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SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
CONNECT, INC.
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(Name of Registrant as Specified in Its Charter)
CONNECT, INC.
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(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement no.:
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(3) Filing Party:
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(4) Date Filed:
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CONNECT, INC.
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 24, 1998
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A Special Meeting of Stockholders (the "Special Meeting") of CONNECT, Inc.,
a Delaware corporation (the "Company"), will be held at the principal
executive offices of the Company, located at 515 Ellis Street, Mountain View,
California, on February 24, 1998 at 10:00 a.m. local time, for the following
purposes:
1. To approve an amendment to the Company's Certificate of Incorporation to
effect a one-for-five reverse split of the Company's Common Stock;
2. To approve an amendment to the Company's Certificate of Incorporation
increasing the number of authorized shares of the Company's Common Stock
from 40,000,000 to 60,000,000 shares;
3. To approve the issuance of up to 6,500,000 shares of the Company's
Series A Preferred Stock in exchange for up to $10,320,000 outstanding
principal amount of outstanding convertible notes, including accrued
interest, and as dividends on the Series A Preferred Stock (and the
issuance of shares of the Company's Common Stock upon conversion of the
Series A Preferred Stock); and
4. To transact such other business as may properly come before the Special
Meeting and any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying and made a part of this Notice.
The Board of Directors has fixed the close of business on January 22, 1998
as the record date for determining the stockholders entitled to notice of and
to vote at the Special Meeting and any adjournment(s) or postponement(s)
thereof.
All stockholders are cordially invited to attend the Special Meeting in
person. However, whether or not you expect to attend the Special Meeting in
person, you are urged to mark, date, sign and return the enclosed proxy card
as promptly as possible in the postage-prepaid envelope provided to ensure
your representation and the presence of a quorum at the Special Meeting. If
you send in your proxy card and then decide to attend the Special Meeting to
vote your shares in person, you may still do so. Your proxy is revocable in
accordance with the procedures set forth in the Proxy Statement.
By Order of the Board of Directors,
/s/ JOSEPH G. GIRATA
Joseph G. Girata
Secretary
Mountain View, California
January 30, 1998
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND RETURN THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE. IF A QUORUM IS NOT REACHED, THE COMPANY WILL HAVE THE ADDED
EXPENSE OF RE-ISSUING THESE PROXY MATERIALS. IF YOU ATTEND THE MEETING AND
SO DESIRE, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.
THANK YOU FOR ACTING PROMPTLY.
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CONNECT, INC.
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PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
GENERAL
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors (the "Board") of CONNECT, Inc., a Delaware corporation (the
"Company"), of proxies in the enclosed form for use in voting at the Special
Meeting of Stockholders (the "Special Meeting") to be held at the principal
executive offices of the Company, located at 515 Ellis Street, Mountain View,
California, on February 24, 1998 at 10:00 a.m., local time, and any
adjournment or postponement thereof.
This Proxy Statement and the enclosed proxy card were first mailed to
stockholders entitled to vote at the meeting on or about January 30, 1998. The
Company's principal executive offices are located at 515 Ellis Street,
Mountain View, California, 94043. The Company's telephone number at that
location is (650) 254-4000.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company (Attention:
Joseph G. Girata) a written notice of revocation or a duly executed proxy
bearing a later date, or by attending the Special Meeting and voting in
person.
RECORD DATE; VOTING SECURITIES
The close of business on January 22, 1998 has been fixed as the record date
(the "Record Date") for determining the holders of shares of Common Stock of
the Company entitled to notice of and to vote at the Special Meeting. At the
close of business on the Record Date, the Company had approximately 19,271,094
shares of Common Stock outstanding and held of record by approximately 144
stockholders.
VOTING AND SOLICITATION
For purposes of this Special Meeting, each outstanding share of Common Stock
on the Record Date is entitled to one vote on all matters.
Votes cast by proxy or in person at the Special Meeting will be tabulated by
the Inspector of Elections (the "Inspector") with the assistance of the
Company's transfer agent. The Inspector will also determine whether or not a
quorum is present. Except in certain specific circumstances, the affirmative
vote of a majority of shares present in person or represented by proxy at a
duly held meeting at which a quorum is present is required under Delaware law
for approval of proposals presented to stockholders. In general, Delaware law
also provides that a quorum consists of a majority of the shares entitled to
vote and present in person or represented by proxy. The Inspector will treat
abstentions as shares that are present and entitled to vote for purposes of
determining the presence of a quorum and as negative votes for purposes of
determining the approval of any matter submitted to the stockholders for a
vote. Any proxy which is returned using the form of proxy enclosed and which
is not marked as to a particular item will be voted for each of the three
Proposals being presented to stockholders at the meeting, and as the proxy
holders deem advisable on other matters that may come before the meeting, as
the case may be, with respect to the item not marked. If a broker indicates on
the enclosed proxy or its substitute that it does not have discretionary
authority as to certain shares to vote on a particular matter ("broker non-
votes"), those shares will be considered as present for purposes of
determining whether a quorum exists, but will not be considered entitled to
vote with respect to that matter. The Company believes that the tabulation
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procedures to be followed by the Inspector are consistent with the general
statutory requirements in Delaware concerning voting of shares and
determination of a quorum.
The solicitation of proxies will be conducted by mail and the Company will
bear all attendant costs. These costs will include the expense of preparing
and mailing proxy solicitation materials for the Special Meeting and
reimbursements paid to brokerage firms and others for their expenses incurred
in forwarding solicitation materials regarding the Special Meeting to
beneficial owners of the Company's Common Stock. The Company may conduct
further solicitation personally, telephonically or by facsimile through its
officers, directors and employees, none of whom will receive additional
compensation for assisting with the solicitation.
DESCRIPTION OF PRIVATE PLACEMENT OF CONVERTIBLE NOTES AND WARRANTS, AND
AGREEMENT TO EXCHANGE SUCH NOTES FOR PREFERRED STOCK
In November 1997, the Company entered into several Private Placement
Purchase Agreements (collectively the "Private Placement") pursuant to which
the Company issued 258 units consisting of convertible notes and warrants (the
"Units"). Each Unit was sold for $40,000 and consisted of a $40,000 principle
amount convertible note (a "Convertible Note") and a warrant (a "Warrant").
The Company issued an aggregate of $10.32 million of Convertible Notes and
Warrants to purchase 3,439,914, shares of Common Stock. Each Convertible Note
accrues interest at a rate of 5% per annum and is convertible at the option of
the holder into shares of the Company's Common Stock at a price per share
equal to the lesser of (i) $2.00 or (ii) 80% of the average closing bid price
of the Company's Common Stock during the 10 trading days prior to conversion.
Each Warrant is exercisable at any time within three years after the date of
issuance to purchase 13,333 shares of the Company's Common Stock at a price of
$2.50 per share. As of the date of this proxy statement, an aggregate of
$80,000 in principal amount of Convertible Notes (together with accrued
interest thereon) has been converted into 132,064 shares of Common Stock. The
Company has reserved 9,000,000 shares of its Common Stock for issuance upon
the conversion of the Convertible Notes, and 3,439,914 shares of Common Stock
for issuance upon exercise of the Warrants. Depending upon the Company's stock
price at the time of conversion of the Convertible Notes, more than 9,000,000
shares of Common Stock may be required to enable all of the Convertible Notes
to convert into Common Stock. The issuance of shares of Common Stock in
satisfaction of the conversion privileges associated with the Convertible
Notes could cause significant dilution to the Company's existing stockholders,
particularly if the conversion occurs at a time when the market price of the
Common Stock is below $2.00. The purpose of the Private Placement was to
provide funds for working capital and general corporate purposes.
In November 1997, The Nasdaq Stock Market, Inc. ("NASDAQ") notified the
Company that the Company's net worth as of September 30, 1997 caused the
Company not to meet NASDAQ's listing requirements for inclusion on The Nasdaq
National Market. Specifically, NASDAQ requires that the Company maintain $4
million of net tangible assets, and the Company's net tangible assets equaled
$2.4 million at September 30, 1997. While the Company completed the
Convertible Note financing in November which increased the Company's cash
assets by approximately $10 million, the Convertible Notes are considered as
debt and as a result the Company's net tangible assets did not increase as a
result of this financing. If the Convertible Notes are exchanged for shares of
Preferred Stock, which is considered as equity for financial accounting
purposes, the Company's net assets will increase and the Company will be in
compliance with the NASDAQ net tangible asset requirements.
As a result, the Company and each holder of the Convertible Notes (the
"Holders") have entered into exchange agreements (the "Exchange Agreements"),
pursuant to which the Company and each Holder have agreed to exchange (the
"Exchange") up to 5,300,000 shares of the Company's Series A Preferred Stock,
$0.001 par value (the "Preferred Stock"), for all of the principal amount of
outstanding Convertible Notes, plus accrued interest. The Exchange will enable
the Company to comply with NASDAQ's net tangible asset requirements. The
Exchange is subject to certain closing conditions, including among others
receipt of approval of the Company's stockholders to effect a one-for-five
reverse stock split, an increase in the number of shares of
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Common Stock authorized from 40,000,000 to 60,000,000, and the Exchange. If
the Exchange is not consummated on or before February 28, 1998, the Exchange
Agreements will terminate and the Convertible Notes will remain outstanding.
In such event, it is likely that the Company's shares of Common Stock will be
delisted from The Nasdaq National Market soon after February 28, 1998. The
terms of the Warrants issued under the Private Placement will not be affected
by the Exchange. See Proposal No. 3 for a more detailed description of the
Convertible Notes and the rights, preferences and privileges of the Preferred
Stock.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Quaestus Management Corporation ("Quaestus"), an entity with which Richard
W. Weening, a Director of the Company, is affiliated, purchased 2 Units in the
Private Placement. If the Exchange occurs, the $80,000 face amount of
Convertible Notes obtained by Quaestus will be exchanged for 40,000 shares of
Preferred Stock, plus accrued interest. Mr. Weening disclaims beneficial
ownership of the securities held by Quaestus, except to the extent of his
proportionate interest therein.
BankAmerica Ventures and BankAmerica Venture Partners I (collectively
"BankAmerica"), entities with which Rory T. O'Driscoll, a Director of the
Company, is affiliated, purchased 30 Units in the Private Placement. If the
Exchange occurs, the $1,200,000 face amount of Convertible Notes obtained by
BankAmerica will be exchanged for 600,000 shares of Preferred Stock, plus
accrued interest. Mr. O'Driscoll disclaims beneficial ownership of the
securities held by BankAmerica, except to the extent of his proportionate
interest therein.
Norwest Equity Partners V, L.L.P. ("Norwest"), an entity with which Promod
Haque, a Director of the Company, is affiliated, purchased 31 Units in the
Private Placement. If the Exchange occurs, the $1,240,000 face amount of
Convertible Notes obtained by Norwest will be exchanged for 620,000 shares of
Preferred Stock, plus accrued interest. Mr. Haque disclaims beneficial
ownership of the securities held by Norwest, except to the extent of his
proportionate interest therein.
DEADLINES FOR RECEIPT OF STOCKHOLDER PROPOSALS FOR THE 1998 AND 1999 ANNUAL
MEETINGS
Proposals of stockholders intended to be presented at the Company's 1998
Annual Meeting of Stockholders were required to be received by the Company by
January 5, 1998. Proposals of stockholders intended to be presented at the
Company's 1999 Annual Meeting of Stockholders must be received by Joseph G.
Girata, CONNECT, Inc., 515 Ellis Street, Mountain View, California, 94043-
2242, no later than the date 120 days prior to the date of the Company's proxy
statement in connection with the 1998 Annual Meeting of Stockholders.
PROPOSAL NO. 1
AMENDMENT TO CERTIFICATE OF INCORPORATION
EFFECTING A REVERSE COMMON STOCK SPLIT
The Board has unanimously approved an amendment to the Company's Certificate
of Incorporation to effect a reverse stock split, pursuant to which each five
shares of Common Stock of the Company will become one share of Common Stock
(the "Reverse Split"). The stockholders are being asked to approve this
proposed amendment. The Reverse Split will take effect, if at all, after it is
approved by the stockholders of the Company and after filing the amendment
with the Secretary of State of the State of Delaware (the "Effective Date").
Even if the Reverse Split is approved by the stockholders it is within the
discretion of the Board of Directors not to carry out the Reverse Split.
The Company is required to seek stockholder approval of the Reverse Split
under the terms of the Private Placement and the Exchange. The Reverse Split
also is necessary to enable the Company to continue to meet the continuing
listing requirements of The Nasdaq National Market with respect to minimum bid
price. Although the Exchange is conditioned upon stockholder approval of the
Reverse Split, if approved, the Reverse Split will occur even if certain other
conditions prevent the consummation of the Exchange.
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As of December 31, 1997, the Company had 40,000,000 authorized shares of
Common Stock of which 19,139,030 were issued and outstanding. Of the unissued
shares of Common Stock, an aggregate of 8,393,003 shares were reserved for
issuance under the Company's 1989 Stock Option Plan, 1996 Directors' Stock
Option Plan, 1996 Employee Stock Purchase Plan and 1996 Stock Option Plan, or
for exercise of options issued under such Plans. In addition, the Company has
reserved 9,000,000 shares of its Common Stock for issuance upon the conversion
of the Convertible Notes and 3,439,914 shares of its Common Stock for issuance
upon exercise of the Warrants. As of December 31, 1997, 28,053 shares of the
Company's Common Stock remained unissued and unreserved.
As a result of the Reverse Split, the 19,139,030 shares of Common Stock
outstanding on December 31, 1997 will become approximately 3,827,806 shares of
Common Stock and any other shares issued prior to the Effective Date will be
similarly adjusted. In addition, on the Effective Date each option and warrant
to purchase Common Stock outstanding on the Effective Date will be adjusted so
that the number of shares of Common Stock issuable upon their exercise shall
be divided by five (and corresponding adjustments will be made to the number
of shares vested under each outstanding option) and the exercise price of each
option and warrant shall be multiplied by five. No fractional shares will be
issued upon the Reverse Split. In lieu thereof, the Company will pay each
holder of a fractional interest an amount in cash equal to the value of such
fractional interest on the Effective Date. There are currently 40,000,000
authorized shares of Common Stock. The reverse split will have the effect of
creating additional authorized and unreserved shares of the Company's Common
Stock. The Company has no current plans to issue such shares. However,
depending upon the Company's stock price at the time of conversion of the
Convertible Notes, more than the current 9,000,000 reserved shares of Common
Stock may be required to enable all of the Convertible Notes to convert into
Common Stock. The additional authorized shares will be reserved as necessary
for issuance upon conversion of the Convertible Notes and will be used for
other general corporate purposes. Under the terms of the Exchange Agreements,
the Company has agreed to reserve 40 million shares of Common Stock for
issuance upon conversion of the Preferred Stock and exercise of the Warrants,
plus such additional amount of shares as may be necessary to be issued upon
conversion of the Preferred Stock. Based on recent prices of the Company's
Common Stock (e.g., the closing bid price on January 15, 1998 was $ 7/8), 40
million shares substantially exceeds the current number of shares necessary to
satisfy the conversion rights associated with the Preferred Stock. The Company
agreed to keep this number of shares available to satisfy the request of the
purchasers of the Preferred Stock that sufficient shares would be available in
the event that shares of Preferred Stock were converted at a time when the
price of the Company's Common Stock was substantially less than the current
prices.
Under Proposal Number 2 to this Proxy Statement, the Company's stockholders
are being asked to approve an amendment to the Company's Certificate of
Incorporation increasing the number of authorized shares of the Company's
Common Stock from 40,000,000 to 60,000,000 shares.
The conversion terms of the Convertible Notes and the Preferred Stock
provide for appropriate adjustments in the event of a stock split, including
the Reverse Split. The number of outstanding shares of Preferred Stock will
not change as a result of the Reverse Split.
APPROVAL REQUIRED
Approval of Proposal No. 1 requires the affirmative vote of a majority of
the outstanding shares of Common Stock of the Company.
RECOMMENDATION OF THE BOARD
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSED AMENDMENT TO THE
CERTIFICATE OF INCORPORATION EFFECTING A REVERSE COMMON STOCK SPLIT.
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PROPOSAL NO. 2
AMENDMENT TO CERTIFICATE OF INCORPORATION
TO INCREASE THE AUTHORIZED SHARES OF COMMON STOCK
The Board has unanimously approved an amendment to the Company's Certificate
of Incorporation (the "Amendment") to increase the number of authorized shares
of Common Stock, par value $0.001 per share ("Common Stock"), from 40,000,000
to 60,000,000. The stockholders are being asked to approve the Amendment. The
Company is required to seek stockholder approval of the Amendment under the
terms of the Private Placement and the Exchange. If the stockholders do not
approve the Amendment, the holders of Convertible Notes will have the right to
require the Company to redeem a portion of the Convertible Notes as described
in Section 4 (Redemption Rights--Convertible Notes) under Proposal No. 3
below. Further, if the Amendment is not approved, the Exchange will not take
place and the Company's net tangible assets will likely be insufficient to be
in compliance with the NASDAQ net tangible asset requirement and, as a result,
the Company's shares of Common Stock will likely be delisted from The Nasdaq
National Market soon after February 28, 1998. If approved, however, the
Amendment will occur even if certain other conditions prevent the consummation
of the Exchange.
As of December 31, 1997, 19,139,030 shares of Common Stock were issued and
outstanding and 8,393,003 shares were reserved for issuance under the
Company's stock plans and employee stock purchase plan. In connection with the
Private Placement, the Company reserved 9,000,000 shares for issuance upon
conversion of the Convertible Notes and 3,439,914 shares for issuance upon
exercise of the Warrants. Effective upon completion of the Exchange and the
Reverse Split, the Company has reserved 40,000,000 shares of Common Stock for
issuance upon conversion of the Preferred Stock (which amount includes the
9,000,000 shares reserved for issuance upon conversion of the Convertible
Notes).
Authorized but unissued shares of the Company's Common Stock may be issued
at such times, for such purposes and for such consideration as the Board of
Directors may determine to be appropriate without further authority from the
Company's stockholders, except as otherwise required by applicable law or
stock exchange policies. Such future issuances could be used for possible
stock dividends or stock splits, equity financings, future opportunities for
expanding the business through investments or acquisitions, management
incentive and employee benefit plans and other general corporate purposes.
The increase in authorized Common Stock will not have any immediate effect
on the rights of existing stockholders. However, the Board will have the
authority to issue authorized Common Stock without requiring future
stockholder approval of such issuances, except as may be required by
applicable law or exchange regulations. Further, the holders of the
Convertible Notes or, if the Exchange occurs, Preferred Stock, and Warrants
have the right to convert or exercise their securities and receive Common
Stock as described above. The issuance of shares of Common Stock in
satisfaction of the conversion privileges associated with the Convertible
Notes and the Preferred Stock could cause significant dilution to the
Company's existing stockholders, particularly if the conversion occurs at a
time when the market price of the Common Stock is below $2.00. To the extent
that the additional authorized shares are issued in the future, they will
decrease the existing stockholders' percentage equity ownership and, depending
upon the price at which they are issued as compared to the price paid by
existing stockholders for their shares, could be dilutive to the existing
stockholders. The holders of Common Stock have no preemptive rights.
The increase in the authorized number of shares of Common Stock and the
subsequent issuance of such shares could have the effect of delaying or
preventing a merger, tender offer or proxy contest, the assumption of control
by a holder of a large block of the Company's Common Stock and the removal of
incumbent management, even if such action would benefit the interests of
stockholders. Common Stock could (within the limits imposed by applicable law)
be issued in one or more transactions which would make such an action more
difficult, and therefore less likely. Thus, an increase in the number of
shares of Common Stock authorized could be beneficial to incumbent management
in the event of a hostile tender offer, and may have an adverse impact on
shareholders who may want
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to participate in such a tender offer. The Company has previously adopted
certain measures that may have the effect of helping to resist an unsolicited
takeover attempt. Further, any issuance of additional stock could have the
effect of diluting the earnings per share and book value per share of
outstanding shares of Common Stock.
In the event that sufficient shares of Common Stock are not available to
satisfy the conversion rights associated with the Convertible Notes, the
holders of the Convertible Notes have the right to demand that the Company
redeem that portion of the Convertible Notes for which there are insufficient
shares reserved for issuance upon conversion. The redemption price would be
135% of the portion of the principal amount of the Convertible Note being
redeemed (plus accrued interest).
APPROVAL REQUIRED
Approval of Proposal No. 2 requires the affirmative vote of a majority of
the outstanding shares of Common Stock of the Company.
RECOMMENDATION OF THE BOARD
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSED AMENDMENT TO THE
CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED SHARES OF COMMON
STOCK.
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PROPOSAL NO. 3
ISSUANCE OF SERIES A PREFERRED STOCK IN EXCHANGE FOR CERTAIN OUTSTANDING
CONVERTIBLE NOTES AND ISSUANCE OF COMMON STOCK
UPON CONVERSION THEREOF
The Board has unanimously approved the issuance of the Preferred Stock (and
the issuance of the Common Stock upon conversion of the Preferred Stock) and
the Exchange pursuant to the Exchange Agreements (as described above under
"Description of Private Placement of Convertible Notes and Warrants, and
Agreement to Exchange such Debt for Preferred Stock"). The stockholders are
being asked to approve the Exchange and the issuance of up to 6,500,000 shares
of Preferred Stock in connection with the Exchange and thereafter in payment
of dividends on the Preferred Stock as described below, and the issuance of
shares of Common Stock upon conversion of the Preferred Stock. The Company is
required to seek stockholder approval of the Exchange under the terms of the
Exchange Agreements.
The Company is effecting the Exchange to enable it to comply with the
quantitative maintenance criteria of The Nasdaq National Market relating to
the Company's net tangible assets (the "NTA Requirement"), as set forth in
Rule 4450 of NASDAQ's Marketplace Rules (the "Rule"). Because the Company has
sustained net losses in each of its last three fiscal years, the Company must
maintain net tangible assets of at least $4 million in order to comply with
the NTA Requirement. If the Convertible Notes are exchanged for shares of
Preferred Stock, which is considered as equity for financial accounting
purposes, the Company's net assets will increase by approximately $9.3
million. The Company estimates that if the Exchange occurs on February 28,
1998, the Company's net tangible assets will exceed $6 million, so that the
Company will exceed the $4 million NTA Requirement by at least $2 million and
be in compliance with the NASDAQ net tangible asset requirements. In addition,
NASDAQ has agreed to permit the Company to remain listed on The Nasdaq
National Market at least until February 28, 1998, pending the completion of
the Exchange and the Reverse Split. If the Exchange is not consummated on or
before February 28, 1998, the Exchange Agreements will terminate and the
Convertible Notes will remain outstanding. In such event, it is likely that
the Company's shares of Common Stock will be delisted from The Nasdaq National
Market soon after February 28, 1998.
The Exchange is conditioned upon the Company meeting the following Nasdaq
National Market continuing listing criteria on the date of the Exchange: (i)
the NTA Requirement; (ii) nonaffiliates of the Company holding at least
750,000 shares of Common Stock; (iii) nonaffiliates of the Company holding at
least $5 million of Common Stock; (iv) the Company having at least 400
stockholders each holding at least 100 shares of Common Stock; (v) the minimum
bid price of Common Stock being at least $1.00 per share; and (vi) the Company
having at least two market makers. If the Exchange occurs, there can be no
assurance that the Company will be able to maintain compliance with all such
listing requirements after the Exchange. The Company had net operating losses
of $5.2 million, $3.2 million, $3.2 million and $3.1 million for the quarters
ended March 31, June 30, September 30 and December 31, 1997, respectively.
Continued significant losses by the Company would cause the Company's net
tangible assets to decline below $4 million, at which point the Company's
Common Stock would likely be delisted from The Nasdaq National Market.
The following is a summary of the terms of the Convertible Notes and the
rights, preferences and privileges of the Preferred Stock. It is qualified by
the rights, preferences and privileges of the Preferred Stock as set forth in
the Exchange Agreement and the Certificate of Designation, the forms of which
were filed as exhibits to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on December 24, 1997, and are included
as appendices to this Proxy Statement.
1. Conversion.
Convertible Notes. Each Note is convertible at the option of the holder into
the number of shares of Common Stock determined by dividing the principal
amount of the Note, plus accrued and unpaid interest, by the lesser of (i)
$2.00 (the "Note Cap") (subject to adjustment in the event of stock splits,
stock combinations
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and the like) or (ii) 80% of the average closing bid price for the 10 trading
days prior to conversion. The Note Cap also will be adjusted downward to the
lowest price at which the Company issues securities or, in the case of
convertible securities, the lowest conversion or exercise price of such
securities (excluding issuances pursuant to employee and director stock option
plans). In addition, unless earlier converted or redeemed, the principal and
accrued but unpaid interest on each Convertible Note will automatically
convert into Common Stock on October 1, 1999 (at the then conversion price),
if the Company has been listed on The Nasdaq National Market at all times
during 1999, a registration statement relating to the resale of the shares of
Common Stock issuable upon conversion of the Convertible Notes and Warrants
has been effective at all times during 1999, and the closing bid price of the
Company's Common Stock was not less than $2.00 per share (subject to
adjustment in the event of stock splits, stock combinations and the like) at
all times from and after August 15, 1999.
Preferred Stock. If issued, each share of Preferred Stock will be
convertible at the option of the holder into that number of shares of the
Company's Common Stock equal to the greater of (i) the quotient obtained by
dividing $2.00 (the "Preferred Cap"), plus accumulated but unpaid dividends,
by the conversion price or (ii) the quotient obtained by dividing the
conversion price, plus accumulated but unpaid dividends, by 80% (60% if the
conversion occurs after December 15, 1999) of the average closing bid price
for the 10 trading days prior to conversion. The initial conversion price is
$2.00, and is subject to adjustment in the event of stock splits, stock
combinations and the like, and will be reduced to $1.50 on and after December
15, 1999. The Preferred Cap also will be adjusted downward to the lowest price
at which the Company issues securities or, in the case of convertible
securities, the lowest conversion or exercise price of such securities
(excluding issuances pursuant to employee and director stock option plans). In
addition, each share of Preferred Stock will automatically convert into Common
Stock on October 1, 1999, if the Company is listed on The Nasdaq National
Market at all times during 1999, an effective registration statement relating
to the resale of the Common Stock issuable upon conversion of the Preferred
Stock has been effective at all times during 1999, and the closing bid price
of the Company's Common Stock is at least $2.00 per share (subject to
adjustment in the event of stock splits, stock combinations and the like) at
all times subsequent to August 15, 1999.
2. Voting Rights.
Convertible Notes. Holders of Convertible Notes are not entitled to notice
of any meeting of stockholders of the Corporation or to vote upon any matter
submitted to stockholders of the Corporation.
Preferred Stock. Except as required by law and as set forth in the next
paragraph, the holders of Preferred Stock will not be entitled to vote.
The Preferred Stock terms include what are customarily called protective
provisions. Under these provisions, a vote of the holders of at least two-
thirds of the outstanding shares of Preferred Stock is required before the
Company can: (i) materially or adversely alter or change the rights,
preferences or privileges of the Preferred Stock; (ii) authorize or issue (a)
shares of any class or series of stock having any preference or priority as to
dividends, liquidation or redemption over or pari passu with the Preferred
Stock, (b) shares of stock of any class or any bonds, debentures, notes or
other obligations convertible into or exchangeable for, or having rights to
purchase, any shares of stock of the Company having any preference or priority
as to dividends, liquidation or redemption over or pari passu with the
Preferred Stock, or (c) any bonds, debentures, notes or other obligations for
borrowed money, except in connection with equipment financing transactions of
up to $1.5 million in any twelve months commencing after the date of initial
issuance of a share of Preferred Stock; (iii) effect any merger, consolidation
or sale of assets of the Company with, into or to another Small Corporation in
which the consideration to be received by the stockholders of the Company in
the merger is not entirely cash (for purposes of this paragraph the term
"Small Corporation" shall mean a corporation and its parent corporation (if
the securities of the parent corporation are being issued) which have a market
capitalization of less than $150 million; and for purposes of this paragraph
the term "market capitalization" shall mean the product of the number of
outstanding shares of the acquiring corporation's or its parent's common stock
(if the securities of the parent corporation are being issued) multiplied by
the average of the closing bid prices for the acquiring corporation's or its
parent's common stock (as quoted on a national securities exchange or on
NASDAQ or over
8
<PAGE>
the counter) during the 20 trading days prior to the date of notice of the
transaction to the holders of the Series A Preferred Stock; (iv) effect any
merger, consolidation or sale of assets of the Company with, into or to
another corporation in which the consideration to be received by the
stockholders of the Company in such transaction includes (1) securities that
have not been registered on an effective Form S-4 or other appropriate form or
(2) property other than cash or securities; (v) apply any of its assets to the
redemption, retirement, purchase or acquisition, directly or indirectly,
through subsidiaries or otherwise, of any shares of any class or series of
equity securities of the Corporation (other than repurchases of Common Stock
from employees of and consultants to the Corporation upon or after termination
of employment and other than redemptions of Series A Preferred Stock permitted
by their terms); or (vi) pay any dividend or make any distribution on shares
of equity securities, other than with respect to the Preferred Stock.
3. Interest and Dividends.
Convertible Notes. The Convertible Notes accrue interest at the rate of 5%
per annum. The interest may be paid in cash or in additional Convertible Notes
(but with a one year maturity), at the option of the Company.
Preferred Stock. The holders of Preferred Stock will be entitled to receive
mandatory cumulative dividends in preference to the holders of Common Stock at
an annual rate of $.10 per share (5% of the original $2.00 exchange price per
share) from legally available funds. Such dividends are payable quarterly and
may be paid in cash or in shares of Preferred Stock, at the option of the
Company.
4. Redemption Rights.
Convertible Notes. The holders of the Convertible Notes have the right to
demand that the Company redeem that portion of the Convertible Notes for which
there are insufficient shares reserved for issuance upon conversion of the
portion of the Convertible Note. The redemption price would be 135% of the
portion of principal amount of the Convertible Note being redeemed (plus
accrued but unpaid interest). In addition, holders of Convertible Notes can
accelerate payment of all principal and interest due under the Convertibles
Notes upon the occurrence of an "event of a default", which includes any
breach of or failure to comply with any provision of the Convertible Note that
is not cured within 15 days after written notice, and the institution of any
bankruptcy or liquidation of the Company.
The Company has the right to redeem all or a portion the Convertible Notes
held by a holder, if the holder proposes to convert the Convertible Note into
shares of Common Stock at a conversion price of less than $1.25 (subject to
adjustment in the event of stock splits, stock combinations and the like). The
Company's right must be exercised by notice from the Company to the holder
given within two days after the notice of conversion. If the Company gives
notice of redemption, the Company must pay the holder, within 10 business days
after the date of such notice of conversion, an amount equal to 135% of the
amount of principal proposed to be converted, together with accrued and unpaid
interest thereon accrued through the date of such conversion.
Preferred Stock. The Preferred Stock will not be redeemable at the option of
the holders. The Company shall have the right to redeem the Preferred Stock at
any time after November 10, 1999 at $2.00 per share plus accrued dividends. In
addition, the Company shall have the right to redeem shares of Preferred Stock
at a price of $2.70 per share plus accrued dividends in the event that holder
proposes to convert such shares of Preferred Stock at a conversion price of
less than $1.25 (subject to adjustment in the event of stock splits, stock
combinations and the like).
5. Certain Rights upon Liquidation or Sale of the Company.
Convertible Notes. A liquidation, bankruptcy or winding up of the Company
would be an "event of default" under the terms of the Convertible Notes and
would enable the holders of the Convertible Notes to accelerate payment of
principal and interest under the Convertible Notes to the date of such event.
Each holder of Convertible Notes would be entitled to receive the entire
principal amount of such holder's Convertible Notes, plus accrued but unpaid
interest, prior and in preference to any assets of the Company being
distributed to holders of equity securities of the Company, including the
holders of the Company's Common Stock.
9
<PAGE>
In the event of any consolidation or merger of the Company into another
corporation which has a market capitalization of not less than $150 million,
or the sale or conveyance of all or substantially all of its assets to any
such corporation, then, at the election of the Company, the Convertible Notes
shall be deemed automatically converted immediately prior to the consummation
of such transaction at a price per share equal to 60% of the average closing
bid price for the 10 trading days prior to conversion, or $2.00 per share
(subject to adjustment) if less. If the Company makes such election, the
holders would have the right to accelerate the Convertible Notes and require
repayment of 100% of the principal and accrued interest in cash. If any other
consolidation, merger or sale of the Company is effected, or if any capital
reorganization or reclassification of the Common Stock is effected, then, as a
condition precedent of such transaction, the conversion provisions of the
Convertible Notes would be required to be applicable to the successor
corporation and each holder of Convertible Notes will have the right to
receive upon conversion the kind of shares of capital stock or other
securities or property which each such holder would have been entitled to
receive upon or as a result of such transaction had the Convertible Notes been
converted immediately prior to such event.
Preferred Stock. The Preferred Stock has liquidation and dividend rights
superior to those of the Common Stock. In the event of a liquidation event,
including certain mergers and sales of the Company, holders of the Preferred
Stock are entitled to receive $1.00, plus accumulated but unpaid dividends,
per share of Preferred Stock held by them prior to any distribution to holders
of shares of the Company's Common Stock. After receipt of the full $1.00 per
share, all remaining assets of the Company will be distributed to holders of
shares of Preferred Stock (on an as-if converted to Common Stock basis, at a
per share price of the lesser of $2.00 per share or 60% of the price per share
of Common Stock payable in the transaction) and Common Stock ratably based on
the number of shares of stock held by them.
The effect of these provisions in the context of a sale of the Company is to
distribute to the Preferred Stock preferential amounts. For example, if no
shares of Preferred Stock have been converted and 19 million shares of Common
Stock are outstanding, for any transaction in which the aggregate
consideration is below approximately $22 million, all of the proceeds will be
payable to the holders of Preferred Stock. Amounts in excess of $22 million
will be shared among the Preferred Stock and the Common Stock based on the
number of shares held by each on an as-if converted basis. As a result, in
connection with the sale of the Company by merger or otherwise, if sufficient
consideration is available the holders of Preferred Stock (assuming no shares
of Preferred Stock have been converted) will receive up to approximately $5.2
million more than they would have received if they had continued to hold
Convertible Notes. In addition, in certain situations involving a liquidation
or bankruptcy of the Company in which insufficient consideration is available,
the holders of Preferred Stock will receive less than they would have received
as holders of Convertible Notes.
6. Registration Rights. The Company is obligated to file with the Securities
and Exchange Commission pursuant to the terms of the Private Placement and the
Exchange a registration statement (the "Registration Statement") with respect
to the resale of the shares issuable upon conversion of the Convertible Notes,
or, if the Exchange occurs, the Preferred Stock, and exercise of the Warrants.
The holders of Common Stock have no preemptive rights. The conversion by the
holders of the Convertible Notes or the Preferred Stock into shares of Common
Stock will decrease the existing stockholders' percentage equity ownership in
the Company and, depending upon the conversion price (as compared to the price
paid by existing stockholders for their shares), would likely be dilutive to
existing stockholders. In addition, such conversion or exercise could give the
holders of the Convertible Notes (or, if issued, the Preferred Stock), and the
Warrants substantial control over the Company and would make a change in
control of the Company more difficult, and therefore less likely. Furthermore,
any such issuances of Common Stock could have the effect of diluting the
earnings per share and book value per share of outstanding shares of Common
Stock.
Under the terms of the Private Placement and the Exchange, the Company is
prohibited from issuing any securities pursuant to a private placement exempt
from registration under the Securities Act of 1933, as amended, for a period
of 270 days after effectiveness of the Registration Statement. The prohibition
does not apply to issuances to raise funds to redeem the Convertible Notes and
Preferred Stock (as provided in Section 4 above).
10
<PAGE>
APPROVAL REQUIRED
Approval of Proposal No. 3 requires the affirmative vote of a majority of
the outstanding shares of Common Stock of the Company.
RECOMMENDATION OF THE BOARD
THE BOARD RECOMMENDS A VOTE FOR ISSUANCE OF SERIES A PREFERRED STOCK IN
EXCHANGE FOR THE CONVERTIBLE NOTES AND IN PAYMENT OF DIVIDENDS ON THE SERIES A
PREFERRED STOCK AND THE ISSUANCE OF COMMON STOCK UPON CONVERSION THEREOF.
11
<PAGE>
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information that has been provided to the
Company with respect to beneficial ownership of shares of the Company's Common
Stock as of November 15, 1997, prior to the closing of the sale of Units
pursuant to the Private Placement or Exchange described above, and without
giving effect to the issuance of shares of Common Stock upon conversion or
exercise of the securities issued in the Private Placement or Exchange (none
of which had been converted by any of the persons set forth below as of the
Record Date), for (i) each person who is known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, (ii) the
Company's Chief Executive Officer and the Company's other four most highly
paid executive officers who earned in excess of $100,000 during the fiscal
year ended December 31, 1996 (collectively, the "Named Executive Officers"),
(iii) each director of the Company and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENT OF
SHARES SHARES
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS(1) OWNED(2) OWNED(1)
------------------- ------------ ------------
<S> <C> <C>
Entities affiliated with Quaestus
Management Corporation(3) ........................... 5,209,138 27.2%
330 E. Kilbourn Avenue
Milwaukee, WI 53202
Norwest Equity Partners V, L.L.P.(4) ................ 1,918,182 10.0
245 Lytton Ave., Suite 250
Palo Alto, CA 94301
Entities affiliated with 21st Century
Communications Partnerships(5)....................... 1,515,150 7.9
GM Building
767 Fifth Avenue
New York, NY 10153
RRE Connect Investors, L.P........................... 1,174,242 6.1
126 East 56th St., 22nd Floor
New York, NY 10022
Entities affiliated with
BankAmerica Ventures(6).............................. 1,206,353 6.3
950 Tower Lane, Suite 700
Foster City, CA 94404
Gordon J. Bridge(7).................................. 749,166 3.9
Thomas P. Kehler(8).................................. 197,652 1.0
Promod Haque(4)...................................... 1,918,182 10.0
Richard H. Lussier(9)................................ 38,732 *
Craig D. Norris(10).................................. 135,549 *
Rory T. O'Driscoll(6)................................ 1,206,353 6.3
Patrick D. Quirk(11)................................. -- *
Kenneth M. Ross(12).................................. 203,499 1.1
Richard W. Weening(13)............................... 5,195,052 27.1
William B. Welty(14)................................. 77,375 *
All directors and executive officers as a group (10
persons)(15)......................................... 10,140,809 53.0
</TABLE>
- --------
* Less than 1%.
12
<PAGE>
(1) Applicable percentage of beneficial ownership is based on 19,144,660
shares of Common Stock outstanding as of November 15, 1997, together with
applicable options for such stockholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission, based on factors including voting and investment power.
Shares of Common Stock subject to the warrants and options currently
exercisable, or exercisable within 60 days after November 15, 1997, are
deemed outstanding for computing the percentage ownership of the person
holding such options, but are not deemed outstanding for computing the
percentage ownership of any other person. Unless otherwise indicated, the
address of each of the named individuals is: c/o CONNECT, Inc., 515 Ellis
Street, Mountain View, CA 94043.
(2) To the Company's knowledge, the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to community property laws
where applicable and except as indicated in the other footnotes to this
table.
(3) Includes 4,253,114 shares held by Network Partners, 12,807 shares held by
Quaestus Limited Partnership and 929,131 shares held by Quaestus Partner
Fund. Also includes 11,068 shares and 3,018 shares held by Richard W.
Weening and Terrence J. Leahy, respectively. Mr. Weening is President and
Chief Executive Officer and a director of Quaestus Management
Corporation. Mr. Leahy is a Vice President and Director of Quaestus
Management Corporation. Quaestus Management Corporation is the managing
general partner of Network Partners and Quaestus Partner Fund. In
addition, Mr. Weening is the President and Chief Executive Officer of RPI
Holdings, Inc., the managing general partner of Quaestus Limited
Partnership, which is managed by Quaestus Management Corporation. Mr.
Weening disclaims beneficial ownership of the shares held by such
entities, except to the extent of his proportionate interest therein.
(4) Includes 1,918,182 shares held by Norwest Equity Partners V, L.L.P.
Promod Haque is a Vice President of Norwest Venture Capital Management,
Inc. and a general partner of two general partnerships that are the
general partners of Norwest Equity Partners V, L.L.P. Mr. Haque disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate partnership interest therein.
(5) Includes 1,027,272 shares held by 21st Century Communications Partners,
L.P., 349,621 shares held by 21st Century Communications T-E Partners,
L.P. and 138,257 shares held by 21st Century Foreign Communications
Partners, L.P.
(6) Includes 1,085,727 shares held by BankAmerica Ventures and 120,626 shares
held by BA Venture Partners I. Rory T. O'Driscoll is a Principal of
BankAmerica Ventures and a General Partner of BA Venture Partners I. Mr.
O'Driscoll disclaims beneficial ownership of the shares held by such
entities except to the extent of his proportionate general partnership
interest in BA Venture Partners I.
(7) Includes 674,658 shares issuable upon exercise of stock options
exercisable within 60 days of November 15, 1997. A portion of the shares
issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over time.
(8) Includes 197,652 shares issuable upon exercise of stock options
exercisable within 60 days of November 15, 1997. A portion of the shares
issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over time. In
April 1997, Mr. Kehler resigned from his position as President and Chief
Executive Officer and is no longer an executive officer of the Company.
(9) Includes 38,732 shares issuable upon exercise of stock options
exercisable within 60 days of November 15, 1997. A portion of the shares
issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over time.
13
<PAGE>
(10) Includes 135,000 shares issuable upon exercise of stock options
exercisable within 60 days of November 15, 1997. A portion of the shares
issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over time.
(11) In April 1997, Mr. Quirk resigned from his position as Vice President of
Sales and is no longer an executive officer of the Company.
(12) Includes 203,499 shares issuable upon exercise of stock options
exercisable within 60 days of November 15, 1997. A portion of the shares
issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over time.
(13) Includes 4,253,114 shares held by Network Partners, 12,807 shares held by
Quaestus Limited Partnership and 929,131 shares held by Quaestus Partner
Fund. Mr. Weening disclaims beneficial ownership of the shares held by
such entities, except to the extent of his proportionate interest
therein.
(14) Includes 77,375 shares held by agincourt partners, llc (formerly Volpe
Welty Asset Management, L.L.C.) William B. Welty is the Chief Executive
Officer and a principal stockholder of agincourt partners, llc. Mr. Welty
disclaims beneficial ownership of the shares held by such entity except
to the extent of his proportionate interest therein.
(15) Includes 1,326,916 shares issuable upon exercise of stock options
exercisable within 60 days of November 15, 1997, 197,652 of which are
issuable upon stock options held by Mr. Kehler, who is no longer an
executive officer of the Company. A portion of the shares issued or
issuable upon exercise of stock options is subject to repurchase by the
Company at the original exercise price in the event of termination of
employment, which repurchase right lapses over time.
14
<PAGE>
OTHER MATTERS
The Board of Directors knows of no other business which will be presented to
the Special Meeting. If any other business is properly brought before the
Special Meeting, proxies in the enclosed form will be voted in respect thereof
as the proxy holders deem advisable.
Representatives of the Company's auditors, Ernst & Young, are expected to be
present at the Special Meeting and will be available to respond to appropriate
questions.
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY AND THAT YOUR SHARES
BE REPRESENTED. STOCKHOLDERS ARE URGED TO MARK, DATE, EXECUTE AND PROMPTLY
RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE.
THE BOARD OF DIRECTORS
January 30, 1998
Mountain View, California
15
<PAGE>
APPENDIX A
----------
EXCHANGE AGREEMENT
This Agreement is being entered into as of the date set forth on the
signature page hereto by and between CONNECT, Inc. (the "Company") and the
undersigned ("Subscriber").
Background
----------
On November 18, 1997, the Company issued to Subscriber, and Subscriber
purchased from the Company, convertible notes of the Company (the "Notes")
pursuant to a Subscription Agreement between the Company and Subscriber (the
"Original Subscription Agreement"). The Company and Subscriber desire to
exchange that principal amount of Notes held by Subscriber as is set forth under
Subscriber's name on the signature page hereto for the number of shares of
Series A Preferred Stock of the Company (the "Preferred Stock") set forth under
Subscriber's name on the signature page hereto.
For good and valuable consideration, the sufficiency of which is hereby
acknowledged, the Company and Subscriber hereby agree as follows:
1. Certain Representations.
A. The Company represents and warrants to Subscriber as follows:
1. all filings which the Company has made with the Securities
Exchange Commission ("SEC") are correct and accurate in all
material respects and in all material respects state all facts
necessary to make such filings not misleading, and during the
last 12 months all such filings required to be made were timely
made;
2. there has been no material adverse change in the business, assets
or financial condition of the Company since the most recent such
filing, except for adverse changes in the Company's financial
condition and results of operations since June 30, 1997;
3. except as set forth in Sections 2 and 4(b), the Company has the
full power and authority to enter into this Agreement and to
carry out the transactions contemplated hereby, all proceedings
required to be taken by it or its stockholders to authorize and
to execute, deliver and perform this Agreement and the agreements
relating hereto have been properly taken, and this Agreement
constitutes a valid and binding obligation of the Company,
enforceable in accordance with its terms;
4. neither the execution, delivery nor performance of this Agreement
by the Company will, with or without the giving of notice or the
passage of time, or both, conflict with, result in a default,
right to accelerate or loss of rights under, or result in the
creation of any lien, charge or encumbrance pursuant to, any
provision of the Company's certificate of incorporation or by-
laws or any franchise, mortgage, deed of trust, lease, license,
agreement, understanding, law, rule or regulation or any order,
judgment or decree to which the Company is a party or by which it
may be bound or affected;
5. the Company has all necessary corporate power and authority to
execute and deliver this Agreement and to perform its obligations
hereunder; the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
hereby have duly authorized and, except as set forth in Sections
2 and 4(b), all corporate actions and all other approvals,
consents, authorizations and filings have been taken or made;
and, this Agreement, the Preferred Stock and the Warrants each
constitute a valid and
-1-
<PAGE>
binding obligation of the Company, enforceable in accordance with
its terms;
6. the Common Stock (as defined below) is listed on the NASDAQ
National Market and trading in the common stock has not been
suspended; NASDAQ has provided to the Company a letter dated
December 19, 1997, relating to the Exchange, a copy of which has
been provided to Subscriber;
7. there is no action, suit, proceeding or investigation pending or,
to the Company's knowledge, currently threatened against the
Company that questions the validity of this Agreement or the
issuance of the Preferred Stock or the Company's Common Stock
(the "Common Stock") issuable upon conversion of the Preferred
Stock or exercise of the Warrants, or the right of the Company to
enter into this Agreement or to consummate the transactions
contemplated hereby; and
8. the Company has filed the Certificate of Designation (as defined
below) with the Secretary of State of the State of Delaware.
II. Exchange of Notes for Shares of Preferred Stock.
A. The Company hereby agrees to issue to Subscriber in exchange for all
Notes held by Subscriber a number of shares of Preferred Stock equal
to the total principal amount of the Notes held by such Subscriber
divided by $2.00 (the "Exchange"). The Preferred Stock shall have the
rights, preferences and privileges as set forth in a Certificate of
Designation, the form of which is attached as Exhibit A hereto (the
"Certificate of Designation"). Subscriber hereby agrees to the
Exchange, subject to the terms hereof.
B. The Exchange shall take place upon satisfaction of each of the
following closing conditions: (i) the receipt of the approval of the
issuance of the Preferred Stock in the Exchange (and issuance of
Common Stock upon conversion thereof) from holders of a majority of
the Company's outstanding shares of Common Stock; (ii) the receipt of
the approval of the Certificate Amendment as defined below and Reverse
Split from holders of a majority of the Company's outstanding shares
of Common Stock; (iii) the simultaneous exchange of all of the
outstanding $10.32 million principal amount of Notes due October 1,
1999, for shares of Preferred Stock as contemplated by exchange
agreements substantially in the form of this Exchange Agreement
entered into with each holder of Notes; (iv) all of the
representations and warranties set forth in Section 1 of this
Agreement shall be true as of the Exchange Date (as defined below);
(v) on the Exchange Date and giving effect to the Exchange and the
Reverse Split, the Company shall be in compliance with the listing
requirements of the NASDAQ National Market and (vi) counsel to the
Company shall have delivered to each Subscriber a legal opinion
substantially consistent with the legal opinion delivered in
connection with the Original Subscription Agreement.
C. The closing of the Exchange shall occur within five days after receipt
by Subscriber of notice from the Company as to the satisfaction of the
closing conditions set forth in Section 2(b) above (the "Exchange
Date"); provided, however, that neither party shall be obligated to
close the Exchange after February 28, 1998. Upon the occurrence of the
Exchange, the Company shall pay to each Subscriber in cash or, if
indicated on the signature page hereto by the Subscriber, in shares of
Series A Preferred Stock at the rate of one share for each two dollars
of accrued interest, the amount of any accrued but unpaid interest on
the Notes through the date of the Exchange.
D. Upon delivery to Subscriber of all shares of Preferred Stock and
payments, in cash or shares of Preferred Stock, for accrued interest
on the Notes pursuant to the Exchange, the Notes will be canceled and
the Original Subscription Agreement will be superseded by this
Agreement. All Warrants issued pursuant to such Original Subscription
Agreement (the "Warrants") will remain outstanding and in full force
and effect. After the Exchange occurs, this Exchange Agreement
-2-
<PAGE>
will govern the treatment of the Warrants to the extent applicable and
all references in the Warrants to the Original Subscription Agreement
shall instead be interpreted to be references to this Exchange
Agreement. Prior to the Exchange Date, the Notes, the Original
Subscription Agreement and the Warrants shall remain in full force and
effect in accordance with the terms thereof; provided, that the
Company and Subscriber hereby amend Section 2(g)(iii) of all
Convertible Notes held by Subscriber to replace the reference to
"January 31, 1998" in the second sentence thereof with "February 28,
1998." If the Exchange does not occur by February 28, 1998, the Notes
and Warrants shall remain outstanding and the Original Subscription
Agreement shall remain in full force and effect.
III. Registration.
A. The Company will file, on or before the 2nd business day after the
date hereof, a shelf registration statement on Form S-3 or, if not
available, on such other appropriate Form as is then available (the
"Initial Registration Statement") for the public sale by Subscriber of
9,000,000 shares of Common Stock which are issuable on conversion of
the Notes, including shares of Common Stock issued in payment of
accrued interest (or issuable on conversion of the Preferred Stock
assuming the Exchange), and on exercise of the Warrants. The Company
will file a second registration statement on or before the 2nd
business day after the Exchange Date, on a shelf registration
statement on Form S-3 or, if not available, on such other appropriate
Form as is then available (the "Second Registration Statement") for
the public sale by Subscriber of the number of additional shares of
Common Stock which is equal to 150% of the number of shares of Common
Stock issuable on conversion of the Preferred Stock as of the Exchange
Date minus 9,000,000. In addition, the Company will file, on or before
the 2nd business day after each date on which the Company issues
shares of Preferred Stock in payment of its dividend obligations on
the Preferred Stock, an additional shelf registration statement on
Form S-3 or, if not available, on such other appropriate Form as is
then available (the "Additional Registration Statements," and together
with the Initial Registration Statement and the Second Registration
Statement (the "Registration Statements") for the public sale by
Subscriber of the additional shares of Common Stock which are issuable
on conversion of such Preferred Stock as of the date of the payment of
such dividends. The Company also shall prepare and file such
amendments and supplements to the Registration Statement (or such
additional Registration Statements) as may be necessary to cover
additional shares of Common Stock which, from time to time, may be
issuable upon conversion of the Preferred Stock and the Warrants, such
that a number of shares of Common Stock at least equal to 125% of the
shares of Common Stock that could be issued upon conversion of the
Preferred Stock and exercise Warrants at any given time shall at all
times be registered. The shares to be covered by the Registration
Statements are collectively referred to as the "registered shares."
The Company and Subscriber agree that the Company's obligations to
file and cause to become effective a registration statement under
Sections 3(a) and (b) of the Original Subscription Agreement shall be
satisfied if the Exchange occurs and the Company complies with this
Section 3.
B. The Company shall use its best efforts to cause the Initial
Registration Statement to become effective not later than the Exchange
Date. The Company shall use its best efforts to cause the Second
Registration Statement, if required to be filed, and each Additional
Registration Statement to become effective not later than 45 days
after each date of filing. The Company shall use its best efforts to
cause the Registration Statements to remain effective for three years;
provided, however, that such three-year period shall be extended for
any amount of time during which such a Registration Statement is not
currently in effect, a stop order is in effect or the common stock is
not listed and trading on the NASDAQ National Market. The registration
shall be accompanied by blue sky clearances in such states as
Subscriber may reasonably request.
C. The Company shall pay all expenses of the registrations hereunder,
other than Subscriber's underwriting discounts and counsel or other
fees.
-3-
<PAGE>
D. The Company shall supply to Subscriber a reasonable number of copies
of all registration materials and prospectuses. The Company shall file
with the SEC such amendments and supplements to the Registration
Statements and the prospectus included therein as may be necessary to
keep the registration statements effective and in compliance with the
provisions of the Securities Act. The Company and Subscriber shall
execute and deliver to each other indemnity agreements which are
conventional in registered offerings of this type with provisions
substantially as set forth in Exhibit B hereto. The Subscriber shall
reasonably cooperate with the Company in the preparation and filing of
the Registration Statements and appropriate amendments thereto.
E. Subscriber may transfer all or any part of its registration rights to
"permitted transferees" of the Preferred Stock or Warrants. A
"permitted transferee" is a person to whom a transfer of more than
20,000 shares of Preferred Stock or Warrants to purchase more than
13,333 shares (2,666 shares, post Reverse Split) is made at one time
in accordance with the terms of this Agreement and who in a written
notice addressed to the transferor and to the Company (i) agrees to
comply with all covenants and agreements set forth in this Agreement,
the Preferred Stock and the Warrants, and (ii) can and does make each
of the representations and warranties set forth in Section 12 of this
Agreement.
F. Once each Registration Statement is effective, the Company will issue
UNLEGENDED shares of common stock (in form which can be transmitted
electronically if desired by Subscriber):
1. on conversion of the shares of Preferred Stock and exercise of
the Warrants, whether or not such shares are sold simultaneously
with such conversion or exercise; or
2. in exchange for any legended shares of common stock which were
issued on prior conversion of the shares of Preferred Stock or
exercise of the Warrants or payment of dividends.
G. Should Subscriber from time to time or times give to the Company
notice that it has assigned the shares of Preferred Stock or Warrants
or any portion thereof, the Company shall, within ten business days
after receipt of such notice as provided below, file a supplement to
the appropriate Registration Statement to reflect the name(s) of the
transferee(s) as a selling stockholder. Each notice given to the
Company pursuant to this Section 3 shall be made in writing to the
Company at the address set forth above (or such other address of the
Company as is provided to Subscriber in writing or by public
announcement), Attention: Chief Financial Officer, shall be made by
overnight courier and shall be deemed made upon the date submitted to
such overnight courier.
IV. Reservation of Shares; Limitation on Conversion.
A. The Company shall at all times after the Exchange reserve for issuance
on conversion of the Preferred Stock and exercise of the Warrants, 40
million shares (post Reverse-Split) of Common Stock. If the Preferred
Stock and Warrants are convertible or exercisable for more than 40
million shares of Common Stock, the Company shall reserve additional
shares of Common Stock for issuance on conversion of the Preferred
Stock and exercise of the Warrants to the extent such additional
shares of Common Stock are authorized and available. In addition, to
the extent additional shares of Common Stock are required for
conversion but are not authorized and available, the Board of
Directors of the Company shall use its best efforts to cause such
additional shares to become authorized and available.
B. The number of shares of Common Stock reserved for issuance upon
conversion of the Preferred Stock (the "Reserved Amount") shall be
allocated pro rata among all holders of Preferred Stock based on the
aggregate number of shares of Preferred Stock held by such holders.
Each increase of the Reserved Amount shall be allocated pro rata among
the holders of such Preferred Stock
-4-
<PAGE>
based on the aggregate number of shares of Preferred Stock held by
each holder at the time of the increase in the Reserved Amount. In the
event that a holder shall sell or otherwise transfer shares of
Preferred Stock, each transferee shall be allocated a pro rata portion
of such transferor's Reserved Amount.
C. The Company agrees to seek the approval of its stockholders as soon as
practicable after the date hereof to increase the number of shares of
Common Stock authorized under the Company's Certificate of
Incorporation from 40,000,000 to 60,000,000 (the "Certificate
Amendment"), and to effect a one for five reverse split of the Common
Stock (the "Reverse Split").
D. In no event shall a holder of Preferred Stock in any Month (as
hereinafter defined) convert more than the lesser of : (i) 15% of such
holder's Aggregate Series A Holdings (as hereinafter defined) plus any
portion of such holder's Notes or Aggregate Series A Holdings which
could have been, but were not, converted in prior Months after
November 18, 1997; or (ii) 30% of such holder's Aggregate Series A
Holdings. A "Month" as used herein means each of the consecutive 30-
day periods which began on November 18, 1997. The "Aggregate Series A
Holdings" for a holder of Preferred Stock is the original aggregate
number of shares of Preferred Stock obtained by such holder.
Notwithstanding the foregoing, this Section 4(d) shall not limit any
conversion of Preferred Stock which occurs when the Average Price (as
defined in Section E.2 of the Certificate of Designation) during the
last ten trading days prior to conversion exceeds $4.00. The $4.00
amount aforesaid shall be equitably adjusted in case the Company shall
issue common stock as a dividend upon common stock or in payment of a
dividend thereon, shall subdivide the number of outstanding shares of
its common stock into a greater number of shares or shall contract the
number of outstanding shares of its common stock into a lesser number
of shares.
E. The shares of Preferred Stock shall be convertible at any time only to
the extent that Subscriber would not as a result of such exercise
beneficially own more than 4.99% of the then outstanding Common Stock.
Beneficial ownership shall be defined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934, as amended, provided,
however, that the restrictions contained in this sentence shall not
apply to a holder of Preferred Stock (and its permitted transferees,
if any) to the extent such holder indicates its intent to not be
subject to this restriction on the signature page to this Agreement or
upon at least 61 days prior written notice to the Company. The opinion
of counsel to Subscriber shall prevail in the event of any dispute on
the calculation of Subscriber's beneficial ownership.
V. The Company shall use its best efforts promptly after the Exchange Date and
from time to time thereafter, as necessary, to list on NASDAQ all shares of
Common Stock which are issuable upon conversion of the Preferred Stock or on
exercise of the Warrant.
VI. In the event the Company fails timely to deliver to the holder or to DWAC a
certificate for shares of Common Stock upon conversion of shares of Preferred
Stock, then, without limiting Holder's other rights and remedies, the Company
shall forthwith pay to the Holder an amount accruing at the rate of $1000.00 per
day for each day of such breach for each 50,000 shares of Preferred Stock for
which the timely delivery of a certificate was required, with pro rata payments
for a number of shares more or less than 50,000.
VII. The Company covenants and agrees that all shares of Common Stock which may
be issued upon conversion of the Preferred Stock will, upon issuance, be duly
and validly issued, fully paid and non-assessable and no personal liability will
attach to the holder thereof.
VIII. If the Exchange occurs, the Company agrees that until the 270th day after
the effective date of the Registration Statement relating to the shares issuable
upon conversion of the Preferred Stock the Company shall not issue any
securities pursuant to a private placement exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"); provided, however,
that nothing in this paragraph shall restrict the Company from offering
securities for the purpose of raising funds to redeem the Preferred Stock
pursuant to its terms as set forth in
-5-
<PAGE>
the Certificate of Designation.
IX. The Company represents that neither the issuance of the Preferred Stock (on
the Exchange Date) and the Warrants, nor the conversion or exercise of the
Preferred Stock or the Warrants, will trigger any rights or obligations under
any outstanding securities of the Company.
X. Subscriber represents, warrants and agrees that Subscriber shall not, for
so long as any shares of Preferred Stock owned by Subscriber remain outstanding:
A. offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any of the Company's Common Stock (each, a
"Sale") that Subscriber does not own as of such date, provided,
however, that no such restriction shall apply to any Common Stock to
be issued to Subscriber upon the conversion of any shares of Preferred
Stock which are converted within ten business days after such Sale or
upon the exercise of any Warrants which are exercised within ten
business days after such Sale; or
B. directly or indirectly take any action that constitutes illegal
manipulation of the Common Stock of the Company.
XI. The Company's obligations under this Agreement and under the Preferred
Stock and Warrants shall not be subject to defense, offset or counterclaim for
any matter or thing, including, without limitation, that Subscriber violated any
provision of Section 10. All claims by the Company against Subscriber shall be
brought by the Company in separate actions for monetary damages only, and
injunctive relief shall not be available.
XII. Securities Representations.
A. Subscriber represents and warrants that it is purchasing the shares of
Preferred Stock solely for investment, solely for its own account and
not with a view to or for the resale or distribution thereof except as
permitted under the Registration Statement or as otherwise permitted
under the Securities Act.
B. Subscriber understands that it may sell or otherwise transfer the
shares of Preferred Stock or Warrants or the shares issuable on
conversion of the Preferred Stock or exercise of the Warrants only if
such transaction is duly registered under the Securities Act, under
the Registration Statement or otherwise, or if Subscriber shall have
received the favorable opinion of counsel to Subscriber, which opinion
shall be reasonably satisfactory to counsel to the Company, to the
effect that such sale or other transfer may be made in the absence of
registration under the Securities Act, and registration or
qualification in every applicable state. The certificates representing
the aforesaid securities will be legended to reflect these
restrictions, and stop transfer instructions will apply. Subscriber
realizes that the Preferred Stock and Warrants are not a liquid
investment.
C. Subscriber has not relied upon the advice of a "Purchaser
Representative" (as defined in Regulation D of the Securities Act) in
evaluating the risks and merits of this investment. Subscriber has the
knowledge and experience to evaluate the Company and the risks and
merits relating thereto.
D. Subscriber represents and warrants that Subscriber is an "accredited
investor" as such term is defined in Rule 501 of Regulation D
promulgated pursuant to the Securities Act, and shall be such on the
date any Preferred Stock is issued to Subscriber; Subscriber
acknowledges that Subscriber is able to bear the economic risk of
losing Subscriber's entire investment in the shares and understands
that an investment in the Company involves substantial risks;
Subscriber has the power and authority to enter into this agreement,
and the execution and delivery of, and performance under this
agreement shall not conflict with any rule, regulation, judgment or
-6-
<PAGE>
agreement applicable to the Subscriber; and Subscriber has invested in
previous transactions involving restricted securities. Subscriber has
had the opportunity to discuss the Company's affairs with the
Company's officers.
XIII. ACKNOWLEDGMENT.
THE COMPANY HAS RECEIVED A NOTICE OF DELISTING FROM NASDAQ DUE TO A
FAILURE TO MEET ITS NET TANGIBLE ASSETS REQUIREMENT BASED ON THE COMPANY'S FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997. THE EXCHANGE WILL ENABLE THE
COMPANY TO MEET THE NET TANGIBLE ASSETS REQUIREMENT. SUBSCRIBER ACKNOWLEDGES
RECEIPT OF A LETTER FROM GORDON BRIDGE, CHIEF EXECUTIVE OFFICER OF THE COMPANY,
WHICH SETS FORTH A SUMMARY OF THE COMPANY'S CORRESPONDENCE WITH NASDAQ.
XIV. Certain Remedies.
A. If the effective date of the Initial Registration Statement (the
"Effective Date") has not occurred by February 28, 1998, then, in
addition to the Subscriber's other remedies, the Company shall pay to
Subscriber an amount equal to 1% per month of the principal amount of
the Notes proposed to be converted in the Exchange (or, if less, the
highest rate permitted by law) for the period from February 28, 1998
until the Effective Date.
B. If the Effective Date has not occurred by April 30, 1998, then, in
addition to the Subscriber's other remedies, the amount stated in (i)
above shall be increased to 2% per month (or, if less, the highest
rate permitted by law) for the period from April 30, 1998 until the
Effective Date.
C. If the Effective Date has not occurred by June 30, 1998, then, in
addition to the Subscriber's other remedies, the amount stated in (i)
above shall be increased to 3% per month (or, if less, the highest
rate permitted by law) for the period from June 30, 1998 until the
Effective Date.
XV. Miscellaneous
This Agreement may not be changed or terminated except by written
agreement. It shall be binding on the parties and on their personal
representatives and permitted assigns. It sets forth all agreements of the
parties, and may be signed in counterparts. It shall be enforceable by decrees
of specific performance (without posting bond or other security) as well as by
other available remedies. This Agreement shall be governed by, and construed in
accordance with, the laws of Delaware. The federal and state courts sitting in
New York, New York shall have exclusive jurisdiction over all matters relating
to this Agreement. Trial by jury is expressly waived.
All notices, requests, service of process, consents, and other
communications under this Agreement shall be in writing and shall be deemed to
have been delivered (i) on the date personally delivered or (ii) one day after
properly sent by recognized overnight courier, addressed to the respective
parties at their address set forth in this Agreement or (iii) on the day
transmitted by facsimile so long as a confirmation copy is simultaneously
forwarded by recognized overnight courier, in each case addressed to the
respective parties at their address set forth in this Agreement. Either party
hereto may designate a different address by providing written notice of such new
address to the other party hereto as provided above.
XVI. Expenses.
Except as otherwise set forth herein, each party hereto shall be
responsible for its own expenses with regard to the negotiation and execution of
this Agreement.
This Agreement may be amended by written agreement signed by the Company
and the original Subscriber.
[SIGNATURE PAGE FOLLOWS]
-7-
<PAGE>
Dated: ________________
SUBSCRIBER:
Name (print):_______________________
Signature: _________________________
Type or print name: ________________
Address: __________________________
__________________________
__________________________
Fax No.:___________________
Social Security No or EIN: _________
Principal Amount of Notes: $________
Shares of Preferred Stock:__________
Interest payable on the Exchange Date in shares of Preferred Stock: yes____;
no_____
Check the following box if Subscriber
desires not to be subject to the restrictions set
forth in Section 4(e): [_]
AGREED:
CONNECT, INC.:
By________________________
Its:______________________
-8-
<PAGE>
Exhibit B
Form Indemnification Provisions
(a) The Company will indemnify each Subscriber, each of its officers
and directors and partners, and each person controlling such Subscriber within
the meaning of Section 15 of the Securities Act, on behalf of which a
registration qualification or compliance has been effected pursuant to this
Section, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading, or any violation by the Company of any rule or regulation
promulgated under the Securities Act applicable to the Company in connection
with any such registration, qualification or compliance, and the Company will
reimburse each such Subscriber, each of its officers and directors, and each
person controlling such Subscriber, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Subscriber, controlling person or underwriter and stated
to be specifically for use therein.
(b) Each Subscriber will, if Registrable Securities held by such
Subscriber are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Subscriber, each of its officers and
directors and each person controlling such Subscriber within the meaning of
Section 15 of the Securities Act, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such Subscribers, such directors,
officers, persons, underwriters or control persons for any legal or any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Subscriber and stated to be specifically for use therein;
provided, however, that the liability of a Subscriber for indemnification under
this Section shall not exceed the gross proceeds from the offering received by
such Subscriber.
(c) Each party entitled to indemnification under Section (a) or (b)
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each
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<PAGE>
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation.
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<PAGE>
APPENDIX B
----------
CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES
AND PRIVILEGES OF
SERIES A PREFERRED STOCK
OF
CONNECT, INC.
(Pursuant to Section 151 of the General Corporation Law of the State of
Delaware)
We, Gordon J. Bridge and Joseph G. Girata, the President and the Secretary,
respectively, of CONNECT, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware, in accordance with the
provisions of Section 103 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Certificate of Incorporation of the said Corporation, the said Board of
Directors on December __, 1997 adopted the following resolution creating a
series of shares of Preferred Stock designated as Series A Preferred Stock:
"RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation by the Certificate of Incorporation, the Board of Directors
does hereby provide for the issue of a Series of Preferred Stock, $0.001 par
value, of the Corporation, to be designated "Series A Preferred Stock",
initially consisting of six million five hundred thousand (6,500,000) shares and
to the extent that the designations, powers, preferences and relative and other
special rights and the qualifications, limitations and restrictions of the
Series A Preferred Stock are not stated and expressed in the Certificate of
Incorporation, does hereby fix and herein state and express such designations,
powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions thereof, as follows (all terms used
herein which are defined in the Certificate of Incorporation shall be deemed to
have the meanings provided therein):
A. Designation and Amount. The shares of such series shall be designated
----------------------
as "Series A Preferred Stock", par value $0.001 per share, and the number of
shares constituting such series shall be six million five hundred thousand
(6,500,000).
B. Mandatory Dividends. The holders of shares of Series A Preferred Stock
-------------------
shall be entitled to receive mandatory dividends, out of any assets legally
available therefor, prior and in preference to any declaration or payment of any
distribution (payable other than in Common Stock or other securities and rights
convertible into or entitling the holder thereof to receive, directly or
indirectly, additional shares of Common Stock of the Corporation) on the Common
Stock or any other series of Preferred Stock of the Corporation, at the rate of
$.10 per share per
<PAGE>
annum on each outstanding share of Series A Preferred Stock, payable quarterly
in arrears on the first day of each January, April, July and October, commencing
April 1, 1998. The Corporation shall have the option of paying all or any
portion of such dividends in cash or in shares of Series A Preferred Stock. If
any of such dividends are paid in shares of Series A Preferred Stock, the number
of shares of Series A Preferred Stock issuable shall be the quotient obtained by
dividing the dollar amount of the dividends by $2.00. Such dividends, to the
extent not paid due to insufficient assets legally available therefor, shall be
cumulative, commencing on the date of the first issuance of a share of Series A
Preferred Stock.
C. Preference on Liquidation; Sale of Corporation
----------------------------------------------
1. Preferred and Common Stock. In the event of any liquidation,
--------------------------
dissolution or winding up of the Corporation, either voluntary or involuntary,
the holders of the Series A Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets of the Corporation to
the holders of any other series of Preferred Stock and Common Stock by reason of
their ownership thereof, an amount per share equal to $1.00 per share for each
share of Series A Preferred Stock then held by them, plus accrued but unpaid
dividends, if any. If, upon the occurrence of such event, the assets and funds
thus distributed among the holders of the Series A Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then the entire assets and funds of the Corporation
legally available for distribution shall be distributed ratably among the
holders of the Series A Preferred Stock in proportion to the preferential amount
each such holder is otherwise entitled to receive.
Upon the completion of the distribution required above, the remaining
assets of the Corporation available for distribution to stockholders shall be
distributed among the holders of the Series A Preferred Stock (without reduction
in the number of shares of Series A Preferred Stock as a result of the payment
in the prior paragraph) and the Common Stock pro rata based on the number of
shares of Common Stock held by each, assuming, for purposes of determining the
number of shares of Common Stock held by each holder of Series A Preferred
Stock, conversion of all shares of Series A Preferred Stock (without reduction
in the number of shares of Series A Preferred Stock as a result of the payment
in the prior paragraph) as provided for in Section E, except that (i) the
Percentage (as defined in Section E.2) shall be 60%, not 80%, (ii) all cumulated
dividends shall be deemed to have been paid, (iii) the calculation of the number
of shares issuable upon conversion of the shares of Series A Preferred Stock
shall not be limited by the number of shares of Common Stock available for
issuance, and (iv) in the case of a merger or consolidation or any other
transaction involving the sale or tender of shares of capital stock (including
Series A Preferred Stock and Common Stock) of the Corporation that is deemed a
liquidation pursuant to this Section C, the Average Price (as defined in Section
E.2(ii)) shall be deemed to be the price per share of Common Stock payable in
any such transaction (the "Per Share Price") as determined in the formulae set
forth below.
-2-
<PAGE>
As an example of the operation of the distribution allocations in the
prior paragraph in the case of a merger or consolidation or other transaction
that is deemed a liquidation pursuant to this Section C, assuming 19 million
shares of Common Stock are outstanding (and no options or warrants are
outstanding) and 5,000,000 shares of Series A Preferred Stock are outstanding,
the Per Share Price (for purposes of the calculation set forth in Section
E.2.(ii) below) payable in such merger or consolidation shall be determined by
operation of the following formulae:
x = Per Share Price
y = Number of shares into which the Series A Preferred Stock converts
1. Formula One: Assets or Aggregate Consideration Available for Distribution
-----------
or payment (after payment of $1.00 liquidation preference) = (19 million * x) +
(y * x)
2. Formula Two:
-----------
$10 million
-----------
y = .6
----------------
x
It is necessary to use these formulae to solve for x. If x is a
negative number, all of the remaining assets of the Corporation available for
distribution to stockholders shall be distributed only among the holders of the
Series A Preferred Stock.
2. Certain Events Deemed Liquidation. A reorganization, merger or
---------------------------------
consolidation of the Corporation with or into any other corporation or
corporations in which the shareholders of the Corporation immediately prior to
such transaction (or transactions, if such transactions comprise a related
series) do not own immediately after such transaction (or transactions, if such
transactions comprise a related series) more than 50% of the outstanding voting
securities of the surviving entity (or its parent), or a transaction (or
transactions, if such transactions comprise a related series) in which
shareholder(s) transfer more than 50% of the outstanding securities of the
Corporation (other than a reincorporation transaction), or a sale or other
disposition of all or substantially all of the assets of the Corporation shall
be deemed to be a liquidation within the meaning of this Section C. For this
purpose, the holders of shares of Series A Preferred Stock transferred,
surrendered or exchanged in any transaction described in the preceding sentence,
or in any other transaction involving the sale or tender of shares of capital
stock (including Series A Preferred Stock and Common Stock) of the Corporation,
shall be entitled to receive, as consideration in such transaction, the amounts
as provided pursuant to the first and second paragraphs of Section C.1 above.
Any securities to be delivered to the holders of the Series A Preferred Stock
and Common Stock upon a merger, reorganization or sale or other disposition of
substantially all of the assets of the Corporation shall be valued as follows:
-3-
<PAGE>
(a) If traded on a securities exchange, the NASDAQ National
Market or the NASDAQ Small Cap Market, the value shall be deemed to be the
average of the closing bid prices of the securities on such exchange or NASDAQ
Market over the 20-day period ending three (3) business days prior to the
closing;
(b) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid prices over the 20-day period ending
three (3) business days prior to the closing; and
(c) If there is no active public market, the value shall be the
fair market value thereof, as mutually determined by the Corporation and holders
of two-thirds of the then outstanding shares of Series A Preferred Stock.
3. Notice. The Corporation shall give each holder of record of
------
Series A Preferred Stock written notice of an impending transaction described in
Section C.2 not later than the earlier of twenty (20) days prior to the
stockholders' meeting called to approve such transaction, or twenty (20) days
prior to the closing of such transaction. The first of such notices shall
describe the material terms and conditions of the impending transaction and the
Corporation shall thereafter give such holders prompt notice of any material
changes. The transaction shall in no event take place sooner than twenty (20)
days after the Corporation has given the first notice provided for herein;
provided, however, that such periods may be shortened upon the written consent
of the holders of the majority of the then outstanding shares of Series A
Preferred Stock which are entitled to such notice rights or similar notice
rights.
D. Voting Rights. Except as required by law and as provided in Section G
-------------
below, the holders of Series A Preferred Stock shall not be entitled to vote.
E. Conversion Rights.
-----------------
1. Conversion of Preferred Stock; Automatic Conversion. Subject to
---------------------------------------------------
Section H, each share of Series A Preferred Stock shall be convertible, at the
option of the holder thereof, at any time after the issuance of such share and
on or prior to any Redemption Date contemplated by Section H below (the
"Conversion Period") into fully paid and nonassessable shares of Common Stock of
the Corporation. All outstanding shares of Series A Preferred Stock shall be
automatically converted into shares of Common Stock on October 1, 1999 if the
Corporation's Common Stock has been listed on the NASDAQ National Market at all
times subsequent to January 1, 1999, the Corporation has maintained at all times
subsequent to January 1, 1999 an effective registration statement relating to
the shares of Common Stock issuable upon conversion of the Series A Preferred
Stock and the closing bid price on each day subsequent to August 15, 1999 has
been at least $2.00 per share. The $2.00 amount referenced in the preceding
sentence shall be equitably adjusted in case the Corporation shall issue Common
Stock as a dividend upon Common Stock or in payment of a dividend thereon, shall
subdivide the number of outstanding shares of its Common Stock into a greater
number of shares or shall combine the number of outstanding shares of its Common
Stock into a lesser number of shares.
2. Determination of Number of Shares of Common Stock Upon
------------------------------------------------------
Conversion.
- ----------
-4-
<PAGE>
(a) Subject to the restrictions contained in (b) below, the
number of shares of Common Stock into which each share of Series A Preferred
Stock may be converted shall be the greater of (i) the quotient obtained by
dividing $2.00 (the "Cap"), plus cumulated but unpaid dividends with respect to
such share through the date of conversion, by the Conversion Price (as defined
in Section E.3), or (ii) the quotient obtained by dividing $2.00, plus cumulated
but unpaid dividends with respect to such share through the date of conversion,
by 80%, if the conversion occurs prior to December 15, 1999, or 60%, if the
conversion occurs thereafter, (the "Percentage") of the average closing bid
price (the "Average Price") of the Common Stock on the Nasdaq National Market
(or if not listed on the Nasdaq National Market, the Nasdaq SmallCap Market or
other national securities exchange or, if not so listed, on the over-the-counter
market) during the last 10 trading days prior to such conversion (excluding the
date of conversion); provided, however, that in no event shall a share of Series
A Preferred Stock be converted into more than the number of shares of Common
Stock determined by dividing $2.00 by the par value of a share of Common Stock
(i.e., $0.001).
(b) Prior to the initial issuance of a share of Series A
Preferred Stock, the Board of Directors of the Corporation will reserve
40,000,000 shares of Common Stock for issuance upon conversion of the Series A
Preferred Stock, and, thereafter, shall reserve additional shares of Common
Stock, to the extent authorized and available, if necessary for issuance upon
conversion of such Series A Preferred Stock. In addition, to the extent
additional shares of Common Stock are required for conversion but are not
authorized and available, the Board of Directors of the Company shall use its
best efforts to cause such additional shares to become authorized and available.
The number of shares of Common Stock reserved for issuance upon conversion of
the Preferred Stock (the "Reserved Amount") shall be allocated pro rata among
all shares of Series A Preferred Stock. To the extent the Board of Directors of
the Corporation increases the Reserved Amount, each increase of the Reserved
Amount shall be allocated pro rata among the shares of Series A Preferred Stock.
3. Determination of Initial Conversion Price. The "Conversion
----------------------------------------- ---------
Price" for the Series A Preferred Stock initially shall be $2.00, prior to
- -----
December 15, 1999, and $1.50, on and after December 15, 1999, subject to
adjustment as provided in Section F hereof.
4. Procedures for Exercise of Conversion Rights. The holders of any
--------------------------------------------
shares of Series A Preferred Stock may exercise their conversion rights during
the Conversion Period as to all such shares or any part thereof by delivering
(which delivery may be accomplished by facsimile and may be provided at any time
up until 12 midnight on any such date) to the Corporation, at the office of any
transfer agent of the Corporation for the Series A Preferred Stock, or at the
principal office of the Corporation or at such other place as may be designated
by the Corporation, written notice stating that the holder elects to convert
such shares. Conversion shall be deemed to have been effected on the date when
such delivery is made, and such date is referred to herein as the "Conversion
----------
Date." Within two business days after the Conversion Date and the delivery to
- ----
the Corporation during regular business hours, at the office of any transfer
agent of the Corporation for the Series A Preferred Stock, or at the principal
office of the Corporation or at such other place as may be designated by the
Corporation, of the certificate or certificates for the shares to be converted,
duly endorsed for transfer to the Corporation (if
-5-
<PAGE>
required by the Corporation), the Corporation shall issue and deliver to or upon
the written order of such holder (or at holder's request, DWAC), at such office
or other place designated by the Corporation, a certificate or certificates for
the number of full shares of Common Stock to which such holder is entitled and a
check for cash with respect to any fractional interest in a share of Common
Stock as provided in Section E.5 below. The applicable Conversion Price shall be
the Conversion Price in effect on the Conversion Date, and the applicable
Average Price shall be the Average Price in effect on the Conversion Date. Upon
conversion of only a portion of the number of shares of Series A Preferred Stock
represented by a certificate surrendered for conversion, the Corporation shall
issue and deliver to or upon the written order of the stockholder of the
certificate so surrendered for conversion, at the expense of the Corporation, a
new certificate covering the number of shares of Series A Preferred Stock
representing the unconverted portion of the certificate so surrendered.
5. No Fractional Shares. No fractional shares of Common Stock shall
--------------------
be issued upon conversion of shares of Series A Preferred Stock. If more than
one share of Series A Preferred Stock shall be surrendered for conversion at any
one time by the same holder, the number of full shares of Common Stock issuable
upon conversion thereof shall be computed on the basis of the aggregate number
of shares of Series A Preferred Stock so surrendered. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of any
shares of Series A Preferred Stock, the Corporation shall pay a cash adjustment
in respect of such fractional interest equal to the fair market value of such
fractional interest as determined in good faith by the Corporation's Board of
Directors.
6. Payment of Taxes for Conversions. The Corporation shall pay any
--------------------------------
and all issue and other taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion pursuant hereto of Series A
Preferred Stock. The Corporation shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that in which the shares
of Series A Preferred Stock so converted were registered, and no such issue or
delivery shall be made unless and until the person requesting such issue has
paid to the Corporation the amount of any such tax, or has established, to the
satisfaction of the Corporation, that such tax has been paid.
7. Status of Common Stock Issued Upon Conversion. All shares of
---------------------------------------------
Common Stock which may be issued upon conversion of the shares of Series A
Preferred Stock will upon issuance by the Corporation be validly issued, fully
paid and non-assessable and free from all preemptive rights, taxes, liens and
charges with respect to the issuance thereof.
F. Adjustment of Conversion Prices.
-------------------------------
1. General Provisions. The Conversion Price of the Series A
------------------
Preferred Stock shall be subject to adjustment from time to time as follows:
(a) If the number of shares of Common Stock outstanding at any
time after the date hereof is increased by a stock dividend payable in shares of
Common Stock or by a subdivision or split-up of shares of Common Stock, then, on
the date such payment is made or
-6-
<PAGE>
such change is effective, the Conversion Price for the Series A Preferred Stock
shall be appropriately decreased so that the number of shares of Common Stock
issuable on conversion of any shares of the Series A Preferred Stock shall be
increased in proportion to such increase of outstanding shares.
(b) If the number of shares of Common Stock outstanding at any
time after the date hereof is decreased by a combination of the outstanding
shares of Common Stock, then, on the effective date of such combination, the
Conversion Price for the Series A Preferred Stock shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
shares of the Series A Preferred Stock shall be decreased in proportion to such
decrease in outstanding shares.
(c) In case the Corporation shall declare a cash dividend upon
its Common Stock payable otherwise than out of retained earnings or shall
distribute to holders of its Common Stock shares of its capital stock (other
than Common Stock), stock or other securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends payable out of retained earnings) or options, rights or other
commitments to acquire securities of the Corporation or other securities of the
Corporation convertible into or exchangeable for Common Stock, then, in each
such case, immediately following the record date fixed for the determination of
the holders of Common Stock entitled to receive such dividend or distribution,
the Conversion Price for the Series A Preferred Stock in effect thereafter shall
be determined by multiplying the Conversion Price for the Series A Preferred
Stock in effect immediately prior to such record date by a fraction of which the
numerator shall be an amount equal to the remainder of (x) the Average Price of
one share of Common Stock less (y) the amount of such cash dividend in respect
of one share of Common Stock or the fair market value (as determined in good
faith by the Board of Directors) of the stock, securities, evidences or
indebtedness, assets, options, rights or derivative securities so distributed in
respect of one share of Common Stock, as the case may be, and of which the
denominator shall be the Average Price of one share of Common Stock. Such
adjustment shall become effective at the opening of business on the business day
next following the record date for the determination of stockholders entitled to
such dividend or distribution.
(d) All calculations under this Section E shall be made to the
nearest one hundredth (1/100) of a cent or to the nearest one hundredth (1/100)
of a share, as the case may be.
2. Computation of Adjustment. Upon the occurrence of each
-------------------------
adjustment or readjustment of the Conversion Price of any series of Series A
Preferred Stock pursuant to this Section F, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof, and prepare and furnish to each holder of Series A Preferred Stock
affected thereby a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series A Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (A) such adjustment or readjustment, (B) the
Conversion Price at the time in effect for the Series A
-7-
<PAGE>
Preferred Stock, and (C) the number of shares of Common Stock and the amount, if
any, of other property which at the time of such adjustment or readjustment
would be received upon the conversion of such holder's shares.
3. Ratchet Adjustment. Notwithstanding the terms of Section (F)
------------------
above, the Cap shall be adjusted to equal (i) the lowest price at which the
Corporation hereafter issues any shares of Common Stock (whether in public or
private placements or otherwise, but excluding issuances pursuant to employee or
director stock options), (ii) the lowest conversion price of any convertible
debenture or other security which the Corporation issues at any time hereafter
(whether in public or private placements or otherwise, but excluding issuances
pursuant to employee or director stock options), (iii) the lowest exercise price
of any warrant or similar security which the Corporation issues at any time
hereafter (but excluding issuances pursuant to employee or director stock
options), or (iv) the lowest Cap Equivalent (as hereinafter defined) in any
convertible or exercisable security which the Corporation issues at any time
hereafter (whether in public or private placements or otherwise). A "Cap
Equivalent" means an amount, similar in concept to the Cap hereunder, which
constitutes a ceiling on the conversion or exercise price of any security.
G. Protective Provisions. In addition to any other class or series vote
---------------------
that may be required by law, for so long as any shares of Series A Preferred
Stock shall be outstanding the Corporation shall not without obtaining the
approval (by vote or written consent, as provided by law), of the holders of
two-thirds of the outstanding shares of Series A Preferred Stock:
(i) materially or adversely alter or change the rights, preferences or
privileges of the Series A Preferred Stock;
(ii) authorize or issue (a) shares of any class or series of stock having any
preference or priority as to dividends, liquidation or redemption over or pari
passu with the Series A Preferred Stock, (b) shares of stock of any class or any
bonds, debentures, notes or other obligations convertible into or exchangeable
for, or having rights to purchase, any shares of stock of this Corporation
having any preference or priority as to dividends, liquidation or redemption
over or pari passu with the Series A Preferred Stock, or (c) any bonds,
debentures, notes or other obligations for borrowed money, except in connection
with equipment financing transactions of up to $1.5 million in any twelve months
commencing after the date of initial issuance of a share of Series A Preferred
Stock;
(iii) effect any merger, consolidation or sale of assets of the Corporation
with, into or to a Small Corporation in which the consideration to be received
by the stockholders of the Corporation in such transaction is not entirely cash
(for purposes of this paragraph the term "Small Corporation" shall mean a
corporation and its parent corporation (if the securities of the parent
corporation are being issued) which have a market capitalization of less than
$150 million; and for purposes of this paragraph the term "market
capitalization" shall mean the product of the number of outstanding shares of
the acquiring corporation's or its parent's common stock (if the securities of
the parent corporation are being issued) multiplied by the average of the
closing bid prices for the acquiring corporation's or its parent's common stock
(as quoted on a national securities
-8-
<PAGE>
exchange or on NASDAQ or over-the counter) during the 20 trading days prior to
the date notice of the proposed transaction is provided to the holders of the
Series A Preferred Stock;
(iv) effect any merger, consolidation or sale of assets of the Corporation
with, into or to another corporation in which the consideration to be received
by the stockholders of the Corporation in such transaction includes (1)
securities that have not been registered on an effective Form S-4 or other
appropriate form or (2) property other than cash or securities;
(vi) apply any of its assets to the redemption, retirement, purchase or
acquisition, directly or indirectly, through subsidiaries or otherwise, of any
shares of any class or series of equity securities of the Corporation (other
than repurchases of Common Stock from employees of and consultants to the
Corporation upon or after termination of employment and other than redemptions
of Series A Preferred Stock in accordance with Section H); or
(vii) pay any dividend or make any distribution on shares of equity securities,
other than with respect to the Series A Preferred Stock.
H. Certain Redemptions of the Series A Preferred Stock.
---------------------------------------------------
1. In the event that a holder of Series A Preferred Stock proposes to
convert any shares of Series A Preferred Stock (other than in connection with a
transaction under Section C. above) at a time when the Average Price (as defined
in Section E.2) is less than $1.25, the Corporation shall at its option be
entitled to redeem all or any portion of the shares of Series A Preferred Stock
proposed to be converted. Such option shall be exercisable by notice from the
Corporation to the Holder(s) given within two days after the notice of
conversion. If the Corporation shall give such notice of redemption, the
Corporation shall be obligated to pay to the Holder, on the 10th business day
after the date of such notice, an amount equal to $2.70 per share of Series A
Preferred Stock proposed to be converted, together with any accrued and unpaid
dividends thereon accrued through the date of such conversion. The $1.25 amount
referred in this paragraph shall be equitably adjusted in case the Corporation
shall issue Common Stock as a dividend upon Common Stock or in payment of a
dividend thereon, shall subdivide the number of outstanding shares of its Common
Stock into a greater number of shares or shall combine the number of outstanding
shares of its common stock into a lesser number of shares.
2. At any time after November 10, 1999, the Corporation shall at its
option be entitled to redeem all or any portion of the shares of Series A
Preferred Stock, exercisable by notice from the Corporation to the Holder(s). If
the Corporation shall give such notice of redemption, the Corporation shall be
obligated to pay to the Holder(s), on the 30th day after the date of such notice
(the "Redemption Date"), an amount equal to $2.00 per share of Series A
Preferred Stock, together with any accrued and unpaid dividends thereon accrued
through the date of redemption.
3. On or after the Redemption Date, each holder of Series A Preferred
Stock shall surrender to the Corporation the certificate or certificates
representing such shares, in the
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<PAGE>
manner and at the place designated in the notice of redemption, and thereupon
the redemption price of such shares shall be payable to the person whose name
appears on such certificate or certificates as the owner thereof and each
surrendered certificate shall be canceled. In the event less than all the shares
represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.
4. From and after the Redemption Date, unless there shall have been a
default in payment of the redemption price, all rights of the holders of Series
A Preferred Stock as holders of Series A Preferred Stock (except the right to
receive the redemption price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Corporation or be
deemed to be outstanding for any purpose whatsoever. If the funds of the
Corporation legally available for redemption of Series A Preferred Stock on any
Redemption Date are insufficient to redeem all outstanding shares of Series A
Preferred Stock then being redeemed, those funds which are legally available
will be used to redeem the maximum possible number of such shares ratably among
the holders of the Series A Preferred Stock, based on the amount of the
redemption price payable to each holder. The shares not redeemed shall remain
outstanding and entitled to all the rights and preferences provided herein (with
the dividend rate increasing from $.10 per share per annum to $.22 per share per
annum on the Redemption Date until the Corporation has deposited the funds (as
contemplated in paragraph 5 below) to effect redemption of these remaining
shares), and a certificate representing the shares that have not been redeemed
shall be returned to each holder. At any time thereafter when additional funds
of the Corporation are legally available for the redemption of Series A
Preferred Stock, such funds will immediately be used to redeem the balance of
the shares of Series A Preferred Stock that have not been redeemed.
5. Three days prior to the Redemption Date, the Corporation shall
deposit the redemption price of all outstanding shares designated for redemption
in the notice of redemption, and not yet redeemed or converted, with a bank or
trust company having aggregate capital and surplus in excess of $50,000,000 as a
trust fund for the benefit of the respective holders of the shares designated
for redemption and not yet redeemed. Simultaneously, the Corporation shall
deposit irrevocable instruction and authority to such bank or trust company to
pay, on and after the date fixed for redemption or prior thereto, the redemption
price of the Series A Preferred Stock to the holders thereof upon surrender of
their certificates. Any monies deposited by the Corporation pursuant to this
paragraph 5 for the redemption of shares that are thereafter converted into
shares of Common Stock pursuant to Section E no later than the close of business
on the Redemption Date shall be returned to the Corporation forthwith upon such
conversion. The balance of any monies deposited by the Corporation pursuant to
this paragraph 5 remaining unclaimed at the expiration of one year following the
Redemption Date shall thereafter be returned to the Corporation, provided that
the stockholder to which such monies would be payable hereunder shall be
entitled, upon proof of its ownership of Series A Preferred Stock and payment of
any bond requested by the corporation, to receive such monies without interest
from the Redemption Date.
6. Except as set forth in this Section H, the Series A Preferred
Stock is not redeemable.
-10-
<PAGE>
I. Sinking Fund. The shares of Series A Preferred Stock are not subject
------------
or entitled to the operation of a retirement or sinking fund.
J. Specific Performance. The Company agrees that, in addition to any
--------------------
other remedies which the holders of the Series A Preferred Stock may have, the
holders of the Series A Preferred Stock shall be entitled to obtain specific
performance of the terms of the Series A Preferred Stock included within this
Certificate."
IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do
affirm the foregoing as true under the penalties of perjury this ___th day of
December, 1997.
CONNECT, INC.
_____________________________________
Gordon J. Bridge, Chief Executive Officer
ATTEST:
__________________________________
Joseph G. Girata, Secretary
-11-
<PAGE>
PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
CONNECT, INC.
1998 SPECIAL MEETING OF STOCKHOLDERS
The undersigned stockholder of CONNECT, Inc., a Delaware corporation, (the
"Company") hereby acknowledges receipt of the Notice of Special Meeting of
Stockholders and Proxy Statement, each dated January 30, 1998, and hereby
appoints Gordon J. Bridge and Joseph G. Girata, or either of them, as proxies
and attorneys-in-fact with full power to each of substitution, on behalf and in
the name of the undersigned, to represent the undersigned at the 1998 Special
Meeting of Stockholders of CONNECT, Inc. to be held on February 24, 1998 at
10:00 a.m. Pacific time, at the principal executive offices of the Company at
515 Ellis Street, Mountain View, California, and at any adjournment(s) or
postponement(s) thereof, and to vote all shares of Common Stock that the
undersigned would be entitled to vote if then and there personally present, on
the matters set forth below:
PROPOSAL NO. 1 - AMENDMENT TO CERTIFICATE OF INCORPORATION EFFECTING A REVERSE
COMMON STOCK SPLIT
To approve an amendment to the Company's Certificate of Incorporation to
effect a one-for-five reverse split of the Company's Common Stock.
[_] FOR [_] AGAINST [_] ABSTAIN
PROPOSAL NO. 2 - AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE THE
AUTHORIZED SHARES OF COMMON STOCK
To approve an amendment to the Company's Certificate of Incorporation
increasing the number of authorized shares of the Company's Common Stock
from 40,000,000 to 60,000,000 shares.
[_] FOR [_] AGAINST [_] ABSTAIN
SEE REVERSE
SIDE
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE>
NOTE: THIS PROXY SHOULD BE MARKED, DATED, SIGNED BY THE STOCKHOLDER(S) EXACTLY
AS HIS OR HER NAME APPEARS HEREON, AND RETURNED IN THE ENCLOSED ENVELOPE.
PROPOSAL NO. 3 - ISSUANCE OF SERIES A PREFERRED STOCK IN EXCHANGE FOR THE
CONVERTIBLE NOTES AND THE ISSUANCE OF COMMON STOCK UPON CONVERSION THEREOF
To approve the issuance of Series A Preferred Stock in exchange for certain
outstanding convertible notes and as dividends on the Series A Preferred
Stock and the issuance of Common Stock upon conversion of the Series A
Preferred Stock.
[_] FOR [_] AGAINST [_] ABSTAIN
In their discretion, upon such other matter or matters which may properly
come before the meeting or any postponement(s) or adjournment(s) thereof.
THIS PROXY WILL BE VOTED AS DIRECTED AND AS SAID PROXIES DEEM ADVISABLE ON
SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING OR ANY POSTPONEMENT(S) OR
ADJOURNMENT(S) THEREOF. IF NO CONTRARY OBJECTION IS INDICATED, THIS PROXY
WILL BE VOTED FOR EACH OF THESE PROPOSALS BEING PRESENTED TO STOCKHOLDERS.
DATED: ________________________ , 1998
______________________________________
Printed name(s) exactly as shown on
Stock Certificate
______________________________________
(Signature)
______________________________________
(Signature)
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD USING THE ENCLOSED ENVELOPE.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee, or guardian, please give full title as such. If a corporation, please
sign in full corporate name by its President or other authorized officer. If a
partnership, please sign in partnership name by an authorized person. THIS
PROXY WILL BE VOTED FOR THE PROPOSALS IF NO SPECIFICATION IS MADE.
