<PAGE> 1
SCHEDULE 14A INFORMATION
Preliminary Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14-6(e)(2))
Spyglass, Inc.
...................................................................
(Name of Registrant as Specified in Its Charter
...................................................................
(Name of Person(s) Filing Proxy Statement
if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No Fee Required
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
........................................................
2) Aggregate number of securities to which transaction applies:
........................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
........................................................
4) Proposed maximum aggregate value of transaction:
........................................................
5) Total fee paid:
........................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the pervious filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:.................................................
2) Form, Schedule or Registration Statement No.:...............................
3) Filing Party:........................................................
4) Date Filed:........................................................
<PAGE> 2
SPYGLASS, INC.
Naperville Corporate Center
1240 East Diehl Road
Naperville, Illinois 60563
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
ON TUESDAY, FEBRUARY 10, 1998
To the Stockholders of Spyglass, Inc.
The Annual Meeting of Stockholders of Spyglass, Inc. (the "Company") will
be held at the Holiday Inn, 1801 Naper Boulevard, Naperville, Illinois 60563, on
Tuesday, February 10, 1998 at 10:00 a.m., local time, to consider and act upon
the following matters:
1. To elect one Class III director to serve for a three-year term.
2. To approve (i) an Amendment to the Company's 1995 Stock Incentive
Plan (the "1995 Plan") increasing the number of shares issuable under
the 1995 Plan from 2,550,000 to 3,300,000 and (ii) the continuance of
the 1995 Plan as amended.
3. To ratify the selection of Ernst & Young LLP as the Company's
independent auditors for the current fiscal year.
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Stockholders of record at the close of business on December 19, 1997 will
be entitled to notice of and to vote at the meeting or any adjournment thereof.
By Order of the Board of Directors
THOMAS S. LEWICKI, Secretary
Naperville, Illinois
December 23, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER
TO ENSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE AFFIXED IF THE PROXY
IS MAILED IN THE UNITED STATES.
<PAGE> 3
SPYGLASS, INC.
Naperville Corporate Center
1240 East Diehl Road
Naperville, Illinois 60563
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS ON FEBRUARY 10, 1998
INTRODUCTION
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Spyglass, Inc. (the "Company") for use at
the Annual Meeting of Stockholders to be held on February 10, 1998, and at any
adjournment of that meeting. All proxies will be voted in accordance with the
stockholders' instructions, and if no choice is specified, the proxies will be
voted in favor of the matters set forth in the accompanying Notice of Meeting.
Any proxy may be revoked by a stockholder at any time before its exercise by
delivery of written revocation or a subsequently dated proxy to the Secretary of
the Company or by voting in person at the Annual Meeting.
The Company's Annual Report for the fiscal year ended September 30, 1997
("Fiscal 1997") was mailed to stockholders, along with these proxy materials, on
or about December 23, 1997.
QUORUM REQUIREMENT
At the close of business on December 19, 1997, the record date for the
determination of stockholders entitled to notice of and to vote at the Annual
Meeting, there were outstanding and entitled to vote an aggregate of 13,030,458
shares of Common Stock of the Company, constituting all of the outstanding
voting stock of the Company. Holders of Common Stock are entitled to one vote
per share.
The holders of a majority of the shares of Common Stock outstanding and
entitled to vote at the Annual Meeting shall constitute a quorum for the
transaction of business at the Annual Meeting. Shares of Common Stock
represented in person or by proxy (including shares which abstain or otherwise
do not vote with respect to one or more of the matters presented for stockholder
approval) will be counted for purposes of determining whether a quorum is
present at the Annual Meeting.
VOTES REQUIRED
The affirmative vote of the holders of shares of Common Stock representing
a plurality of the votes cast by the holders of Common Stock is required for the
election of the director. The affirmative vote of the holders of shares of
Common Stock representing a majority of the votes cast is required for the
approval of the proposed amendment to, and the continuance of, the Company's
1995 Stock Incentive Plan and the ratification of the selection of Ernst & Young
LLP as the Company's independent auditors for the current fiscal year.
Shares which abstain from voting as to a particular matter, and shares held
in "street name" by a broker or nominee who indicates on a proxy that it does
not have discretionary authority to vote as to a particular matter, will not be
voted in favor of such matter, and also will not be counted as votes cast on
such matter. Accordingly, abstentions and "broker non-votes" will have no effect
on the voting on a matter that requires the affirmative vote of a certain
percentage of the votes cast on that matter (such as the election of the Class
III director, the approval of the proposed amendment to, and continuance of, the
Company's 1995 Stock Incentive Plan and the ratification of the selection of
independent auditors).
1
<PAGE> 4
BENEFICIAL OWNERSHIP OF VOTING STOCK
The following table sets forth the beneficial ownership of the Company's
Common Stock as of November 1, 1997 (i) by each director, (ii) by each of the
executive officers named in the Summary Compensation Table set forth under the
caption "Executive Compensation" below (the "Named Executives"), and (iii) by
all current directors and executive officers as a group. No person is known by
the Company to beneficially own more than 5% of the outstanding shares of Common
Stock.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING
BENEFICIAL OWNER BENEFICIALLY OWNED(1) COMMON STOCK(2)
---------------- --------------------- ---------------
<S> <C> <C>
DIRECTORS
Douglas P. Colbeth(3)..................................... 366,426 2.9%
Brian J. Jackman.......................................... 1,000 *
Tim K. Krauskopf.......................................... 447,000 3.6%
Ray A. Rothrock(4)........................................ 29,161 *
Steven R. Vana-Paxhia(5).................................. 16,300 *
NAMED EXECUTIVES
Richard M. Houle(6)....................................... 22,400 *
Randall T. Littleson(7)................................... 11,680 *
Michael F. Tyrrell(8)..................................... 92,790 *
Gary L. Vilchick(9)....................................... 31,680 *
All directors and executive officers as a group (11
persons)(10)............................................ 1,097,016 8.5%
</TABLE>
- -------------------------
* Less than 1%
(1) Each stockholder possesses sole voting and investment power with respect to
the shares listed, except as otherwise indicated. In accordance with the
rules of the Securities and Exchange Commission, each stockholder is deemed
to beneficially own any shares subject to stock options which are currently
exercisable or which become exercisable within 60 days after November 1,
1997, and any reference in these footnotes to shares subject to stock
options held by the person or entity in question refers only to such stock
options. The inclusion herein of shares listed as beneficially owned does
not constitute an admission of beneficial ownership.
(2) Number of shares deemed outstanding includes 12,370,071 shares outstanding
as of November 1, 1997 and any shares subject to stock options held by the
person or entity in question.
(3) Includes 265,600 shares issuable upon the exercise of outstanding options.
Also includes 98,044 shares held by the Douglas P. Colbeth Trust.
(4) Includes 16,300 shares issuable upon the exercise of outstanding options.
Excludes 69 shares owned by Venrock Associates and 21 shares owned by
Venrock Associates II, L.P., as to which shares Mr. Rothrock disclaims
beneficial ownership. Mr. Rothrock is a General Partner of both Venrock
Associates and Venrock Associates II, L.P.
(5) Comprised of 16,300 shares issuable upon the exercise of outstanding
options.
(6) Comprised of 22,400 shares issuable upon the exercise of outstanding
options.
(7) Comprised of 11,680 shares issuable upon the exercise of outstanding
options.
(8) Includes 77,300 shares issuable upon the exercise of outstanding options.
(9) Comprised of 31,680 shares issuable upon the exercise of outstanding
options.
(10) Includes 502,800 shares issuable upon the exercise of outstanding options.
2
<PAGE> 5
ELECTION OF DIRECTORS
The Company's Board of Directors is divided into three classes, with
members of each Class holding office for staggered three-year terms. Currently
there are two Class I directors, whose terms expire at the Annual Meeting of
Stockholders following the fiscal year ending September 30, 1998 ("Fiscal
1998"), one Class II director, whose term expires at the Annual Meeting of
Stockholders following the fiscal year ending September 30, 1999 ("Fiscal 1999")
and two Class III directors, whose terms expire at this Annual Meeting of
Stockholders (in all cases subject to the election and qualification of their
successors or to their earlier death, resignation or removal).
The persons named in the enclosed proxy will vote to elect Brian J. Jackman
as a Class III director, unless authority to vote for the election of the
nominee is withheld by marking the proxy to that effect. Mr. Jackman is
currently a Class III director of the Company. He has indicated his willingness
to serve, if elected, but if he should be unable or unwilling to stand for
election, proxies may be voted for a substitute nominee designated by the Board
of Directors.
DIRECTORS OF THE COMPANY
Set forth below are the names and certain information with respect to each
director of the Company, including the nominee for Class III director.
NOMINEE FOR CLASS III DIRECTOR (HOLDING OFFICE FOR TERM EXPIRING AT THIS
ANNUAL MEETING; NOMINATED FOR THE TERM EXPIRING AT THE ANNUAL MEETING FOR
THE FISCAL YEAR ENDING SEPTEMBER 30, 2000):
MR. JACKMAN, age 56, has been a director of the Company since April 1997.
Mr. Jackman has been President of Tellabs Operations, Inc. since 1992. Mr.
Jackman is also a member of the Board of Directors of Tellabs, Inc., Advanced
Fiber Communications and Universal Electronics.
CLASS III DIRECTOR (HOLDING OFFICE FOR TERM EXPIRING AT THIS ANNUAL
MEETING):
MR. VANA-PAXHIA, age 50, has been a director of the Company since March
1995. Mr. Vana-Paxhia has been President, Chief Executive Officer and a director
of INSO Corporation (formerly InfoSoft International, Inc.), a software
publishing company, since its inception in March 1994. Mr. Vana-Paxhia was
director of the Software Division of Houghton Mifflin Company from November 1990
until March 1994 and was a Vice President of Houghton Mifflin from April 1991
until March 1994. Mr. Vana-Paxhia is also a member of the Board of Directors of
MathSoft, Inc.
CLASS I DIRECTORS (HOLDING OFFICE FOR TERM EXPIRING AT THE ANNUAL MEETING
FOR FISCAL 1998):
MR. COLBETH, age 42, 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.
MR. ROTHROCK, age 42, has been a director of the Company since September
1991. Mr. Rothrock has been a Partner of both Venrock Associates and Venrock
Associates II, L.P., venture capital firms, since 1995, and was an Associate of
Venrock Associates from 1988 until 1995. Mr Rothrock is also a member of the
Board of Directors of CheckPoint Software Technologies, Ltd.
CLASS II DIRECTOR (HOLDING OFFICE FOR TERM EXPIRING AT THE ANNUAL MEETING
FOR FISCAL 1999):
MR. KRAUSKOPF, age 34, has been a director of the Company since October
1992. Mr. Krauskopf has been the Head of Information Systems at the Field
Museum, Chicago since July 1997. Mr. Krauskopf was a co-founder of the Company,
served as Director of Software Development of the Company from January 1990 to
October 1994, as Vice President, Research and Development from October 1994 to
March 1996 and as Chief Technical Officer from March 1996 to April 1997. Mr.
Krauskopf is also a member of the Board of Directors of PC Quote, Inc.
3
<PAGE> 6
There are no family relationships among any of the executive officers or
directors of the Company.
BOARD AND COMMITTEE MEETINGS
The Company has a standing Audit Committee of the Board of Directors, which
meets with the Company's auditors to review and evaluate the Company's audit
procedures and to recommend and implement any desired changes to the Company's
audit procedures. The members of the Audit Committee are Messrs. Jackman,
Rothrock and Vana-Paxhia. The Audit Committee met four times during Fiscal 1997.
The Company has a standing Compensation Committee which establishes (a) the
compensation of each of the Company's executive officers, (b) compensation
policies applicable to the Company's executive officers and (c) the basis for
the compensation of the Company's Chief Executive Officer, including the facts
and criteria on which it is based. The members of the Compensation Committee are
Messrs. Jackman, Rothrock and Vana-Paxhia. The Compensation Committee met once
during Fiscal 1997.
The Board of Directors met four times during Fiscal 1997. Each incumbent
director attended at least 75% of the number of meetings of the Board and of the
committees on which he then served.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee is comprised of Messrs. Jackman,
Rothrock and Vana-Paxhia three of the Company's non-employee directors.
COMPENSATION OF DIRECTORS
Directors of the Company are reimbursed for expenses incurred in connection
with their attendance at Board and committee meetings. Directors receive no
other cash compensation for serving as directors.
Under the Company's 1995 Director Stock Option Plan (the "Director Option
Plan"), each non-employee director initially elected to the Board of Directors
in the future will be granted an option, upon his or her initial election as a
director, to purchase 20,000 shares of Common Stock. Each non-employee director
is also entitled to receive an option for 5,000 shares on the date of each
Annual Meeting of Stockholders. On February 12, 1997, the date of the last
Annual Meeting of Shareholders, each of Messrs. Rothrock and Vana-Paxhia was
granted an option to purchase 5,000 shares of Common Stock at an exercise price
of $11.375 per share. On April 8, 1997, the date of his election as a director,
Mr. Jackman was granted an option to purchase 20,000 shares of Common Stock at
an exercise price of $6.875 per share. All options granted under the Director
Option Plan have or will have an exercise price equal to the fair market value
of the Common Stock on the date of grant, will vest over a four-year period,
provided the optionholder continues to serve as a director of the Company, and
will expire ten years from the date of grant (subject to earlier termination in
the event the optionee ceases to serve as a director of the Company). The total
number of shares of Common Stock that may be issued under the Director Option
Plan is 200,000 shares.
4
<PAGE> 7
EXECUTIVE COMPENSATION
Summary Compensation
The following Summary Compensation Table sets forth certain information
concerning the compensation for each of the last three fiscal years of the
Company's Chief Executive Officer and the Company's Named Executives during
Fiscal 1997.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION-
AWARDS(2)
-------------
ANNUAL NUMBER OF
COMPENSATION(1) SHARES
NAME AND FISCAL ----------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS STOCK OPTIONS COMPENSATION(3)
------------------ ------ -------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Douglas P. Colbeth................. 1997 $190,352 $ 22,800 20,000 $2,850
President and Chief 1996 140,668 42,000 0 2,850
Executive Officer 1995 125,400 62,500 50,000 3,978
Michael F. Tyrrell................. 1997 176,852 55,500(4) 52,000(5) 2,850
Executive Vice President, 1996 117,654 80,994(4) 20,000(6) 3,648
Business Development 1995 74,400 218,800(7) 30,000 1,302
Gary L. Vilchick................... 1997 150,351 18,000 116,000(8) 65,393
Executive Vice President, Finance, 1996 93,702(9) 27,750 100,000(10) 1,000
Administration and Operations and
Chief Financial Officer
Richard M. Houle................... 1997 151,891(11) 33,500 200,000(12) 0
Executive Vice President,
Development
Randall T. Littleson............... 1997 140,250 16,800 120,000(13) 3,108
Vice President, Marketing 1996 31,100(14) 0 10,000(15) 550
</TABLE>
- -------------------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted in those instances where such perquisites and other
personal benefits constituted less than the lesser of $50,000 or 10% of the
total of annual salary and bonus for the executive officer for the fiscal
year.
(2) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive plan payouts during the
years ended September 30, 1995, 1996 and 1997 ("Fiscal 1995," "Fiscal 1996"
and "Fiscal 1997").
(3) Represents the value of the Company's contribution to the 401(k) accounts
of the Named Executives and, with respect to Mr. Vilchick, includes $60,940
which represents reimbursement for moving expenses.
(4) Represents bonus and sales commissions.
(5) Includes options to purchase an aggregate of 32,000 shares granted on April
8, 1997 replacing an option to purchase 20,000 shares granted on November
21, 1996 and an option to purchase 20,000 shares granted October 17, 1995.
Options to purchase 40,000 shares were cancelled in connection with the
repricing. See the "Executive Compensation -- Ten Year Option Repricing"
and "Report of the Compensation Committee on Repricing of Options."
(6) Represents an option to purchase 20,000 shares that was repriced and thus
cancelled on April 8, 1997. See footnote 5 above.
(7) Represents sales commissions.
(8) Includes options to purchase an aggregate of 96,000 shares granted on April
8, 1997 replacing an option to purchase 20,000 shares granted on November
21, 1996 and an option to purchase 100,000 shares granted July 23, 1996.
Options to purchase 120,000 shares were cancelled in connection with the
repricing. See the "Executive Compensation -- Ten Year Option Repricing"
and "Report of the Compensation Committee on Repricing of Options."
5
<PAGE> 8
(9) Mr. Vilchick joined the Company in December 1995 and thus received
compensation for only a portion of Fiscal 1996. His annual salary as of
September 30, 1996 was $120,000.
(10) Represents an option to purchase 100,000 shares that was repriced and thus
cancelled on April 8, 1997. See footnote 8 above.
(11) Mr. Houle joined the Company in November 1996 and thus received
compensation for only a portion of Fiscal 1997. His annual salary as of
September 30, 1997 was $160,000.
(12) Includes options to purchase an aggregate of 80,000 shares granted on April
8, 1997 replacing an option to purchase 100,000 shares granted on November
21, 1996, which was cancelled in connection with the repricing. See the
"Executive Compensation -- Ten Year Option Repricing" and "Report of the
Compensation Committee on Repricing of Options."
(13) Includes options to purchase an aggregate of 40,000 shares granted on April
8, 1997 replacing an option to purchase 40,000 shares granted on November
21, 1996 and an option to purchase 10,000 shares granted July 23, 1996.
Options to purchase 50,000 shares were cancelled in connection with the
repricing. See the "Executive Compensation -- Ten Year Option Repricing"
and "Report of the Compensation Committee on Repricing of Options."
(14) Mr. Littleson joined the Company in June 1996 and thus received
compensation for only a portion of Fiscal 1996. His annual salary as of
September 30, 1996 was $100,000.
(15) Represents an option to purchase 10,000 shares that was repriced and thus
cancelled on April 8, 1997. See footnote 13 above.
Option Grants
The following table sets forth certain information concerning grants of
stock options during Fiscal 1997 to each of the Named Executives.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
NUMBER OF TOTAL OPTIONS EXERCISE PRICE APPRECIATION FOR
SHARES GRANTED TO PRICE OPTION TERM(2)
UNDERLYING EMPLOYEES IN PER EXPIRATION -----------------------
OPTIONS GRANTED FISCAL YEAR SHARE(1) DATE 5% 10%
--------------- ------------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Douglas P. Colbeth......... 20,000 0.88% 10.250 11/21/06 128,923 326,717
Michael F. Tyrrell......... 32,000 1.40% 6.875 04/08/07 138,357 350,623
20,000(3) 0.88% 10.250 11/21/06 0 0
Gary L. Vilchick........... 96,000 4.20% 6.875 04/08/07 415,071 1,051,870
20,000(3) 0.88% 10.250 11/21/06 0 0
Richard M. Houle........... 100,000 4.38% 6.875 04/08/07 432,365 1,095,698
100,000(3) 4.38% 10.250 11/21/06 0 0
Randall T. Littleson....... 40,000 1.75% 7.438 07/17/07 187,096 474,138
40,000 1.75% 6.875 04/08/07 172,946 438,279
40,000(3) 1.75% 10.250 11/21/06 0 0
</TABLE>
- -------------------------
(1) Options are incentive stock options (except as noted below for repriced
options), become exercisable over a four-year period and generally terminate
three months following termination of the executive officer's employment
with the Company or the expiration date, whichever occurs earlier. The
exercise price of each option was determined to be equal to the fair market
value per share of the Common Stock on the date of grant. Repriced options
are treated as new options and will be incentive stock options except that,
to the extent the aggregate fair market value of stock with respect to which
such options are exercisable by an individual for the first time during any
calendar year exceeds $100,000, such options are treated as nonqualified
stock options.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. The
6
<PAGE> 9
gains shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise of the
option or the sale of the underlying shares. The actual gains, if any, on
the exercises of stock options will depend on the future performance of the
Common Stock, the optionholder's continued employment through the option
period, and the date on which the options are exercised.
(3) Reflects options that were cancelled in the April 1997 option repricing.
Option Exercises and Holdings
The following table sets forth certain information concerning the aggregate
number of shares of Common Stock acquired upon option exercises by the Named
Executives during Fiscal 1997 and the value realized upon exercise as well as
the number and value of unexercised options held by each of the Named Executives
on September 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR END FISCAL YEAR END(2)
SHARES ------------------ -----------------------
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED(1) UNEXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------------ -----------------------
<S> <C> <C> <C> <C>
Douglas P. Colbeth................ 25,000 $441,750 247,500/ 32,500 $2,381,325/$116,875
Michael F. Tyrrell................ 38,000 300,960 66,860/ 32,140 $561,388/$131,653
Gary L. Vilchick.................. 0 0 22,400/ 73,600 $64,400/$211,600
Richard M. Houle.................. 0 0 0/100,000 $0/$287,500
Randall T. Littleson.............. 0 0 2,240/ 77,760 $6,440/$201,060
</TABLE>
- -------------------------
(1) Based on the fair market value of the Common Stock on the date of the
exercise less the option exercise price.
(2) Based on a value of $9.75 per share, the fair market value of the Common
Stock on September 30, 1997, less the option exercise price.
7
<PAGE> 10
Ten Year Option Repricing
The following table provides the specified information concerning all
repricings of options to purchase the Company's Common Stock held by any
executive officer of the Company since June 27, 1995, the date of the Company's
initial public offering.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------------------
LENGTH OF
ORIGINAL
MARKET PRICE OPTION TERM
NUMBER OF OF STOCK EXERCISE PRICE NEW REMAINING AT
SECURITIES UNDERLYING AT TIME OF AT TIME OF EXERCISE DATE OF
DATE OPTIONS REPRICED REPRICING REPRICING PRICE(1) REPRICING
---- --------------------- ------------ -------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael F. Tyrrell............ 4/8/97 20,000 $6.875 $17.44 $6.875 8.5 years
Executive Vice President, 4/8/97 20,000 6.875 10.25 6.875 9.6 years
Business Development
Gary L. Vilchick.............. 4/8/97 100,000 6.875 14.63 6.875 9.3 years
Executive Vice President, 4/8/97 20,000 6.875 10.25 6.875 9.6 years
Finance, Administration and
Operations and Chief Financial
Officer
Richard M. Houle.............. 4/8/97 100,000 6.875 10.25 6.875 9.6 years
Executive Vice President,
Development
Randall T. Littleson.......... 4/8/97 40,000 6.875 10.25 6.875 9.6 years
Vice President, Marketing 4/8/97 10,000 6.875 14.63 6.875 9.3 years
Thomas S. Lewicki............. 4/8/97 20,000 6.875 17.44 6.875 8.5 years
Controller 4/8/97 10,000 6.875 10.25 6.875 9.6 years
Timothy M. P. Seamans......... 4/8/97 20,000 6.875 10.25 6.875 9.6 years
General Manager Professional 4/8/97 30,000 6.875 14.63 6.875 9.3 years
Services
</TABLE>
- -------------------------
(1) Repriced options continue to vest in accordance with the vesting schedule of
the original options. See also "Report of the Compensation Committee on
Repricing of Options"
EMPLOYMENT AGREEMENTS
In April 1991, the Company entered into an Employment and Confidentiality
Agreement with Mr. Colbeth, pursuant to which the Company agreed to employ Mr.
Colbeth as its Chief Executive Officer. Under the terms of this Agreement, which
has no stated term, the Company issued 331,590 shares of Common Stock to Mr.
Colbeth in the form of a bonus; the Company had certain repurchase rights with
respect to some or all of such shares in the event of the termination of Mr.
Colbeth's employment on or before March 31, 1995. This Agreement also includes a
covenant by Mr. Colbeth not to compete with the business of the Company, or to
solicit any employees of the Company, during the two-year period following his
employment termination, and contains customary confidentiality and invention
assignment provisions.
In April 1991, the Company entered into an Employment and Confidentiality
Agreement with Mr. Tyrrell. Under the terms of this Agreement, the Company
issued 60,000 shares of Common Stock to Mr. Tyrrell in the form of a bonus; the
Company had certain repurchase rights with respect to some or all of such shares
in the event of the termination of Mr. Tyrrell's employment on or before May 31,
1993. This Agreement also includes a covenant by Mr. Tyrrell not to compete with
the business of the Company, or to solicit any employees of the Company, during
the two-year period following his employment termination, and contains customary
confidentiality and invention assignment provisions.
The Company is party to senior management retention agreements providing
contingent severance payments ("Retention Agreements") with five executive
officers (including Messrs. Colbeth, Tyrrell, Vilchick and Houle) which would
become operative following a "change in control" of the Company, as defined in
the Retention Agreements. The Company believes that these agreements will better
ensure the
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<PAGE> 11
retention of those officers and enable them to devote their full attention and
energies to the Company's business without the distractions that might arise in
the circumstances addressed in the agreements. The Retention Agreements continue
in effect while the executive is employed by the Company until December 31,
1998, automatically renew for additional one year terms unless specified advance
written notice is given by the Company and remain in effect for 24 months
following a change in control. If the executive's employment is terminated
within 24 months following a change in control, the executive would become
entitled to various benefits under the Retention Agreements, including (i) the
executive's annual base salary through the date of the termination, (ii) a bonus
for the current fiscal year through the date of termination equal to a prorated
fraction of the executive's bonus for the most recently completed fiscal year,
(iii) one year's salary and bonus equal to the highest salary and bonus received
by the executive in the five year period prior to the change in control and (iv)
continued employee benefits for 12 months after the date of termination. If,
within 24 months following a change in control, an executive voluntarily
terminates his or her employment without "good reason," as defined in the
Retention Agreements, or the executive's employment is terminated because of
death or disability, the executive is entitled only to items (i) and (ii)
described above. If, within 24 months following a change in control, the
executive is terminated by the Company for "cause" as defined in the Retention
Agreements, he or she is only entitled to receive the payment described in item
(i) above.
The Retention Agreements provide that the above payments would be subject
to reduction to the extent that any payment was subject to the excise tax
imposed under Section 4999 of the Internal Revenue Code of 1986, as amended if
such reduction would result in a greater after tax payment to the executive.
REPORT OF THE COMPENSATION COMMITTEE ON REPRICING OF OPTIONS
The Company uses stock options as a significant element of the compensation
of employees, in part because it believes options provide an incentive to
employees to maximize shareholder value. Stock options also serve as a means of
retaining employees. Because the market value of the Company's common stock had
fallen significantly below the exercise price of most outstanding options, the
value of such stock options as a means of motivating and retaining employees had
been significantly diminished. The Board of Directors concluded that the Company
needed to restore the value of the existing stock options as a means of
motivating and retaining employees in order to promote the successful
implementation of the Company's growth strategies.
As a result, on April 8, 1997, the Board of Directors approved a stock
option exchange program (the "Exchange Program"), pursuant to which full-time
permanent employees holding stock options under the Company's 1995 Stock
Incentive Plan were given the opportunity to exchange the unexercised portion of
such options (the "Existing Options") for new options (the "New Options") on a
basis of four shares of common stock for every five shares covered by the
Existing Option and having an exercise price of $6.875 per share (the fair
market value of the Company's common stock on such date). The New Options expire
ten years from the Date of Grant and have the same vesting schedule and other
terms as the Existing Option cancelled in exchange therefor. Option holders who
own more than 1% of the outstanding Common Stock and Directors were excluded
from the Exchange Program.
In the aggregate, options for 1,239,150 shares with exercise prices from
$10.25 per share to $21.69 per share have been exchanged for options for 991,320
shares at an exercise price of $6.875 per share. Pursuant to the option exchange
program, four of the Named Executives, Messrs. Tyrrell, Vilchick, Houle and
Littleson, exchanged options to purchase an aggregate of 310,000 shares with
exercise price from $10.25 per share to $17.44 per share for options to purchase
an aggregate of 248,000 shares at an exercise price of $6.875 per share.
Compensation Committee
Brian J. Jackman
Ray Rothrock
Steven R. Vana-Paxhia
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<PAGE> 12
REPORT OF COMPENSATION COMMITTEE
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors (the "Committee"), which is
comprised of Messrs. Jackman, Rothrock and Vana-Paxhia, three of the Company's
non-employee directors. The Committee is responsible for determining the
salaries of, establishing bonus programs for, and granting stock options to, the
Company's executive officers. In making decisions regarding executive
compensation, the Committee receives and considers input from the Company's
Chief Executive Officer (the "CEO") in addition to the results of an annual
executive compensation review prepared by an outside consultant. The Company's
executive compensation plan is comprised of several elements designed to attract
and retain key personnel, reward outstanding performance, link executive pay to
long-term Company performance and to align executive interests with stockholder
interests. These elements consist of a base salary, annual bonuses, and
long-term incentive stock awards.
The base salaries of the Company's executive officers are determined by the
Committee and, for executive officers other than the CEO, are based upon
recommendations from Mr. Colbeth. In establishing base salaries for executive
officers the Committee considers numerous factors such as: a review of salaries
in comparable software companies, the executive's responsibilities, the
executive's importance to the Company, the executive's performance in the prior
year, historical salary levels of the executive and relative salary levels
within the Company. Increases in base salary are generally based upon enhanced
individual performance and/or increases in an executive's responsibilities. The
Company engaged a third party consultant to assist in the review, comparison and
evaluation of the overall compensation program including but not limited to
specific recommendations for individual executives.
The Committee believes that it is important to tie a significant portion of
the compensation of executive officers to the attainment of corporate success,
thus aligning the objectives and rewards of Company executives with those of the
stockholders of the Company. The Committee awards executive bonuses based upon a
review of the bonuses given by comparable software companies, and, for executive
officers other than the CEO, based upon recommendations from Mr. Colbeth.
Individual bonuses are paid as a percentage of salary and are based upon the
Company meeting certain financial goals, in addition to the attainment of
individual achievement goals. The Company financial goals are established by the
Board of Directors at the beginning of the fiscal year, in the form of gross
revenue and net income benchmarks. If the specified gross revenue and net income
benchmarks are achieved the Committee has discretion to distribute bonuses to
the Company's executives based upon their individual contributions to the
achievement of the Company's financial benchmarks. Individual achievement goals
are established for each executive by Mr. Colbeth and an executive's performance
in meeting his or her specified individual achievement goals, coupled with
attainment of the Company's gross revenue and net income goals, determines the
total bonus for each executive in any given year.
The criteria used in determining the CEO's annual bonus are also
established by the Compensation Committee at the beginning of the fiscal year.
In Fiscal 1997, Mr. Colbeth's bonus was based upon the attainment of specified
objectives and certain non-quantitative goals such as enhancement of the
Company's management team.
The Company's 1995 Stock Incentive Plan (the "1995 Plan") authorizes the
Committee to grant incentive or non-qualified stock options to employees of the
Company. The Committee determines the prices and terms at which such options are
granted. The Committee uses stock options as a significant element of the
compensation package of executive officers, because it believes options provide
an incentive to executives to maximize stockholder value and because they
compensate executives only to the extent that the Company's stockholders receive
a return on their investment. Moreover, because options granted to executive
officers become exercisable over a four-year period and terminate upon or
shortly after the termination of the executive's employment with the Company,
stock options serve as a means of retaining these executives. In determining the
total number of shares of Common Stock to be covered by option grants to
executive officers in a given year, the Committee takes into account the number
of outstanding shares of Common Stock, the number of shares reserved for
issuance under the Company's 1995 Plan, recommendations of management concerning
option grants to employees below executive level, and the Company's projected
hiring needs for
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<PAGE> 13
the coming year. In making individual stock option grants to executives, the
Committee considers the same factors considered in the determination of base
salary levels, as well as the stock and option holdings of each executive and
the remaining vesting schedule of such executive's options.
Under Section 162(m) of the Internal Revenue Code of 1986, as amended,
certain executive compensation in excess of $1 million paid to the five most
highly paid executives of the Company will not be deductible by the Company for
federal income tax purposes unless the compensation is awarded under a
performance-based plan approved by the stockholders of the Company. The Company
has structured the 1995 Plan and the grants of options thereunder such that
gains realized by executives upon the exercise of such stock options generally
should be deductible under Section 162(m). The Committee intends to periodically
review the potential effect of Section 162(m) and may in the future decide to
structure certain other executive compensation programs so that they comply with
the performance-based requirements of Section 162(m).
Compensation Committee
Brian J. Jackman
Ray Rothrock
Steven R. Vana-Paxhia
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the
Common Stock of the Company from June 27, 1995 (the date the Common Stock of the
Company commenced public trading) through September 30, 1997 (the end of Fiscal
1997) with the cumulative total return during this period of (i) the Nasdaq
Composite Index and (ii) the Inter@ctive Week Internet Index. This graph assumes
the investment of $100 on June 27, 1995 in the Company's Common Stock, the
Nasdaq Composite Index and the Inter@ctive Week Internet Index, and assumes
dividends are reinvested.
Stock Performance Graph
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
September September September
June 27, 1995 30, 1995 30, 1996 30, 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Spyglass $100 $168.66 $139.17 $ 71.89
- ----------------------------------------------------------------------------------------
NASDAQ $100 $113.48 $133.42 $183.31
- ----------------------------------------------------------------------------------------
Inter@ctive Week Internet Index $100 $119.30 $141.45 $160.86
- ----------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 14
APPROVAL OF AMENDMENT TO 1995 STOCK INCENTIVE PLAN
On October 15, 1997, the Board of Directors adopted, subject to stockholder
approval, an amendment to the Company's 1995 Stock Incentive Plan (the "1995
Plan") increasing the number of shares of Common Stock authorized for issuance
pursuant to the 1995 Plan from 2,550,000 to 3,300,000, in the aggregate. The
Amendment was adopted because the Company believes that available shares under
the 1995 Plan will not be sufficient to satisfy the Company's compensation and
hiring needs through Fiscal 1998. Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code") enacted in 1993, generally disallows a tax
deduction to public companies for compensation over $1 million paid to the
corporation's chief executive officers and four other most highly compensated
executive officers. Qualifying performance-based compensation is not subject to
the deduction limit if certain requirements are met. In particular, income
recognized upon the exercise of a stock option is not subject to the deduction
limit if the option was issued under a plan approved by stockholders that
provides a limit to the number of shares that may be issued under the plan to
any individual.
In order for options and restricted stock awarded under the 1995 Plan, as
amended by the Amendment, to comply with Section 162(m) after the Annual
Meeting, the continuance of the 1995 Plan must be approved by stockholders. If
the stockholders do not vote to continue the 1995 Plan, the Company will not
grant any further options or make any further awards of restricted stock under
the Plan.
The Board of Directors believes that awards under the 1995 Plan, including
stock options, have been and will continue to be, an important compensation
element in attracting and retaining key employees who are expected to contribute
to the Company's growth and success. ACCORDINGLY, THE BOARD OF DIRECTORS
BELIEVES THAT THE APPROVAL OF THE AMENDMENT IS IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL.
SUMMARY OF THE 1995 PLAN
The Company's 1995 Plan took effect upon the closing of the Company's
initial public offering of Common Stock on June 27, 1995. The 1995 Plan enables
the Company to grant options (including options intended to qualify as incentive
stock options under Section 422 of the Code) to make awards of restricted Common
Stock, and to issue certain other equity-related securities of the Company to
employees and directors of and consultants to 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 1995 Plan is 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. Stock options granted under the 1995 Plan are generally
nontransferable, and they generally become exercisable over a four-year period
and expire ten years after the date of grant (subject to earlier termination in
the event of the termination of the optionee's employment with the Company).
As option grants and the grants of other equity-related securities under
the 1995 Plan are discretionary, the Company cannot now determine the number of
any such securities to be granted to any particular executive officer, executive
officers as a group, non-employee directors or non-executive officers and
employees as a group. However, under the terms of the 1995 Plan, no employee may
be granted awards or options with respect to more than 300,000 shares during any
calendar year.
Options may be granted at an exercise price which may be less than, equal
to or greater than the fair market value of the Common Stock on the date of
grant. Under present law, however, incentive stock options and options intended
to qualify as performance-based compensation under Section 162(m) of the Code
may not be granted at an exercise price less than the fair market value of the
Common Stock on the date of grant
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<PAGE> 15
(or less than 110% of the fair market value in the case of incentive stock
options granted to optionees holding more than 10% of the voting power of the
Company). The 1995 Plan permits the Board to determine the manner of payment of
the exercise price of options, including through payment by cash, check or in
connection with a "cashless exercise" through a broker, by surrender to the
Company of shares of Common Stock, by delivery to the Company of a promissory
note, or by any other lawful means.
As of November 30, 1997, the Company had granted options under the 1995
Plan to purchase an aggregate of 3,217,044 shares of Common Stock. Of these
options 932,000 were granted to the current executive officers of the Company
and none were granted to non-employee directors of the Company. As of November
30, 1997 the Company had not granted any stock appreciation rights, performance
shares, or restricted or unrestricted stock under the 1995 Plan. As of November
30, 1997 there were 182 employees and directors of and consultants to the
Company who were eligible to receive awards under the 1995 Plan. As of November
30, 1997, 1,059,060 shares remained available for future issuance under the 1995
Plan.
The 1995 Plan will remain in effect until May 7, 2005 (except that it will
continue in effect as to equity-related securities outstanding on that date),
unless terminated earlier by the Board of Directors. The Board of Directors may
amend, suspend or terminate the 1995 Plan or any portion thereof at any time,
provided that no amendment shall be made without stockholder approval if such
approval is necessary to comply with any applicable tax or regulatory
requirement.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to stock options and
restricted stock awards granted under the 1995 Plan and with respect to the sale
of Common Stock acquired under the 1995 Plan. It does not address the tax
consequences that may arise with respect to any gift or disposition other than
by sale of Common Stock. For precise advice as to any specific transaction or
set of circumstances, participants should consult with their own tax advisors.
Participants should also consult with their own tax advisors regarding the
application of any state, local and foreign taxes and any federal gift, estate
and inheritance taxes. The 1995 Plan is not a qualified Plan under Section
401(a) of the Code.
Incentive Stock Options. In general, a participant will not recognize
taxable income upon the grant or exercise of an incentive stock option. Instead,
a participant will recognize taxable income with respect to an incentive stock
option only upon the sale of Common Stock acquired through the exercise of the
option ("ISO Stock"). Nevertheless, in the case of a participant who has not
been an employee of the Company at all times commencing on the date on which a
particular option was granted (the "Grant Date") and ending on the date that is
three months before the date on which the option is exercised (the "Exercise
Date") an option will be treated as though it were a non-statutory option and
taxed as described below under "Non-Statutory Options".
Incentive stock options are treated as non-statutory options for purposes
of the alternative minimum tax. Although a participant will pay alternative
minimum tax only to the extent of the excess of that tax over the participant's
regular tax, the treatment of an option as a non-statutory option for purposes
of the alternate minimum tax could create such an excess.
The amount of incentive stock options that may be granted to an individual
are subject to an additional limitation. The value (determined as of the date of
the option grant) of the stock as to which the incentive stock options are
exercisable for the first time during any calendar year cannot exceed $100,000.
Any options that exceed that limitation are treated as nonincentive
(non-statutory) Stock Options. Since repriced options are treated as new
options, they will not be incentive stock options to the extent such options
first become exercisable in any calendar year for stock valued (as of the date
of option grant) for more than $100,000.
Generally, the tax consequences of selling ISO Stock will vary with the
length of time that the participant has owned the ISO Stock at the time it is
sold. If the participant sells ISO Stock after having owned it for at least two
years from the Grant Date and one year from the Exercise Date, then the
participant will recognize a long-term capital gain in an amount equal to the
excess of the sale price of the ISO Stock over the exercise price.
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<PAGE> 16
If the participant sells ISO Stock prior to two years from the Grant Date
or one year from the Exercise Date (a "Disqualifying Disposition"), then the
participant generally will recognize ordinary compensation income in an amount
equal to the lesser of: (i) the excess of the fair market value of the ISO Stock
on the Exercise Date over the exercise price or (ii) the excess of the sale
prices of the ISO Stock over the exercise price.
A participant making a Disqualifying Disposition will also recognize
capital gain in an amount equal to any excess of the sale price of the ISO Stock
over the fair market value of the ISO Stock on the Exercise Date. This capital
gain will be a long-term capital gain if the participant has held the ISO Stock
for more than one year prior to the date of the sale and will be a short-term
capital gain if the participant has held the ISO Stock for a shorter period.
If a participant sells ISO Stock for less than the exercise price, then the
participant will recognize capital loss equal to the excess of the exercise
price over the sale price of the ISO Stock. The capital loss will be a long-term
capital loss if the participant has held the ISO Stock for more than one year
prior to the date of the sale and will be a short-term capital loss if the
participant has held the ISO Stock for a shorter period.
Non-statutory Stock Options. As in the case of an incentive stock option, a
participant will not recognize taxable income upon the grant of a non-statutory
option. However, a participant generally will recognize ordinary compensation
income upon the exercise of a non-statutory option in an amount equal to the
excess of the fair market value of the Common Stock acquired through the
exercise of the option (the "NSO Stock") on the Exercise Date over the exercise
price.
A participant will have a tax basis for any NSO Stock equal to the exercise
price plus any income recognized upon the exercise of the option. Upon selling
NSO Stock, a participant generally will recognize capital gain or loss in an
amount equal to the difference between the sale price of the NSO Stock and the
participant's tax basis in the NSO Stock. This capital gain or loss will be a
long-term capital gain or loss if the participant has held the NSO Stock for
more than one year prior to the date of the sale and will be a short-term
capital gain or loss if the participant has held the NSO Stock for a shorter
period.
Delivery of Common Stock Upon Exercise of Stock Options. Where provided for
in the applicable option agreement the 1995 Plan permits a participant to
exercise a stock option by delivering to the Company Common Stock having a fair
market value equal in amount to the exercise price. The use of this method of
exercise generally will not alter the tax consequences described above, and it
may enable a participant to dispose of appreciated Common Stock without
immediately recognizing capital gain on the disposition. The participant's tax
basis in any shares of Common Stock delivered to the Company to exercise an
option generally will be carried over to an equal number of shares of Common
Stock acquired upon exercising the option. Nevertheless, participants should
consider that the delivery to the Company of ISO Stock or stock acquired
pursuant to the Company's employee stock purchase plan will constitute a
Disqualifying Disposition, having all the adverse tax consequences described
above, if the holding period requirements described above are not satisfied with
respect to that stock.
Restricted Stock. A participant will not recognize taxable income upon the
grant of a restricted stock award, unless the participant makes an election
under Section 83(b) of the Code. If the participant makes this election within
30 days of the date of the grant, then the participant will recognize ordinary
income, for the year in which the award is granted, in an amount equal to the
excess of the fair market value of the Common Stock at the time the award is
granted over the purchase price paid for the Common Stock. If such election is
made and the participant subsequently forfeits some or all of the shares, the
participant will not be entitled to any refund of taxes paid as a result of a
Code Section 83(b) election. If this election is not made, the participant will
recognize ordinary income at the time that the forfeiture provisions or
restrictions on transfer lapse in an amount equal to the difference between the
fair market value of the Common Stock at the time of such lapse and the original
purchase price paid for the Common Stock, The participant will have a basis in
the Common Stock acquired equal to the sum of the price paid and the amount of
ordinary income recognized either at the time the Code Section 83(b) election is
made or at the time the forfeiture provisions or transfer restrictions lapse, as
applicable.
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<PAGE> 17
Upon the disposition of the Common Stock acquired pursuant to a restricted
stock award the participant will recognize a capital gain or loss equal to the
difference between the sale price of the Common Stock and the participant's
basis in the Common Stock. The gain or loss will be a long-term gain or loss if
the shares are held for more than one year. For this purpose, the holding period
shall begin on the day after the date on which the forfeiture provisions or
restrictions lapse if a Code Section 83(b) election is not made, or on the day
after the award is granted if a Code Section 83(b) election is made.
Maximum Income Tax Rates on Capital Gain and Ordinary Income. Long-term
capital gain will be taxable at a maximum rate of 20% if attributable to Common
Stock held for more than eighteen months and at a maximum rate of 28% if
attributable to Common Stock held for more than one year but not more than
eighteen months. Short-term capital gain and ordinary income will be taxable at
a maximum rate of 39.6%. Phaseouts of personal exemptions and reductions of
allowable itemized deductions at higher levels of income may result in slightly
higher marginal tax rates. Ordinary compensation will also be subject to a
Medicare tax and, under certain circumstances, a social security tax.
Tax Consequences to the Company. The grant of a stock option or restricted
stock award under the 1995 Plan will have no tax consequences to the Company.
Moreover, in general, neither the exercise of an incentive stock option acquired
under the 1995 Plan will have any tax consequences to the Company. However, the
Company generally will be entitled to a business-expense deduction with respect
to any ordinary compensation income recognized by a participant under the 1995
Plan. Any such deduction will be subject to the limitations of Section 162(m) of
the Code.
Withholding. Although a participant's Disqualifying Disposition of ISO
Stock will result in the recognition of ordinary compensation income, the
Company will have no withholding obligations with respect to that income. In
contrast, the Company will have a withholding obligation with respect to
ordinary compensation income recognized with respect to a non-statutory option
or restricted stock award by a participant who is employed by the Company. The
Company will require any such participant to make arrangements to satisfy this
withholding obligation.
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected the firm of Ernst & Young LLP as the
Company's independent auditors for the current fiscal year. Ernst & Young LLP
has served as the Company's independent auditors since July 1997. Although
stockholder approval of the Board of Directors' selection of Ernst & Young LLP
is not required by law, the Board of Directors believes that it is advisable to
give stockholders an opportunity to ratify this selection. If this proposal is
not approved at the Annual Meeting, the Board of Directors may reconsider its
selection.
Representatives of Ernst & Young LLP are expected to be present at the
Annual Meeting and will have the opportunity to make a statement if they desire
to do so and will also be available to respond to appropriate questions from
stockholders.
Previously, Price Waterhouse LLP served as the independent auditors for the
Company (or its predecessor Illinois corporation) since 1991. The Company
dismissed Price Waterhouse LLP as its independent auditors effective July 9,
1997. The report of Price Waterhouse LLP on the Company's financial statements
for the fiscal years ended September 30, 1995 and 1996 did not contain an
adverse opinion or a disclaimer of opinion, nor was it qualified or modified as
to uncertainty, audit scope, or accounting principles. The decision to dismiss
Price Waterhouse LLP was recommended by management and the Company's Audit
Committee and was approved by the Board of Directors. During the fiscal years
ended September 30, 1995 and 1996 and the interim period ended July 9, 1997,
there were no disagreements with Price Waterhouse LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreement(s), if not resolved to the satisfaction
of Price Waterhouse LLP, would have caused it to make a reference to the subject
matter of the disagreement(s) in connection with its report.
Price Waterhouse did not advise the Registrant during the Registrant's two
most recent fiscal years or during the interim period ended July 9, 1997: (A)
that the internal controls necessary for the Registrant to
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<PAGE> 18
develop reliable financial statements did not exist; (B) that information had
come to its attention that had led it to no longer be able to rely on
management's representations, or that had made it unwilling to be associated
with the financial statements prepared by management; (C) of the need to expand
significantly the scope of its audit, or that information had come to its
attention during fiscal years ended September 30, 1995 and 1996 and the interim
period ended July 9, 1997 that if further investigated might (i) materially have
impacted the fairness or reliability of either: a previously issued audit report
or the underlying financial statements, or the financial statements issued or to
be issued covering the fiscal period(s) subsequent to the date of the most
recent financial statements covered by an audit report or (ii) have caused it to
be unwilling to rely on management's representations or be associated with the
Company's financial statements; or (D) that information had come to its
attention that it had concluded materially impacts the fairness or reliability
of either: (i) a previously issued audit report or the underlying financial
statements, or (ii) the financial statements issued or to be issued covering the
fiscal period(s) subsequent to the date of the most recent financial statements
covered by an audit report.
The Company engaged Ernst & Young LLP as the principal accountant to audit
the consolidated financial statements of the Company, effective July 9, 1997.
During the fiscal years ended September 30, 1995 and 1996 and the interim period
prior to engaging Ernst & Young LLP, neither the Company nor anyone on its
behalf consulted Ernst & Young LLP regarding either: (a) the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Registrant's
financial statements, and neither a written report was provided to the Company
or oral advice was provided that Ernst & Young LLP concluded was an important
factor considered by the Company in reaching a decision as to the accounting,
auditing or financial reporting issue; or (b) any matter that was the subject of
either a disagreement or an event described in the preceding two paragraphs.
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OTHER MATTERS
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on its review of reports filed by "reporting persons" of the
Company under Section 16(a) of the Securities Exchange Act of 1934, as amended
("Section 16(a)"), the Company believes that during Fiscal 1997 all filings
required to be made by reporting persons were timely made in accordance with the
requirements of Section 16(a).
MATTERS TO BE CONSIDERED AT THE MEETING
The Board of Directors does not know of any other matters which may come
before the Annual Meeting. However, if any other matters are properly presented
to the Annual Meeting, it is the intention of the persons named in the
accompanying proxy to vote, or otherwise act, in accordance with their judgment
on such matters. Stockholders should be aware that the Company's By-laws (a copy
of which is available upon request to the Secretary of the Company) contain
provisions requiring certain advance notice from a stockholder who wishes to
bring business before the Annual Meeting.
SOLICITATION OF PROXIES
All costs of solicitation of proxies will be borne by the Company. In
addition to solicitations by mail, the Company's Directors, officers and regular
employees, without additional remuneration, may solicit proxies by telephone,
telegraph, facsimile, email and personal interviews. Georgeson and Company Inc.
has been engaged by the Company to solicit proxies on behalf of the Company. For
these services, the Company will pay Georgeson and Company Inc. a fee of $5,000
plus reimbursement of out-of-pocket expenses. Brokers, custodians and
fiduciaries will be requested to forward proxy soliciting material to the owners
of stock held in their names, and the Company will reimburse them for their
out-of-pocket expenses in this connection.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the Annual Meeting of
Stockholders for Fiscal 1998 must be received by the Company at its principal
office not later than August 25, 1998 for inclusion in the proxy statement for
that meeting.
By Order of the Board of Directors,
THOMAS S. LEWICKI,
Secretary
December 23, 1997
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL
GREATLY FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION WILL BE
APPRECIATED. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR STOCK PERSONALLY
EVEN THOUGH THEY HAVE SENT IN THEIR PROXIES.
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