<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
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
------------------------------- --------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive offices, zip code, registrant's telephone
number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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 report) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 7, 1997
--------------------------------------- ------------------------------
Common Stock (par value $.01 per share) 12,316,412
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SPYGLASS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets
June 30, 1997 and September 30, 1996 3
Consolidated Statements of Operations
Three Months Ended June 30, 1997 and 1996
Nine Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended June 30, 1997 5
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1997 and 1996 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
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SPYGLASS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, SEPTEMBER 30,
(In thousands) 1997 1996
===================================================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,564 $ 16,490
Short-term investments 9,831 17,593
Accounts receivable, net of allowance for
doubtful accounts of $350 and $470, respectively 3,463 7,608
Prepaid expenses and other assets 2,472 2,094
----------- -----------
Total current assets 38,330 43,785
Properties, net 5,025 3,377
Long-term accounts receivable 200 618
Other assets 1,446 989
----------- -----------
Total Assets $ 45,001 $ 48,769
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,474 $ 2,160
Deferred revenues 1,035 1,453
Accrued compensation and related benefits 1,059 952
Accrued restructuring costs 309
Accrued expenses and other liabilities 213 103
----------- -----------
Total current liabilities 5,090 4,668
Long-term deferred revenues - 210
----------- -----------
Total liabilities 5,090 4,878
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Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized,
none issued - -
Common stock, $.01 par value, 50,000,000 shares
authorized, 12,287,931 and 11,819,545 shares
issued and outstanding, respectively 123 118
Additional paid-in capital 40,383 39,341
Retained earnings (deficit) (595) 4,432
----------- -----------
Total stockholders' equity 39,911 43,891
----------- -----------
Total Liabilities and Stockholders' Equity $ 45,001 $ 48,769
=========== ===========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
3
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SPYGLASS, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
(In thousands, except per share amounts) 1997 1996 1997 1996
======================================================================================= ============================
<S> <C> <C> <C> <C>
Net revenues:
World-Wide Web technology revenues $ 1,179 $ 5,322 $ 15,154 $ 13,849
Service revenues 1,037 681 2,962 1,907
----------- ------------ ------------ -----------
Total net revenues 2,216 6,003 18,116 15,756
Cost of revenues:
Cost of technology revenues 200 506 1,326 1,397
Cost of service revenues 477 13 1,017 43
----------- ------------ ------------ -----------
Total cost of revenues 677 519 2,343 1,440
----------- ------------ ------------ -----------
Gross profit 1,539 5,484 15,773 14,316
Operating expenses and other:
Sales and marketing 1,813 1,687 5,843 4,223
Research and development 3,714 1,838 10,074 4,517
General and administrative 2,162 951 5,282 2,830
Restructuring charge - - 900 -
----------- ------------ ------------ -----------
Total operating expenses and other 7,689 4,476 22,099 11,570
----------- ------------ ------------ -----------
Income (loss) from operations (6,150) 1,008 (6,326) 2,746
Other income 307 428 1,299 1,321
----------- ------------ ------------ -----------
Income (loss) before income taxes (5,843) 1,436 (5,027) 4,067
Income tax provision (benefit) (310) 574 - 1,611
----------- ------------ ------------ -----------
Net income (loss) $ (5,533) $ 862 $ (5,027) $ 2,456
=========== ============ ============ ===========
Earnings (loss) per common share and equivalents:
Net income (loss) $ (0.45) $ 0.07 $ (0.42) $ 0.19
Weighted average number of common
shares and equivalents outstanding 12,187 12,853 12,010 12,832
=========== ============ ============ ===========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
4
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SPYGLASS, INC.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
----------------------- PAID-IN EARNINGS/
(In thousands, except share amounts) SHARES AMOUNT CAPITAL (DEFICIT)
==============================================================================================
<C> <S> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996 11,819,545 $ 118 $ 39,341 $ 4,432
Exercise of stock options 468,386 5 763
Issuance of incentive stock options 179
Issuance of incentive stock options
related to restructuring 100
Net loss (5,027)
---------- -------- ---------- ----------
BALANCE AT JUNE 30, 1997 12,287,931 $ 123 $ 40,383 $ (595)
========== ======== ========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
5
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SPYGLASS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
(in thousands) 1997 1996
=========================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,027) $ 2,456
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,144 496
Bad debt provison 858 99
Deferred income taxes - (1,764)
Incentive stock option compensation 279 60
Other - (201)
Changes in operating assets and liabilities:
Accounts and long-term receivables 3,705 (3,267)
Prepaid expenses and other assets (835) (795)
Accounts payable 314 199
Deferred revenues (628) (279)
Accrued compensation and related benefits 107 939
Accrued restructuring costs 309 -
Accrued expenses and other liabilities 110 (839)
-------- ---------
Net cash provided by (used in) operating activities 336 (2,896)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments, net activity 7,762 -
Capital expenditures (2,792) (2,035)
-------- ---------
Net cash provided by (used in) investing activities 4,970 (2,035)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, including
tax related benefits 768 3,521
-------- ---------
Net cash provided by financing activities 768 3,521
-------- ---------
Net increase (decrease) in cash and cash equivalents 6,074 (1,410)
Cash and cash equivalents at beginning of period 16,490 34,872
-------- ---------
Cash and cash equivalents at end of period $ 22,564 $ 33,462
======== =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
6
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SPYGLASS, INC.
FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the
Company in accordance with generally accepted accounting principles,
although certain information and footnote disclosures normally
included in the Company's audited annual financial statements have
been condensed or omitted. In the opinion of management, the
accompanying unaudited financial statements include all adjustments
(consisting only of normal recurring items) necessary for a fair
presentation of the Company's financial position, results of
operations and cash flows at the dates and for the periods indicated.
These interim financial statements should be read in connection with
the audited financial statements for the fiscal years ended September
30, 1996, 1995 and 1994 which are included in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1996.
The results of operations for the three and nine months ended
June 30, 1997 are not necessarily indicative of the results of
operations to be expected for the full fiscal year.
NOTE 2. STOCK OPTION EXCHANGE PROGRAM
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
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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 Company's outstanding common stock and Directors
were excluded from the Exchange Program.
8
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SPYGLASS, INC.
FORM 10-Q
ITEM 2. 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 software products and
services. Beginning in fiscal 1997, the Company has been focusing on the
development, marketing and distribution of its technologies and services to the
Internet device market. This market consists of non-PC devices and the
underlying Internet infrastructure. Spyglass markets Internet connectivity
products to a variety of companies such as real-time operating system (RTOS)
vendors and consumer and industrial device manufacturers in the device segment
of this market and markets Internet infrastructure and application products to
a variety of companies such as the Regional Bell Operating Companies (RBOCs),
telephone companies, cable companies, Internet Service Providers (ISPs) and
internetworking hardware providers in the infrastructure segment of this
market. These technologies are designed to be embedded within Internet devices
and on-line services to bring Web functionality to these products and services.
Spyglass technology offerings include Spyglass Device Mosaic, Spyglass
MicroServer, SurfWatch ProServer and SurfWatch including add-ons for Microsoft,
Netscape and Oracle Proxy Servers. Spyglass also offers Internet consulting
and custom engineering services through its Professional Services organization.
Spyglass Web technology is designed to be embedded inside various end-user
products, including but not limited to televisions, office equipment,
television set-top boxes, network computers and Internet access services.
Spyglass acquired Stonehand Inc. ("Stonehand"), OS Technologies
Corporation ("OS Tech") and SurfWatch Software, Inc. ("SurfWatch"), in fiscal
1996 in transactions accounted for as poolings of interests. All financial
information presented includes the accounts and results of operations of these
companies for all periods presented.
The Company pays royalties to the University of Illinois with respect to
licenses of Spyglass Mosaic. 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, to Sun Microsystems, Inc. with respect to licenses
of the Company's technologies containing certain Java code and to Versant
Industries, Inc. with respect to licenses of SurfWatch ProServer. These
royalties are reflected in cost of technology revenues.
9
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This Form 10-Q 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 to
differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below.
The Company has announced an increased strategic focus on the Internet
device market. The Company is focused on the development and marketing of
technologies that enable 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 that its revenues may be adversely
affected during fiscal 1997 and 1998 as the Company continues to direct its
business strategy to the Internet device market, rather than vendors of
desktop software applications. In addition, the Company expects to
significantly increase its expenditures in product development, marketing and
sales in order to position itself as a leader in the Internet device market,
which should negatively impact net income during fiscal 1997 and 1998.
Other factors that may affect the Company's future results of operations
include, but are not limited to, the extent to which the market for Internet
services and products develops and grows; competition from other companies that
develop and market Web technologies, as well as from potential customers which
choose to internally develop Web technologies; the Company's ability to develop
and introduce new products, the success of any products introduced by the
Company in the future, such as the planned releases of Spyglass Remote Mosaic
and Spyglass Prism; the performance of the Company's customers who incorporate
the Company's technology into their products; claims of infringement of third
party proprietary rights resulting in restrictions on the Company's ability to
distribute certain products or to include particular features in its products,
or requiring the Company to pay royalties in connection with the distribution
of its products; and any adverse developments affecting the computer or
communications industries in general.
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 minimum
number of licenses, and license revenues are recognized as the committed
licenses are purchased. Additional license 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 depend in significant part on its
ability to sell licenses to new customers in that quarter in addition to the
timing of product deployment by its customers. The Company typically
structures its
10
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professional service agreements with customers to recognize revenue on the
percentage of completion method of accounting.
The Company's expense levels are based in part on expectations of future
revenue levels and any shortfall in expected revenue could therefore result in
a disproportionate decrease in the Company's net income in any given fiscal
period.
On January 21, 1997, the Company amended its license arrangement with
Microsoft to convert Microsoft's existing license for the Spyglass Mosaic
browser technology into a fully paid-up license in consideration of an
additional $8,000,000 payment from Microsoft. Spyglass recognized the revenue
from this payment in the quarter ended March 31, 1997. Management believes
that its results of operations, without giving effect to this one-time event,
present a more accurate presentation of the Company's ongoing business.
Accordingly, the following analyses for the nine months ended June 30, 1997,
including amounts and percentages, exclude the $8,000,000 of revenue as well as
the associated $600,000 of cost of sales and $400,000 of sales expense for the
nine months ended June 30, 1997.
NINE MONTHS ENDED JUNE 30, 1997 COMPARED WITH NINE MONTHS ENDED JUNE 30, 1996
Technology revenues for the nine months ended June 30, 1997 decreased
$6,695,000 or 48%, to $7,154,000 compared to $13,849,000 for the nine months
ended June 30, 1996. This decrease in technology revenues was due primarily to
a significant decline in revenues from vendors of desktop software applications
combined with slower than anticipated development of the Internet device market
as the Company has redirected its strategic focus to this market. During this
period of strategic redirection, initial technology license revenues will
typically comprise a smaller component of total revenue until such time as
customer devices utilizing the Company's technology are introduced commercially
and the contractual royalty revenue stream commences.
Service revenues, which include revenues from both customer support
agreements and professional consulting services, increased $1,055,000, or 55%,
to $2,962,000 for the nine months ended June 30, 1997 compared to $1,907,000
for the nine months ended June 30, 1996. The increase in service revenues was
due primarily to the increase in the number of professional services agreements
entered into by the Company. Revenues from professional services totaled
approximately $1,383,000 for the nine months ended June 30, 1997 compared to
$445,000 for the nine months ended June 30, 1996. The Company expects
professional service revenues to increase both in absolute dollars and as a
percentage of revenues during fiscal 1997 and 1998 while service revenues from
customer support agreements are expected to decline slightly during the same
period.
Gross profit as a percentage of revenues was 82.8% for the nine months
ended June 30, 1997 compared to 90.9% for the nine months ended June 30, 1996.
This decrease in gross profit percentage resulted primarily from an increase in
service revenues, particularly professional service revenues, as a percentage
of revenues, which have significantly higher costs as a percentage of revenues
than technology revenues. Additionally, the cost of service revenues
11
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increased, as a percentage of service revenues, to 34% for the nine months
ended June 30, 1997, from 2% for the nine months ended June 30, 1996. This
increase was due to increased costs associated with professional services,
which services were introduced in June 1996. The Company expects gross profit
as a percentage of revenues to decline slightly throughout the remainder of
fiscal 1997 and 1998 as professional service revenues as a percentage of
revenues increase.
Sales and marketing expenses for the nine months ended June 30, 1997
increased $1,220,000, or 29%, to $5,443,000 from $4,223,000 for the nine
months ended June 30, 1996, and increased as a percentage of revenues to
53.8% from 26.8%. The increased expenses reflected staff additions in sales,
marketing, and customer services to support the sale and marketing of
Spyglass product lines to the device market which increased the cost of
salary and related personnel expenses by $705,000 and increased related
facility costs by $337,000 between these periods. Additionally, certain
marketing initiatives, which included a print campaign as well as increased
travel and trade show appearances which were focused on increasing awareness
of the Company's products among the business and technology communities,
accounted for an increase of $103,000 in sales and marketing expenses. The
Company expects to increase its sales and marketing expenses during the
remainder of fiscal 1997 as the Company focuses its efforts on the Internet
device market.
Research and development expenses for the nine months ended June 30,
1997 increased $5,557,000, or 123%, to $10,074,000 from $4,517,000 for the
nine months ended June 30, 1996 and increased as a percentage of revenues to
99.6% from 28.7%. The increase in research and development expenses was due
primarily to costs of additional personnel required to provide enhancements
to existing technologies and develop new technologies as well as the
reallocation of personnel to geographic areas in which higher salaries are
required, all of which increased the cost of salary and related personnel
expenses by $3,587,000 for the nine months ended June 30, 1997 compared to
the nine months ended June 30, 1996. Additionally, facility costs increased
$1,739,000 between these periods as the Company consolidated its Champaign,
Illinois research and development facility into its Naperville, Illinois and
Cambridge, Massachusetts locations, which have higher facility costs than the
Champaign facility. The Company believes that it has been necessary to make
significant investments in research and development and acquisitions of new
technologies to remain competitive and establish a leadership position in the
emerging Internet device market. The Company expects its research and
development expenses to remain relatively constant throughout the remainder
of fiscal 1997.
General and administrative expenses for the nine months ended June 30,
1997 increased $2,452,000, or 87%, to $5,282,000 from $2,830,000 for the nine
months ended June 30, 1996 and increased as a percentage of revenues to 52.2%
from 18.0%. The increase in general and administrative expenses was primarily
due to increases in personnel, which increased salary and related personnel
expenses by $1,050,000. Bad debt expense increased by $759,000 as the Company
wrote-off certain accounts receivable balances related to its desktop software
application business as the Company transitioned to the Internet device market.
Additionally, in order to effectively and rapidly transition the focus of the
Company from the desktop market to
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the Internet device market it was necessary to incur significantly more
conference, travel and meeting expenses, which increased general and
administrative expenses by $506,000 for the nine months ended June 30, 1997 as
compared to the nine months ended June 30, 1996.
On March 10, 1997, the Company consolidated its Champaign, Illinois
development facility with its Naperville, Illinois and Cambridge, Massachusetts
locations. This consolidation reflects the Company's evolution from its
desktop focus to the Internet device market and the realignment of its product
development activities with the needs of this market. A charge of $900,000 was
recorded in the second quarter of fiscal 1997 and consists primarily of
severance and related personnel costs of $730,000 and lease cancellation and
other exit costs of $170,000. Included in the charge for personnel costs was
$100,000 of compensation expense related to the acceleration of the
exercisability of certain stock options. The Company expects the decrease in
facility costs related to the closing of the Champaign facility to be offset by
expansion within existing facilities as well as expansion into new facilities.
The Company recorded no income tax benefit for income taxes for the nine
months ended June 30, 1997 as compared to a provision for income taxes of
$1,611,000 for the nine months ended June 30, 1996. This reflects a decision
by the Company not to recognize income tax benefits associated with the
Company's operating loss generated during fiscal 1997. The Company believes
that it is appropriate to defer recognition of potential tax benefits until
such time when its return to profitability can provide assurances that these
tax benefits will be realized.
QUARTER ENDED JUNE 30, 1997 COMPARED WITH QUARTER END JUNE 30, 1996
Technology revenues for the quarter ended June 30, 1997 decreased
$4,143,000 or 78%, to $1,179,000 compared to $5,322,000 for the quarter ended
June 30, 1996. This decrease in technology revenues was due primarily to a
significant decline in revenues from vendors of desktop software applications
combined with slower than anticipated development of the Internet device market
as the Company has redirected its strategic focus to this market.
Service revenues for the quarter ended June 30, 1997 increased $356,000,
or 52%, to $1,037,000 compared to $681,000 for the quarter ended June 30, 1996.
The increase in service revenues was due to the increase in the number of
professional services agreements entered into by the Company. Revenues from
professional services approximated $521,000 in the quarter ended June 30, 1997
as compared to $165,000 for the quarter ended June 30, 1996.
Gross profit as a percentage of revenues was 69.4% for the quarter ended
June 30, 1997 compared to 91.4% for the quarter ended June 30, 1996. This
decrease in gross profit percentage resulted primarily from an increase in
service revenues, particularly professional service revenues, as a percentage
of revenues, which have significantly higher costs as a percentage of revenues
than technology revenues. Furthermore, the percentage of revenues represented
by service revenues was particularly high during the quarter ended June 30,
1997 given the unusually low level of licensing fees. As the Internet device
market develops, the Company would expect licensing fees as a percentage of
revenues to increase from third quarter levels.
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Sales and marketing expenses for the quarter ended June 30, 1997 increased
$126,000, or 7%, to $1,813,000 from $1,687,000 for the quarter ended June 30,
1996, and increased as a percentage of revenues to 81.8% from 28.1%. The
increased expenses reflected staff additions in sales and marketing to support
the sale and marketing of Spyglass technologies which increased the cost of
salary and related personnel expenses by $260,000 and related facility costs by
$141,000 between these periods. Due to the significant decline in revenues for
the quarter ended June 30, 1997 compared to the quarter ended June 30, 1996,
sales commissions declined by $150,000. Advertising costs decreased $158,000
between these periods due to the cancellation of a monthly advertising service
fee associated with previous marketing programs targeting the desktop
marketplace.
Research and development expenses for the quarter ended June 30, 1997
increased $1,876,000, or 102%, to $3,714,000 from $1,838,000 for the quarter
ended June 30, 1996 and increased as a percentage of revenues to 167.6% from
30.6%. The increase in research and development costs was due primarily to
costs of increased personnel required to provide enhancements to existing
technologies and develop new technologies as well as the reallocation of
personnel to geographic areas in which higher salaries are required, all of
which increased the cost of salary and related personnel expenses by
$1,024,000 between these periods. Additionally, facility costs increased
$448,000 for the quarter ended June 30, 1997 compared to the quarter ended
June 30, 1996 as the Company consolidated its Champaign, Illinois research
and development facility into its Naperville, Illinois and Cambridge,
Massachusetts locations, which have higher facility costs than the Champaign
facility.
General and administrative expenses for the quarter ended June 30, 1997
increased $1,211,000, or 127%, to $2,162,000 from $951,000 for the quarter
ended June 30, 1996 and increased as a percentage of revenues to 97.6% from
15.8%. The increase in general and administrative expenses was due primarily
an increase in bad debt expense of $600,000 as the Company wrote-off of certain
accounts receivable balances related to its desktop software application
business as the Company transitioned to the Internet device market.
Additionally, increases in personnel increased salary and related personnel
expenses by $539,000.
The Company recorded an income tax benefit of $310,000 for the quarter
ended June 30, 1997 as compared to a provision for income taxes of $574,000 for
the quarter ended June 30, 1996. This reflects a decision by the Company not
to recognize $1.9 million in income tax benefits associated with the Company's
third quarter operating loss. As a result, the Company recorded a tax benefit
in the third quarter to the extent of the income tax expense recorded during
the first two quarters of 1997. The Company believes that it is appropriate to
defer recognition of potential tax benefits until such time when its return to
profitability can provide assurances that these tax benefits will be realized.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had no debt and had cash and cash
equivalents and short-term investments of $32,395,000 and working capital of
$33,240,000. The Company's operating activities provided cash of $336,000 and
used cash of $2,896,000 for the nine months ended June 30, 1997 and June 30,
1996, respectively. The Company's cash flows for fiscal 1997 were impacted by
the $7,500,000 in cash received from Microsoft during the quarter ended March
31, 1997 in connection with the Company's license arrangement as discussed in
the Overview section.
The Company's net accounts receivable balance decreased to $3,663,000 at
June 30, 1997 from $8,226,000 at September 30, 1996. This decrease was
primarily due to a significant decrease in revenues, increased collection
efforts of the Company and the write-off of approximately $600,000 of accounts
receivable balances.
The Company's capital expenditures totaled $2,792,000 and $2,035,000 for
the nine months ended June 30, 1997 and 1996, respectively. This increase
consists primarily of furniture, leasehold improvements and computer equipment
relating to the continued growth of the Company's infrastructure.
The Company believes that its current cash and cash equivalents, together
with funds expected to be generated from operations, will be sufficient to fund
the Company's operations through at least the twelve-month period ending June
30, 1998.
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SPYGLASS, INC.
FORM 10-Q
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
The exhibits are listed in the accompanying Index to Exhibits immediately
following the signature page.
(b) Reports on Form 8-K
None.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements 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: August 13, 1997 /s/ Gary Vilchick
----------------------------------
Gary Vilchick
Executive Vice President, Finance,
Administration and Operations and
Chief Financial Officer
17
<PAGE> 18
INDEX TO EXHIBITS
Sequential
Page
Exhibit No. Description Number
- ----------- ----------- ----------
27 Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 22,564
<SECURITIES> 0<F1>
<RECEIVABLES> 3,463<F2>
<ALLOWANCES> 350<F2>
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 38,330
<PP&E> 5,025
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 45,001
<CURRENT-LIABILITIES> 5,090
<BONDS> 0<F1>
0<F1>
0<F1>
<COMMON> 123
<OTHER-SE> 39,788
<TOTAL-LIABILITY-AND-EQUITY> 45,001
<SALES> 15,154
<TOTAL-REVENUES> 18,116
<CGS> 1,326
<TOTAL-COSTS> 2,343
<OTHER-EXPENSES> 22,099
<LOSS-PROVISION> 858
<INTEREST-EXPENSE> 0<F1>
<INCOME-PRETAX> (6,236)
<INCOME-TAX> 0<F1>
<INCOME-CONTINUING> (5,027)
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> (5,027)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
<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>
