approximately $2,683,000, or 181% of service
revenue, for the quarter ended March 31, 1997 and $2,209,000, or 209% of service
revenue, for the three months ended March 31, 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.
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OPERATING EXPENSES
Research and development expenses consist primarily of personnel and
equipment costs. Research and development expenses increased 20% to $1,408,000
for the quarter ended March 31, 1997 from $1,174,000 during the quarter ended
March 31, 1996. This increase is primarily due to an increase in management
information system charges.
Sales and marketing expenses consist primarily of salaries and sales
commissions of sales and marketing personnel, travel, marketing and promotional
expenses. Sales and marketing expenses were approximately $2,218,000 for the
quarter ended March 31, 1997, and $2,480,000 for the three months ended March
31, 1996. This represents an 11% decrease from the quarter ending March 31,
1996. This is partially due to higher public relations costs in the first
quarter of 1996 as the Company changed public relation firms creating a
temporary overlap in coverage.
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
increased 19% to $651,000 for the quarter ended March 31, 1997 from $546,000
during the quarter ended March 31, 1996. The increase in 1997 is primarily due
to costs associated with being a public company.
Interest expense consists primarily of interest incurred on the Company's
equipment leases and financing secured by equipment. Interest expense decreased
28% to $70,000 for the quarter ended March 31, 1997 from $97,000 during the
quarter ended March 31, 1996.
Interest income and other income(expense), consists primarily of interest
earned on cash and cash equivalents and short term investments. Interest income
increased to approximately $121,000 for the three period ended March 31, 1997
from $112,000 from the three month period ended March 31, 1996.
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
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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.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended March 31, 1997 the Company obtained a commitment for
a $2,000,000 line of credit to be secured by equipment, furniture and fixtures.
Each advance must be at least $50,000 and secured by specific unencumbered
equipment. Amounts advanced are to be repaid over a period of up to four years
at an effective annual interest rate of approximately 15% per year. The Company
had drawn $1.4 million against this line of credit as of March 31, 1997.
Subsequent to March 31, 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. Management is
closely monitoring its cash requirements versus its available cash. The Company
anticipates that its available cash resources are sufficient to meet its
presently anticipated working capital and capital expenditure requirements
through the end of 1997 based upon these recent steps and its currently
estimated revenue for the year. 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. The
Company may need to raise additional funds in order to support more rapid
expansion, develop new or enhanced products or services, respond to competitive
pressures, acquire complementary businesses or technologies, or respond to other
requirements. The Company may seek to raise additional funds through private or
public sales of securities, strategic relationships, bank or lease financings,
or otherwise. If additional funds are raised through the issuance of equity
securities, stockholders of the Company may experience dilution, or the
securities may have rights, preferences, or privileges senior to those of the
holders of the Company's Common Stock. There
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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
Not applicable
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 March 31, 1997.
a) EXHIBITS
ITEM DESCRIPTION
---- -----------
10.25 Letter Agreement dated April 21, 1997 with Thomas P. Kehler
11.1 Computation of Earnings Per Share
27 Financial Data Schedule
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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: May 14, 1997 /s/ Gordon J. Bridge
- ------------------------- --------------------------
Gordon J. Bridge
President, Chief Executive
Officer, and Chairman
(Principal Executive Officer)
Date: May 14, 1997 /s/ Joseph Girata
- ------------------------- --------------------------
Joseph Girata
Vice President, Finance &
Administration and
Chief Financial Officer
(Principal Financial and
Accounting officer)
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EXHIBIT 10.25
LETTER AGREEMENT DATED APRIL 21, 1997 WITH THOMAS P. KEHLER
CONNECT, INC.
AGREEMENT AND MUTUAL RELEASE
This Agreement and Mutual Release ("AGREEMENT") is made by and between
CONNECT, Inc., a Delaware corporation (the "COMPANY"), and Thomas P. Kehler
("MR. KEHLER").
WHEREAS, Mr. Kehler is employed by the Company; and
WHEREAS, the Company and Mr. Kehler have mutually agreed to terminate
the existing employment relationship and to release each other from any
claims arising from or related to the employment relationship.
NOW, THEREFORE, in consideration of the mutual promises made herein,
the Company and Mr. Kehler (collectively referred to as the "PARTIES")
hereby agree as follows:
1. RESIGNATION; CONTINUATION OF EMPLOYMENT.
----------------------------------------
(a) Mr. Kehler and the Company agree to the following terms with
respect to continuation of Mr. Kehler's employment by the Company:
(i) that Mr. Kehler's status as President, Chief Executive
Officer and a member of the Board of Directors of the Company terminated on
April 8, 1997 (the "Resignation Date"), provided, however, that Mr. Kehler's
employment with the Company shall continue beyond the termination of such status
as provided in this Agreement;
(ii) that Mr. Kehler shall continue to work as an employee of the
Company until April 8, 1998, and shall be entitled to receive an annual salary
of $50,000 (less applicable withholding) while so employed. Mr. Kehler's last
day of employment is referred to in this Agreement as the Termination Date; and
(iii) that as a condition to Mr. Kehler's continued employment with
the Company, Mr. Kehler agrees to provide services to assist the President, or
other employees of the Company as designated by the President, in fulfilling
such tasks reasonably consistent with Mr. Kehler's prior position with the
Company as identified by the President.
2. SEVERANCE PAYMENT. In consideration for the release of claims set
-----------------
forth below and other obligations under this Agreement, the Company agrees to
pay Mr. Kehler a lump sum severance payment of $100,000 (less applicable tax
withholding) on the Effective Date of this Agreement.
3. EMPLOYEE BENEFITS.
-----------------
(a) Mr. Kehler shall continue to receive the Company's life, medical,
dental and vision insurance benefits at Company expense until the Termination
Date, which date shall be the "qualifying event" date under the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA").
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Following such date, Mr. Kehler shall have the right to continue, at his own
expense, coverage under the Company's medical, dental and vision (but not life)
insurance programs as provided by COBRA. Mr. Kehler's coverage under the
Company's Accidental Death & Dismemberment and Long-Term Disability Insurance
Programs shall terminate on the Termination Date.
(b) Mr. Kehler shall be entitled to keep and assume ownership of the
Company's laptop computer in his possession. Mr. Kehler shall be responsible
for any and all maintenance and repair costs incurred with respect to the
computer after the Effective Date of the Agreement.
(c) The Company agrees to maintain Mr. Kehler's voicemail and
electronic mail addresses on the Company's systems through the Termination Date.
(d) Except as otherwise provided above, Mr. Kehler shall not be
entitled to participate in any of the Company's benefit plans or programs
offered to employees or officers of the Company, including, but not limited to,
any accrual of vacation, after the Resignation Date.
4. STOCK OPTIONS. Under the terms of the Stock Option Agreements issued
-------------
to Mr. Kehler over the course of his employment with the Company, Mr. Kehler was
granted options to purchase 83,600 (the "JULY 1992 OPTIONS"), 30,550 (the "APRIL
OPTIONS"), 80,715 (the "JULY 1993 OPTIONS"), 10,000 (the "MAY OPTIONS"), 30,000
(the "DECEMBER OPTIONS") and 375,000 (the "JANUARY 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 Resignation Date,
the Company's repurchase rights under the July 1992, April, July 1993, May,
December and January options shall have lapsed to the extent of 83,600, 30,550,
80,715, 9,443, 16,874, and 78,120 shares, respectively. In consideration for
the release of claims set forth below and other obligations under this
Agreement, the Parties agree that, as of the Effective Date of this Agreement,
the Company shall no longer have the right to repurchase 25,000 additional
shares of the Company's Common Stock, pursuant to the terms of the January
Options so that as of the Effective Date of this Agreement, a total of 103,120
shares of the January Options shall be fully vested. Pursuant to the terms of
Section 1(g) of the Stock Option Agreement issued to Mr. Kehler for the January
Options, the Board of Directors of the Company has determined that the
Performance Objectives set forth therein have not been satisfied. In accordance
with the terms of the Stock Option Agreements for the May, December and January
Options and this Agreement, the Company's repurchase rights under such options
shall continue to lapse at the rate of 1/36 per month for the May Options, at
the rate of 1/48 per month for the December Options and at the rate of 1/72 per
month for the January Options through August 31, 1997. As a result of the
continuation of such options after the Resignation Date, the Company's
repurchase rights under the May, December and July Options shall lapse to the
extent of an additional 557, 3,125 and 20,832 shares, respectively. The
remaining unvested 10,001 and 251,048 shares of the December and January
Options, respectively, shall expire on August 31, 1997. Mr. Kehler acknowledges
and agrees that he remains bound by all other terms of the Stock Option
Agreements issued by the Company to Mr. Kehler.
5. NO OTHER PAYMENTS DUE. The Company agrees that it will continue to pay
---------------------
to Mr. Kehler the salary described in Section 1(a)(ii) through the Termination
Date in accordance with the Company's normal payroll practices, and
2
<PAGE>
that the Company will pay to Mr. Kehler on or before the Termination Date all
salary as may then be due to Mr. Kehler. Mr. Kehler will execute an
acknowledgment of receipt of all such payments as received and an acknowledgment
that, in light of the payment by the Company of all wages due, or to become due
to Mr. Kehler, California Labor Code Section 206.5 is not applicable to the
Parties hereto. That Section provides in pertinent part as follows:
No employer shall require the execution of any release of any
claim or right on account of wages due, or to become due, or made
as an advance on wages to be earned, unless payment of such wages
has been made.
6. RELEASE OF CLAIMS. In consideration for the obligations of both
-----------------
parties set forth in this Agreement, Mr. Kehler and the Company, on behalf of
themselves, and their respective heirs, executors, officers, directors,
employees, investors, stockholders, administrators and assigns, hereby fully and
forever release each other and their respective heirs, executors, officers,
directors, employees, investors, stockholders, administrators and assigns, of
and from any claim, duty, obligation or cause of action relating to any matters
of any kind, whether presently known or unknown, suspected or unsuspected, that
any of them may possess arising from any omissions, acts or facts that have
occurred up until and including the date of this Agreement including, without
limitation:
(a) any and all claims relating to or arising from Mr. Kehler's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from, Mr. Kehler's
right to purchase, or actual purchase of shares of stock of the Company;
(c) any and all claims for wrongful discharge of employment; breach of
contract, both express and implied; breach of a covenant of good faith and fair
dealing, both express and implied, negligent or intentional infliction of
emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage;
negligence; and defamation;
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, the Americans with Disabilities Act of 1990, and the California
Fair Employment and Housing Act;
(e) any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination; and
(f) any and all claims for attorneys' fees and costs.
The Company and Mr. Kehler agree that the release set forth in this
Section 6 shall be and remain in effect in all respects as a complete general
release as to the matters released. This release does not extend to any
obligations incurred or specified under this Agreement.
3
<PAGE>
7. ACKNOWLEDGMENT OF WAIVER OF CLAIMS UNDER ADEA. Mr. Kehler acknowledges
---------------------------------------------
that he is waiving and releasing any rights he may have under the Age
Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary. Mr. Kehler and the Company agree that this
waiver and release does not apply to any rights or claims that may arise under
ADEA after the Effective Date of this Agreement. Mr. Kehler acknowledges that
the consideration given for this waiver and release Agreement is in addition to
anything of value to which Mr. Kehler was already entitled. Mr. Kehler further
acknowledges that he has been advised by this writing that (a) he should consult
with an attorney prior to executing this Agreement; (b) he has at least twenty-
-----
one (21) days within which to consider this Agreement; (c) he has at least seven
(7) days following the execution of this Agreement by the Parties to revoke the
Agreement (the "Revocation Period"); and (d) this Agreement shall not be
effective until the Revocation Period has expired.
8. CIVIL CODE SECTION 1542. The Parties represent that they are not aware
-----------------------
of any claim by either of them other than the claims that are released by this
Agreement. Mr. Kehler and the Company acknowledge that they have been advised
by legal counsel and are familiar with the provisions of California Civil Code
Section 1542, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
Mr. Kehler and the Company, being aware of said Code section, agree to
expressly waive any rights they may have thereunder, as well as under any other
statute or common law principles of similar effect.
9. NONDISCLOSURE OF CONFIDENTIAL AND PROPRIETARY INFORMATION. Mr. Kehler
---------------------------------------------------------
understands and agrees that his obligations to the Company under his existing
Proprietary Information and Inventions Assignment and Confidentiality Agreement
between Mr. Kehler and the Company (the "CONFIDENTIALITY AGREEMENT"), a copy of
which is attached hereto as Exhibit A, shall continue through the Termination
---------
Date and shall survive termination of his relationship with the Company under
this Agreement and that Mr. Kehler shall continue to maintain the
confidentiality of all confidential and proprietary information of the Company
as provided by the Confidentiality Agreement. Mr. Kehler agrees that at all
times hereafter, he shall not intentionally divulge, furnish or make available
to any party any of the trade secrets, patents, patent applications, price
decisions or determinations, inventions, customers, proprietary information or
other intellectual property of the Company, until after such time as such
information has become publicly known otherwise than by act of collusion of Mr.
Kehler.
10. NONCOMPETITION AND NONSOLICITATION. Mr. Kehler agrees that through
----------------------------------
the Termination Date, Mr. Kehler shall not, without the prior written consent of
the Company, at any time, directly or indirectly, whether or not for
compensation, (a) engage in, or have any interest in any person, firm,
corporation or business (whether as an employee, officer, director, agent,
security holder, creditor, consultant, partner or otherwise) that engages in any
activity that is in direct competition with the Company, including without
limitation, Open Market, Inc. and BroadVision, but excluding companies that may
on their own decide to build interactive commerce software as part of a broader
4
<PAGE>
business initiative but that do not specifically aim to license application
software to others in direct competition with the Company, (b) divert or attempt
to divert from the Company, or any affiliated company, any business of a kind
involving the professional specialties or product lines indicated in clause (a)
above, or (c) induce or attempt to induce any person who is an employee of the
Company, or any affiliated company, to leave the Company, or any affiliated
company, to become an employee of any person, firm, corporation or business
described in clause (a) above; provided, however, that Mr. Kehler may own up to
-------- -------
1% of the securities of any company whose securities are publicly traded that is
of a sort described in clause (a) above. It is expressly agreed by the Parties
that Mr. Kehler may pursue and engage in full-time employment that does not
conflict with his obligations under the preceding sentence and Section 1(a)(iii)
of this Agreement and that such employment shall not constitute a breach of this
Agreement by Mr. Kehler.
The Parties intend that the covenant contained in the preceding paragraph
shall be construed as a series of separate covenants, one for each county or
other geographic or political subdivision of each jurisdiction in which the
Company conducts business. If, in any judicial proceeding, a court shall refuse
to enforce any of the separate covenants deemed included in this paragraph, then
the unenforceable covenant shall be deemed eliminated from the provisions for
the purpose of those proceedings to the extent necessary to permit the remaining
separate covenants to be enforced.
11. NON-DISPARAGEMENT. Each Party agrees to refrain from any
-----------------
disparagement, criticism, defamation, slander of the other, or tortious
interference with the contracts and relationships of the other.
12. AUTHORITY. The Company represents and warrants that the undersigned
---------
has the authority to act on behalf of the Company and to bind the Company and
all who may claim through it to the terms and conditions of this Agreement. Mr.
Kehler represents and warrants that he has the capacity to act on his own behalf
and on behalf of all who might claim through him to bind them to the terms and
conditions of this Agreement. Each Party warrants and represents that there are
no liens or claims of lien or assignments in law or equity or otherwise of or
against any of the claims or causes of action released herein.
13. NO REPRESENTATIONS. Neither Party has relied upon any representations
------------------
or statements made by the other Party hereto which are not specifically set
forth in this Agreement.
14. SEVERABILITY. In the event that any provision hereof becomes or is
------------
declared by a court or other tribunal of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
15. ARBITRATION. The Parties shall attempt to settle all disputes arising
-----------
in connection with this Agreement through good faith consultation. In the event
no agreement can be reached on such dispute within fifteen (15) days after
notification in writing by either Party to the other concerning such dispute,
the dispute shall be settled by binding arbitration to be conducted in Santa
Clara County before the American Arbitration Association under its California
Employment Dispute Resolution Rules, or by a judge to be mutually
5
<PAGE>
agreed upon. The arbitration decision shall be final, conclusive and binding on
both Parties and any arbitration award or decision may be entered in any court
having jurisdiction. The Parties agree that the prevailing party in any
arbitration shall be entitled to injunctive relief in any court of competent
jurisdiction to enforce the arbitration award. The Parties further agree that
the prevailing Party in any such proceeding shall be awarded reasonable
attorneys' fees and costs. This Section 15 shall not apply to the
Confidentiality Agreement. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO
TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS.
16. ENTIRE AGREEMENT. This Agreement, and the exhibit hereto, represent
----------------
the entire agreement and understanding between the Company and Mr. Kehler
concerning Mr. Kehler's separation from the Company, and supersede and replace
any and all prior agreements and understandings concerning Mr. Kehler's
relationship with the Company and his compensation by the Company, other than
the Stock Option Agreements described in Section 4 and the Confidentiality
Agreement described in Section 10.
17. NO ORAL MODIFICATION. This Agreement may only be amended in writing
--------------------
signed by Mr. Kehler and the Company.
18. GOVERNING LAW. This Agreement shall be governed by the laws of the
-------------
State of California, without regard to its conflicts of law provisions.
19. EFFECTIVE DATE. This Agreement is effective seven days after it has
--------------
been signed by both Parties and such date is referred to herein as the
"EFFECTIVE DATE."
20. COUNTERPARTS. This Agreement may be executed in counterparts, and
------------
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
21. ASSIGNMENT. This Agreement may not be assigned by Mr. Kehler or the
----------
Company without the prior written consent of the other party. Notwithstanding
the foregoing, this Agreement may be assigned by the Company to a corporation
controlling, controlled by or under common control with the Company without the
consent of Mr. Kehler.
22. VOLUNTARY EXECUTION OF AGREEMENT. This Agreement is executed
--------------------------------
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:
(a) they have read this Agreement;
(b) they have been represented in the preparation, negotiation, and
execution of this Agreement by legal counsel of their own choice or that they
have voluntarily declined to seek such counsel;
(c) they understand the terms and consequences of this Agreement and
of the releases it contains; and
(d) they are fully aware of the legal and binding effect of this
Agreement.
6
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement and Mutual
Release on the respective dates set forth below.
CONNECT, INC.
Dated as of April 21, 1997 By: /s/ GORDON J. BRIDGE
-------------------------
Title: President & Chief Executive Officer
THOMAS P. KEHLER, an individual
Dated as of April 21, 1997 /s/ THOMAS P. KEHLER
-------------------------
Thomas P. Kehler
7
<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
March 31,
--------------------
1997 1996
--------- --------
<S> <C> <C>
Net Loss $(5,198) $(5,065)
Weighted average common shares 18,655 424
outstanding
Shares related to SAB No. 64 and 83 - 13,285
(Topic 4, Sec. D)
Conversion of preferred stock to - 4,147
common stock not included
in shares related to SAB
No. 64 and 83
(Topic 4, Sec D) ------- -------
Total shares used in 18,655 17,856
Pro forma net loss per share ======= =======
Proforma net loss per share $ (0.28) $ (0.28)
======= =======
</TABLE>
* Not included as effects are anti-dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY PERIOD ENDED MARCH 31, 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> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,947
<SECURITIES> 0
<RECEIVABLES> 1,804
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,396
<PP&E> 6,861
<DEPRECIATION> (3,477)
<TOTAL-ASSETS> 14,933
<CURRENT-LIABILITIES> 4,824
<BONDS> 0
0
0
<COMMON> 60,785
<OTHER-SE> (52,300)
<TOTAL-LIABILITY-AND-EQUITY> 14,933
<SALES> 403
<TOTAL-REVENUES> 1,887
<CGS> 176
<TOTAL-COSTS> 2,859
<OTHER-EXPENSES> 4,277
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> (5,198)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,198)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,198)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
