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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1996
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-26074
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SPYGLASS, INC.
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(Exact name of Registrant as Specified in its Charter)
DELAWARE 37-1258139
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1240 E. DIEHL ROAD, 4TH FLOOR, NAPERVILLE, IL 60563 (630) 505-1010
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(Address of principal executive offices, zip code, registrant's telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
$0.01 PAR VALUE COMMON STOCK
(Title of Class)
Traded on the Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
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The aggregate market value of the Common Stock held by non-affiliates of the
registrant on October 31, 1996, based upon the closing sale price of the Common
Stock on the Nasdaq National Market on that date as reported in The Wall Street
Journal was approximately $132,555,624.
Registrant had 11,894,387 shares of Common Stock outstanding as of December 10,
1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1996 Annual Report to stockholders for fiscal 1996
are incorporated by reference in Parts II and IV hereof. The Annual Report
shall be deemed "filed" with the Commission only with respect to those portions
specifically incorporated by reference herein. Portions of the registrant's
definitive Proxy Statement for its Annual Meeting of stockholders for fiscal
1996, which will be filed with the Securities and Exchange Commission on or
about January 6, 1997, are incorporated by reference into Part III hereof.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Spyglass(R), Inc. ( "Spyglass" or the "Company" ) develops, markets and
distributes World-Wide Web ("WWW") technologies designed to be embedded within
Internet devices, software applications and on-line services. The Company
began operations in February 1990 and, until 1994, focused substantially all of
its resources on its data visualization products sold to the scientific market.
The Company sold its data visualization product line in September 1995. In May
1994, the Company entered into an agreement with the University of Illinois
which, as amended in August 1994 and June 1995, granted the Company the
exclusive right (subject to certain previously granted licenses) to develop,
distribute and sublicense commercial products based upon NCSA Mosaic(TM). The
Company introduced its commercial version of NCSA Mosaic, Spyglass Mosaic(TM),
during the third quarter of fiscal 1994. In July 1995, the Company introduced
the Spyglass Server, a software product that manages and controls access to
information stored at individual WWW databases or sites. During fiscal 1996,
the Company introduced the Spyglass Web Client and the Spyglass Web Server
Software Development Kits (SDK). These SDKs are modular and easy to embed
within other applications to add Web functionality to other products and
services. In December 1996, the Spyglass Web Client and the Spyglass Web
Server SDKs were renamed Spyglass Mosaic and Spyglass Web Server, respectively.
During fiscal 1996, the Company significantly enhanced its existing product
offerings through a series of acquisitions. On February 2, 1996, the Company
acquired Stonehand Inc. ("Stonehand"), a leader in core Web technologies
including text formatting and internationalization technologies. On April 17,
1996, the Company acquired OS Technologies Corporation ("OS Tech"), a developer
and licensor of WWW conferencing and forum technology. On April 24, 1996, the
Company acquired SurfWatch Software, Inc. ("SurfWatch"), a vendor of Internet
filtering and parental control software.
A central element of the Company's business strategy is a multi-channel
distribution model. The Company provides scalable, adaptable, modular WWW
technologies that its customers can customize and incorporate into their
products and services for end users. The Company chose this approach because it
enables it to leverage the marketing, distribution and development resources of
much larger organizations that are strategically focused on offering
value-added products and services for the Internet and because it makes most
companies publishing information or conducting business on the WWW potential
customers of the Company. The Company intends to continue to increase the
performance, functionality and flexibility of its technology offerings to meet
the evolving needs of Internet users and to continue to invest in building
customer awareness of the Spyglass name and the range of Internet technology
solutions available from Spyglass.
The Company's future results of operations will be largely dependent upon a
number of factors relating to development and acceptance of the Internet as
a commercial market and the Company's ability to establish its technologies
as widely-accepted in the market. See the "Future Operating Results"
section incorporated by reference into Item 7 of this Annual Report on Form
10-K.
<PAGE> 3
The Company has recently announced an increased strategic focus on the
Internet device market. The Company is increasing its focus on the
development and marketing of technologies that enable digital devices, such
as business productivity products, consumer electronic devices and office
equipment, to access the Web. Because this is a new and undeveloped market,
there can be no assurance as to the extent of the demand for product
offerings of the Company, or the extent to which the Company will be
successful in penetrating this market. Moreover, the Company expects its
revenue growth to slow during fiscal 1997 as the Company focuses its business
strategy toward vendors of Internet-enabled devices, rather than vendors of
desktop software applications. In addition, the Company expects to
significantly increase its expenditures in product development, marketing
and sales which should negatively impact net income during fiscal 1997.
THE INTERNET
The Internet is a worldwide network that links thousands of public and private
computer networks. The Internet began in 1969 as a project of the Advanced
Research Projects Agency ("ARPA") of the U.S. Department of Defense to connect
different types of computers across geographically disparate areas. The ARPA
network was designed to allow any computer on the network to communicate with
any other computer on the network through an open communications protocol known
as TCP/IP.
Until recently, use of the Internet was generally limited to governmental,
educational and commercial organizations with a working knowledge of the UNIX
operating system and commands, and the primary use made of the Internet was the
communication of information via electronic mail. However, there has been a
significant growth in the use and popularity of the Internet in the past
several years, due in part to the introduction in 1992 of the World Wide Web
(WWW), a client/server system of hyperlinked multimedia databases.
The WWW is based on a client/server system in which certain computers
("servers") store files and respond to requests issued by remote computers
("clients" ) to download the files, thus allowing multiple, geographically
dispersed users to view and use the information stored on a single server. The
client must contain software, known as a browser, that can read Hyper Text
Markup Language (HTML) documents and follow their hypertext links to retrieve
and display linked documents from servers. One limitation on the early growth
of the WWW was that the browser software initially provided by the European
Laboratory for Research Physics (CERN) was text-based and contained limited
retrieval and display capabilities.
In January 1993, the National Center for Supercomputing Applications ("NCSA")
at the University of Illinois at Urbana-Champaign introduced NCSA Mosaic for X
Window on the UNIX platform, the first intuitive, graphical user interface
browser for the WWW. The NCSA Mosaic graphical user interface allows users to
access the diverse information archives, data protocols and data formats of the
Internet using point-and-click, mouse-driven commands. NCSA Mosaic is offered
by NCSA to users on a free-with-copyright basis (making it available for use
without charge and without the right to distribute). NCSA released a version
of NCSA Mosaic for Windows in September 1993.
In order to support the continued growth and popularity of the Internet,
certain "infrastructure" elements must expand to handle the resulting increases
in Internet demand and traffic. These elements include widespread, inexpensive
Internet access, either through Internet access
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providers or on-line services, and widely available high-speed communications
channels to accommodate the increasing number and size of files available for
downloading.
PRODUCTS
In fiscal 1995, the Spyglass product line consisted of two core products:
Spyglass Mosaic and the Spyglass Server. In fiscal 1996, the Company focused on
making its products more modular and easy to embed within other software
applications. As a result, Spyglass Mosaic and the Spyglass Server were
rearchitected into the Spyglass Web Client and the Spyglass Web Server Software
Development Kits (SDKs). These kits consist of technologies that can be used to
add Web functionality to other products and services. In December 1996, the
Spyglass Web Client and Spyglass Web Server SDKs were renamed Spyglass Mosaic
and Spyglass Web Server, respectively.
SPYGLASS MOSAIC
In April 1996, the Company announced its Spyglass Web Client SDK, later renamed
Spyglass Mosaic. Spyglass Mosaic is a kit of technologies that gives
software developers, device manufacturers, Internet service providers and
other companies the ability to add Web client functionality to their products
and services. Spyglass Mosaic provides:
- - Support for a variety of multimedia content types, including Hyper Text
Markup Language("HTML") 3.2, Plug-ins, Graphics Interchange Format ("GIF"),
Joint Photographic Experts Group ("JPEG"), and Audio.
- - Support for a variety of networking and application protocols, including
Simple Mail Transfer Protocol ("SMTP"), Network News Transfer Protocol
("NNTP"), Socks, Transmission Control Protocol ("TCP"), Private
Communications Technology (" PCT"), Secure Sockets Layer ("SSL"), Hyper
Text Transfer Protocol ("HTTP"), News, Mailto, Gopher, and File Transfer
Protocol ("FTP").
- - Support for authentication schemes, including Basic and Digest.
- - A choice of integration methods, including Spyglass Application
Programming Interfaces ("APIs").
- - A customizable user interface.
- - Multiple platform availability.
SPYGLASS WEB SERVER
In January 1996, the Company introduced the Spyglass Web Server SDK later
renamed Spyglass Web Server (" Web Server"). The Web Server is a kit of
technologies that gives software developers the ability to add Web server
functionality to their products and services. In addition to a
high-performance HTTP engine, the Web Server features:
- - Support for multiple APIs, including Common Gateway Interface ("CGI"),
WinCGI, Microsoft ISAPI and Spyglass ADI.
- - Support for multiple protocols, including TCP/IP and Socks networking
protocols, SSL and PCT encryption/payment protocols, and the Web's HTTP
protocol.
- - Support for authentication mechanisms, including Basic, Digest Internet
Protocol ("IP") and Domain.
- - Support for content negotiation, allowing for easier interoperability with
clients.
- - A set of HTML-based administration tools for easy server management.
- - A User Interface Programming Interface (UIPI) for creating custom user
interfaces.
- - Multiple platform availability.
In addition to these rearchitected products, the Company introduced several new
products to the Internet market during fiscal 1996. These products include:
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SURFWATCH PROSERVER
Through the acquisition of SurfWatch, the Company obtained the SurfWatch client
filtering product, which works with browser software to block access to
potentially objectionable sights. The filtering technology has been integrated
with Spyglass server technology to create the SurfWatch ProServer, a proxy
server that offers high performance as well as the ability to filter
potentially objectionable sights for groups of users from a single point.
The Company introduced SurfWatch ProServer in July 1996. SurfWatch ProServer
features:
- - Spyglass' high-performance HTTP engine.
- - A caching facility that stores frequently-accessed content for faster
delivery.
- - Filtering functionality that allows server administrators to exclusively or
inclusively filter Internet content.
- - SurfWatch content filters that block access to more than 15,000
inappropriate Internet sites.
- - A simple set of administration tools, configurable from a Web browser.
- - Logging and usage tracking capabilities.
- - Multiple platform availability.
SURFWATCH
Spyglass acquired this product with its acquisition of SurfWatch in April 1996.
SurfWatch from Spyglass is an easy-to-use, effective software
application for screening unwanted material from the Internet. SurfWatch
from Spyglass features:
- - The ability to block access to a comprehensive list of sites pertaining
to violence, hate crimes, drugs/alcohol, and sex.
- - A subscription service for updating the SurfWatch content list.
- - A filter manager for defining custom content filters.
- - A password protected on/off switch.
- - The ability to block objectionable Web, News, FTP, Gopher, and Chat
content.
- - Multiple platform availability.
WEBNOTES
Spyglass acquired this product with its acquisition of OS Tech in April 1996.
WebNotes is a browser-independent conferencing system for establishing
discussion groups on the Web. WebNotes features:
- - The ability to be accessed through a Web browser.
- - Customizable conference text and graphics.
- - Integrated e-mail capabilities for sending notification of conference
activity.
- - Ability to store and post text and graphics.
- - Optimized search and retrieval engine.
- - A real-time database for organizing conference data as soon as its posted.
- - Moderator functions for controlling content and participation.
MARKETING, SALES, AND DISTRIBUTION
The Company distributes its technologies through a multi-channel distribution
network of OEMs, VARs and distributors that incorporate client and server
technology into their products and services. Spyglass has adopted this
distribution model to increase its presence in the marketplace, and to leverage
the marketing, distribution and development resources of its customers.
Certain products such as the SurfWatch ProServer, SurfWatch and
WebNotes are also sold directly to end users.
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As it expands its technologies to serve the non-PC marketplace, the Company is
focusing its marketing efforts on a variety of companies including real time
operating system (RTOS) vendors, consumer and industrial device manufacturers,
software developers, cable companies, Regional Bell Operating Companies(RBOC)
and Internet Service Providers (ISP). Efforts include direct marketing
campaigns, including conventional and electronic mail efforts, as well as
targeting the engineering and trade conferences and shows focused on these
markets and industries. In addition, the Company is targeting public relations
efforts at analysts, the trade press and other media relevant to the Internet
device market.
While the SurfWatch ProServer and SurfWatch products are sold on an OEM
basis, they are also marketed to end users via direct mail campaigns. In
addition, they are also marketed via a recently formed relationship with a
channel vendor, Unidirect. Unidirect has set up a direct marketing unit
dedicated to marketing and selling these Spyglass products to end users,
operating under the name of Spyglass Direct.
The Company's license arrangements with its customers typically provide for a
non-exclusive license to incorporate Spyglass technology into the customer's
products and services and distribute the Spyglass technology. These licenses
generally provide for royalties based on the number of copies distributed and
generally include significant minimum royalty commitments.
As of September 30, 1996, the Company had 15 employees in marketing and 14 in
sales. The Company currently operates sales offices located in Cambridge,
Massachusetts, San Ramon, California, Morristown, New Jersey, Marina del Rey,
California, Central, Hong Kong and Berkshire, United Kingdom.
PARTNER SERVICES
A key element of the Company's business strategy is a commitment to provide
extensive support and service to its customers. As such, during fiscal 1996,
the Company formed its Partner Services group which is comprised of
Professional Services and Customer Support.
Professional Services
Professional Services concentrates on providing services to core Spyglass
markets in conjunction with sales and marketing. This group is committed to
delivering information and services to enable the Company's customers to
quickly incorporate Spyglass technologies into their respective products and
services through the following service offerings:
- Project Coordination / Pre-sales Consultation
- Project Analysis and Review
- Requirements Definition
- Scope and Estimate Preparation
- Design Specification and Test Planning
- Custom Engineering Development, Testing, and Delivery
- Custom Engineering Documentation
- Custom Engineering Planning for Standard Product Inclusion
- Technical Support and Information Transfer
As of September 30, 1996, the Company employed 6 employees in its professional
services group.
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Customer Support
Most of the Company's customers enter into support agreements with the Company
for annual fees based upon on the number of products licensed, platforms
supported and copies distributed. These support agreements entitle the
customer to the backup technical support described below, product upgrades and
enhancements, and access to certain complementary technologies that are
available to the Company for distribution without charge.
The Company tracks all support requests through a series of customer databases
that maintain current status reports as well as historical logs of customer
interaction. The Company also assigns a support specialist to each of its
customers as a point of contact for resolving issues. These support specialists
diagnose and solve technical problems related not only to the Company's
products, but also to other software and technologies with which the Company's
products interact. In addition, support specialists provide the customer with
direct access to the Company's development engineers and report customer and
end-user feedback to the Company's development staff. Other types of support
provided to the customer include technical reports, documentation, status
reports for product upgrades and updates, and support during Beta test and
pre-release cycles.
As of September 30, 1996, the Company employed 12 employees in its customer
support group.
PRODUCT DEVELOPMENT
Spyglass believes that its future success will depend in large part on its
ability to enhance its existing Internet connectivity, infrastructure, and
productivity products and to develop other products complementary to these
Internet-enabling products as well as being the first to market with critical
solutions.
An important factor in the future success of the Spyglass product suite will be
the Company's ability to provide products that have more features, better
scalability, and higher quality than products available from other vendors.
Accordingly, the Company's primary development efforts are focused on improving
the scalability and performance of its connectivity and infrastructure
productivity software products.
The Company also plans to invest heavily in developing new products that are
complementary to existing products and that will augment the overall
functionality of its Internet-enabling product suite. In order to respond to
rapidly changing competitive and technological conditions, the Company may seek
to enhance or expand its product offerings through licensing one or more
complementary technologies or products or acquiring one or more complementary
companies.
Because many of the significant technologies in the Spyglass product suite are
implementations of Internet standard protocols which are constantly evolving,
the Company actively participates in a number of Internet standards-setting
groups and technical conferences.
As of September 30, 1996, the Company's research and development staff, which
is responsible for product development, quality assurance, technical
documentation and product coordination, consisted of 88 full-time employees and
three part-time employees. From time to time the
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Company employs independent contractors for software development,
documentation, artistic design and quality reviews. For the fiscal years ended
September 30, 1996, 1995 and 1994, research and development expenses were
$6,801,000, $2,756,000 and $871,000, respectively, which represented 30%, 23%
and 19% of revenues, respectively. The Company has not capitalized any
research and development expenses.
COMPETITION
The market for Internet software is extremely competitive. Moreover, because
the Internet is an open system designed to be freely available to computer
users worldwide, and because of the increasing popularity of the Internet, the
Company expects that it will encounter increased competition in the future. In
developing and licensing its technologies, products and services, the Company
competes with other Internet device technology and software vendors, on-line
service companies, Internet access providers and networking software companies
that have developed their own WWW browsers or server products. In addition,
the Company considers a significant source of competition to be the prospect
company's internal software development resources. Furthermore, the increase
in market share of Netscape Communications ("Netscape") and Microsoft
Corporation ("Microsoft") in the desktop browser and server market, as well as
the Microsoft corporate strategy for Windows, has increased the competitive
pressures on Spyglass customers in the browser, server and embedded technology
markets.
In licensing its technologies and services aimed at the non-PC device
marketplace, the Company expects to compete with Navio Communications
("Navio"), an independent Internet software company in which Netscape has an
equity position. Navio, formed in August 1996, has announced plans to deliver
core, scaleable software based on Netscape Navigator technology for a wide
variety of consumer and non-PC products. While an independent company, Navio
has stated that it plans to build its connectivity products on Netscape's
browser product, which is well-known, and which Netscape claims has a dominant
share of the browser market.
Microsoft began distributing Internet Explorer, a WWW browser based on Spyglass
Mosaic, as part of its Windows 95 operating system in August 1995. The Company
has a license arrangement with Microsoft which provides a worldwide license to
distribute Spyglass Mosaic on multiple platforms on a per copy basis with
certain fixed fee provisions. Until December 31, 1998, Microsoft may
distribute Spyglass Mosaic (or derivative works thereof) only as part of other
Microsoft products. Both the Company and its other OEMs, VARs and distributors
may encounter competition from any product offered by Microsoft incorporating
browser technology.
Spyglass Mosaic also competes with browser software that is available on the
Internet and can be downloaded by users for either no charge or for an extended
evaluation period. The University of Illinois makes NCSA Mosaic available on a
free-with-copyright basis, and the Company agreed, as part of its licensing
arrangement with the University, to make available to the University releases of
Spyglass Mosaic (which was incorporated into the Spyglass Web Client SDK)
through Release 2.5, which the University will in turn make available on a
free-with-copyright basis. While the free availability of NCSA Mosaic could
constrain end-user demand for the Company's client products.
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the University has agreed not to make NCSA Mosaic available for
distribution by resellers.
The Company also encounters significant competition in the licensing of its
Web Server. Competition comes from two main sources: server software that is
freely available on the Internet and software from other Internet technology
companies. NCSA and CERN offer server software that can be downloaded from the
Internet by any organization at no charge. These offerings provide the basic
functionality necessary for storing and serving WWW content, and thereby
satisfy the basic server requirements of many organizations and individuals.
While the Company believes, based upon its experience with these products, that
these products do not offer the same level of performance, reliability or
functionality that the Web Server offers, other commercial vendors of WWW
server technology may freely use any or all of the public domain software in
their own product offerings, thus greatly reducing development cost and time to
market for competitors of the Web Server. In addition, the Company faces
significant competition from vendors such as Netscape and Microsoft .
Netscape's server products target end-users--those organizations and
individuals creating and managing WWW sites. As a result, those products
include certain built-in features not included in the Web Server. The
Company has chosen not to incorporate these features in the Web Server in order
to concentrate on high-performance core technology to permit licensees to
customize their servers to accommodate a number of different solutions and to
embed components of the Web Server in a variety of hardware devices. In
addition, the Company expects to compete with operating system vendors which
include a server product with their offerings. For example, Microsoft offers
its Internet Information Server, which runs on Windows NT, free of charge.
The Company also faces competition for its SurfWatch product from other
companies who have filtering products, such as Cyber Patrol. The SurfWatch
ProServer competes with servers offered by Microsoft and Netscape. WebNotes
competes with proprietary solutions such as those provided by Lotus Notes. The
Company expects Microsoft and Netscape will offer a conferencing product in the
future.
Competition among the current and future suppliers of WWW client and server
software could result in significant price competition and reductions in the
selling price of the Company's products. Moreover, many of the Company's
current and potential competitors have significantly greater financial,
technical, marketing and other resources than the Company. There can be no
assurance that the Company will be able to compete successfully against current
and future sources of competition or that the competitive pressures faced by
the Company will not adversely affect the Company's revenues or gross margins.
PROPRIETARY RIGHTS
One of the Company's products, Spyglass Mosaic, is based in part on technology
licensed to the Company under an agreement with the University of Illinois at
Urbana-Champaign. This agreement grants the Company the exclusive (subject to
previously granted licenses described below) worldwide right to develop,
distribute and sublicense commercial derivative versions of NCSA Mosaic, the
Web browser that was originally developed at the National Center for
Supercomputing Applications on the University of Illinois campus. The
University Agreement provides for royalties based on Spyglass' net revenues
from Spyglass Mosaic, and includes cumulative minimum quarterly royalties. This
University Agreement has an initial term of five years, with automatic one-year
renewals, and is terminable in the event of a material breach by the Company of
its obligations thereunder.
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Under the University Agreement, the Company was required to provide the
University with source code versions of Spyglass Mosaic (which was incorporated
into the Spyglass Web Client SDK) through Release 2.5. The University has the
right (subject to certain restrictions) to incorporate these releases of
Spyglass Mosaic into new releases of NCSA Mosaic, which continues to be
available on a free-with-copyright basis to Internet users, and to distribute
Spyglass Mosaic (in object code form) on a free-with-copyright basis to
organizations for non-commercial academic and research use only. However, the
University is not permitted to make NCSA Mosaic or Spyglass Mosaic available
for distribution by resellers other than the Company.
The University has informed the Company that, prior to appointing the Company
as its exclusive licensing agent, the University granted certain rights with
respect to NCSA Mosaic and the Mosaic trademark to approximately 10
organizations, some of which have developed and market WWW browsers based on
NCSA Mosaic. Of these companies, Spry (now owned by CompuServe Incorporated),
Quarterdeck Corp. and Fujitsu Limited have entered into license agreements with
the Company. In addition, the University agreed to list the Company as its
contact for commercial licensing of Mosaic and to refer all inquiries regarding
commercial development and licensing of Mosaic to the Company.
The University Agreement gives the Company the exclusive right (with certain
limited exceptions) to use the University's trademarks "Mosaic" and "NCSA
Mosaic" and its spinning globe logo in connection with Spyglass Mosaic on a
royalty-free basis (with certain limited exceptions). In addition, the Company
has the exclusive right (with certain limited exceptions) to use these marks in
connection with the sale of other products for a royalty payment based on net
revenues derived from such products. The University has filed an application to
register the "NCSA Mosaic" and "Mosaic" trademarks and the spinning globe logo
in the United States. Spyglass has registered the name "Spyglass" in the United
States and has pending applications to register its red "S" logo and the tag
line "Make The Net Work" in the United States. In addition, the Company has
filed applications to register the name "Spyglass" in various foreign
jurisdictions.
The Company relies upon copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers and
others to protect its proprietary technology. Effective trademark, copyright
and trade secret protection may not be available in every foreign country in
which the Company's products are distributed. The University has no patent
protection for NCSA Mosaic, and the Company has filed only one patent
application to protect its products. There can be no assurance that the steps
taken by the Company (or the University) to protect their respective
proprietary technologies will be adequate to prevent misappropriation of their
technology by third parties, or that third parties will not be able to
independently develop similar technology. In addition, there can be no
assurance that other parties will not assert technology infringement claims
against the Company.
On September 13, 1995, the Company announced an agreement with RSA Data
Security, Inc. allowing the Company to bundle RSA-security products with its
Spyglass Mosaic and Web Server. The agreement allows Spyglass to use RSA's
BSAFE and TIPEM software developer's kits to build security into Spyglass
Mosaic and Web Server. BSAFE is a well-known cryptographer's tool kit,
providing the means to add multiple algorithms and modules for encryption and
authentication features to any application.
On November 3, 1995, the Company entered into an agreement with the Java
Products Group of Sun Microsystems, Inc.("Sun") to license the JAVA programming
language, the HOT JAVA browser and related technology. Under the Agreement,
the Company is granted the right to distribute the JAVA Runtime interpreter,
the HOT JAVA browser and certain JAVA classes and interfaces developed by both
Sun and the Company. The Company also has the right to port so-called
"platform dependant parts" to other platforms.
<PAGE> 11
EMPLOYEES
As of September 30, 1996, Spyglass employed 156 persons, including 29 in sales
and marketing, 88 in research and development, 12 in customer support, 6 in
professional services and 21 in finance and administrative functions. None of
the Company's employees are represented by a labor union and Spyglass considers
its employee relations to be good.
ITEM 2. PROPERTIES
The Company's executive offices are located in Naperville, Illinois (27,841
square feet) and are occupied under a lease that expires in December 1997. The
Company also leases research and development facilities in Champaign, Illinois,
located near the University of Illinois at Urbana-Champaign, Cambridge,
Massachussets and Los Altos, California. The Company leases sales offices in
San Ramon, California, Morristown, New Jersey, Marina del Rey, California,
Central, Hong Kong and Berkshire, United Kingdom. The Company is evaluating
its space needs and will be considering leasing additional space in the near
future.
ITEM 3. LEGAL PROCEEDINGS
Unisys Corporation ("Unisys") has announced its intention to require the payment
of royalties for the use of compression technology associated with the Graphics
Interchange Format ("GIF"), a popular file format based on compression
technology patented by Unisys. Spyglass Mosaic has the ability to decompress
files, including files stored in GIF. The assertion of these patent rights by
Unisys, if successful, could result in additional royalty costs to the Company
or prevent the Company's products from enabling users to view files compressed
in GIF.
The Company has received a notice from Elk Industries Inc. ("Elk") alleging
that one or more of the Company's products infringe a now expired patent owned
by Elk. The Company has not concluded its examination of this claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the quarter ended September 30, 1996.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Position(s) with the Company
- ---------------- --- ----------------------------
<S> <C> <C>
Douglas P. Colbeth.......... 41 President, Chief Executive Officer
and Director
Tim Krauskopf............... 33 Chief Technical Officer and Director
Randall T. Littleson........ 31 Vice President, Marketing
Michael F. Tyrrell.......... 37 Executive Vice President, Business
Development
Gary L. Vilchick............ 42 Executive Vice President, Finance,
Administration and Operations and
Chief Financial Officer
Thomas S. Lewicki........... 42 Controller, Treasurer and Secretary
</TABLE>
<PAGE> 12
<TABLE>
<S> <C> <C>
Richard M. Houle............... 41 Executive Vice President,
Development and Services
</TABLE>
Mr. Colbeth has been President, Chief Executive Officer and a director of the
Company since he joined the Company in April 1991. Prior to joining the
Company, Mr. Colbeth spent four years at Stellar/Stardent Computer Corp., a
high-end graphics workstation supplier, in various management positions, most
recently as Vice President/General Manager of its AVS software business unit.
From January 1979 until March 1987, Mr. Colbeth was employed in various sales
and management positions at Prime Computer, Inc., a minicomputer vendor. Mr.
Colbeth received his B.S. degree in economics from Siena College in 1977 and
has completed graduate studies in managerial economics at Rensselaer
Polytechnic Institute.
Mr. Krauskopf, a co-founder of the Company, served as Director of Software
Development of the Company from its inception in 1990 to October 1994, as Vice
President, Research and Development from October 1994 to March 1996 and has
been Chief Technical Officer since April 1996. Mr. Krauskopf has been a
director of the Company since October 1992. Prior to founding the Company, Mr.
Krauskopf was employed at the National Center for Supercomputing Applications
at the University of Illinois at Urbana-Champaign for four years in various
software development positions. Mr. Krauskopf received his B.S. degree in
integrated science from Northwestern University and his M.S. degree in computer
science from the University of Illinois at Urbana-Champaign. He is a charter
member of the International World-Wide Web Conference Committee.
Mr. Littleson joined the Company as Director, Product Marketing in June 1996
and was promoted to Vice President, Marketing in October 1996. Prior to
joining the Company, Mr. Littleson was employed by Seagate Software (formerly
Palindrome Corp.), a computer technology company, since 1990, most recently as
Director, Product Marketing. Mr. Littleson received his B.S. degree from the
University of Michigan in 1987 and his M.B.A. from Keller Graduate School of
Management in 1994.
Mr. Tyrrell joined the Company in June 1990 as Vice President, Sales. Mr.
Tyrrell has served as Executive Vice President, Business Development since
November 1995. Prior to joining the Company, Mr. Tyrrell spent three years as a
regional sales manager for Multiflow Computer, Inc., a supercomputer company.
Mr. Tyrrell's prior experience includes five years of sales and sales
management at Celerity Computing and Prime Computer, Inc. Mr. Tyrrell received
his B.S. degree in business administration from the University of New
Hampshire.
Mr. Vilchick joined the Company in December 1995 as Executive Vice President,
Finance, Administration and Operations and Chief Financial Officer. Prior to
joining the Company, Mr. Vilchick was the Vice President of Finance for Pitney
Bowes Logistics Systems for three years, and Controller for Pitney Bowes
Management Services for four years prior to that. Mr. Vilchick received his
B.S. degree in accounting from the University of Rhode Island. Mr. Vilchick is
a Certified Public Accountant.
Mr. Lewicki joined the Company in July 1993 as Controller and was elected
Treasurer and Secretary in May 1995. Prior to joining the Company, Mr. Lewicki
was the Controller of Hansvedt Industries, Inc., a machine tool manufacturer,
from 1988 to 1993. Mr. Lewicki's prior experience includes eight years of
accounting and auditing experience at several organizations
<PAGE> 13
including the University of Illinois. Mr. Lewicki received his B.S. degree in
industrial management from Purdue University and his M.A.S. degree in
accountancy from the University of Illinois at Urbana-Champaign. Mr. Lewicki is
a Certified Public Accountant.
Mr. Houle joined the Company in November 1996 as Executive Vice President,
Development and Services. Prior to joining the Company, Mr. Houle was employed
as the Executive Vice President, Operations for Trimark Technology, Inc. from
September 1995 through October 1996. Prior to Trimark, Mr. Houle was employed
with Sun Microsystems from 1988 through 1995, most recently as Systems
Engineering Director.
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On February 2, 1996, the Company issued approximately 230,000 shares of its
common stock in exchange for all of the outstanding common stock of Stonehand
Inc. On April 17, 1996, the Company issued approximately 87,000 shares of its
common stock in exchange for all of the outstanding common stock of OS
Technologies Corporation. On April 24, 1996, the Company issued approximately
470,000 shares of its common stock in exchange for all of the outstanding common
stock of SurfWatch Software, Inc. No underwriters were engaged in connection
with any of the foregoing issuances of securities. The securities issued in the
above transactions were issued and sold in reliance upon the exemptions from
registration under Section 4(2) of the Securities Act of 1933, as amended.
The remaining information required by this Item is incorporated herein by
reference from the sections entitled "Selected Quarterly Data" and "Shares
Listed" in the Company's Annual Report to stockholders for the fiscal year ended
September 30, 1996 (the "Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference from
the section entitled "Selected Financial Data" in the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated herein by reference from
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein be reference from
the financial statements contained in the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning directors of the Company is
incorporated herein by reference from the section entitled "Election of
Directors" included in the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders for the fiscal year ended September 30, 1996, which will
be filed with the Securities and Exchange commission on or about January 6, 1997
(the "1996 Proxy Statement"). The information required by this Item concerning
executive officers of the Company is included in Part I of this Annual Report on
Form 10-K under the section captioned "Additional Item. Executive Officers of
the Registrant". The information required by this Item concerning compliance
with Section 16(a) of the Securities Exchange Act of 1934, as amended, is
incorporated herein by reference from the section entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" in the 1996 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference from
the sections entitled "Compensation Committee Interlocks and Insider
Participation", "Compensation of Directors", "Executive Compensation" and
"Employment and Severance Agreements" included in the 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference from
the section entitled "Beneficial Ownership of Voting Stock" included in the
1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference from
the section entitled "Certain Transactions" included in the 1996 Proxy
Statement.
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial information is incorporated by reference into Part
II hereof from the Annual Report
1. Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets at September 30,
1996 and 1995
Consolidated Statements of Operations for the three
years ended September 30, 1996
Consolidated Statements of Changes in Redeemable
Convertible Preferred Stock and Stockholders' Equity
for the three years ended September 30, 1996
Consolidated Statements of Cash Flows for the three years
ended September 30, 1996
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedule
Schedule VIII - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable, not
required, or the information required is included in the financial statements
or notes thereto.
3. Exhibits
The exhibits are listed in the accompanying Index to Exhibits immediately
following the signature page.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Spyglass, Inc.
--------------
Registrant
Date: December 23, 1996 /s/ Gary L. Vilchick
----------------------------
Gary L. Vilchick
Executive Vice President,
Finance, Administration and
Operations and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of December 23, 1996 by the following persons
on behalf of the registrant and in the capacities indicated.
Signature
/s/ Douglas P. Colbeth
- --------------------------
Douglas P. Colbeth
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Gary L. Vilchick
- --------------------------
Gary L. Vilchick
Executive Vice President, Finance, Administration
and Operations and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Tim Krauskopf
- --------------------------
Tim Krauskopf
Director
/s/ William S. Kaiser
- --------------------------
William S. Kaiser
Director
/s/ Ray Rothrock
- --------------------------
Ray Rothrock
Director
/s/ Steven R. Vana-Paxhia
- --------------------------
Steven R. Vana-Paxhia
Director
<PAGE> 18
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Spyglass, Inc.
Naperville, Illinois:
Our audits of the consolidated financial statements referred to in our report
dated October 25, 1996 appearing on page 31 of the 1996 Annual Report to
Shareholders of Spyglass, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedules listed in Item
14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Chicago, Illinois
October 25, 1996
<PAGE> 19
SPYGLASS, INC.
SCHEDULE VIII
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance at
beginning costs and to other (1) end of
Description of period expenses accounts Deductions period
- ------------------------------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1996
Allowance for doubtful accounts $180,209 301,034 - 11,243 $470,000
SEPTEMBER 30, 1995
Allowance for doubtful accounts $2,300 184,070 - 6,161 $180,209
SEPTEMBER 30, 1994
Allowance for doubtful accounts $3,500 2,686 - 3,886 $2,300
</TABLE>
(1) - Bad debt write-offs
<PAGE> 20
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant, as amended
3.2(2) By-laws of the Registrant
4.1(2) Specimen certificate for shares of Common Stock
10.1(2) 1991 Stock Option Plan
10.2(4) 1995 Stock Incentive Plan, as amended
10.3(2) 1995 Director Stock Option Plan
10.4(2) Employment and Confidentiality Agreement between the
Registrant and Douglas P. Colbeth dated April 1, 1991
10.5(2) Employment and Confidentiality Agreement between the Registrant
Michael F. Tyrrell dated April 29, 1991
10.6 Senior Management Retention Agreement between the Registrant and
Doug Colbeth, dated November 1, 1996
10.7 Senior Management Retention Agreement between the Registrant and
Tim Krauskopf, dated November 1, 1996
10.8 Senior Management Retention Agreement between the Registrant
and Michael Tyrrell, dated November 1, 1996
10.9 Senior Management Retention Agreement between the Registrant and
Gary Vilchick, dated November 1, 1996
10.10 Senior Management Retention Agreement between the Registrant and
Thomas S. Lewicki, dated November 1, 1996
10.11 Senior Management Retention Agreement between the Registrant and
Randall T. Littleson, dated November 1, 1996
10.12 Senior Management Retention Agreement between the Registrant and
Richard Houle, dated November 1, 1996
10.13(3) Standard form of Employment and Confidentiality Agreement
10.14(3) Amendment No. 4 to NCSA Mosaic Software License Agreement
between the Registrant and the
<PAGE> 21
Board of Trustees for the University of Illinois, dated June
28, 1995. (5)
10.15(2) NCSA Mosaic Software License Agreement between the Registrant and
the Board of Trustees for the University of Illinois.
10.16(4) Amendment No. 1 to the OEM/Source License Agreement
between the Registrant and Microsoft Corporation, dated September
26, 1995. (5)
10.17(2) OEM/Source License Agreement , dated December 12, 1994,
between the Registrant and Microsoft Corporation.
10.18(4) Technology Cooperation Agreement, Including Amendment of
OEM/Source License Agreement between the Registrant and Microsoft
Corporation dated December 6, 1995 (5)
10.19+ Amendment No. 1 dated September 30, 1996, to the Technology
Cooperation Agreement, Including Amendment of OEM/Source License
Agreement between the Registrant and Microsoft Corporation,
dated December 6, 1995
10.20(3) RSA Data Security, Inc.-BSAFE/TIPEM OEM Master License
Agreement dated August 8, 1995 (5)
10.21(6) Sub-Lease Agreement between Rust Environment &
Infrastructure, Inc. and the Registrant dated February 6, 1996
10.22(6) Standard Form of Invention and Non-Disclosure Agreement
10.23(6) Standard Form of Non-Disclosure Agreement
11.1 Statement Regarding Computation of Earnings per Share
13.1 Portions of the Annual Report to Shareholders for the fiscal year
ended September 30, 1996 (only those portions specifically
incorporated by reference herein are filed herewith).
21.1 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse LLP
27 Financial Data Schedule
<PAGE> 22
(1) Incorporated herein by reference from the Company's Registration Statement
on Form S-8 (File No. 333-04357) filed May 23, 1996.
(2) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (File No. 33-92174).
(3) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1995, as amended by an Annual
Report on Form 10-K/A filed on May 17, 1996.
(4) Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995, as amended by a Quarterly
Report on Form 10-Q/A filed on May 17, 1996.
(5) Confidential treatment previously granted by the Securities and Exchange
Commission as to certain portions.
(6) Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996.
+ Confidential treatment requested as to certain portions.
<PAGE> 1
EXHIBIT 10.6
SPYGLASS, INC.
Senior Management Retention Agreement
Doug Colbeth
Spyglass, Inc.
Naperville Corporate Center
1240 East Diehl Road
Naperville, IL 60563
Dear Mr. Colbeth:
Spyglass, Inc. (the "Company") recognizes that, as is the case with many
publicly-held corporations, the possibility of a change in control of the
Company exists and that such possibility, and the uncertainty and questions
which it may raise among key personnel, may result in the departure or
distraction of key personnel to the detriment of the Company and its
stockholders.
The Board of Directors of the Company (the "Board") has determined that
appropriate steps should be taken to reinforce and encourage the continued
employment and dedication of the Company's key personnel, including yourself,
without distraction from the possibility of a change in control of the Company
and related events and circumstances.
As inducement for and in consideration of your remaining in its employ,
the Company agrees that you shall receive the severance benefits set forth in
this letter agreement (the "Agreement") in the event your employment with the
Company is terminated under the circumstances described below subsequent to a
Change in Control of the Company (as defined below).
1. Certain Definitions.
As used herein, the following terms shall have the following respective
meanings:
1.1 "Change in Control" shall mean:
<PAGE> 2
(a) the acquisition by an individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of either (i) the then-outstanding shares of common stock of the Company
(the "Outstanding Company Common Stock") or (ii) the combined voting power of
the then-outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection (a), the
following acquisitions shall not constitute a Change in Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the Company, or
(iv) any acquisition by any corporation pursuant to a transaction which
complies with clauses (i), (ii) and (iii) of subsection (c) of this Section
1.1; or
(b) individuals who, as of the date hereof, constitute the
members of the Board (the "Incumbent Directors") cease for any reason
to constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by a vote
of at least a majority of the Incumbent Directors shall be deemed to be an
Incumbent Director (except that this proviso clause shall not apply to any
individual whose initial election as a director occurs as a result of an actual
or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board); or
(c) the consummation of a reorganization, merger or consolidation
involving the Company or a sale or other disposition of all or substantially
all of the assets of the Company (a "Business Combination"), unless,
immediately following such Business Combination, (i) all or substantially all
of the individuals and entities who were the beneficial owners of the
Outstanding Company Common Stock and
<PAGE> 3
Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of
the then-outstanding shares of common stock and the combined voting power of
the then-outstanding voting securities entitled to vote generally in the
election of directors, respectively, of the resulting or acquiring corporation
in such Business Combination in substantially the same proportions as their
ownership, immediately prior to such Business Combination, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, respectively,
(ii) no Person (excluding any resulting or acquiring corporation in such
Business Combination or any employee benefit plan (or related trust) of the
Company or of such resulting or acquiring corporation in such Business
Combination) beneficially owns, directly or indirectly, 30% or more of the then
outstanding shares of common stock of such resulting or acquiring corporation
in such Business Combination, or of the combined voting power of the
then-outstanding voting securities of such corporation (except to the extent
that such ownership existed prior to the Business Combination) and (iii) at
least half of the members of the board of directors of the resulting or
acquiring corporation in such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or of
the action of the Board, providing for such Business Combination; or
(d) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
1.2 "Cause" shall mean:
(a) your willful failure to substantially perform your reasonable
assigned duties as an officer of the Company (other than any such failure
resulting from incapacity due to physical or mental illness), which failure is
not cured within 30 days after a written demand for substantial performance is
delivered to you by the Board which specifically identifies the manner in which
the Board believes that you have not substantially performed your duties; or
(b) your willful engagement in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the
Company.
<PAGE> 4
For purposes of this Section 1.2, no act or failure to act, on your
part shall be considered "willful" unless it is done, or omitted to be done, by
you in bad faith and without reasonable belief that your action or omission was
in the best interests of the Company.
1.3 "Good Reason" shall mean the occurrence, without your written
consent, of any of the following circumstances unless such circumstance is
fully corrected prior to the Date of Termination specified in the Notice of
Termination (each as defined below) given in respect thereof (provided that
such right of correction by the Company shall only apply to the first Notice of
Termination for Good Reason given by you):
(a) the assignment to you (without your written consent) of any
duties inconsistent in any respect with your position (including
status, offices, titles and reporting requirements), authority or
responsibilities in effect as immediately prior to the Change in Control, or
any other action by the Company which results in a diminution in such position,
authority or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of written notice thereof given
by you;
(b) a reduction in your annual base salary as in effect on the
date hereof or as the same may be increased from time to time;
(c) the failure by the Company to (i) continue in effect any
material compensation or benefit plan in which you participate
immediately prior to the Change in Control, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been made with
respect to such plan, (ii) continue your participation therein (or in such
substitute or alternative plan) on a basis not materially less favorable, both
in terms of the amount of benefits provided and the level of your participation
relative to other participants, as existed at the time of the Change in Control
or (iii) award cash bonuses to you in amounts and in a manner
<PAGE> 5
substantially consistent with past practice in light of the Company's
financial performance;
(d) the failure by the Company to continue to provide you with
benefits substantially similar to those enjoyed by you under any of the
Company's life insurance, medical, health and accident, or disability plans in
which you were participating at the time of the Change in Control, the taking
of any action by the Company which would directly or indirectly materially
reduce any of such benefits, or the failure by the Company to provide you with
the number of paid vacation days to which you are entitled on the basis of
years of service with the Company in accordance with the Company's normal
vacation policy in effect at the time of the Change in Control;
(e) a change by the Company in the location at which you
perform your principal duties for the Company to a new location that is
both (i) outside a radius of 35 miles from your principal residence at the time
of the Change in Control and (ii) more than 20 miles from the location at which
you perform your principal duties for the Company at the time of the Change in
Control; or a requirement by the Company that you travel on Company business to
a substantially greater extent than required immediately prior to the Change in
Control;
(f) the failure of the Company to obtain a reasonably
satisfactory agreement from any successor to assume and agree to
perform this Agreement, as required by Section 5; or
(g) a purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the
requirements of Sections 3.2 and 6, which purported termination shall not be
effective for purposes of this Agreement.
For purposes of this Agreement, any good faith determination of
"Good Reason" made by the Board shall be conclusive, provided that
Incumbent Directors then comprise a majority of the Board.
<PAGE> 6
1.4 "Disability" shall mean your absence from the full-time
performance of your duties with the Company for six consecutive months as a
result of incapacity due to mental or physical illness which is determined to
be total and permanent by a physician selected by the Company or its insurers
and acceptable to you or your legal representative.
2. Term of the Agreement. The term of this Agreement (the
"Term") shall commence on as of the date hereof and shall continue in
effect through December 31, 1998; provided, however, that commencing on January
l, 1999 and each January l thereafter, the Term shall be automatically extended
for one additional year unless, not later than October 31 of the preceding
calendar year, the Company shall have given you written notice that the Term
will not be extended. This Agreement, and all rights and obligations of the
parties hereunder, shall expire upon (a) the expiration of the Term if a Change
in Control has not occurred during the Term, (b) the date 24 months after the
date of the Change in Control, if you are still employed by the Company as of
such date, or (c) the fulfillment by the Company of all of its obligations
under Section 4 if your employment with the Company terminates within 24 months
following a Change in Control.
3. Employment Status; Termination Following Change in Control.
3.1 Not Employment Contract. You acknowledge that this
Agreement does not constitute a contract of employment or impose on the
Company any obligation to retain you as an employee and that this Agreement
does not prevent you from terminating your employment at any time. If your
employment with the Company terminates for any reason and subsequently a Change
in Control shall occur, you shall not be entitled to any benefits hereunder.
3.2 Termination of Employment. Any termination of your
employment by the Company or by you within 24 months following a Change
in Control of the Company during the Term shall be communicated by written
notice of termination ("Notice of Termination") to the other party hereto in
accordance with Section 6. If such employment termination is for Cause, Good
Reason or Disability, the Notice of
<PAGE> 7
Termination shall so state. The "Date of Termination" shall mean the effective
date of such termination as specified in the Notice of Termination (provided
that no such Notice of Termination shall specify an effective date less than
fifteen days or more than 120 days after the date such Notice of Termination is
delivered).
4. Rights Upon Termination.
4.1 Compensation. You shall be entitled to the following
benefits if a Change in Control occurs during the Term and your
employment with the Company terminates within 24 months following such Change
in Control:
(a) Termination Without Cause or for Good Reason. If your
employment with the Company is terminated by the Company (other than
for Cause, Disability or your death) or by you for Good Reason within 24 months
following a Change in Control, then you shall be entitled to the following
benefits:
(i) the Company shall pay to you in a lump sum in cash within 30
days after the Date of Termination the aggregate of the following
amounts:
(1) the sum of (A) your annual base salary through the Date of
Termination, (B) the product of (x) the annual bonus paid or payable (including
any bonus or portion thereof which has been earned but deferred) for the most
recently completed fiscal year and (y) a fraction, the number of which is the
number of days in the current fiscal year through the Date of Termination, and
the denominator of which is 365 and (C) the amount of any compensation
previously deferred by you (together with any accrued interest or earnings
thereon) and any accrued vacation pay, in each case to the extent not
theretofore paid (the sum of the amounts described in clauses (A), (B), and (C)
shall be hereinafter referred to as the "Accrued Obligations"); and
(2) the amount equal to the sum of (A) your highest annual base
salary during the five-year period prior to the Change in Control and
(B) your highest annual bonus during the five-year period prior to the Change
in Control.
(ii) for 12 months after your Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan,
program,
<PAGE> 8
practice or policy, the Company shall continue to provide benefits to you and
your family at least equal to those which would have been provided to you and
them in accordance with the applicable plans, programs, practices and policies
in effect on the Date of Termination (excluding any savings and/or retirement
plans) if your employment had not been terminated; provided, however, that if
you become reemployed with another employer and are eligible to receive medical
or other welfare benefits under another employer-provided plan, the medical and
other welfare benefits described herein shall not be provided to the extent the
same are provided under such other plan during such applicable period of
eligibility; and
(iii) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to you any other amounts or
benefits required to be paid or provided or which you are eligible to receive
following your termination of employment under any plan, program, policy or
practice or contract or agreement of the Company and its affiliated companies
(such other amounts and benefits shall be hereinafter referred to as the "Other
Benefits").
(b) Resignation without Good Reason; Termination for Death or
Disability. If you voluntarily terminate your employment within 24
months following a Change in Control, excluding a termination for Good Reason,
or if your employment is terminated by reason of your death or Disability
within 24 months following a Change in Control, the Company shall (i) pay you,
in a lump sum in cash within 30 days after the Date of Termination, the Accrued
Obligations and (ii) timely pay or provide to you the Other Benefits.
(c) Termination for Cause. If your employment is terminated by
the Company for Cause within 24 months following a Change in Control,
the Company shall (i) pay you, in a lump sum in cash within 30 days after the
Date of Termination, the sum of (A) your annual base salary through the Date of
Termination and (B) the amount of any compensation previously deferred by you,
in each case to the extent not theretofore paid, and (ii) timely pay or provide
to you the Other Benefits.
<PAGE> 9
4.2 Taxes. Payments under this Agreement shall be made without regard
to whether the deductibility of such payments (or any other payments to or for
your benefit) would be limited or precluded by Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code") and without regard to whether
such payments (or any other payments) would subject you to the federal excise
tax levied on certain "excise parachute payments" under Section 4999 of the
Code; provided, that if the total of all payments to or for your benefit, after
deduction of all federal taxes (including the tax set forth in Section 4999 of
the Code, if applicable) with respect to such payments (the "total after-tax
payments"), would be increased by the limitation or elimination of any payment
under this Agreement, amounts payable under this Agreement shall be reduced to
the extent, and only to the extent, necessary to maximize the total after-tax
payments. The determination as to whether and to what extent payments under
this agreement are required to be reduced in accordance with the preceding
sentence shall be made by agreement between you and the independent public
accounting firm of the Company (whose fees and expenses shall be borne solely
by the Company). To the extent that any elimination or reduction of payments
is made in accordance with this Section 4.2, the determination as to which
payments shall be eliminated or reduced shall be made by you.
4.3 Mitigation. Except as provided in Section 4.1(a)(ii) hereof, you
shall not be required to mitigate the amount of any payment or benefits
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefits provided for in this Section 4 be
reduced by any compensation earned by you as a result of employment by another
employer, by retirement benefits or by offset against any amount claimed to be
owed by you to the Company or otherwise.
4.4 Expenses. The Company agrees to pay as incurred, to the full
extent permitted by law, all legal fees and expenses which you may reasonably
incur as a result of any claim or contest by the Company, you or others
regarding the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee
<PAGE> 10
of performance thereof (including as a result of any contest by you regarding
the amount of any payment or benefits pursuant to this Agreement), plus in each
case interest on any delayed payment at the applicable Federal rate provided
for in Section 7872(f)(2)(A) of the Code.
5. Successors; Binding Agreement.
5.1 The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of the Company expressly to assume and agree to perform
this Agreement to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain an
assumption of this Agreement at or prior to the effectiveness of any succession
shall be a breach of this Agreement and shall constitute Good Reason if you
elect to terminate your employment, except that for purposes of implementing
the foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall
mean the Company as defined above and any successor to its business or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
5.2 This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If you should die while any amount
would still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or if there
is no such designee, to your estate.
6. Notice. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or
certified mail, return receipt requested, postage prepaid, or (ii) via a
reputable nationwide overnight courier service, in each case addressed to the
Chief Executive Officer of the Company, at
<PAGE> 11
Naperville Corporate Center, 1240 East Diehl Road, Naperville, Illinois 60563,
and to you at the address shown above (or to such other address as either the
Company or you may have furnished to the other in writing in accordance
herewith). Any such notice, instruction or communication shall be deemed to
have been delivered two business days after it is sent by registered or
certified mail, return receipt requested, postage prepaid, or one business day
after it is sent via a reputable nationwide overnight courier service.
7. Miscellaneous.
7.1 For purposes of this Agreement, your employment with the Company shall
not be deemed to have terminated if you continue to be employed by a subsidiary
of the Company.
7.2 The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
7.3 The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware.
7.4 No waiver by you at any time of any breach of, or compliance with, any
provision of this Agreement to be performed by the Company shall be deemed a
waiver of that or any other provision at any subsequent time.
7.5 This Agreement may be executed in counterparts, each of which shall be
deemed to be an original but both of which together will constitute one and the
same instrument.
7.6 Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
7.7 This Agreement sets forth the entire agreement of the parties hereto
in respect of the subject matter contained herein and supersedes all prior
agreements, promises, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any officer, employee or
representative of any party
<PAGE> 12
hereto; and any prior agreement of the parties hereto in respect of the subject
matter contained herein is hereby terminated and canceled.
If this accurately reflects our agreement on the subject matter hereof,
kindly sign and return to the Company the enclosed copy of this letter, which
will then constitute our agreement on this subject.
Sincerely,
SPYGLASS, INC.
By: /s/ Doug Colbeth
-----------------
Doug Colbeth
-----------------
(Print Name)
President and CEO
-----------------
(Print Title)
Agreed to this 1st day of November, 1996
/s/ Douglas Colbeth
----------------------------------------
(Signature)
Doug Colbeth
----------------------------------------
(Print Name)
President and Chief Executive Officer
----------------------------------------
(Print Title)
<PAGE> 1
EXHIBIT 10.7
SPYGLASS, INC.
Senior Management Retention Agreement
Tim Krauskopf
Spyglass, Inc.
Naperville Corporate Center
1240 East Diehl Road
Naperville, IL 60563
Dear Mr. Krauskopf:
Spyglass, Inc. (the "Company") recognizes that, as is the case with
many publicly-held corporations, the possibility of a change in control of the
Company exists and that such possibility, and the uncertainty and questions
which it may raise among key personnel, may result in the departure or
distraction of key personnel to the detriment of the Company and its
stockholders.
The Board of Directors of the Company (the "Board") has determined that
appropriate steps should be taken to reinforce and encourage the continued
employment and dedication of the Company's key personnel, including yourself,
without distraction from the possibility of a change in control of the Company
and related events and circumstances.
As inducement for and in consideration of your remaining in its employ,
the Company agrees that you shall receive the severance benefits set forth in
this letter agreement (the "Agreement") in the event your employment with the
Company is terminated under the circumstances described below subsequent to a
Change in Control of the Company (as defined below).
1. Certain Definitions.
As used herein, the following terms shall have the following respective
meanings:
1.1 "Change in Control" shall mean:
(a) the acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then-outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change in
<PAGE> 2
Control: (i) any acquisition directly from the Company, (ii) any acquisition
by the Company, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled by
the Company, or (iv) any acquisition by any corporation pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of subsection (c)
of this Section 1.1; or
(b) individuals who, as of the date hereof, constitute the
members of the Board (the "Incumbent Directors") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by a vote
of at least a majority of the Incumbent Directors shall be deemed to be an
Incumbent Director (except that this proviso clause shall not apply to any
individual whose initial election as a director occurs as a result of an actual
or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board); or
(c) the consummation of a reorganization, merger or
consolidation involving the Company or a sale or other disposition of all or
substantially all of the assets of the Company (a "Business Combination"),
unless, immediately following such Business Combination, (i) all or
substantially all of the individuals and entities who were the beneficial
owners of the Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 60% of the then-outstanding shares of common
stock and the combined voting power of the then-outstanding voting securities
entitled to vote generally in the election of directors, respectively, of the
resulting or acquiring corporation in such Business Combination in
substantially the same proportions as their ownership, immediately prior to
such Business Combination, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, respectively, (ii) no Person (excluding
any resulting or acquiring corporation in such Business Combination or any
employee benefit plan (or
<PAGE> 3
related trust) of the Company or of such resulting or acquiring corporation in
such Business Combination) beneficially owns, directly or indirectly, 30% or
more of the then outstanding shares of common stock of such resulting or
acquiring corporation in such Business Combination, or of the combined voting
power of the then-outstanding voting securities of such corporation (except to
the extent that such ownership existed prior to the Business Combination) and
(iii) at least half of the members of the board of directors of the resulting
or acquiring corporation in such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or of
the action of the Board, providing for such Business Combination; or
(d) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
1.2 "Cause" shall mean:
(a) your willful failure to substantially perform your reasonable
assigned duties as an officer of the Company (other than any such failure
resulting from incapacity due to physical or mental illness), which failure is
not cured within 30 days after a written demand for substantial performance is
delivered to you by the Board which specifically identifies the manner in which
the Board believes that you have not substantially performed your duties; or
(b) your willful engagement in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this Section 1.2, no act or failure to act, on your part shall
be considered "willful" unless it is done, or omitted to be done, by you in
bad faith and without reasonable belief that your action or omission was in the
bes interests of the Company.
1.3 "Good Reason" shall mean the occurrence, without your written
consent, of any of the following circumstances unless such circumstance is
fully corrected prior to the Date of Termination specified in the Notice of
Termination (each as defined below) given in respect thereof (provided that
such right of correction by
<PAGE> 4
the Company shall only apply to the first Notice of Termination for Good Reason
given by you):
(a) the assignment to you (without your written consent)
of any duties inconsistent in any respect with your position (including
status, offices, titles and reporting requirements), authority or
responsibilities in effect as immediately prior to the Change in Control, or
any other action by the Company which results in a diminution in such position,
authority or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of written notice thereof given
by you;
(b) a reduction in your annual base salary as in effect on the
date hereof or as the same may be increased from time to time;
(c) the failure by the Company to (i) continue in effect any
material compensation or benefit plan in which you participate immediately
prior to the Change in Control, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been made with
respect to such plan, (ii) continue your participation therein (or in such
substitute or alternative plan) on a basis not materially less favorable, both
in terms of the amount of benefits provided and the level of your participation
relative to other participants, as existed at the time of the Change in Control
or (iii) award cash bonuses to you in amounts and in a manner substantially
consistent with past practice in light of the Company's financial performance;
(d) the failure by the Company to continue to provide you with
benefits substantially similar to those enjoyed by you under any of the
Company's life insurance, medical, health and accident, or disability plans in
which you were participating at the time of the Change in Control, the taking
of any action by the Company which would directly or indirectly materially
reduce any of such benefits, or the failure by the Company to provide you with
the number of paid vacation days to which you are entitled on the basis of
years of service with the Company in accordance
<PAGE> 5
with the Company's normal vacation policy in effect at the time of the Change
in Control;
(e) a change by the Company in the location at which you perform
your principal duties for the Company to a new location that is both
(i) outside a radius of 35 miles from your principal residence at the time of
the Change in Control and (ii) more than 20 miles from the location at which
you perform your principal duties for the Company at the time of the Change in
Control; or a requirement by the Company that you travel on Company business to
a substantially greater extent than required immediately prior to the Change in
Control;
(f) the failure of the Company to obtain a reasonably satisfactory
agreement from any successor to assume and agree to perform this Agreement, as
required by Section 5; or
(g) a purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the
requirements of Sections 3.2 and 6, which purported termination shall not be
effective for purposes of this Agreement.
For purposes of this Agreement, any good faith determination of
"Good Reason" made by the Board shall be conclusive, provided that
Incumbent Directors then comprise a majority of the Board.
1.4 "Disability" shall mean your absence from the full-time
performance of your duties with the Company for six consecutive months
as a result of incapacity due to mental or physical illness which is determined
to be total and permanent by a physician selected by the Company or its
insurers and acceptable to you or your legal representative.
2. Term of the Agreement. The term of this Agreement (the
"Term") shall commence on as of the date hereof and shall continue in
effect through December 31, 1998; provided, however, that commencing on January
l, 1999 and each January l thereafter, the Term shall be automatically extended
for one additional year unless, not later than October 31 of the preceding
calendar year, the Company shall have
<PAGE> 6
given you written notice that the Term will not be extended. This Agreement,
and all rights and obligations of the parties hereunder, shall expire upon (a)
the expiration of the Term if a Change in Control has not occurred during the
Term, (b) the date 24 months after the date of the Change in Control, if you
are still employed by the Company as of such date, or (c) the fulfillment by
the Company of all of its obligations under Section 4 if your employment with
the Company terminates within 24 months following a Change in Control.
3. Employment Status; Termination Following Change in Control.
3.1 Not Employment Contract. You acknowledge that this Agreement does not
constitute a contract of employment or impose on the Company any obligation to
retain you as an employee and that this Agreement does not prevent you from
terminating your employment at any time. If your employment with the Company
terminates for any reason and subsequently a Change in Control shall occur,
you shall not be entitled to any benefits hereunder.
3.2 Termination of Employment. Any termination of your employment by the
Company or by you within 24 months following a Change in Control of the Company
during the Term shall be communicated by written notice of termination ("Notice
of Termination") to the other party hereto in accordance with Section 6. If
such employment termination is for Cause, Good Reason or Disability, the Notice
of Termination shall so state. The "Date of Termination" shall mean the
effective date of such termination as specified in the Notice of Termination
(provided that no such Notice of Termination shall specify an effective date
less than fifteen days or more than 120 days after the date such Notice of
Termination is delivered).
4. Rights Upon Termination.
4.1 Compensation. You shall be entitled to the following benefits if a
Change in Control occurs during the Term and your employment with the Company
terminates within 24 months following such Change in Control:
(a) Termination Without Cause or for Good Reason. If your
employment with the Company is terminated by the Company (other than for Cause,
<PAGE> 7
Disability or your death) or by you for Good Reason within 24 months following
a Change in Control, then you shall be entitled to the following benefits:
(i) the Company shall pay to you in a lump sum in cash within 30 days
after the Date of Termination the aggregate of the following amounts:
(1) the sum of (A) your annual base salary through the Date of
Termination, (B) the product of (x) the annual bonus paid or payable (including
any bonus or portion thereof which has been earned but deferred) for the most
recently completed fiscal year and (y) a fraction, the number of which is the
number of days in the current fiscal year through the Date of Termination, and
the denominator of which is 365 and (C) the amount of any compensation
previously deferred by you (together with any accrued interest or earnings
thereon) and any accrued vacation pay, in each case to the extent not
theretofore paid (the sum of the amounts described in clauses (A), (B), and (C)
shall be hereinafter referred to as the "Accrued Obligations"); and
(2) the amount equal to the sum of (A) your highest annual base salary
during the five-year period prior to the Change in Control and (B) your highest
annual bonus during the five-year period prior to the Change in Control.
(ii) for 12 months after your Date of Termination, or such longer period
as may be provided by the terms of the appropriate plan, program, practice or
policy, the Company shall continue to provide benefits to you and your family
at least equal to those which would have been provided to you and them in
accordance with the applicable plans, programs, practices and policies in
effect on the Date of Termination (excluding any savings and/or retirement
plans) if your employment had not been terminated; provided, however, that if
you become reemployed with another employer and are eligible to receive medical
or other welfare benefits under another employer-provided plan, the medical and
other welfare benefits described herein shall not be provided to the extent the
same are provided under such other plan during such applicable period of
eligibility; and
<PAGE> 8
(iii) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to you any other amounts or benefits required to be paid
or provided or which you are eligible to receive following your termination of
employment under any plan, program, policy or practice or contract or agreement
of the Company and its affiliated companies (such other amounts and benefits
shall be hereinafter referred to as the "Other Benefits").
(b) Resignation without Good Reason; Termination for Death or
Disability. If you voluntarily terminate your employment within 24
months following a Change in Control, excluding a termination for Good Reason,
or if your employment is terminated by reason of your death or Disability
within 24 months following a Change in Control, the Company shall (i) pay you,
in a lump sum in cash within 30 days after the Date of Termination, the Accrued
Obligations and (ii) timely pay or provide to you the Other Benefits.
(c) Termination for Cause. If your employment is terminated by
the Company for Cause within 24 months following a Change in Control,
the Company shall (i) pay you, in a lump sum in cash within 30 days after the
Date of Termination, the sum of (A) your annual base salary through the Date of
Termination and (B) the amount of any compensation previously deferred by you,
in each case to the extent not theretofore paid, and (ii) timely pay or provide
to you the Other Benefits.
4.2 Taxes. Payments under this Agreement shall be made without regard to
whether the deductibility of such payments (or any other payments to or for
your benefit) would be limited or precluded by Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code") and without regard to whether
such payments (or any other payments) would subject you to the federal excise
tax levied on certain "excise parachute payments" under Section 4999 of the
Code; provided, that if the total of all payments to or for your benefit, after
deduction of all federal taxes (including the tax set forth in Section 4999 of
the Code, if applicable) with respect to such payments (the "total after-tax
payments"), would be increased by the limitation or elimination of any payment
under this Agreement, amounts payable under this Agreement shall be
<PAGE> 9
reduced to the extent, and only to the extent, necessary to maximize the total
after-tax payments. The determination as to whether and to what extent
payments under this agreement are required to be reduced in accordance with the
preceding sentence shall be made by agreement between you and the independent
public accounting firm of the Company (whose fees and expenses shall be borne
solely by the Company). To the extent that any elimination or reduction of
payments is made in accordance with this Section 4.2, the determination as to
which payments shall be eliminated or reduced shall be made by you.
4.3 Mitigation. Except as provided in Section 4.1(a)(ii) hereof, you
shall not be required to mitigate the amount of any payment or benefits
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefits provided for in this Section 4 be
reduced by any compensation earned by you as a result of employment by another
employer, by retirement benefits or by offset against any amount claimed to be
owed by you to the Company or otherwise.
4.4 Expenses. The Company agrees to pay as incurred, to the full extent
permitted by law, all legal fees and expenses which you may reasonably incur as
a result of any claim or contest by the Company, you or others regarding the
validity or enforceability of, or liability under, any provision of this
Agreement or any guarantee of performance thereof (including as a result of any
contest by you regarding the amount of any payment or benefits pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Code.
5. Successors; Binding Agreement.
5.1 The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of the Company expressly to assume and agree to perform
this Agreement to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain an
assumption of
<PAGE> 10
this Agreement at or prior to the effectiveness of any succession shall be a
breach of this Agreement and shall constitute Good Reason if you elect to
terminate your employment, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall
mean the Company as defined above and any successor to its business or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
5.2 This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If you should die while any amount
would still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or if there
is no such designee, to your estate.
6. Notice. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or
certified mail, return receipt requested, postage prepaid, or (ii) via a
reputable nationwide overnight courier service, in each case addressed to the
Chief Executive Officer of the Company, at Naperville Corporate Center, 1240
East Diehl Road, Naperville, Illinois 60563, and to you at the address shown
above (or to such other address as either the Company or you may have furnished
to the other in writing in accordance herewith). Any such notice, instruction
or communication shall be deemed to have been delivered two business days after
it is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service.
7. Miscellaneous.
<PAGE> 11
7.1 For purposes of this Agreement, your employment with the Company shall
not be deemed to have terminated if you continue to be employed by a subsidiary
of the Company.
7.2 The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
7.3 The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware.
7.4 No waiver by you at any time of any breach of, or compliance with, any
provision of this Agreement to be performed by the Company shall be deemed a
waiver of that or any other provision at any subsequent time.
7.5 This Agreement may be executed in counterparts, each of which shall be
deemed to be an original but both of which together will constitute one and the
same instrument.
7.6 Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
7.7 This Agreement sets forth the entire agreement of the parties hereto
in respect of the subject matter contained herein and supersedes all prior
agreements, promises, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any officer, employee or
representative of any party hereto; and any prior agreement of the parties
hereto in respect of the subject matter contained herein is hereby terminated
and canceled.
If this accurately reflects our agreement on the subject matter hereof,
kindly sign and return to the Company the enclosed copy of this letter, which
will then constitute our agreement on this subject.
Sincerely,
SPYGLASS, INC.
By: /s/Doug Colbeth
-----------------
<PAGE> 12
Doug Colbeth
-----------------------------
(Print Name)
President and CEO
-----------------------------
(Print Title)
Agreed to this 1st day of November, 1996
/s/ Tim Krauskopf
----------------------------------------
(Signature)
Tim Krauskopf
----------------------------------------
(Print Name)
Chief Technical Officer
----------------------------------------
(Print Title)
<PAGE> 1
EXHIBIT 10.8
SPYGLASS, INC.
Senior Management Retention Agreement
Michael Tyrrell
Spyglass, Inc.
Naperville Corporate Center
1240 East Diehl Road
Naperville, IL 60563
Dear Mr. Tyrrell:
Spyglass, Inc. (the "Company") recognizes that, as is the case with many
publicly-held corporations, the possibility of a change in control of the
Company exists and that such possibility, and the uncertainty and questions
which it may raise among key personnel, may result in the departure or
distraction of key personnel to the detriment of the Company and its
stockholders.
The Board of Directors of the Company (the "Board") has determined that
appropriate steps should be taken to reinforce and encourage the continued
<PAGE> 2
employment and dedication of the Company's key personnel, including yourself,
without distraction from the possibility of a change in control of the Company
and related events and circumstances.
As inducement for and in consideration of your remaining in its employ,
the Company agrees that you shall receive the severance benefits set forth in
this letter agreement (the "Agreement") in the event your employment with the
Company is terminated under the circumstances described below subsequent to a
Change in Control of the Company (as defined below).
1. Certain Definitions.
As used herein, the following terms shall have the following respective
meanings:
1.1 "Change in Control" shall mean:
(a) the acquisition by an individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then-outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change in Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or (iv)
any acquisition by any corporation pursuant to a transaction which complies
with clauses (i), (ii) and (iii) of subsection (c) of this Section 1.1; or
(b) individuals who, as of the date hereof, constitute the members of the
Board (the "Incumbent Directors") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director
<PAGE> 3
subsequent to the date hereof whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least a majority of the
Incumbent Directors shall be deemed to be an Incumbent Director (except that
this proviso clause shall not apply to any individual whose initial election as
a director occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board); or
(c) the consummation of a reorganization, merger or consolidation
involving the Company or a sale or other disposition of all or substantially
all of the assets of the Company (a "Business Combination"), unless,
immediately following such Business Combination, (i) all or substantially all
of the individuals and entities who were the beneficial owners of the
Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of the then-outstanding shares of common stock and
the combined voting power of the then-outstanding voting securities entitled to
vote generally in the election of directors, respectively, of the resulting or
acquiring corporation in such Business Combination in substantially the same
proportions as their ownership, immediately prior to such Business Combination,
of the Outstanding Company Common Stock and Outstanding Company Voting
Securities, respectively, (ii) no Person (excluding any resulting or acquiring
corporation in such Business Combination or any employee benefit plan (or
related trust) of the Company or of such resulting or acquiring corporation in
such Business Combination) beneficially owns, directly or indirectly, 30% or
more of the then outstanding shares of common stock of such resulting or
acquiring corporation in such Business Combination, or of the combined voting
power of the then-outstanding voting securities of such corporation (except to
the extent that such ownership existed prior to the Business Combination) and
(iii) at least half of the members of the board of directors of the resulting
or acquiring corporation in such Business Combination were
<PAGE> 4
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
(d) approval by the stockholders of the Company of a complete liquidation
or dissolution of the Company.
1.2 "Cause" shall mean:
(a) your willful failure to substantially perform your reasonable assigned
duties as an officer of the Company (other than any such failure resulting from
incapacity due to physical or mental illness), which failure is not cured
within 30 days after a written demand for substantial performance is delivered
to you by the Board which specifically identifies the manner in which the Board
believes that you have not substantially performed your duties; or
(b) your willful engagement in illegal conduct or gross misconduct which
is materially and demonstrably injurious to the Company.
For purposes of this Section 1.2, no act or failure to act, on your part
shall be considered "willful" unless it is done, or omitted to be done, by you
in bad faith and without reasonable belief that your action or omission was in
the best interests of the Company.
1.3 "Good Reason" shall mean the occurrence, without your written consent,
of any of the following circumstances unless such circumstance is fully
corrected prior to the Date of Termination specified in the Notice of
Termination (each as defined below) given in respect thereof (provided that
such right of correction by the Company shall only apply to the first Notice of
Termination for Good Reason given by you):
(a) the assignment to you (without your written consent) of any duties
inconsistent in any respect with your position (including status, offices,
titles and reporting requirements), authority or responsibilities in effect as
immediately prior to the Change in Control, or any other action by the Company
which results in a diminution in such position, authority or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent action
not taken in bad faith and which is
<PAGE> 5
remedied by the Company promptly after receipt of written notice thereof given
by you;
(b) a reduction in your annual base salary as in effect on the date hereof
or as the same may be increased from time to time;
(c) the failure by the Company to (i) continue in effect any material
compensation or benefit plan in which you participate immediately prior to the
Change in Control, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan, (ii)
continue your participation therein (or in such substitute or alternative plan)
on a basis not materially less favorable, both in terms of the amount of
benefits provided and the level of your participation relative to other
participants, as existed at the time of the Change in Control or (iii) award
cash bonuses to you in amounts and in a manner substantially consistent with
past practice in light of the Company's financial performance;
(d) the failure by the Company to continue to provide you with benefits
substantially similar to those enjoyed by you under any of the Company's life
insurance, medical, health and accident, or disability plans in which you were
participating at the time of the Change in Control, the taking of any action by
the Company which would directly or indirectly materially reduce any of such
benefits, or the failure by the Company to provide you with the number of paid
vacation days to which you are entitled on the basis of years of service with
the Company in accordance with the Company's normal vacation policy in effect
at the time of the Change in Control;
(e) a change by the Company in the location at which you perform your
principal duties for the Company to a new location that is both (i) outside a
radius of 35 miles from your principal residence at the time of the Change in
Control and (ii) more than 20 miles from the location at which you perform your
principal duties for the Company at the time of the Change in Control; or a
requirement by the
<PAGE> 6
Company that you travel on Company business to a substantially greater extent
than required immediately prior to the Change in Control;
(f) the failure of the Company to obtain a reasonably satisfactory
agreement from any successor to assume and agree to perform this Agreement, as
required by Section 5; or
(g) a purported termination of your employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of Sections 3.2
and 6, which purported termination shall not be effective for purposes of this
Agreement.
For purposes of this Agreement, any good faith determination of "Good
Reason" made by the Board shall be conclusive, provided that Incumbent
Directors then comprise a majority of the Board.
1.4 "Disability" shall mean your absence from the full-time performance
of your duties with the Company for six consecutive months as a result of
incapacity due to mental or physical illness which is determined to be total
and permanent by a physician selected by the Company or its insurers and
acceptable to you or your legal representative.
2. Term of the Agreement. The term of this Agreement (the "Term") shall
commence on as of the date hereof and shall continue in effect through December
31, 1998; provided, however, that commencing on January l, 1999 and each
January l thereafter, the Term shall be automatically extended for one
additional year unless, not later than October 31 of the preceding calendar
year, the Company shall have given you written notice that the Term will not be
extended. This Agreement, and all rights and obligations of the parties
hereunder, shall expire upon (a) the expiration of the Term if a Change in
Control has not occurred during the Term, (b) the date 24 months after the date
of the Change in Control, if you are still employed by the Company as of such
date, or (c) the fulfillment by the Company of all of its obligations under
Section 4 if your employment with the Company terminates within 24 months
following a Change in Control.
<PAGE> 7
3. Employment Status; Termination Following Change in Control.
3.1 Not Employment Contract. You acknowledge that this Agreement does not
constitute a contract of employment or impose on the Company any obligation to
retain you as an employee and that this Agreement does not prevent you from
terminating your employment at any time. If your employment with the Company
terminates for any reason and subsequently a Change in Control shall occur,
you shall not be entitled to any benefits hereunder.
3.2 Termination of Employment. Any termination of your employment by the
Company or by you within 24 months following a Change in Control of the Company
during the Term shall be communicated by written notice of termination ("Notice
of Termination") to the other party hereto in accordance with Section 6. If
such employment termination is for Cause, Good Reason or Disability, the Notice
of Termination shall so state. The "Date of Termination" shall mean the
effective date of such termination as specified in the Notice of Termination
(provided that no such Notice of Termination shall specify an effective date
less than fifteen days or more than 120 days after the date such Notice of
Termination is delivered).
4. Rights Upon Termination.
4.1 Compensation. You shall be entitled to the following benefits if a
Change in Control occurs during the Term and your employment with the Company
terminates within 24 months following such Change in Control:
(a) Termination Without Cause or for Good Reason. If your employment with
the Company is terminated by the Company (other than for Cause, Disability or
your death) or by you for Good Reason within 24 months following a Change in
Control, then you shall be entitled to the following benefits:
(i) the Company shall pay to you in a lump sum in cash within 30 days
after the Date of Termination the aggregate of the following amounts:
(1) the sum of (A) your annual base salary through the Date of
Termination, (B) the product of (x) the annual bonus paid or payable (including
any bonus or portion thereof which has been earned but deferred) for the
<PAGE> 8
most recently completed fiscal year and (y) a fraction, the number of which is
the number of days in the current fiscal year through the Date of Termination,
and the denominator of which is 365 and (C) the amount of any compensation
previously deferred by you (together with any accrued interest or earnings
thereon) and any accrued vacation pay, in each case to the extent not
theretofore paid (the sum of the amounts described in clauses (A), (B), and (C)
shall be hereinafter referred to as the "Accrued Obligations"); and
(2) the amount equal to the sum of (A) your highest annual base salary
during the five-year period prior to the Change in Control and (B) your highest
annual bonus during the five-year period prior to the Change in Control.
(ii) for 12 months after your Date of Termination, or such longer period
as may be provided by the terms of the appropriate plan, program, practice or
policy, the Company shall continue to provide benefits to you and your family
at least equal to those which would have been provided to you and them in
accordance with the applicable plans, programs, practices and policies in
effect on the Date of Termination (excluding any savings and/or retirement
plans) if your employment had not been terminated; provided, however, that if
you become reemployed with another employer and are eligible to receive medical
or other welfare benefits under another employer-provided plan, the medical and
other welfare benefits described herein shall not be provided to the extent the
same are provided under such other plan during such applicable period of
eligibility; and
(iii) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to you any other amounts or benefits required to be paid
or provided or which you are eligible to receive following your termination of
employment under any plan, program, policy or practice or contract or agreement
of the Company and its affiliated companies (such other amounts and benefits
shall be hereinafter referred to as the "Other Benefits").
(b) Resignation without Good Reason; Termination for Death or Disability.
If you voluntarily terminate your employment within 24 months following
<PAGE> 9
a Change in Control, excluding a termination for Good Reason, or if your
employment is terminated by reason of your death or Disability within 24 months
following a Change in Control, the Company shall (i) pay you, in a lump sum in
cash within 30 days after the Date of Termination, the Accrued Obligations and
(ii) timely pay or provide to you the Other Benefits.
(c) Termination for Cause. If your employment is terminated by the
Company for Cause within 24 months following a Change in Control, the Company
shall (i) pay you, in a lump sum in cash within 30 days after the Date of
Termination, the sum of (A) your annual base salary through the Date of
Termination and (B) the amount of any compensation previously deferred by you,
in each case to the extent not theretofore paid, and (ii) timely pay or provide
to you the Other Benefits.
4.2 Taxes. Payments under this Agreement shall be made without regard to
whether the deductibility of such payments (or any other payments to or for
your benefit) would be limited or precluded by Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code") and without regard to whether
such payments (or any other payments) would subject you to the federal excise
tax levied on certain "excise parachute payments" under Section 4999 of the
Code; provided, that if the total of all payments to or for your benefit, after
deduction of all federal taxes (including the tax set forth in Section 4999 of
the Code, if applicable) with respect to such payments (the "total after-tax
payments"), would be increased by the limitation or elimination of any payment
under this Agreement, amounts payable under this Agreement shall be reduced to
the extent, and only to the extent, necessary to maximize the total after-tax
payments. The determination as to whether and to what extent payments under
this agreement are required to be reduced in accordance with the preceding
sentence shall be made by agreement between you and the independent public
accounting firm of the Company (whose fees and expenses shall be borne solely
by the Company). To the extent that any elimination or reduction of payments
is made in accordance with this Section 4.2, the determination as to which
payments shall be eliminated or reduced shall be made by you.
<PAGE> 10
4.3 Mitigation. Except as provided in Section 4.1(a)(ii) hereof, you
shall not be required to mitigate the amount of any payment or benefits
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefits provided for in this Section 4 be
reduced by any compensation earned by you as a result of employment by another
employer, by retirement benefits or by offset against any amount claimed to be
owed by you to the Company or otherwise.
4.4 Expenses. The Company agrees to pay as incurred, to the full extent
permitted by law, all legal fees and expenses which you may reasonably incur as
a result of any claim or contest by the Company, you or others regarding the
validity or enforceability of, or liability under, any provision of this
Agreement or any guarantee of performance thereof (including as a result of any
contest by you regarding the amount of any payment or benefits pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Code.
5. Successors; Binding Agreement.
5.1 The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of the Company expressly to assume and agree to perform
this Agreement to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain an
assumption of this Agreement at or prior to the effectiveness of any succession
shall be a breach of this Agreement and shall constitute Good Reason if you
elect to terminate your employment, except that for purposes of implementing
the foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall
mean the Company as defined above and any successor to its business or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
<PAGE> 11
5.2 This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If you should die while any amount
would still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or if there
is no such designee, to your estate.
6. Notice. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or
certified mail, return receipt requested, postage prepaid, or (ii) via a
reputable nationwide overnight courier service, in each case addressed to the
Chief Executive Officer of the Company, at Naperville Corporate Center, 1240
East Diehl Road, Naperville, Illinois 60563, and to you at the address shown
above (or to such other address as either the Company or you may have furnished
to the other in writing in accordance herewith). Any such notice, instruction
or communication shall be deemed to have been delivered two business days after
it is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service.
7. Miscellaneous.
7.1 For purposes of this Agreement, your employment with the Company shall
not be deemed to have terminated if you continue to be employed by a subsidiary
of the Company.
7.2 The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
7.3 The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware.
<PAGE> 12
7.4 No waiver by you at any time of any breach of, or compliance with, any
provision of this Agreement to be performed by the Company shall be deemed a
waiver of that or any other provision at any subsequent time.
7.5 This Agreement may be executed in counterparts, each of which shall be
deemed to be an original but both of which together will constitute one and the
same instrument.
7.6 Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
7.7 This Agreement sets forth the entire agreement of the parties hereto
in respect of the subject matter contained herein and supersedes all prior
agreements, promises, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any officer, employee or
representative of any party hereto; and any prior agreement of the parties
hereto in respect of the subject matter contained herein is hereby terminated
and canceled.
If this accurately reflects our agreement on the subject matter hereof,
kindly sign and return to the Company the enclosed copy of this letter, which
will then constitute our agreement on this subject.
Sincerely,
SPYGLASS, INC.
By: /s/Doug Colbeth
-----------------------------
Doug Colbeth
-----------------------------
(Print Name)
President and CEO
-----------------------------
(Print Title)
Agreed to this 1st day of November, 1996
/s/ Michael Tyrrell
- ------------------------------------------------
(Signature)
Michael Tyrrell
- ------------------------------------------------
(Print Name)
Executive Vice President of Business Development
- ------------------------------------------------
(Print Title)
<PAGE> 1
EXHIBIT 10.9
SPYGLASS, INC.
Senior Management Retention Agreement
Gary Vilchick
Spyglass, Inc.
Naperville Corporate Center
1240 East Diehl Road
Naperville, IL 60563
Dear Mr. Vilchick:
Spyglass, Inc. (the "Company") recognizes that, as is the case with many
publicly-held corporations, the possibility of a change in control of the
Company exists and that such possibility, and the uncertainty and questions
which it may raise among key personnel, may result in the departure or
distraction of key personnel to the detriment of the Company and its
stockholders.
The Board of Directors of the Company (the "Board") has determined that
appropriate steps should be taken to reinforce and encourage the continued
employment and dedication of the Company's key personnel, including yourself,
without distraction from the possibility of a change in control of the Company
and related events and circumstances.
As inducement for and in consideration of your remaining in its employ,
the Company agrees that you shall receive the severance benefits set forth in
this letter agreement (the "Agreement") in the event your employment with the
Company is terminated under the circumstances described below subsequent to a
Change in Control of the Company (as defined below).
1. Certain Definitions.
<PAGE> 2
As used herein, the following terms shall have the following respective
meanings:
1.1 "Change in Control" shall mean:
(a) the acquisition by an individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of either (i) the then-outstanding shares of common stock of the Company
(the "Outstanding Company Common Stock") or (ii) the combined voting power of
the then-outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection (a), the
following acquisitions shall not constitute a Change in Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the Company, or
(iv) any acquisition by any corporation pursuant to a transaction which
complies with clauses (i), (ii) and (iii) of subsection (c) of this Section
1.1; or
(b) individuals who, as of the date hereof, constitute the
members of the Board (the "Incumbent Directors") cease for any reason
to constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by a vote
of at least a majority of the Incumbent Directors shall be deemed to be an
Incumbent Director (except that this proviso clause shall not apply to any
individual whose initial election as a director occurs as a result of an actual
or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board); or
(c) the consummation of a reorganization, merger or
consolidation involving the Company or a sale or other disposition of
all or substantially all of the
<PAGE> 3
assets of the Company (a "Business Combination"), unless, immediately following
such Business Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding Company Common Stock
and Outstanding Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 60% of the
then-outstanding shares of common stock and the combined voting power of the
then-outstanding voting securities entitled to vote generally in the election
of directors, respectively, of the resulting or acquiring corporation in such
Business Combination in substantially the same proportions as their ownership,
immediately prior to such Business Combination, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, respectively, (ii) no
Person (excluding any resulting or acquiring corporation in such Business
Combination or any employee benefit plan (or related trust) of the Company or
of such resulting or acquiring corporation in such Business Combination)
beneficially owns, directly or indirectly, 30% or more of the then outstanding
shares of common stock of such resulting or acquiring corporation in such
Business Combination, or of the combined voting power of the then-outstanding
voting securities of such corporation (except to the extent that such ownership
existed prior to the Business Combination) and (iii) at least half of the
members of the board of directors of the resulting or acquiring corporation in
such Business Combination were members of the Incumbent Board at the time of
the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) approval by the stockholders of the Company of a complete liquidation
or dissolution of the Company.
1.2 "Cause" shall mean:
(a) your willful failure to substantially perform your reasonable assigned
duties as an officer of the Company (other than any such failure resulting from
incapacity due to physical or mental illness), which failure is not cured
within 30 days after a written demand for substantial performance is delivered
to you by the
<PAGE> 4
Board which specifically identifies the manner in which the Board believes that
you have not substantially performed your duties; or
(b) your willful engagement in illegal conduct or gross misconduct which
is materially and demonstrably injurious to the Company.
For purposes of this Section 1.2, no act or failure to act, on your part
shall be considered "willful" unless it is done, or omitted to be done, by you
in bad faith and without reasonable belief that your action or omission was in
the best interests of the Company.
1.3 "Good Reason" shall mean the occurrence, without your written consent,
of any of the following circumstances unless such circumstance is fully
corrected prior to the Date of Termination specified in the Notice of
Termination (each as defined below) given in respect thereof (provided that
such right of correction by the Company shall only apply to the first Notice of
Termination for Good Reason given by you):
(a) the assignment to you (without your written consent) of any duties
inconsistent in any respect with your position (including status, offices,
titles and reporting requirements), authority or responsibilities in effect as
immediately prior to the Change in Control, or any other action by the Company
which results in a diminution in such position, authority or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent action
not taken in bad faith and which is remedied by the Company promptly after
receipt of written notice thereof given by you;
(b) a reduction in your annual base salary as in effect on the date hereof
or as the same may be increased from time to time;
(c) the failure by the Company to (i) continue in effect any material
compensation or benefit plan in which you participate immediately prior to the
Change in Control, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan, (ii)
continue your participation therein (or in such substitute or alternative plan)
on a basis not
<PAGE> 5
materially less favorable, both in terms of the amount of benefits provided and
the level of your participation relative to other participants, as existed at
the time of the Change in Control or (iii) award cash bonuses to you in amounts
and in a manner substantially consistent with past practice in light of the
Company's financial performance;
(d) the failure by the Company to continue to provide you with benefits
substantially similar to those enjoyed by you under any of the Company's life
insurance, medical, health and accident, or disability plans in which you were
participating at the time of the Change in Control, the taking of any action by
the Company which would directly or indirectly materially reduce any of such
benefits, or the failure by the Company to provide you with the number of paid
vacation days to which you are entitled on the basis of years of service with
the Company in accordance with the Company's normal vacation policy in effect
at the time of the Change in Control;
(e) a change by the Company in the location at which you perform your
principal duties for the Company to a new location that is both (i) outside a
radius of 35 miles from your principal residence at the time of the Change in
Control and (ii) more than 20 miles from the location at which you perform your
principal duties for the Company at the time of the Change in Control; or a
requirement by the Company that you travel on Company business to a
substantially greater extent than required immediately prior to the Change in
Control;
(f) the failure of the Company to obtain a reasonably satisfactory
agreement from any successor to assume and agree to perform this Agreement, as
required by Section 5; or
(g) a purported termination of your employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of Sections 3.2
and 6, which purported termination shall not be effective for purposes of this
Agreement.
<PAGE> 6
For purposes of this Agreement, any good faith determination of "Good
Reason" made by the Board shall be conclusive, provided that Incumbent
Directors then comprise a majority of the Board.
1.4 "Disability" shall mean your absence from the full-time performance
of your duties with the Company for six consecutive months as a result of
incapacity due to mental or physical illness which is determined to be total
and permanent by a physician selected by the Company or its insurers and
acceptable to you or your legal representative.
2. Term of the Agreement. The term of this Agreement (the "Term") shall
commence on as of the date hereof and shall continue in effect through December
31, 1998; provided, however, that commencing on January l, 1999 and each
January l thereafter, the Term shall be automatically extended for one
additional year unless, not later than October 31 of the preceding calendar
year, the Company shall have given you written notice that the Term will not be
extended. This Agreement, and all rights and obligations of the parties
hereunder, shall expire upon (a) the expiration of the Term if a Change in
Control has not occurred during the Term, (b) the date 24 months after the date
of the Change in Control, if you are still employed by the Company as of such
date, or (c) the fulfillment by the Company of all of its obligations under
Section 4 if your employment with the Company terminates within 24 months
following a Change in Control.
3. Employment Status; Termination Following Change in Control.
3.1 Not Employment Contract. You acknowledge that this Agreement does not
constitute a contract of employment or impose on the Company any obligation to
retain you as an employee and that this Agreement does not prevent you from
terminating your employment at any time. If your employment with the Company
terminates for any reason and subsequently a Change in Control shall occur,
you shall not be entitled to any benefits hereunder.
3.2 Termination of Employment. Any termination of your employment by the
Company or by you within 24 months following a Change in Control of the
<PAGE> 7
Company during the Term shall be communicated by written notice of termination
("Notice of Termination") to the other party hereto in accordance with Section
6. If such employment termination is for Cause, Good Reason or Disability, the
Notice of Termination shall so state. The "Date of Termination" shall mean the
effective date of such termination as specified in the Notice of Termination
(provided that no such Notice of Termination shall specify an effective date
less than fifteen days or more than 120 days after the date such Notice of
Termination is delivered).
4. Rights Upon Termination.
4.1 Compensation. You shall be entitled to the following benefits if a
Change in Control occurs during the Term and your employment with the Company
terminates within 24 months following such Change in Control:
(a) Termination Without Cause or for Good Reason. If your employment with
the Company is terminated by the Company (other than for Cause, Disability or
your death) or by you for Good Reason within 24 months following a Change in
Control, then you shall be entitled to the following benefits:
(i) the Company shall pay to you in a lump sum in cash within 30 days
after the Date of Termination the aggregate of the following amounts:
(1) the sum of (A) your annual base salary through the Date of
Termination, (B) the product of (x) the annual bonus paid or payable (including
any bonus or portion thereof which has been earned but deferred) for the most
recently completed fiscal year and (y) a fraction, the number of which is the
number of days in the current fiscal year through the Date of Termination, and
the denominator of which is 365 and (C) the amount of any compensation
previously deferred by you (together with any accrued interest or earnings
thereon) and any accrued vacation pay, in each case to the extent not
theretofore paid (the sum of the amounts described in clauses (A), (B), and (C)
shall be hereinafter referred to as the "Accrued Obligations"); and
<PAGE> 8
(2) the amount equal to the sum of (A) your highest annual base salary
during the five-year period prior to the Change in Control and (B) your highest
annual bonus during the five-year period prior to the Change in Control.
(ii) for 12 months after your Date of Termination, or such longer period
as may be provided by the terms of the appropriate plan, program, practice or
policy, the Company shall continue to provide benefits to you and your family
at least equal to those which would have been provided to you and them in
accordance with the applicable plans, programs, practices and policies in
effect on the Date of Termination (excluding any savings and/or retirement
plans) if your employment had not been terminated; provided, however, that if
you become reemployed with another employer and are eligible to receive medical
or other welfare benefits under another employer-provided plan, the medical and
other welfare benefits described herein shall not be provided to the extent the
same are provided under such other plan during such applicable period of
eligibility; and
(iii) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to you any other amounts or benefits required to be paid
or provided or which you are eligible to receive following your termination of
employment under any plan, program, policy or practice or contract or agreement
of the Company and its affiliated companies (such other amounts and benefits
shall be hereinafter referred to as the "Other Benefits").
(b) Resignation without Good Reason; Termination for Death or Disability.
If you voluntarily terminate your employment within 24 months following a
Change in Control, excluding a termination for Good Reason, or if your
employment is terminated by reason of your death or Disability within 24 months
following a Change in Control, the Company shall (i) pay you, in a lump sum in
cash within 30 days after the Date of Termination, the Accrued Obligations and
(ii) timely pay or provide to you the Other Benefits.
(c) Termination for Cause. If your employment is terminated by the
Company for Cause within 24 months following a Change in Control, the Company
<PAGE> 9
shall (i) pay you, in a lump sum in cash within 30 days after the Date of
Termination, the sum of (A) your annual base salary through the Date of
Termination and (B) the amount of any compensation previously deferred by you,
in each case to the extent not theretofore paid, and (ii) timely pay or provide
to you the Other Benefits.
4.2 Taxes. Payments under this Agreement shall be made without regard to
whether the deductibility of such payments (or any other payments to or for
your benefit) would be limited or precluded by Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code") and without regard to whether
such payments (or any other payments) would subject you to the federal excise
tax levied on certain "excise parachute payments" under Section 4999 of the
Code; provided, that if the total of all payments to or for your benefit, after
deduction of all federal taxes (including the tax set forth in Section 4999 of
the Code, if applicable) with respect to such payments (the "total after-tax
payments"), would be increased by the limitation or elimination of any payment
under this Agreement, amounts payable under this Agreement shall be reduced to
the extent, and only to the extent, necessary to maximize the total after-tax
payments. The determination as to whether and to what extent payments under
this agreement are required to be reduced in accordance with the preceding
sentence shall be made by agreement between you and the independent public
accounting firm of the Company (whose fees and expenses shall be borne solely
by the Company). To the extent that any elimination or reduction of payments
is made in accordance with this Section 4.2, the determination as to which
payments shall be eliminated or reduced shall be made by you.
4.3 Mitigation. Except as provided in Section 4.1(a)(ii) hereof, you
shall not be required to mitigate the amount of any payment or benefits
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefits provided for in this Section 4 be
reduced by any compensation earned by you as a result of employment by another
employer, by retirement benefits or by offset against any amount claimed to be
owed by you to the Company or otherwise.
<PAGE> 10
4.4 Expenses. The Company agrees to pay as incurred, to the full extent
permitted by law, all legal fees and expenses which you may reasonably incur as
a result of any claim or contest by the Company, you or others regarding the
validity or enforceability of, or liability under, any provision of this
Agreement or any guarantee of performance thereof (including as a result of any
contest by you regarding the amount of any payment or benefits pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Code.
5. Successors; Binding Agreement.
5.1 The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of the Company expressly to assume and agree to perform
this Agreement to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain an
assumption of this Agreement at or prior to the effectiveness of any succession
shall be a breach of this Agreement and shall constitute Good Reason if you
elect to terminate your employment, except that for purposes of implementing
the foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall
mean the Company as defined above and any successor to its business or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
5.2 This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If you should die while any amount
would still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or if there
is no such designee, to your estate.
<PAGE> 11
6. Notice. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or
certified mail, return receipt requested, postage prepaid, or (ii) via a
reputable nationwide overnight courier service, in each case addressed to the
Chief Executive Officer of the Company, at Naperville Corporate Center, 1240
East Diehl Road, Naperville, Illinois 60563, and to you at the address shown
above (or to such other address as either the Company or you may have furnished
to the other in writing in accordance herewith). Any such notice, instruction
or communication shall be deemed to have been delivered two business days after
it is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service.
7. Miscellaneous.
7.1 For purposes of this Agreement, your employment with the Company shall
not be deemed to have terminated if you continue to be employed by a subsidiary
of the Company.
7.2 The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
7.3 The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware.
7.4 No waiver by you at any time of any breach of, or compliance with, any
provision of this Agreement to be performed by the Company shall be deemed a
waiver of that or any other provision at any subsequent time.
7.5 This Agreement may be executed in counterparts, each of which shall be
deemed to be an original but both of which together will constitute one and the
same instrument.
7.6 Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
<PAGE> 12
7.7 This Agreement sets forth the entire agreement of the parties hereto
in respect of the subject matter contained herein and supersedes all prior
agreements, promises, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any officer, employee or
representative of any party hereto; and any prior agreement of the parties
hereto in respect of the subject matter contained herein is hereby terminated
and canceled.
If this accurately reflects our agreement on the subject matter hereof,
kindly sign and return to the Company the enclosed copy of this letter, which
will then constitute our agreement on this subject.
Sincerely,
SPYGLASS, INC.
By: /s/Doug Colbeth
--------------------------------
Doug Colbeth
--------------------------------
(Print Name)
President and CEO
--------------------------------
(Print Title)
Agreed to this 1st day of November, 1996
/s/Gary Vilchick
- ----------------------------------------
(Signature)
Gary Vilchick
- ----------------------------------------
(Print Name)
Executive Vice President, Chief Financial Officer
- -------------------------------------------------
(Print Title)
<PAGE> 1
EXHIBIT 10.10
SPYGLASS, INC.
Senior Management Retention Agreement
-------------------------------------
Thomas Lewicki
Spyglass, Inc.
Naperville Corporate Center
1240 East Diehl Road
Naperville, IL 60563
Dear Mr. Lewicki:
Spyglass, Inc. (the "Company") recognizes that, as is the case with many
publicly-held corporations, the possibility of a change in control of the
Company exists and that such possibility, and the uncertainty and questions
which it may raise among key personnel, may result in the departure or
distraction of key personnel to the detriment of the Company and its
stockholders.
The Board of Directors of the Company (the "Board") has determined that
appropriate steps should be taken to reinforce and encourage the continued
employment and dedication of the Company's key personnel, including yourself,
without distraction from the possibility of a change in control of the Company
and related events and circumstances.
As inducement for and in consideration of your remaining in its employ,
the Company agrees that you shall receive the severance benefits set forth in
this letter agreement (the "Agreement") in the event your employment with the
Company is terminated under the circumstances described below subsequent to a
Change in Control of the Company (as defined below).
1. Certain Definitions.
As used herein, the following terms shall have the following respective
meanings:
1.1 "Change in Control" shall mean:
(a) the acquisition by an individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then-outstanding shares of common stock of the Company (the
"Outstanding
<PAGE> 2
Company Common Stock") or (ii) the combined voting power of the
then-outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change in Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or (iv)
any acquisition by any corporation pursuant to a transaction which complies
with clauses (i), (ii) and (iii) of subsection (c) of this Section 1.1; or
(b) individuals who, as of the date hereof, constitute the members of the
Board (the "Incumbent Directors") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at least a
majority of the Incumbent Directors shall be deemed to be an Incumbent Director
(except that this proviso clause shall not apply to any individual whose
initial election as a director occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board); or
(c) the consummation of a reorganization, merger or consolidation
involving the Company or a sale or other disposition of all or substantially
all of the assets of the Company (a "Business Combination"), unless,
immediately following such Business Combination, (i) all or substantially all
of the individuals and entities who were the beneficial owners of the
Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of the then-outstanding shares of common stock and
the combined voting power of the then-outstanding voting securities entitled to
vote generally in the election of directors, respectively, of the resulting or
acquiring corporation in such Business Combination in
<PAGE> 3
substantially the same proportions as their ownership, immediately prior to
such Business Combination, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, respectively, (ii) no Person (excluding
any resulting or acquiring corporation in such Business Combination or any
employee benefit plan (or related trust) of the Company or of such resulting or
acquiring corporation in such Business Combination) beneficially owns, directly
or indirectly, 30% or more of the then outstanding shares of common stock of
such resulting or acquiring corporation in such Business Combination, or of the
combined voting power of the then-outstanding voting securities of such
corporation (except to the extent that such ownership existed prior to the
Business Combination) and (iii) at least half of the members of the board of
directors of the resulting or acquiring corporation in such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) approval by the stockholders of the Company of a complete liquidation
or dissolution of the Company.
1.2 "Cause" shall mean:
(a) your willful failure to substantially perform your reasonable assigned
duties as an officer of the Company (other than any such failure resulting from
incapacity due to physical or mental illness), which failure is not cured
within 30 days after a written demand for substantial performance is delivered
to you by the Board which specifically identifies the manner in which the Board
believes that you have not substantially performed your duties; or
(b) your willful engagement in illegal conduct or gross misconduct which
is materially and demonstrably injurious to the Company.
For purposes of this Section 1.2, no act or failure to act, on your part
shall be considered "willful" unless it is done, or omitted to be done, by you
in bad faith and without reasonable belief that your action or omission was in
the best interests of the Company.
<PAGE> 4
1.3 "Good Reason" shall mean the occurrence, without your written consent,
of any of the following circumstances unless such circumstance is fully
corrected prior to the Date of Termination specified in the Notice of
Termination (each as defined below) given in respect thereof (provided that
such right of correction by the Company shall only apply to the first Notice of
Termination for Good Reason given by you):
(a) the assignment to you (without your written consent) of any duties
inconsistent in any respect with your position (including status, offices,
titles and reporting requirements), authority or responsibilities in effect as
immediately prior to the Change in Control, or any other action by the Company
which results in a diminution in such position, authority or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent action
not taken in bad faith and which is remedied by the Company promptly after
receipt of written notice thereof given by you;
(b) a reduction in your annual base salary as in effect on the date hereof
or as the same may be increased from time to time;
(c) the failure by the Company to (i) continue in effect any material
compensation or benefit plan in which you participate immediately prior to the
Change in Control, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan, (ii)
continue your participation therein (or in such substitute or alternative plan)
on a basis not materially less favorable, both in terms of the amount of
benefits provided and the level of your participation relative to other
participants, as existed at the time of the Change in Control or (iii) award
cash bonuses to you in amounts and in a manner substantially consistent with
past practice in light of the Company's financial performance;
(d) the failure by the Company to continue to provide you with benefits
substantially similar to those enjoyed by you under any of the Company's life
insurance, medical, health and accident, or disability plans in which you were
<PAGE> 5
participating at the time of the Change in Control, the taking of any action by
the Company which would directly or indirectly materially reduce any of such
benefits, or the failure by the Company to provide you with the number of paid
vacation days to which you are entitled on the basis of years of service with
the Company in accordance with the Company's normal vacation policy in effect
at the time of the Change in Control;
(e) a change by the Company in the location at which you perform your
principal duties for the Company to a new location that is both (i) outside a
radius of 35 miles from your principal residence at the time of the Change in
Control and (ii) more than 20 miles from the location at which you perform your
principal duties for the Company at the time of the Change in Control; or a
requirement by the Company that you travel on Company business to a
substantially greater extent than required immediately prior to the Change in
Control;
(f) the failure of the Company to obtain a reasonably satisfactory
agreement from any successor to assume and agree to perform this Agreement, as
required by Section 5; or
(g) a purported termination of your employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of Sections 3.2
and 6, which purported termination shall not be effective for purposes of this
Agreement.
For purposes of this Agreement, any good faith determination of "Good
Reason" made by the Board shall be conclusive, provided that Incumbent
Directors then comprise a majority of the Board.
1.4 "Disability" shall mean your absence from the full-time performance
of your duties with the Company for six consecutive months as a result of
incapacity due to mental or physical illness which is determined to be total
and permanent by a physician selected by the Company or its insurers and
acceptable to you or your legal representative.
<PAGE> 6
2. Term of the Agreement. The term of this Agreement (the "Term") shall
commence on as of the date hereof and shall continue in effect through December
31, 1998; provided, however, that commencing on January l, 1999 and each
January l thereafter, the Term shall be automatically extended for one
additional year unless, not later than October 31 of the preceding calendar
year, the Company shall have given you written notice that the Term will not be
extended. This Agreement, and all rights and obligations of the parties
hereunder, shall expire upon (a) the expiration of the Term if a Change in
Control has not occurred during the Term, (b) the date 24 months after the date
of the Change in Control, if you are still employed by the Company as of such
date, or (c) the fulfillment by the Company of all of its obligations under
Section 4 if your employment with the Company terminates within 24 months
following a Change in Control.
3. Employment Status; Termination Following Change in Control.
3.1 Not Employment Contract. You acknowledge that this Agreement does not
constitute a contract of employment or impose on the Company any obligation to
retain you as an employee and that this Agreement does not prevent you from
terminating your employment at any time. If your employment with the Company
terminates for any reason and subsequently a Change in Control shall occur,
you shall not be entitled to any benefits hereunder.
3.2 Termination of Employment. Any termination of your employment by the
Company or by you within 24 months following a Change in Control of the Company
during the Term shall be communicated by written notice of termination ("Notice
of Termination") to the other party hereto in accordance with Section 6. If
such employment termination is for Cause, Good Reason or Disability, the Notice
of Termination shall so state. The "Date of Termination" shall mean the
effective date of such termination as specified in the Notice of Termination
(provided that no such Notice of Termination shall specify an effective date
less than fifteen days or more than 120 days after the date such Notice of
Termination is delivered).
4. Rights Upon Termination.
<PAGE> 7
4.1 Compensation. You shall be entitled to the following benefits if a
Change in Control occurs during the Term and your employment with the Company
terminates within 24 months following such Change in Control:
(a) Termination Without Cause or for Good Reason. If your employment with
the Company is terminated by the Company (other than for Cause, Disability or
your death) or by you for Good Reason within 24 months following a Change in
Control, then you shall be entitled to the following benefits:
(i) the Company shall pay to you in a lump sum in cash within 30 days
after the Date of Termination the aggregate of the following amounts:
(1) the sum of (A) your annual base salary through the Date of
Termination, (B) the product of (x) the annual bonus paid or payable (including
any bonus or portion thereof which has been earned but deferred) for the most
recently completed fiscal year and (y) a fraction, the number of which is the
number of days in the current fiscal year through the Date of Termination, and
the denominator of which is 365 and (C) the amount of any compensation
previously deferred by you (together with any accrued interest or earnings
thereon) and any accrued vacation pay, in each case to the extent not
theretofore paid (the sum of the amounts described in clauses (A), (B), and (C)
shall be hereinafter referred to as the "Accrued Obligations"); and
(2) the amount equal to the sum of (A) your highest annual base salary
during the five-year period prior to the Change in Control and (B) your highest
annual bonus during the five-year period prior to the Change in Control.
(ii) for 12 months after your Date of Termination, or such longer period
as may be provided by the terms of the appropriate plan, program, practice or
policy, the Company shall continue to provide benefits to you and your family
at least equal to those which would have been provided to you and them in
accordance with the applicable plans, programs, practices and policies in
effect on the Date of Termination (excluding any savings and/or retirement
plans) if your employment had not been terminated; provided, however, that if
you become
<PAGE> 8
reemployed with another employer and are eligible to receive medical or other
welfare benefits under another employer-provided plan, the medical and other
welfare benefits described herein shall not be provided to the extent the same
are provided under such other plan during such applicable period of
eligibility; and
(iii) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to you any other amounts or benefits required to be paid
or provided or which you are eligible to receive following your termination of
employment under any plan, program, policy or practice or contract or agreement
of the Company and its affiliated companies (such other amounts and benefits
shall be hereinafter referred to as the "Other Benefits").
(b) Resignation without Good Reason; Termination for Death or Disability.
If you voluntarily terminate your employment within 24 months following a
Change in Control, excluding a termination for Good Reason, or if your
employment is terminated by reason of your death or Disability within 24 months
following a Change in Control, the Company shall (i) pay you, in a lump sum in
cash within 30 days after the Date of Termination, the Accrued Obligations and
(ii) timely pay or provide to you the Other Benefits.
(c) Termination for Cause. If your employment is terminated by the
Company for Cause within 24 months following a Change in Control, the Company
shall (i) pay you, in a lump sum in cash within 30 days after the Date of
Termination, the sum of (A) your annual base salary through the Date of
Termination and (B) the amount of any compensation previously deferred by you,
in each case to the extent not theretofore paid, and (ii) timely pay or provide
to you the Other Benefits.
4.2 Taxes. Payments under this Agreement shall be made without regard to
whether the deductibility of such payments (or any other payments to or for
your benefit) would be limited or precluded by Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code") and without regard to whether
such payments (or any other payments) would subject you to the federal excise
tax levied on certain "excise parachute payments" under Section 4999 of the
Code; provided, that if the total
<PAGE> 9
of all payments to or for your benefit, after deduction of all federal taxes
(including the tax set forth in Section 4999 of the Code, if applicable) with
respect to such payments (the "total after-tax payments"), would be increased
by the limitation or elimination of any payment under this Agreement, amounts
payable under this Agreement shall be reduced to the extent, and only to the
extent, necessary to maximize the total after-tax payments. The determination
as to whether and to what extent payments under this agreement are required to
be reduced in accordance with the preceding sentence shall be made by agreement
between you and the independent public accounting firm of the Company (whose
fees and expenses shall be borne solely by the Company). To the extent that
any elimination or reduction of payments is made in accordance with this
Section 4.2, the determination as to which payments shall be eliminated or
reduced shall be made by you.
4.3 Mitigation. Except as provided in Section 4.1(a)(ii) hereof, you
shall not be required to mitigate the amount of any payment or benefits
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefits provided for in this Section 4 be
reduced by any compensation earned by you as a result of employment by another
employer, by retirement benefits or by offset against any amount claimed to be
owed by you to the Company or otherwise.
4.4 Expenses. The Company agrees to pay as incurred, to the full
extent permitted by law, all legal fees and expenses which you may
reasonably incur as a result of any claim or contest by the Company, you or
others regarding the validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance thereof (including
as a result of any contest by you regarding the amount of any payment or
benefits pursuant to this Agreement), plus in each case interest on any delayed
payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of
the Code.
5. Successors; Binding Agreement.
<PAGE> 10
5.1 The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company expressly to assume
and agree to perform this Agreement to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of
the Company to obtain an assumption of this Agreement at or prior to the
effectiveness of any succession shall be a breach of this Agreement and shall
constitute Good Reason if you elect to terminate your employment, except that
for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination. As used
in this Agreement, "Company" shall mean the Company as defined above and any
successor to its business or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
5.2 This Agreement shall inure to the benefit of and be enforceable
by your personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If you should die
while any amount would still be payable to you hereunder if you had continued
to live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to your devisee, legatee or other
designee or if there is no such designee, to your estate.
6. Notice. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or
certified mail, return receipt requested, postage prepaid, or (ii) via a
reputable nationwide overnight courier service, in each case addressed to the
Chief Executive Officer of the Company, at Naperville Corporate Center, 1240
East Diehl Road, Naperville, Illinois 60563, and to you at the address shown
above (or to such other address as either the Company or you may have furnished
to the other in writing in accordance herewith). Any such notice, instruction
or communication shall be deemed to have been delivered two business days after
it is sent by registered or certified mail, return receipt requested,
<PAGE> 11
postage prepaid, or one business day after it is sent via a reputable
nationwide overnight courier service.
7. Miscellaneous.
7.1 For purposes of this Agreement, your employment with the Company
shall not be deemed to have terminated if you continue to be employed
by a subsidiary of the Company.
7.2 The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
7.3 The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of Delaware.
7.4 No waiver by you at any time of any breach of, or compliance
with, any provision of this Agreement to be performed by the Company
shall be deemed a waiver of that or any other provision at any subsequent time.
7.5 This Agreement may be executed in counterparts, each of which
shall be deemed to be an original but both of which together will
constitute one and the same instrument.
7.6 Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
7.7 This Agreement sets forth the entire agreement of the parties
hereto in respect of the subject matter contained herein and supersedes
all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer,
employee or representative of any party hereto; and any prior agreement of the
parties hereto in respect of the subject matter contained herein is hereby
terminated and canceled.
If this accurately reflects our agreement on the subject matter hereof,
kindly sign and return to the Company the enclosed copy of this letter, which
will then constitute our agreement on this subject.
<PAGE> 12
Sincerely,
SPYGLASS, INC.
By: /s/Doug Colbeth
-----------------
(Signature)
Doug Colbeth
-----------------
(Print Name)
President and CEO
-----------------
(Print Title)
Agreed to this 1st day of November, 1996
/s/ Thomas Lewicki
- ----------------------------------------
(Signature)
Thomas Lewicki
- ----------------------------------------
(Print Name)
Controller, Treasurer and Secretary
- ----------------------------------------
(Print Title)
<PAGE> 1
EXHIBIT 10.11
SPYGLASS, INC.
Senior Management Retention Agreement
Randy Littleson
Spyglass, Inc.
Naperville Corporate Center
1240 East Diehl Road
Naperville, IL 60563
Dear Mr. Littleson:
Spyglass, Inc. (the "Company") recognizes that, as is the case with many
publicly-held corporations, the possibility of a change in control of the
Company exists and that such possibility, and the uncertainty and questions
which it may raise among key personnel, may result in the departure or
distraction of key personnel to the detriment of the Company and its
stockholders.
The Board of Directors of the Company (the "Board") has determined that
appropriate steps should be taken to reinforce and encourage the continued
employment and dedication of the Company's key personnel, including yourself,
without distraction from the possibility of a change in control of the Company
and related events and circumstances.
As inducement for and in consideration of your remaining in its employ,
the Company agrees that you shall receive the severance benefits set forth in
this letter agreement (the "Agreement") in the event your employment with the
Company is terminated under the circumstances described below subsequent to a
Change in Control of the Company (as defined below).
1. Certain Definitions.
As used herein, the following terms shall have the following respective
meanings:
1.1 "Change in Control" shall mean:
(a) the acquisition by an individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then-outstanding shares of
common stock of the Company (the "Outstanding Company Common Stock") or (ii)
the combined voting power of the then-outstanding voting securities of the
Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that for purposes
of this subsection (a), the following acquisitions shall not constitute a
Change in Control: (i) any acquisition directly from the Company, (ii) any
acquisition by the Company, (iii) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any corporation
controlled by the
<PAGE> 2
Company, or (iv) any acquisition by any corporation pursuant to a transaction
which complies with clauses (i), (ii) and (iii) of subsection (c) of this
Section 1.1; or
(b) individuals who, as of the date hereof, constitute the members
of the Board (the "Incumbent Directors") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by a vote
of at least a majority of the Incumbent Directors shall be deemed to be an
Incumbent Director (except that this proviso clause shall not apply to any
individual whose initial election as a director occurs as a result of an actual
or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board); or
(c) the consummation of a reorganization, merger or consolidation
involving the Company or a sale or other disposition of all or substantially
all of the assets of the Company (a "Business Combination"), unless,
immediately following such Business Combination, (i) all or substantially all
of the individuals and entities who were the beneficial owners of the
Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of the then-outstanding shares of common stock and
the combined voting power of the then-outstanding voting securities entitled to
vote generally in the election of directors, respectively, of the resulting or
acquiring corporation in such Business Combination in substantially the same
proportions as their ownership, immediately prior to such Business Combination,
of the Outstanding Company Common Stock and Outstanding Company Voting
Securities, respectively, (ii) no Person (excluding any resulting or acquiring
corporation in such Business Combination or any employee benefit plan (or
related trust) of the Company or of such resulting or acquiring corporation in
such Business Combination) beneficially owns, directly or indirectly, 30% or
more of the then outstanding shares of common stock of such resulting or
acquiring corporation in
<PAGE> 3
such Business Combination, or of the combined voting power of the
then-outstanding voting securities of such corporation (except to the extent
that such ownership existed prior to the Business Combination) and (iii) at
least half of the members of the board of directors of the resulting or
acquiring corporation in such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or of
the action of the Board, providing for such Business Combination; or
(d) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
1.2 "Cause" shall mean:
(a) your willful failure to substantially perform your reasonable
assigned duties as an officer of the Company (other than any such
failure resulting from incapacity due to physical or mental illness), which
failure is not cured within 30 days after a written demand for substantial
performance is delivered to you by the Board which specifically identifies the
manner in which the Board believes that you have not substantially performed
your duties; or
(b) your willful engagement in illegal conduct or gross misconduct
which is materially and demonstrably injurious to the Company.
For purposes of this Section 1.2, no act or failure to act, on your part
shall be considered "willful" unless it is done, or omitted to be done, by you
in bad faith and without reasonable belief that your action or omission was in
the best interests of the Company.
1.3 "Good Reason" shall mean the occurrence, without your written
consent, of any of the following circumstances unless such circumstance is fully
corrected prior to the Date of Termination specified in the Notice of
Termination (each as defined below) given in respect thereof (provided that
such right of correction by the Company shall only apply to the first Notice of
Termination for Good Reason given by you):
(a) the assignment to you (without your written consent) of any
duties inconsistent in any respect with your position (including status,
offices, titles
<PAGE> 4
and reporting requirements), authority or responsibilities in effect as
immediately prior to the Change in Control, or any other action by the Company
which results in a diminution in such position, authority or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent action
not taken in bad faith and which is remedied by the Company promptly after
receipt of written notice thereof given by you;
(b) a reduction in your annual base salary as in effect on the date
hereof or as the same may be increased from time to time;
(c) the failure by the Company to (i) continue in effect any material
compensation or benefit plan in which you participate immediately prior to the
Change in Control, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan, (ii)
continue your participation therein (or in such substitute or alternative plan)
on a basis not materially less favorable, both in terms of the amount of
benefits provided and the level of your participation relative to other
participants, as existed at the time of the Change in Control or (iii) award
cash bonuses to you in amounts and in a manner substantially consistent with
past practice in light of the Company's financial performance;
(d) the failure by the Company to continue to provide you with benefits
substantially similar to those enjoyed by you under any of the Company's life
insurance, medical, health and accident, or disability plans in which you were
participating at the time of the Change in Control, the taking of any action by
the Company which would directly or indirectly materially reduce any of such
benefits, or the failure by the Company to provide you with the number of paid
vacation days to which you are entitled on the basis of years of service with
the Company in accordance with the Company's normal vacation policy in effect
at the time of the Change in Control;
(e) a change by the Company in the location at which you perform your
principal duties for the Company to a new location that is both (i) outside a
<PAGE> 5
radius of 35 miles from your principal residence at the time of the Change in
Control and (ii) more than 20 miles from the location at which you perform your
principal duties for the Company at the time of the Change in Control; or a
requirement by the Company that you travel on Company business to a
substantially greater extent than required immediately prior to the Change in
Control;
(f) the failure of the Company to obtain a reasonably satisfactory
agreement from any successor to assume and agree to perform this Agreement, as
required by Section 5; or
(g) a purported termination of your employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of Sections 3.2
and 6, which purported termination shall not be effective for purposes of this
Agreement.
For purposes of this Agreement, any good faith determination of "Good
Reason" made by the Board shall be conclusive, provided that Incumbent
Directors then comprise a majority of the Board.
1.4 "Disability" shall mean your absence from the full-time performance
of your duties with the Company for six consecutive months as a result of
incapacity due to mental or physical illness which is determined to be total
and permanent by a physician selected by the Company or its insurers and
acceptable to you or your legal representative.
2. Term of the Agreement. The term of this Agreement (the "Term") shall
commence on as of the date hereof and shall continue in effect through December
31, 1998; provided, however, that commencing on January l, 1999 and each
January l thereafter, the Term shall be automatically extended for one
additional year unless, not later than October 31 of the preceding calendar
year, the Company shall have given you written notice that the Term will not be
extended. This Agreement, and all rights and obligations of the parties
hereunder, shall expire upon (a) the expiration of the Term if a Change in
Control has not occurred during the Term, (b) the date 24 months after the date
of the Change in Control, if you are still employed by the
<PAGE> 6
Company as of such date, or (c) the fulfillment by the Company of all of its
obligations under Section 4 if your employment with the Company terminates
within 24 months following a Change in Control.
3. Employment Status; Termination Following Change in Control.
3.1 Not Employment Contract. You acknowledge that this Agreement does not
constitute a contract of employment or impose on the Company any obligation to
retain you as an employee and that this Agreement does not prevent you from
terminating your employment at any time. If your employment with the Company
terminates for any reason and subsequently a Change in Control shall occur,
you shall not be entitled to any benefits hereunder.
3.2 Termination of Employment. Any termination of your employment by the
Company or by you within 24 months following a Change in Control of the Company
during the Term shall be communicated by written notice of termination ("Notice
of Termination") to the other party hereto in accordance with Section 6. If
such employment termination is for Cause, Good Reason or Disability, the Notice
of Termination shall so state. The "Date of Termination" shall mean the
effective date of such termination as specified in the Notice of Termination
(provided that no such Notice of Termination shall specify an effective date
less than fifteen days or more than 120 days after the date such Notice of
Termination is delivered).
4. Rights Upon Termination.
4.1 Compensation. You shall be entitled to the following benefits if a
Change in Control occurs during the Term and your employment with the Company
terminates within 24 months following such Change in Control:
(a) Termination Without Cause or for Good Reason. If your employment
with the Company is terminated by the Company (other than for Cause,
Disability or your death) or by you for Good Reason within 24 months following
a Change in Control, then you shall be entitled to the following benefits:
(i) the Company shall pay to you in a lump sum in cash within 30 days
after the Date of Termination the aggregate of the following amounts:
<PAGE> 7
(1) the sum of (A) your annual base salary through the Date of
Termination, (B) the product of (x) the annual bonus paid or payable (including
any bonus or portion thereof which has been earned but deferred) for the most
recently completed fiscal year and (y) a fraction, the number of which is the
number of days in the current fiscal year through the Date of Termination, and
the denominator of which is 365 and (C) the amount of any compensation
previously deferred by you (together with any accrued interest or earnings
thereon) and any accrued vacation pay, in each case to the extent not
theretofore paid (the sum of the amounts described in clauses (A), (B), and (C)
shall be hereinafter referred to as the "Accrued Obligations"); and
(2) the amount equal to the sum of (A) your highest annual base salary
during the five-year period prior to the Change in Control and (B) your highest
annual bonus during the five-year period prior to the Change in Control.
(ii) for 12 months after your Date of Termination, or such longer period
as may be provided by the terms of the appropriate plan, program, practice or
policy, the Company shall continue to provide benefits to you and your family
at least equal to those which would have been provided to you and them in
accordance with the applicable plans, programs, practices and policies in
effect on the Date of Termination (excluding any savings and/or retirement
plans) if your employment had not been terminated; provided, however, that if
you become reemployed with another employer and are eligible to receive medical
or other welfare benefits under another employer-provided plan, the medical and
other welfare benefits described herein shall not be provided to the extent the
same are provided under such other plan during such applicable period of
eligibility; and
(iii) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to you any other amounts or benefits required to be paid
or provided or which you are eligible to receive following your termination of
employment under any plan, program, policy or practice or contract or agreement
of
<PAGE> 8
the Company and its affiliated companies (such other amounts and benefits shall
be hereinafter referred to as the "Other Benefits").
(b) Resignation without Good Reason; Termination for Death or Disability.
If you voluntarily terminate your employment within 24 months following a
Change in Control, excluding a termination for Good Reason, or if your
employment is terminated by reason of your death or Disability within 24 months
following a Change in Control, the Company shall (i) pay you, in a lump sum in
cash within 30 days after the Date of Termination, the Accrued Obligations and
(ii) timely pay or provide to you the Other Benefits.
(c) Termination for Cause. If your employment is terminated by the
Company for Cause within 24 months following a Change in Control, the Company
shall (i) pay you, in a lump sum in cash within 30 days after the Date of
Termination, the sum of (A) your annual base salary through the Date of
Termination and (B) the amount of any compensation previously deferred by you,
in each case to the extent not theretofore paid, and (ii) timely pay or provide
to you the Other Benefits.
4.2 Taxes. Payments under this Agreement shall be made without regard to
whether the deductibility of such payments (or any other payments to or for
your benefit) would be limited or precluded by Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code") and without regard to whether
such payments (or any other payments) would subject you to the federal excise
tax levied on certain "excise parachute payments" under Section 4999 of the
Code; provided, that if the total of all payments to or for your benefit, after
deduction of all federal taxes (including the tax set forth in Section 4999 of
the Code, if applicable) with respect to such payments (the "total after-tax
payments"), would be increased by the limitation or elimination of any payment
under this Agreement, amounts payable under this Agreement shall be reduced to
the extent, and only to the extent, necessary to maximize the total after-tax
payments. The determination as to whether and to what extent payments under
this agreement are required to be reduced in accordance with the preceding
sentence shall be made by agreement between you and the independent public
accounting firm of
<PAGE> 9
the Company (whose fees and expenses shall be borne solely by the Company). To
the extent that any elimination or reduction of payments is made in accordance
with this Section 4.2, the determination as to which payments shall be
eliminated or reduced shall be made by you.
4.3 Mitigation. Except as provided in Section 4.1(a)(ii) hereof, you
shall not be required to mitigate the amount of any payment or benefits
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefits provided for in this Section 4 be
reduced by any compensation earned by you as a result of employment by another
employer, by retirement benefits or by offset against any amount claimed to be
owed by you to the Company or otherwise.
4.4 Expenses. The Company agrees to pay as incurred, to the full extent
permitted by law, all legal fees and expenses which you may reasonably incur as
a result of any claim or contest by the Company, you or others regarding the
validity or enforceability of, or liability under, any provision of this
Agreement or any guarantee of performance thereof (including as a result of any
contest by you regarding the amount of any payment or benefits pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Code.
5. Successors; Binding Agreement.
5.1 The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of the Company expressly to assume and agree to perform
this Agreement to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain an
assumption of this Agreement at or prior to the effectiveness of any succession
shall be a breach of this Agreement and shall constitute Good Reason if you
elect to terminate your employment, except that for purposes of implementing
the foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
<PAGE> 10
As used in this Agreement, "Company" shall mean the Company as defined above
and any successor to its business or assets as aforesaid which assumes and
agrees to perform this Agreement by operation of law, or otherwise.
5.2 This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If you should die while any amount
would still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or if there
is no such designee, to your estate.
6. Notice. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or
certified mail, return receipt requested, postage prepaid, or (ii) via a
reputable nationwide overnight courier service, in each case addressed to the
Chief Executive Officer of the Company, at Naperville Corporate Center, 1240
East Diehl Road, Naperville, Illinois 60563, and to you at the address shown
above (or to such other address as either the Company or you may have furnished
to the other in writing in accordance herewith). Any such notice, instruction
or communication shall be deemed to have been delivered two business days after
it is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service.
7. Miscellaneous.
7.1 For purposes of this Agreement, your employment with the Company
shall not be deemed to have terminated if you continue to be employed
by a subsidiary of the Company.
7.2 The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
<PAGE> 11
7.3 The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware.
7.4 No waiver by you at any time of any breach of, or compliance with, any
provision of this Agreement to be performed by the Company shall be deemed a
waiver of that or any other provision at any subsequent time.
7.5 This Agreement may be executed in counterparts, each of which shall be
deemed to be an original but both of which together will constitute one and the
same instrument.
7.6 Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
7.7 This Agreement sets forth the entire agreement of the parties hereto
in respect of the subject matter contained herein and supersedes all prior
agreements, promises, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any officer, employee or
representative of any party hereto; and any prior agreement of the parties
hereto in respect of the subject matter contained herein is hereby terminated
and canceled.
If this accurately reflects our agreement on the subject matter hereof,
kindly sign and return to the Company the enclosed copy of this letter, which
will then constitute our agreement on this subject.
Sincerely,
SPYGLASS, INC.
By: /s/Doug Colbeth
-----------------
Doug Colbeth
-----------------
(Print Name)
President and CEO
-----------------
(Print Title)
Agreed to this 1st day of November, 1996
/s/ Randall T. Littleson
- ------------------------
(Signature)
Randall T. Littleson
- --------------------
(Print Name)
Vice President, Marketing
- -------------------------
(Print Title)
<PAGE> 1
EXHIBIT 10.12
SPYGLASS, INC.
Senior Management Retention Agreement
Rich Houle
Spyglass, Inc.
Naperville Corporate Center
1240 East Diehl Road
Naperville, IL 60563
Dear Mr. Houle:
Spyglass, Inc. (the "Company") recognizes that, as is the case with many
publicly-held corporations, the possibility of a change in control of the
Company exists and that such possibility, and the uncertainty and questions
which it may raise among key personnel, may result in the departure or
distraction of key personnel to the detriment of the Company and its
stockholders.
The Board of Directors of the Company (the "Board") has determined that
appropriate steps should be taken to reinforce and encourage the continued
employment and dedication of the Company's key personnel, including yourself,
without distraction from the possibility of a change in control of the Company
and related events and circumstances.
As inducement for and in consideration of your remaining in its employ,
the Company agrees that you shall receive the severance benefits set forth in
this letter agreement (the "Agreement") in the event your employment with the
Company is
<PAGE> 2
terminated under the circumstances described below subsequent to a Change in
Control of the Company (as defined below).
1. Certain Definitions.
As used herein, the following terms shall have the following respective
meanings:
1.1 "Change in Control" shall mean:
(a) the acquisition by an individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then-outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change in Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or (iv)
any acquisition by any corporation pursuant to a transaction which complies
with clauses (i), (ii) and (iii) of subsection (c) of this Section 1.1; or
(b) individuals who, as of the date hereof, constitute the members of the
Board (the "Incumbent Directors") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at least a
majority of the Incumbent Directors shall be deemed to be an Incumbent Director
(except that this proviso clause shall not apply to any individual whose
initial election as a director occurs as a result of an actual or threatened
election contest with respect to the election
<PAGE> 3
or removal of directors or other actual or threatened solicitation of proxies
or consents by or on behalf of a Person other than the Board); or
(c) the consummation of a reorganization, merger or consolidation
involving the Company or a sale or other disposition of all or substantially
all of the assets of the Company (a "Business Combination"), unless,
immediately following such Business Combination, (i) all or substantially all
of the individuals and entities who were the beneficial owners of the
Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of the then-outstanding shares of common stock and
the combined voting power of the then-outstanding voting securities entitled to
vote generally in the election of directors, respectively, of the resulting or
acquiring corporation in such Business Combination in substantially the same
proportions as their ownership, immediately prior to such Business Combination,
of the Outstanding Company Common Stock and Outstanding Company Voting
Securities, respectively, (ii) no Person (excluding any resulting or acquiring
corporation in such Business Combination or any employee benefit plan (or
related trust) of the Company or of such resulting or acquiring corporation in
such Business Combination) beneficially owns, directly or indirectly, 30% or
more of the then outstanding shares of common stock of such resulting or
acquiring corporation in such Business Combination, or of the combined voting
power of the then-outstanding voting securities of such corporation (except to
the extent that such ownership existed prior to the Business Combination) and
(iii) at least half of the members of the board of directors of the resulting
or acquiring corporation in such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or of
the action of the Board, providing for such Business Combination; or
(d) approval by the stockholders of the Company of a complete liquidation
or dissolution of the Company.
1.2 "Cause" shall mean:
<PAGE> 4
(a) your willful failure to substantially perform your reasonable
assigned duties as an officer of the Company (other than any such failure
resulting from incapacity due to physical or mental illness), which failure is
not cured within 30 days after a written demand for substantial performance is
delivered to you by the Board which specifically identifies the manner in which
the Board believes that you have not substantially performed your duties; or
(b) your willful engagement in illegal conduct or gross misconduct which
is materially and demonstrably injurious to the Company.
For purposes of this Section 1.2, no act or failure to act, on your part
shall be considered "willful" unless it is done, or omitted to be done, by you
in bad faith and without reasonable belief that your action or omission was in
the best interests of the Company.
1.3 "Good Reason" shall mean the occurrence, without your written
consent, of any of the following circumstances unless such circumstance is
fully corrected prior to the Date of Termination specified in the Notice of
Termination (each as defined below) given in respect thereof (provided that
such right of correction by the Company shall only apply to the first Notice of
Termination for Good Reason given by you):
(a) the assignment to you (without your written consent) of any duties
inconsistent in any respect with your position (including status, offices,
titles and reporting requirements), authority or responsibilities in effect as
immediately prior to the Change in Control, or any other action by the Company
which results in a diminution in such position, authority or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent action
not taken in bad faith and which is remedied by the Company promptly after
receipt of written notice thereof given by you;
(b) a reduction in your annual base salary as in effect on the date
hereof or as the same may be increased from time to time;
<PAGE> 5
(c) the failure by the Company to (i) continue in effect any material
compensation or benefit plan in which you participate immediately prior to the
Change in Control, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan, (ii)
continue your participation therein (or in such substitute or alternative plan)
on a basis not materially less favorable, both in terms of the amount of
benefits provided and the level of your participation relative to other
participants, as existed at the time of the Change in Control or (iii) award
cash bonuses to you in amounts and in a manner substantially consistent with
past practice in light of the Company's financial performance;
(d) the failure by the Company to continue to provide you with benefits
substantially similar to those enjoyed by you under any of the Company's life
insurance, medical, health and accident, or disability plans in which you were
participating at the time of the Change in Control, the taking of any action by
the Company which would directly or indirectly materially reduce any of such
benefits, or the failure by the Company to provide you with the number of paid
vacation days to which you are entitled on the basis of years of service with
the Company in accordance with the Company's normal vacation policy in effect
at the time of the Change in Control;
(e) a change by the Company in the location at which you perform your
principal duties for the Company to a new location that is both (i) outside a
radius of 35 miles from your principal residence at the time of the Change in
Control and (ii) more than 20 miles from the location at which you perform your
principal duties for the Company at the time of the Change in Control; or a
requirement by the Company that you travel on Company business to a
substantially greater extent than required immediately prior to the Change in
Control;
(f) the failure of the Company to obtain a reasonably satisfactory
agreement from any successor to assume and agree to perform this Agreement, as
required by Section 5; or
<PAGE> 6
(g) a purported termination of your employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of Sections 3.2
and 6, which purported termination shall not be effective for purposes of this
Agreement.
For purposes of this Agreement, any good faith determination of "Good
Reason" made by the Board shall be conclusive, provided that Incumbent
Directors then comprise a majority of the Board.
1.4 "Disability" shall mean your absence from the full-time performance
of your duties with the Company for six consecutive months as a result of
incapacity due to mental or physical illness which is determined to be total
and permanent by a physician selected by the Company or its insurers and
acceptable to you or your legal representative.
2. Term of the Agreement. The term of this Agreement (the "Term") shall
commence on as of the date hereof and shall continue in effect through December
31, 1998; provided, however, that commencing on January l, 1999 and each
January l thereafter, the Term shall be automatically extended for one
additional year unless, not later than October 31 of the preceding calendar
year, the Company shall have given you written notice that the Term will not be
extended. This Agreement, and all rights and obligations of the parties
hereunder, shall expire upon (a) the expiration of the Term if a Change in
Control has not occurred during the Term, (b) the date 24 months after the date
of the Change in Control, if you are still employed by the Company as of such
date, or (c) the fulfillment by the Company of all of its obligations under
Section 4 if your employment with the Company terminates within 24 months
following a Change in Control.
3. Employment Status; Termination Following Change in Control.
3.1 Not Employment Contract. You acknowledge that this Agreement does
not constitute a contract of employment or impose on the Company any obligation
to retain you as an employee and that this Agreement does not prevent you from
terminating your employment at any time. If your employment with the
<PAGE> 7
Company terminates for any reason and subsequently a Change in Control shall
occur, you shall not be entitled to any benefits hereunder.
3.2 Termination of Employment. Any termination of your employment by
the Company or by you within 24 months following a Change in Control of the
Company during the Term shall be communicated by written notice of termination
("Notice of Termination") to the other party hereto in accordance with Section
6. If such employment termination is for Cause, Good Reason or Disability, the
Notice of Termination shall so state. The "Date of Termination" shall mean the
effective date of such termination as specified in the Notice of Termination
(provided that no such Notice of Termination shall specify an effective date
less than fifteen days or more than 120 days after the date such Notice of
Termination is delivered).
4. Rights Upon Termination.
4.1 Compensation. You shall be entitled to the following benefits if a
Change in Control occurs during the Term and your employment with the Company
terminates within 24 months following such Change in Control:
(a) Termination Without Cause or for Good Reason. If your employment
with the Company is terminated by the Company (other than for Cause, Disability
or your death) or by you for Good Reason within 24 months following a Change in
Control, then you shall be entitled to the following benefits:
(i) the Company shall pay to you in a lump sum in cash within 30 days
after the Date of Termination the aggregate of the following amounts:
(1) the sum of (A) your annual base salary through the Date of
Termination, (B) the product of (x) the annual bonus paid or payable (including
any bonus or portion thereof which has been earned but deferred) for the most
recently completed fiscal year and (y) a fraction, the number of which is the
number of days in the current fiscal year through the Date of Termination, and
the denominator of which is 365 and (C) the amount of any compensation
previously deferred by you (together with any accrued interest or earnings
thereon) and any accrued vacation pay, in each case to the extent not
theretofore paid (the sum of the
<PAGE> 8
amounts described in clauses (A), (B), and (C) shall be hereinafter referred to
as the "Accrued Obligations"); and
(2) the amount equal to the sum of (A) your highest annual base salary
during the five-year period prior to the Change in Control and (B) your highest
annual bonus during the five-year period prior to the Change in Control.
(ii) for 12 months after your Date of Termination, or such longer period
as may be provided by the terms of the appropriate plan, program, practice or
policy, the Company shall continue to provide benefits to you and your family
at least equal to those which would have been provided to you and them in
accordance with the applicable plans, programs, practices and policies in
effect on the Date of Termination (excluding any savings and/or retirement
plans) if your employment had not been terminated; provided, however, that if
you become reemployed with another employer and are eligible to receive medical
or other welfare benefits under another employer-provided plan, the medical and
other welfare benefits described herein shall not be provided to the extent the
same are provided under such other plan during such applicable period of
eligibility; and
(iii) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to you any other amounts or benefits required to be paid
or provided or which you are eligible to receive following your termination of
employment under any plan, program, policy or practice or contract or agreement
of the Company and its affiliated companies (such other amounts and benefits
shall be hereinafter referred to as the "Other Benefits").
(b) Resignation without Good Reason; Termination for Death or Disability.
If you voluntarily terminate your employment within 24 months following a
Change in Control, excluding a termination for Good Reason, or if your
employment is terminated by reason of your death or Disability within 24 months
following a Change in Control, the Company shall (i) pay you, in a lump sum in
cash within 30 days after the Date of Termination, the Accrued Obligations and
(ii) timely pay or provide to you the Other Benefits.
<PAGE> 9
(c) Termination for Cause. If your employment is terminated by the
Company for Cause within 24 months following a Change in Control, the Company
shall (i) pay you, in a lump sum in cash within 30 days after the Date of
Termination, the sum of (A) your annual base salary through the Date of
Termination and (B) the amount of any compensation previously deferred by you,
in each case to the extent not theretofore paid, and (ii) timely pay or provide
to you the Other Benefits.
4.2 Taxes. Payments under this Agreement shall be made without regard to
whether the deductibility of such payments (or any other payments to or for
your benefit) would be limited or precluded by Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code") and without regard to whether
such payments (or any other payments) would subject you to the federal excise
tax levied on certain "excise parachute payments" under Section 4999 of the
Code; provided, that if the total of all payments to or for your benefit, after
deduction of all federal taxes (including the tax set forth in Section 4999 of
the Code, if applicable) with respect to such payments (the "total after-tax
payments"), would be increased by the limitation or elimination of any payment
under this Agreement, amounts payable under this Agreement shall be reduced to
the extent, and only to the extent, necessary to maximize the total after-tax
payments. The determination as to whether and to what extent payments under
this agreement are required to be reduced in accordance with the preceding
sentence shall be made by agreement between you and the independent public
accounting firm of the Company (whose fees and expenses shall be borne solely
by the Company). To the extent that any elimination or reduction of payments
is made in accordance with this Section 4.2, the determination as to which
payments shall be eliminated or reduced shall be made by you.
4.3 Mitigation. Except as provided in Section 4.1(a)(ii) hereof, you
shall not be required to mitigate the amount of any payment or benefits
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefits provided for in this Section 4 be
reduced by any compensation earned by you as a result of employment by another
employer, by retirement benefits
<PAGE> 10
or by offset against any amount claimed to be owed by you to the Company or
otherwise.
4.4 Expenses. The Company agrees to pay as incurred, to the full extent
permitted by law, all legal fees and expenses which you may reasonably incur as
a result of any claim or contest by the Company, you or others regarding the
validity or enforceability of, or liability under, any provision of this
Agreement or any guarantee of performance thereof (including as a result of any
contest by you regarding the amount of any payment or benefits pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Code.
5. Successors; Binding Agreement.
5.1 The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of
the business or assets of the Company expressly to assume and agree to perform
this Agreement to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain an
assumption of this Agreement at or prior to the effectiveness of any succession
shall be a breach of this Agreement and shall constitute Good Reason if you
elect to terminate your employment, except that for purposes of implementing
the foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall
mean the Company as defined above and any successor to its business or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
5.2 This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If you should die while any amount
would still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this
<PAGE> 11
Agreement to your devisee, legatee or other designee or if there is no such
designee, to your estate.
6. Notice. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or
certified mail, return receipt requested, postage prepaid, or (ii) via a
reputable nationwide overnight courier service, in each case addressed to the
Chief Executive Officer of the Company, at Naperville Corporate Center, 1240
East Diehl Road, Naperville, Illinois 60563, and to you at the address shown
above (or to such other address as either the Company or you may have furnished
to the other in writing in accordance herewith). Any such notice, instruction
or communication shall be deemed to have been delivered two business days after
it is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service.
7. Miscellaneous.
7.1 For purposes of this Agreement, your employment with the Company shall
not be deemed to have terminated if you continue to be employed by a subsidiary
of the Company.
7.2 The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
7.3 The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware.
7.4 No waiver by you at any time of any breach of, or compliance with, any
provision of this Agreement to be performed by the Company shall be deemed a
waiver of that or any other provision at any subsequent time.
7.5 This Agreement may be executed in counterparts, each of which shall be
deemed to be an original but both of which together will constitute one and the
same instrument.
<PAGE> 12
7.6 Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
7.7 This Agreement sets forth the entire agreement of the parties hereto
in respect of the subject matter contained herein and supersedes all prior
agreements, promises, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any officer, employee or
representative of any party hereto; and any prior agreement of the parties
hereto in respect of the subject matter contained herein is hereby terminated
and canceled.
If this accurately reflects our agreement on the subject matter hereof,
kindly sign and return to the Company the enclosed copy of this letter, which
will then constitute our agreement on this subject.
Sincerely,
SPYGLASS, INC.
By: /s/Doug Colbeth
-----------------
Doug Colbeth
-----------------
(Print Name)
President and CEO
-----------------
(Print Title)
Agreed to this 1st day of November, 1996
/s/ Rich Houle
- --------------
(Signature)
Rich Houle
- ------------
(Print Name)
Executive Vice President
- ------------------------
(Print Title)
<PAGE> 1
EXHIBIT 10.19
AMENDMENT #1
to
TECHNOLOGY COOPERATION AGREEMENT,
INCLUDING AMENDMENT OF OEM/SOURCE LICENSE AGREEMENT
between
Spyglass, Inc. and Microsoft Corporation
This Amendment #1 amends the Technology Cooperation Agreement, including
Amendment of OEM/Source License Agreement effective December 6, 1995 between
Spyglass, Inc. and Microsoft Corporation.
1. The Technology Cooperation Agreement Section 1.3(a)(1) Minimum Quarterly
Purchase Commitments table and following paragraph are hearby amended as
follows:
<TABLE>
<S> <C> <C> <C> <C>
Calendar Calendar Calendar Calendar
Q1 Q2 Q3 Q4
1996 ****** ****** ****** ******
1997 ****** ****** ****** ******
1998 ****** ****** ****** ******
</TABLE>
Such Quarterly Fees shall be paid and delivered along with the quarterly
royalty report specified in Section 1.3(b). All Quarterly Fees specified in
this Section 1.3(a)(1), totaling ******, shall be applied against and recouped
from future earned royalties. Notwithstanding the foregoing, once the total
amount of cumulative earned royalties paid to Spyglass (with credit for
Quarterly Fees already paid) equals or exceeds ****** Microsoft shall not be
obligated to pay Spyglass any further Quarterly Fees.
2. All other terms and conditions of the Technology Cooperation Agreement,
including Amendment of OEM/Source License Agreement shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
by their duly authorized representatives and effective as of the date of the
last party to sign.
SPYGLASS, INC. Microsoft Corporation
By: /s/ Michael F. Tyrrell By: /s/ John Ludwig
----------------------------- -------------------------
Name: Michael F. Tyrrell Name: John Ludwig
---------------------------- -----------------------
Title: EVP Business Development Title: Vice President
--------------------------- ---------------------
Date: 9/30/96 Date: 9/30/96
---------------------------- -----------------------
<PAGE> 1
EXHIBIT 11.1
SPYGLASS, INC.
COMPUTATION OF NET INCOME PER SHARE (1)
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net income $3,460,000 $2,176,000 $1,384,000
---------- ---------- ----------
Weighted average shares outstanding:
Common stock 11,618,800 8,272,876 3,318,952
Redeemable convertible preferred
stock - - 3,448,000
Common stock equivalents
calculated by treasury stock
method applied to option,
and warrants issued (2) 1,219,292 1,150,542 918,470
---------- ---------- ----------
Weighted average common shares and
equivalents 12,838,062 9,423,418 7,685,422
---------- ---------- ----------
Net income per share $0.27 $0.23 $0.18
</TABLE>
(1) - This exhibit should be read in conjunction with "Summary
of Operations and Significant Accounting Policies-Per Share
Information" in Note 1 of the Notes to the Consolidated Financial
Statements.
(2) - Stock options granted prior to the beginning of each
reporting period have been included in the calculation of common stock
equivalents as if they were outstanding for the entire period (using
the treasury stock method).
<PAGE> 1
Exhibit 13.1
selected financial data
The following table sets forth selected financial data of the Company for and
as of the five years ended September 30, 1996, 1995, 1994, 1993 and 1992. The
selected financial data has been derived from the Company's consolidated
financial statements. This financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) 1996 1995 1994 1993(1) 1992(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total net revenues $22,307 $12,141 $ 4,667 $ 1,375 $ 918
Gross profit 20,277 10,380 3,580 1,152 763
Income (loss) from operations 3,667 3,025 770 (388) (484)
Income (loss) before cumulative
effect of change in accounting 3,460 2,176 584 (320) (389)
Net income (loss) 3,460 2,176 1,384 (320) (389)
Net income (loss) available to
common stockholders $ 3,460 $ 1,985 $ 1,127 $ (577) $ (645)
PER SHARE AND SHARE DATA:
Earnings (loss) per common share
and equivalents(2):
Income (loss) before cumulative
effect of change in accounting $ 0.27 $ 0.23 $ 0.08 $ (0.13) $ (0.15)
Net income (loss) $ 0.27 $ 0.23 $ 0.18 $ (0.13) $ (0.15)
Net income (loss) available to
common stockholders $ 0.27 $ 0.21 $ 0.15 $ (0.23) $ (0.26)
Weighted average number of common
shares and equivalents outstanding 12,838 9,423 7,685 2,514 2,520
BALANCE SHEET DATA:
Cash and cash equivalents $16,490 $34,872 $ 1,606 $ 757 $ 239
Short-term investments 17,593 -- -- $ -- --
Working capital 39,117 35,550 2,174 661 1,030
Total assets 48,769 43,509 5,871 1,167 1,416
Redeemable convertible preferred stock -- -- 3,393 3,135 2,878
Total stockholders' equity $43,891 $37,614 $ (756) $(2,227) $(1,651)
</TABLE>
(1) Selected financial data for the years ended September 30, 1993 and 1992 do
not include the results of Stonehand Inc., SurfWatch Software, Inc. or
OS Technologies Corporation which were acquired in fiscal 1996 in
transactions accounted for as pooling of interests. The selected financial
data of such companies for these fiscal years do not materially affect the
results shown above.
(2) On November 28, 1995, the Board of Directors declared a two-for-one common
stock split, effected in the form of a 100% stock dividend, paid
December 20, 1995, to stockholders of record as of December 6, 1995. All
share and per share data have been restated to reflect the two-for-one
common stock split for all periods presented.
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12
<PAGE> 2
selected quarterly data
The following table sets forth certain quarterly financial information of the
Company for fiscal years 1996 and 1995. This information has been derived from
the quarterly consolidated financial statements of the Company which are
unaudited but which, in the opinion of management, have been prepared on the
same basis as the audited consolidated financial statements included herein and
include all adjustments (consisting only of normal recurring items) necessary
for a fair presentation of the financial results for such periods. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
Three Months Ended (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31,
(In thousands, except per share amounts) 1996 1996 1996 1995 1995(1) 1995 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total net revenues $ 6,551 $ 6,003 $ 5,000 $ 4,753 $ 4,259 $ 3,154 $2,448 $2,280
Gross profit 5,961 5,484 4,562 4,270 3,708 2,789 2,094 1,789
Income from operations 921 1,008 876 862 1,490 560 577 398
Net income 1,004 862 752 842 1,176 356 400 244
Net income available to
common stockholders $ 1,004 $ 862 $ 752 $ 842 $ 1,176 $ 294 $ 335 $ 180
PER SHARE AND SHARE DATA:
Earnings per common share
and equivalents(2):
Net income $ 0.08 $ 0.07 $ 0.06 $ 0.07 $ 0.09 $ 0.04 $ 0.05 $ 0.03
Net income available to
common stockholders $ 0.08 $ 0.07 $ 0.06 $ 0.07 $ 0.09 $ 0.03 $ 0.04 $ 0.02
Weighted average number of
common shares and
equivalents outstanding 12,750 12,853 12,962 12,929 12,689 8,729 7,889 7,801
MARKET PRICE PER SHARE:
High $23 5/8 $34 7/8 $55 3/4 $ 61 $ 54 $29 1/4 N/A N/A
Low $ 12 $19 1/8 $ 18 $16 1/2 $28 1/2 $26 1/2 N/A N/A
</TABLE>
DIVIDEND POLICY:
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain earnings, if any, to support its growth strategy and
does not anticipate paying cash dividends in the foreseeable future.
(1) Includes a one-time pre-tax gain of $863 from the sale of the Company's
data visualization product line in September 1995. The after-tax
contribution to income is $0.06 per share.
(2) On November 28, 1995, the Board of Directors declared a two-for-one common
stock split, effected in the form of a 100% stock dividend, paid
December 20, 1995, to stockholders of record as of December 6, 1995. All
share and per share data have been restated to reflect the two-for-one
common stock split for all periods presented.
As of December 18, 1996, there were 651 stockholders of record.
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<PAGE> 3
management's discussion and analysis of
financial condition and results of operations
OVERVIEW
Spyglass, Inc. ("Spyglass" or the "Company") was organized as an Illinois
corporation in February 1990 and reincorporated in Delaware in May 1995.
Spyglass entered the Internet market during fiscal 1994 and from fiscal 1994
through fiscal 1996, focused its efforts on developing, marketing and
distributing World Wide Web ("WWW" or "Web") client and server technologies for
incorporation into a variety of Internet-based products and services. In fiscal
1997, the Company will increasingly focus on the development, marketing and
distribution of its technologies to the Internet device market. This market
consists of non-PC devices and the underlying Internet infrastructure. Spyglass
will market Internet connectivity products to a variety of companies such as the
real time operating system (RTOS) vendors and consumer and industrial device
manufacturers in the device segment of this market, and will market Internet
infrastructure and application products to a variety of companies such as the
Regional Bell Operating Companies (RBOCs), Internet Service Providers (ISPs) and
internetworking hardware providers in the infrastructure segment of this market.
These technologies will be designed to be embedded within Internet devices,
software applications and on-line services to bring Web functionality to these
products and services. Spyglass technology offerings include the Spyglass Web
Client Software Development Kit, which was renamed Spyglass Mosaic in December
1996, ("Client SDK"), the Spyglass Web Server Software Development Kit, which
was renamed Spyglass Web Server in December 1996, ("Server SDK"), SurfWatch
ProServer, SurfWatch from Spyglass and WebNotes. Spyglass Web technology can be
found embedded inside various end-user products, including televisions, database
applications, set-top boxes, CAD-CAM software and consumer kiosks. Prior to
fiscal 1994, the Company focused its efforts on the scientific data
visualization tools market; this product line was sold in fiscal 1995.
In February 1996, the Company acquired Stonehand Inc. ("Stonehand"), a
privately-held company which was based in Cambridge, Massachusetts, for
approximately 230,000 shares of common stock in a transaction accounted for as
pooling of interests. As a result, all financial information prior to February
2, 1996, unless otherwise noted, includes the accounts and results of
operations of Stonehand for all periods presented. At the time of acquisition,
Stonehand was a leader in core Web technologies including text formatting and
internationalization technologies such as SGML, HTML, DSSSL and Unicode.
In April 1996, the Company acquired OS Technologies Corporation ("OS Tech") and
SurfWatch Software, Inc. ("SurfWatch") for approximately 87,000 and 470,000
shares of common stock, respectively, in transactions accounted for as pooling
of interests. As a result, all financial information prior to April 17, 1996
and April 24, 1996, unless otherwise noted, includes the accounts and results
of operations of OS Tech and SurfWatch, respectively, for all periods
presented. At the time of acquisition, OS Tech was located in Cambridge,
Massachusetts and developed and licensed WWW conferencing and forum technology.
At the time of acquisition, SurfWatch, a Los Altos, California vendor of
Internet filtering and parental control software, marketed Internet software
for blocking access to inappropriate material and licensed Internet filtering
technology to a variety of markets, including the on-line services industry,
personal computer manufacturers, and the educational market as well as
corporations.
These acquisitions significantly enhanced Spyglass core technologies as well as
increased its product offerings. Additionally, Stonehand and SurfWatch
operations have formed the core of new Spyglass research and development
facilities in Cambridge, Massachusetts and Los Altos, California, respectively.
The Company pays royalties to the University of Illinois with respect to
licenses of the Client SDK. Under its agreement with the University of
Illinois, the Company's royalty rate decreased effective January 1, 1995 from
the rate previously in effect. In addition, the Company pays royalties to RSA
Data Security, Inc. with respect to licenses of the Company's technologies
containing certain RSA code. These royalties are reflected in cost of revenues.
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<PAGE> 4
management's discussion and analysis of
financial condition and results of operations (continued)
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
revenues for the fiscal years ended September 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Percentage of Revenues
For the Fiscal Years Ended September 30,
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES:
World Wide Web technology revenues 87.3% 81.3% 56.1%
Data visualization product revenues -- 12.5 42.3
Service revenues 12.7 6.2 1.6
- -------------------------------------------------------------------------------------------------------------
Total net revenues 100.0 100.0 100.0
- -------------------------------------------------------------------------------------------------------------
COST OF REVENUES:
Cost of technology and product revenues 8.6 14.5 23.3
Cost of service revenues 0.5 -- --
- -------------------------------------------------------------------------------------------------------------
Total cost of revenues 9.1 14.5 23.3
- -------------------------------------------------------------------------------------------------------------
Gross profit 90.9 85.5 76.7
OPERATING EXPENSES AND OTHER:
Sales and marketing 26.7 27.2 22.9
Research and development 30.6 22.7 18.7
General and administrative 17.2 17.8 18.6
Gain on sale of data visualization product line -- (7.1) --
- -------------------------------------------------------------------------------------------------------------
Income from operations 16.4 24.9 16.5
Other income 7.8 4.7 2.3
- -------------------------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of change in accounting 24.2 29.6 18.8
Provision for income taxes 8.7 11.7 6.3
- -------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting 15.5 17.9 12.5
Cumulative effect of change in accounting for income taxes -- -- 17.1
- -------------------------------------------------------------------------------------------------------------
NET INCOME 15.5% 17.9% 29.6%
=============================================================================================================
</TABLE>
FISCAL YEAR ENDED SEPTEMBER 30, 1996
COMPARED WITH FISCAL YEAR ENDED SEPTEMBER 30, 1995
Technology and product revenues for the year ended September 30, 1996
increased $8,082,000, or 71%, to $19,466,000 compared to $11,384,000 for the
year ended September 30, 1995. This increase in technology and product revenues
was due primarily to revenues from license agreements with new customers for
the Client SDK and, to a lesser extent, the Server SDK and SurfWatch
technologies. Approximately 12.1% of the Company's revenues for fiscal 1996
were attributable to a license from one customer. World Wide Web technology
revenues, as a percentage of revenues, increased to 87.3% during the 1996
fiscal year from 81.3% during the 1995 fiscal year. The Company sold its data
visualization product line in September 1995 and reported no revenues from this
product line for the year ended September 30, 1996 compared to $1,513,000 in
the year ended September 30, 1995. The Company expects its revenue growth to
slow during fiscal 1997 as the Company increasingly focuses its efforts on the
Internet device market.
Service revenues for the year ended September 30, 1996 increased $2,084,000, or
275%, to $2,841,000 compared to $757,000 for the year ended September 30, 1995.
During the third quarter of fiscal 1996, the Company formed a Partner Services
group to service the Internet device market. This group is comprised of
customer support and professional services. The increase in service revenues
was due primarily to the increase in the number of support agreements with new
customers for the Client SDK and the Server SDK in addition to continuing
support agreements with existing customers. Revenues from professional services
approximated $560,000 in fiscal 1996. The Company expects service revenues to
increase significantly as a percentage of revenues in fiscal 1997.
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<PAGE> 5
management's discussion and analysis of
financial condition and results of operations (continued)
Gross profit as a percentage of revenues was 90.9% for the year ended September
30, 1996 compared to 85.5% for the year ended September 30, 1995. This increase
in gross profit percentage resulted primarily from lower royalty costs
reflecting changes in product mix. This change in product mix resulted from the
sale of the data visualization product line in September 1995 (which had higher
royalty costs as a percentage of revenue than the Client SDK) and the
introduction of the Spyglass Server in July 1995, which has now been
incorporated into the Server SDK (which has lower royalty costs as a percentage
of revenue than the Client SDK).
Sales and marketing expenses for the year ended September 30, 1996 increased
$2,660,000, or 81%, to $5,963,000 from $3,303,000 for the year ended September
30, 1995, but decreased slightly as a percentage of revenues to 26.7% from
27.2%. The increased expenses reflected higher sales commission costs (which
increased to $785,000 in fiscal 1996 from $442,000 in fiscal 1995) due to
increased revenues in addition to staff additions in sales, marketing, and
customer support (which increased the cost of salary and related personnel
expenses to $2,725,000 in fiscal 1996 from $1,331,000 in fiscal 1995).
Additionally, certain marketing initiatives, which included a print campaign to
increase awareness of its products among the business and technology
communities, accounted for $530,000 of the increase in sales and marketing
expenses for the year ended September 30, 1996 as compared to the year ended
September 30, 1995. The Company expects to significantly increase its sales and
marketing expenses in fiscal 1997 as the Company increasingly focuses its
efforts on the Internet device market. The increased sales and marketing
expenses are expected to result from initiatives such as increased marketing
activities, an expanded sales organization, and the addition of new
distribution channels.
Research and development expenses for the year ended September 30, 1996
increased $4,045,000, or 147%, to $6,801,000 compared to $2,756,000 for the
year ended September 30, 1995, and increased as a percentage of revenues to
30.6% from 22.7%. The increase in research and development costs was due
primarily to costs associated with enhancements to existing technologies as
well as the development of the Software Development Kits, the SurfWatch
ProServer(TM) and other new technologies. The Company believes that it is
necessary to make significant investments in research and development and
acquisitions of new technologies to remain competitive in the Internet software
business and solidify a leadership position in the Internet device market. The
Company's current plans include significantly increasing the size of its
research and development staff during fiscal 1997, which will significantly
increase research and development expenses.
General and administrative expenses for the year ended September 30, 1996
increased $1,687,000, or 78%, to $3,846,000 from $2,159,000 for the year ended
September 30, 1995 but declined slightly as a percentage of revenues to 17.2%
from 17.8%. The increase in general and administrative expenses was due
primarily to increases in personnel (which increased salary and related
personnel expenses to $1,476,000 in fiscal 1996 from $679,000 in fiscal 1995)
as well as expenses incurred by the Company related to the acquisitions of
Stonehand, OS Tech and SurfWatch.
In fiscal 1995, the Company recorded a pre-tax gain, net of transaction
expenses, of $863,000 on the sale of its data visualization product line. The
approximate after-tax contribution to income was $523,000, or $0.06 per share.
Interest income, included in other income on the financial statements, for the
year ended September 30, 1996 increased $1,243,000, or 253%, to $1,734,000 from
$491,000 for the year ended September 30, 1995. This increase in interest
income is primarily due to an increase in cash and cash equivalents and
short-term investments as a result of the Company's initial public offering in
June 1995.
The provision for income taxes for the year ended September 30, 1996 increased
$536,000 to $1,951,000 from $1,415,000 for the year ended September 30, 1995.
The provision for income taxes as a percentage of income before income taxes
approximated 36% in fiscal 1996 as compared to 39% in fiscal 1995. This
decrease in the effective tax rate is due to increased research and development
tax credits for the current fiscal year.
FISCAL YEAR ENDED SEPTEMBER 30, 1995
COMPARED WITH FISCAL YEAR ENDED SEPTEMBER 30, 1994
Technology and product revenues for the year ended September 30, 1995 increased
$6,790,000, or 148%, to $11,384,000 compared to $4,594,000 for the year ended
September 30, 1994. This increase in technology and product revenues was due
primarily to revenues from licenses of Spyglass Mosaic, which was introduced in
the third quarter of fiscal 1994 (and has now been incorporated into the Client
SDK). Approximately 17.3% of the Company's revenues for fiscal 1995 were
attributable to a license for Spyglass Mosaic granted in the first quarter of
fiscal 1995 to a single customer. World Wide Web technology revenues, as a
percentage of revenues, increased to 81.3% during the 1995 fiscal year from
56.1% during the 1994 fiscal year. Revenues from licenses of data visualization
products decreased $460,000, or 23%, to $1,513,000 for the year ended September
30, 1995 compared to $1,973,000 for the year ended September 30, 1994. In
September 1995, the Company sold its data visualization product line to a
stockholder for $910,000.
Service revenues for the year ended September 30, 1995 increased $684,000 to
$757,000 compared to $73,000 for
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16
<PAGE> 6
management's discussion and analysis of
financial condition and results of operations (continued)
the year ended September 30, 1994. This increase in service revenues was due
to revenues from support agreements of Spyglass Mosaic.
Gross profit as a percentage of revenues was 85.5% for the year ended September
30, 1995 compared to 76.7% for the year ended September 30, 1994. This increase
in gross profit percentage resulted primarily from lower royalty costs
reflecting changes in product mix, as Spyglass Mosaic revenues (which had lower
royalty costs as a percentage of net revenues than data visualization products)
comprised a greater percentage of revenues during fiscal 1995 compared to
fiscal 1994, in addition to the effect of the acquisition of Stonehand (which
had a higher gross profit percentage in fiscal 1995 than in fiscal 1994).
Sales and marketing expenses for fiscal 1995 increased $2,234,000, or 209%, to
$3,303,000 from $1,069,000 for fiscal 1994, and increased as a percentage of
revenues to 27.2% from 22.9%. The increased expenses reflected higher sales
commission costs (which increased to $442,000 in fiscal 1995 from $112,000 in
fiscal 1994) due to increased revenues in addition to staff additions in sales,
marketing, and product support (which increased the cost of salary and related
personnel expenses to $1,331,000 in fiscal 1995 from $364,000 in fiscal 1994).
Research and development expenses for fiscal 1995 increased $1,885,000, or
216%, to $2,756,000, from $871,000 for fiscal 1994, and increased as a
percentage of revenues to 22.7% from 18.7%. The increase in research and
development costs was due primarily to costs associated with enhancements to
existing technologies and new product development of Spyglass Mosaic and the
Spyglass Server.
General and administrative expenses for fiscal 1995 increased $1,289,000, or
148%, to $2,159,000 from $870,000 for fiscal 1994, but declined as a percentage
of revenues to 17.8% from 18.6%. The increase in general and administrative
expenses in fiscal 1995 was due primarily to increases in personnel and
general corporate expenses required to support the growth of the Company's
operations.
In fiscal 1995, the Company recorded a pre-tax gain, net of transaction
expenses, of $863,000 on the sale of its data visualization product line. The
approximate after-tax contribution to income was $523,000 or $0.06 per share.
Interest income, included in other income on the financial statements, for the
year ended September 30, 1995 increased $468,000 to $491,000 from $23,000 for
the year ended September 30, 1994. This increase in interest income is
primarily due to the increase in the Company's cash balance and cash
equivalents as a result of its initial public offering in June 1995.
The provision for income taxes for the year ended September 30, 1995 increased
$1,090,000 to $1,415,000 from $325,000 for the year ended September 30, 1994.
The provision for income taxes as a percentage of income before income taxes
and cumulative effect of change in accounting approximated 39% in fiscal 1995
as compared to 38% in fiscal 1994. In the year ended September 30, 1994, the
Company recorded a tax benefit of $800,000 as a result of the change in its
method of accounting for income taxes. The cumulative effect of the change in
accounting for income taxes related primarily to the future tax benefits of net
operating loss carryforwards aggregating $1,655,000.
LIQUIDITY AND CAPITAL RESOURCES
On June 27, 1995, the Company completed an initial public offering of its
common stock which provided the Company with net proceeds of approximately
$32,145,000. As of September 30, 1996, the Company had no debt and had cash and
cash equivalents of $16,490,000, short-term investments of $17,593,000 and
working capital of $39,117,000. The Company's operating activities used cash of
$822,000 for the fiscal year ended September 30, 1996 and provided cash of
$715,000 and $879,000 for the fiscal years ended September 30, 1995 and 1994,
respectively.
The Company's net accounts receivable increased to $7,608,000 at September 30,
1996 from $4,180,000 at September 30, 1995. This increase was primarily due to
an increase in revenues.
The Company's capital expenditures totaled $2,905,000, $1,034,000, and $209,000
for the fiscal years ended September 30, 1996, 1995 and 1994, respectively, and
consisted primarily of computer hardware and software, office furniture and
equipment and leasehold improvements. The Company had no material commitments
for capital expenditures at September 30, 1996. Subsequent to year end, the
Company entered into agreements with various vendors to improve and enhance its
finance, human resources and customer support information systems.
The Company believes that its current cash and cash equivalents, together with
funds expected to be generated from operations, will be sufficient to finance
the Company's operations through at least the fiscal year ending September 30,
1997.
FUTURE OPERATING RESULTS
This Annual Report contains a number of forward-looking statements. Any
statements contained herein (including without limitation statements to the
effect that the Company or its management "believes", "expects", "anticipates",
"plans" and similar expressions) that are not statements of historical fact
should be considered forward-looking statements. There are a number of
important factors that could cause the Company's actual results
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<PAGE> 7
management's discussion and analysis of
financial condition and results of operations (continued)
to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth below.
The Company's future results of operations will be largely dependent upon a
number of factors relating to development and acceptance of the Internet device
market as a commercial market and the Company's ability to establish its
technologies as widely-accepted in the market. In particular, commercial use of
the Internet continues to be constrained by the need for reliable processes
such as security measures for electronic commerce as well as the need for
regularly available customer support and a supporting infrastructure providing
widespread Internet accessibility and high-speed communications capabilities.
In addition, the market for Internet software products is characterized by
rapidly changing technology, evolving industry standards and customer demands,
and frequent product introductions and enhancements, which make it difficult to
predict whether the initial commercial acceptance of the Company's products can
be sustained over a period of time.
The Company has recently announced an increased strategic focus on the Internet
device market. The Company is increasingly focusing on the development and
marketing of technologies that enable digital devices, such as business
productivity products, consumer electronic devices and office equipment, to
access the Web. Because this is a new and undeveloped market, there can be no
assurance as to the extent of the demand for product offerings similar to those
of the Company, or the extent to which the Company will be successful in
penetrating this market. Moreover, the Company expects its revenue growth to
slow during fiscal 1997 as the Company redirects its business strategy toward
vendors of Internet-enabled devices, rather than vendors of desk-top software
applications. In addition, the Company expects to significantly increase its
expenditures in product development, marketing and sales relating to the
Internet device market, which should negatively impact net income during fiscal
1997.
The market for Internet software products is extremely competitive, and
competition is likely to increase in the future due to the increasing
popularity of the Internet. The Company currently faces competition from other
Internet device technology and software vendors (such as Navio Communications
and Microsoft Corporation). In licensing its Internet technologies, the Company
considers a significant source of competition to be the prospect company's
internal software development resources. In addition, the increase in market
share of Netscape and Microsoft in the desktop browser and server market, as
well as the Microsoft corporate strategy for Windows, has increased the
competitive pressures on customers of Spyglass in the browser, server and
embedded technology markets. The Company has a license arrangement with
Microsoft Corporation which provides a worldwide license to distribute Spyglass
Mosaic on multiple platforms on a per copy basis with certain fixed fee
provisions.
The Company licenses its products to a variety of companies such as RTOS
vendors, consumer and industrial device manufacturers, RBOCs, ISPs and
internetworking hardware providers that incorporate the Company's technology
into their products and services. The success of the Company is therefore
dependent in large part on the performance of its customers, which is outside
of the Company's control.
The Company from time to time receives notices alleging that its products
infringe third party proprietary rights. For example, the Company has a pending
dispute with Unisys Corporation regarding the Graphics Interchange Format.
Spyglass has received a notice from Elk Industries Inc. alleging that one or
more products of Spyglass infringe a patent owned by Elk Industries Inc.
Spyglass has not concluded its examination of this claim. Patent and similar
litigation frequently is complex and expensive and its outcome can be difficult
to predict. If, as a result of proprietary rights infringements by any of the
Company's products, the Company is required to discontinue sales of certain
products, eliminate certain features on its products, or pay royalties to
another party, the Company's future operating results could be materially
adversely affected.
The Company's quarterly operating results have varied and they may continue to
vary significantly depending on factors such as the timing of significant
license agreements, the terms of the Company's licensing arrangements with its
customers and the timing of new product introductions and upgrades by the
Company and its competitors. The Company typically structures its license
agreements with customers to require commitments for a significant minimum
number of licenses, and license revenues are recognized as the committed
licenses are purchased. The Company typically experiences the greatest
proportion of net revenues in the first quarter of a license arrangement. The
Company's net revenue often declines after the first quarter of a contract as
the number of copies purchased by the customer declines. Additional revenues
from a customer will not be earned unless and until the initial committed
levels are exceeded. The Company's revenues in any quarter will therefore
depend in significant part on its ability to sell licenses to new customers in
that quarter. The Company's expense levels are based in part in expectations of
future revenue levels and any shortfall in expected revenue could therefore
result in a disproportionate decrease in the Company's net income.
INFLATION
The Company does not believe that inflation has had a material impact on its
operations to date.
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<PAGE> 8
consolidated statements of operations
<TABLE>
<CAPTION>
For the Years Ended September 30,
- ---------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
NET REVENUES:
World Wide Web technology revenues $19,466 $ 9,871 $ 2,621
Data visualization product revenues -- 1,513 1,973
Service revenues 2,841 757 73
- ---------------------------------------------------------------------------------------------------------
Total net revenues 22,307 12,141 4,667
COST OF REVENUES:
Cost of technology and product revenues 1,912 1,761 1,087
Cost of service revenues (Note 1) 118 -- --
- ---------------------------------------------------------------------------------------------------------
Total cost of revenues 2,030 1,761 1,087
- ---------------------------------------------------------------------------------------------------------
Gross profit 20,277 10,380 3,580
OPERATING EXPENSES AND OTHER:
Sales and marketing 5,963 3,303 1,069
Research and development 6,801 2,756 871
General and administrative 3,846 2,159 870
Gain on sale of data visualization product line -- (863) --
- ---------------------------------------------------------------------------------------------------------
Income from operations 3,667 3,025 770
Other income 1,744 566 139
- ---------------------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of change in accounting 5,411 3,591 909
Provision for income taxes 1,951 1,415 325
- ---------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting 3,460 2,176 584
Cumulative effect of change in accounting for income taxes -- -- 800
- ---------------------------------------------------------------------------------------------------------
NET INCOME 3,460 2,176 1,384
Accretion of preferred stock dividends -- (191) (257)
- ---------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 3,460 $ 1,985 $ 1,127
=========================================================================================================
Earnings per common share and equivalents:
Income before cumulative effect of change in accounting $ 0.27 $ 0.23 $ 0.08
Net income $ 0.27 $ 0.23 $ 0.18
Net income available to common stockholders $ 0.27 $ 0.21 $ 0.15
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND EQUIVALENTS OUTSTANDING 12,838 9,423 7,685
==========================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
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<PAGE> 9
consolidated balance sheets
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------------------
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $16,490 $34,872
Short-term investments 17,593 --
Accounts receivable, net of allowance for
doubtful accounts of $470 and $180, respectively 7,608 4,180
Prepaid expenses and other assets 2,094 489
Deferred income taxes -- 199
- --------------------------------------------------------------------------------
Total current assets 43,785 39,740
Properties, net 3,377 1,187
Long-term accounts receivable 618 1,281
Other assets 989 1,301
- --------------------------------------------------------------------------------
TOTAL ASSETS $48,769 $43,509
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,160 $ 1,466
Deferred revenues 1,453 1,634
Accrued compensation and related benefits 952 604
Accrued expenses and other liabilities 103 486
- --------------------------------------------------------------------------------
Total current liabilities 4,668 4,190
Long-term deferred revenues 210 1,100
Deferred income taxes -- 605
- --------------------------------------------------------------------------------
Total liabilities 4,878 5,895
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
2,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 50,000,000 and
15,000,000 shares authorized, 11,819,545 and
11,406,645 shares issued and outstanding, respectively 118 114
Additional paid-in capital 39,341 36,528
Retained earnings 4,432 972
- --------------------------------------------------------------------------------
Total stockholders' equity 43,891 37,614
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $48,769 $43,509
================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
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<PAGE> 10
consolidated statements of changes in redeemable
convertible preferred stock and stockholders' equity
<TABLE>
<CAPTION>
Redeemable convertible preferred stock
at net issuance plus dividend accretion Common Stock Additional
--------------------------------------- ----------------- Paid-in Retained
(In thousands, except share amounts) Series A Series B Total Shares Amount Capital Earnings
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1993 $ 1,063 $ 2,073 $ 3,136 1,658,969 $ 213 $ -- $(2,140)
Exercise of stock options 875
Capital contribution 24
Net income 1,384
Accretion of preferred
stock dividends 85 172 257 (257)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1994 1,148 2,245 3,393 1,659,844 237 -- (1,013)
Exercise of stock options 46,602 1 45
Exercise of stock warrants 202,778 2 18
Issuance of incentive
stock options 146
Exchange of common stock
from no par to $0.01 par (221) 221
Conversion of preferred stock
into common stock (1,211) (2,373) (3,584) 1,724,099 17 3,567
Net proceeds from
initial public offering 2,070,000 21 32,124
Tax benefit from exercise
of stock options 464
Issuance of common stock
to effect for two-for-one
common stock split 5,703,322 57 (57)
Net income 2,176
Accretion of preferred
stock dividends 63 128 191 (191)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995 -- -- -- 11,406,645 114 36,528 972
Exercise of stock options 412,900 4 797
Issuance of incentive
stock options 80
Tax benefit from exercise
of stock options 1,936
Net income 3,460
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 $ -- $ -- $ -- 11,819,545 $ 118 $39,341 $ 4,432
====================================================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
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<PAGE> 11
consolidated statements of cash flows
<TABLE>
<CAPTION>
For the Years Ended September 30,
- --------------------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,460 $ 2,176 $ 1,384
Cumulative effect of change in accounting for income taxes -- -- (800)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 694 218 68
Loss on disposal of fixed assets 21 -- --
Deferred income taxes (406) 888 318
Incentive stock option compensation 80 146 --
Interest income from related party receivables -- -- (4)
Gain on sale of data visualization product line -- (863) --
Other (201) (17) --
Changes in operating assets and liabilities:
Accounts and long-term receivables (2,765) (2,368) (2,754)
Prepaid expenses and other assets (1,293) (1,530) (53)
Accounts payable 694 940 267
Deferred revenues (1,071) 210 2,487
Accrued compensation and related benefits 348 463 141
Accrued expenses and other liabilities (383) 452 (175)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (822) 715 879
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of data visualization product line -- 910 --
Purchase of short-term investments (17,593) -- --
Capital expenditures (2,905) (1,034) (209)
- ---------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (20,498) (124) (209)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options,
including tax related benefits 2,938 510 --
Capital contribution -- -- 24
Net proceeds from initial public offering -- 32,145 --
Proceeds from exercise of warrants -- 20 --
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,938 32,675 24
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (18,382) 33,266 694
Cash and cash equivalents at beginning of period 34,872 1,606 912
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,490 $34,872 $ 1,606
=========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 169 $ 80 $ --
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
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<PAGE> 12
notes to the consolidated financial statements
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Operations
Spyglass, Inc. ("Spyglass" or the "Company") develops, markets and distributes
World Wide Web ("WWW" or "Web") technologies designed to be embedded within
Internet devices, software applications and on-line services. Spyglass
technology offerings include the Spyglass Web Client Software Development Kit,
which was renamed Spyglass Mosaic in December 1996, ("Client SDK"), the Spyglass
Web Server Software Development Kit, which was renamed Spyglass Web Server in
December 1996, ("Server SDK"), SurfWatch ProServer, SurfWatch from Spyglass and
WebNotes. These technologies are used to bring Web functionality to customers'
products and services.
In May 1996, the Company formed Spyglass International, Inc., a wholly-owned
subsidiary. Spyglass International, Inc. is a U.S. subsidiary that has one
branch office in Hong Kong.
In April 1996, the Company acquired OS Technologies Corporation ("OS Tech") and
SurfWatch Software, Inc. ("SurfWatch") in transactions accounted for as pooling
of interests. As a result, all financial information prior to April 17, 1996
and April 24, 1996 includes the accounts and results of operations of OS Tech
and SurfWatch, respectively, for all periods presented. (See Note 14.)
In February 1996, the Company acquired Stonehand Inc. ("Stonehand"), in a
transaction accounted for as pooling of interests. As a result, all financial
information prior to February 2, 1996 includes the accounts and results of
operations of Stonehand for all periods presented. (See Note 14.)
On November 28, 1995, the Board of Directors declared a two-for-one common
stock split effected in the form of a 100% stock dividend paid on December 20,
1995 to stockholders of record as of December 6, 1995. All share and per share
information in the accompanying consolidated financial statements and related
notes thereto have been restated to reflect the two-for-one common stock split
for all periods presented.
On June 27, 1995, the Company completed an initial public offering of
its common stock in which it sold 4,140,000 shares of common stock at a public
offering price of $8.50 per share. Proceeds to the Company totaled approximately
$32,145,000, net of expenses associated with the offering. Upon the closing of
the initial public offering, 1,724,099 shares of redeemable convertible
preferred stock were converted into 3,448,198 shares of common stock.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All intercompany transactions and balances between
the companies have been eliminated.
University of Illinois Agreement
The Company's principal product, the Client SDK, is a commercial derivative
version of NCSA Mosaic(TM). NCSA Mosaic was developed by the National Center
for Supercomputing Applications at the University of Illinois at
Urbana-Champaign. In May 1994, the Company and the University entered into an
agreement (as amended to date, the "University Agreement") granting the Company
the exclusive (subject to approximately 10 previously granted licenses),
worldwide right to develop, distribute and sublicense commercial client
browsers based on NCSA Mosaic. The University Agreement provides for royalties
based on Spyglass' net revenues from the Client SDK, and includes cumulative
minimum quarterly royalties. The University Agreement has an initial term of
five years, with automatic one-year renewals, and is terminable in the event of
a material breach by the Company of its obligations thereunder. Under the
University Agreement, the Company was required to provide the University with
source code versions of Spyglass Mosaic through Release 2.5. The University
will have the right (subject to certain restrictions) to incorporate these
releases of the Spyglass Mosaic into new releases of NCSA Mosaic, which will
continue to be available on a free-with-copyright basis to organizations for
non-commercial academic and research use only. However, the University is not
permitted to make NCSA Mosaic available for distribution by resellers other
than the Company. The University Agreement gives the Company the exclusive
right (with certain limited exceptions) to use the University's trademarks
"Mosaic(TM)" and "NCSA Mosaic(TM)" and its spinning globe logo in connection
with Mosaic on a royalty-free basis (with certain limited exceptions). In
addition, the Company has the exclusive right (with certain limited exceptions)
to use these marks in connection with the sale of other products for a royalty
payment based on net revenues derived from such products.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
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<PAGE> 13
notes to the consolidated financial statements (continued)
Cash and Cash Equivalents
For the purposes of the balance sheet and statement of cash flows, all highly
liquid investments with original maturities of three months or less are
considered cash equivalents.
Investments
The Company accounts for its investments in debt and equity securities in
accordance with Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Accordingly, the Company
has classified its marketable debt securities in the held-to-maturity category.
Securities classified as held-to-maturity are reported at amortized cost.
Realized gains and losses and declines in value of securities judged to be
other-than-temporary are included in other income. The appropriate
classification of debt securities is determined at the time of purchase and is
re-evaluated as of each balance sheet date.
Investments with original maturities between three and twelve months are
considered short-term investments. Short-term investments consist of debt
securities such as commercial paper, time deposits, certificates of deposit,
bankers' acceptances, and marketable direct obligations of the United States
Treasury.
Other Assets
The Company licenses certain technology from third parties and records prepaid
royalty costs associated with these licenses. These expenses are deferred and
realized based upon revenues. It is the Company's policy to periodically review
and evaluate whether the benefits associated with these expenses are expected
to be realized and, therefore, deferral and amortization is appropriate.
Approximately $550,000 and $200,000 of these deferred expenses are included in
prepaid expenses and other assets and approximately $989,000 and $1,301,000 are
included in other assets at September 30, 1996 and September 30, 1995,
respectively.
Properties
Properties are stated at cost less accumulated depreciation. Depreciation is
determined for financial reporting purposes using the straight line method over
the estimated useful lives of the assets, which range from 3 to 7 years.
Depreciation for income tax reporting purposes is determined using accelerated
depreciation methods.
Revenue Recognition
The Company recognizes revenue in accordance with the provisions of Statement
of Position 91-1, Software Revenue Recognition, issued by the American
Institute of Certified Public Accountants. World Wide Web technology revenues
are generally recognized as the licenses are purchased, provided the license
agreement does not allow for extended payment terms, and there are no
significant remaining obligations under the contract. Data visualization
product revenue was recognized upon shipment. Service revenues are comprised of
revenues from customer support and professional services agreements. Revenue
from the sale of support agreements is recognized over the term of the
agreement using the straight-line method and related costs are included in
operating expenses under the sales and marketing classification. Revenue from
professional services agreements is recognized on the percentage of completion
method and related costs are reported as a cost of sales.
As of September 30, 1995, long-term receivables of $1,100,000 resulted from a
non-refundable Spyglass Mosaic software licensing contract with installment
payments totaling $2,812,500 over a five year contract term commencing July 27,
1994. The Company's license contract required a payment of $562,500 upon
execution of the agreement and four equal payments of $500,000 on July 27,
1995, 1996, 1997 and 1998. The Company had no significant post-contract
obligations under this agreement. In addition to the license contract, the
Company entered into a contract to provide support for a period of five years.
This contract required payment of $50,000 upon execution and four equal annual
payments of $50,000 on the first four anniversary dates of the contract. During
fiscal 1996, the Company completed an amendment to this contract which provided
for a discounted prepayment of the remaining license fee installments and the
cancellation of all future support obligations of the Company and related
support fee installments. As of September 30, 1996, there were no long-term
receivables or deferred revenues relating to this contract.
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which will be effective for the Company in fiscal year 1997. SFAS
No. 123 allows companies which have stock-based compensation arrangements with
employees to adopt a new fair-value basis of accounting for stock options and
other equity instruments, or to continue to apply the existing accounting rules
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<PAGE> 14
notes to the consolidated financial statements (continued)
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, but with additional financial statement disclosure. The Company
plans to adopt the disclosure provisions of this statement and does not
anticipate that SFAS No. 123 will have a material impact on its financial
position, results of operations or cash flows.
Per Share Information
Earnings per share are based on the weighted average number of shares of common
stock and common stock equivalents outstanding during periods presented,
computed using the treasury stock method for stock options and warrants in
accordance with Staff Accounting Bulletin No. 83 of the Securities and Exchange
Commission.
Reclassification
Certain balance sheet accounts as of September 30, 1995 and certain income
statement accounts as of September 30, 1995 and 1994 have been reclassified to
conform with the current year's presentation.
NOTE 2. ACCOUNTING CHANGE
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting For Income Taxes. The cumulative
effect of the change in accounting for income taxes, recorded in fiscal 1994,
was $800,000.
NOTE 3. SHORT-TERM INVESTMENTS
The following is a summary of short-term investments at
amortized cost as of September 30, 1996:
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------
<S> <C>
Commercial paper $ 4,776
Corporate debt securities 1,973
Money market 9,513
- ------------------------------------------
Cash equivalents 16,262
Cash 228
- ------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS $16,490
==========================================
Commercial paper $ 997
Corporate debt securities 10,740
U.S. treasury notes 5,856
- ------------------------------------------
TOTAL SHORT-TERM INVESTMENTS $17,593
==========================================
</TABLE>
Since these securities are short-term in nature, changes in market interest
rates would not have a significant impact on the fair value of these
securities. These securities are carried at amortized cost which approximates
fair value. It is the intent of the Company to hold its investments until
maturity.
NOTE 4. PROPERTIES
Properties and related accumulated depreciation were as follows:
<TABLE>
<CAPTION>
September 30,
- ----------------------------------------------------------
(In thousands) 1996 1995
- ----------------------------------------------------------
<S> <C> <C>
Computer equipment $ 2,545 $ 1,102
Furniture and fixtures 1,571 468
Leasehold improvements and other 420 148
- ----------------------------------------------------------
4,536 1,718
Less: Accumulated depreciation (1,159) (531)
- ---------------------------------------------------------
PROPERTIES, NET $ 3,377 $ 1,187
=========================================================
</TABLE>
NOTE 5. INCOME TAXES
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
For the Years Ended September 30,
- ---------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ 3 $ 8
Foreign 152 60 --
State -- -- --
- ----------------------------------------------------------------------------
Total current 152 63 8
- ----------------------------------------------------------------------------
Deferred:
Federal 1,444 1,100 263
State 355 252 54
- ----------------------------------------------------------------------------
Total deferred 1,799 1,352 317
- ----------------------------------------------------------------------------
PROVISION FOR
INCOME TAXES $ 1,951 $ 1,415 $ 325
============================================================================
</TABLE>
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25
<PAGE> 15
notes to the consolidated financial statements (continued)
A reconciliation of income tax expense to the statutory federal income tax rate
follows:
<TABLE>
<CAPTION>
For the Years Ended September 30,
- ------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at
statutory rate 34.0% 34.0% 34.0%
State income taxes, net
of federal income tax benefit 4.3% 4.6% 4.2%
Other (2.2%) 0.8% (0.3%)
- ------------------------------------------------------------------
EFFECTIVE TAX RATE 36.1% 39.4% 37.9%
==================================================================
</TABLE>
The current provision is the amount of income taxes reported or expected to be
reported on the Company's tax returns. Differences between accounting rules and
tax laws cause differences between the basis of certain assets and liabilities
for financial reporting and tax purposes. The tax effect of these differences,
to the extent that they are temporary, are recorded as deferred tax assets and
liabilities under Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes.
Significant components of the Company's net deferred tax assets
(liabilities) were as follows:
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accounts payable $ 836 $ 540
Deferred revenue 282 320
Accrued expenses and other liabilities 410 272
- --------------------------------------------------------------------------------------------------------------------
Deferred tax assets 1,528 1,132
- --------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Depreciation (103) (31)
Accounts and notes receivable (2,840) (1,375)
Prepaid expenses and other assets (1,070) (685)
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities (4,013) (2,091)
- ---------------------------------------------------------------------------------------------------------------------
Net operating loss carryforwards 3,459 289
Research and development tax
credit carryforwards 341 194
Foreign tax credit carryforwards 152 60
Alternative minimum tax
credit carryforwards 10 10
- ---------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets (liabilities) $ 1,477 $ (406)
Deferred tax asset valuation allowance (1,477) --
- ----------------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS (LIABILITIES) $ -- $ (406)
======================================================================================================================
</TABLE>
As of September 30, 1996, the Company had net operating loss carryforwards for
income tax purposes of approximately $8,939,000 which expire in the years
2006-2011. The net operating loss carryforward balances at September 30, 1995
and 1994 were approximately $748,000 and $845,000, respectively. The net
operating losses arise primarily as a result of the deductions relating to the
exercise of incentive stock options.
As of September 30, 1996, the Company had research and development credit
carryforwards of approximately $341,000 which are available to offset future
income tax liabilities in the years 2006-2011. The research and development
credit carryforward balances at September 30, 1995 and 1994 were approximately
$194,000 and $80,000, respectively.
In fiscal 1996, the Company realized approximately $3,682,000 of tax benefit
from the exercise of stock options by employees. Of this amount, $2,205,000 has
been recorded as a reduction of the Company's deferred tax liability and an
increase in additional paid-in capital. The remaining $1,477,000 of tax benefit
has been recorded as a valuation allowance and is available to reduce future
deferred tax liabilities. In fiscal 1995, the Company realized approximately
$464,000 of tax benefit from the exercise of stock options by employees. This
amount was recorded as a reduction of the Company's deferred tax liability and
an increase in additional paid-in capital.
NOTE 6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 27, 1995, the Company completed an initial public offering of its
common stock in which 1,724,099 shares of redeemable convertible preferred
stock were converted into 3,448,198 shares of common stock.
As of September 30, 1994, the Company was authorized to issue 2,000,000 shares
of no par value redeemable convertible preferred stock ("preferred stock"), of
which 765,766 shares were outstanding as Series A preferred stock, and 958,334
shares were outstanding as Series B preferred stock and 275,900 shares were not
outstanding. The Series A and B preferred stock had certain conversion, voting,
redemption, liquidation and dividend rights prior to the conversion of the
preferred stock on June 27, 1995.
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26
<PAGE> 16
notes to the consolidated financial statements (continued)
At September 30, 1994, the liquidation value of the Series A and Series B
preferred stock was $1,147,500 and $2,245,382, respectively. As of June 27,
1995, the liquidation value of the Series A and Series B preferred stock was
$1,210,540 and $2,373,322, respectively.
The difference between the preferred stock issuance price and the redemption
value was accreted periodically through June 27, 1995, by a charge to
accumulated deficit in the amount equal to the annual accruing dividend. The
Company charged $190,980 and $257,500, respectively, to the accumulated deficit
in recognition of the accruing dividends applicable to the Series A and Series
B preferred stock issued and outstanding during the years ended September 30,
1995 and 1994.
NOTE 7. PREFERRED STOCK
Pursuant to the Company's Amended and Restated Certificate of Incorporation,
the Company is authorized to issue up to 2,000,000 shares of $.01 par value
preferred stock at terms and conditions to be designated by the Board of
Directors. As of September 30, 1996 and 1995, there were no shares of
preferred stock designated or outstanding.
NOTE 8. STOCKHOLDERS' EQUITY
In May 1995, the Company reincorporated as a Delaware corporation and exchanged
each share of no par value common stock for one share of common stock, $.01 par
value. Holders of common stock are entitled to one vote per share.
NOTE 9. STOCK INCENTIVE PLANS
The Company has a 1995 Director Stock Option Plan ("1995 Director Option Plan")
and a 1995 Stock Incentive Plan ("1995 Incentive Plan") which replaced the
Company's 1991 Stock Option Plan ("1991 Option Plan") and the 1991 Employee
Stock Bonus Plan ("1991 Bonus Plan") effective June 27, 1995, when the Company
completed its initial public offering.
The above plans enable the Company to grant options to purchase common stock,
to make awards of restricted common stock and to issue certain other
equity-related securities of the Company to any full or part-time employees,
officers, directors, consultants or independent contractors of the Company.
Stock options entitle the optionee to purchase common stock from the Company
for a specified exercise price during a period specified in the applicable
option agreement. Restricted stock awards entitle the recipient to purchase
common stock from the Company under terms which provide for vesting over a
period of time and a right of repurchase in favor of the Company of the
unvested portion of the common stock subject to the award upon the termination
of the recipient's employment or other relationship with the Company. The
plans, except for the 1995 Director Option Plan, are administered by the
Compensation Committee of the Board of Directors, which selects the persons to
whom stock options and restricted stock awards are granted and determines the
number of shares of common stock covered by the option or award, its exercise
price or purchase price, its vesting schedule and, in the case of stock
options, its expiration date.
Furthermore, the above plans stipulate that the exercise price of any incentive
stock option shall not be less than 100% of the fair market value of the common
stock at the date of the grant or less than 110% of the fair market value in
the case of optionees holding more than 10% of the total combined voting power
of all classes of stock of the Company. The exercise periods of incentive stock
options cannot exceed 10 years from the date of grant, except for incentive
stock options granted to optionees holding more than 10% of the total combined
voting power of all classes of stock, which must be exercised within 5 years.
Non-qualified stock options, if any, must be exercised within the time period
set forth in the option agreement. Any portion not exercised within the terms
as stipulated in the option agreement shall be forfeited.
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27
<PAGE> 17
notes to the consolidated financial statements (continued)
The Company records as compensation expense the excess, if any, of the
estimated fair market value of the common stock at the date of option grant
over the option exercise price. Any compensation expense is recognized ratably
over the vesting period of the options. The Company recorded compensation
expense of $80,148 and $146,013 for the years ended September 30, 1996 and
1995, respectively, relating to options granted with an exercise price below
the estimated fair market value of the common stock. No compensation expense
was recorded in fiscal 1994. Options granted prior to October 1994 and
subsequent to the Company's initial public offering have an exercise price
approximating the fair market value of the common stock as of their grant date.
1995 Stock Incentive Plan
The maximum number of shares of common stock which may be issued pursuant to
the 1995 Incentive Plan is 1,800,000 shares, subject to certain anti-dilution
adjustments. Options generally become exercisable over four years, commencing
on the one-year anniversary of the date of grant and accumulate if not
exercised. Options to purchase 967,099 and 72,000 shares of common stock, at
prices ranging from $0.43 to $28.375 per share and from $18.75 to $21.75 per
share, had been granted as of September 30, 1996 and 1995, respectively.
The 1995 Incentive Plan further provides for the granting of stock appreciation
rights ("SARs") subject to certain conditions and limitations to holders of
options under the 1995 Incentive Plan. SARs permit optionees to surrender an
exercisable option for any amount equal to the excess of the market price of
the common stock over the option price when the right is exercised. There were
no SARs issued or exercised during fiscal 1996 or 1995.
Furthermore, the 1995 Incentive Plan provides for the granting of performance
share awards entitling recipients to acquire shares of common stock upon the
attainment of specified performance goals, as determined by the Board of
Directors. No performance share awards were issued during fiscal 1996 or fiscal
1995.
1991 Stock Option Plan
At September 30, 1996, the maximum number of shares of common stock which may
be issued pursuant to the 1991 Option Plan is 1,574,448 shares subject to
certain anti-dilution adjustments. The 1991 Option Plan was terminated
effective June 27, 1995, when the Company completed its initial public
offering, and was replaced by the 1995 Stock Incentive Plan. Options granted
under the 1991 Option Plan generally become exercisable in four equal annual
installments, commencing on the date of grant and continuing through the third
anniversary of the date of grant and accumulate if not exercised. At September
30, 1996, options to purchase 1,520,132 shares of common stock, at prices
ranging from $0.08 to $4.125 per share, had been granted.
The 1991 Option Plan further provides for the granting of SARs subject to
certain conditions and limitations to holders of options under the 1991 Option
Plan. SARs permit optionees to surrender an exercisable option for any amount
equal to the excess of the market price of the common stock over the option
price when the right is exercised. There were no SARs issued or exercised
during fiscal 1996, 1995 or 1994.
A summary of the 1995 Stock Incentive Plan and the 1991 Stock Option Plan
transactions follows:
<TABLE>
<CAPTION>
September 30,
- ---------------------------------------------------------
1996 1995
- ---------------------------------------------------------
<S> <C> <C>
Options outstanding at
beginning of year 1,433,004 872,438
Granted (prices ranging
from $0.43 to $28.375) 895,099 671,922
Exercised (prices ranging
from $0.08 to $17.4375) (412,900) (94,454)
Canceled (19,014) (16,902)
- ---------------------------------------------------------
Options outstanding at end
of year (prices ranging from
$0.08 to $28.375) 1,896,189 1,433,004
=========================================================
</TABLE>
Options to purchase 670,535 and 602,488 shares of common stock were exercisable
under the Plans at September 30, 1996 and 1995, respectively.
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28
<PAGE> 18
notes to the consolidated financial statements (continued)
1995 Director Stock Option Plan
Under the Company's 1995 Director Stock Option Plan, the maximum number of
shares of common stock which may be issued is 200,000 shares, subject to
certain anti-dilution adjustments. Options become exercisable over four years,
commencing on the one-year anniversary of the date of grant and accumulate if
not exercised. As of September 30, 1996, 24,000 shares were exercisable. There
were no shares exercisable as of September 30, 1995.
In January 1996 and March 1995, the Company granted options to purchase 5,000
and 20,000 shares of common stock, respectively, to each of its non-employee
directors at an exercise price of $42.50 and $3.75 per share, respectively. In
addition, each non-employee director initially elected to the Board of
Directors in the future will be granted an option, upon initial election as a
director, to purchase 20,000 shares of common stock. Each non-employee director
will also receive a subsequent grant of an option for 5,000 shares on the date
of each Annual Meeting of Stockholders.
Common Stock Warrants
The Company issued common stock purchase warrants for 30,000 shares of common
stock during fiscal 1995 pursuant to the terms of an agreement with a third
party under which the Company purchased certain trademark rights. The common
stock warrants permit the holder to purchase shares of common stock at a price
of $20.625 per share. The common stock warrants expire in August, 2002.
The Company issued common stock purchase warrants for 455,556 shares of common
stock during fiscal 1991 pursuant to the terms of the investment agreement with
Greylock Limited Partnership and Venrock Associates. The common stock warrants
permitted the holders to purchase shares of common stock at a price of $0.05
per share, subject to certain anti-dilution adjustments. The common stock
warrants were scheduled to expire at various dates through fiscal 1996. There
were stock warrants for 50,000 shares canceled during fiscal 1993. The
remaining common stock purchase warrants for 405,556 shares were exercised in
full in May 1995.
NOTE 10. EMPLOYEE BENEFITS
401(k) Savings Plan
The Company has a salary reduction 401(k) retirement savings plan (the "Plan")
covering substantially all of the Company's employees. Participating employees
may contribute an amount up to 15% of their eligible compensation, subject to
an annual limit. The Company, at the discretion of the Board of Directors, may
make contributions to the Plan. The Company contributed $118,300 and $31,600 to
the Plan in fiscal 1996 and 1995, respectively. No contributions were made to
the Plan by the Company in fiscal 1994. Expenses of the Plan were approximately
$6,400, $2,600 and $2,400 in fiscal 1996, 1995 and 1994, respectively.
1995 Employee Stock Purchase Plan
Under the Company's 1995 Employee Stock Purchase Plan ("Stock Purchase Plan"),
employees are granted the opportunity to purchase the Company's common stock.
The first offering under the Plan commenced on August 16, 1995 and concluded
February 15, 1996. Subsequent offerings begin on February 16 and August 16 of
each year and conclude on August 15 and February 15, respectively. The price at
which the employees may purchase the common stock is 85% of the closing price
of the Company's common stock on the Nasdaq National Market on the date the
offering period commences or terminates, whichever is lower. A total of 600,000
shares of common stock have been reserved under this plan. In fiscal 1996,
18,401 shares were issued under the Stock Purchase Plan. No shares were issued
under the Stock Purchase Plan in fiscal 1995.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under non-cancelable operating lease
agreements expiring at various dates through fiscal 2001. At September 30,
1996, approximate future minimum lease commitments under these leases were as
follows:
<TABLE>
<CAPTION>
(In thousands)
- -----------------------
<S> <C>
1997 $1,162
1998 716
1999 511
2000 257
2001 29
- -----------------------
$2,675
=======================
</TABLE>
Total rent expense under non-cancelable operating leases was approximately
$689,000, $269,000 and $97,000 for the years ended September 30, 1996, 1995 and
1994, respectively.
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29
<PAGE> 19
notes to the consolidated financial statements (continued)
NOTE 12. SIGNIFICANT CUSTOMERS AND FOREIGN REVENUES
Sales to Microsoft Corporation represented 12.1% and 17.3% of revenues in
fiscal 1996 and 1995, respectively. In fiscal 1994, sales to FTP Software, Inc.
and Sumitomo Metal Industries, Ltd., a foreign customer, represented 12.3% and
11.0% of revenues, respectively.
The Company exports products to diverse geographic areas. Net revenues by
geographic area were as follows:
<TABLE>
<CAPTION>
For the Years Ended September 30,
- --------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $18,619 $10,095 $ 3,817
Japan 2,094 708 819
Other international 1,594 1,338 31
- --------------------------------------------------------------------------------
TOTAL NET REVENUES $22,307 $12,141 $ 4,667
================================================================================
</TABLE>
NOTE 13. SALE OF DATA VISUALIZATION PRODUCT LINE
In September 1995, the Company sold its data visualization product line to a
stockholder for $910,000. The Company recorded a pre-tax gain, net of
transaction expenses, of $863,000. As of September 30, 1995, accounts
receivable of approximately $109,000 related to the data visualization product
line were included in current assets.
NOTE 14. ACQUISITIONS
On February 2, 1996, the Company issued approximately 230,000 shares of its
common stock in exchange for all of the outstanding common stock of Stonehand.
At the time of acquisition, Stonehand was located in Cambridge, Massachusetts,
and was a leader in core Web technologies including text formatting and
internationalization technologies such as SGML, HTML, DSSSL and Unicode.
On April 17, 1996, the Company issued approximately 87,000 shares of
its common stock in exchange for all of the outstanding common stock of OS
Tech. At the time of acquisition, OS Tech was located in Townsend,
Massachusetts, and developed and licensed WWW conferencing and forum
technology.
On April 24, 1996, the Company issued approximately 470,000 shares of its
common stock in exchange for all of the outstanding common stock of SurfWatch.
At the time of acquisition, SurfWatch, a Los Altos, California vendor of
Internet filtering and parental control software, marketed Internet software
for blocking access to inappropriate material, and licensed Internet filtering
technology to a variety of markets including the on-line services industry,
personal computer manufacturers and the educational market as well as
corporations.
These acquisitions have been accounted for as pooling of interests and,
accordingly, the Company's consolidated financial statements reflect the
accounts and operations of Stonehand, OS Tech and SurfWatch for all periods
prior to the acquisitions. Separate results of operations for the periods prior
to the acquisition of Stonehand, OS Tech and SurfWatch by the Company are
summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended September 30,
- --------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES:
Spyglass $20,391 $10,350 $ 3,629
Stonehand 540 1,479 921
OS Tech 31 3 117
Surf/Watch 1,345 309 --
- --------------------------------------------------------------------------------
COMBINED $22,307 $12,141 $ 4,667
================================================================================
NET INCOME:
Spyglass $ 3,355 $2,177 $ 1,331
Stonehand 67 199 (5)
OS Tech -- (63) 58
Surf/Watch 38 (137) --
- --------------------------------------------------------------------------------
COMBINED $ 3,460 $2,176 $ 1,384
================================================================================
</TABLE>
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30
<PAGE> 20
report of independent accountants
To the Board of Directors
and Stockholders of Spyglass, Inc.
Naperville, Illinois
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in redeemable convertible
preferred stock and stockholders' equity and of cash flows, present fairly, in
all material respects, the financial position of Spyglass, Inc. and its
subsidiary at September 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
-----------------------
Price Waterhouse LLP
Chicago, Illinois
October 25, 1996
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31
<PAGE> 21
DIRECTORY
SPYGLASS WORLDWIDE HEADQUARTERS
Spyglass, Inc.
1240 E. Diehl Road
Naperville, IL60563
SPYGLASS U.S. OPERATIONS
Cambridge, MA
Champaign, IL
Los Altos, CA
Marina del Rey, CA
Morristown, NJ
San Ramon, CA
SPYGLASS INTERNATIONAL OPERATIONS
Spyglass Asia Pacific
Central, Hong Kong
SPYGLASS EUROPE
Berkshire, United Kingdom
INTERNET ADDRESSES
World Wide Web, www.spyglass.com
Electronic mail, [email protected]
TRANSFER AGENT
Inquiries regarding shareholder-related
services, such as transfers or changes
of address, should be directed to:
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
800-937-5449
10-K FILING
A copy of Spyglass' Annual Report on Form 10-K,
filed with the Securities and Exchange Commission,
is available to stockholders by written request to
Thomas S. Lewicki, Controller, at the Spyglass
Worldwide Headquarter address.
SHARES LISTED
Spyglass common stock is traded on the Nasdaq
Stock Market under the ticker symbol SPYG.
INDEPENDENT AUDITORS
Price Waterhouse LLP
Chicago, IL
LEGAL COUNSEL
Hale and Dorr
Boston, MA
ANNUAL MEETING
Spyglass shareholders are invited to attend
our annual shareholder meeting, to be held on
February 12, 1997 at 10:00 AM, at the Holiday Inn
in Naperville, IL.
SPYGLASS DIRECTORS
Douglas P. Colbeth, President and
Chief Executive Officer, Spyglass, Inc.
William S. Kaiser, General Partner,
Greylock Management Corporation
Timothy K. Krauskopf, Chief Technical Officer,
Spyglass, Inc.
Ray Rothrock, General Partner, Venrock Associates
Steven R. Vana-Paxhia, President and
Chief Executive Officer, INSOCorporation
SPYGLASS EXECUTIVE OFFICERS
Douglas P. Colbeth, President and
Chief Executive Officer
Gary L. Vilchick, Executive Vice President
Finance, Administration and Operations
and Chief Financial Officer
Thomas S. Lewicki, Controller,
Treasurer and Secretary
Timothy K. Krauskopf,
Chief Technical Officer
Richard M. Houle, Executive Vice President
of Development and Services
Michael F. Tyrrell, Executive Vice President
of Business Development
Randall T. Littleson,
Vice President of Marketing
[LOGO]
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Registrant Jurisdiction of Incorporation
- ------------------------------ -----------------------------
Spyglass International, Inc. Delaware
SurfWatch Software, Inc. California
Stonehand Inc. Massachusetts
OS Technologies Corporation Massachusetts
<PAGE> 1
EXHIBIT 23.1
Consent of Price Waterhouse
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-95164, 33-95160, 33-95162, 33-95158, 333-2312 and
333-04357) of Spyglass, Inc. of our report dated October 25, 1996 appearing on
page 31 of the Annual Report to Shareholders which is incorporated in this
Annual Report on Form 10-K. We also consent to the incorporation by reference
of our report on the Financial Statement Schedule listed in Item 14 of this
Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Chicago, IL
December 20, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 16,490
<SECURITIES> 0<F1>
<RECEIVABLES> 8,078<F2>
<ALLOWANCES> 470<F2>
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 43,785
<PP&E> 3,377
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 48,769<F1>
<CURRENT-LIABILITIES> 4,668<F1>
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 43,773
<TOTAL-LIABILITY-AND-EQUITY> 48,769
<SALES> 19,466
<TOTAL-REVENUES> 22,307
<CGS> 1,912
<TOTAL-COSTS> 2,030
<OTHER-EXPENSES> 16,610
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 0<F1>
<INCOME-PRETAX> 5,411
<INCOME-TAX> 1,951
<INCOME-CONTINUING> 3,460
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> 3,460
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
<FN>
<F1>Amounts inapplicable or not disclosed as a separate line on the Consolidated
Balance Sheets or Consolidated Statement of Operations are reported as 0
herein.
<F2>Notes and Accounts receivable-trade are reported net of allowances for
doubtful accounts in the Consolidated Balance Sheets.
</FN>
</TABLE>
