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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 000-20873
CONNECT, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0431045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
515 Ellis Street
Mountain View, California 94043-2242
(Address of principal executive offices) (Zip code)
(650) 254-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of July 31, 1998 there were 12,886,552 shares of the Registrant's Common
Stock outstanding.
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CONNECT, INC.
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of 3
June 30, 1998 and December 31, 1997
Condensed Statements of Operations for the three months 4
and six months ended June 30, 1998 and 1997
Condensed Statements of Cash Flows for the 5
six months ended June 30, 1998 and 1997
Notes to Condensed Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 12
ITEM 2 Changes in Securities and Use of Proceeds 13
ITEM 3 Defaults Upon Senior Securities 13
ITEM 4. Submission of Matters to Vote of Security Holders 13
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on Form 8-K. 14
SIGNATURES
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ITEM 1. FINANCIAL STATEMENTS
CONNECT, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 5,491 $ 9,644
Accounts receivable, less allowances for doubtful accounts of $329 at
June 30, 1998 and $642 at December 31, 1997.......................... 1,200 2,298
Prepaid expenses and other current assets............................. 466 895
-------- --------
Total current assets.................................................... 7,157 12,837
Property and equipment, net............................................. 1,812 2,442
Other assets............................................................ 75 85
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Total assets............................................................ $ 9,044 $ 15,364
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable......................................................... $ 786 $ 620
Accounts payable...................................................... 737 1,279
Accrued payroll and related expenses.................................. 346 609
Other accrued liabilities............................................. 1,589 1,588
Deferred revenue...................................................... 455 681
Current portion of extended vendor liabilities........................ 278 272
Obligations under capital leases...................................... 82 355
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Total current liabilities............................................... 4,273 5,404
Notes payable......................................................... 566 713
Long-term portion of extended vendor liabilities...................... 113 224
Long-term obligations under capital leases............................ -- 2
Convertible notes..................................................... -- 9,654
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock:
Authorized shares--3,500,000
Issued and outstanding shares--None................................. -- --
Common stock: $.001 par value
Authorized shares--60,000,000
Issued and outstanding shares--12,884,947 at June 30, 1998 and
3,827,806 at December 31, 1997...................................... 13 4
Additional paid-in capital............................................ 70,588 60,986
Deferred compensation................................................. (74) (96)
Accumulated deficit................................................... (66,435) (61,557)
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Total stockholders' equity (deficit).................................... 4,092 (633)
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Total liabilities and stockholders' equity (deficit).................... $ 9,044 $ 15,364
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</TABLE>
See accompanying notes.
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CONNECT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except loss per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
REVENUE:
License........................................ $ 460 $ 1,479 $ 1,485 $ 1,882
Service........................................ 1,228 1,701 2,455 3,185
------- ------- ------- -------
Total revenue.................................... 1,688 3,180 3,940 5,067
COST OF REVENUE:
License........................................ 116 218 294 394
Service........................................ 1,063 2,113 2,465 4,796
------- ------- ------- -------
Total cost of revenue............................ 1,179 2,331 2,759 5,190
------- ------- ------- -------
Gross profit (loss)............................ 509 849 1,181 (123)
OPERATING EXPENSES:
Research and development....................... 989 1,214 2,300 2,622
Sales and marketing............................ 868 2,136 2,308 4,354
General and administrative..................... 614 691 1,350 1,342
------- ------- ------- -------
Total operating expenses......................... 2,471 4,041 5,958 8,318
------- ------- ------- -------
LOSS FROM OPERATIONS........................... (1,962) (3,192) (4,777) (8,441)
Interest expense................................. (37) (76) (259) (146)
Interest income and other income, net............ 71 105 158 226
------- ------- ------- -------
LOSS BEFORE INCOME TAXES....................... (1,928) (3,163) (4,878) (8,361)
Provision (benefit) for income taxes............. -- -- -- --
------- ------- ------- -------
NET LOSS......................................... $(1,928) $(3,163) $(4,878) $(8,361)
======= ======= ======= =======
BASIC AND DILUTED NET LOSS PER SHARE............. ($0.15) ($0.84) ($0.58) ($2.23)
======= ======= ======= =======
Weighted average common shares outstanding...... 12,849 3,772 8,418 3,751
</TABLE>
See accompanying notes.
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CONNECT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
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1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss..................................................................... $(4,878) $(8,361)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization......................................... 751 912
Amortization of deferred compensation................................. 22 21
Changes in operating assets and liabilities:
Accounts receivable................................................ 1,098 (281)
Prepaid expenses and other current assets.......................... 429 (70)
Deposits and other assets.......................................... 10 28
Accounts payable, accrued payroll and related expenses, other
accrued liabilities, and extended vendor liabilities............... (909) (97)
Deferred revenue................................................... (226) (58)
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Net cash used in operating activities..................................... (3,703) (7,906)
INVESTING ACTIVITIES
Purchases of property and equipment.......................................... (194) (418)
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Net cash used in investing activities..................................... (194) (418)
FINANCING ACTIVITIES
Proceeds from issuance of common stock....................................... -- 411
Proceeds from issuance of notes payable...................................... 311 1,750
Repayment of principal on notes payable...................................... (292) (199)
Repayment of principal under capital lease obligations....................... (275) (265)
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Net cash provided (used) by financing activities.......................... (256) 1,697
------- -------
Net decrease in cash and cash equivalents.................................... (4,153) (6,627)
Cash and cash equivalents at beginning of period............................. 9,644 12,214
------- -------
Cash and cash equivalents at end of period................................ $ 5,491 $ 5,587
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest....................................................... $ 222 $ 146
SUPPLEMENTAL NON-CASH FINANCING INFORMATION
Conversion of convertible notes into preferred stock and common stock........ $ 9,654 $ --
</TABLE>
See accompanying notes.
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CONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1) THE COMPANY AND SIGNIFICANT ACCOUNTING P0LICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The financial information should be read in conjunction with the
financial statements and notes thereto included in CONNECT, Inc.'s ("CONNECT" or
the "Company") Annual Report on Form 10-K for the year ended December 31, 1997
(the "Annual Report"). The results of operations for the six months ended June
30, 1998 are not necessarily indicative of the results that may be expected for
the full fiscal year or for any future periods. Certain prior year amounts
previously reported, have been reclaimed to conform to 1998 presentation.
2) NET LOSS PER SHARE
Basic and diluted net loss per share is based on the weighted average number
of shares of Common Stock outstanding during the period presented, in accordance
with statement of financial accounting standards No. 128 (earnings per share).
The numbers of shares for three and six months ended June 30, 1998, are adjusted
to reflect the one-for-five reverse stock split effected in February 1998.
On April 1, 1998, the first day of the quarter being reported on, the Company
announced that it reached agreement with all holders of CONNECT's Series A
Preferred Stock to exchange all outstanding shares of Series A Preferred Stock
for Common Stock. As a result of the exchange, each outstanding share of Series
A Preferred Stock has been exchanged for 1.739 shares of Common Stock
representing a price per share of Common Stock of $1.15. The closing of the
exchange occurred on april 1, 1998. An aggregate of approximately 8,097,000
shares of Common Stock was issued as a result of the exchange.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains, in addition to historical information, forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed under the caption, "Risk Factors" in the
Annual Report on Form 10-K for the year ended December 31, 1997, as well as the
risks discussed elsewhere in this Quarterly Report. In particular such factors
include: the Company's ability to sell and implement its products; the Company's
ability to obtain addition capital on terms favorable to the Company, or at all;
acceptance by the marketplace of the Company's products and services; the
Company's ability to develop new products and services to meet market demand or
that incorporate evolving industry standards; the Company's ability to compete
effectively; acceptance of the Internet as a medium for electronic commerce and
order management; the Company's dependence on the Internet infrastructure; the
Company's dependence on certain third party software and services vendors; and
the Company's ability to protect its intellectual property. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. Readers should carefully review
the risk factors
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described in other documents the Company files from time to
time with the Securities and Exchange Commission, including, the Annual Report
on Form 10-K, the Quarterly Reports on Form 10-Q, and any Current Reports on
Form 8-K filed by the Company.
OVERVIEW
The Company designs, develops, markets and supports application software for
Internet-based interactive commerce. The Company was founded in 1987 to provide
on-line information services to businesses. During the period 1987 through
1992, the Company's primary business was the operation and management of a
private on-line service and the licensing of related client software. In 1993
and 1994, the Company also offered software for creation, access and operation
of custom on-line systems. In late 1994, the Company began to shift its focus
from providing on-line services to developing packaged software applications for
Internet-based interactive commerce. During 1994 and 1995, the Company derived
a significant portion of its revenue from contract software development projects
with two companies under which the Company retained ownership of the technology
developed. These projects formed the foundation for the development of
OneServer, the Company's core software application, which was commercially
released in September 1995, and OrderStream, the first pre-configured
implementation of OneServer, which was commercially released in June 1996.
In the second quarter of 1997, the Company announced a new 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 are empowered to place
secure online orders for routine transactions through an electronic mall of
approved suppliers. PurchaseStream was available on a limited basis and became
commercially available in December 1997. (OneServer, OrderStream, and
PurchaseStream are trademarks of the Company).
The Company transferred, effective December 31, 1997, its legacy online
services business to a new company formed primarily by former CONNECT employees,
thus allowing the company to focus entirely on its electronic commerce
applications software business. The online services business accounted for $1.7
million of revenue in 1997. As a result, the Company will be dependent solely
on OrderStream and PurchaseStream products and related services for revenue in
fiscal 1998, and the Company's past results of operations should not be relied
upon as indicative of future results.
The Company derives revenue from software license fees and services. License
fees primarily consist of revenue from licenses of the Company's application
software. Service revenue consists of fees from implementation (including
customization of licensed software), training, maintenance and support, contract
software development projects, and system hosting and on-line services. On
January 1, 1998, the Company adopted Statement of Position No. 97-2, "Software
Revenue Recognition" (SOP 97-2) which superceded Statement of Position 91-1,
"Software Revenue Recognition" (SOP 91-1). Arrangements with effective dates
prior to January 1, 1998 have been and will be accounted for under SOP 91-1.
Any amendments after January 1, 1998 to arrangements with effective dates prior
to January 1, 1998 will be accounted for under SOP 97-2. The implementation of
SOP 97-2 did not have a material adverse affect on the Company's business or
revenue accounting practices or on the Company's reported revenues and earnings
for the three and six months ended June 30, 1998. In accordance with SOP 97-2
all elements of software licensing arrangement are separately identified and
accounted for based on relative fair values of each element, and revenue is
recognized as elements are delivered. License fees under contracts requiring
significant implementation, including customization, of licensed application
software are recognized on a percentage-of-completion basis. Revenue from
implementation services is recognized as the services are performed.
The Company also typically enters into maintenance agreements in connection
with licenses of its application software under which revenue is recognized
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ratably over the term of the agreement, generally one year. Usage fees related
to the Company's training, system-hosting services, private on-line services and
consulting services are recognized as the services are performed.
The Company incurred net losses in each fiscal year since its inception and as
of June 30, 1998, has an accumulated deficit of $66.4 million. The Company's
operating expenses increased in 1997 and 1996 as the Company made investments
related to the development and introduction of OneServer, OrderStream and
PurchaseStream. To date, all research and development costs have been expensed
as incurred, instead of being capitalized, because the costs have not been
material. The Company anticipates its operating expenses will continue to
decrease during the reminder of the 1998 fiscal year as compared to 1997,
primarily as a result of the reduction of headcount affected at the beginning of
the second quarter of 1998. Although the reduction in headcount could help the
Company meet its operating expense objectives, such reduction could adversely
impact the Company's sales, marketing and product development efforts. As the
market for Internet-based electronic commerce continues to evolve, the
combination of an evolving market and the Company's dependence on a relatively
small number of large value transactions has created additional complexities in
forecasting revenues and, therefore, staffing requirements. Because of these
conditions, and the Company's limited resources, the Company has focused on
controlling expenses and has reduced headcount until a clearer picture of market
demands, and its abilities to meet them, exists. The Company anticipates that
operating expenses will continue to exceed revenues, resulting in continuing net
losses and negative cash flow from operations for the foreseeable future.
The Company's prospects are dependent upon the successful acceptance of its
products by the market, and must be evaluated in light of the risks and
uncertainties frequently encountered by companies dependent upon such early
stage products. In addition, the Company's markets are new and rapidly evolving,
which heightens these risks and uncertainties. To address these risks, the
Company must, among other things, successfully implement its marketing strategy,
respond to competitive developments, continue to develop and upgrade its
products and technologies more rapidly than its competitors, and commercialize
its products and services incorporating these enhanced technologies. There can
be no assurance that the Company will succeed in addressing any or all of these
risks. See "Risk Factors" in the Annual Report, as well as the risks discussed
elsewhere in this Quarterly Report.
The Company has incurred net losses and experienced significant negative cash
flow from operations since inception. As of June 30, 1998, the Company has an
accumulated deficit of $66.4 million. Based upon its current operating plan,
the Company believes it has adequate cash balances to fund its operations
through 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 to 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 me be unable to continue operations, develop or enhance its products,
take advantage of future opportunities or respond to competitive pressures of
other requirements, any of which would have a material adverse effect on the
Company's business, operating results and financial condition.
In July 1998, the Company announced that it has hired Alliant Partners, a Palo
Alto, California based investment-banking firm, to assist the Company in
evaluating opportunities to enhance stockholder value through strategic
relationships, including those that could lead to the sale of the Company.
There can be no assurance that the Company will succeed in enhancing stockholder
value through these actions.
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The listing requirements of The Nasdaq Stock Market, Inc. ("Nasdaq") require
the Company to maintain net tangible assets of at least $4 million (the "NTA
Requirement"). The Company's net tangible assets were approximately $4.1 million
as of June 30, 1998. In addition, in order for the Company to remain listed on
The Nasdaq National Market, the Company must continue to meet the following
additional listing criteria on an ongoing basis in addition to the NTA
Requirement: (i) nonaffiliates of the Company must hold at least 750,000 shares
of Common Stock; (ii)nonaffiliates of the Company must hold at least $5 million
of Common Stock (the "Float Requirement"); (iii)the Company must have at least
400 stockholders, each holding at least 100 shares of Common Stock; (iv)the
minimum bid price of the Common Stock must be at least $1.00 per share; and (v)
the Company must have at least two market makers. There can be no assurance that
the Company will be able to maintain compliance with the NTA Requirement or any
such additional listing requirements. Furthermore, the Company anticipates that
it will continue to incur net losses for the foreseeable future, which will
cause the Company's net tangible assets to decline below $4 million. As a result
of any or a combination of these factors or the failure of the Company to
satisfy any other requirements under the Rule, the Common Stock would likely be
delisted from The Nasdaq National Market. The removal of the 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.
Revenue
Total revenue was $1,688,000 for the three months ended June 30, 1998,
compared to $3,180,000 for the comparable period in 1997, a decrease of 47%.
Total revenue for the six months ended June 30, 1998 was $3,940,000 compared to
$5,067,000 for the comparable period in 1997, a decrease of 22%. In the quarter
ended June 30, 1998 three customers represented approximately 24%, 22% and 13%
of the total revenue, respectively. For the six months ended June 30, 1998 two
customers represented approximately 26% and 11% of total revenue, respectively.
One customer was represented in both the three and six months' periods. No
other customer contributed more than 10% for the three and six months ended June
30, 1998.
License. License revenue was $460,000 or 27% of total revenue for the three
months ended June 30, 1998, compared to $1,479,000, or 47% of total revenue, for
the comparable period in 1997. This represents a decrease of $1,019,000 or 69%.
For the six months ended June 30, 1998 license revenue was $1,485,000 or 38% of
total revenue, compared to $1,882,000 or 37% of total revenue, for the six
months ended June 30, 1997. This represents a decrease of $397,000 or 21%. The
three and six month decreases in license revenue is attributable to several
factors, including potential customers extending their decision process, due to
limitations on MIS resources that are committed to Year 2000 projects or their
derivative, and the implementation of major ERP systems.
Service. Service revenue was $1,228,000, or 73% of total revenue for the
three months ended June 30, 1998, compared to $1,701,000, or 53% of total
revenue, for the comparable period in 1997. This represents a decrease of
$473,000 or 28%. For the six months ended June 30, 1998 service revenue was
$2,455,000 or 62% of total revenue, compared to $3,185,000 or 63% of total
revenue for the comparable period in 1997. This represents a decrease of
$730,000 or 23%. Service revenue in 1998 is lower than 1997 primarily due to
reduced staff associated with fewer software implementation projects.
Cost of Revenue
Cost of License. Cost of license revenue includes sub-license fees and
expenses relating to product media duplication and manuals. Cost of license
revenue was $116,000, or 25% of license revenue, for the three months ended June
30, 1998, compared to $218,000, or 15% of license revenue for the comparable
period in 1997. The 10% increase in cost of license revenue as a percentage of
license revenue from 1997 to 1998 is primarily related to fixed
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departmental costs associated with product documentation costs. For the six
months ended June 30, 1998 cost of license revenue was $294,000 or 20% of
license revenue, compared to $394,000 or 21% of license revenue for the
comparable period in 1997.
Cost of Service. Cost of service revenue consists of cost of implementation
services including fees for third-party contract developers, company personnel
costs, training and customer support costs for OneServer; costs associated with
contract software development projects, telecommunications, depreciation related
to hosting services and the operation of the Company's private online service.
Cost of service revenue was $1,063,000 or 87% of service revenue for the three
months ended June 30, 1998, compared to $2,113,000, or 124% of service revenue,
for the comparable period in 1997. For the six months ended June 30, 1998 cost
of service revenue was $2,465,000 or approximately 100% of service revenue,
compared to $4,796,000 or 151% of service revenue for the comparable period of
1997. The cost as a percent of revenue declined in 1998 due to cost reduction
steps taken in the Company's services business and the absence of charges in the
first and second quarters of 1998 related to fixed price contracts that existed
in the previous year.
Operating Expenses
Research and Development. Research and development expenses consist primarily
of personnel and equipment costs. Research and development expenses for the
three months ended June 30, 1998 were $989,000 or 59% of total revenue, compared
with $1,214,000 or 38% for the comparable period in 1997. Expenses for the six
months ended June 30, 1998 were $2,300,000 or 58% of total revenue, compared
with $2,622,000 or 52% for the comparable period in 1997. The decline in total
research and development expense is related to staffing and cost reduction
measures. The Company expects research and development expenses in 1998 to
continue to be lower than 1997 levels.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions of sales and marketing personnel, travel, and marketing
and promotional expense. Sales and marketing expenses were $868,000 or 51% of
total revenue for the three months ended June 30, 1998 compared with $2,136,000
or 67% of total revenue for the comparable period in 1997. For the six months
ended June 30, 1998 expenses were $2,308,000 or 59% of total revenue, compared
to $4,354,000 or 86% of total revenue for the comparable period in 1997. The
sales and marketing costs decrease in 1998 from 1997 was attributable to lower
sales revenue, decreased staffing and reductions in marketing expenditures.
General and Administrative. General and administrative expenses consist
primarily of salaries of financial, administrative and management personnel and
related travel expenses, as well as legal, accounting and public company related
expenses. General and administrative expenses were $614,000 or 36% of
total revenue for the three months ended June 30, 1998, compared with $691,000
or 22% of total revenue for the comparable period in 1997. For the six months
ended June 30, 1998, expenses were $1,350,000 or 34% of total revenue, compared
with $1,342,000 or 26% of total revenue for the comparable period in 1997. The
Company expects 1998 general and administrative expenses to remain relatively
constant in absolute dollars with general and administrative expense in 1997.
Other Income(Expense)
Other income (expense) consists primarily of interest expense and interest
income. Interest expense, which resulted principally from interest incurred
under notes payable and capital lease obligations, was $37,000 or 2% of total
revenue for the three months ended June 30, 1998, compared with $76,000 or 2%
for the comparable period in 1997. For the six months ended June 30, 1998
interest expense was $259,000 or 7% of total revenue, compared to $146,000 or 3%
for the comparable period in 1997. Interest expense increased in 1998 from 1997
due to interest associated with the convertible notes issued in November 1997.
Interest expense in the second quarter of 1998 was $37,000, and was
substantially lower than the first quarter interest expense for 1998 of
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$222,000, due to the conversion of convertible notes to preferred stock and
common stock.
Interest and other income principally represents interest earned on cash
balances. Interest and other income was $71,000 or 4% of total revenue for the
three months ended June 30, 1998, compared with $105,000 or 3% of total revenue
for the comparable period in 1997. For the six months ended June 30, 1998
interest income was $158,000 or 4% of total revenue, compared to $226,000 or 4%
of total revenue for the comparable period in 1997. This decrease is primarily
due to lower cash balances in 1998.
The Company has a tax loss carry forward and is currently incurring losses for
tax purposes. Accordingly, there is no provision for income taxes.
FACTORS AFFECTING QUARTERLY OPERATING RESULTS
The Company has experienced and expects to continue to experience significant
fluctuations in quarterly operating results that may be caused by many factors
including, among others, the number, timing and significance of product
enhancements and new product announcements by the Company or its competitors,
the ability of the Company to develop, introduce and market new and enhanced
versions of the Company's products on a timely basis, the length of the
Company's sales cycle, market acceptance of and demand for the Company's
products, the pace of development of electronic commerce conducted on the
Internet, the mix of the Company's products sold, customer order deferrals in
anticipation of enhancements or new products offered by the Company or its
competitors, non-renewal of service agreements, software defects and other
product quality problems, the Company's ability to attract and retain key
personnel, the extent of international sales, changes in the level of operating
expenses and general economic conditions. The Company anticipates that a
significant portion of its revenue will be derived from a limited number of
orders placed by large corporations, and the timing of receipt and fulfillment
of any such orders is expected to cause material fluctuations in the Company's
operating results, particularly on a quarterly basis. The Company expects to
recognize the majority of its license revenue in the last month of each
quarter. As a result, any delay in delivery of products at the end of a quarter
could materially adversely affect operating results for that quarter.
Furthermore, the operating results of many software companies reflect seasonal
trends, and the Company expects to be affected by such trends in the future due
to the foregoing factors, quarterly revenue and operating results are difficult
to forecast. Revenue is also difficult to forecast because the market for
Internet-based packaged applications software is rapidly evolving and the
Company's sales cycle may vary substantially from customer to customer.
Further, the Company's expense levels are based, in significant part, on the
Company's expectations as to future revenue and are therefore relatively fixed
in the short term. If revenue levels fall below expectations, net loss 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 profitability on a
quarterly or annual basis in the future. Due to all the foregoing factors, the
Company's future operating results may be below the expectations of securities
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. See "Risk Factors - Fluctuations
in Quarterly Operating Results" in the Company's Annual Report on Form 10-K.
YEAR 2000 COMPLIANCE
The Company has determined that it will need to modify or replace significant
portions of its software so that its internal computer systems will function
properly with respect to dates in the Year 2000 and beyond. The Company has
initiated discussions with its significant suppliers and financial institutions
to ensure that those parties have appropriate plans to mediate Year 2000 issues
where their systems interface with the Company's systems or otherwise impact its
operations. The Company is assessing the extent to which its operations
-11-
<PAGE>
would be affected in the event that such third parties fail to mediate Year 2000
issues.
A team of internal staff is managing the Company's Year 2000 initiative. The
activities are designed to ensure that there is no adverse effect on the
Company's core business operations and that transactions with suppliers and
financial institutions are fully supported. While the Company believes its
planning efforts are adequate to address Year 2000 concerns, there can be no
assurance that the systems of third parties on which the Company's systems and
operations rely will be converted on a timely basis. The cost of the Year 2000
initiatives is not expected to be material to the Company's results of
operations or financial condition. There can be no assurance that another
company's failure to ensure year 2000 capability would not have an adverse
effect on the Company.
The Company believes that all of its existing products are Year 2000 compliant
and new products are being designed to be Year 2000 compliant. Although
products have undergone, and will undergo, the Company's normal quality testing
procedures, there can be no assurance that the Company's products will contain
all necessary date code changes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through the private
and public sale of debt and equity securities and the use of capitalized leases
for equipment financing. The Company had working capital of $2.9 million at
June 30, 1998.
During the six months ended June 30, 1998 and 1997, net cash used in operating
activities was $3.7 million and $7.9 million respectively, primarily due to net
losses incurred by the Company.
During the six months ended June 30, 1998 and 1997, the Company used $194,000
and $418,000 respectively, in investing activities primarily for the purchase of
property and equipment. Net cash used by financing activities for the six
months ended June 30, 1998 was $256,000, primarily from the repayment of notes
payable and principal under capital lease obligations. Net cash provided by
financing activities for the six months ended June 30, 1997 was $1,697,000,
primarily from the issuance of notes payable.
The Company has incurred net losses and experienced significant negative cash
flow from operations since inception. As of June 30, 1998, the Company has an
accumulated deficit of $66.4 million. Based upon its current operating plan,
the Company believes it has adequate cash balances to fund its operations
through 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 to 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 me be unable to continue operations, develop or enhance its products,
take advantage of future opportunities or respond to competitive pressures of
other requirements, any of which would have a material adverse effect on the
Company's business, operating results and financial condition.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
-12-
<PAGE>
ITEM 2. CHANGES IN SECURITIES
On April 1, 1998, each outstanding share of Series A Preferred Stock
was exchanged for 1.739 shares of Common Stock, representing a price
per share of Common Stock of $1.15. An aggregate of approximately
8,097,000 shares of Common Stock was issued as a result of the
exchange. The Company relied on Section 3(a)(9) of the Act, which
provides an exemption from the registration requirements of the act
for exchanges of securities with existing security holders.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 28, 1998
at the Company's offices in Mountain View, California, where the
following matters were submitted to a vote of the stockholders, with
the results as noted below.
1. Election of five (5) directors to serve until the 1999 Annual
Meeting of Stockholders or until their respective successors
are elected and qualified.
Broker
Favor Opposed Abstain Non Voters
----- ------- ------- ----------
Gordon J. Bridge 10,287,835 - 962 -
Promod Haque 10,288,035 - 762 -
Richard H. Lussier 10,288,035 - 762 -
Craig D. Norris 10,288,035 - 762 -
Rory T. O'Driscoll 10,288,035 - 762 -
2. Approval of amendment and restatement of the Company's Amended
and Restated Certificate of Incorporation to eliminate
references to series of Preferred Stock which had been
previously outstanding.
Broker
Favor Opposed Abstain Non Voters
----- ------- ------- ----------
8,578,444 1,159 900 1,708,294
3. Approval of amendment to the 1996 Stock Option Plan to increase
the number of shares of Common Stock reserved for issuance
thereunder by 2,000,000 shares and to increase the maximum
number of shares subject to options that may be issued to any
one employee during a fiscal year to 1,000,000 shares.
Broker
Favor Opposed Abstain Non Voters
----- ------- ------- ----------
8,574,599 4,949 955 1,708,294
4. Ratification of the appointment of Ernst and young LLP as
independent auditors of the Company for the fiscal year ending
December 31, 1998.
Broker
Favor Opposed Abstain Non Voters
----- ------- ------- ----------
10,287,187 1,110 500 -
ITEM 5. OTHER INFORMATION
Not applicable
-13-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
ITEM DESCRIPTION
----- -----------
3.1 Second Amended and Restated Certificate of Incorporation of the
Company.
10.35 Change of Control Agreement between the Company and Amanda Reed
Dated as of July 22, 1998.
10.36 Change of Control Agreement between the Company and Pia
Chamberlain dated as of July 22, 1998.
27 Financial Data Schedule
B) REPORT ON FORM 8-K
1. Form 8-K filed on July 7, 1998.
(i) Item 5. Other Events. (Press Release relating to
announcement of results for the quarter ended June 30, 1998
and certain other matters.)
2. Form 8-K filed on April 3, 1998.
(i) Item 5. Other Events. (Press Releases relating to exchange
and management restructures.)
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONNECT, Inc.
Date: August 14, 1998 /s/ Craig D. Norris
- ------------------------- --------------------------
Craig D. Norris
President and Chief Executive
Officer
(Principal Executive Officer)
Date: August 14, 1998 /s/ Joseph G. Girata
- ------------------------- --------------------------
Joseph G. Girata
Vice President, Finance &
Administration, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-15-
<PAGE>
EXHIBIT 3.1
CONNECT, INC.
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
CONNECT, Inc., a corporation organized and existing under the laws of the
State of Delaware, hereby certifies as follows:
1. The name of the corporation is CONNECT, Inc. and the original
Certificate of Incorporation of the corporation was filed with the Secretary of
State of the State of Delaware on May 20, 1996.
2. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Second Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of this corporation's
Amended and Restated Certificate of Incorporation.
3. The terms and provisions of this Second Amended and Restated
Certificate of Incorporation have been duly approved by the required number of
shares of outstanding stock of this corporation pursuant to Section 242 of the
General Corporation Law of the State.
4. The text of the Second Amended and Restated Certificate of
Incorporation is as hereby restated and further amended to read in its entirety
as set forth in Exhibit A attached hereto.
---------
IN WITNESS WHEREOF, this Second Amended and Restated Certificate of
Incorporation has been signed this 1st day of June, 1998.
CONNECT, INC.
/s/ Craig D. Norris
-------------------------------------
Craig Norris, Chief Executive Officer
ATTEST:
/s/ Joseph G. Girata
- ---------------------------
Joseph G. Girata, Secretary
<PAGE>
EXHIBIT A
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF CONNECT, INC.
ARTICLE I
The name of the Corporation is CONNECT, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of Delaware is
1013 Centre Road, Wilmington, County of New Castle. The name of its registered
agent at such address is The Prentice-Hall Corporation System, Inc.
ARTICLE III
STOCK
-----
The corporation is authorized to issue two classes of shares to be
designated respectively "Preferred Stock," $0.001 par value per share, and
---------------
"Common Stock," $0.001 par value per share. The total number of shares of
- -------------
Preferred Stock authorized is 3,500,000 and the total number of shares of Common
Stock authorized is 60,000,000. The Preferred Stock may be issued from time to
time in one or more series.
Subject to the restrictions prescribed by law, the Board of Directors
is authorized to fix by resolution or resolutions the number of shares of any
series of Preferred Stock and to determine or alter the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock and, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series of Preferred Stock, to increase (but not above
the total number of authorized shares of Preferred Stock) or decrease (but not
below the number of shares of any such series then outstanding) the number of
shares of any such series subsequent to the issue of shares of that series.
The authority of the Board of Directors with respect to each series of
Preferred Stock shall include, but not be limited to, determination of the
following:
(a) the number of shares constituting that series and the
distinctive designation of that series;
(b) the dividend rate on the shares of that series, whether
dividends shall be cumulative, and if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of that
series;
<PAGE>
(c) whether that series shall have voting rights in addition to
the voting rights provided by law, and if so, the terms of such voting rights;
(d) whether that series shall have conversion privileges, and if
so, the terms and conditions of such privileges, including provision for
adjustment of the conversion rate in such events as the Board of Directors shall
determine;
(e) whether or not the shares of that series shall be redeemable,
and if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different conditions
and at different redemption dates;
(f) whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and if so, the terms in the
amount of such sinking funds;
(g) the rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
corporation, and the relative rights of priority, if any, of payment of shares
of that series; and
(h) any other relative rights, preferences and limitations of
that series.
ARTICLE IV
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may now or hereafter be organized under the General
Corporation Law of Delaware.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, adopt, alter, amend or
repeal the Bylaws of the Corporation, subject to the right of the stockholders
entitled to vote with respect thereto to amend or repeal Bylaws made by the
Board of Directors as provided for in this Amended and Restated Certificate of
Incorporation. The affirmative vote of 66-2/3% of the total number of votes of
the then out-standing shares of capital stock of this Corporation entitled to
vote generally in the election of directors, voting together as a single class,
shall be required for the adoption, amendment or repeal of the following
sections of the Corporation's Bylaws: 2.3 (Special Meeting), 2.5 (Advance
Notice of Stockholder Nominees) and 2.6 (Advance Notice of Stockholder Business)
by the stockholders of this Corporation.
<PAGE>
ARTICLE VII
The number of directors which shall constitute the whole Board of Directors
of the Corporation shall be as specified in the Bylaws of the Corporation.
ARTICLE VIII
The election of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statute) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE X
If at any time this Corporation shall have a class of stock registered
pursuant to the provisions of the Securities Exchange Act of 1934, for so long
as such class is so registered, any action by the stockholders of such class
must be taken at an annual or special meeting of stock-holders and may not be
taken by written consent. This provision shall supersede any provision to the
contrary in the Bylaws of the Corporation.
ARTICLE XI
Advance notice of new business and stockholder nominations for the election
of directors shall be given in the manner and to the extent provided in the
Bylaws of the Corporation.
ARTICLE XII
Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or the Bylaws (and notwithstanding the fact that a
lesser percentage may be specified by law, this Amended and Restated Certificate
of Incorporation or the Bylaws of this Corporation), the affirmative vote of 66-
2/3% of the total number of the then outstanding shares of capital stock of this
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to amend or repeal, or to adopt
any provision inconsistent with the purpose or intent of, Articles VI through
XIV. Notice of any such proposed amendment, repeal or adoption, shall be
contained in the notice of the meeting at which it is to be considered. Subject
to the provisions set forth herein, this Corporation reserves the right to
amend, alter, change or repeal any provision contained in this Amended and
Restated Certificate of Incorporation, in the manner now or hereafter prescribed
by statute, and all rights conferred upon stockholders herein are granted
subject to this reservation.
ARTICLE XIII
To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or as may hereafter be amended, a director of the Corporation
shall not be personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a
<PAGE>
director. Neither any amendment nor repeal of this Article XIII, nor the
adoption of any provision of this Amended and Restated Certificate of
Incorporation inconsistent with this Article XIII, shall eliminate or reduce the
effect of this Article XIII in respect of any matter occurring, or any cause of
action, suit or claim that, but for this Article XIII, would accrue or arise,
prior to such amendment, repeal or adoption of any inconsistent provision.
ARTICLE XIV
"Listing Event" as used in this Amended and Restated Certificate of
-------------
Incorporation shall mean the Corporation becoming a "Listed Corporation" within
------------------
the meaning of Section 301.5 of the California Corporations Code. For the
management of the business and for the conduct of the affairs of the
Corporation, and in further definition, limitation and regulation of the powers
of the Corporation, its directors and its stockholders or any class thereof, as
the case may be, it is further provided that, effective upon the occurrence of
the Listing Event:
(i) The number of directors which shall constitute the entire Board of
Directors, and the number of directors in each class, shall be fixed exclusively
by one or more resolutions adopted from time to time by the Board of Directors.
Until changed by a resolution of the Board of Directors, Class I shall consist
of five directors, each of whom shall be designated by the Board of Directors,
and Class II shall consist of five directors, each of whom shall be designated
by the Board of Directors.
The Board of Directors shall be divided into two classes, designated as
Class I and Class II, respectively. Directors shall be assigned to each class
in accordance with a resolution or resolutions adopted by the Board of
Directors. At the first annual meeting of stockholders following the Listing
Event, the terms of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of two years. At the second annual
meeting of stockholders following the Listing Event, the term of office of the
Class II directors shall expire and Class II directors shall be elected for a
full term of two years. At each succeeding annual meeting of stockholders,
directors shall be elected for a full term of two years to succeed the directors
of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his or her successor is duly elected and qualified or until
his or her death, resignation, or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
Any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal, or other causes shall be filled by either (i) the
affirmative vote of the holders of a majority of the voting power of the then-
outstanding shares of voting stock of the corporation entitled to vote generally
in the election of directors (the "Voting Stock") voting together as a single
------------
class; or (ii) by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the Board of Directors. Newly
created directorships resulting from any increase in the number of directors
shall, unless the Board of Directors determines by resolution that any such
newly created directorship shall be filled by the stockholders, be filled only
by the affirmative vote of the directors then in office, even though
<PAGE>
less than a quorum of the Board of Directors. Any director elected in accordance
with the preceding sentence shall hold office for the remainder of the full term
of the class of directors in which the new directorship was created or the
vacancy occurred and until such director's successor shall have been elected and
qualified.
(ii) There shall be no right with respect to shares of stock of the
Corporation to cumulate votes in the election of directors.
(iii) Any director, or the entire Board of Directors, may be removed
from office at any time (i) with cause by the affirmative vote of the holders of
at least a majority of the voting power of the then-outstanding shares of the
Voting Stock, voting together as a single class; or (ii) without cause by the
affirmative vote of the holders of at least 66-2/3% of the voting power of the
then-outstanding shares of the Voting Stock.
<PAGE>
EXHIBIT 10.35
CONNECT, INC.
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "Agreement") is made and entered into
--------
effective as of July 22, 1998, by and between Amanda Reed (the "Employee") and
--------
CONNECT, Inc., a Delaware corporation (the "Company").
------
RECITALS
A. It is expected that another company or other entity may from time to
time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors (the "Board"). The Board recognizes that such consideration can be
-----
a distraction to the Employee, an officer of the Company, and can cause the
Employee to consider alternative employment opportunities. The Board has
determined that it is in the best interests of the Company and its stockholders
to assure that the Company will have the continued dedication and objectivity of
the Employee, notwithstanding the possibility, threat or occurrence of a Hostile
Takeover or a Change of Control (as each are defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its stockholders to provide the Employee with an incentive to continue his or
her employment with the Company.
C. The Board believes that it is imperative to provide the Employee with
certain benefits upon a Change of Control or a Hostile Takeover and, under
certain circumstances, upon termination of the Employee's employment in
connection with a Change of Control, which benefits are intended to provide the
Employee with financial security and provide sufficient income and encouragement
to the Employee to remain with the Company notwithstanding the possibility of
such transactions.
D. To accomplish the foregoing objectives, the Board of Directors has
directed the Company, upon execution of this Agreement by the Employee, to agree
to the terms provided in this Agreement.
E. The Board, for the reasons set forth above, authorized the Company to
enter into Change of Control Agreements with each of its executive corporate
officers substantially in the form hereof.
F. Certain capitalized terms used in the Agreement are defined in Section
4 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
<PAGE>
1. AT-WILL EMPLOYMENT. The Company and the Employee acknowledge that
------------------
the Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments or benefits, other than as
provided by this Agreement, or as may otherwise be available in accordance with
the terms of Employee's offer letter from the Company, if applicable, and the
Company's established employee plans and written policies at the time of
termination. The terms of this Agreement shall terminate upon the earlier of
(i) the date on which Employee ceases to be employed as an officer of the
Company, (ii) the date that all obligations of the parties hereunder have been
satisfied, or (iii) two (2) years after a Change of Control. A termination of
the terms of this Agreement pursuant to the preceding sentence shall be
effective for all purposes, except that such termination shall not affect the
payment or provision of compensation or benefits on account of a termination of
employment occurring prior to the termination of the terms of this Agreement.
2. HOSTILE TAKEOVER. Subject to Section 7(1) below, in the event of
----------------
a Hostile Takeover and regardless of whether the Employee's employment with the
Company is terminated in connection with such takeover, each stock option
granted for the Company's securities held by the Employee shall become
immediately exercisable and vested, and shall be considered "Vested Shares"
-------------
under each such stock option, on the effective date of the Hostile Takeover as
to 100% of the shares issuable upon exercise of such option and shall be
exercisable in full in accordance with the provisions of the Option Agreement
and Plan pursuant to which such option was granted; and the Company's right of
repurchase with respect to such shares and any shares previously issued upon
exercise of stock options held by the Employee shall immediately lapse on such
date.
3. CHANGE OF CONTROL.
-----------------
(a) PAYMENT UPON CHANGE OF CONTROL. Except as limited by Section 7(l)
------------------------------
below, the Employee shall be entitled to receive a cash payment equal to 2.99
times his or her total compensation for fiscal 1997 (base salary plus any bonus
received) on or prior to the closing of a Change of Control (as defined in
Section 4(a) below); provided however that such payment shall be reduced as
follows if the following circumstances apply: (i) if the payment to the
Employee would exceed one percent (1.0%) of the aggregate value received by the
stockholders of the Company in connection with such Change of Control, such
payment would be reduced to an amount equal to one percent (1.0%) of such
aggregate value, and (ii) if the aggregate value received by the stockholders of
the Company in connection with such Change of Control was equal to or less than
$25,000,000, such payment would be reduced to zero.
(b) TERMINATION FOLLOWING A CHANGE OF CONTROL. Subject to Section
-----------------------------------------
7(1) below, if the Employee's employment with the Company is terminated at any
time within two (2) years after a Change of Control, then the Employee shall be
entitled to receive severance benefits as follows:
-2-
<PAGE>
(i) VOLUNTARY RESIGNATION. If the Employee voluntarily resigns
---------------------
from the Company (other than as an Involuntary Termination (as defined below),
or if the Company terminates the Employee's employment for Cause (as defined
below), then the Employee shall not be entitled to receive severance payments.
The Employee's benefits will be terminated under the Company's then existing
benefit plans and policies in accordance with such plans and policies in effect
on the date of termination or as otherwise determined by the Board of Directors
of the Company.
(ii) INVOLUNTARY TERMINATION. If the Employee's employment is
-----------------------
terminated as a result of an Involuntary Termination other than for Cause, the
Employee shall be entitled to receive the following benefits: (i) monthly
severance payments during the period from the date of the Employee's termination
until the date 12 months after the effective date of the termination (the
"Severance Period") equal to the monthly salary which the Employee was receiving
- -----------------
immediately prior to the Change of Control; (ii) monthly severance payments
during the Severance Period equal to 1/12th of the Employee's "target bonus" (as
defined below) for the fiscal year in which the termination occurs; (iii)
continuation of health and life insurance benefits through the end of the
Severance Period substantially identical to those to which the Employee was
entitled immediately prior to the Change of Control; (iv) each stock option held
by the Employee shall become immediately exercisable and vested, and shall be
considered "Vested Shares" under each such stock option, on the date of
-------------
termination as to 100% of the shares issuable upon exercise of such option and
shall be exercisable in full in accordance with the provisions of the Option
Agreement and Plan pursuant to which such option was granted; and the Company's
right of repurchase with respect to such shares and any shares previously issued
upon exercise of stock options held by the Employee shall immediately lapse on
such date; and (v) outplacement services with a total value not to exceed
$15,000. The severance payments described in subsections (i) and (ii) above
shall be paid during the Severance Period in accordance with the Company's
standard payroll practices. For purposes of this Agreement, the term "target
------
bonus" shall mean that percentage of the Employee's base salary that is
- -----
prescribed by the Company under its Management Bonus Program as the percentage
of such base salary payable to the Company as a bonus if the Company pays
bonuses at one-hundred percent (100%) of its operating plan.
(iii) INVOLUNTARY TERMINATION FOR CAUSE. If the Employee's
---------------------------------
employment is terminated for Cause, then the Employee shall not be entitled to
receive severance payments. The Employee's benefits will be terminated under
the Company's then existing benefit plans and policies in accordance with such
plans and policies in effect on the date of termination.
(b) TERMINATION APART FROM A CHANGE OF CONTROL. In the event the
------------------------------------------
Employee's employment terminates for any reason, either prior to the occurrence
of a Change of Control or after the two year period following the effective date
of a Change of Control, then the Employee shall not be entitled to receive any
severance payments under this Agreement. The Employee's benefits will be
terminated under the terms of the Company's then existing benefit
-3-
<PAGE>
plans and policies in accordance with such plans and policies in effect on the
date of termination or as otherwise determined by the Board of Directors of the
Company.
4. DEFINITION OF TERMS. The following terms referred to in this
-------------------
Agreement shall have the following meanings:
(a) CHANGE OF CONTROL. "Change of Control" shall mean the
----------------- -----------------
occurrence of any of the following events:
(i) OWNERSHIP. Any "Person" (as such term is used in
---------- ------
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is
or becomes the "Beneficial Owner" (as defined in Rule 13d- 3 under said Act),
----------------
directly or indirectly, of securities of the Company representing fifty percent
(50%) or more of the total voting power represented by the Company's then
outstanding voting securities without the approval of the Board of Directors of
the Company; or
(ii) MERGER/SALE OF ASSETS. A merger or consolidation of
---------------------
the Company, whether or not approved by the Board of Directors of the Company,
other than a merger or consolidation which would result in holders of more than
fifty percent (50%) of the voting power represented by the voting securities of
the Company outstanding immediately prior thereto continuing to hold (either by
the voting securities remaining outstanding or by being converted into voting
securities of the surviving entity) more than fifty percent (50%) of the total
voting power represented by the voting securities of the Company, or such
surviving entity outstanding immediately after such merger or consolidation, or
the Company sells all substantially all of the Company's assets.
(iii) CHANGE IN BOARD COMPOSITION. A change in the
---------------------------
composition of the Board of Directors of the Company, as a result of which fewer
than a majority of the directors are Incumbent Directors. "Incumbent Directors"
-------------------
shall mean directors who either (A) are directors of the Company as of the date
of this Agreement or (B) are elected, or nominated for election, to the Board of
Directors of the Company with the affirmative votes of at least a majority of
the Incumbent Directors at the time of such election or nomination (but shall
not include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company).
(b) CAUSE. "Cause" shall mean (i) gross negligence or willful
----- -----
misconduct in the performance of the Employee's duties to the Company where such
gross negligence or willful misconduct has resulted or is likely to result in
substantial and material damage to the Company or its subsidiaries (ii) repeated
unexplained or unjustified absence from the Company, (iii) a material and
willful violation of any federal or state law; (iv) commission of any act of
fraud with respect to the Company; or (v) conviction of a felony or a crime
involving moral turpitude causing material harm to the standing and reputation
of the Company, in each case as determined in good faith by the Board of
Directors of the Company.
-4-
<PAGE>
(c) HOSTILE TAKEOVER. "Hostile Takeover" shall mean a transaction or
---------------- ----------------
series of transactions that results in any person becoming the Beneficial Owner,
directly or indirectly, of securities of the Company representing more than
fifty percent (50%) of the total voting power represented by the Company's then
outstanding voting securities without the approval of the Board of Directors of
the Company.
(d) INVOLUNTARY TERMINATION. "Involuntary Termination" shall include
----------------------- -----------------------
any termination by the Company other than for Cause and the Employee's voluntary
termination, following (i) a material reduction or change in job duties,
responsibilities and requirements inconsistent with the Employee's position with
the Company and the Employee's prior duties, responsibilities and requirements;
(ii) any reduction of the Employee's base compensation (other than in connection
with a general decrease in base salaries for most officers of the Company and
any successor corporation); or (iii) the Employee's refusal to relocate to a
facility or location more than 50 miles from the Company's current location.
5. SUCCESSORS. Any successor to the Company (whether direct or
----------
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and/or assets
shall assume the obligations under this Agreement and agree expressly to perform
the obligations under this Agreement in the same manner and to the same extent
as the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of the Employee's rights
hereunder shall inure to the benefit of, and be enforceable by, the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributes, devisees and legatees.
6. NOTICE. Notices and all other communications contemplated by
------
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. Mailed notices to the Employee
shall be addressed to the Employee at the home address which the Employee most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
7. MISCELLANEOUS PROVISIONS.
------------------------
(a) NO DUTY TO MITIGATE. The Employee shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor, except as otherwise
provided in this Agreement, shall any such payment be reduced by any earnings
that the Employee may receive from any other source.
(b) WAIVER. No provision of this Agreement shall be modified,
------
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of
-5-
<PAGE>
this Agreement by the other party shall be considered a waiver of any other
condition or provision or of the same condition or provision at another time.
(c) WHOLE AGREEMENT. No agreements, representations or
---------------
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
supersedes any agreement of the same title and concerning similar subject matter
dated prior to the date of this Agreement, and by execution of this Agreement
both parties agree that any such predecessor agreement shall be deemed null and
void. Effective upon the executive of this Agreement, that Change of Control
Agreement between Employee and the Company dated June 11, 1997 is declared null
and void and is hereby amended and restated in its entirety as set forth in this
Agreement.
(d) CHOICE OF LAW. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California without reference to conflict of laws provisions.
(e) SEVERABILITY. If any term or provision of this Agreement or
------------
the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to circumstances other than those as to which it is held invalid or
unenforceable, and a suitable and equitable term or provision shall be
substituted therefor to carry out, insofar as may be valid and enforceable, the
intent and purpose of the invalid or unenforceable term or provision.
(f) ARBITRATION. Any dispute or controversy arising under or in
-----------
connection with this Agreement may be settled at the option of either party by
binding arbitration in the County of Santa Clara, California, in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction. Punitive
damages shall not be awarded.
(g) LEGAL FEES AND EXPENSES. The parties shall each bear their
-----------------------
own expenses, legal fees and other fees incurred in connection with this
Agreement.
(h) NO ASSIGNMENT OF BENEFITS. The rights of any person to
-------------------------
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (h) shall be
void.
(i) EMPLOYMENT TAXES. All payments made pursuant to this
----------------
Agreement will be subject to withholding of applicable income and employment
taxes.
-6-
<PAGE>
(j) ASSIGNMENT BY COMPANY. The Company may assign its rights
---------------------
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment. In
the case of any such assignment, the term "Company" when used in a section of
this Agreement shall mean the corporation that actually employs the Employee.
(k) COUNTERPARTS. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
(l) LIMITATION ON PAYMENTS. In the event that the severance and
----------------------
other benefits provided for in this Agreement to the Employee (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
------------------
Code of 1986, as amended (the "Code") and (ii) but for this Section, would be
----
subject to the excise tax imposed by Section 4999 of the Code, then the
Employee's benefits under Sections 2 and 3 shall be payable either:
(a) in full, or
(b) as to such lesser amount which would result in no portion
of such severance benefits being subject to excise tax under Section 4999 of the
Code, whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Section
4999, results in the receipt by the Employee on an after-tax basis, of the
greatest amount of benefits under Sections 2 and 3, notwithstanding that all or
some portion of such benefits may be taxable under Section 4999 of the Code.
Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 7(1) shall be made in writing by the
Company's independent public accountants (the "Accountants"), whose
-----------
determination shall be conclusive and binding upon the Employee and the Company
for all purposes. For purposes of making the calculations required by this
Section 7(1), the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Section 280G and 4999 of the Code.
The Company and the Employee shall furnish to the Accountants such information
and documents as the Accountants may reasonably request in order to make a
determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 7(1).
-7-
<PAGE>
Each of the parties has executed this Agreement, in the case of the Company
by its duly authorized officer, as of the day and year first above written.
CONNECT, INC. AMANDA REED
- ------------------------------ -------------------------------
By:
---------------------------
Title:
------------------------
-8-
<PAGE>
EXHIBIT 10.36
CONNECT, INC.
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "Agreement") is made and entered into
--------
effective as of July 22, 1998, by and between Pia Chamberlain (the "Employee")
--------
and CONNECT, Inc., a Delaware corporation (the "Company").
------
RECITALS
A. It is expected that another company or other entity may from time to
time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors (the "Board"). The Board recognizes that such consideration can be
-----
a distraction to the Employee, an officer of the Company, and can cause the
Employee to consider alternative employment opportunities. The Board has
determined that it is in the best interests of the Company and its stockholders
to assure that the Company will have the continued dedication and objectivity of
the Employee, notwithstanding the possibility, threat or occurrence of a Hostile
Takeover or a Change of Control (as each are defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its stockholders to provide the Employee with an incentive to continue his or
her employment with the Company.
C. The Board believes that it is imperative to provide the Employee with
certain benefits upon a Change of Control or a Hostile Takeover and, under
certain circumstances, upon termination of the Employee's employment in
connection with a Change of Control, which benefits are intended to provide the
Employee with financial security and provide sufficient income and encouragement
to the Employee to remain with the Company notwithstanding the possibility of
such transactions.
D. To accomplish the foregoing objectives, the Board of Directors has
directed the Company, upon execution of this Agreement by the Employee, to agree
to the terms provided in this Agreement.
E. The Board, for the reasons set forth above, authorized the Company to
enter into Change of Control Agreements with each of its executive corporate
officers substantially in the form hereof.
F. Certain capitalized terms used in the Agreement are defined in Section
4 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
<PAGE>
1. AT-WILL EMPLOYMENT. The Company and the Employee acknowledge that
------------------
the Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments or benefits, other than as
provided by this Agreement, or as may otherwise be available in accordance with
the terms of Employee's offer letter from the Company, if applicable, and the
Company's established employee plans and written policies at the time of
termination. The terms of this Agreement shall terminate upon the earlier of
(i) the date on which Employee ceases to be employed as an officer of the
Company, (ii) the date that all obligations of the parties hereunder have been
satisfied, or (iii) two (2) years after a Change of Control. A termination of
the terms of this Agreement pursuant to the preceding sentence shall be
effective for all purposes, except that such termination shall not affect the
payment or provision of compensation or benefits on account of a termination of
employment occurring prior to the termination of the terms of this Agreement.
2. HOSTILE TAKEOVER. Subject to Section 7(1) below, in the event of
----------------
a Hostile Takeover and regardless of whether the Employee's employment with the
Company is terminated in connection with such takeover, each stock option
granted for the Company's securities held by the Employee shall become
immediately exercisable and vested, and shall be considered "Vested Shares"
-------------
under each such stock option, on the effective date of the Hostile Takeover as
to 100% of the shares issuable upon exercise of such option and shall be
exercisable in full in accordance with the provisions of the Option Agreement
and Plan pursuant to which such option was granted; and the Company's right of
repurchase with respect to such shares and any shares previously issued upon
exercise of stock options held by the Employee shall immediately lapse on such
date.
3. CHANGE OF CONTROL.
-----------------
(a) PAYMENT UPON CHANGE OF CONTROL. Except as limited by Section
------------------------------
7(l) below, the Employee shall be entitled to receive a cash payment equal to
2.99 times his or her total compensation for fiscal 1997 (base salary plus any
bonus received) on or prior to the closing of a Change of Control (as defined in
Section 4(a) below); provided however that such payment shall be reduced as
follows if the following circumstances apply: (i) if the payment to the Employee
would exceed five-tenths of one percent (.5%) of the aggregate value received by
the stockholders of the Company in connection with such Change of Control, such
payment would be reduced to an amount equal to five-tenths of one percent (.5%)
of such aggregate value, and (ii) if the aggregate value received by the
stockholders of the Company in connection with such Change of Control was equal
to or less than $25,000,000, such payment would be reduced to zero.
(b) TERMINATION FOLLOWING A CHANGE OF CONTROL. Subject to Section
-----------------------------------------
7(1) below, if the Employee's employment with the Company is terminated at any
time within two (2) years after a Change of Control, then the Employee shall be
entitled to receive severance benefits as follows:
-2-
<PAGE>
(i) VOLUNTARY RESIGNATION. If the Employee voluntarily
---------------------
resigns from the Company (other than as an Involuntary Termination (as defined
below), or if the Company terminates the Employee's employment for Cause (as
defined below), then the Employee shall not be entitled to receive severance
payments. The Employee's benefits will be terminated under the Company's then
existing benefit plans and policies in accordance with such plans and policies
in effect on the date of termination or as otherwise determined by the Board of
Directors of the Company.
(ii) INVOLUNTARY TERMINATION. If the Employee's employment is
-----------------------
terminated as a result of an Involuntary Termination other than for Cause, the
Employee shall be entitled to receive the following benefits: (i) monthly
severance payments during the period from the date of the Employee's termination
until the date 12 months after the effective date of the termination (the
"Severance Period") equal to the monthly salary which the Employee was receiving
- -----------------
immediately prior to the Change of Control; (ii) monthly severance payments
during the Severance Period equal to 1/12th of the Employee's "target bonus" (as
defined below) for the fiscal year in which the termination occurs; (iii)
continuation of health and life insurance benefits through the end of the
Severance Period substantially identical to those to which the Employee was
entitled immediately prior to the Change of Control; (iv) each stock option held
by the Employee shall become immediately exercisable and vested, and shall be
considered "Vested Shares" under each such stock option, on the date of
-------------
termination as to 100% of the shares issuable upon exercise of such option and
shall be exercisable in full in accordance with the provisions of the Option
Agreement and Plan pursuant to which such option was granted; and the Company's
right of repurchase with respect to such shares and any shares previously issued
upon exercise of stock options held by the Employee shall immediately lapse on
such date; and (v) outplacement services with a total value not to exceed
$15,000. The severance payments described in subsections (i) and (ii) above
shall be paid during the Severance Period in accordance with the Company's
standard payroll practices. For purposes of this Agreement, the term "target
------
bonus" shall mean that percentage of the Employee's base salary that is
- -----
prescribed by the Company under its Management Bonus Program as the percentage
of such base salary payable to the Company as a bonus if the Company pays
bonuses at one-hundred percent (100%) of its operating plan.
(iii) INVOLUNTARY TERMINATION FOR CAUSE. If the Employee's
---------------------------------
employment is terminated for Cause, then the Employee shall not be entitled to
receive severance payments. The Employee's benefits will be terminated under
the Company's then existing benefit plans and policies in accordance with such
plans and policies in effect on the date of termination.
(b) TERMINATION APART FROM A CHANGE OF CONTROL. In the event the
------------------------------------------
Employee's employment terminates for any reason, either prior to the occurrence
of a Change of Control or after the two year period following the effective date
of a Change of Control, then the Employee shall not be entitled to receive any
severance payments under this Agreement. The Employee's benefits will be
terminated under the terms of the Company's then existing benefit
-3-
<PAGE>
plans and policies in accordance with such plans and policies in effect on the
date of termination or as otherwise determined by the Board of Directors of the
Company.
4. DEFINITION OF TERMS. The following terms referred to in this
-------------------
Agreement shall have the following meanings:
(a) CHANGE OF CONTROL. "Change of Control" shall mean the
----------------- -----------------
occurrence of any of the following events:
(i) OWNERSHIP. Any "Person" (as such term is used in
---------- ------
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is
or becomes the "Beneficial Owner" (as defined in Rule 13d- 3 under said Act),
----------------
directly or indirectly, of securities of the Company representing fifty percent
(50%) or more of the total voting power represented by the Company's then
outstanding voting securities without the approval of the Board of Directors of
the Company; or
(ii) MERGER/SALE OF ASSETS. A merger or consolidation of
---------------------
the Company, whether or not approved by the Board of Directors of the Company,
other than a merger or consolidation which would result in holders of more than
fifty percent (50%) of the voting power represented by the voting securities of
the Company outstanding immediately prior thereto continuing to hold (either by
the voting securities remaining outstanding or by being converted into voting
securities of the surviving entity) more than fifty percent (50%) of the total
voting power represented by the voting securities of the Company, or such
surviving entity outstanding immediately after such merger or consolidation, or
the Company sells all substantially all of the Company's assets.
(iii) CHANGE IN BOARD COMPOSITION. A change in the
---------------------------
composition of the Board of Directors of the Company, as a result of which fewer
than a majority of the directors are Incumbent Directors. "Incumbent Directors"
-------------------
shall mean directors who either (A) are directors of the Company as of the date
of this Agreement or (B) are elected, or nominated for election, to the Board of
Directors of the Company with the affirmative votes of at least a majority of
the Incumbent Directors at the time of such election or nomination (but shall
not include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company).
(b) CAUSE. "Cause" shall mean (i) gross negligence or willful
----- -----
misconduct in the performance of the Employee's duties to the Company where such
gross negligence or willful misconduct has resulted or is likely to result in
substantial and material damage to the Company or its subsidiaries (ii) repeated
unexplained or unjustified absence from the Company, (iii) a material and
willful violation of any federal or state law; (iv) commission of any act of
fraud with respect to the Company; or (v) conviction of a felony or a crime
involving moral turpitude causing material harm to the standing and reputation
of the Company, in each case as determined in good faith by the Board of
Directors of the Company.
-4-
<PAGE>
(c) HOSTILE TAKEOVER. "Hostile Takeover" shall mean a
---------------- ----------------
transaction or series of transactions that results in any person becoming the
Beneficial Owner, directly or indirectly, of securities of the Company
representing more than fifty percent (50%) of the total voting power represented
by the Company's then outstanding voting securities without the approval of the
Board of Directors of the Company.
(d) INVOLUNTARY TERMINATION. "Involuntary Termination" shall
----------------------- -----------------------
include any termination by the Company other than for Cause and the Employee's
voluntary termination, following (i) a material reduction or change in job
duties, responsibilities and requirements inconsistent with the Employee's
position with the Company and the Employee's prior duties, responsibilities and
requirements; (ii) any reduction of the Employee's base compensation (other than
in connection with a general decrease in base salaries for most officers of the
Company and any successor corporation); or (iii) the Employee's refusal to
relocate to a facility or location more than 50 miles from the Company's current
location.
5. SUCCESSORS. Any successor to the Company (whether direct or
----------
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and/or assets
shall assume the obligations under this Agreement and agree expressly to perform
the obligations under this Agreement in the same manner and to the same extent
as the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of the Employee's rights
hereunder shall inure to the benefit of, and be enforceable by, the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributes, devisees and legatees.
6. NOTICE. Notices and all other communications contemplated by
------
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. Mailed notices to the Employee
shall be addressed to the Employee at the home address which the Employee most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
7. MISCELLANEOUS PROVISIONS.
------------------------
(a) NO DUTY TO MITIGATE. The Employee shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor, except as otherwise
provided in this Agreement, shall any such payment be reduced by any earnings
that the Employee may receive from any other source.
(b) WAIVER. No provision of this Agreement shall be modified,
------
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of
-5-
<PAGE>
this Agreement by the other party shall be considered a waiver of any other
condition or provision or of the same condition or provision at another time.
(c) WHOLE AGREEMENT. No agreements, representations or
---------------
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
supersedes any agreement of the same title and concerning similar subject matter
dated prior to the date of this Agreement, and by execution of this Agreement
both parties agree that any such predecessor agreement shall be deemed null and
void. Effective upon the executive of this Agreement, that Change of Control
Agreement between Employee and the Company dated June 11, 1997 is declared null
and void and is hereby amended and restated in its entirety as set forth in this
Agreement.
(d) CHOICE OF LAW. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California without reference to conflict of laws provisions.
(e) SEVERABILITY. If any term or provision of this Agreement or
------------
the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to circumstances other than those as to which it is held invalid or
unenforceable, and a suitable and equitable term or provision shall be
substituted therefor to carry out, insofar as may be valid and enforceable, the
intent and purpose of the invalid or unenforceable term or provision.
(f) ARBITRATION. Any dispute or controversy arising under or in
-----------
connection with this Agreement may be settled at the option of either party by
binding arbitration in the County of Santa Clara, California, in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction. Punitive
damages shall not be awarded.
(g) LEGAL FEES AND EXPENSES. The parties shall each bear their
-----------------------
own expenses, legal fees and other fees incurred in connection with this
Agreement.
(h) NO ASSIGNMENT OF BENEFITS. The rights of any person to
-------------------------
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (h) shall be
void.
(i) EMPLOYMENT TAXES. All payments made pursuant to this
----------------
Agreement will be subject to withholding of applicable income and employment
taxes.
-6-
<PAGE>
(j) ASSIGNMENT BY COMPANY. The Company may assign its rights
---------------------
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment. In
the case of any such assignment, the term "Company" when used in a section of
this Agreement shall mean the corporation that actually employs the Employee.
(k) COUNTERPARTS. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
(l) LIMITATION ON PAYMENTS. In the event that the severance and
----------------------
other benefits provided for in this Agreement to the Employee (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
------------------
Code of 1986, as amended (the "Code") and (ii) but for this Section, would be
----
subject to the excise tax imposed by Section 4999 of the Code, then the
Employee's benefits under Sections 2 and 3 shall be payable either:
(a) in full, or
(b) as to such lesser amount which would result in no portion
of such severance benefits being subject to excise tax under Section 4999 of the
Code, whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Section
4999, results in the receipt by the Employee on an after-tax basis, of the
greatest amount of benefits under Sections 2 and 3, notwithstanding that all or
some portion of such benefits may be taxable under Section 4999 of the Code.
Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 7(1) shall be made in writing by the
Company's independent public accountants (the "Accountants"), whose
-----------
determination shall be conclusive and binding upon the Employee and the Company
for all purposes. For purposes of making the calculations required by this
Section 7(1), the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Section 280G and 4999 of the Code.
The Company and the Employee shall furnish to the Accountants such information
and documents as the Accountants may reasonably request in order to make a
determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 7(1).
-7-
<PAGE>
Each of the parties has executed this Agreement, in the case of the Company
by its duly authorized officer, as of the day and year first above written.
CONNECT, INC. PIA CHAMBERLAIN
- ------------------------------ ----------------------------
By:
---------------------------
Title:
------------------------
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 5,491 0
<SECURITIES> 0 0
<RECEIVABLES> 1,529 0
<ALLOWANCES> 329 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 7,493 0
<PP&E> 7,418 0
<DEPRECIATION> 5,606 0
<TOTAL-ASSETS> 9,044 0
<CURRENT-LIABILITIES> 4,273 0
<BONDS> 0 0
0 0
0 0
<COMMON> 64 0
<OTHER-SE> 8,980 0
<TOTAL-LIABILITY-AND-EQUITY> 9,044 0
<SALES> 1,688 3,940
<TOTAL-REVENUES> 1,688 3,940
<CGS> 1,179 2,759
<TOTAL-COSTS> 1,179 2,759
<OTHER-EXPENSES> 2,471 5,958
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (34) 101
<INCOME-PRETAX> (1,928) (4,878)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,928) (4,878)
<EPS-PRIMARY> (.15) (.58)
<EPS-DILUTED> 0 0
</TABLE>
