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As filed with the Securities and Exchange Commission on April 3, 1998
Registration No. 333-43197
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CONNECT, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 77-0431045
(State of incorporation) (I.R.S. Employer Identification No.)
515 ELLIS STREET
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 254-4000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
GORDON J. BRIDGE
CHAIRMAN OF THE BOARD
CONNECT, INC.
515 ELLIS STREET
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 254-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
DONALD M. KELLER, JR.
VENTURE LAW GROUP
A PROFESSIONAL CORPORATION
2800 SAND HILL ROAD
MENLO PARK, CALIFORNIA 94025
(650) 854-4488
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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PROSPECTUS
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674,801 SHARES
CONNECT, INC.
COMMON STOCK
___________________
This Prospectus covers 674,801 shares of Common Stock, $.001 par value (the
"Common Stock" or the "Shares"), of CONNECT, Inc. ("CONNECT" or the "Company"),
which may be offered from time to time by one or all of the selling stockholders
named herein (the "Selling Stockholders"). The Company will receive no part of
the proceeds of such sales.
The Shares were issued to the Selling Stockholders prior to April 1, 1998
upon conversion of shares of Series A Preferred Stock of the Company (the
"Series A Preferred Stock") or upon conversion of Convertible Notes (the
"Notes"), which Notes were issued to the Selling Stockholders in a private
placement transaction consummated in November 1997. On April 1, 1998, the
Selling Stockholders and other holders of Series A Preferred Stock exchanged an
aggregate of 4,634,772 shares of Series A Preferred Stock for an aggregate of
8,096,911 shares of Common Stock (the "Exchange"). For additional information
concerning the Exchange, see "Issuance of Common Stock to Selling Stockholders."
The Selling Stockholders intend to sell the shares offered hereby from time
to time in The Nasdaq National Market at prices prevailing therein, in
individually negotiated transactions at such prices as may be agreed upon or a
combination of such methods of sale, during the period following the effective
date of this Prospectus. The Company will bear all expenses with respect to the
offering of the Common Stock, except any underwriting discounts, selling
commissions, stock transfer taxes, and fees and disbursements of counsel for the
Selling Stockholders. To the extent required, the specific shares of Common
Stock to be sold, the names of the Selling Stockholders, the public offering
price, the names of any agent dealer or underwriter and any applicable
commission or discount with respect to any particular offer is set forth herein
or will be set forth in an accompanying Prospectus Supplement. See "Selling
Stockholders" and "Plan of Distribution."
The Company's Common Stock is traded on The Nasdaq National Market under
the symbol "CNKT." The last reported sales price of the Common Stock on The
Nasdaq National Market on March 31, 1998 was $1-9/16 per share (as adjusted to
reflect a one-for-five reverse stock split effected on February 26, 1998).
______________________________________
SEE "RISK FACTORS," BEGINNING ON PAGE 5,
FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
______________________________________
The Selling Stockholders and any broker executing selling orders on behalf
of the Selling Stockholders may be deemed to be an "underwriter" within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
Commissions received by any such broker may be deemed to be underwriting
commissions under the Securities Act. See "Plan of Distribution" for
information relating to indemnification of the Selling Stockholders.
______________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMIS-
SION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
______________________________________
The date of this Prospectus is _____________, 1998
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No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained in this Prospectus,
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or the Selling Stockholders. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the shares of Common Stock offered hereby, nor does
it constitute an offer to sell or a solicitation of an offer to buy any of the
shares offered hereby to any person in any jurisdiction in which it is unlawful
to make such an offer or solicitation. Neither the delivery of this Prospectus
nor any sale made hereunder shall under any circumstances create any implication
that the information contained herein is correct as of any time subsequent to
the date hereof.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
shares of Common Stock offered hereby, reference is hereby made to the
Registration Statement. Statements contained herein concerning the provisions
of any document are not necessarily complete, and each such statement is
qualified in its entirety by reference to the copy of such document filed with
the Commission.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Commission. Such reports, proxy and information statements
and other information may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, NW, Washington,
D.C. 20549, and at the following Regional Offices of the Commission: New York
Regional Office, Seven World Trade Center, New York, New York 10048, and Chicago
Regional Office, Northwest Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, NW, Washington, D.C.
20549 upon payment of the prescribed fees. The Common Stock of the Company is
quoted on The Nasdaq National Market. Reports, proxy and information statements
and other information concerning the Company may be inspected at The Nasdaq
Stock Market at 1735 K Street, NW, Washington, D.C. 20006. In addition, the
Commission maintains a World Wide Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are hereby
incorporated by reference in this Prospectus:
(1) The Company's Annual Report on Form 10-K for the year ended December
31, 1997;
(2) The Company's Current Reports on Form 8-K filed November 11, 1997,
November 21, 1997, December 24, 1997, January 29, 1998, February 27,
1998 and April 3, 1998.
All reports and other documents subsequently filed by the Company pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference herein, to the extent required, and to be a part
hereof from the date of filing of such reports and documents. Any statement
incorporated herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon written or oral request of such person, a copy of any or all of
the foregoing documents incorporated herein by reference (other than exhibits to
such documents, unless such exhibits are specifically incorporated by reference
into such documents). Requests for such documents should be submitted in
writing to Joseph G. Girata, Vice President of Finance and Administration and
Chief Financial Officer, CONNECT, Inc., 515 Ellis Avenue, Mountain View,
California 94043 or by telephone at (650) 254-4000.
THE COMPANY
CONNECT, Inc. ("CONNECT" or the "Company") designs, develops, markets and
supports application software for Internet-based electronic 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 electronic commerce. During
1994 and 1995, the Company derived a significant portion of its revenue from
contract software development projects with two companies under which the
Company retained ownership of the technology developed. These projects formed
the foundation for the development of OneServer, the Company's core software
application, which was commercially released in September 1995, and OrderStream,
the first pre-configured implementation of OneServer, which was commercially
released in June 1996.
During the quarter ended June 30, 1997 the Company announced its newest
product, PurchaseStream. The PurchaseStream application is an Internet-based
purchasing system that simplifies and streamlines acquisition of indirect goods
and services. With PurchaseStream, end-user requisitioners can place secure
online orders for routine transactions through an electronic mall of approved
suppliers. (OneServer, OrderStream, and PurchaseStream are trademarks of the
Company).
The Company's recent operating results have been lower than expected.
Total revenues for the quarter ended December 31, 1997 and for the year ended
December 31, 1997 were $2.3 million and $9.4 million, respectively, compared to
revenues of $3.2 million and $10.1 million for the same periods in the prior
year. In addition, the Company incurred net losses for the quarter ended
December 31, 1997 and for the year ended December 31, 1997 of $3.1 million and
$14.6 million, respectively, compared to net losses of $3.1 million and $16.1
million for the same periods in the prior year. The Company anticipates that
operating expenses will continue to exceed revenues, resulting in continuing net
losses and negative cash flow from operations for the foreseeable future. See
"Risk Factors--Recent Operating Results; Accumulated Deficit and Anticipated
Future Losses."
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CONNECT was incorporated in 1987 under the laws of California and
reincorporated under the laws of Delaware in 1996. The Company's principal
executive offices are located at 515 Ellis Street, Mountain View, California,
and its telephone number is (650) 254-4000. As used in this Prospectus, the
"Company" and "CONNECT" refer to CONNECT, Inc., a Delaware corporation, and its
subsidiaries.
On February 24, 1998, the stockholders of the Company approved a one-for-
five reverse stock split, pursuant to which every five shares of Common Stock
outstanding as of February 26, 1998 became one share of Common Stock (the
"Reverse Split"). Except where otherwise indicated, the share and per share
amounts in this prospectus are adjusted to reflect the Reverse Split.
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RISK FACTORS
This Prospectus (including the documents incorporated by reference herein)
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including, without limitation, statements regarding the Company's expectations,
beliefs, intentions or future strategies. All forward looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors set
forth below and in the documents incorporated by reference herein. In
evaluating the Company's business, prospective investors should carefully
consider the following risk factors in addition to the other information set
forth herein or incorporated herein by reference.
RECENT OPERATING RESULTS; ACCUMULATED DEFICIT AND ANTICIPATED FUTURE
LOSSES. The Company's recent operating results have been lower than expected.
Total revenues for the quarter ended December 31, 1997 and for the year ended
December 31, 1997 were $2.3 million and $9.4 million, respectively, compared to
revenues of $3.2 million and $10.2 million for the same periods in the prior
year. In addition, the Company incurred net losses for the quarter ended
December 31, 1997 and for the year ended December 31, 1997 of $3.1 million and
$14.6 million, respectively, compared to net losses of $3.1 million and $16.1
million for the same periods in the prior year. The Company has not realized a
profit in any year, and as of December 31, 1997 had an accumulated deficit of
approximately $61.6 million. In 1997, 1996 and 1995, the Company experienced
significant negative cash flow from operations. The Company has reduced its
headcount from 144 at December 31, 1996 to 91 at December 31, 1997 as part of
its efforts to reduce operating expenses. Although the reduction in headcount
could help the Company to meet its operating expense objectives, such reduction
could adversely impact the Company's sales, marketing and product development
efforts. The Company anticipates that operating expenses will continue to
exceed revenues, resulting in continuing net losses and negative cash flow from
operations for the foreseeable future. There can be no assurance that the
Company can generate revenue growth, or that any revenue growth that is achieved
can be sustained. To the extent that increases in such operating expenses
precede or are not subsequently followed by increased revenues, the Company's
business, results of operations and financial condition would be materially
adversely affected. There can be no assurance that the Company will ever achieve
or sustain profitability.
FUTURE CAPITAL NEEDS. The Company has incurred net losses and
experienced significant negative cash flow from operations since inception. As
of December 31, 1997, the Company had an accumulated deficit of approximately
$61.6 million. Based upon its current operating plan, the Company believes it
has adequate cash balances to fund its operations through at least December 31,
1998. There can be no assurance, however, that the Company's actual cash
requirements will not exceed anticipated levels, or that the Company will
generate sufficient revenue 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 may be
unable to continue its operations, develop or enhance its products, take
advantage of future opportunities or respond to competitive pressures or other
requirements, any of which would have a material adverse effect on the Company's
business, operating results and financial condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has
experienced and expects to continue to experience significant fluctuations in
quarterly operating results that may be caused by many factors including, among
others, the number, timing and significance of product enhancements and new
product announcements by the Company or its competitors, the ability of the
Company to develop, introduce and market new and enhanced versions of the
Company's products on a timely basis, the length of the Company's sales cycle,
market acceptance of and demand for the Company's products, the pace of
development of electronic commerce conducted on the Internet, the mix of the
Company's products sold, customer order deferrals in anticipation of
enhancements or new products offered by the Company or its competitors,
nonrenewal of service agreements, software defects and other product quality
problems, the Company's ability to attract and retain key personnel, the extent
of international sales, changes in the level of operating expenses and general
economic conditions. The Company anticipates that a significant portion of its
revenue will be derived from a limited number of orders placed by large
corporations, and the timing of receipt and fulfillment of any such orders is
expected to cause material
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fluctuations in the Company's operating results, particularly on a quarterly
basis. The Company expects to recognize the majority of its license revenue in
the last month of each quarter. As a result, any delay in delivery of products
at the end of a quarter could materially adversely affect operating results for
that quarter. Furthermore, the operating results of many software companies
reflect seasonal trends, and the Company expects to be affected by such trends
in the future.
Due to the foregoing factors, quarterly revenue and operating results
are difficult to forecast. Revenue is also difficult to forecast because the
market for Internet-based packaged applications software is rapidly evolving and
the Company's sales cycle may vary substantially from customer to customer.
Further, the Company's expense levels are based, in significant part, on the
Company's expectations as to future revenue and are therefore relatively fixed
in the short term. If revenue levels fall below expectations, as has occurred
during 1997, results of operations are likely to be disproportionately adversely
affected because a proportionately smaller amount of the Company's expenses
varies with its revenue. There can be no assurance that the Company will be able
to achieve or maintain profitability on a quarterly or annual basis in the
future. Due to the foregoing factors, the Company's operating results may fall
below the expectations of securities analysts and investors, would could have a
material adverse effect on the market price of the Company's Common Stock.
RISKS ASSOCIATED WITH FAILURE TO MEET NASDAQ NATIONAL MARKET LISTING
REQUIREMENTS. In November 1997, the Company was informed by The Nasdaq Stock
Market, Inc. ("Nasdaq") that it did not meet the requirements for the continued
listing of its Common Stock on The Nasdaq National Market. Specifically,
Nasdaq's listing rules require the Company to maintain net tangible assets of at
least $4 million (the "NTA Requirement"), as set forth in Rule 4450 of Nasdaq's
Marketplace Rules (the "Rule"). The Company's net tangible assets were $2.4
million as of September 30, 1997. While the Company completed the sale and
issuance of convertible notes (the "Notes") in November 1997, which increased
the Company's cash assets by approximately $10 million, the Notes were
considered as debt and, therefore, the Company's net tangible assets did not
increase as a result of the transaction. In contrast, the Series A Preferred
Stock (and the Common Stock issued in the Exchange) is considered as equity for
financial accounting purposes. As a result, the Company's net assets increased
as a result of the exchange of the outstanding Notes for shares of Series A
Preferred Stock in February 1998. Accordingly, the Company believes that it is
in compliance with the NTA Requirement as of the date hereof. Nevertheless, in
order for the Company to remain listed on The Nasdaq National Market, the
Company must continue to meet the following Nasdaq continuing 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. Recently, the minimum bid price of the Common Stock has
been below $1.00 at certain times. Furthermore, the Company had net operating
losses of $5.2 million, $3.2 million, $3.2 million and $3.1 million for the
quarters ended March 31, June 30, September 30 and December 31, 1997,
respectively. Continued significant losses by the Company would cause the
Company's net tangible assets to decline below $4 million. 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. See
"Description of Capital Stock" and "Issuance of Common Stock to Selling
Stockholders."
RECENT INTRODUCTION OF PRIMARY PRODUCTS; PRODUCT CONCENTRATION.
Although the Company was founded in 1987, in 1995 it initiated a new business
strategy focused on providing packaged software applications for Internet-based
electronic commerce. Consequently, the Company is dependent upon the successful
development, market acceptance and sales of OneServer, released in September
1995, OrderStream, released in June 1996, and PurchaseStream, released in
December 1997. Accordingly, the Company's business must be considered in light
of the risks, expenses and problems frequently encountered by companies in an
early stage of development, particularly companies in new and rapidly evolving
markets such as the Internet. Such risks include a lack of acceptance of
products and services by target customers, the development of equal or superior
products or services by competitors, the failure of electronic commerce in
general, and Internet-based electronic commerce in
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particular, to be broadly adopted, the inability of the Company to develop and
enhance competitive products or to successfully commercialize any such products,
and the inability of the Company to identify, attract, retain and motivate
qualified personnel. There can be no assurance that the Company will succeed in
addressing such risks.
As of December 31, 1997, CONNECT had licensed OneServer or OrderStream
to 30 customers and had licensed PurchaseStream to two customers. The Company
expects OneServer, OrderStream and PurchaseStream and related services to
account for most of its revenues for the foreseeable future. As a result,
factors adversely affecting the pricing of, or demand for OneServer, OrderStream
and PurchaseStream, such as competition, technological change, failure of the
market for Internet-based packaged applications to develop as the Company
anticipates, lack of customer acceptance of OneServer, OrderStream and
PurchaseStream, or failure of the Company to develop and introduce new and
enhanced versions of OneServer, OrderStream and PurchaseStream on a timely
basis, could have a material adverse effect on its business, operating results
and financial condition. Further, if any of the Company's customers are not able
to successfully develop and deploy electronic commerce applications with
OneServer, OrderStream or PurchaseStream or for any other reason are not
satisfied with its products or services, the Company's reputation could be
damaged, which could have a material adverse effect on its business, operating
results and financial condition.
DEPENDENCE UPON PRODUCT DEVELOPMENT; RISKS OF TECHNOLOGICAL CHANGE AND
EVOLVING INDUSTRY STANDARDS. The Company's success will depend upon its ability
to develop new products and provide new services that meet changing customer
requirements. The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and customer requirements,
emerging competition and frequent new product and service introductions. As a
result, the Company may be required to change and improve its products in
response to changes in operating systems, application and networking software,
computer and communications hardware, programming tools and computer language
technology. In particular, the Company's software operates on the HP-UX 10 and
Sun Solaris 2.4/2.5 versions of the UNIX operating system. The Company plans to
port its software to the Windows NT operating system from Microsoft Corporation
("Microsoft") in the future due to increasing adoption of Windows NT by the
Company's potential customers. The Company has not begun the development work
necessary to port its software to Windows NT. There can be no assurance that the
Company will be successful in developing and marketing, on a timely basis,
products ported to the Windows NT operating system or any other operating
system. As a result, any shift in the market toward products running on
operating systems other than UNIX, including Windows NT, before the Company
offers versions of its software running on such operating systems, could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company can successfully
respond to changing technology, identify new product opportunities or develop
and bring new products and services to market in a timely manner. The Company
has in the past experienced delays in software development and there can be no
assurance that the Company will not experience delays in connection with its
current or future product development activities. Delays and difficulties
associated with new product introductions or product enhancements could have a
material adverse effect on the Company's business, operating results and
financial condition. Failure of the Company, for technological or other reasons,
to develop and introduce new products and product enhancements and new services
on a timely basis that are compatible with industry standards and that satisfy
customer requirements would have a material adverse effect on the Company's
business, operating results and financial condition.
In addition, the Company or its competitors may announce enhancements
to existing products or services, or new products or services embodying new
technologies, industry standards or customer requirements that have the
potential to supplant or provide lower cost alternatives to the Company's
existing products and services. The introduction of such enhancements or new
products and services could render the Company's existing products and services
obsolete and unmarketable. There can be no assurance that the announcement or
introduction of new products or services by the Company or its competitors or
any change in industry standards will not cause customers to defer or cancel
purchases of existing products or services, which could have a material adverse
effect on the Company's business, operating results and financial condition.
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Furthermore, introduction by the Company of products or services with
reliability, quality or compatibility problems could result in reduced orders,
delays in collecting accounts receivable and additional service costs. The
failure to introduce a new product, service or product enhancement on a timely
basis could delay or hinder market acceptance. Any such event could have a
material adverse effect on the Company's business, operating results and
financial condition.
COMPETITION. The market for electronic commerce software is new,
rapidly evolving and intensely competitive. The Company expects competition to
intensify in the future. The Company competes with vendors of prepackaged
electronic commerce software, vendors of software tools for developing
electronic commerce applications, system integrators and providers of business
application software. In addition, potential customers may elect to develop
their own electronic commerce solutions. The Company's current competitors
include Open Market, Inc., BroadVision, Inc., Ariba and CommerceOne, and the
Company expects additional competition from other companies, including
Microsoft, IBM/Lotus, Oracle Corporation ("Oracle"), Interworld and Netscape
Communications, Inc. ("Netscape") (specifically, its former Actra division), all
of which have announced or released products for Internet-based electronic
commerce or intranet requisitioning. The Company's potential competitors also
include a number of successful client/server applications software companies,
such as Baan Company, PeopleSoft, Inc., Vantive Corporation and SAP AG, and
electronic data interchange (EDI) solution vendors, including Sterling Commerce,
Inc. and General Electric Information Services Corporation.
Many of these competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
the Company and thus may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. Also, many current and
potential competitors have greater name recognition and more extensive customer
bases that could be leveraged, thereby gaining market share to the Company's
detriment. Such competitors may be able to undertake more extensive promotional
activities, adopt more aggressive pricing policies and offer more attractive
terms to purchasers than the Company and to bundle their products in a manner
that may discourage users from purchasing products offered by the Company. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to enhance
their products. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. There
can be no assurance that the Company will be able to compete effectively with
competitors or that the competitive pressures faced by the Company will not have
a material adverse effect on the Company's business, operating results and
financial condition.
The Company believes that rapid implementation of software
applications is critical to success in the Internet-based electronic commerce
applications market. The Company has a limited history in implementing its
products, and there can be no assurance that the Company will be able to meet
customer needs and expectations in this regard. Additional competitive factors
affecting the market for the Company's services and software products include
vendor and product reputation, architecture, functionality and features, ease of
use, time-to-market, quality of support, product quality, performance and price.
In order to succeed, the Company must respond promptly and effectively to the
challenges of technical change and competitive innovations. Performance in
these areas will, in turn, depend upon the Company's ability to attract and
retain highly qualified technical and sales personnel in a highly competitive
market.
MANAGEMENT OF RAPIDLY CHANGING BUSINESS; DEPENDENCE ON KEY
PERSONNEL. The Company's anticipated expansion of operations will place a
significant strain on the Company's managerial, operational and financial
resources. To manage this anticipated expansion, the Company must continue to
implement and improve its operational and financial controls and systems and
to expand, train and manage its employee base. Further, the Company will need
to manage multiple relationships with various customers and other third
parties. There can be no assurance that the Company will be able to implement
on a timely basis the systems, procedures or controls required to support its
operations or that will enable the Company to successfully market its products
and services. The Company's future operating results will also depend on its
ability to expand its sales and marketing organization, establish a
distribution channel to penetrate different and broader markets and expand its
support organization. If the Company is unable to respond effectively to
changing business conditions, its business, operating results and financial
condition would be materially adversely affected.
The Company's performance depends substantially on the performance of
its executive officers and key employees. The Company's future success also
depends on its continuing ability to identify, hire, train and retain
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other highly qualified technical and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to attract, assimilate or retain other highly qualified technical and
managerial personnel in the future. The inability to attract and retain its
executive officers and other key technical and managerial personnel could have a
material adverse effect upon the Company's business, operating results and
financial condition.
UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR ELECTRONIC
COMMERCE. The Company's future operating results depend upon the development and
growth of the market for Internet-based packaged software applications,
including electronic commerce applications. This market is new and rapidly
evolving. The acceptance of electronic commerce in general and, in particular,
the Internet as a sales, marketing and order capture medium are highly uncertain
and subject to a number of risks. Critical issues concerning the commercial use
of the Internet (including security, reliability, cost, ease of use, quality of
service and the effect of government regulation) remain unresolved and may
impact the growth of the Internet. If widespread use of the Internet for
commercial transactions does not develop or if the Internet does not develop as
an effective sales, marketing and order capture medium, the Company's business,
operating results and financial condition would be materially adversely
affected.
The adoption of the Internet for sales, marketing, order capture and
other commercial transactions, and the development of a market for packaged
electronic commerce applications require acceptance of new ways of transacting
business and exchanging information. In particular, enterprises that have
already invested substantial resources in other means of transacting business
may be particularly reluctant to adopt a new strategy that may make certain of
their existing personnel and infrastructure obsolete. If the market for
Internet-based packaged applications fails to develop or develops more slowly
than the Company anticipates, or if the Company's products do not achieve market
acceptance, the Company's business, operating results and financial condition
would be materially adversely affected.
RISKS ASSOCIATED WITH COMPLEX SOFTWARE PRODUCTS; LENGTHY SALES AND
IMPLEMENTATION CYCLES. The Company's products are complex and expensive and
will generally involve significant investment decisions by prospective
customers. Accordingly, the license of the Company's software products is often
an executive-level decision by prospective customers and can be expected to
require the Company to engage in a lengthy sales cycle to provide a significant
level of education to prospective customers regarding the use and benefits of
the Company's products. In addition, the implementation of the Company's
products involves a significant commitment of resources by customers over an
extended period of time. As a result, the Company's sales and customer
implementation cycles are subject to a number of significant delays over which
it has little or no control. The Company has limited experience with
implementing its applications, and most of the Company's OneServer, OrderStream
and PurchaseStream customers are at an early stage in the process of
implementing the application and rolling it out for commercial use. The Company
believes that rapid implementation is critical to success in the Internet-based
interactive commerce applications market. Significant delays in implementation,
whether or not such delays are within the Company's control, could materially
adversely affect its business, operating results and financial condition. From
time to time, the Company enters into fixed price arrangements for its
implementation services and currently has three such arrangements. Fixed price
arrangements have resulted in the past, and could in the future result in,
losses primarily due to delays in the implementation process or other
complexities associated with completion of the project. Such losses have had a
material adverse effect on the Company's business, operating results and
financial condition. In addition, delays in license transactions due to lengthy
sales cycles or delays in customer production or deployment of a system could
have a material adverse effect on the Company's business, operating results and
financial condition and could be expected to cause the Company's operating
results to vary significantly from quarter to quarter.
The marketability and acceptance of OneServer, OrderStream and
PurchaseStream also will be highly dependent on the success of initial
implementations of these products by the Company's customers. Problems or delays
experienced by the Company's initial customers in the installation and use of
OneServer, OrderStream or PurchaseStream, even if such problems or delays are
not attributable to the Company or its products, or a failure of the Company's
customers to successfully attract purchasers to interactive commerce Web sites,
could slow the rate of adoption of the Company's products by other potential
customers. Moreover, products as complex as those offered by the Company may
contain undetected errors when first introduced or when new versions are
released. There can be no assurance that, despite testing by the Company, errors
will not occur in current or new products
-9-
<PAGE>
after commencement of commercial shipments, resulting in adverse publicity, in
loss of or delay in market acceptance, or in claims by the customer against the
Company, which would have a material adverse effect on the Company's business,
operating results and financial condition.
DEPENDENCE UPON SERVICE PROVIDERS. The Company expects that its
customers will typically rely on professional services organizations, such as
consulting firms and systems integrators, as well as design firms to assist with
implementation of the Company's products. If the Company is unable to adequately
train a sufficient number of such firms or if for any reason a large number of
such firms support or promote competing products or technologies, the Company's
business, operating results and financial condition could be materially
adversely affected. Many of these relationships are not subject to formal
agreements and none of such providers are under any obligation to provide
services to the Company or its customers. Failure of the Company to develop and
maintain relationships with leading service providers and design firms could
adversely impact the Company's ability to successfully market, sell and deploy
its products, which would have a material adverse effect on the Company's
business, operating results and financial condition.
DEPENDENCE UPON CERTAIN LICENSES. The Company relies on certain
technology that it licenses from third parties, including a relational database
management system from Oracle, a text search engine from Fulcrum Technologies
Inc. ("Fulcrum"), a web server from Netscape, encryption technology from RSA
Data Security, Inc. ("RSA") and other software that is integrated with
internally developed software and used in the Company's software to perform key
functions. Oracle also offers products that are competitive with those offered
by the Company. There can be no assurance that the Company's third-party
technology licenses will continue to be available to the Company on commercially
reasonable terms, or at all. The loss or inability to maintain any of these
technology licenses could result in delays in introduction of the Company's
products and services until equivalent technology, if available, is identified,
licensed and integrated, which could have a material adverse effect on the
Company's business, operating results and financial condition.
DEPENDENCE UPON THE INTERNET INFRASTRUCTURE. The use of the Company's
products and services will depend in large part upon the continued development
of the infrastructure for providing Internet access and services. Because global
commerce and online exchange of information on the Internet is new and evolving,
it is difficult to predict with any assurance whether the Internet will prove to
be a viable commercial marketplace. The Internet has experienced, and is
expected to continue to experience, substantial growth in the number of users
and amount of traffic. There can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on it by
this continued growth. In addition, the Internet could lose its viability due to
delays in the development or adoption of new standards and protocols to handle
increased levels of Internet activity, or due to increased governmental
regulation. Further, the costs of use of the Internet could increase to a degree
which reduces its attraction as a platform for electronic commerce. As a result,
there can be no assurance that the infrastructure or complementary services
necessary to make the Internet a viable commercial marketplace will be
developed, or, if developed, that the Internet will become a viable commercial
marketplace for products and services such as those offered by the Company. If
the necessary infrastructure or complementary services or facilities are not
developed, or if the Internet does not become a viable commercial marketplace,
the Company's business, operating results and financial condition would be
materially adversely affected.
RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION. To date, the Company
has sold its products through a direct sales force. The Company's ability to
achieve revenue growth in the future will depend in large part upon its success
in recruiting and training sufficient direct sales personnel and establishing
and maintaining relationships with distributors, resellers, systems integrators
and other third parties. Although the Company is currently investing, and plans
to continue investing, significant resources to expand its sales force and to
develop distribution relationships with third-party distributors and resellers,
the Company may at times experience difficulty in recruiting qualified sales
personnel and in establishing necessary third-party alliances. In addition, as
the Company hires new sales personnel it is anticipated that there will be a
delay before such personnel become productive. There can be no assurance that
the Company will be able to successfully expand its direct sales force or other
distribution channels or that any such expansion will result in an increase in
revenues. Any failure by the Company to expand its direct sales force or other
distribution channels would materially adversely affect the Company's business,
operating results and financial condition.
-10-
<PAGE>
RISKS ASSOCIATED WITH SECURITY, SYSTEM DISRUPTIONS AND COMPUTER
INFRASTRUCTURE. Despite the implementation in the Company's products of various
security mechanisms, the Company's products may be vulnerable to break-ins and
similar disruptive problems caused by Internet users. The level of security
provided by the Company's products is dependent upon the level of security
selected by the Company's customers and the proper configuration and use of the
products' security mechanisms. Such computer break-ins and other disruptions
would jeopardize the security of information stored in and transmitted through
the computer systems of users of the Company's products, which may result in
significant liability to the Company and may also deter potential customers.
Persistent security problems continue to plague public and private data
networks. Recent break-ins reported in the press and otherwise have included
incidents involving hackers bypassing firewalls by posing as authorized
computers and involving the theft of confidential information. Alleviating
problems caused by third parties may require significant expenditures of capital
and resources by the Company. Such expenditures could have a material adverse
effect on the Company's business, operating results and financial condition.
Moreover, the security and privacy concerns of existing and potential customers,
as well as concerns related to computer viruses, may inhibit the growth of the
Internet marketplace generally, and the Company's customer base and revenues in
particular. There can be no assurance that the Company's attempts to limit its
liability to customers, including liability arising from a failure of the
security feature contained in the Company's products, through contractual
provisions will be enforceable. The Company currently does not have product
liability insurance to protect against these risks and there can be no assurance
that such insurance will be available to the Company on commercially reasonable
terms, or at all.
As part of the Company's services, the Company operates and manages
online networks for certain of its customers on a seven day per week, 24-hour
basis, and provides hosting for certain customers' OneServer, OrderStream and
PurchaseStream applications. These services depend upon the Company's ability to
protect the computer equipment and the information stored in its data center
against damage that may be caused by fire, earthquakes, power loss,
telecommunications failures, unauthorized entry and other similar events. Any
such damage or failure that causes interruptions in the Company's operations
could materially adversely affect the businesses of the Company's customers,
which could expose the Company to liability for these adverse effects.
DEPENDENCE UPON PROPRIETARY RIGHTS; RISKS OF INFRINGEMENT. The
Company relies on trademark, copyright and trade secret laws, employee and
third-party non-disclosure agreements and other methods to protect its
proprietary rights. The Company does not currently have any patents or pending
patent applications. The Company believes that, due to the rapid pace of
technological innovation for Internet products, the Company's ability to
establish and maintain a position of technology leadership in the industry
depends more on the skills of its development personnel, new product
developments, frequent product enhancements, and name recognition than upon the
legal protections afforded its existing technology. The Company seeks to protect
its software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult, and while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be expected
to be a persistent problem. In addition, the laws of some foreign countries do
not protect the Company's proprietary rights as fully as do the laws of the
United States. There can be no assurance that the Company's means of protecting
its proprietary rights in the United States or abroad will be adequate. There
can be no assurance that its agreements with employees, consultants and others
who participate in the development of its software will not be breached, that
the Company will have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known to or independently developed by
competitors. Furthermore, there can be no assurance that the Company's efforts
to protect its rights through trademark and copyright laws will not fail to
prevent the development and design by others of products or technology similar
to or competitive with those developed by the Company.
The Company expects that software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps and there can be no assurance that third
parties will not assert infringement claims against the Company. Any such
claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, if at all. In the event of a
successful claim of product
-11-
<PAGE>
infringement against the Company and failure or inability of the Company to
license the infringed or similar technology, the Company's business, operating
results and financial condition would be materially adversely affected.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common
Stock has been subject to significant fluctuations in response to quarter-to-
quarter variations in the Company's operating results, announcements of
technological innovations or new products and services by the Company or its
competitors, and other events or factors. In addition, the stock market in
recent years, and in particular the market for stocks relating to the Internet,
has experienced extreme price and volume fluctuations that have particularly
affected the market prices of many high technology companies and that have often
been unrelated or disproportionate to the operating performance of companies.
These fluctuations, as well as general economic and market conditions, may
adversely affect the market price for the Common Stock.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company is not
currently subject to direct regulation by any government agency, other than
regulations applicable to businesses generally, and there are currently few laws
or regulations directly applicable to access to, or commerce on, the Internet.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing and characteristics
and quality of products and services. The Telecommunications Reform Act of 1996
imposes criminal penalties on anyone who distributes obscene, lascivious or
indecent communications on the Internet. The adoption of any such laws or
regulations may decrease the growth of the Internet, which could in turn
adversely affect the Company's business, operating results or financial
condition. Moreover, the applicability to the Internet of existing laws
governing issues such as property ownership, libel and personal privacy is
uncertain. Further, due to the encryption technology contained in the Company's
products, such products are subject to U.S. export controls. There can be no
assurance that such export controls, either in their current form or as may be
subsequently enacted, will not delay the introduction of new products or limit
the Company's ability to distribute products outside of the United States or
electronically. While the Company intends to take precautions against unlawful
exportation, the global nature of the Internet makes it difficult to effectively
control the distribution of the Company's products. In addition, federal or
state legislation or regulation may further limit levels of encryption or
authentication technology. Further, various countries regulate the import of
certain encryption technology and have adopted laws relating to personal privacy
issues which could limit the Company's ability to distribute products in those
countries. Any such export or import restrictions, new legislation or regulation
or government enforcement of existing regulations could have a material adverse
impact on the Company's business, operating results and financial condition.
ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The Board of
Directors has the authority to issue up to 3.5 million shares of Preferred Stock
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change of control of the
Company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of Common Stock. The Company has no
present plans to issue shares of Preferred Stock. Further, certain provisions
of the Company's charter documents, including provisions eliminating the ability
of stockholders to take action by written consent and limiting the ability of
stockholders to raise matters at a meeting of stockholders without giving
advance notice, may have the effect of delaying or preventing changes in control
or management of the Company, which could have an adverse effect on the market
price of the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of the
Company's Common Stock in the public market or the anticipation of such sales
could materially affect then prevailing market prices. The effect of such sales
may be exacerbated further by the relatively low trading volume of the Company's
Common Stock. The Securities and Exchange Commission has recently adopted
changes to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), which changes became effective in April 1997. As a result of
such changes, substantially all of the unregistered shares of the Company's
Common Stock which are not already eligible for resale under Rule 144 or Rule
701 under the Securities Act are eligible for resale pursuant to Rule 144,
subject in some cases to volume limitations and other requirements.
-12-
<PAGE>
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 remediate 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 would be affected in the event that such third parties
fail to remediate Year 2000 issues.
The Company's Year 2000 initiative is being managed by a team of
internal staff. The team's 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 a third party's failure to ensure Year 2000 compliance 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.
-13-
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of April
1, 1998 by each Selling Stockholder.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED PRIOR TO SHARES BENEFICIALLY OWNED
THE OFFERING (1) AFTER THE OFFERING(3)
---------------------------- SHARES --------------------------
SELLING STOCKHOLDERS SHARES PERCENT (2) OFFERED (3) SHARES PERCENT (2)
- --------------------- ------------ ------------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C>
Combination Inc. 1,072,817 8.3% 193,097 -- --
c/o ISCC
310 Madison Avenue, Suite 501
New York, NY 10017
Stark International 915,686 7.1 111,041 -- --
1500 W. Market Street, Suite 200
Mequon, WI 53092
Shepard Investments International, Ltd. 915,686 7.1 111,041 -- --
1500 W. Market Street, Suite 200
Mequon, WI 53092
Total 2,904,189 22.6% 415,179 -- --
</TABLE>
______________________________
(1) Represents the number of shares beneficially held by the Selling Stockholder
prior to the offering.
(2) Based on 12,862,711 shares outstanding at April 1, 1998.
(3) Assumes that each Selling Stockholder will sell all of the Shares set forth
above under "Shares Offered," as well as all of the shares set forth in the
Company's Registration Statement on Form S-3 (file no. 333-47055) filed with
the Securities and Exchange Commission on February 27,1998. There can be no
assurance that the Selling Stockholders will sell all or any of the Shares
offered hereunder.
-14-
<PAGE>
ISSUANCE OF COMMON STOCK TO SELLING STOCKHOLDERS
On November 18, 1997, the Company closed the private placement (the
"Private Placement") of 250 Units, each such Unit consisting of one (1)
convertible note (a "Note") in the principal amount of $40,000 and one (1)
warrant (a "Warrant") to purchase 2,666 shares of Common Stock of the Company.
The Units were priced at $40,000 per Unit, resulting in gross proceeds of
approximately $10 million. Lehman Brothers, Inc. received a placement fee of 8%
of gross proceeds (excluding proceeds from sales of up to $2,000,000 of Units to
current stockholders of the Company) from the Private Placement for services
rendered in connection with the Private Placement, 50% of which has been paid in
cash and the balance of which has been paid in Units (consisting of 8 Units
issued to LBI Holdings, an affiliate of Lehman Brothers, Inc.). The Company
relied on Rule 506 of Regulation D under the Securities Act of 1933, as amended
(the "Act"), which, among other things, provides an exemption from the
registration requirements of the Act for sales to accredited investors (as
defined by Rule 501(a) of Regulation D under the Act).
In November 1997, the Company was informed by The Nasdaq Stock Market, Inc.
("Nasdaq") that it did not meet the requirements for the continued listing of
its Common Stock on The Nasdaq National Market. Specifically, Nasdaq's listing
rules require the Company to maintain net tangible assets of at least $4
million, and the Company's net tangible assets were $2.4 million as of September
30, 1997. While the Company completed the Private Placement in November 1997,
which increased the Company's cash assets by approximately $10 million, the
Notes are considered as debt and, therefore, the Company's net tangible assets
did not increase as a result of the Private Placement.
In order to achieve compliance with the foregoing listing requirements, on
February 26, 1998, the Company and each holder of the Notes exchanged all of the
Notes that had not been converted as of such date (which Notes had an aggregate
principal amount of $9,744,250) for 4,905,209 shares of the Company's Series A
Preferred Stock, plus accrued interest on such Notes (the "Exchange"). As a
result, the Company's net tangible assets were increased and the Company
believes that as of the date hereof it is currently in compliance with the
Nasdaq net tangible assets requirements. However, there can be no assurance
that the Company will be able to continue to maintain compliance with the
listing requirements of The Nasdaq National Market. For example, continued
losses by the Company could cause the Company's net tangible assets to again
fall below $4 million, at which point the Company's Common Stock would likely be
removed from listing on The Nasdaq National Market. The removal of the
Company's Common Stock from listing on The Nasdaq National Market most likely
would have a material adverse effect on the stock price of the Common Stock and
on the ability of stockholders and investors to buy and sell shares of the
Common Stock in the public markets. See "Risk Factors--Risks Associated with
Failure to Meet Nasdaq National Market Listing Requirements."
On April 1, 1998, all holders of Series A Preferred Stock exchanged all
outstanding shares of Series A Preferred Stock for an aggregate of 8,096,911
shares of Common Stock, pursuant to an agreement in which each share of Series A
Preferred Stock was exchanged for 1.739 shares of Common Stock, representing an
exchange price of $1.15 per share of Common Stock. Prior to April 1, 1998, an
aggregate of 674,801 shares issued upon conversion of Notes or Series A
Preferred Stock were held by the original purchasers of the Notes.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 60,000,000 shares of
Common Stock, $0.001 per share, and 10,000,000 shares of Preferred Stock, $0.001
par value per share. As of April 1, 1998, there were 12,862,711 shares of
Common Stock outstanding held of record by approximately 142 record holders of
the Company's Common Stock.
On February 24, 1998, the Company's stockholders approved a one-for-five
reverse stock split of the Common Stock, pursuant to which each five shares of
Common Stock outstanding as of February 26, 1998 became one share of Common
Stock.
-15-
<PAGE>
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior rights of Preferred Stock, if
any, then outstanding. The Common Stock has no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund provisions
available to the Common Stock. All outstanding shares of Common Stock are fully
paid and non-assessable.
PREFERRED STOCK. As of the date of this Prospectus, the Company has
10,000,000 authorized shares of Preferred Stock 6,500,000 of which were
designated Series A Preferred Stock, none of which are outstanding, and
3,500,000 of which are shares of "bank check" Preferred Stock, which may be
issued with such designations, rights and preferences as may be determined from
time to time by the Board of Directors, without any further vote or action by
the stockholders. The rights of the holders of the Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights, senior to the Common Stock, and as a result, the issuance of
such Preferred Stock could have a material adverse effect on the market value of
the Common Stock. Although the Company has no present intention to issue any
shares of its Preferred Stock, there can be no assurance that the Company will
not do so in the future. See "Delaware Anti-Takeover Law and Certain Charter
Provisions."
On April 1, 1998, the Company acquired all outstanding shares of Series A
Preferred Stock in exchange for shares of Common Stock. The Company does not
intend to reissue any shares of Series A Preferred Stock and intends to
eliminate the Series A Preferred Stock from its Certificate of Incorporation,
subject to approval in the Company's common stockholder.
REGISTRATION RIGHTS OF CERTAIN OTHER HOLDERS
Excluding the shares of Common Stock issued in the Exchange and the shares
covered by this prospectus, the holders of approximately 877,901 shares of
Common Stock (the "Registrable Securities") or their transferees are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. These rights are provided under the terms of agreements between
the Company and the holders of Registrable Securities. If at any time, the
Company registers any of its Common Stock, the holders of Registrable Securities
are entitled to include their shares of Common Stock in the registration. A
holder's right to include shares in an underwritten registration is subject to
the ability of the underwriters to limit the number of shares included in the
offering. All registration expenses must be borne by the Company and all
selling expenses relating to Registrable Securities must be borne by the holders
of the securities being registered. In addition, such holders may require the
Company to use its best efforts to file a registration statement under the
Securities Act at the Company's expense with respect to their shares of Common
Stock, subject to certain limitations.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Certain provisions of Delaware law and the Company's Restated Certificate
of Incorporation could make more difficult the acquisition of the Company by
means of a tender offer, a proxy contest or otherwise and the removal of
incumbent officers and directors. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to first negotiate
with the Company. The Company believes that the benefits of increased
protection of the Company's potential ability to negotiate with the proponent of
an unfriendly or unsolicited proposal to acquire or restructure the Company
outweigh the disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals could result in an improvement of their
terms.
-16-
<PAGE>
The Company is subject to the provisions of Section 203 of the Delaware
law. In general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the corporation's voting stock. These provisions may have
the effect of delaying, deferring or preventing a change in control of the
Company without further action by the Company's stockholders.
Commencing at the first annual meeting of stockholders following the annual
meeting of stockholders when the Company shall have had at least 800
stockholders, the Restated Certificate of Incorporation of the Company will
provide for the Board of Directors to be divided into two classes, with
staggered two-year terms. As a result, only one class of directors will be
elected at each annual meeting of stockholders of the Company, with the other
class continuing for the remainder of its respective two-year term. Thereafter,
stockholders shall no longer have cumulative voting rights and the Company's
stockholders representing a majority of the shares of Common Stock outstanding
will be able to elect all of the directors. The classification of the Board of
Directors and elimination of cumulative voting make it more difficult for the
Company's existing stockholders to replace the Board of Directors as well as for
another party to obtain control of the Company by replacing the Board of
Directors. Since the Board of Directors has the power to retain and discharge
officers of the Company, these provisions could also make it more difficult for
existing stockholders or another party to effect a change in management. See
"Management."
The Company's Restated Certificate of Incorporation provides that
stockholder action can be taken only at an annual or special meeting of
stockholders and may not be taken by written consent. The Bylaws provide that
special meetings of stockholders can be called only by the Board of Directors,
the Chairman of the Board, if any, the President of the Company and holders of
10% of the votes entitled to be cast at a meeting. Moreover, the business
permitted to be conducted at any special meeting of stockholders is limited to
the business brought before the meeting by the Board of Directors, the Chairman
of the Board, if any, the President of the Company or any such 10% holder. The
Bylaws set forth an advance notice procedure with regard to the nomination,
other than by or at the direction of the Board of Directors, of candidates for
election as directors and with regard to business to be brought before a meeting
of stockholders of the Company.
The Company's Restated Certificate of Incorporation contains a provision
requiring the affirmative vote of the holders of at least two-thirds of the
voting stock of the Company to amend the foregoing provisions of the Restated
Certificate of Incorporation and Bylaws.
PLAN OF DISTRIBUTION
Shares of Common Stock covered hereby may be offered and sold from time to
time by the Selling Stockholders. The Selling Stockholders will act
independently of the Company in making decisions with respect to the timing,
manner and size of each sale. The Selling Stockholders may sell the Shares
being offered hereby: (i) on the Nasdaq National Market, or otherwise at prices
and at terms then prevailing or at prices related to the then current market
price; or (ii) in private sales at negotiated prices directly or through a
broker or brokers, who may act as agent or as principal or by a combination of
such methods of sale. The Selling Stockholders and any underwriter, dealer or
agent who participate in the distribution of such shares may be deemed to be
"underwriters" under the Securities Act, and any discount, commission or
concession received by such persons might be deemed to be an underwriting
discount or commission under the Securities Act. The Company has agreed to
indemnify the Selling Stockholders against certain liabilities arising under the
Securities Act.
Any broker-dealer participating in such transactions as agent may receive
commissions from the Selling Stockholders (and, if acting as agent for the
purchaser of such shares, from such purchaser). Usual and customary brokerage
fees will be paid by the Selling Stockholders. Broker-dealers may agree with
the Selling Stockholders to sell a specified number of shares at a stipulated
price per share, and, to the extent such a broker-dealer is unable to do so
acting as agent for the Selling Stockholders, to purchase as principal any
unsold shares at the price required to fulfill the broker-dealer commitment to
the Selling Stockholders. Broker-dealers who acquire shares as principal
-17-
<PAGE>
may thereafter resell such shares from time to time in transactions (which may
involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or by a
combination of such methods of sale or otherwise at market prices prevailing at
the time of sale or at negotiated prices, and in connection with such resales
may pay to or receive from the purchasers of such shares commissions computed as
described above.
The Company has advised the Selling Stockholders that the anti-manipulation
Rules 10b-6 and 10b-7 under the Exchange Act may apply to sales of Shares in the
market and to the activities of the Selling Stockholders and their affiliates.
The Selling Stockholders have advised the Company that during such time as the
Selling Stockholders may be engaged in the attempt to sell shares registered
hereunder, they will not directly or indirectly take any action that constitutes
illegal manipulation of the price of the Common Stock of the Company.
The Selling Stockholders may indemnify any broker-dealer that participates
in transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act. Any commissions paid or
any discounts or concessions allowed to any such broker-dealers, and any profits
received on the resale of such shares, may be deemed to be underwriting
discounts and commissions under the Securities Act if any such broker-dealers
purchase shares as principal.
In order to comply with the securities laws of certain states, if
applicable, the Common Stock will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states, the
Common Stock may not be sold unless such shares have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.
The Company has agreed to maintain the effectiveness of this Registration
Statement until the date three years from the date of this Prospectus. No sales
may be made pursuant to this Prospectus after such date unless the Company
amends or supplements this Prospectus to indicate that it has agreed to extend
such period of effectiveness. There can be no assurance that the Selling
Stockholders will sell all or any of the shares of Common Stock offered
hereunder.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon by Venture Law Group, A Professional Corporation, Menlo Park, California,
counsel to the Company.
EXPERTS
The financial statements and schedule of the Company appearing in the
Company's Annual Report (Form 10-K) for the year ended December 31, 1997, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon included therein and incorporated herein by reference. Such
financial statements and schedule are incorporated herein by reference in
reliance upon such reports given upon the authority of such firms as experts in
accounting and auditing.
-18-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant will bear no expenses in connection with any sale or other
distribution by the Selling Stockholders of the shares being registered other
than the expenses of preparation and distribution of this Registration Statement
and the Prospectus included in this Registration Statement. Such expenses are
set forth in the following table. All of the amounts shown are estimates except
the Securities and Exchange Commission ("SEC") registration fee.
<TABLE>
<S> <C>
SEC registration fee $ 3,900
Legal fees and expenses 20,000
Accounting fees and expenses 8,000
Miscellaneous expenses 3,100
-------
Total $35,000
=======
</TABLE>
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Certificate of Incorporation and Bylaws provide for indemnification of the
Registrant's directors, officers, employees and other agents to the extent and
under the circumstances permitted by the Delaware General Corporation Law. The
Registrant has also entered into agreements with its directors and officers that
will require the Registrant, among other things, to indemnify them against
certain liabilities that may arise by reason of their status or service as
directors to the fullest extent not prohibited by law. In addition, the
Registrant carries director and officer liability insurance.
In connection with this offering, the Selling Stockholders have agreed to
indemnify the Registrant, its directors and officers and each such person who
controls the Registrant, against any and all liability arising from inaccurate
information provided to the Registrant by the Selling Stockholders and contained
herein.
Item 16. EXHIBITS.
Exhibits.
--------
5.1+ Opinion of Venture Law Group, A Professional Corporation
23.1 Consent of Independent Auditors (see page II-4)
23.2+ Consent of Counsel (included in Exhibit 5.1)
24.1+ Power of Attorney
________________________________
+ Previously filed.
Item 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement
to include any material information with respect to the plan of
<PAGE>
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of this offering.
(4) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act that is
incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
CONNECT, Inc. certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Mountain View, State of California, on April 2, 1998.
CONNECT, INC.
By: /s/ JOSEPH G. GIRATA
-------------------------------------------
Joseph G. Girata
Vice President, Finance and Administration
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board of Directors April 2, 1998
- ------------------------------------
Gordon J. Bridge
/s/ JOSEPH G. GIRATA Vice President of Finance and April 2, 1998
- ------------------------------------ Administration and Chief Financial
Joseph G. Girata Officer (Principal Financial and
Accounting Officer)
* Director April 2, 1998
- ------------------------------------
Promod Haque
* Director April 2, 1998
- ------------------------------------
Richard H. Lussier
* Director April 2, 1998
- ------------------------------------
Rory T. O'Driscoll
/s/ Craig Norris President, Chief Executive Officer April 2, 1998
- ------------------------------------ and Director
Craig Norris
*By: /s/ JOSEPH G. GIRATA
--------------------------------
Attorney in fact
- ------------------------------------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement on Form S-3 (No. 333-43197) and
related Prospectus of CONNECT, Inc. for the registration of 674,801 shares of
its Common Stock and to the incorporation by reference therein of our report
dated January 27, 1998, except for Note 14, as to which the date is February
26, 1998, with respect to the financial statements and our report dated
January 27, 1998, with respect to the financial statement schedule of CONNECT,
Inc. included in its Annual Report on Form 10-K for the year ended December
31, 1997 filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
San Jose, California
April 3, 1998
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
5.1+ Opinion of Venture Law Group, A Professional Corporation
23.1 Consent of Independent Auditors (see page II-4)
23.2+ Consent of Counsel (included in Exhibit 5.1)
24.1+ Power of Attorney
________________________________
+ Previously filed.
