<PAGE>
As filed with the Securities and Exchange Commission on February 27, 1998
Registration No. 333-_______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CONNECT, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 77-0431045
(State of incorporation) (I.R.S. Employer Identification No.)
515 ELLIS STREET
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 254-4000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
GORDON J. BRIDGE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONNECT, INC.
515 ELLIS STREET
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 254-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
DONALD M. KELLER, JR.
VENTURE LAW GROUP
A PROFESSIONAL CORPORATION
2800 SAND HILL ROAD
MENLO PARK, CALIFORNIA 94025
(650) 854-4488
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Amount Proposed maximum Proposed maximum
Title of each class of to be offering price aggregate Amount of
securities to be registered registered (1) per share(2) offering price(1) registration fee
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 37,512,018 $2.50 $93,780,045 $27,666
$.001 par value shares
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</TABLE>
(1) On February 24, 1998, the stockholders of the Company approved a one-for-
five reverse stock split, pursuant to which every five shares of Common
Stock outstanding as of February 26, 1998 became one share of Common Stock
(the "Reverse Split"). Except where otherwise indicated, all share and per
share amounts in this Registration Statement are adjusted to reflect the
Reverse Split.
(2) Estimated solely for the purpose of computing the amount of the registration
fee, based on the average of the high and low prices for the Company's
Common Stock as reported on The Nasdaq National Market on February 25, 1998
(as adjusted to reflect the Reverse Split) in accordance with Rule 457 under
the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
<PAGE>
PROSPECTUS
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37,512,018 SHARES
CONNECT, INC.
COMMON STOCK
______________________________________
This Prospectus covers 37,512,418 shares of Common Stock, $.001 par value
(the "Common Stock" or the "Shares"), of CONNECT, Inc. ("CONNECT" or the
"Company"), which may be offered from time to time by one or all of the selling
stockholders named herein (the "Selling Stockholders"). The Company will
receive no part of the proceeds of such sales.
The Shares were issued, or are issuable, to the Selling Stockholders upon
conversion of shares of Series A Preferred Stock of the Company (the "Series A
Preferred Stock"). The Company issued an aggregate of 4,905,209 shares of
Series A Preferred Stock in February 1998 to the Selling Stockholders in
exchange (the "Exchange") for an convertible notes (the "Notes") in the
aggregate principal amount of $9,744,250, which Notes were issued to the Selling
Stockholders in a private placement transaction consummated in November 1997 for
shares of Series A Preferred Stock. For additional information concerning the
Exchange, see "Issuance of Common Stock to Selling Stockholders."
The Selling Stockholders intend to sell the shares offered hereby from time
to time in The Nasdaq National Market at prices prevailing therein, in
individually negotiated transactions at such prices as may be agreed upon or a
combination of such methods of sale, during the period following the effective
date of this Prospectus. The Company will bear all expenses with respect to the
offering of the Common Stock, except any underwriting discounts, selling
commissions, stock transfer taxes, and fees and disbursements of counsel for the
Selling Stockholders. To the extent required, the specific shares of Common
Stock to be sold, the names of the Selling Stockholders, the public offering
price, the names of any agent dealer or underwriter and any applicable
commission or discount with respect to any particular offer is set forth herein
or will be set forth in an accompanying Prospectus Supplement. See "Selling
Stockholders" and "Plan of Distribution."
The Company's Common Stock is traded on The Nasdaq National Market under
the symbol "CNKT." The last reported sales price of the Common Stock on The
Nasdaq National Market on February 26, 1998 was $2.50 per share (as adjusted to
reflect a one-for-five reverse stock split effected on February 26, 1998).
______________________________________
SEE "RISK FACTORS," BEGINNING ON PAGE 5,
FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
______________________________________
The Selling Stockholders and any broker executing selling orders on behalf
of the Selling Stockholders may be deemed to be an "underwriter" within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
Commissions received by any such broker may be deemed to be underwriting
commissions under the Securities Act. See "Plan of Distribution" for
information relating to indemnification of the Selling Stockholders.
______________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMIS-
SION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
______________________________________
THE DATE OF THIS PROSPECTUS IS _____________, 1998
<PAGE>
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained in this Prospectus,
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or the Selling Stockholders. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the shares of Common Stock offered hereby, nor does
it constitute an offer to sell or a solicitation of an offer to buy any of the
shares offered hereby to any person in any jurisdiction in which it is unlawful
to make such an offer or solicitation. Neither the delivery of this Prospectus
nor any sale made hereunder shall under any circumstances create any implication
that the information contained herein is correct as of any time subsequent to
the date hereof.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
shares of Common Stock offered hereby, reference is hereby made to the
Registration Statement. Statements contained herein concerning the provisions
of any document are not necessarily complete, and each such statement is
qualified in its entirety by reference to the copy of such document filed with
the Commission.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Commission. Such reports, proxy and information statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, NW, Washington, D.C. 20549,
and at the following Regional Offices of the Commission: New York Regional
Office, Seven World Trade Center, New York, New York 10048, and Chicago Regional
Office, Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, NW, Washington, D.C. 20549 upon
payment of the prescribed fees. The Common Stock of the Company is quoted on
The Nasdaq National Market. Reports, proxy and information statements and other
information concerning the Company may be inspected at The Nasdaq Stock Market
at 1735 K Street, NW, Washington, D.C. 20006. In addition, the Commission
maintains a World Wide Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
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<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are hereby
incorporated by reference in this Prospectus:
(1) The Company's Annual Report on Form 10-K for the year ended
December 31, 1996, as filed on March 28, 1997;
(2) The Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997, as filed on May 15, 1997;
(3) The Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, as filed on August 13, 1997;
(4) The Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997, as filed on November 13, 1997;
(5) The Company's Current Reports on Form 8-K filed November 11,
1997, November 21, 1997, December 24, 1997, January 29, 1998
and February 27, 1998.
All reports and other documents subsequently filed by the Company pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference herein, to the extent required, and to be a part
hereof from the date of filing of such reports and documents. Any statement
incorporated herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon written or oral request of such person, a copy of any or all of
the foregoing documents incorporated herein by reference (other than exhibits to
such documents, unless such exhibits are specifically incorporated by reference
into such documents). Requests for such documents should be submitted in
writing to Joseph G. Girata, Vice President of Finance and Administration and
Chief Financial Officer, CONNECT, Inc., 515 Ellis Avenue, Mountain View,
California 94043 or by telephone at (650) 254-4000.
THE COMPANY
CONNECT, Inc. ("CONNECT" or the "Company") designs, develops, markets and
supports application software for Internet-based interactive commerce. The
Company was founded in 1987 to provide on-line information services to
businesses. During the period 1987 through 1992, the Company's primary business
was the operation and management of a private on-line service and the licensing
of related client software. In 1993 and 1994, the Company also offered software
for creation, access and operation of custom on-line systems. In late 1994, the
Company began to shift its focus from providing on-line services to developing
packaged software applications for Internet-based interactive commerce. During
1994 and 1995, the Company derived a significant portion of its revenue from
contract software development
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<PAGE>
projects with two companies under which the Company retained ownership of the
technology developed. These projects formed the foundation for the development
of OneServer, the Company's core software application, which was commercially
released in September 1995, and OrderStream, the first pre-configured
implementation of OneServer, which was commercially released in June 1996.
During the quarter ended June 30, 1997 the Company announced its newest
product, PurchaseStream. The PurchaseStream application is an Internet-based
purchasing system that simplifies and streamlines acquisition of indirect goods
and services. With PurchaseStream, end-user requisitioners can place secure
online orders for routine transactions through an electronic mall of approved
suppliers. (OneServer, OrderStream, and PurchaseStream are trademarks of the
Company).
The Company's recent operating results have been lower than expected.
Total revenues for the quarter ended December 31, 1997 and for the year ended
December 31, 1997 were $2.3 million and $9.4 million, respectively, compared to
revenues of $3.2 million and $10.1 million for the same periods in the prior
year. In addition, the Company incurred net losses for the quarter ended
December 31, 1997 and for the year ended December 31, 1997 of $3.1 million and
$14.6 million, respectively, compared to net losses of $3.1 million and $16.1
million for the same periods in the prior year. The Company anticipates that
operating expenses will continue to increase significantly, resulting in
continuing net losses and negative cash flow from operations for the foreseeable
future. See "Risk Factors--Recent Operating Results; Accumulated Deficit and
Anticipated Future Losses."
CONNECT was incorporated in 1987 under the laws of California and
reincorporated under the laws of Delaware in 1996. The Company's principal
executive offices are located at 515 Ellis Street, Mountain View, California,
and its telephone number is (650) 254-4000. As used in this Prospectus, the
"Company" and "CONNECT" refer to CONNECT, Inc., a Delaware corporation, and its
subsidiaries.
On February 24, 1998, the stockholders of the Company approved a one-for-
five reverse stock split, pursuant to which every five shares of Common Stock
outstanding as of February 26, 1998 became one share of Common Stock (the
"Reverse Split"). Except where otherwise indicated, the share and per share
amounts in this prospectus are adjusted to reflect the Reverse Split.
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<PAGE>
RISK FACTORS
This Prospectus (including the documents incorporated by reference herein)
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including, without limitation, statements regarding the Company's expectations,
beliefs, intentions or future strategies. All forward looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors set
forth below and in the documents incorporated by reference herein. In
evaluating the Company's business, prospective investors should carefully
consider the following risk factors in addition to the other information set
forth herein or incorporated herein by reference.
RECENT OPERATING RESULTS; ACCUMULATED DEFICIT AND ANTICIPATED FUTURE
LOSSES. The Company's recent operating results have been lower than expected.
Total revenues for the quarter ended December 31, 1997 and for the year ended
December 31, 1997 were $2.3 million and $9.4 million, respectively, compared to
revenues of $3.2 million and $10.1 million for the same periods in the prior
year. In addition, the Company incurred net losses for the quarter ended
December 31, 1997 and for the year ended December 31, 1997 of $3.1 million and
$14.6 million, respectively, compared to net losses of $3.1 million and $16.1
million for the same periods in the prior year. The Company has not realized a
profit in any year, and as of December 31, 1997 had an accumulated deficit of
approximately $61.6 million. In 1997, 1996 and 1995, the Company experienced
significant negative cash flow from operations. The Company has reduced its
headcount from 144 at December 31, 1996 to 91 at December 31, 1997 as part of
its efforts to reduce operating expenses. Although the reduction in headcount
could help the Company to meet its operating expense objectives, such reduction
could adversely impact the Company's sales, marketing and product development
efforts. The Company anticipates that operating expenses will continue to
increase significantly, resulting in continuing net losses and negative cash
flow from operations for the foreseeable future. There can be no assurance that
the Company can generate revenue growth, or that any revenue growth that is
achieved can be sustained. To the extent that increases in such operating
expenses precede or are not subsequently followed by increased revenues, the
Company's business, results of operations and financial condition would be
materially adversely affected. There can be no assurance that the Company will
ever achieve or sustain profitability.
POTENTIAL DILUTION TO STOCKHOLDERS. Each share of Series A Preferred Stock
issued in exchange for the Notes is convertible at the option of the holder into
that number of shares of Common Stock equal to the greater of (i) the quotient
obtained by dividing $2.00, plus accumulated but unpaid dividends, by the
conversion price (which initially is $10.00 per share and adjusts to $7.50 per
share on December 15, 1999) or (ii) the quotient obtained by dividing $2.00,
plus accumulated but unpaid dividends, by 80% (or 60% if the conversion occurs
after December 15, 1999) of the average closing bid price for the 10 trading
days prior to conversion. Prior to the Exchange, certain Selling Stockholders
converted an aggregate of $575,750 in principal amount of Notes into 1,245,028
shares of Common Stock. Existing stockholders could experience substantial
dilution as a result of the conversion of the Series A Preferred Stock into
shares of Common Stock, particularly if such conversion occurs at a time when
the market price of the Common Stock is below $10.00 per share.
FUTURE CAPITAL NEEDS. The Company has incurred net losses and experienced
significant negative cash flow from operations since inception. As of December
31, 1997, the Company had an accumulated deficit of approximately $61.6 million.
Based upon its current operating plan, the Company believes it has adequate cash
balances to fund its operations through at least December 31, 1998. There can be
no assurance, however, that the Company's actual cash requirements will not
exceed anticipated levels, or that the Company will generate sufficient revenue
fund its operations in the absence of additional funding sources. If additional
funds are raised through the issuance of equity securities, stockholders of the
Company may experience additional dilution, or the securities may have rights,
preferences or privileges senior to those of the Company's Common Stock. There
can be no assurance that such additional financing will be available on
acceptable terms, if at all. If adequate funds are not available or are not
available on acceptable terms, the Company may be unable to continue its
operations, develop or enhance its products, take
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<PAGE>
advantage of future opportunities or respond to competitive pressures or other
requirements, any of which would have a material adverse effect on the Company's
business, operating results and financial condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experienced
and expects to continue to experience significant fluctuations in quarterly
operating results that may be caused by many factors including, among others,
the number, timing and significance of product enhancements and new product
announcements by the Company or its competitors, the ability of the Company to
develop, introduce and market new and enhanced versions of the Company's
products on a timely basis, the length of the Company's sales cycle, market
acceptance of and demand for the Company's products, the pace of development of
electronic commerce conducted on the Internet, the mix of the Company's products
sold, customer order deferrals in anticipation of enhancements or new products
offered by the Company or its competitors, nonrenewal of service agreements,
software defects and other product quality problems, the Company's ability to
attract and retain key personnel, the extent of international sales, changes in
the level of operating expenses and general economic conditions. The Company
anticipates that a significant portion of its revenue will be derived from a
limited number of orders placed by large corporations, and the timing of receipt
and fulfillment of any such orders is expected to cause material fluctuations in
the Company's operating results, particularly on a quarterly basis. The Company
expects to recognize the majority of its license revenue in the last month of
each quarter. As a result, any delay in delivery of products at the end of a
quarter could materially adversely affect operating results for that quarter.
Furthermore, the operating results of many software companies reflect seasonal
trends, and the Company expects to be affected by such trends in the future.
Due to the foregoing factors, quarterly revenue and operating results are
difficult to forecast. Revenue is also difficult to forecast because the market
for Internet-based packaged applications software is rapidly evolving and the
Company's sales cycle may vary substantially from customer to customer. Further,
the Company's expense levels are based, in significant part, on the Company's
expectations as to future revenue and are therefore relatively fixed in the
short term. If revenue levels fall below expectations, as has occurred during
1997, net income is likely to be disproportionately adversely affected because a
proportionately smaller amount of the Company's expenses varies with its
revenue. There can be no assurance that the Company will be able to achieve or
maintain profitability on a quarterly or annual basis in the future.
RISKS ASSOCIATED WITH FAILURE TO MEET NASDAQ NATIONAL MARKET LISTING
REQUIREMENTS. In November 1997, the Company was informed by The Nasdaq Stock
Market, Inc. ("Nasdaq") that it did not meet the requirements for the continued
listing of its Common Stock on The Nasdaq National Market. Specifically,
Nasdaq's listing rules require the Company to maintain net tangible assets of at
least $4 million, and the Company's net tangible assets were $2.4 million as of
September 30, 1997. While the Company completed the sale and issuance of the
Notes in November 1997, which increased the Company's cash assets by
approximately $10 million, the Notes were considered as debt and, therefore, the
Company's net tangible assets did not increase as a result of the transaction.
In contrast, the Series A Preferred Stock is considered as equity for financial
accounting purposes. As a result, the Company's net assets increased as a
result of the Exchange. Accordingly, the Company believes that it is in
compliance with the Nasdaq net tangible assets requirements as of the date
hereof. However, there can be no assurance that the Company will be able to
continue to maintain compliance with the listing requirements of The Nasdaq
National Market. For example, continued losses by the Company could cause the
Company's net tangible assets to again fall below $4 million, at which point the
Company's Common Stock would likely be removed from listing on The Nasdaq
National Market. The removal of the Company's Common Stock from listing on The
Nasdaq National Market most likely would have a material adverse effect on the
market price of the Common Stock and on the ability of stockholders and
investors to buy and sell shares of the Common Stock in the public markets. See
"Description of Capital Stock" and "Issuance of Common Stock to Selling
Stockholders."
RECENT INTRODUCTION OF PRIMARY PRODUCTS; PRODUCT CONCENTRATION. Although
the Company was founded in 1987, in 1995 it initiated a new business strategy
focused on providing packaged software applications for Internet-based
interactive commerce. Consequently, the Company is dependent upon the successful
development, market acceptance and sales of OneServer, released in September
1995, and OrderStream, released in June 1996. Accordingly, the Company's
business must be considered in light of the risks, expenses and problems
frequently encountered by companies in an early stage of development,
particularly companies in new and rapidly evolving markets such as the Internet.
Such risks include a lack of acceptance of products and services by target
customers, the development of equal or superior products or services by
competitors, the failure of electronic
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commerce in general, and Internet-based electronic commerce in particular, to be
broadly adopted, the inability of the Company to develop and enhance competitive
products or to successfully commercialize any such products, and the inability
of the Company to identify, attract, retain and motivate qualified personnel.
There can be no assurance that the Company will succeed in addressing such
risks.
As of December 31, 1997, CONNECT had licensed OneServer or OrderStream to
over 25 customers. The Company expects OneServer, OrderStream and related
services to account for most of its revenues for the foreseeable future. As a
result, factors adversely affecting the pricing of, or demand for OneServer, and
OrderStream, such as competition, technological change, failure of the market
for Internet-based packaged applications to develop as the Company anticipates,
lack of customer acceptance of OneServer and OrderStream, or failure of the
Company to develop and introduce new and enhanced versions of OneServer and
OrderStream on a timely basis, could have a material adverse effect on its
business, operating results and financial condition. Further, if any of the
Company's customers are not able to successfully develop and deploy interactive
commerce applications with OneServer or OrderStream or for any other reason are
not satisfied with its products or services, the Company's reputation could be
damaged, which could have a material adverse effect on its business, operating
results and financial condition.
DEPENDENCE UPON PRODUCT DEVELOPMENT; RISKS OF TECHNOLOGICAL CHANGE AND
EVOLVING INDUSTRY STANDARDS. The Company's success will depend upon its ability
to develop new products and provide new services that meet changing customer
requirements. The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and customer requirements,
emerging competition and frequent new product and service introductions. As a
result, the Company may be required to change and improve its products in
response to changes in operating systems, application and networking software,
computer and communications hardware, programming tools and computer language
technology. In particular, the Company's software operates on the HP-UX 10 and
Sun Solaris 2.4/2.5 versions of the UNIX operating system. The Company plans to
port its software to the Windows NT operating system from Microsoft Corporation
("Microsoft") in the future due to increasing adoption of Windows NT by the
Company's potential customers. The Company has not begun the development work
necessary to port its software to Windows NT. There can be no assurance that the
Company will be successful in developing and marketing, on a timely basis,
products ported to the Windows NT operating system or any other operating
system. As a result, any shift in the market toward products running on
operating systems other than UNIX, including Windows NT, before the Company
offers versions of its software running on such operating systems, could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company can successfully
respond to changing technology, identify new product opportunities or develop
and bring new products and services to market in a timely manner. The Company
has in the past experienced delays in software development and there can be no
assurance that the Company will not experience delays in connection with its
current or future product development activities. Delays and difficulties
associated with new product introductions or product enhancements could have a
material adverse effect on the Company's business, operating results and
financial condition. Failure of the Company, for technological or other reasons,
to develop and introduce new products and product enhancements and new services
on a timely basis that are compatible with industry standards and that satisfy
customer requirements would have a material adverse effect on the Company's
business, operating results and financial condition.
In addition, the Company or its competitors may announce enhancements to
existing products or services, or new products or services embodying new
technologies, industry standards or customer requirements that have the
potential to supplant or provide lower cost alternatives to the Company's
existing products and services. The introduction of such enhancements or new
products and services could render the Company's existing products and services
obsolete and unmarketable. There can be no assurance that the announcement or
introduction of new products or services by the Company or its competitors or
any change in industry standards will not cause customers to defer or cancel
purchases of existing products or services, which could have a material adverse
effect on the Company's business, operating results and financial condition.
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Furthermore, introduction by the Company of products or services with
reliability, quality or compatibility problems could result in reduced orders,
delays in collecting accounts receivable and additional service costs. The
failure to introduce a new product, service or product enhancement on a timely
basis could delay or hinder market acceptance. Any such event could have a
material adverse effect on the Company's business, operating results and
financial condition.
COMPETITION. The market for interactive commerce software is new, rapidly
evolving and intensely competitive. The Company expects competition to intensify
in the future. The Company competes with vendors of prepackaged electronic
commerce software, vendors of software tools for developing electronic commerce
applications, system integrators and providers of business application software.
In addition, potential customers may elect to develop their own interactive
commerce solutions. The Company's competitors include Open Market, Inc.,
BroadVision, Inc., Microsoft, IBM/Lotus, Oracle Corporation ("Oracle"),
Informix/Illustra, Interworld and Actra. The Company's potential competitors
also include a number of successful client/server applications software
companies, such as Baan Company, PeopleSoft, Inc., Vantive Corporation and SAP
AG, and electronic data interchange (EDI) solution vendors, including Sterling
Commerce, Inc. and General Electric Information Services Corporation.
Many of these competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than the Company and
thus may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and potential
competitors have greater name recognition and more extensive customer bases that
could be leveraged, thereby gaining market share to the Company's detriment.
Such competitors may be able to undertake more extensive promotional activities,
adopt more aggressive pricing policies and offer more attractive terms to
purchasers than the Company and to bundle their products in a manner that may
discourage users from purchasing products offered by the Company. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to enhance their products.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. There can be no
assurance that the Company will be able to compete effectively with competitors
or that the competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, operating results and financial
condition.
MANAGEMENT OF RAPIDLY CHANGING BUSINESS; NEW MANAGEMENT TEAM; DEPENDENCE ON
KEY PERSONNEL. The Company's anticipated expansion of operations will place a
significant strain on the Company's managerial, operational and financial
resources. To manage this anticipated expansion, the Company must continue to
implement and improve its operational and financial controls and systems and to
expand, train and manage its employee base. Further, the Company will need to
manage multiple relationships with various customers and other third parties.
There can be no assurance that the Company will be able to implement on a timely
basis the systems, procedures or controls required to support its operations or
that will enable the Company to successfully market its products and services.
The Company's future operating results will also depend on its ability to expand
its sales and marketing organization, establish a distribution channel to
penetrate different and broader markets and expand its support organization. If
the Company is unable to respond effectively to changing business conditions,
its business, operating results and financial condition would be materially
adversely affected.
The Company's performance depends substantially on the performance of its
executive officers and key employees. The Company's future success also depends
on its continuing ability to identify, hire, train and retain other highly
qualified technical and managerial personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to attract,
assimilate or retain other highly qualified technical and managerial personnel
in the future. The inability to attract and retain its executive officers and
other key technical and managerial personnel could have a material adverse
effect upon the Company's business, operating results and financial condition.
UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR ELECTRONIC COMMERCE.
The Company's future operating results depend upon the development and growth of
the market for Internet-based packaged software applications, including
electronic commerce applications. This market is new and rapidly evolving. The
acceptance of electronic commerce in general and, in particular, the Internet as
a sales, marketing and order capture medium are highly uncertain and subject to
a number of risks. Critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use, quality of service and the
effect of
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government regulation) remain unresolved and may impact the growth of the
Internet. If widespread use of the Internet for commercial transactions does not
develop or if the Internet does not develop as an effective sales, marketing and
order capture medium, the Company's business, operating results and financial
condition would be materially adversely affected.
The adoption of the Internet for sales, marketing, order capture and other
commercial transactions, and the development of a market for packaged electronic
commerce applications require acceptance of new ways of transacting business and
exchanging information. In particular, enterprises that have already invested
substantial resources in other means of transacting business may be particularly
reluctant to adopt a new strategy that may make certain of their existing
personnel and infrastructure obsolete. If the market for Internet-based packaged
applications fails to develop or develops more slowly than the Company
anticipates, or if the Company's products do not achieve market acceptance, the
Company's business, operating results and financial condition would be
materially adversely affected.
RISKS ASSOCIATED WITH COMPLEX SOFTWARE PRODUCTS; LENGTHY SALES AND
IMPLEMENTATION CYCLES. The Company's products are complex and expensive and
will generally involve significant investment decisions by prospective
customers. Accordingly, the license of the Company's software products is often
an executive-level decision by prospective customers and can be expected to
require the Company to engage in a lengthy sales cycle to provide a significant
level of education to prospective customers regarding the use and benefits of
the Company's products. In addition, the implementation of the Company's
products involves a significant commitment of resources by customers over an
extended period of time. As a result, the Company's sales and customer
implementation cycles are subject to a number of significant delays over which
it has little or no control. The Company has limited experience with
implementing its applications, and most of the Company's OneServer and
OrderStream customers are at an early stage in the process of implementing the
application and rolling it out for commercial use. The Company believes that
rapid implementation is critical to success in the Internet-based interactive
commerce applications market. Significant delays in implementation, whether or
not such delays are within the Company's control, could materially adversely
affect its business, operating results and financial condition. From time to
time, the Company enters into fixed price arrangements for its implementation
services and currently has three such arrangements. Fixed price arrangements
have resulted in the past, and could in the future result in, losses primarily
due to delays in the implementation process or other complexities associated
with completion of the project. Such losses have had a material adverse effect
on the Company's business, operating results and financial condition. In
addition, delays in license transactions due to lengthy sales cycles or delays
in customer production or deployment of a system could have a material adverse
effect on the Company's business, operating results and financial condition and
could be expected to cause the Company's operating results to vary significantly
from quarter to quarter.
The marketability and acceptance of OneServer and OrderStream also will be
highly dependent on the success of initial implementations of these products by
the Company's customers. Problems or delays experienced by the Company's initial
customers in the installation and use of OneServer or OrderStream, even if such
problems or delays are not attributable to the Company or its products, or a
failure of the Company's customers to successfully attract purchasers to
interactive commerce Web sites, could slow the rate of adoption of the Company's
products by other potential customers. Moreover, products as complex as those
offered by the Company may contain undetected errors when first introduced or
when new versions are released. There can be no assurance that, despite testing
by the Company, errors will not occur in current or new products after
commencement of commercial shipments, resulting in adverse publicity, in loss of
or delay in market acceptance, or in claims by the customer against the Company,
which would have a material adverse effect on the Company's business, operating
results and financial condition.
DEPENDENCE UPON SERVICE PROVIDERS. The Company expects that its customers
will typically rely on professional services organizations, such as consulting
firms and systems integrators, as well as design firms to assist with
implementation of the Company's products. If the Company is unable to adequately
train a sufficient number of such firms or if for any reason a large number of
such firms support or promote competing products or technologies, the Company's
business, operating results and financial condition could be materially
adversely affected. Many of these relationships are not subject to formal
agreements and none of such providers are under any obligation to provide
services to the Company or its customers. Failure of the Company to develop and
maintain relationships with leading service providers and design firms could
adversely impact the Company's ability to
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successfully market, sell and deploy its products, which would have a material
adverse effect on the Company's business, operating results and financial
condition.
DEPENDENCE UPON CERTAIN LICENSES. The Company relies on certain technology
that it licenses from third parties, including a relational database management
system from Oracle, a text search engine from Fulcrum Technologies Inc.
("Fulcrum"), encryption technology from RSA Data Security, Inc. ("RSA") and
other software that is integrated with internally developed software and used in
the Company's software to perform key functions. Oracle also offers products
that are competitive with those offered by the Company. There can be no
assurance that the Company's third-party technology licenses will continue to be
available to the Company on commercially reasonable terms, or at all. The loss
or inability to maintain any of these technology licenses could result in delays
in introduction of the Company's products and services until equivalent
technology, if available, is identified, licensed and integrated, which could
have a material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE UPON THE INTERNET INFRASTRUCTURE. The use of the Company's
products and services will depend in large part upon the continued development
of the infrastructure for providing Internet access and services. Because global
commerce and online exchange of information on the Internet is new and evolving,
it is difficult to predict with any assurance whether the Internet will prove to
be a viable commercial marketplace. The Internet has experienced, and is
expected to continue to experience, substantial growth in the number of users
and amount of traffic. There can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on it by
this continued growth. In addition, the Internet could lose its viability due to
delays in the development or adoption of new standards and protocols to handle
increased levels of Internet activity, or due to increased governmental
regulation. Further, the costs of use of the Internet could increase to a degree
which reduces its attraction as a platform for electronic commerce. As a result,
there can be no assurance that the infrastructure or complementary services
necessary to make the Internet a viable commercial marketplace will be
developed, or, if developed, that the Internet will become a viable commercial
marketplace for products and services such as those offered by the Company. If
the necessary infrastructure or complementary services or facilities are not
developed, or if the Internet does not become a viable commercial marketplace,
the Company's business, operating results and financial condition would be
materially adversely affected.
RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION. To date, the Company has
sold its products through a direct sales force. The Company's ability to achieve
revenue growth in the future will depend in large part upon its success in
recruiting and training sufficient direct sales personnel and establishing and
maintaining relationships with distributors, resellers, systems integrators and
other third parties. Although the Company is currently investing, and plans to
continue investing, significant resources to expand its sales force and to
develop distribution relationships with third-party distributors and resellers,
the Company may at times experience difficulty in recruiting qualified sales
personnel and in establishing necessary third-party alliances. In addition, as
the Company hires new sales personnel it is anticipated that there will be a
delay before such personnel become productive. There can be no assurance that
the Company will be able to successfully expand its direct sales force or other
distribution channels or that any such expansion will result in an increase in
revenues. Any failure by the Company to expand its direct sales force or other
distribution channels would materially adversely affect the Company's business,
operating results and financial condition.
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RISKS ASSOCIATED WITH SECURITY, SYSTEM DISRUPTIONS AND COMPUTER
INFRASTRUCTURE. Despite the implementation in the Company's products of various
security mechanisms, the Company's products may be vulnerable to break-ins and
similar disruptive problems caused by Internet users. The level of security
provided by the Company's products is dependent upon the level of security
selected by the Company's customers and the proper configuration and use of the
products' security mechanisms. Such computer break-ins and other disruptions
would jeopardize the security of information stored in and transmitted through
the computer systems of users of the Company's products, which may result in
significant liability to the Company and may also deter potential customers.
Persistent security problems continue to plague public and private data
networks. Recent break-ins reported in the press and otherwise have included
incidents involving hackers bypassing firewalls by posing as authorized
computers and involving the theft of confidential information. Alleviating
problems caused by third parties may require significant expenditures of capital
and resources by the Company. Such expenditures could have a material adverse
effect on the Company's business, operating results and financial condition.
Moreover, the security and privacy concerns of existing and potential customers,
as well as concerns related to computer viruses, may inhibit the growth of the
Internet marketplace generally, and the Company's customer base and revenues in
particular. There can be no assurance that the Company's attempts to limit its
liability to customers, including liability arising from a failure of the
security feature contained in the Company's products, through contractual
provisions will be enforceable. The Company currently does not have product
liability insurance to protect against these risks and there can be no assurance
that such insurance will be available to the Company on commercially reasonable
terms, or at all.
As part of the Company's services, the Company operates and manages online
networks for certain of its customers on a seven day per week, 24-hour basis,
and provides hosting for certain customers' OneServer/OrderStream applications.
These services depend upon the Company's ability to protect the computer
equipment and the information stored in its data center against damage that may
be caused by fire, earthquakes, power loss, telecommunications failures,
unauthorized entry and other similar events. Any such damage or failure that
causes interruptions in the Company's operations could materially adversely
affect the businesses of the Company's customers, which could expose the Company
to liability for these adverse effects.
DEPENDENCE UPON PROPRIETARY RIGHTS; RISKS OF INFRINGEMENT. The Company
relies on trademark, copyright and trade secret laws, employee and third-party
non-disclosure agreements and other methods to protect its proprietary rights.
The Company does not currently have any patents or pending patent applications.
The Company believes that, due to the rapid pace of technological innovation for
Internet products, the Company's ability to establish and maintain a position of
technology leadership in the industry depends more on the skills of its
development personnel, new product developments, frequent product enhancements,
and name recognition than upon the legal protections afforded its existing
technology. The Company seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States. There
can be no assurance that the Company's means of protecting its proprietary
rights in the United States or abroad will be adequate. There can be no
assurance that its agreements with employees, consultants and others who
participate in the development of its software will not be breached, that the
Company will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known to or independently developed by
competitors. Furthermore, there can be no assurance that the Company's efforts
to protect its rights through trademark and copyright laws will not fail to
prevent the development and design by others of products or technology similar
to or competitive with those developed by the Company.
The Company expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in different
industry segments overlaps and there can be no assurance that third parties will
not assert infringement claims against the Company. Any such claims, with or
without merit, could be time consuming to defend, result in costly litigation,
divert management's attention and resources, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company, if at all. In the event of a successful claim of product
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infringement against the Company and failure or inability of the Company to
license the infringed or similar technology, the Company's business, operating
results and financial condition would be materially adversely affected.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common Stock
has been subject to significant fluctuations in response to quarter-to-quarter
variations in the Company's operating results, announcements of technological
innovations or new products and services by the Company or its competitors, and
other events or factors. In addition, the stock market in recent years, and in
particular the market for stocks relating to the Internet, has experienced
extreme price and volume fluctuations that have particularly affected the market
prices of many high technology companies and that have often been unrelated or
disproportionate to the operating performance of companies. These fluctuations,
as well as general economic and market conditions, may adversely affect the
market price for the Common Stock.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company is not
currently subject to direct regulation by any government agency, other than
regulations applicable to businesses generally, and there are currently few laws
or regulations directly applicable to access to, or commerce on, the Internet.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing and characteristics
and quality of products and services. The Telecommunications Reform Act of 1996
imposes criminal penalties on anyone who distributes obscene, lascivious or
indecent communications on the Internet. The adoption of any such laws or
regulations may decrease the growth of the Internet, which could in turn
adversely affect the Company's business, operating results or financial
condition. Moreover, the applicability to the Internet of existing laws
governing issues such as property ownership, libel and personal privacy is
uncertain. Further, due to the encryption technology contained in the Company's
products, such products are subject to U.S. export controls. There can be no
assurance that such export controls, either in their current form or as may be
subsequently enacted, will not delay the introduction of new products or limit
the Company's ability to distribute products outside of the United States or
electronically. While the Company intends to take precautions against unlawful
exportation, the global nature of the Internet makes it difficult to effectively
control the distribution of the Company's products. In addition, federal or
state legislation or regulation may further limit levels of encryption or
authentication technology. Further, various countries regulate the import of
certain encryption technology and have adopted laws relating to personal privacy
issues which could limit the Company's ability to distribute products in those
countries. Any such export or import restrictions, new legislation or regulation
or government enforcement of existing regulations could have a material adverse
impact on the Company's business, operating results and financial condition.
CONTROL BY EXISTING SECURITY HOLDERS. As of December 31, 1997, the
Company's officers and directors, together with entities affiliated with them,
own approximately 44% of the outstanding Common Stock of the Company. Such
persons will have sufficient power to significantly influence the outcome of
many matters (including the election of directors, and any merger, consolidation
or sale of all or substantially all of the Company's assets) submitted to the
stockholders for approval. As a result, certain transactions are unlikely to be
approved without the approval of these stockholders.
ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The Board of Directors
has the authority to issue up to 3.5 million shares of Preferred Stock (in
addition to the 6.5 million shares designated as Series A Preferred Stock) and
to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change of control of the
Company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of Common Stock. Except for up to 6.5
million shares of Series A Preferred Stock which were issued in connection with
the Exchange and which in the future may be issued as dividends on the Series A
Preferred Stock, the Company has no other present plans to issue shares of
Preferred Stock. Further, certain provisions of the Company's charter
documents, including provisions eliminating the ability of stockholders to take
action by written consent and limiting the ability of stockholders to raise
matters at a meeting of stockholders without giving advance notice, may have the
effect of delaying or preventing changes in control or management of the
Company, which could have an adverse effect on the market price of the Company's
Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Company's Common Stock in the public market or the anticipation of such sales
could materially affect then prevailing market prices. The effect of such sales
may be exacerbated further by the relatively low trading volume of the Company's
Common Stock. The Securities and Exchange Commission has recently adopted
changes to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), which changes became effective in April 1997. As a result of
such changes, substantially all of the unregistered shares of the Company's
Common Stock which are not already eligible for resale under Rule 144 or Rule
701 under the Securities Act are eligible for resale pursuant to Rule 144,
subject in some cases to volume limitations and other requirements.
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SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of
February 27, 1998 by each Selling Stockholder.
<TABLE>
<CAPTION>
SHARES OF SERIES A SHARES OF COMMON STOCK
PREFERRED STOCK BENEFICIALLY OWNED PRIOR TO SHARES BENEFICIALLY OWNED
BENEFICALLY OWNED THE OFFERING (2) SHARES AFTER THE OFFERING(4)
---------------------------- --------------------------
SELLING STOCKHOLDERS PRIOR TO OFFERING (1) SHARES PERCENT (5) OFFERED (3) SHARES PERCENT (5)
- -------------------------------- ------------------------- ------------ -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Combination Inc. 646,000 202,814 4.8% 4,940,210 -- --
c/o ISCC
310 Madison Avenue,
Suite 501
New York, NY 10017
Norwest Equity Partners V 628,493 466,301 11.2 4,806,327 383,636 9.4%
245 Lytton Avenue,
Suite 250
Palo Alto, CA 94301
Stark International 524,589 108,595 2.6 4,011,734 -- --
1500 W. Market Street, Suite
200
Mequon, WI 53092
Shepard Investments 524,589 108,595 2.6 4,011,734 -- --
International, Ltd.
1500 W. Market Street, Suite
200
Mequon, WI 53092
BankAmerica Ventures (6) 608,219 321,269 7.7 4,651,284 241,271 5.9
950 Tower Lane, Suite 700
Foster City, CA 94404
Elliot Bossen 600,000 79,998 1.9 4,588,431 -- --
3100 Tower Blvd.,
Suite 1104
Durham, NC 27707
Special Situations Private 572,038 125,665 3.0 4,374,594 -- --
Equity Fund L.P.
133 East 53rd St.
New York, NY 10022
Special Situations Cayman Fund 129,963 27,666 * 993,877 -- --
L.P.
133 East 53rd St.
New York, NY 10022
Special Situations Fund III 359,163 69,328 1.7 2,746,657 -- --
133 East 53rd St.
New York, NY 10022
Special Situations Technology 109,963 25,000 * 840,929 -- --
Fund L.P.
133 East 53rd St.
New York, NY 10022
Quaestus Management Corporation 40,000 1,047,161 25.6 305,895 1,041,828 25.5
(7)
330 E. Kilbourn Avenue
Milwaukee, WI 53202
LBI Holdings 162,192 21,333 * 1,240,346 -- --
c/o Lehman Brothers, Inc.
3 World Financial Center
New York, NY 10285
Total 4,905,209 2,603,725 37,512,018 1,666,735
</TABLE>
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______________________________
* Less than one percent of the Company's outstanding Common Stock.
(1) Indicates the number of Shares of Series A Preferred Stock held by the
Selling Stockholder. Each share of Series A Preferred Stock is convertible
at the option of the holder into that number of shares of Common Stock equal
to the greater of (i) the quotient obtained by dividing $2.00, plus
accumulated but unpaid dividends, by the conversion price (which initially
is $10.00 per share and shifts to $7.50 per share on December 15, 1999) or
(ii) the quotient obtained by dividing $2.00, plus accumulated but unpaid
dividends, by 80% (or 60% if the conversion occurs after December 15, 1999)
of the average closing bid price for the 10 trading days prior to
conversion.
(2) Represents the number of shares beneficially held by the Selling Stockholder
prior to the offering, including shares issuable upon exercise of the
Warrants and shares issued upon conversion of Notes prior to February 27,
1998. Excludes shares issuable upon conversion of Series A Preferred Stock
held by the Selling Stockholder.
(3) The number of shares offered does not reflect the actual current conversion
rate of the Series A Preferred Stock. The number of shares offered
represents each Selling Stockholder's pro rata portion of the 40,000,000
shares of Common Stock reserved for issuance upon conversion of the Series A
Preferred Stock, minus an aggregate of 2,487,982 shares (as adjusted to
reflect the Reverse Split) previously registered pursuant to the Company's
Registration Statement on Form S-3 (file no. 333-43197) filed with the
Securities and Exchange Commision on December 24, 1997. See "Issuance of
Common Stock to Selling Stockholders."
(4) Assumes that each Selling Stockholder will sell all of the Shares set forth
above under "Shares Offered," as well as all of the shares set forth in the
Company's Registration Statement on Form S-3 (file no. 333-43197) filed with
the Securities and Exchange Commission on December 24, 1997. There can be no
assurance that the Selling Stockholders will sell all or any of the Shares
offered hereunder.
(5) Based on 4,091,010 shares outstanding at February 26, 1998 and, for each
given holder, assumes the issuance of the Common Stock issued or issuable
upon exercise of the holder's Warrants.
(6) Includes 24,125 shares held by BA Venture Partners I.
(7) Includes 850,622 shares held by Network Partners, 12,807 shares held by
Quaestus Limited Partnership and 185,826 shares held by Quaestus Partner
Fund. Also includes 2,213 shares and 603 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.
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ISSUANCE OF COMMON STOCK TO SELLING STOCKHOLDERS
On November 18, 1997, the Company closed the private placement (the
"Private Placement") of 250 Units, each such Unit consisting of one (1)
convertible note (a "Note") in the principal amount of $40,000 and one (1)
warrant (a "Warrant") to purchase 2,666 shares of Common Stock of the Company.
The Units were priced at $40,000 per Unit, resulting in gross proceeds of
approximately $10 million. Lehman Brothers, Inc. received a placement fee of 8%
of gross proceeds (excluding proceeds from sales of up to $2,000,000 of Units to
current stockholders of the Company) from the Private Placement for services
rendered in connection with the Private Placement, 50% of which has been paid in
cash and the balance of which has been paid in Units (consisting of 8 Units
issued to LBI Holdings, an affiliate of Lehman Brothers, Inc.). The Company
relied on Rule 506 of Regulation D under the Securities Act of 1933, as amended
(the "Act"), which, among other things, provides an exemption from the
registration requirements of the Act for sales to accredited investors (as
defined by Rule 501(a) of Regulation D under the Act).
In November 1997, the Company was informed by The Nasdaq Stock Market, Inc.
("Nasdaq") that it did not meet the requirements for the continued listing of
its Common Stock on The Nasdaq National Market. Specifically, Nasdaq's listing
rules require the Company to maintain net tangible assets of at least $4
million, and the Company's net tangible assets were $2.4 million as of September
30, 1997. While the Company completed the Private Placement in November 1997,
which increased the Company's cash assets by approximately $10 million, the
Notes are considered as debt and, therefore, the Company's net tangible assets
did not increase as a result of the Private Placement.
In order to achieve compliance with the foregoing listing requirements, on
February 26, 1998, the Company and each holder of the Notes exchanged all of the
Notes that had not been converted as of such date (which Notes had an aggregate
principal amount of $9,744,250) for 4,905,209 shares of the Company's Series A
Preferred Stock, plus accrued interest on such Notes (the "Exchange"). As a
result, the Company's net tangible assets were increased and the Company
believes that as of the date hereof it is currently in compliance with the
Nasdaq net tangible assets requirements. However, there can be no assurance that
the Company will be able to continue to maintain compliance with the listing
requirements of The Nasdaq National Market. For example, continued losses by the
Company could cause the Company's net tangible assets to again fall below $4
million, at which point the Company's Common Stock would likely be removed from
listing on The Nasdaq National Market. The removal of the Company's Common Stock
from listing on The Nasdaq National Market most likely would have a material
adverse effect on the stock price of the Common Stock and on the ability of
stockholders and investors to buy and sell shares of the Common Stock in the
public markets. See "Risk Factors--Risks Associated with Failure to Meet Nasdaq
National Market Listing Requirements."
Each share of Series A Preferred Stock issued in exchange for the Notes is
convertible at the option of the holder into that number of shares of Common
Stock equal to the greater of (i) the quotient obtained by dividing $2.00, plus
accumulated but unpaid dividends, by the conversion price (which initially is
$10.00 per share and shifts to $7.50 per share on December 15, 1999) or (ii) the
quotient obtained by dividing $2.00, plus accumulated but
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<PAGE>
unpaid dividends, by 80% (or 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 will be subject to adjustment in the
event of issuances of capital stock at a purchase price of less than $10.00
(other than issuances of Common Stock to employees, directors or consultants of
the Company) and convertible securities with a conversion price of less than
$10.00 per share, as well as stock splits, stock combinations and the like.
Under the terms of the Exchange, the Company has agreed to file a Registration
Statement on Form S-3 following the closing of the Exchange to cover the shares
of the Company's Common Stock issuable upon conversion of the Series A Preferred
Stock, in addition to the Registration Statement on Form S-3 filed by the
Company on December 24, 1997 (file no. 333-43197).
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 60,000,000 shares
of Common Stock, $0.001 per share, and 10,000,000 shares of Preferred Stock,
$0.001 par value per share. Of these shares, 40,000,000 are reserved for
issuance on conversion of the Preferred Stock and exercise of the Warrants. As
of February 26, 1998, there were 4,091,010 shares of Common Stock outstanding
held of record by approximately 142 record holders of the Company's Common
Stock.
On February 24, 1998, the Company's stockholders approved a one-for-five
reverse stock split of the Common Stock, pursuant to which each five shares of
Common Stock outstanding as of February 26, 1998 became one share of Common
Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior rights of Preferred Stock, if
any, then outstanding. The Common Stock has no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund provisions
available to the Common Stock. All outstanding shares of Common Stock are fully
paid and non-assessable.
PREFERRED STOCK
Series A Preferred Stock. Of the 10,000,000 authorized shares of Preferred
Stock, the Company has designated 6,500,000 shares of Series A Preferred Stock.
The following is a summary of certain of the rights, preferences and privileges
of the Series A Preferred Stock, of which 4,905,209 shares were outstanding as
of the date hereof. This summary is qualified by reference to the Exchange
Agreement and the Company's Certificate of Designation of Rights, Preferences
and Privileges of Series A Preferred Stock, both of which have been filed as
exhibits to the Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission in December 1997.
1. Conversion. Each share of Series A Preferred Stock is
----------
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 $2.00, 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 $10.00, and is subject to
adjustment in the event of stock splits, stock combinations and the like, and
will be reduced to $7.50 on and after December 15, 1999. The Preferred Cap
also will be adjusted downward
-17-
<PAGE>
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 Series A 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 shares of Common Stock issuable on
conversion of the Series A Preferred Stock has been in effect at all times
during 1999 and the price of the Company's Common Stock is at least $10.00 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. Except as required by law and as set forth herein, the
-------------
holders of Series A Preferred Stock are not entitled to vote. The Series A
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 Series A Preferred Stock is required before the Company
can: (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 the Company 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 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-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
of registration statement 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 Company (other than repurchases of
Common Stock from employees of and consultants to the Company 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 Series A Preferred
Stock.
3. Interest and Dividends. The holders of Series A Preferred Stock are
----------------------
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 Series A Preferred
Stock, at the option of the Company.
4. Redemption Rights. The Series A Preferred Stock are not redeemable at
-----------------
the option of the holders. The Company shall have the right to redeem the Series
A 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 Series A Preferred Stock at a price of $2.70 per share plus accrued
dividends in the event that a holder proposes to convert such shares of Series A
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. The Series A
------------------------------------------------------
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 Series A Preferred Stock are entitled
to receive $1.00, plus accumulated but unpaid dividends, per share of Series A
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
-18-
<PAGE>
remaining assets of the Company will be distributed to holders of shares of
Series A Preferred Stock (on an as-if converted to Common Stock basis, at a per
share price of the lesser of $10.00 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 Series A Preferred Stock preferential amounts. For
example, if no shares of Series A Preferred Stock have been converted and 4
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 Series A Preferred Stock. Amounts in excess
of $22 million will be shared among the Series A Preferred Stock and the Common
Stock based on the number of shares held by each on an as-if converted basis.
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 Series A Preferred Stock and exercise of the Warrants.
"Blank-Check" Preferred Stock. As of the date of this Prospectus, and
assuming completion of the Exchange, the Company will have 3,500,000 authorized
shares of "blank-check" Preferred Stock with such designations, rights and
preferences as may be determined from time to time by the Board of Directors,
without any further vote or action by the stockholders; provided, however, that
approval by the holders of at least two-thirds of the outstanding shares of
Series A Preferred Stock will be required in order to authorize or issue shares
of any series of Preferred Stock having any preference or priority as to
dividends, liquidation or redemption over or pari passu with the Series A
Preferred Stock. The rights of the holders of the Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights, senior to the Common Stock, and as a result, the issuance of
such Preferred Stock could have a material adverse effect on the market value of
the Common Stock. Although the Company has no present intention to issue any
shares of its Preferred Stock (other than the shares of Series A Preferred Stock
to be issued pursuant to the Exchange), there can be no assurance that the
Company will not do so in the future. See "Delaware Anti-Takeover Law and
Certain Charter Provisions."
WARRANTS
As of the date of this Prospectus, the Company has outstanding Warrants to
purchase an aggregate of up to 687,983 shares of Common Stock at an exercise
price of $12.50 per share. Each such Warrant is exercisable at any time prior
to November 2000.
REGISTRATION RIGHTS OF CERTAIN OTHER HOLDERS
Excluding the shares of Common Stock issuable upon conversion of the Series
A Preferred Stock and upon exercise of the Warrants, the holders of
approximately 4,389,505 shares of Common Stock (the "Registrable Securities") or
their transferees are entitled to certain rights with respect to the
registration of such shares under the Securities Act. These rights are provided
under the terms of agreements between the Company and the holders of Registrable
Securities. If at any time, the Company registers any of its Common Stock, the
holders of Registrable Securities are entitled to include their shares of Common
Stock in the registration. A holder's right to include shares in an
underwritten registration is subject to the ability of the underwriters to limit
the number of shares included in the offering. All registration expenses must
be borne by the Company and all selling expenses relating to Registrable
Securities must be borne by the holders of the securities being registered. In
addition, such holders may require the Company to use its best efforts to file a
registration statement under the Securities Act at the Company's expense with
respect to their shares of Common Stock, subject to certain limitations.
-19-
<PAGE>
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Certain provisions of Delaware law and the Company's Restated Certificate
of Incorporation could make more difficult the acquisition of the Company by
means of a tender offer, a proxy contest or otherwise and the removal of
incumbent officers and directors. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to first negotiate
with the Company. The Company believes that the benefits of increased
protection of the Company's potential ability to negotiate with the proponent of
an unfriendly or unsolicited proposal to acquire or restructure the Company
outweigh the disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals could result in an improvement of their
terms.
The Company is subject to the provisions of Section 203 of the Delaware
law. In general, the statute prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the corporation's voting stock. These provisions may have
the effect of delaying, deferring or preventing a change in control of the
Company without further action by the Company's stockholders.
Commencing at the first annual meeting of stockholders following the annual
meeting of stockholders when the Company shall have had at least 800
stockholders, the Restated Certificate of Incorporation of the Company will
provide for the Board of Directors to be divided into two classes, with
staggered two-year terms. As a result, only one class of directors will be
elected at each annual meeting of stockholders of the Company, with the other
class continuing for the remainder of its respective two-year term. Thereafter,
stockholders shall no longer have cumulative voting rights and the Company's
stockholders representing a majority of the shares of Common Stock outstanding
will be able to elect all of the directors. The classification of the Board of
Directors and elimination of cumulative voting make it more difficult for the
Company's existing stockholders to replace the Board of Directors as well as for
another party to obtain control of the Company by replacing the Board of
Directors. Since the Board of Directors has the power to retain and discharge
officers of the Company, these provisions could also make it more difficult for
existing stockholders or another party to effect a change in management. See
"Management."
The Company's Restated Certificate of Incorporation provides that
stockholder action can be taken only at an annual or special meeting of
stockholders and may not be taken by written consent. The Bylaws provide that
special meetings of stockholders can be called only by the Board of Directors,
the Chairman of the Board, if any, the President of the Company and holders of
10% of the votes entitled to be cast at a meeting. Moreover, the business
permitted to be conducted at any special meeting of stockholders is limited to
the business brought before the meeting by the Board of Directors, the Chairman
of the Board, if any, the President of the Company or any such 10% holder. The
Bylaws set forth an advance notice procedure with regard to the nomination,
other than by or at the direction of the Board of Directors, of candidates for
election as directors and with regard to business to be brought before a meeting
of stockholders of the Company.
The Company's Restated Certificate of Incorporation contains a provision
requiring the affirmative vote of the holders of at least two-thirds of the
voting stock of the Company to amend the foregoing provisions of the Restated
Certificate of Incorporation and Bylaws.
PLAN OF DISTRIBUTION
Shares of Common Stock covered hereby may be offered and sold from time to
time by the Selling Stockholders. The Selling Stockholders will act
independently of the Company in making decisions with respect to the timing,
manner and size of each sale. The Selling Stockholders may sell the Shares
being offered hereby: (i) on the Nasdaq National Market, or otherwise at prices
and at terms then prevailing or at prices related to the then current market
-20-
<PAGE>
price; or (ii) in private sales at negotiated prices directly or through a
broker or brokers, who may act as agent or as principal or by a combination of
such methods of sale. The Selling Stockholders and any underwriter, dealer or
agent who participate in the distribution of such shares may be deemed to be
"underwriters" under the Securities Act, and any discount, commission or
concession received by such persons might be deemed to be an underwriting
discount or commission under the Securities Act. The Company has agreed to
indemnify the Selling Stockholders against certain liabilities arising under the
Securities Act.
Any broker-dealer participating in such transactions as agent may receive
commissions from the Selling Stockholders (and, if acting as agent for the
purchaser of such shares, from such purchaser). Usual and customary brokerage
fees will be paid by the Selling Stockholders. Broker-dealers may agree with
the Selling Stockholders to sell a specified number of shares at a stipulated
price per share, and, to the extent such a broker-dealer is unable to do so
acting as agent for the Selling Stockholders, to purchase as principal any
unsold shares at the price required to fulfill the broker-dealer commitment to
the Selling Stockholders. Broker-dealers who acquire shares as principal may
thereafter resell such shares from time to time in transactions (which may
involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or by a
combination of such methods of sale or otherwise at market prices prevailing at
the time of sale or at negotiated prices, and in connection with such resales
may pay to or receive from the purchasers of such shares commissions computed as
described above.
The Company has advised the Selling Stockholders that the anti-manipulation
Rules 10b-6 and 10b-7 under the Exchange Act may apply to sales of Shares in the
market and to the activities of the Selling Stockholders and their affiliates.
The Selling Stockholders have advised the Company that during such time as the
Selling Stockholders may be engaged in the attempt to sell shares registered
hereunder, they will not directly or indirectly take any action that constitutes
illegal manipulation of the price of the Common Stock of the Company.
The Selling Stockholders may indemnify any broker-dealer that participates
in transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act. Any commissions paid or
any discounts or concessions allowed to any such broker-dealers, and any profits
received on the resale of such shares, may be deemed to be underwriting
discounts and commissions under the Securities Act if any such broker-dealers
purchase shares as principal.
In order to comply with the securities laws of certain states, if
applicable, the Common Stock will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states, the
Common Stock may not be sold unless such shares have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.
The Company has agreed to maintain the effectiveness of this Registration
Statement until the date three years from the date of this Prospectus. No sales
may be made pursuant to this Prospectus after such date unless the Company
amends or supplements this Prospectus to
-21-
<PAGE>
indicate that it has agreed to extend such period of effectiveness. There can be
no assurance that the Selling Stockholders will sell all or any of the shares of
Common Stock offered hereunder.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon by Venture Law Group, A Professional Corporation, Menlo Park, California,
counsel to the Company.
EXPERTS
The consolidated financial statements and schedule of the Company appearing
in the Company's Annual Report (Form 10-K) for the year ended December 31, 1996,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon included therein and incorporated herein by reference.
Such consolidated financial statements and schedule are incorporated herein by
reference in reliance upon such reports given upon the authority of such firms
as experts in accounting and auditing.
-22-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant will bear no expenses in connection with any sale or other
distribution by the Selling Stockholders of the shares being registered other
than the expenses of preparation and distribution of this Registration Statement
and the Prospectus included in this Registration Statement. Such expenses are
set forth in the following table. All of the amounts shown are estimates except
the Securities and Exchange Commission ("SEC") registration fee.
<TABLE>
<S> <C>
SEC registration fee $27,666
Legal fees and expenses 20,000
Accounting fees and expenses 8,000
Miscellaneous expenses 4,334
-------
Total $60,000
=======
</TABLE>
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Certificate of Incorporation and Bylaws provide for indemnification of the
Registrant's directors, officers, employees and other agents to the extent and
under the circumstances permitted by the Delaware General Corporation Law. The
Registrant has also entered into agreements with its directors and officers that
will require the Registrant, among other things, to indemnify them against
certain liabilities that may arise by reason of their status or service as
directors to the fullest extent not prohibited by law. In addition, the
Registrant carries director and officer liability insurance.
In connection with this offering, the Selling Stockholders have agreed to
indemnify the Registrant, its directors and officers and each such person who
controls the Registrant, against any and all liability arising from inaccurate
information provided to the Registrant by the Selling Stockholders and contained
herein.
Item 16. EXHIBITS.
Exhibits.
--------
5.1 Opinion of Venture Law Group, A Professional Corporation
23.1 Consent of Independent Auditors (see page II-5)
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-4)
________________________________
II-1
<PAGE>
Item 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement
to include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of this offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Exchange Act
that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
CONNECT, Inc. certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Mountain View, State of California, on February 27, 1998.
CONNECT, INC.
By: /s/ JOSEPH G. GIRATA
--------------------
Joseph G. Girata
Vice President, Finance and Administration
and Chief Financial Officer
II-3
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Gordon J. Bridge and Joseph G.
Girata, jointly and severally, his or her true and lawful attorneys-in-fact,
each with full power of substitution, for him or her in any and all capacities,
to sign any and all amendments (including post-effective amendments) to this
Registration Statement, and to sign any registration statement for the same
offering covered by this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and
all post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done or by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ GORDON J. BRIDGE President, Chief Executive Officer February 27, 1998
- ------------------------------------ and Chairman of the Board of Directors
Gordon J. Bridge
/s/ JOSEPH G. GIRATA Vice President of Finance and February 27, 1998
- ------------------------------------ Administration and Chief Financial
Joseph G. Girata Officer (Principal Financial and
Accounting Officer)
/s/ PROMOD HAQUE Director February 27, 1998
- ------------------------------------
Promod Haque
/s/ RICHARD H. LUSSIER Director February 27, 1998
- ------------------------------------
Richard H. Lussier
/s/ RORY T. O'DRISCOLL Director February 27, 1998
- ------------------------------------
Rory T. O'Driscoll
/s/ RICHARD W. WEENING Director February 27, 1998
- ------------------------------------
Richard W. Weening
/s/ WILLIAM B. WELTY Director February 27, 1998
- ------------------------------------
William B. Welty
</TABLE>
II-4
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-3 and related Prospectus of CONNECT, Inc. for
the registration of 37,512,018 shares of its Common Stock and to the
incorporation by reference therein of our reports dated January 24, 1997, with
respect to the financial statements and schedule of CONNECT, Inc. incorporated
by reference in its Annual Report on Form 10-K for the year ended December 31,
1996 filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
San Jose, California
February 27, 1998
II-5
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
5.1 Opinion of Venture Law Group, A Professional Corporation
23.1 Consent of Independent Auditors (see page II-5)
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-4)
________________________________
<PAGE>
EXHIBIT 5.1
-----------
February 27, 1998
CONNECT, Inc.
515 Ellis Street
Mountain View, CA 94043
REGISTRATION STATEMENT ON FORM S-3
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 (the "Registration
------------
Statement") filed by you with the Securities and Exchange Commission (the
- ---------
"Commission") on February 27, 1998 in connection with the registration under the
- -----------
Securities Act of 1933, as amended, of a total of 37,512,018 shares of your
Common Stock (collectively, the "Shares") issuable upon conversion of an
------
aggregate of 4,905,209 shares of Series A Preferred Stock that were issued
pursuant to the Exchange (as defined in the Registration Statement). As your
counsel in connection with this filing, we have examined the proceedings taken
and are familiar with the proceedings proposed to be taken by you in connection
with the sale and issuance of the Shares.
It is our opinion that upon conclusion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares when issued and sold in the manner
described in the Registration Statement will be legally and validly issued,
fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and in any amendment thereto.
Very truly yours,
VENTURE LAW GROUP
A Professional Corporation
/s/ VENTURE LAW GROUP
