<PAGE>
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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Connect, Inc.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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<PAGE>
CONNECT, INC.
515 Ellis Street
Mountain View, California 94043
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 12, 1999
To The Stockholders Of Connect, Inc.:
Notice Is Hereby Given that the Annual Meeting of Stockholders of Connect,
Inc., a Delaware corporation (the "Company"), will be held on Thursday, August
12, 1999 at 1:00 p.m. local time at the principal executive offices of the
Company, located at 515 Ellis Street, Mountain View, California 94043, for the
purposes of considering and voting upon the following matters, as more fully
described in the attached proxy statement:
1. To elect three Class I directors of the Company to serve until the 2001
Annual Meeting of Stockholders or until their respective successors are
elected and qualified, and to elect two Class II directors of the Company
to serve until the 2000 Annual Meeting of Stockholders or until their
respective successors are elected and qualified;
2. To approve an amendment to the Company's Second Amended and Restated
Certificate of Incorporation to change the Company's name to
ConnectInc.com, Co.;
3. To approve the adoption of the Company's 1999 Stock Option Plan for Non-
Employee Directors and Advisors and the reservation of 500,000 shares of
the Company's common stock for issuance thereunder.
4. To ratify the selection of Ernst & Young LLP as independent auditors of the
Company for its fiscal year ending December 31, 1999; and
5. To transact such other business as may properly come before the meeting or
any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on June 30, 1999,
as the record date for the determination of stockholders entitled to notice of
and to vote at this Annual Meeting of Stockholders and at any adjournment or
postponement thereof.
By Order of the Board of Directors
Alan C. Mendelson
Secretary
Mountain View, California
[____________, 1999]
All Stockholders are cordially invited to attend the meeting in person.
Whether or not you expect to attend the meeting, please complete, date, sign and
return the enclosed proxy as promptly as possible in order to ensure your
representation at the meeting. A return envelope (which is postage prepaid if
mailed in the United States) is enclosed for that purpose. Even if you have
given your proxy, you may still vote in person if you attend the meeting.
Please note, however, that if your shares are held of record by a broker, bank
or other nominee and you wish to vote at the meeting, you must obtain from the
record holder a proxy issued in your name.
<PAGE>
CONNECT, INC.
515 Ellis Street
Mountain View, California 94043
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 12, 1999
Information Concerning Solicitation And Voting
General
The enclosed proxy is solicited on behalf of the Board of Directors of
Connect, Inc., a Delaware corporation (the "Company"), for use at the Annual
Meeting of Stockholders to be held on August 12, 1999, at 1:00 p.m. local time
(the "Annual Meeting"), or at any adjournment or postponement thereof, for the
purposes set forth herein and in the accompanying Notice of Annual Meeting. The
Annual Meeting will be held at the principal executive offices of the Company,
located at 515 Ellis Street, Mountain View, California 94043. The Company
intends to mail this proxy statement and accompanying proxy card on or about
July 2, 1999, to all stockholders entitled to vote at the Annual Meeting.
Solicitation
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to stockholders. Copies of
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians holding in their names shares of Common Stock beneficially owned
by others to forward to such beneficial owners. The Company may reimburse
persons representing beneficial owners of Common Stock for their costs of
forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other regular employees of the
Company. No additional compensation will be paid to directors, officers or
other regular employees for such services.
Voting Rights and Outstanding Shares
Only holders of record of Common Stock at the close of business on
June 30, 1999 will be entitled to notice of and to vote at the Annual Meeting.
At the close of business on May 15, 1999 the Company had outstanding and
entitled to vote 14,821,449 shares of Common Stock.
Each holder of record of Common Stock on such date will be entitled to one
vote for each share held on all matters to be voted upon at the Annual Meeting.
The inspector of election appointed for the meeting will tabulate all votes
and will separately tabulate affirmative and negative votes, abstentions and
broker non-votes. Abstentions will be counted towards the tabulation of votes
cast on proposals presented to the stockholders and will have the same effect
as negative votes. Broker non-votes are counted towards a quorum, but are not
counted for any purpose in determining whether a matter has been approved.
With respect to Proposal 2, abstentions and broker non-votes will have the
same effect as negative votes.
Revocability of Proxies
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's principal executive office, 515 Ellis
Street, Mountain View, CA 94043, a written notice of revocation or a duly
executed proxy bearing a later date, or it may be revoked by attending the
meeting and voting in person. Attendance at the meeting will not, by itself,
revoke a proxy.
Stockholder Proposals
The deadline for submitting a stockholder proposal for inclusion in the
Company's proxy statement and form of proxy for the Company's 2000 Annual
Meeting of Stockholders pursuant to Rule 14a-8 of the Securities and Exchange
Commission is [________________, 1999].
1
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Proposal 1
Election Of Directors
The Company's Second Amended and Restated Certificate of Incorporation
provides that the Board of Directors (the "Board") shall be divided into two
classes, each class consisting, as nearly as possible, of one-half of the total
number of directors, with each class having a two-year term. Vacancies on the
Board may be filled by either (i) the affirmative vote of the holders of a
majority of the voting power of the shares of the Company or (ii) by the
affirmative vote of a majority of the remaining directors. A director elected
by the Board to fill a vacancy (including a vacancy created by an increase in
the authorized size Board) shall serve for the remainder of the full term of the
class of directors in which the vacancy occurred and until such director's
successor is elected and qualified.
The Board is presently composed of five members. There are three directors
in Class I (Radha R. Basu, Gordon J. Bridge and Craig D. Norris) and two
directors in Class II (Richard H. Lussier and Rory T. O'Driscoll). If elected
at the Annual Meeting, each of the Class I nominees will be elected to a two
year term expiring at the 2001 annual meeting and until his or her successor is
elected and has qualified, or until such director's earlier death, resignation
or removal. If elected at the Annual Meeting, each of the Class II directors
will be elected to a one year term expiring at the 2000 annual meeting and until
his or her successor is elected and has qualified, or until such director's
earlier death, resignation or removal. After the Annual Meeting, one class of
directors will be elected at each successive annual meeting to serve for two-
year terms. Each nominee listed below is currently a director of the Company,
four directors having been elected by the stockholders, and one director, Radha
R. Basu, having been elected by the Board.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting. Shares represented by
executed proxies will be voted, if authority to do so is not withheld, for the
election of the five nominees named below. In the event that any nominee should
be unavailable for election as a result of an unexpected occurrence, such shares
will be voted for the election of such substitute nominee as management may
propose. Each person nominated for election has agreed to serve if elected, and
management has no reason to believe that any nominee will be unable to serve.
The Board Recommends
A Vote In Favor Of Each Named Nominee.
The names of the current directors and nominees, their ages (as of December
31, 1998) and certain information about them are set forth below:
<TABLE>
<CAPTION>
Principal Occupation/ Director
Name Age Position Held With the Company Since
<S> <C> <C> <C>
Radha R. Basu............................ 49 General Manager, Electronic Business 1999
Software Division, Hewlett
Packard Corporation
Gordon J. Bridge......................... 56 Chairman of the Board of Directors 1995
of the Company
Richard H. Lussier....................... 61 Retired 1992
Craig D. Norris.......................... 51 Chief Executive Officer and 1998
President of the Company
Rory T. O'Driscoll....................... 34 Principal, BankAmerica Ventures and 1995
Vice President, BA Venture Partners I
</TABLE>
Certain additional information about the directors and nominees is given
below.
Nominees for Election for a Two-year Term Expiring at the 2001 Annual Meeting of
Stockholders
Radha R. Basu became a member of the Board in March 1999. Ms. Basu joined
Hewlett Packard Corporation ("HP") in 1978 as a research & development engineer
in HP's laboratories. She has held a number of positions with HP since joining
the company including most recently, General Manger of the Electronic Business
Software Division. Ms. Basu currently serves as a director of SEEC, Inc. a
computer software company. Ms. Basu holds a bachelor of engineering
2
<PAGE>
degree from the University of Madras and a master's degree in Electrical
Engineering and Computer Science from the University of Southern California.
Gordon J. Bridge joined the Company in November 1995 as the Chairman of the
Board and served as President and Chief Executive Officer of the Company from
April 1997 to April 1998. Currently, he is Chairman of the Board and, since
April 1998, a consultant to the Company. Since November 1995 Mr. Bridge has
also served as the chief business development officer of the Company. From
November 1995 to April 1997, Mr. Bridge was an Executive Vice President and
director of Quaestus Management Corporation ("Quaestus"), a venture capital
investment and private equity fund management company, which funds are
stockholders of the Company, although Mr. Bridge does not hold an equity
interest in the Quaestus funds. From 1988 to 1995, Mr. Bridge held executive
management positions with AT&T Corporation, a telecommunications company,
including President of AT&T Computer Systems, President of AT&T EasyLink
Services, President of Consumer Interactive Services and most recently Vice
President, Corporate Strategy responsible for Emerging Services and Products.
Prior to joining AT&T Corporation in 1988, he served for 23 years with IBM
Corporation in various positions, including Vice President of Marketing and Vice
President of U.S. Sales. Mr. Bridge is a director of ARI Network Services,
Inc., an electronic commerce services provider. Mr. Bridge holds a B.S. in
Mathematics from Bradley University.
Craig D. Norris joined the Company in January 1996 as Vice President of
Professional Services. In July 1997 he was promoted to the position of
Executive Vice President of Services and Operations and in April 1998 to the
positions of Chief Executive Officer and President. In addition, in April 1998,
Mr. Norris was appointed to the Company's Board. Prior to joining the Company,
Mr. Norris was a management consultant with Gemini Consulting Inc., a consulting
firm, from October 1992 to December 1995. From October 1988 to October 1992,
Mr. Norris was Vice President, West Area at Cap Gemini America, a consulting
firm. Mr. Norris holds a B.A. in Economics from Macalester College and an
M.B.A. from Fairleigh Dickenson University.
Nominees for Election for a One-year Term Expiring at the 2000 Annual Meeting of
Stockholders
Richard H. Lussier became a member of the Board in June 1992. Until
September 1996, when Mr. Lussier retired, he was President and Chief Executive
Officer of Siemens Nixdorf Information Systems Inc., a computer company and a
subsidiary of Siemens Nixdorf Informationssysteme AG ("Siemens Nixdorf"). From
November 1986 to March 1995 he was Chairman and Chief Executive Officer of
Pyramid Technology Corporation, a computer company, which was acquired by
Siemens Nixdorf in March 1995. Mr. Lussier holds a B.A. in Economics from
College of the Holy Cross and completed coursework at Boston College Graduate
School of Business.
Rory T. O'Driscoll became a member of the Board in December 1995.
Mr. O'Driscoll is a Principal of BankAmerica Ventures, a venture capital firm
and through its managed investment funds a stockholder of the Company, and a
General Partner of BA Venture Partners I. Prior to joining BankAmerica Ventures
in September 1993, Mr. O'Driscoll served in the Corporate Development department
of BankAmerica Corporation from March 1992 to September 1993. Before his
employment with BankAmerica Corporation, he worked as a financial advisor to a
number of privately held companies in the United Kingdom from March 1991 to
December 1991. Mr. O'Driscoll also serves as a director of several private
companies. Mr. O'Driscoll holds a B.Sc. in Economics from the London School of
Economics.
3
<PAGE>
Board Committees and Meetings
During the fiscal year ended December 31, 1998 the Board held seven
meetings. The Board has an Audit Committee and a Compensation Committee.
The Board does not have a standing nominating committee.
The Audit Committee meets with the Company's independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements; recommends to the Board the independent auditors to be retained; and
receives and considers the accountants' comments as to controls, adequacy of
staff and management performance and procedures in connection with audit and
financial controls. The Audit Committee was composed of two non-employee
directors during 1998: Messrs. O'Driscoll and Welty. It met seven times during
such fiscal year.
The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants under
the Company's stock option plans and otherwise determines compensation levels
and performs such other functions regarding compensation as the Board may
delegate. From January 1, 1998 through March 31, 1998, the Compensation
Committee was composed of three non-employee directors: Messrs. Haque, Weening
and Lussier. From March 31, 1998 until December 31, 1998, the Compensation
Committee was composed of two non-employee directors: Messrs. Haque and
Lussier. The Compensation Committee met seven times during such fiscal year.
During the fiscal year ended December 31, 1998, each Board member attended
75% or more of the aggregate of the meetings of the Board and of the committees
on which he served, held during the period for which he was a director or
committee member, respectively.
4
<PAGE>
Proposal 2
Amendment to the Company's Second Amended and Restated Certificate of
Incorporation
The Board has approved an amendment to the Company's Second Amended and
Restated Certificate of Incorporation. The amendment approved by the Board is
in the form attached to this Proxy Statement as Exhibit A (the "Amendment").
The Board is seeking approval of the Amendment by the Company's stockholders.
The Amendment changes the Company's name to ConnectInc.com, Co. In
furtherance of the changing focus of the Company to providing more Internet-
related services, the Board believes that it is in the best interests of the
Company to change its name.
APPROVAL REQUIRED
Approval of Proposal No. 2 requires the affirmative vote of a majority of
the outstanding shares of Common Stock of the Company.
The Board Recommends
A Vote In Favor Of Proposal 2.
5
<PAGE>
PROPOSAL 3
APPROVAL OF THE 1999 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS AND
ADVISORS
In June 1999, the Board of Directors of the Company (the "Board")
adopted the Company's 1999 Stock Option Plan for Non-Employee Directors and
Advisors (the "Option Plan"), subject to stockholder approval. There are
500,000 shares of Common Stock reserved for issuance under the Option Plan. As
of June 15, 1999 no option had been granted under the Option Plan.
Stockholders are requested in this Proposal 3 to approve the Option
Plan. The affirmative vote of the holders of a majority of the shares present
in person or represented by proxy and entitled to vote at the meeting will be
required to approve the Option Plan. Abstentions will be counted toward the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes. Broker non-votes are counted towards a
quorum, but are not counted for any purpose in determining whether this matter
has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3.
The essential features of the Option Plan are outlined below:
GENERAL
The Option Plan provides for the grant of nonstatutory stock options.
Nonstatutory stock options granted under the Option Plan are not intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"). See "Federal Income Tax Information" for
a discussion of the tax treatment of options.
PURPOSE
The Board adopted the Option Plan to provide a means by which
non-employee directors and certain advisors of the Company and its affiliates
may be given an opportunity to purchase stock in the Company, to assist in
retaining the services of such persons, to secure and retain the services of
persons capable of filling such positions and to provide incentives for such
persons to exert maximum efforts for the success of the Company and its
affiliates. All of the Company's non-employee directors and members of advisory
boards of the Company are eligible to participate in the Option Plan.
6
<PAGE>
ADMINISTRATION
The Board administers the Option Plan. Subject to the provisions of the
Option Plan, the Board has the power to construe and interpret the Option Plan
and to determine the persons to whom and the dates on which options will be
granted, the number of shares of Common Stock to be subject to each option, the
time or times during the term of each option within which all or a portion of
such option may be exercised, the exercise price, the type of consideration and
other terms of the option.
The Board has the power to delegate administration of the Option Plan to
a committee composed of not fewer than two members of the Board. In the
discretion of the Board, a committee may consist solely of two or more
non-employee directors in accordance with Rule 16b-3 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). As used herein with respect to
the Option Plan, the "Board" refers to any committee the Board appoints as well
as to the Board itself. The Board also may delegate to a committee of one or
more members of the Board the power to grant options to persons who are not
subject to Section 16 of the Exchange Act.
ELIGIBILITY
Any director who is not an employee of the Company or an affiliate of
the Company at the time of grant is eligible to receive nonstatutory stock
options under the Option Plan. Any members of an advisory board established by
the board of directors of the Company is eligible to receive nonstatutory stock
options under the Option Plan.
STOCK SUBJECT TO THE OPTION PLAN
Subject to the Proposal, an aggregate of 500,000 shares of Common Stock
is reserved for issuance under the Option Plan. If options granted under the
Option Plan expire or otherwise terminate without being exercised, the shares of
Common Stock not acquired pursuant to such options again becomes available for
issuance under the Option Plan. If the Company reacquires unvested stock issued
under the Option Plan, the reacquired stock will not again become available for
reissuance under the Option Plan.
TERMS OF OPTIONS
The following is a description of the permissible terms of options under
the Option Plan. Individual option grants may be more restrictive as to any or
all of the permissible terms described below.
Exercise Price; Payment. The exercise price of nonstatutory options may
not be less than 85% of the fair market value of the stock on the date of grant.
To date, all options have been granted with exercise prices equal to 100% of
the fair market value of the stock on the date of grant. As of June 7, 1999,
the last sale price of the Company's Common Stock as reported at market close of
the Nasdaq National Market System was $3.0938 per share.
7
<PAGE>
The exercise price of options granted under the Option Plan must be paid
either in cash at the time the option is exercised or at the discretion of the
Board, (i) by delivery of other Common Stock of the Company, (ii) pursuant to a
deferred payment arrangement or (iii) in any other form of legal consideration
acceptable to the Board.
Repricing. In the event of a decline in the value of the company's
Common Stock, the Board has the authority to offer optionholders the opportunity
to replace outstanding higher priced options with new lower priced options.
Option Exercise. Options granted under the Option Plan may become
exercisable in cumulative increments ("vest") as determined by the Board. The
Board has the power to accelerate the time during which an option may vest or be
exercised. In addition, options granted under the Option Plan may permit
exercise prior to vesting, but in such event the optionholder may be required to
enter into an early exercise stock purchase agreement that allows the Company to
repurchase unvested shares, generally at their exercise price, should the
optionholder's service terminate before vesting. To the extent provided by the
terms of an option, an optionholder may satisfy any federal, state or local tax
withholding obligation relating to the exercise of such option by a cash payment
upon exercise, by authorizing the company to withhold a portion of the stock
otherwise issuable to the optionholder, by delivering already-owned Common Stock
of the company or by a combination of these means.
Term. The maximum term of options under the Option Plan is 10 years.
Options under the Option Plan generally terminate three months after
termination of the optionholder's service unless (i) such termination is due to
the optionholder's permanent and total disability (as defined in the Code), in
which case the option may, but need not, provide that it may be exercised (to
the extent the option was exercisable at the time of the termination of service)
at any time within 12 months of such termination; (ii) the optionholder dies
before the optionholder's service has terminated, or within three months after
termination of such service, in which case the option may, but need not, provide
that it may be exercised (to the extent the option was exercisable at the time
of the optionholder's death) within 18 months of the optionholder's death by the
person or persons to whom the rights to such option pass by will or by the laws
of descent and distribution; or (iii) the option by its terms specifically
provides otherwise. An optionholder may designate a beneficiary who may
exercise the option following the optionholder's death. Individual option
grants by their terms may provide for exercise within a longer period of time
following termination of service. The option term generally is not extended in
the extent that exercise of the option within these period is prohibited.
RESTRICTIONS ON TRANSFER
Except as provided in an option agreement, an optionholder may not
transfer an option otherwise that by will or by the laws of descent and
distribution. During the lifetime of the optionholder, only the optionholder
may exercise an option. Shares subject to repurchase by the Company under an
early exercise stock purchase agreement may be subject to restrictions on
transfer that the Board deems appropriate.
ADJUSTMENT PROVISIONS
8
<PAGE>
Transactions not involving receipt of consideration by the company, such
as a merger, consolidation, reorganization, stock dividend, or stock split, may
change the class and number of shares of Common Stock subject to the Option Plan
and outstanding options. In that event, the Option Plan will be appropriately
adjusted as to the class and the maximum number of shares of Common Stock
subject to the Option Plan, and outstanding options will be adjusted as to the
class, number of shares and price per share of Common Stock subject to such
options.
EFFECT OF CERTAIN CORPORATE EVENTS
The Option Plan provides that, in the event of a dissolution,
liquidation of the Company, all outstanding options shall terminate if not
exercised prior to such event. The Option Plan provides that, in the event of a
sale of all or substantially all of the assets of the Company, specified types
of merger, or other corporate reorganization ("change in control"), any
acquiring or surviving corporation may either assume options outstanding under
the Option Plan or substitute similar options for those outstanding under the
Option Plan, otherwise such outstanding options will continue in full force and
effect. If any acquiring or surviving corporation declines to assume options
outstanding under the Option Plan, or to substitute similar options shall
accelerate in full and such option may be exercised during the 15 days following
such acceleration nd then terminate to the extent unexercised. With respect to
any other outstanding options, such options shall terminate to the extent not
exercised prior to such event. The acceleration of an option in the event of an
acquisition or similar corporate event may be viewed as an anti-takeover
provision, which may have the effect of discouraging a proposal to acquire or
otherwise obtain control of the Company.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the Option Plan without stockholder
approval or ratification at any time or from time to time.
The Board may also amend the Option Plan at any time or from time to
time. However, no amendment will be effective unless approved by the
stockholders of the Company within 12 months before or after its adoption by
the Board if the amendment would (i) modify the requirements as to eligibility
for participation; (ii) increase the number of shares reserved for issuance upon
exercise of options; or (iii) change any other provision of the Option Plan in
any other way if such modification requires stockholder approval in order to
comply with applicable law or any securities exchange listing requirements.
FEDERAL INCOME TAX INFORMATION
Long-term capital gains currently are generally subject to lower tax
rates than ordinary income or short-term capital gains. The maximum long-term
capital gains rate for federal income tax purposes is currently 20% while the
maximum ordinary income rate and short-term capital gains rate is effectively
39.6%. Slightly different rules may apply to optionholders who acquire stock
subject to certain repurchase options or who are subject to Section 16(b) of the
Exchange Act.
9
<PAGE>
Nonstatutory stock options granted under the Option Plan generally have
the following federal income tax consequences:
There are no tax consequences to the optionholder or the Company by
reason of the grant of a nonstatutory stock option. Upon exercise of a
nonstatutory stock option, the optionholder normally will recognize taxable
ordinary income equal to the excess, if any, of the stock's fair market value on
the date of exercise over the option exercise price. However, to the extent the
stock is subject to certain types of vesting restrictions, the taxable event
will be delayed until the vesting restrictions lapse unless the participant
elects to be taxed on receipt of the stock. With respect to employees, the
company is generally required to withhold from regular wages or supplemental
ways payments an amount based on the ordinary income recognized. Subject to the
requirements of reasonableness and the satisfaction of a tax reporting
obligation, the Company will generally be entitled to a business expense
deduction equal to the taxable ordinary income realized by the optionholder.
Upon disposition of the stock the optionholder will recognize a capital
gain or loss equal to the difference between the selling price and the sum of
the amount paid for such stock plus any amount recognized an ordinary income
upon exercise of the option (or vesting of the stock). Such gain or loss will
be long-term or short-term depending on whether the stock was held for more
than one year. Slightly different rules may apply to optionholders who acquire
stock subject to certain repurchase options or who are subject to Section 16(b)
of the Exchange Act.
10
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Proposal 4
Ratification Of Selection Of Independent Auditors
The Board has selected Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending December 31, 1999 and has further directed
that management submit the selection of independent auditors for ratification by
the stockholders at the Annual Meeting. Ernst & Young LLP has audited the
Company's financial statements since 1995. Representatives of Ernst & Young LLP
are expected to be present at the Annual Meeting, will have an opportunity to
make a statement if they so desire and are expected to be available to respond
to appropriate questions.
Stockholder ratification of the selection of Ernst & Young LLP as the
Company's independent auditors is not required by the Company's Bylaws or
otherwise. However, the Board is submitting the selection of Ernst & Young LLP
to the stockholders for ratification as a matter of good corporate practice. If
the stockholders fail to ratify the selection, the Audit Committee and the Board
will reconsider whether or not to retain that firm. Even if the selection is
ratified, the Audit Committee and the Board in their discretion may direct the
appointment of different independent auditors at any time during the year if
they determine that such a change would be in the best interests of the Company
and its stockholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the Annual Meeting will
be required to ratify the selection of Ernst & Young LLP.
The Board Recommends
A Vote In Favor Of Proposal 4.
11
<PAGE>
Security Ownership Of
Certain Beneficial Owners And Management
The following table sets forth certain information regarding the ownership
of the Company's common stock as of May 15, 1999 by: (i) each director and
nominee; (ii) each of the Named Executive Officers; (iii) all current
executive officers and directors of the Company as a group; and (iv) all those
known by the Company to be beneficial owners of more than five percent of its
common stock.
<TABLE>
<CAPTION>
Beneficial Ownership (2)
Beneficial Owner (1) Number of Percent of
Shares Total
<S> <C> <C>
RRE Connect Investors, LP
126 East 56th Street, 22nd Floor
New York, NY 10022...................................... 1,174,242 7.92%
Entities affiliated with Special Situations
Fund, L.P.
133 East 53rd Street
New York, NY 10022 (3).................................. 961,539 6.49%
Craig D. Norris (4)...................................... 467,371 3.15%
Radha R. Basu ........................................... - *
Gordon J. Bridge (5)..................................... 52,138 *
Barton S. Foster (6)..................................... - *
Joseph G. Girata (7)..................................... - *
Lucille Hoger (8)........................................ 88,699 *
Richard H. Lussier (9)................................... 8,735 *
Rory T. O'Driscoll (10).................................. 2,000 *
All directors and current executive officers as a group
(7 persons) (11)......................................... 618,943 4.18%
</TABLE>
- ----------------------------------
*Less than 1%.
(1) Unless otherwise indicated, the address of each of the named individuals
is: c/o Connect, Inc., 515 Ellis Street, Mountain View, CA 94043.
(2) This table is based on information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "SEC"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, the Company believes that each of the stockholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
14,821,449 shares of common stock outstanding on May 15, 1999, adjusted as
required by rules promulgated by the SEC.
(3) Includes 134,615 shares held by Special Situations Cayman Fund
L.P., 442,308 shares held by Special Situations Fund III, 288,462 shares
held by Special Situations Private Equity Fund L.P. and 96,154 shares held
by Special Situations Technology Fund L.P.
(4) Includes 467,121 shares subject to stock options held by Mr. Norris
exercisable within 60 days of the date of this table. A portion of the
shares issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over
12
s
<PAGE>
time. Substantially all of the shares and stock options held by Mr. Norris
are subject to a lockup agreement which expires in September 1999.
(5) Includes 52,138 shares subject to stock options held by Mr. Bridge
exercisable within 60 days of the date of this table. A portion of the
shares issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over time.
(6) In April 1998, Mr. Foster resigned from the Company as its Executive Vice
President of Sales and Marketing.
(7) In September, 1998, Mr. Girata resigned from the Company as its Chief
Financial Officer.
(8) Includes 88,699 shares subject to stock options held by Ms. Hoger
exercisable within 60 days of the date of this table. A portion of the
shares issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price in the event of
termination of employment, which repurchase right lapses over time.
Substantially all of the shares and stock options held by Ms. Hoger are
subject to a lockup agreement which expires in September 1999.
(9) Includes 8,735 shares subject to stock options held by Mr. Lussier
exercisable within 60 days of the date of this table. A portion of the
shares issued or issuable upon exercise of stock options is subject to
repurchase by the Company at the original exercise price upon cessation of
service as a director of the Company, which repurchase right lapses over
time.
(10) Includes 2,000 shares subject to stock options held by Mr. O'Driscoll on
behalf of BankAmerica Ventures exercisable within 6 0 days of the date of
this table. Mr. O'Driscoll is a Principal of BankAmerica Ventures. Mr.
O'Driscoll disclaims beneficial ownership of the shares held by such
entities except to the extent of his pro rata interest therein.
(11) Includes shares described in the notes above, as applicable. Includes
shares which certain executive officers and directors of the Company have
the right to acquire within 60 days of the date of this table pursuant to
outstanding options.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity securities,
to file with the SEC initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the company.
Officers, directors and greater than ten percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
13
<PAGE>
Executive Compensation
Compensation of Directors
The Company's nonemployee directors are eligible to receive stock option
grants pursuant to the Company's 1996 Directors' Stock Option Plan (the
"Directors' Plan") and 1996 Stock Option Plan. Except as described below,
directors do not otherwise receive compensation for their service as directors,
except that non-employee directors are reimbursed for out-of-pocket expenses
incurred in connection with attendance at meetings of the Board and its
committees.
The Directors' Plan provides for the grant of nonstatutory stock options
to nonemployee directors of the Company. The Directors' Plan provides that each
person who first becomes a nonemployee director of the Company after the date of
effectiveness of the Company's initial public offering will be granted an option
to purchase 4,000 shares of common stock on the date on which the optionee first
becomes a nonemployee director of the company. Thereafter, on the date of each
annual meeting of the Company's stockholders following which a nonemployee
director is serving on the Board, each such nonemployee director will be granted
an option to purchase 1,000 shares of common stock, provided that on such date,
he or she shall have served on the Company's Board for at least three months
prior to the date of such annual meeting.
Mr. Bridge, Chairman of the company's Board, entered into a consulting
relationship with the Company in April 1998 pursuant to which he received cash
compensation of $18,750 per month. Upon the termination of this arrangement at
the end of March 1999, Mr. Bridge was retained as a consultant to the company
for an additional six months and will receive cash compensation of $13,542 per
month. For a full description of the terms of Mr. Bridge's consulting
arrangement with the Company, see "Employment Contracts, Termination of
Employment and Change-in-Control Agreements -- Employee Agreements."
Compensation of Executive Officers
Summary of Compensation
The following table shows for the fiscal years ended December 31, 1998,
1997 and 1996, compensation awarded or paid to, or earned by, (i) all
individuals who have served as the Company's Chief Executive Officer during 1998
(Mr. Bridge and Mr. Norris), (ii) the Company's other most highly compensated
executive officers at December 31, 1998 (Ms. Hoger), and (iii) the two
individuals that would have otherwise been listed pursuant to (ii) except that
they were not executive officers at December 31, 1998 (Mr. Foster and Mr.
Girata) (collectively, the "Names Executive Officers"):
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
----------------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------------------------------------------
Other Restricted Securities
Annual Stock Underlying All Other
Name and Principal Year Salary Bonus(1) Compensation Awards Options/ LTIP Payouts Compensation
Position ($) ($) ($) ($) SARs(#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gordon J. Bridge (2) 1998 $ 68,366 $23,125 $ $ 85,000 $ $84,127(3)
Chairman of the 1997 $206,251 $45,000 $ $ 124,821 $ $
Board, 1996 $150,000 $87,344 $ $ 30,000 $ $
Former President and
Chief Executive Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Barton S. Foster (3) 1998 $ 96,360 $51,705 $ $ $ $12,900(14)
Former Executive 1997 $159,583 $53,266 $ $ 19,999 $ $
Vice President of 1996 $110,981 $21,875 $15,000(4) $ $ $
Sales and Marketing
- ------------------------------------------------------------------------------------------------------------------------------------
Joseph G. Girata (5) 1998 $151,422 $35,892 $ $ 140,000 $ $
Former Vice 1997 $145,000 $24,034 $ $ 50,248(6) $ $
President of 1996 $ 78,526 $ 5,907 $ $ 35,000 $ $
Finance and
Administration,
Chief Financial
Officer and
Secretary
- ------------------------------------------------------------------------------------------------------------------------------------
Craig D. Norris (8) 1998 $208,750 $42,891 $ $ 842,000(9) $ $
President and Chief 1997 $150,000 $16,250 $ 8,522(10) $ 15,000 $ $
Executive Officer 1996 $140,000 $46,020 $ $ 29,000 $ $
- ------------------------------------------------------------------------------------------------------------------------------------
Lucille Hoger (11) 1998 $166,320 $35,522 $ $ 158,028(12) $ $
President and Chief 1997 $119,722 $16,250 $ $ 13,828 $ $
Executive Officer 1996 $ 15,000 $46,020 $ $ 7,720 $ $
</TABLE>
14
<PAGE>
- ---------------------------
(1) Includes bonuses paid in January of the following year based upon the
individual's performance in the indicated years.
(2) In April 1998, Mr. Bridge resigned as President and Chief Executive
Officer of the Company. Mr. Bridge continues to serve as the Company's
Chairman of the Board, a position he has held since November 1995.
(3) In April 1998, Mr. Foster resigned as Executive Vice President of Sales
and Marketing of the Company and is no longer an executive officer of the
Company.
(4) Represents amounts paid as a signing bonus in 1996.
(5) In September 1998, Mr. Girata resigned as Chief Financial Officer of the
Company and is no longer an executive officer of the Company.
(6) Includes a grant of a new option to purchase 10,000 shares and a grant of
options to purchase 40,248 shares of common stock that was made pursuant
to a repricing program whereby outstanding options for an equal number of
shares having higher exercise prices were canceled and new options having
an exercise price of $8.125 were issued in their place. The vesting terms
of such repriced options did not change. See "Ten-Year Option Repricings"
for further details on this repricing.
(7) Represents 35,000 shares of common stock issuable upon exercise of an
option with an original purchase price of $48 per share, which option was
exchanged in September 1996 for a new option to purchase 35,000 shares
with an exercise price of $30.625 per share. See "Ten-Year Option
Repricings" for further details on this repricing.
(8) Mr. Norris became Chief Executive Officer and President of the Company in
April 1998.
(9) Incudes 842,000 shares subject to stock options re-granted pursuant to
option repricing in November 1998. See "Ten-Year Option Repricings" for
further details on this repricing.
(10) Represents amounts paid as commissions in 1997.
(11) Ms. Hoger became Chief Operating Officer of the Company in October 1998.
(12) Includes 158,020 shares subject to stock options re-granted pursuant to
option repricing in November 1998. See "Ten-Year Option Repricings" for
further details on this repricing.
(13) Consists of principal and interest forgiven by the Company in connection
with a loan to Mr. Bridge. The forgiveness was done in connection with
Mr. Bridge's consulting arrangement. See "Certain Relationships and
Related Transactions."
(14) Consists of principal and interest forgiven by the Company in connection
with a loan to Mr. Foster. The forgiveness was done in connection with Mr.
Foster's consulting arrangement. See "Certain Relationships and Related
Transactions."
Mr. Norris and the other executive officers of the Company are entitled to
cash and option acceleration benefits relating to a change of control of the
Company pursuant to Change of Control Agreements between such officers and the
Company. See "Certain Relationships and Related Transactions."
15
<PAGE>
Stock Option Grants And Exercises
The Company grants options to its executive officers under its 1989
Stock Option Plan and 1996 Stock Option Plan (the "Incentive Plans"). As of
March 10, 1999, options to purchase a total of 1,816,301 shares were outstanding
under the Incentive Plans and options to purchase 982,816 shares remained
available for grant thereunder.
The following tables show for the fiscal year ended December 31, 1998,
certain information regarding options granted to, exercised by, and held at
year-end by, the Named Executive Officers:
Option Grants in Last Fiscal Year
---------------------------------
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------- Value at Assumed
Number of % of Total Annual Rates of
Securities Options Stock Price
Underlying Granted to Exercise Appreciation for
Options Employees Or Base Option Term(2)
Granted In Fiscal Price Expiration ----------------------------
Name (#) Year(1) ($/Sh) Date 5% ($) 10% ($)
- ---- ----------- ------------ -------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gordon J. Bridge (3) 79,999 2.16% 4.375 April 2008 130,310 207,497
1,000 0.02% 2.063 May 2008 1,628 2,593
Barton S. Foster (4) - - - - - -
Joseph G. Girata (5) - - - - - -
Craig D. Norris (6) 20,000(7)(8) 0.54% 0.500 April 2008 32,578 51,875
780,000(7)(8) 21.09% 0.500 May 2008 1,270,538 2,023,119
15,000(7) .40% 0.500 July 2007 24,433 38,906
10,000(7) .27% 0.500 April 2006 16,289 25,937
17,000(7) .46% 0.500 December 2005 27,691 44,094
Lucille Hoger (9) 10,000(7)(8) .27% 0.500 April 2008 18,289 51,837
130,000(7)(8) 3.52% 0.500 May 2008 211,756 337,187
6,000(7) .16% 0.500 December 2007 9,773 15,562
2,000(7) .05% 0.500 November 2007 3,258 5,187
4,028(7) .11 0.500 April 2007 6,561 10,448
6,000(7) .16% 0.500 January 2006 9,773 15,562
</TABLE>
- --------------------------------
(1) Based on options to purchase an aggregate of 3,698,349 shares granted to
employees (including employee directors) during the fiscal year ended
December 31, 1998 (including 1,122,950 options granted in November 1998
pursuant to option repricing, see "Ten-Year Option Repricing"). The
foregoing total excludes options granted to consultants and nonemployee
directors. There were no stock appreciation rights granted during 1998.
(2) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior
to the expiration of their terms, assuming the specified compounded rates
of appreciation of the market price per share from the date of grant to the
end of the option term. Actual gains, if any, on
16
<PAGE>
There can be no assurance that the amounts reflected in this table will be
achieved stock option exercise are dependent upon a number of factors,
including the future performance of the Company's common stock and the timing
of option exercises, as well as the optionee's continued employment through
the vesting period. There can be no assurance that the amounts reflected in
this table will be achieved.
(3) In April 1988, Mr. Bridge resigned as President and Chief Executive Officer
of the Company. Mr. Bridge continues to serve as the Company's Chairman of
the Board, a position he has held since November 1995.
(4) In April 1998, Mr. Foster resigned as Executive Vice President of Sales and
Marketing of the Company and is no longer an executive officer of the
Company.
(5) In September 1998, Mr. Girata resigned from his position as Chief Financial
Officer of the Company and is no longer an executive officer of the
Company.
(6) Mr. Norris became Chief Executive Officer and president of the Company in
April 1998.
(7) Such stock options granted pursuant to option repricing in November 1998.
(8) Such repriced stock options were originally granted in 1998.
(9) Ms. Hoger became Chief Operating Officer of the Company in October 1998.
Aggregated Option Exercises in Last Fiscal Year, and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Number of Securities
Name Shares Underlying Value of Unexercised
Acquired Unexercised Options at In-the-Money Options a
on Value FY-End (#) FY-End ($)
Exercise Realized Exercisable/ Exercisable/
(#) ($) (1) Unexercisable Unexercisable (2)
----------- ------------ ------------------------- ------------------------
<S> <C> <C> <C> <C>
Gordon J. Bridge (3) 133,395 449,974 119,622/25,803 $ 311/$3,435
Barton S. Foster (4) 0 0 0/0 $ 0/$0
Joseph G. Girata (5) 0 0 0/0 $ 0/$0
Craig D. Norris (6) 0 0 268,242/573,758 (7) $ 603,545/$1,290,956(7)
Lucille Hoger (8) 0 0 532,532/104,496 (9) $ 120,447/$235,116(9)
</TABLE>
- ---------------------------
(1) This amount represents the market value of the underlying securities on the
exercise date minus the exercise price of such options.
(2) Based on the $2.75 per share closing price of the Company's common stock on
The Nasdaq National Market on December 31,1998, less the exercise prices.
(3) In April 1998, Mr. Bridge resigned as President and Chief Executive Officer
of the Company. Mr. Bridge continues to serve as the Company's Chairman of
the Board, a position he has held since November 1995.
(4) In April 1998, Mr. Foster resigned as Executive Vice President of Sales and
Marketing of the Company and is no longer an executive officer of the
Company.
(5) In September 1998, Mr. Girata resigned from his position as Chief Financial
Officer of the Company and is no longer an executive officer of the
Company.
(6) Mr. Norris became Chief Executive Officer and President of the Company in
April 1998.
(7) Substantially all of Mr. Norris' stock options are subject to a lock-up
agreement which expires in September 1999.
(8) Ms. Hoger became Chief Operating Officer of the Company in October 1998.
(9) Substantially all of Ms. Hoger's stock options are subject to a lock-up
agreement which expires in September 1999.
17
<PAGE>
TEN-YEAR OPTION REPRICINGS
In order to reincentivize its employees, the Board of the Company, upon
recommendation of the Compensation Committee, approved in November 1998 an
option repricing program pursuant to which employees could surrender options
granted by the Company with an exercise price greater than $0.50 per share and
receive in place of the surrendered options, new options with an exercise price
to $0.50 per share, the fair market value of the Company's stock on the date of
Board approval. The new options issued pursuant to this repricing program were
subject to the same vesting provisions as the surrendered options. Options
representing 1,122,950 shares of common stock were repriced.
The following table sets forth certain information as of December 31, 1998
with respect to the repricing of certain stock options held by the Company's
executive officers since the Company's initial public offering.
<TABLE>
<CAPTION>
Number of Market Length of
Securities Price of Exercise Original
Underlying Stock at Price at Option Term
Options Time of Time of New Remaining at
Repriced or Repricing or Repricing or Exercise Date of
Amended Amendment Amendment Price Repricing or
Name Date (#) ($) ($) ($) Amendment
- --------------------------- ----------- ------- ------------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph G. Girata(1)........ 4/14/97(3) 13,060 8.125 30.625 8.125 110 mos.
Former Chief 4/14/97(3) 21,939 8.125 30.625 8.125 110 mos.
Financial Officer 4/14/97(3) 4,391 8.125 31.875 8.125 113 mos.
4/14/97(3) 858 8.125 31.875 8.125 113 mos.
9/10/96(2) 35,000 30.625 48.00 30.625 117 mos.
Craig Norris............... 11/13/98 17,000 0.500 2.500 0.500 85 mos.
President and Chief 11/13/98 10,000 0.500 2.500 0.500 89 mos.
Executive Officer 11/13/98 15,000 0.500 11.250 0.500 103 mos.
11/13/98 20,000 0.500 1.312 0.500 113 mos.
11/13/98 780,000 0.500 2.063 0.500 114 mos.
Lucille Hoger.............. 11/13/98 6,000 0.500 2.500 0.500 85 mos.
Chief Operating Officer 11/13/98 4,028 0.500 8.125 0.500 89 mos.
11/13/98 2,000 0.500 7.188 0.500 108 mos.
11/13/98 6,000 0.500 5.470 0.500 109 mos.
11/13/98 10,000 0.500 1.312 0.500 112 mos.
11/13/98 130,000 0.500 2.063 0.500 113 mos.
Victor L. Fischer(4)....... 4/14/97(3) 19,999 8.125 31.875 8.125 113 mos.
Former Vice President
of Management
Information Services
</TABLE>
(1) In September 1998, Mr. Girata resigned from his position as Chief
Financial Officer of the Company and is no longer an executive officer of
the Company.
(2) This option grant to Mr. Girata was done pursuant to a repricing program
approved by the Compensation Committee of the Board in September 1996 that
allowed employees to surrender outstanding options with exercise prices of
$48.00 per share or greater and to receive in the place of such
surrendered options new options with an exercise price of $30.625 per
share, the fair market value of the Company's stock on the date the
repricing program was approved. The new options are subject to the same
vesting schedule as the surrendered options. Options representing 163,334
shares of common stock were repriced pursuant to this repricing program.
(3) In April 1997, the Board approved a repricing program pursuant to which
employees could surrender options granted by the Company between May 1996
and March 1997 having exercise prices greater than $15.00 per share and
receive in place of the surrendered options, new options having an
exercise price of $8.125 per share, the fair market value of the
Company's stock on the date of Board approval. The new options issued
pursuant to the 1997 repricing program were subject to the same vesting
provisions as the surrendered options. Options representing 166,708
shares of common stock were repriced.
(4) Mr. Fischer resigned from his position as an executive officer of the
Company in January 1998.
18
<PAGE>
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL ARRANGEMENTS
Employment Agreements
In connection with Mr. Bridge's appointment in April 1997 as the Company's
Chief Executive Officer and President, Mr. Bridge and the Company entered into
an agreement (the "1997 Letter") providing that Mr. Bridge would receive an
annual salary for fiscal 1997 of $225,000 and be eligible to receive a bonus,
based on the achievement of certain financial objectives, of up to $285,000.
Actual amounts paid to Mr. Bridge during 1997 are as reflected in the Summary
Compensation Table. In addition, pursuant to the 1997 Letter, Mr. Bridge was
granted an option to purchase 79,999 shares of the Company's common stock at an
exercise price of $6.25 per share, the fair market value of such stock on the
grant date. Pursuant to the terms of this option, 12.5% of the shares issuable
upon exercise of the option were to vest in October 1997, with the remainder of
the shares vesting in equal monthly installments thereafter through the fourth
anniversary of the grant date. In July 1997, the Compensation Committee of the
Board amended the vesting terms of this option grant to Mr. Bridge such that
16.67% of the shares issuable on exercise became vested in October 1997, with
the remainder of the shares vesting in equal monthly installments thereafter
through the third anniversary of the grant date. The 1997 Letter also provided
that the Company would loan Mr. Bridge $150,000 pursuant to a full recourse,
three-year promissory note to which interest at the then-current minimum
applicable federal rate would apply. The 1997 Letter provides that, should the
Company terminate Mr. Bridge without cause, he would be entitled to continue
working as a consultant to the Company for a period of one year following such
termination and that the option described above would continue to vest through
such consultancy period. In addition, the 1997 Letter provides that certain
performance objectives set forth in stock option agreements relating to options
to purchase an aggregate of 30,000 shares issued to Mr. Bridge in January 1996
and April 1996 had been achieved and that, pursuant to the terms of such stock
option agreements, the vesting schedules for the options converted from a 72-
month to a 48-month schedule.
In January 1998, the Company and Mr. Bridge entered into an agreement (the
"1998 Letter") pursuant to which Mr. Bridge would receive an annual salary for
fiscal 1998 of $225,000 and be eligible to receive a performance bonus, based
upon the Company's achievement of certain financial objectives, of up to
$200,000. In addition, Mr. Bridge would be eligible to receive a strategic
bonus, payable upon the achievement of certain strategic objectives set by the
Board, of up to $500,000 during fiscal 1998. Actual amounts paid to Mr. Bridge
during 1998 are as reflected in the Summary Compensation Table. Mr. Bridge was
granted an option to purchase 79,999 shares of the Company's common stock in
January 1998 pursuant to the 1998 Letter, which options were to vest in equal
monthly installments over a three-year period.
In April 1998, Mr. Bridge resigned his positions as the Company's Chief
Executive Officer and President. He continues to serve as its Chairman of the
Board. In connection with his resignation as Chief Executive Officer and
President and pursuant to the 1997 Letter, Mr. Bridge entered into an agreement
with the Company whereby he agreed to remain as a consultant to the Company
through March 1999. Pursuant to this agreement, Mr. Bridge received through
March 1999 an amount equal to his regular monthly salary prior to his
resignation ($18,750), acceleration of the exercisability of certain options to
purchase 69,000 shares of the Company's common stock, continued vesting of other
unvested options and reimbursement for certain business expenses associated with
his consulting relationship. Upon the termination of this arrangement at the end
of March 1999, Mr. Bridge was retained as a consultant to the Company for an
additional six months and will receive cash compensation of $13,542 per month.
In addition, the Company has agreed to forgive 50% of the total principal and
outstanding interest of the loan described above in exchange for Mr. Bridge's
remaining a consultant to the Company and, if Mr. Bridge achieves certain
specified goals, he may be entitled to forgiveness of the remainder of
outstanding principal and interest on his loan.
In April 1998, the Company entered into an employment letter with Craig
Norris in connection with his appointment as the Company's President and Chief
Executive Officer. Pursuant to the terms of this letter agreement, Mr. Norris
was to receive an annual salary of $225,000 for 1998 and was to be eligible for
a bonus, payable upon the Company's achievement of certain quarterly and annual
financial objectives, of up to $150,000. The employment letter also provides
that Mr. Norris was to be eligible to receive a strategic bonus, payable upon
the achievement of certain strategic objectives set by the Board during fiscal
1998 in an amount to be determined by the Board. Actual amounts paid to Mr.
Norris during 1998 are as reflected in the Summary Compensation Table. In
addition, on May 28, 1998, Mr. Norris received an option to purchase 780,000
shares of common stock at an exercise price of $2.063 per share, which vests
over 24 months.
19
<PAGE>
Change-in-Control Arrangements
In June 1997, the Company entered into Change of Control Agreements with
each of Gordon Bridge, Joseph Girata and Craig Norris. In April 1998, pursuant
to Mr. Bridge's resignation as Chief Executive Officer and President of the
Company, his Change of Control Agreement was terminated. In April 1998, Lucille
Hoger, the Company's newly appointed Vice President of Professional Services,
entered into a Change of Control Agreement and Mr. Norris' Change of Control
Agreement was amended. In September 1998, Greigory Park, the Company's newly
appointed Chief Financial Officer, entered into a Change of Control Agreement.
In April 1999, pursuant to Mr. Park's termination as Chief Financial Officer,
his Change of Control Agreement was terminated. Pursuant to the terms of such
Change of Control Agreements, as amended, each executive officer will be
entitled to a cash payment equal to 2.99 times such officer's total compensation
during fiscal year 1998 upon certain change of control transactions involving
the Company (generally, a merger or acquisition of the Company). Such cash
payments are subject to reduction in certain circumstances and would be reduced
to zero if the aggregate value to be received by the Company's stockholders in
connection with such change of control transaction were equal to or less than
$25 million. Each executive officer would also be entitled to acceleration of
vesting of all options held by him or her in the event of a hostile takeover of
the Company. In addition, if such officer were to be terminated involuntarily
within two years of a change of control, he or she would be entitled for a
period of twelve months following such termination to continuation of his or her
monthly salary, payment on a monthly basis of one-twelfth of the performance
bonus to which he or she would have been entitled assuming full achievement of
all performance objectives of the Company for such year, acceleration of vesting
of all stock options held at the time of termination, certain benefits under the
Company's health and other benefit plans, and outplacement services not to
exceed $15,000.
20
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following is a report of the Compensation Committee of the Board (the
"Committee") describing the compensation policies applicable to the Company's
executive officers (including the Named Executive Officers) during the fiscal
year ended December 31, 1998. The Committee is responsible for establishing and
monitoring the general compensation policies and compensation plans of the
Company, as well as the specific compensation levels for executive officers.
The Committee also administers the Company's stock plans and determines the
terms and conditions of stock option grants. Executive officers who are also
directors have not participated in deliberations or decisions involving their
own compensation.
General Policies
The Company's compensation policies are designed to link the executive
officers' compensation to the annual and long-term performance of the Company
and to provide compensation that is competitive with the compensation paid to
other executives in the industry and that will attract and retain superior
talent and reward performance. The compensation mix reflects a balance of
annual cash payments, consisting of annual base salary payments and incentive
bonus payments, and long-term stock-based incentives in the form of stock
options. The emphasis in incentive compensation is placed on the more strategic
stock-based options that more closely align the financial interests of the
Company's employees with those of its stockholders.
Base Salaries
The salary component of executive compensation is based on the executive's
level of responsibility for meeting Company objectives and performance, and
comparable to similar positions in the Company and to comparable companies.
Base salaries for executives are reviewed and adjusted at least annually based
on information regarding competitive salaries, the results of industry
compensation surveys, individual experience and performance.
Cash Bonuses
The Company's incentive program for executive officers provides direct
financial incentives in the form of cash bonuses. Executive bonuses are based
entirely on Company financial performance.
Stock Options
The Company's 1996 Stock Option Plan and 1989 Stock Option Plan provide for
the issuance of stock options to officers and employees of the Company to
purchase shares of the Company's common stock at an exercise price equal to the
fair market value of such stock on the date of grant. The Company's stock
options typically vest over a 36-month period.
The Company's compensation policies recognize the importance of stock
ownership by senior executives and stock options are an integral part of each
executive's compensation. The Committee believes that the opportunity for stock
appreciation through stock options that vest over time promotes the relationship
between long-term interests of executive officers and stockholders. The size of
specific grants takes into account the executive officer's salary and the number
of options previously granted to the officer, as well as his or her
contributions to the Company's success.
Compensation of the Chief Executive Officer
In April 1997, Gordon J. Bridge was appointed the Company's President and
Chief Executive Officer (the "CEO"). He resigned such positions in April 1998,
at which time Craig Norris, previously the Company's Executive Vice President of
Services and Operations, was appointed as the Company's CEO and President. At
the time Mr. Bridge was appointed CEO in April 1997, he entered into the 1997
Letter with the Company, the terms of which are described in more detail in
"Employment Contracts, Termination of Employment and Change-in-Control
Arrangements."
21
<PAGE>
During fiscal 1998, Mr. Norris, the current Chief Executive Officer of the
Company received $251,642. In reviewing the compensation paid to Mr. Norris for
fiscal 1998, the Committee applied the factors discussed above in this Report
under the headings "Base Salaries," "Cash Bonuses", and "Stock Options". In
addition, in determining Mr. Norris' 1998 compensation the Committee considered
a number of other factors, including competitive market compensation packages,
Mr. Norris' past performance at the Company and the responsibilities he was
undertaking in assuming the position of CEO. Based on its survey data and
informal information reviewed by the Committee, the Committee believes that the
base salary level for the CEO is commensurate with salaries paid to chief
executive officers of comparable companies engaged in similar industries.
Overall, the Committee believes that Mr. Norris is being appropriately
compensated in a manner that is consistent with the long-term interests of
stockholders.
Deductibility of Executive Compensation
The Committee has considered the impact of Section 162(m) of the Internal
Revenue Code adopted under the Omnibus Budget Reconciliation Act of 1993, which
section disallows a deduction for any publicly held corporation for individual
compensation exceeding $1 million in any taxable year for the CEO and four other
most highly compensated executive officers, unless such compensation meets the
requirements for the "performance-based" exception to the general rule. Since
the cash compensation paid by the Company to each of its executive officers is
expected to be below $1 million and the Committee believes that options granted
under the Company's 1996 Stock Option Plan and 1989 Plan will meet the
requirements for qualifying as performance-based, the Committee believes that
this section will not affect the tax deductions available to the Company. It
will be the Committee's policy to qualify, to the extent reasonable, the
executive officers' compensation for deductibility under applicable tax law.
However, the Company may from time to time pay compensation to its executive
officers that may not be deductible.
The members of the Committee submit the foregoing report.
COMPENSATION COMMITTEE:
Promod Haque
Richard Lussier
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board currently consists of Radha R. Basu
and Richard Lussier. From March 31, 1998 until March 10, 1999, the Compensation
Committee consisted of directors Promod Haque and Richard Lussier. From January
1, 1998 through March 31, 1998, it consisted of directors Promod Haque, Richard
Weening and Richard Lussier.
Performance Measurement Comparison(1)
The following graph compares the cumulative total stockholder return for
the Company's stock since August 15, 1996, the date the Company's common stock
began to trade on The Nasdaq Stock Market, Inc., through December 31, 1998, the
last trading date of fiscal 1998, to the cumulative return over such period of
(i) the Nasdaq Market Index and (ii) the MG Internet Software & Services Index
(provided by Media General Financial Services, Inc.). The graph assumes that
$100 was invested in the common stock of the Company and the respective indices
on August 15, 1996 (including reinvestment of dividends). The stock price
performance on the following graph is not necessarily indicative of future stock
price performance.
22
<PAGE>
[EDGAR representation of data points in printed graph]
<TABLE>
<CAPTION>
08/15/96* 12/31/96 12/31/97 12/31/98
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Connect, Inc.................................................................... 100 102 14 9
Nasdaq Market Index............................................................. 100 112 137 193
MG Internet Software & Services Index........................................... 100 123 73 192
</TABLE>
* Assumes $100 invested at August 15, 1996 in common stock of the Company and in
each of the comparative indices.
(1) This Section is not "soliciting material," is not deemed "filed" with the
SEC and is not to be incorporated by reference in any filing of the Company
under the Securities Act or the Exchange Act whether made before or after
the date hereof and irrespective of any general incorporation language in
any such filing.
Certain Relationships and Related Transactions
Certain stock option grants to directors and executive officers of the
Company are described herein under the caption "Executive Compensation." Certain
agreements between the Company and its directors are described herein under the
caption "Employment Contracts, Termination of Employment and Change-in-Control
Agreements."
In April 1998, Mr. Foster resigned his position as Executive Vice President
of Sales and Marketing. Pursuant to the terms of an agreement between Mr.
Foster and the Company in connection with his resignation, Mr. Foster remained
as a consultant to the Company through July 1998, during which time he received
compensation equal to his regular monthly salary prior to his resignation
($14,167), continued vesting of unvested options and health benefits. Actual
amounts paid to Mr. Foster during 1998 are reflected in the Summary Compensation
Table. In addition, pursuant to the terms of this agreement, the Company agreed
to forgive accrued interest on, and a portion of the principal of, a $30,000
loan to Mr. Foster, which principal amount to be forgiven was not to exceed
$10,000. The total amount forgiven was $12,900.
Mr. Bridge entered into the 1997 Letter and the 1998 Letter with the
Company, which letters governed the terms of his employment relationship with
the Company for fiscal years 1997 and 1998, respectively. The 1998 Letter has
been superseded by Mr. Bridge's consulting arrangement with the Company in April
1998. Pursuant to the 1997 Letter, the Company in April 1997 loaned Mr. Bridge
$150,000 pursuant to a three-year, full recourse promissory note which is
subject to interest, compounded annually, at the rate of 5.91%. In exchange for
Mr. Bridge's remaining a consultant to the Company for the twelve-month period
from April 1998 through March 1999, the Company has agreed to forgive 50% of the
total principal and outstanding interest of this loan and, if Mr. Bridge
achieves certain specified goals prior to March 31, 1999, he may be entitled to
forgiveness of the remainder of outstanding principal and interest on his loan.
The total amount of principal and accrued interest on such note as of April 2,
1999 is approximately $84,127. Other material terms of each of the 1997 Letter,
the 1998 Letter and Mr. Bridge's consulting relationship with the Company are
described in "Employment Contracts, Termination of Employment and Change-in-
Control Arrangements -- Employment Agreements."
On November 18, 1997, BankAmerica Ventures and BankAmerica Venture Partners
I (collectively "BankAmerica"), entities with which Rory T. O'Driscoll, a
director of the Company, is affiliated, were issued convertible notes by the
Company in the aggregate principal amount of $1,200,000 and warrants to purchase
an aggregate of 399,990 shares of the Company's common stock. On February 26,
1998, the notes plus the accrued interest thereon were converted into 608,219
shares of the Company's Series A Preferred Stock. On April 1, 1998, all of the
shares of Series A Preferred Stock held by BankAmerica plus accrued but unpaid
dividends thereon were converted into 1,062,555 shares of the Company's common
stock and the warrants held by BankAmerica were canceled. Mr. O'Driscoll
disclaims beneficial ownership of the securities held by BankAmerica, except to
the extent of his proportionate interest therein.
On November 18, 1997, Norwest Equity Partners V, L.L.P. ("Norwest"), an
entity with which Promod Haque, a former director of the Company, is affiliated,
was issued a $1,240,000 principal amount convertible note by the Company and a
warrant to purchase 413,323 shares of the Company's common stock. On February
26, 1998, the note plus the accrued interest thereon was converted into 628,493
shares of the Company's Series A Preferred Stock. On April 1, 1998, all of
23
<PAGE>
the shares of Series A Preferred Stock held by Norwest plus accrued but unpaid
dividends thereon were converted into 1,097,972 shares of the Company's common
stock and the warrants held by Norwest were canceled. Mr. Haque disclaims
beneficial ownership of the securities held by Norwest, except to the extent of
his proportionate interest therein.
The Company has entered into indemnification agreements with its officers
and directors containing provisions which may require the Company, among other
things, to indemnify its officers and directors against certain liabilities that
may arise by reason of their status or service as officers or directors (other
than liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified.
Other Matters
The Board knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
[______________, 1999]
A copy of the Company's Annual Report to the Securities and Exchange
Commission on Form 10-K for the fiscal year ended December 31, 1998 is included
along with this Proxy Statement.
24
<PAGE>
EXHIBIT A
Certificate of Amendment Of Second Amended and Restated
Certificate of Incorporation of Connect, Inc.
Connect, Inc., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware (the "Corporation"), Does
Hereby Certify:
First: The name of the Corporation is Connect, Inc.
Second: The date on which the Certificate of Incorporation of the
Corporation was originally filed with the Secretary of State of the State of
Delaware is May 20, 1996.
Third: The Board of Directors of the Corporation, acting in accordance
with the provisions of Sections 141 and 242 of the General Corporation Law of
the State of Delaware, adopted resolutions amending its Certificate and
Incorporation as follows:
Article I shall be amended and restated to read in its entirety as follows:
"The name of the Corporation is ConnectInc.com, Co."
Fourth: thereafter pursuant to a resolution of the Board of Directors this
Certificate of Amendment was submitted to the stockholders of the Corporation
for their approval, and was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
In Witness Whereof, Connect, Inc. has caused this Certificate of Amendment
to be signed by its President and attested to by its Secretary this ___ day of
________, 1999.
Connect, Inc.
By:_________________________________
Craig D. Norris, President
Attest:
____________________________
Alan C. Mendelson, Secretary
<PAGE>
CONNECT, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 12, 1999
The undersigned hereby appoints Craig D. Norris and Gordon J. Bridge, and
each of them, as attorneys and proxies of the undersigned, with full power of
substitution, to vote all of the shares of stock of Connect, Inc. which the
undersigned may be entitled to vote at the Annual Meeting of Stockholders of
Connect, Inc. to be held at Connect, Inc.'s principal executive offices, 515
Ellis Street Mountain View, CA 94043 on August 12, 1999 at 1:00 p.m. (local
time), and at any and all postponements, continuations and adjournments thereof,
with all powers that the undersigned would possess if personally present, upon
and in respect of the following matters and in accordance with the following
instructions, with discretionary authority as to any and all other matters that
may properly come before the meeting.
Unless a contrary direction is indicated, this Proxy will be voted for all
nominees listed in Proposal 1 and for Proposals 2, 3 and 4, as more specifically
described in the Proxy Statement. If specific instructions are indicated, this
Proxy will be voted in accordance therewith.
Management recommends a vote for the nominees for director listed below.
Proposal 1: To elect three directors to Class I of the Board of Directors, to
hold office until the 2001 Annual Meeting of Stockholders, and to
elect two directors to Class II of the Board of Directors to hold
office until the 2000 Annual Meeting of Stockholders.
[_] For all nominees listed below [_] Withhold Authority
(except as marked to the contrary to vote for all nominees
below). listed below.
Class I Nominees: Radha R. Basu, Gordon J. Bridge, Craig D. Norris
Class II Nominees: Richard H. Lussier, Rory T. O'Driscoll
To withhold authority to vote for any nominee(s) write such nominee(s)' name(s)
below:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Management recommends a vote for Proposals 2, 3 and 4.
Proposal 2: To approve an amendment to the Company's Second Amended and
Restated Certificate of Incorporation to change the Company's name
to "ConnectInc.com, Co."
[_] For [_] Against [_] Abstain
Proposal 3: To approve the adoption of the Company's 1999 Stock Option Plan for
Non-Employee Directors and Advisors and the reservation of 500,000
shares of the Company's common stock for issuance thereunder.
[_] For [_] Against [_] Abstain
<PAGE>
Proposal 4: To ratify selection of Ernst & Young LLP as independent auditors of
the Company for its fiscal year ending December 31, 1999.
[_] For [_] Against [_] Abstain
DATED _________________ _____________________________________
_____________________________________
SIGNATURE(S)
Please sign exactly as your name appears hereon.
If the stock is registered in the names of two or
more persons, each should sign. Executors,
administrators, trustees, guardians and attorneys-
in-fact should add their titles. If signer is a
corporation, please give full corporate name and
have a duly authorized officer sign, stating
title. If signer is a partnership, please sign in
partnership name by authorized person.
Please vote, date and promptly return this proxy in the enclosed return envelope
which is postage prepaid if mailed in the United States.
