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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
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Commission file number 0-26074
SPYGLASS, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
37-1258139
(I.R.S. Employer 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)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g)of the Act:
$0.01 PAR VALUE COMMON STOCK
(Title of Class)
Traded on the Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the Common Stock held by non-affiliates of
the registrant on October 31, 1997, based upon the closing sale price of the
Common Stock on the Nasdaq National Market on that date as reported in The Wall
Street Journal, was approximately $105,982,695.
Registrant had 13,236,114 shares of Common Stock outstanding as of December
8, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1997 Annual Report to Stockholders for fiscal
1997 are incorporated by reference in Parts II and IV hereof. The Annual Report
shall be deemed "filed" with the Commission only with respect to those portions
specifically incorporated by reference herein. Portions of the registrant's
definitive Proxy Statement for its Annual Meeting of Stockholders for fiscal
1997, which will be filed with the Securities and Exchange Commission within 120
days after the end of the Company's fiscal year, are incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS
GENERAL
Spyglass(R), Inc. ( "Spyglass" or the "Company" ) develops, markets and
distributes Internet enabling technologies, content services and professional
services that enable various non-PC devices, including, but not limited to,
televisions, office equipment, television set-top boxes, network computers and
telephones, to work with the Internet (also referred to as "World Wide Web",
"WWW" or the "Web").
The Company began operations in February 1990 and, until 1994, focused
substantially all of its resources on its data visualization products sold to
the scientific market. The Company sold its data visualization product line in
September 1995. Spyglass entered the Internet market during fiscal 1994 and from
fiscal 1994 through fiscal 1996, focused its efforts on developing, marketing
and distributing Internet client and server technologies for incorporation into
a variety of Internet-based software products and services. Beginning in fiscal
1997, the Company began focusing on the development, marketing and distribution
of its technologies and services to the non-PC Internet device marketplace.
Spyglass markets embedded solutions to a variety of companies such as the
real time operating system (RTOS) vendors, consumer and industrial electronics
manufacturers, and office equipment suppliers. Spyglass also provides
infrastructure solutions to a variety of companies such as the Regional Bell
Operating Companies (RBOCs), telephone companies, cable companies, cellular
providers, Internet Service Providers (ISPs) and internetworking hardware
providers. These technologies enable Web connectivity through highly scalable
embedded browsers and servers, and provide performance enhancements, content
filtering and conversion through an integrated suite of infrastructure servers.
The Spyglass Professional Services group offers consulting, project management
and custom engineering for defining, developing and delivering complete,
end-to-end project solutions. Spyglass provides its customers with expertise,
software and services that enable them to rapidly deploy cost-effective
Web-enabled devices. Spyglass solutions have been integrated into a variety of
products, including but not limited to televisions, office equipment, television
set-top boxes, network computers, screen and cellular phones. In addition,
several major corporations have deployed SurfWatch, a leading content filtering
software designed to block unwanted material from the Internet.
A central element of the Company's business strategy is a multi-channel
distribution model. The Company, through its scalable, adaptable, modular
Internet technologies and services, creates customized solutions for its
customers which are incorporated into their products and services for end-users.
The Company chose this approach to best meet the varying needs of its customers
and because it enables it to leverage the marketing, distribution and
development resources of much larger organizations that are strategically
focused on offering value-added products and services for the Internet. The
Company intends to continue to increase the performance, functionality and
flexibility of its technology offerings and breadth of its services to meet the
evolving needs of Internet users and to continue to invest in building customer
awareness of the Spyglass name and the range of Internet solutions available
from Spyglass.
The Company's future results of operations will be largely dependent upon a
number of factors relating to development and acceptance of the Internet as a
commercial market, particularly use of the Internet through non-PC devices, and
the Company's ability to establish its solutions as widely-accepted in the
market. See the "Future Operating Results" section incorporated by reference
into Item 7 of this Annual Report on Form 10-K.
During fiscal 1997, the Company first directed its strategic focus to the
Internet device and infrastructure market. 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 and net income may be adversely affected during fiscal 1998 as
the Company continues to concentrate its business strategy on the Internet
device market, rather than on vendors of desktop software applications.
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On November 14, 1997, the Company acquired AllPen Software ("AllPen").
AllPen, based in Los Gatos, California, is a leading systems integration and
software development firm focused on Internet technology for non-PC devices. In
consideration of the acquisition, Spyglass issued approximately 640,000 shares
of common stock and converted outstanding AllPen stock options into options for
approximately 360,000 shares of Spyglass common stock. The transaction has been
accounted for as a pooling of interests.
THE INTERNET
The Internet is a worldwide network that links thousands of public and
private computer networks. The Internet began in 1969 as a project of the
Advanced Research Projects Agency ("ARPA") of the U.S. Department of Defense to
connect different types of computers across geographically disparate areas. The
ARPA network was designed to allow any computer on the network to communicate
with any other computer on the network through an open communications protocol
known as TCP/IP.
Until the mid-1990's, use of the Internet was generally limited to
governmental, educational and commercial organizations with a working knowledge
of the UNIX operating system and commands, and the primary use of the Internet
was the communication of information via electronic mail. However, there has
been a significant growth in the use and popularity of the Internet in the past
several years, due in part to the introduction in 1992 of the World Wide Web, a
client/server system of hyperlinked multimedia databases.
The WWW is based on a client/server system in which certain computers
("servers") store files and respond to requests issued by remote computers
("clients" ) to download the files, thus allowing multiple, geographically
dispersed users to view and use the information stored on a single server. The
client must contain software, known as a browser, that can read Hyper Text
Markup Language (HTML) documents and follow their hypertext links to retrieve
and display linked documents from servers. One limitation on the early growth of
the WWW was that the browser software initially provided by the European
Laboratory for Research Physics (CERN) was text-based and contained limited
retrieval and display capabilities.
In January 1993, the National Center for Supercomputing Applications
("NCSA") at the University of Illinois at Urbana-Champaign introduced NCSA
Mosaic for X Window on the UNIX platform, the first intuitive, graphical user
interface browser for the WWW. The NCSA Mosaic graphical user interface allows
users to access the diverse information archives, data protocols and data
formats of the Internet using point-and-click, mouse-driven commands. NCSA
Mosaic is offered by NCSA to users on a free-with-copyright basis (making it
available for use without charge and without the right to distribute). NCSA
released a version of NCSA Mosaic for Windows in September 1993.
In order to support the continued growth and popularity of the Internet,
certain "infrastructure" elements must expand to handle the resulting increases
in Internet demand and traffic. These elements include widespread, inexpensive
Internet access, either through Internet access providers or on-line services,
and widely available high-speed communications channels to accommodate the
increasing number and size of files available for downloading.
PRODUCTS AND TECHNOLOGIES
Spyglass products and technologies deliver the embedded Internet and
infrastructure solutions needed to effectively connect a wide variety of devices
to the Internet and leverage the wealth of on-line information and communication
options. Spyglass products deliver benefits to a wide range of groups such as
consumers, device manufacturers, content providers, internetworking vendors and
Internet service providers
Spyglass' solutions provide its partners with a complete array of software
and services necessary to make devices work with the Web. Spyglass solutions
enable Web connectivity from virtually any device, while providing the
infrastructure solutions needed to eliminate performance "bottlenecks" and
deliver value-added services such as content filtering and conversion. And,
critically important to the mass deployment of these new devices, these
solutions ensure that these devices have access to evolving Web content without
the need for changes in the original Web content or costly changes to the
device's software.
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SPYGLASS DEVICE MOSAIC
Spyglass Device Mosaic is the embedded industry's first full-featured, thin
browser. Occupying less than 675KB of code when compiled specifically for
devices, it supports the latest Internet standard technologies found in desktop
browsers many times larger. Moreover, Device Mosaic's modular design makes it
scalable across a broad range of devices. Features can be added to support the
latest needs of televisions and set-top boxes or a stripped down version can be
embedded in more memory-constrained screen phones and hand-held devices. Easily
ported to a variety of popular real-time operating systems, Device Mosaic
enables consumer electronics manufacturers to add Web functionality to products
quickly, cutting development dollars and sharply reducing time to market.
SPYGLASS MICROSERVER
Spyglass MicroServer is a small footprint embedded Web server that enables
full HTML page-based monitoring, management and control of devices such as
copiers, printers, hubs/routers and manufacturing equipment. It delivers
standards-based Web server functionality to multiple concurrent users in as
little as 36KB of RAM. Application user interfaces for MicroServer-enabled
devices are authored in HTML and may be used with any commercial Web browser.
Typical uses include providing operational or status information to a user,
updating a device's internal database through information collected via HTML
forms, or initiating a device action, such as running a diagnostic utility,
based on a user request. Developed specifically for the embedded systems market,
MicroServer has already been ported to many of the leading real-time operating
systems.
SPYGLASS PRISM
Spyglass Prism is a server-based content conversion solution designed to
optimize the performance of the new generation of Web-enabled devices, such as
hand-held PCs & Personal Digital Assistants ("PDA"s), televisions, smart phones,
cellular phones and pagers. Spyglass Prism can dynamically translate richly-
formatted Web content -- HTML, tables, JPEG, frames -- into formats that match
the relatively limited display capabilities of non-PC devices. For example, with
a PDA, Prism could convert memory and bandwidth intensive color images into a
simpler gray-scale format and then resize that image for the PDA's small display
screen. These conversions of graphic laden content can reduce access times by as
much as 90 percent. Performance is further enhanced by a caching feature that
stores previously converted, frequently requested Web content.
SURFWATCH CLIENT
SurfWatch Client from Spyglass is an easy-to-use, effective software
application for screening unwanted material from the Internet. SurfWatch Client
from Spyglass features:
- The ability to block access to a comprehensive list of sites pertaining
to violence, hate crimes, drugs/alcohol, and sex,
- A subscription service for updating the SurfWatch content list,
- A filter manager for defining custom content filters,
- A password protected on/off switch,
- The ability to block objectionable Web, News, FTP, Gopher, and Chat
content, and
- Multiple platform availability.
SURFWATCH PROSERVER
SurfWatch ProServer, based on SurfWatch Client, is installed on a Proxy
Server and blocks unwanted sexually explicit and other inappropriate material on
computers connected to the network-without restricting the access rights of
other Internet users. The SurfWatch ProServer software removes no material from
the
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Internet or any server, but simply blocks it at any local network where it is
installed. SurfWatch ProServer screens the World Wide Web, FTP, Gopher and other
services. In addition to filters for sexually explicit material, SurfWatch
ProServer includes filter options for violence, hate crimes, drugs, alcohol,
games, and gambling. SurfWatch ProServer is available in the following editions:
Microsoft Proxy Server, Netscape Proxy Server, Oracle Proxy Server, NetApp Proxy
Server, FireWall-1 and Spyglass Prism.
The following products were obtained upon Spyglass' acquisition of AllPen
Software in November, 1997.
NETHOPPER BROWSER TECHNOLOGY
The NetHopper browser technology is a portable browser technology geared
for small memory footprint devices. NetHopper allows users to browse the web
from any location at any time, even wirelessly. The NetHopper browser technology
can be found in many popular consumer electronics products currently on the
market today such as Apple Computer's eMate 300 mobile computer. The NetHopper
browser is written to be completely modular. In this way, the NetHopper browser
can be ported to a number of other platforms, including several single-purpose
devices.
NETHOPPER ENTERPRISE SERVER
The NetHopper Enterprise Server is a Java-based server geared for mobile
and/or wireless, non-traditional web clients accessing traditional web-based
Internet/Intranet content. As more and more web content is being targeted at
large, desktop bound, multimedia computers, the NetHopper Enterprise Server
helps bridge the gap between the growing amount of desktop web content to
smaller, more consumer oriented devices. Java provides the ability for the
NetHopper web server to be scaled for use in large, powerful server computers to
much smaller Java-based devices.
EMBEDDEDWEB FOR WINDOWS CE
Targeted at mobile, small memory footprint electronic devices, AllPen's
EmbeddedWeb for Windows CE, a technology of AllPen Software, which was acquired
by Spyglass in November 1997, provides a means for remote devices to share and
publish data via standard web protocols (HTTP, HTML, etc.) By incorporating a
lightweight Web server into products such as automobiles, mobile phones, alarm
systems, fax machines and televisions, these devices can be easily accessed
and/or controlled through the Internet from a standard Web browser.
ALLPEN MOBILE FORMS DATABASE
The AllPen Mobile Forms Database is a mobile database and forms data
collection application for the Windows CE operating system. AllPen Mobile Forms
Database allows users to create powerful handheld databases that fit their
mobile data collection needs. The database exists on handheld devices for easy
collection of important data while freeing users from their desktops. All the
data collected on the mobile device can be uploaded to the Windows 95 desktop
via the Database Export functionality of the AllPen Mobile Forms Database
product. Additionally, any database that one may have on their desktop can be
imported into the AllPen Mobile Forms Database product for display and
manipulation on the mobile CE device.
The AllPen Mobile Forms Database works with all the latest Windows CE
devices including the Philips Velo, the HP 320LX, Casio's Cassiopeia, Compaq's
PC Companion, LG's Phenom, and NEC's MobilePro.
MARKETING, SALES, AND DISTRIBUTION
The Company distributes its technologies through a multi-channel
distribution network of original equipment manufacturers ("OEMs"), value-added
resellers ("VARs") and distributors that incorporate Internet technology into
their products and services. Spyglass has adopted this distribution model to
increase its presence in the marketplace, and to leverage the marketing,
distribution and development resources of its
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customers. Certain products, such as the SurfWatch products, are also sold
directly to end users via direct marketing.
As it expands its technologies to serve the non-PC marketplace, the Company
is focusing its marketing efforts on a variety of companies, including but not
limited to real time operating system (RTOS) vendors, consumer and industrial
device manufacturers, software developers, cable companies, Regional Bell
Operating Companies (RBOC) and Internet Service Providers (ISP). Efforts include
direct marketing campaigns, advertising campaigns and targeting the engineering
and trade conferences and shows focused on these markets and industries. In
addition, the Company is targeting public relations efforts at analysts, the
trade press and other media relevant to the Internet device market.
The Company's license arrangements with its customers typically provide for
a non-exclusive license to incorporate Spyglass technology into the customer's
products and services and distribute the Spyglass technology. These licenses
generally provide for royalties based on the number of copies distributed and
generally include significant minimum royalty commitments.
As of December 10, 1997, the Company had 18 employees in marketing and 18
in sales. The Company currently operates sales offices located in Cambridge,
Massachusetts, San Ramon, California, Morristown, New Jersey, Marina del Rey,
California, Berkshire, United Kingdom and Tokyo, Japan.
PROFESSIONAL SERVICES
The Spyglass Professional Services organization provides custom solutions
and support for its' customers through its professional services and customer
services groups. These custom solutions are essential to Spyglass' overall
strategy.
Professional Services
The Professional Services group provides strategic consulting, custom
engineering, development, systems integration and project management services.
These services are provided on a project basis to assist customers in developing
unique products or services utilizing Spyglass technologies and other third
party technologies. This organization consists of senior consulting managers,
experienced engineering developers, senior technologists and architects,
technical writers and quality assurance specialists.
Customer Services
Most of the Company's customers enter into support agreements with the
Company for annual fees based upon on the number of products licensed, platforms
supported and copies distributed. These support agreements entitle the customer
to the backup technical support described below, product upgrades and
enhancements, and access to certain complementary technologies that are made
available by the Company for distribution without charge.
The Company tracks all support requests through a series of customer
databases that maintain current status reports as well as historical logs of
customer interaction. The Company also assigns a support specialist to each of
its customers as a point of contact for resolving issues. These support
specialists diagnose and solve technical problems related not only to the
Company's products, but also to other software and technologies with which the
Company's products interact. In addition, support specialists provide the
customer with direct access to the Company's development engineers and report
customer and end-user feedback to the Company's development staff. Other types
of support provided to the customer include technical reports, documentation,
status reports for product upgrades and updates, and support during Beta test
and pre-release cycles.
As of December 10, 1997, the Company employed 31 employees in its
Professional Services group.
PRODUCT DEVELOPMENT
An important factor in the Company's ability to deliver state-of-the-art
solutions to its customers is the technology base the Company can leverage in
the creation of customized solutions for its customers. The
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Company has a suite of embedded Internet and infrastructure solutions that it
continues to develop in order to support the latest Internet technologies and
standards. These core technologies form the basis for most of the Company's
customer solutions.
The Company's primary development efforts are focused on embedded Internet
technologies for HTML rendering and browsing and infrastructure technologies
that enhance the performance and functionality of non-PC devices connected to
the Internet.
In order to respond to rapidly changing competitive and technological
conditions, the Company may seek to enhance or expand its product offerings by
licensing one or more complementary technologies or products or acquiring one or
more complementary companies.
Because many of the significant technologies incorporated in the Spyglass
product suite are implementations of Internet standard protocols which are
constantly evolving, the Company actively participates in a number of Internet
standards-setting groups and technical conferences.
As of December 10, 1997, the Company's research and development staff,
which is responsible for product development, quality assurance, technical
communication and product coordination, consisted of 59 full-time employees.
From time to time the Company employs independent contractors for software
development, documentation, artistic design and quality reviews. For the fiscal
years ended September 30, 1997, 1996 and 1995, research and development expenses
were $13,644,000, $6,801,000 and $2,756,000, respectively, which represented
64%, 30% and 23% of revenues, respectively.
COMPETITION
The market for Internet software is extremely competitive. Moreover,
because the Internet is an open system designed to be freely available to
computer users worldwide, and because of the increasing popularity of the
Internet, the Company expects that it will encounter increased competition in
the future. In developing and licensing its technologies, products and services,
the Company competes with other Internet device technology and software vendors,
on-line service companies, Internet access providers and networking software
companies that have developed their own WWW browsers or server products. In
addition, the Company considers a significant source of competition to be the
prospective customer's internal software development resources.
Spyglass MicroServer competes with other thin, embeddable Web server
technologies, including those provided by 3Soft, Agranat, emWare, Integrated
Systems, Inc. and Wind River Systems. The embedded server market is
characterized by an abundance of small competitors and two RTOS developers. Many
of the smaller competitors are offering their products at extremely competitive
prices in an attempt to establish a market position. The RTOS developers have
the advantage of being able to offer embedded Web server functionality along
with their operating systems. The barriers to entry for the embedded Web server
market are very low, as the amount of software required for a server is very
small.
Spyglass Device Mosaic also competes with several companies who are
providing lightweight Web browsers for the emerging Internet device marketplace.
Spyglass competes with a number of small start-up companies in specific vertical
markets. Spyglass also competes with Microsoft's Pocket Internet Explorer
offering on WindowsCE, Network Computer, Inc. (an Oracle subsidiary) and
JavaSoft, which is attempting to adapt the Java environment to embedded devices.
All of these companies are licensing their Web browser and other solutions to
OEMs.
At this time, the Company believes there are no other content conversion
servers that are being offered to the OEM market that directly compete with
Spyglass Prism.
The Company also faces competition for its SurfWatch Client product from
other companies who have filtering products, such as Cyber Patrol.
In its professional services offerings, Spyglass competes with other
technology consulting firms as well as other technology competitors and
customers' in-house research and development staff.
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Competition among the current and future suppliers of Internet software
could result in significant price competition and reductions in the selling
price of the Company's products. Moreover, many of the Company's current and
potential competitors have significantly greater financial, technical, marketing
and other resources than the Company. There can be no assurance that the Company
will be able to compete successfully against current and future sources of
competition or that the competitive pressures faced by the Company will not
adversely affect the Company's revenues or gross margins.
PROPRIETARY RIGHTS
One of the Company's products, Spyglass Device Mosaic, is based in part on
technology licensed to the Company under an agreement with the University of
Illinois at Urbana-Champaign. This agreement grants the Company the exclusive
(subject to previously granted licenses described below) worldwide right to
develop, distribute and sublicense commercial derivative versions of NCSA
Mosaic, the Web browser that was originally developed at the National Center for
Supercomputing Applications on the University of Illinois campus. The University
Agreement provides for royalties based on Spyglass' net revenues from Device
Mosaic. This University Agreement has an initial term of five years, with
automatic one-year renewals, and is terminable in the event of a material breach
by the Company of its obligations thereunder.
The University informed the Company that, prior to appointing the Company
as its exclusive licensing agent, the University granted certain rights with
respect to NCSA Mosaic and the Mosaic trademark to approximately 10
organizations, some of which have developed and market WWW browsers based on
NCSA Mosaic.
The University Agreement gives the Company the exclusive right (with
certain limited exceptions) to use the University's trademarks "Mosaic" and
"NCSA Mosaic" and its spinning globe logo in connection with Spyglass Mosaic
products on a royalty-free basis (with certain limited exceptions). In addition,
the Company has the exclusive right (with certain limited exceptions) to use
these marks in connection with the sale of other products for a royalty payment
based on net revenues derived from such products. The University has filed an
application to register the "NCSA Mosaic" and "Mosaic" trademarks and the
spinning globe logo in the United States.
Spyglass has registered the name "Spyglass", the red "S" logo and the tag
line "Make The Net Work" in the United States. In addition, the Company has
filed applications to register the name "Spyglass" in various foreign
jurisdictions. Spyglass has also registered the name "SurfWatch" in the United
States.
AllPen Software, Inc. has registered the following trademarks in the United
States: "AllPen", "Nethopper" and "The World in the Palm of your Hand". AllPen
Software, Inc. also has filed applications to register the name "Nethopper" in
Canada and France and "EmbeddedWeb" in the United States.
The Company relies upon copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers and
others to protect its proprietary technology. Effective trademark, copyright and
trade secret protection may not be available in every foreign country in which
the Company's products are distributed. The University has no patent protection
for NCSA Mosaic, and the Company has filed only one patent application to date
to protect its products. There can be no assurance that the steps taken by the
Company (or the University) to protect their respective proprietary technologies
will be adequate to prevent misappropriation of their technology by third
parties, or that third parties will not be able to independently develop similar
technology. In addition, there can be no assurance that other parties will not
assert technology infringement claims against the Company.
The Company licenses technology from a number of third party product
vendors for incorporation into the Company's products. Examples of such licensed
technologies include security products, image conversion products and databases.
Specifically, the Company announced on September 13, 1995 an agreement with RSA
Data Security, Inc. ("RSA") allowing the Company to bundle RSA-security products
with its technology offerings. The agreement allows Spyglass to use RSA's BSAFE
and TIPEM software developer's kits to build security into Spyglass' technology
offerings. BSAFE is a well-known cryptographer's tool kit,
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providing the means to add multiple algorithms and modules for encryption and
authentication features to any application.
On November 3, 1995, the Company entered into an agreement with the Java
Products Group of Sun Microsystems, Inc. to license the JAVA programming
language, the HOT JAVA browser and related technology. Under the agreement, the
Company is granted the right to distribute the JAVA Runtime interpreter, the HOT
JAVA browser and certain JAVA classes and interfaces developed by both Sun and
the Company. The Company also has the right to port so-called "platform
dependent parts" to other platforms.
EMPLOYEES
As of December 10, 1997, Spyglass employed 162 persons, including 36 in
sales and marketing, 59 in research and development, 5 in customer services, 31
in professional services and 31 in finance and administrative functions. None of
the Company's employees are represented by a labor union and Spyglass considers
its employee relations to be good.
ITEM 2. PROPERTIES
The Company's executive offices are located in Naperville, Illinois (27,841
square feet) and are occupied under a lease that expires in December 1999. The
Company also leases research and development facilities Cambridge,
Massachusetts, Los Gatos, California and Los Altos, California. The Company
leases sales offices in San Ramon, California, Morristown, New Jersey, Marina
del Rey, California, Berkshire, United Kingdom and Tokyo, Japan.
ITEM 3. LEGAL PROCEEDINGS
Unisys Corporation ("Unisys") has announced its intention to require the
payment of royalties for the use of compression technology associated with the
Graphics Interchange Format ("GIF"), a popular file format based on compression
technology patented by Unisys. Spyglass Device Mosaic has the ability to
decompress files, including files stored in GIF. The assertion of these patent
rights by Unisys, if successful, could result in additional royalty costs to the
Company or prevent the Company's products from enabling users to view files
compressed in GIF.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the quarter ended September 30, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- ---- --- ----------------------------
<S> <C> <C>
Douglas P. Colbeth........................ 42 President, Chief Executive Officer and
Director
Randall T. Littleson...................... 32 Vice President, Marketing
Michael F. Tyrrell........................ 38 Executive Vice President, Business Development
Gary L. Vilchick.......................... 43 Executive Vice President, Finance,
Administration and Operations and Chief
Financial Officer
Timothy M.P. Seamans...................... 38 Vice President and General Manager,
Professional Services and Chief Information
Officer
Richard M. Houle.......................... 42 Executive Vice President, Development and
Services
Michael Sears............................. 40 Vice President and General Manager, SurfWatch
Software Division
</TABLE>
Mr. Colbeth has been President, Chief Executive Officer and a director of
the Company since he joined the Company in April 1991. Prior to joining the
Company, Mr. Colbeth spent four years at Stellar/Stardent
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Computer Corp., a high-end graphics workstation supplier, in various management
positions, most recently as Vice President/General Manager of its AVS software
business unit. From January 1979 until March 1987, Mr. Colbeth was employed in
various sales and management positions at Prime Computer, Inc., a minicomputer
vendor. Mr. Colbeth received his B.S. degree in economics from Siena College in
1977 and has completed graduate studies in managerial economics at Rensselaer
Polytechnic Institute.
Mr. Littleson joined the Company as Director, Product Marketing in June
1996 and was promoted to Vice President, Marketing in October 1996. Prior to
joining the Company, Mr. Littleson was employed by Seagate Software (formerly
Palindrome Corp.), a computer technology company, since 1990, most recently as
Director, Product Marketing. Mr. Littleson received his B.S. degree from the
University of Michigan in 1987 and his M.B.A. from Keller Graduate School of
Management in 1994.
Mr. Tyrrell joined the Company in June 1990 as Vice President, Sales. Mr.
Tyrrell has served as Executive Vice President, Business Development since
November 1995. Prior to joining the Company, Mr. Tyrrell spent three years as a
regional sales manager for Multiflow Computer, Inc., a supercomputer company.
Mr. Tyrrell's prior experience includes five years of sales and sales management
at Celerity Computing and Prime Computer, Inc. Mr. Tyrrell received his B.S.
degree in business administration from the University of New Hampshire.
Mr. Vilchick joined the Company in December 1995 as Executive Vice
President, Finance, Administration and Operations and Chief Financial Officer.
Prior to joining the Company, Mr. Vilchick was the Vice President of Finance for
Pitney Bowes Logistics Systems for three years, and Controller for Pitney Bowes
Management Services for four years prior to that. Mr. Vilchick received his B.S.
degree in accounting from the University of Rhode Island. Mr. Vilchick is a
Certified Public Accountant.
Mr. Seamans joined the Company in July 1996 as Chief Information Officer
and was promoted to Vice President and General Manager, Professional Services in
addition to Chief Information Officer in May 1997. Prior to joining the Company,
Mr. Seamans was Vice President, Product Development and Technology for Pitney
Bowes from 1993 to 1996, Director, Large Accounts for J.D. Edwards in 1992 and
System Development Manger for Pitney Bowes for six years. Mr. Seamans received
his B.S. degree in Business Administration from Bryant College in 1992 with a
major in computer science.
Mr. Houle joined the Company in November 1996 as Executive Vice President,
Development and Services. Prior to joining the Company, Mr. Houle was employed
as the Executive Vice President, Operations for Trimark Technology, Inc. from
September 1995 through October 1996. Prior to Trimark, Mr. Houle was employed
with Sun Microsystems, Inc. from 1988 through 1995, most recently as Systems
Engineering Director.
Mr. Sears joined the Company in June 1997 as Vice President and General
Manager of its SurfWatch Software Division. Prior to joining the Company, Mr.
Sears was principal of The Reticle Group, a Silicon Valley-based management
consulting firm providing business and development counsel for technology
companies, from 1996 through June 1997. Prior to that, he spent six years at Sun
Microsystems, Inc., most recently serving as chief of staff for SunSoft, Sun's
software division. Mr. Sears received a master's degree in business
administration from the Stanford Graduate School of Business and a juris
doctorate degree from Stanford Law School. Mr. Sears graduated from the United
States Naval Academy, and served for five years with the United States Marine
Corps, where he rose to the rank of Captain.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference
from the sections entitled "Selected Quarterly Data" and "Shares Listed" in the
Company's Annual Report to stockholders for the fiscal year ended September 30,
1997 (the "Annual Report").
9
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference
from the section entitled "Selected Financial Data" in the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated herein by reference
from the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required by this Item is not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein be reference
from the financial statements contained in the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company changed its independent accountants in July 1997 as reported in
its Current Report on Form 8-K dated July 15, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning directors of the Company
is incorporated herein by reference from the section entitled "Election of
Directors" included in the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders for the fiscal year ended September 30, 1997, which will
be filed with the Securities and Exchange commission within 120 days of the
Company's fiscal year end (the "1997 Proxy Statement"). The information required
by this Item concerning executive officers of the Company is included in Part I
of this Annual Report on Form 10-K under the section captioned "Executive
Officers of the Registrant". The information required by this Item concerning
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, is incorporated herein by reference from the section entitled "Section
16(a) Beneficial Ownership Reporting Compliance" included in the 1997 Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
from the sections entitled "Compensation Committee Interlocks and Insider
Participation", "Compensation of Directors", "Executive Compensation" and
"Employment Agreements" included in the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
from the section entitled "Beneficial Ownership of Voting Stock" included in the
1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is not applicable.
10
<PAGE> 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial information is incorporated by reference into
Part II hereof from the Annual Report
1.Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets at September 30, 1997 and 1996
Consolidated Statements of Operations for the three years ended September
30, 1997
Consolidated Statements of Changes in Redeemable Convertible Preferred
Stock and Stockholders' Equity for the three years ended September 30,
1997
Consolidated Statements of Cash Flows for the three years ended September
30, 1997
Notes to the Consolidated Financial Statements
2.Financial Statement Schedules:
Report of Independent Auditors on Financial Statement Schedule
Schedule VIII -- Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable,
not required, or the information required is included in the financial
statements or notes thereto.
3.Exhibits:
The exhibits are listed in the accompanying Index to Exhibits immediately
following the signature page.
(b) Reports on Form 8-K
Current Reports on Form 8-K were filed dated July 15, 1997 to report a
change in the Company's independent accountants and dated November 21,
1997 to report the acquisition of AllPen Software.
11
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Spyglass, Inc.
--------------------------------------
Registrant
Date: December 18, 1997 /s/ GARY L. VILCHICK
-------------------------------------
Gary L. Vilchick
Executive Vice President, Finance,
Administration and Operations and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of December 18, 1997 by the following persons on
behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE
---------
<C> <S>
/s/ DOUGLAS P. COLBETH President, Chief Executive Officer and
- ----------------------------------------------------- Director (Principal Executive Officer)
Douglas P. Colbeth
/s/ GARY L. VILCHICK Executive Vice President, Finance,
- ----------------------------------------------------- Administration and Operations and Chief
Gary L. Vilchick Financial Officer (Principal Financial and
Accounting Officer)
/s/ TIM KRAUSKOPF Director
- -----------------------------------------------------
Tim Krauskopf
/s/ BRIAN J. JACKMAN Director
- -----------------------------------------------------
Brian J. Jackman
/s/ RAY ROTHROCK Director
- -----------------------------------------------------
Ray Rothrock
/s/ STEVEN R. VANA-PAXHIA Director
- -----------------------------------------------------
Steven R. Vana-Paxhia
</TABLE>
12
<PAGE> 14
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Spyglass, Inc.
We have audited the consolidated financial statements of Spyglass, Inc. and
subsidiaries as of September 30, 1997, and for the year then ended, and have
issued our report thereon dated October 24, 1997. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). This schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audit. The consolidated financial statements and
financial statement schedule of Spyglass, Inc. and subsidiaries as of September
30, 1996 and for the years ended September 30, 1996 and 1995 were audited by
other auditors whose report dated October 25, 1996 expressed an unqualified
opinion on those statements and schedule.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
-------------------------------------
Ernst & Young LLP
Chicago, Illinois
October 24, 1997
13
<PAGE> 15
SPYGLASS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER (1) END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1997
Allowance for doubtful accounts....... $ 470,000 1,029,051 -- 1,149,051 $ 350,000
SEPTEMBER 30, 1996
Allowance for doubtful accounts....... $ 180,209 301,034 -- 11,243 $ 470,000
SEPTEMBER 30, 1995
Allowance for doubtful accounts....... $ 2,300 184,070 -- 6,161 $ 180,209
SEPTEMBER 30, 1997
Valuation allowance for income
taxes................................. $1,477,000 3,093,000 -- -- $4,570,000
SEPTEMBER 30, 1996
Valuation allowance for income
taxes................................. $ 0 1,477,000 -- -- $1,477,000
SEPTEMBER 30, 1995
Valuation allowance for income
taxes................................. $ 0 -- -- -- $ 0
</TABLE>
- -------------------------
(1) Bad debt write-offs
14
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
3.1 (1) Amended and Restated Certificate of Incorporation of the
Registrant, as amended
3.2 (2) By-laws of the Registrant
4.1 (2) Specimen certificate for shares of Common Stock
10.1 (2) 1991 Stock Option Plan
10.2 (4) 1995 Stock Incentive Plan, as amended
10.3 (2) 1995 Director Stock Option Plan
10.4 (2) Employment and Confidentiality Agreement between the
Registrant and Douglas P. Colbeth dated April 1, 1991
10.5 (2) Employment and Confidentiality Agreement between the
Registrant and Michael F. Tyrrell dated April 29, 1991
10.6 (7) Senior Management Retention Agreement between the Registrant
and Doug Colbeth, dated November 1, 1996
10.7 (7) Senior Management Retention Agreement between the Registrant
and Tim Krauskopf, dated November 1, 1996
10.8 (7) Senior Management Retention Agreement between the Registrant
and Michael Tyrrell, dated November 1, 1996
10.9 (7) Senior Management Retention Agreement between the Registrant
and Gary Vilchick, dated November 1, 1996
10.10(7) Senior Management Retention Agreement between the Registrant
and Randall T. Littleson, dated November 1, 1996
10.11(7) Senior Management Retention Agreement between the Registrant
and Richard Houle, dated November 1, 1996
10.12 Senior Management Retention Agreement between the Registrant
and Michael Sears, dated June 2, 1997
10.13 Senior Management Retention Agreement between the Registrant
and Timothy Seamans, dated November 1, 1996
10.14(3) Standard form of Employment and Confidentiality Agreement
10.15(2) NCSA Mosaic Software License Agreement between the
Registrant and the Board of Trustees for the University of
Illinois dated May 10, 1994, as amended by amendment No. 1
dated May 10, 1994, amendment No. 2 dated August 4, 1994 and
amendment No. 3 dated March 21, 1995(5)
10.16(3) Amendment No. 4 to NCSA Mosaic Software License Agreement
between the Registrant and the Board of Trustees for the
University of Illinois, dated June 28, 1995(5)
10.17(2) OEM/Source License Agreement, dated December 12, 1994,
between the Registrant and Microsoft Corporation.
10.18(4) Amendment No. 1 to the OEM/Source License Agreement between
the Registrant and Microsoft Corporation, dated September
26, 1995(5)
10.19(4) Technology Cooperation Agreement, Including Amendment of
OEM/Source License Agreement between the Registrant and
Microsoft Corporation dated December 6, 1995(5)
10.20(7) Amendment No. 1, dated September 30, 1996, to the Technology
Cooperation Agreement, Including Amendment of OEM/Source
License Agreement between the Registrant and Microsoft
Corporation, dated December 6, 1995(5)
</TABLE>
15
<PAGE> 17
<TABLE>
<C> <S>
10.21(8) Amendment No. 2 to the Technology Cooperation Agreement, Including Amendment of OEM/Source License
Agreement between the Registrant and Microsoft Corporation, dated January 21, 1997.
10.22(3) RSA Data Security, Inc.-BSAFE/TIPEM OEM Master License Agreement dated August 8, 1995(5)
10.23(6) Sub-Lease Agreement between Rust Environment & Infrastructure, Inc. and the Registrant dated February
6, 1996
10.24 Office Lease Agreement between American National Bank and Trust Company of Chicago Trust No. 43194
and the Registrant dated May 28, 1997
10.25(6) Standard Form of Invention and Non-Disclosure Agreement
10.26(6) Standard Form of Non-Disclosure Agreement
11.1 Statement Regarding Computation of Earnings per Share
13.1 Portions of the Annual Report to Shareholders for the fiscal year ended September 30, 1997 (only
those portions specifically incorporated by reference herein are filed herewith).
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
- -------------------------
(1) Incorporated herein by reference from the Company's Registration Statement
on Form S-8 (File No. 333-04357) filed on May 23, 1996.
(2) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (File No. 33-92174).
(3) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1995, as amended by an Annual
Report on Form 10-K/A filed on May 17, 1996.
(4) Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1995, as amended by a Quarterly
Report on Form 10-Q/A filed on May 17, 1996.
(5) Confidential treatment previously granted by the Securities and Exchange
Commission as to certain portions.
(6) Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996.
(7) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1996.
(8) Incorporated herein by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996.
16
<PAGE> 1
EXHIBIT 10.12
SPYGLASS, INC.
Senior Management Retention Agreement
Michael Sears
Spyglass, Inc.
175 S. San Antonio Rd
Los Altos, CA 94022
Dear Michael:
Spyglass, Inc. (the "Company") recognizes that, as is the case with
many publicly-held corporations, the possibility of a change in control of the
Company exists and that such possibility, and the uncertainty and questions
which it may raise among key personnel, may result in the departure or
distraction of key personnel to the detriment of the Company and its
stockholders.
The Board of Directors of the Company (the "Board") has determined
that appropriate steps should be taken to reinforce and encourage the continued
employment and dedication of the Company's key personnel, including yourself,
without distraction from the possibility of a change in control of the Company
and related events and circumstances.
As inducement for and in consideration of your remaining in its
employ, the Company agrees that you shall receive the severance benefits set
forth in this letter agreement (the "Agreement") in the event your employment
with the Company is terminated under the circumstances described below
subsequent to a Change in Control of the Company (as defined below).
1. Certain Definitions.
<PAGE> 2
As used herein, the following terms shall have the following
respective meanings:
1.1 "Change in Control" shall mean:
(a) the acquisition by an individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 20% or more of either (i) the then-outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock") or (ii) the combined voting
power of the then-outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection (a), the
following acquisitions shall not constitute a Change in Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the Company, or
(iv) any acquisition by any corporation pursuant to a transaction which
complies with clauses (i), (ii) and (iii) of subsection (c) of this Section
1.1; or
(b) individuals who, as of the date hereof, constitute
the members of the Board (the "Incumbent Directors") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by a vote
of at least a majority of the Incumbent Directors shall be deemed to be an
Incumbent Director (except that this proviso clause shall not apply to any
individual whose initial election as a director occurs as a result of an actual
or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board); or
<PAGE> 3
(c) the consummation of a reorganization, merger or
consolidation involving the Company or a sale or other disposition of all or
substantially all of the assets of the Company (a "Business Combination"),
unless, immediately following such Business Combination, (i) all or
substantially all of the individuals and entities who were the beneficial
owners of the Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 60% of the then-outstanding shares of common
stock and the combined voting power of the then-outstanding voting securities
entitled to vote generally in the election of directors, respectively, of the
resulting or acquiring corporation in such Business Combination in
substantially the same proportions as their ownership, immediately prior to
such Business Combination, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, respectively, (ii) no Person (excluding
any resulting or acquiring corporation in such Business Combination or any
employee benefit plan (or related trust) of the Company or of such resulting or
acquiring corporation in such Business Combination) beneficially owns, directly
or indirectly, 30% or more of the then outstanding shares of common stock of
such resulting or acquiring corporation in such Business Combination, or of the
combined voting power of the then-outstanding voting securities of such
corporation (except to the extent that such ownership existed prior to the
Business Combination) and (iii) at least half of the members of the board of
directors of the resulting or acquiring corporation in such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) approval by the stockholders of the Company of a
complete liquidation or dissolution of the Company.
1.2 "Cause" shall mean:
<PAGE> 4
(a) your willful failure to substantially perform your
reasonable assigned duties as an officer of the Company (other than any such
failure resulting from incapacity due to physical or mental illness), which
failure is not cured within 30 days after a written demand for substantial
performance is delivered to you by the Board which specifically identifies the
manner in which the Board believes that you have not substantially performed
your duties; or
(b) your willful engagement in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this Section 1.2, no act or failure to act, on your
part shall be considered "willful" unless it is done, or omitted to be done, by
you in bad faith and without reasonable belief that your action or omission was
in the best interests of the Company.
1.3 "Good Reason" shall mean the occurrence, without your
written consent, of any of the following circumstances unless such circumstance
is fully corrected prior to the Date of Termination specified in the Notice of
Termination (each as defined below) given in respect thereof (provided that
such right of correction by the Company shall only apply to the first Notice of
Termination for Good Reason given by you):
(a) the assignment to you (without your written
consent) of any duties inconsistent in any respect with your position
(including status, offices, titles and reporting requirements), authority or
responsibilities in effect as immediately prior to the Change in Control, or
any other action by the Company which results in a diminution in such position,
authority or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of written notice thereof given
by you;
<PAGE> 5
(b) a reduction in your annual base salary as in effect
on the date hereof or as the same may be increased from time to time;
(c) the failure by the Company to (i) continue in
effect any material compensation or benefit plan in which you participate
immediately prior to the Change in Control, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been made with
respect to such plan, (ii) continue your participation therein (or in such
substitute or alternative plan) on a basis not materially less favorable, both
in terms of the amount of benefits provided and the level of your participation
relative to other participants, as existed at the time of the Change in Control
or (iii) award cash bonuses to you in amounts and in a manner substantially
consistent with past practice in light of the Company's financial performance;
(d) the failure by the Company to continue to provide
you with benefits substantially similar to those enjoyed by you under any of
the Company's life insurance, medical, health and accident, or disability plans
in which you were participating at the time of the Change in Control, the
taking of any action by the Company which would directly or indirectly
materially reduce any of such benefits, or the failure by the Company to
provide you with the number of paid vacation days to which you are entitled on
the basis of years of service with the Company in accordance with the Company's
normal vacation policy in effect at the time of the Change in Control;
(e) a change by the Company in the location at which
you perform your principal duties for the Company to a new location that is
both (i) outside a radius of 35 miles from your principal residence at the time
of the Change in Control and (ii) more than 20 miles from the location at which
you perform your principal duties for the Company at the time of the Change in
Control; or a requirement by the Company that you travel on Company business to
a substantially greater extent than required immediately prior to the Change in
Control;
<PAGE> 6
(f) the failure of the Company to obtain a reasonably
satisfactory agreement from any successor to assume and agree to perform this
Agreement, as required by Section 5; or
(g) a purported termination of your employment which is
not effected pursuant to a Notice of Termination satisfying the requirements of
Sections 3.2 and 6, which purported termination shall not be effective for
purposes of this Agreement.
For purposes of this Agreement, any good faith determination of "Good
Reason" made by the Board shall be conclusive, provided that Incumbent
Directors then comprise a majority of the Board.
1.4 "Disability" shall mean your absence from the full-time
performance of your duties with the Company for six consecutive months as a
result of incapacity due to mental or physical illness which is determined to
be total and permanent by a physician selected by the Company or its insurers
and acceptable to you or your legal representative.
2. Term of the Agreement. The term of this Agreement (the
"Term") shall commence on as of the date hereof and shall continue in effect
through December 31, 1998; provided, however, that commencing on January l,
1999 and each January l thereafter, the Term shall be automatically extended
for one additional year unless, not later than October 31 of the preceding
calendar year, the Company shall have given you written notice that the Term
will not be extended. This Agreement, and all rights and obligations of the
parties hereunder, shall expire upon (a) the expiration of the Term if a Change
in Control has not occurred during the Term, (b) the date 24 months after the
date of the Change in Control, if you are still employed by the Company as of
such date, or (c) the fulfillment by the Company of all of its obligations
under Section 4 if your employment with the Company terminates within 24 months
following a Change in Control.
<PAGE> 7
3. Employment Status; Termination Following Change in Control.
3.1 Not Employment Contract. You acknowledge that this
Agreement does not constitute a contract of employment or impose on the Company
any obligation to retain you as an employee and that this Agreement does not
prevent you from terminating your employment at any time. If your employment
with the Company terminates for any reason and subsequently a Change in Control
shall occur, you shall not be entitled to any benefits hereunder.
3.2 Termination of Employment. Any termination of your
employment by the Company or by you within 24 months following a Change in
Control of the Company during the Term shall be communicated by written notice
of termination ("Notice of Termination") to the other party hereto in
accordance with Section 6. If such employment termination is for Cause, Good
Reason or Disability, the Notice of Termination shall so state. The "Date of
Termination" shall mean the effective date of such termination as specified in
the Notice of Termination (provided that no such Notice of Termination shall
specify an effective date less than fifteen days or more than 120 days after
the date such Notice of Termination is delivered).
4. Rights Upon Termination.
4.1 Compensation. You shall be entitled to the following
benefits if a Change in Control occurs during the Term and your employment with
the Company terminates within 24 months following such Change in Control:
(a) Termination Without Cause or for Good Reason. If
your employment with the Company is terminated by the Company (other than for
Cause, Disability or your death) or by you for Good Reason within 24 months
following a Change in Control, then you shall be entitled to the following
benefits:
(i) the Company shall pay to you in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the
following amounts:
<PAGE> 8
(1) the sum of (A) your annual base salary
through the Date of Termination, (B) the product of (x) the annual bonus paid
or payable (including any bonus or portion thereof which has been earned but
deferred) for the most recently completed fiscal year and (y) a fraction, the
number of which is the number of days in the current fiscal year through the
Date of Termination, and the denominator of which is 365 and (C) the amount of
any compensation previously deferred by you (together with any accrued interest
or earnings thereon) and any accrued vacation pay, in each case to the extent
not theretofore paid (the sum of the amounts described in clauses (A), (B), and
(C) shall be hereinafter referred to as the "Accrued Obligations"); and
(2) the amount equal to the sum of (A) your
highest annual base salary during the five-year period prior to the Change in
Control and (B) your highest annual bonus during the five-year period prior to
the Change in Control.
(ii) for 12 months after your Date of Termination,
or such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue to provide benefits to
you and your family at least equal to those which would have been provided to
you and them in accordance with the applicable plans, programs, practices and
policies in effect on the Date of Termination (excluding any savings and/or
retirement plans) if your employment had not been terminated; provided,
however, that if you become reemployed with another employer and are eligible
to receive medical or other welfare benefits under another employer-provided
plan, the medical and other welfare benefits described herein shall not be
provided to the extent the same are provided under such other plan during such
applicable period of eligibility; and
(iii) to the extent not theretofore paid or
provided, the Company shall timely pay or provide to you any other amounts or
benefits required to be paid or provided or which you are eligible to receive
following your termination of employment under any plan, program, policy or
practice or contract or agreement of
<PAGE> 9
the Company and its affiliated companies (such other amounts and benefits shall
be hereinafter referred to as the "Other Benefits").
(b) Resignation without Good Reason; Termination for
Death or Disability. If you voluntarily terminate your employment within 24
months following a Change in Control, excluding a termination for Good Reason,
or if your employment is terminated by reason of your death or Disability
within 24 months following a Change in Control, the Company shall (i) pay you,
in a lump sum in cash within 30 days after the Date of Termination, the Accrued
Obligations and (ii) timely pay or provide to you the Other Benefits.
(c) Termination for Cause. If your employment is
terminated by the Company for Cause within 24 months following a Change in
Control, the Company shall (i) pay you, in a lump sum in cash within 30 days
after the Date of Termination, the sum of (A) your annual base salary through
the Date of Termination and (B) the amount of any compensation previously
deferred by you, in each case to the extent not theretofore paid, and (ii)
timely pay or provide to you the Other Benefits.
4.2 Taxes. Payments under this Agreement shall be made
without regard to whether the deductibility of such payments (or any other
payments to or for your benefit) would be limited or precluded by Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") and without
regard to whether such payments (or any other payments) would subject you to
the federal excise tax levied on certain "excise parachute payments" under
Section 4999 of the Code; provided, that if the total of all payments to or for
your benefit, after deduction of all federal taxes (including the tax set forth
in Section 4999 of the Code, if applicable) with respect to such payments (the
"total after-tax payments"), would be increased by the limitation or
elimination of any payment under this Agreement, amounts payable under this
Agreement shall be reduced to the extent, and only to the extent, necessary to
maximize the total after-tax payments. The determination as to whether and to
what extent payments under this
<PAGE> 10
agreement are required to be reduced in accordance with the preceding sentence
shall be made by agreement between you and the independent public accounting
firm of the Company (whose fees and expenses shall be borne solely by the
Company). To the extent that any elimination or reduction of payments is made
in accordance with this Section 4.2, the determination as to which payments
shall be eliminated or reduced shall be made by you.
4.3 Mitigation. Except as provided in Section 4.1(a)(ii)
hereof, you shall not be required to mitigate the amount of any payment or
benefits provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment or benefits provided for in this
Section 4 be reduced by any compensation earned by you as a result of
employment by another employer, by retirement benefits or by offset against any
amount claimed to be owed by you to the Company or otherwise.
4.4 Expenses. The Company agrees to pay as incurred, to the
full extent permitted by law, all legal fees and expenses which you may
reasonably incur as a result of any claim or contest by the Company, you or
others regarding the validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance thereof (including
as a result of any contest by you regarding the amount of any payment or
benefits pursuant to this Agreement), plus in each case interest on any delayed
payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of
the Code.
5. Successors; Binding Agreement.
5.1 The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company expressly to assume
and agree to perform this Agreement to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of
the Company to obtain an assumption of
<PAGE> 11
this Agreement at or prior to the effectiveness of nay succession shall be a
breach of this Agreement and shall constitute Good Reason if you elect to
terminate your employment, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall
mean the Company as defined above and any successor to its business or assets
as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
5.2 This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
should die while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to your devisee, legatee or
other designee or if there is no such designee, to your estate.
6. Notice. All notices, instructions and other communications
given hereunder or in connection herewith shall be in writing. Any such
notice, instruction or communication shall be sent either (i) by registered or
certified mail, return receipt requested, postage prepaid, or (ii) via a
reputable nationwide overnight courier service, in each case addressed to the
Chief Executive Officer of the Company, at Naperville Corporate Center, 1240
East Diehl Road, Naperville, Illinois 60563, and to you at the address shown
above (or to such other address as either the Company or you may have furnished
to the other in writing in accordance herewith). Any such notice, instruction
or communication shall be deemed to have been delivered two business days after
it is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service.
7. Miscellaneous.
<PAGE> 12
7.1 For purposes of this Agreement, your employment with the
Company shall not be deemed to have terminated if you continue to be employed
by a subsidiary of the Company.
7.2 The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
7.3 The validity, interpretation, construction and performance
of this Agreement shall be governed by the laws of the State of Delaware.
7.4 No waiver by you at any time of any breach of, or
compliance with, any provision of this Agreement to be performed by the Company
shall be deemed a waiver of that or any other provision at any subsequent time.
7.5 This Agreement may be executed in counterparts, each of
which shall be deemed to be an original but both of which together will
constitute one and the same instrument.
7.6 Any payments provided for hereunder shall be paid net of
any applicable withholding required under federal, state or local law.
7.7 This Agreement sets forth the entire agreement of the
parties hereto in respect of the subject matter contained herein and supersedes
all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer,
employee or representative of any party hereto; and any prior agreement of the
parties hereto in respect of the subject matter contained herein is hereby
terminated and canceled.
If this accurately reflects our agreement on the subject matter
hereof, kindly sign and return to the Company the enclosed copy of this letter,
which will then constitute our agreement on this subject.
<PAGE> 13
Sincerely,
SPYGLASS, INC.
By: /s/Gary Vilchick
------------------------------------
Gary Vilchick
------------------------------------
(Print Name)
Executive VP and CFO
------------------------------------
(Print Title)
Agreed to this 2nd day of June, 1997
/s/ Michael Sears
- ------------------------------------
(Signature)
Michael Sears
- ------------------------------------
(Print Name)
VP and General Manager SurfWatch
- ------------------------------------
(Print Title)
<PAGE> 1
EXHIBIT 10.13
SPYGLASS, INC.
Senior Management Retention Agreement
Tim Seamans
Spyglass, Inc.
Naperville Corporate Center
1240 E. Diehl Road
Naperville, IL 60563
Dear Mr. Seamans:
Spyglass, Inc. (the "Company") recognizes that, as is the case with
many publicly-held corporations, the possibility of a change in control of the
Company exists and that such possibility, and the uncertainty and questions
which it may raise among key personnel, may result in the departure or
distraction of key personnel to the detriment of the Company and its
stockholders.
The Board of Directors of the Company (the "Board") has determined
that appropriate steps should be taken to reinforce and encourage the continued
employment and dedication of the Company's key personnel, including yourself,
without distraction from the possibility of a change in control of the Company
and related events and circumstances.
As inducement for and in consideration of your remaining in its
employ, the Company agrees that you shall receive the severance benefits set
forth in this letter agreement (the "Agreement") in the event your employment
with the Company is terminated under the circumstances described below
subsequent to a Change in Control of the Company (as defined below).
1. Certain Definitions.
<PAGE> 2
As used herein, the following terms shall have the following
respective meanings:
1.1 "Change in Control" shall mean:
(a) the acquisition by an individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 20% or more of either (i) the then-outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock") or (ii) the combined voting
power of the then-outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection (a), the
following acquisitions shall not constitute a Change in Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the Company, or
(iv) any acquisition by any corporation pursuant to a transaction which
complies with clauses (i), (ii) and (iii) of subsection (c) of this Section
1.1; or
(b) individuals who, as of the date hereof, constitute
the members of the Board (the "Incumbent Directors") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by a vote
of at least a majority of the Incumbent Directors shall be deemed to be an
Incumbent Director (except that this proviso clause shall not apply to any
individual whose initial election as a director occurs as a result of an actual
or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board); or
<PAGE> 3
(c) the consummation of a reorganization, merger or
consolidation involving the Company or a sale or other disposition of all or
substantially all of the assets of the Company (a "Business Combination"),
unless, immediately following such Business Combination, (i) all or
substantially all of the individuals and entities who were the beneficial
owners of the Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 60% of the then-outstanding shares of common
stock and the combined voting power of the then-outstanding voting securities
entitled to vote generally in the election of directors, respectively, of the
resulting or acquiring corporation in such Business Combination in
substantially the same proportions as their ownership, immediately prior to
such Business Combination, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, respectively, (ii) no Person (excluding
any resulting or acquiring corporation in such Business Combination or any
employee benefit plan (or related trust) of the Company or of such resulting or
acquiring corporation in such Business Combination) beneficially owns, directly
or indirectly, 30% or more of the then outstanding shares of common stock of
such resulting or acquiring corporation in such Business Combination, or of the
combined voting power of the then-outstanding voting securities of such
corporation (except to the extent that such ownership existed prior to the
Business Combination) and (iii) at least half of the members of the board of
directors of the resulting or acquiring corporation in such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) approval by the stockholders of the Company of a complete liquidation or
dissolution of the Company.
1.2 "Cause" shall mean:
<PAGE> 4
(a) your willful failure to substantially perform your
reasonable assigned duties as an officer of the Company (other than any such
failure resulting from incapacity due to physical or mental illness), which
failure is not cured within 30 days after a written demand for substantial
performance is delivered to you by the Board which specifically identifies the
manner in which the Board believes that you have not substantially performed
your duties; or
(b) your willful engagement in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this Section 1.2, no act or failure to act, on your
part shall be considered "willful" unless it is done, or omitted to be done, by
you in bad faith and without reasonable belief that your action or omission was
in the best interests of the Company.
1.3 "Good Reason" shall mean the occurrence, without your
written consent, of any of the following circumstances unless such circumstance
is fully corrected prior to the Date of Termination specified in the Notice of
Termination (each as defined below) given in respect thereof (provided that
such right of correction by the Company shall only apply to the first Notice of
Termination for Good Reason given by you):
(a) the assignment to you (without your written
consent) of any duties inconsistent in any respect with your position
(including status, offices, titles and reporting requirements), authority or
responsibilities in effect as immediately prior to the Change in Control, or
any other action by the Company which results in a diminution in such position,
authority or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of written notice thereof given
by you;
<PAGE> 5
(b) a reduction in your annual base salary as in effect
on the date hereof or as the same may be increased from time to time;
(c) the failure by the Company to (i) continue in
effect any material compensation or benefit plan in which you participate
immediately prior to the Change in Control, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been made with
respect to such plan, (ii) continue your participation therein (or in such
substitute or alternative plan) on a basis not materially less favorable, both
in terms of the amount of benefits provided and the level of your participation
relative to other participants, as existed at the time of the Change in Control
or (iii) award cash bonuses to you in amounts and in a manner substantially
consistent with past practice in light of the Company's financial performance;
(d) the failure by the Company to continue to provide
you with benefits substantially similar to those enjoyed by you under any of
the Company's life insurance, medical, health and accident, or disability plans
in which you were participating at the time of the Change in Control, the
taking of any action by the Company which would directly or indirectly
materially reduce any of such benefits, or the failure by the Company to
provide you with the number of paid vacation days to which you are entitled on
the basis of years of service with the Company in accordance with the Company's
normal vacation policy in effect at the time of the Change in Control;
(e) a change by the Company in the location at which
you perform your principal duties for the Company to a new location that is
both (i) outside a radius of 35 miles from your principal residence at the time
of the Change in Control and (ii) more than 20 miles from the location at which
you perform your principal duties for the Company at the time of the Change in
Control; or a requirement by the Company that you travel on Company business to
a substantially greater extent than required immediately prior to the Change in
Control;
<PAGE> 6
(f) the failure of the Company to obtain a reasonably
satisfactory agreement from any successor to assume and agree to perform this
Agreement, as required by Section 5; or
(g) a purported termination of your employment which is
not effected pursuant to a Notice of Termination satisfying the requirements of
Sections 3.2 and 6, which purported termination shall not be effective for
purposes of this Agreement.
For purposes of this Agreement, any good faith determination of "Good
Reason" made by the Board shall be conclusive, provided that Incumbent
Directors then comprise a majority of the Board.
1.4 "Disability" shall mean your absence from the full-time
performance of your duties with the Company for six consecutive months as a
result of incapacity due to mental or physical illness which is determined to
be total and permanent by a physician selected by the Company or its insurers
and acceptable to you or your legal representative.
2. Term of the Agreement. The term of this Agreement (the
"Term") shall commence on as of the date hereof and shall continue in effect
through December 31, 1998; provided, however, that commencing on January l,
1999 and each January l thereafter, the Term shall be automatically extended
for one additional year unless, not later than October 31 of the preceding
calendar year, the Company shall have given you written notice that the Term
will not be extended. This Agreement, and all rights and obligations of the
parties hereunder, shall expire upon (a) the expiration of the Term if a Change
in Control has not occurred during the Term, (b) the date 24 months after the
date of the Change in Control, if you are still employed by the Company as of
such date, or (c) the fulfillment by the Company of all of its obligations
under Section 4 if your employment with the Company terminates within 24 months
following a Change in Control.
<PAGE> 7
3. Employment Status; Termination Following Change in Control.
3.1 Not Employment Contract. You acknowledge that this
Agreement does not constitute a contract of employment or impose on the Company
any obligation to retain you as an employee and that this Agreement does not
prevent you from terminating your employment at any time. If your employment
with the Company terminates for any reason and subsequently a Change in Control
shall occur, you shall not be entitled to any benefits hereunder.
3.2 Termination of Employment. Any termination of your
employment by the Company or by you within 24 months following a Change in
Control of the Company during the Term shall be communicated by written notice
of termination ("Notice of Termination") to the other party hereto in
accordance with Section 6. If such employment termination is for Cause, Good
Reason or Disability, the Notice of Termination shall so state. The "Date of
Termination" shall mean the effective date of such termination as specified in
the Notice of Termination (provided that no such Notice of Termination shall
specify an effective date less than fifteen days or more than 120 days after
the date such Notice of Termination is delivered).
4. Rights Upon Termination.
4.1 Compensation. You shall be entitled to the following
benefits if a Change in Control occurs during the Term and your employment with
the Company terminates within 24 months following such Change in Control:
(a) Termination Without Cause or for Good Reason. If
your employment with the Company is terminated by the Company (other than for
Cause, Disability or your death) or by you for Good Reason within 24 months
following a Change in Control, then you shall be entitled to the following
benefits:
(i) the Company shall pay to you in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the
following amounts:
<PAGE> 8
(1) the sum of (A) your annual base salary
through the Date of Termination, (B) the product of (x) the annual bonus paid
or payable (including any bonus or portion thereof which has been earned but
deferred) for the most recently completed fiscal year and (y) a fraction, the
number of which is the number of days in the current fiscal year through the
Date of Termination, and the denominator of which is 365 and (C) the amount of
any compensation previously deferred by you (together with any accrued interest
or earnings thereon) and any accrued vacation pay, in each case to the extent
not theretofore paid (the sum of the amounts described in clauses (A), (B), and
(C) shall be hereinafter referred to as the "Accrued Obligations"); and
(2) the amount equal to the sum of (A) your
highest annual base salary during the five-year period prior to the Change in
Control and (B) your highest annual bonus during the five-year period prior to
the Change in Control.
(ii) for 12 months after your Date of Termination,
or such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue to provide benefits to
you and your family at least equal to those which would have been provided to
you and them in accordance with the applicable plans, programs, practices and
policies in effect on the Date of Termination (excluding any savings and/or
retirement plans) if your employment had not been terminated; provided,
however, that if you become reemployed with another employer and are eligible
to receive medical or other welfare benefits under another employer-provided
plan, the medical and other welfare benefits described herein shall not be
provided to the extent the same are provided under such other plan during such
applicable period of eligibility; and
(iii) to the extent not theretofore paid or
provided, the Company shall timely pay or provide to you any other amounts or
benefits required to be paid or provided or which you are eligible to receive
following your termination of employment under any plan, program, policy or
practice or contract or agreement of
<PAGE> 9
the Company and its affiliated companies (such other amounts and benefits shall
be hereinafter referred to as the "Other Benefits").
(b) Resignation without Good Reason; Termination for
Death or Disability. If you voluntarily terminate your employment within 24
months following a Change in Control, excluding a termination for Good Reason,
or if your employment is terminated by reason of your death or Disability
within 24 months following a Change in Control, the Company shall (i) pay you,
in a lump sum in cash within 30 days after the Date of Termination, the Accrued
Obligations and (ii) timely pay or provide to you the Other Benefits.
(c) Termination for Cause. If your employment is
terminated by the Company for Cause within 24 months following a Change in
Control, the Company shall (i) pay you, in a lump sum in cash within 30 days
after the Date of Termination, the sum of (A) your annual base salary through
the Date of Termination and (B) the amount of any compensation previously
deferred by you, in each case to the extent not theretofore paid, and (ii)
timely pay or provide to you the Other Benefits.
4.2 Taxes. Payments under this Agreement shall be made
without regard to whether the deductibility of such payments (or any other
payments to or for your benefit) would be limited or precluded by Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") and without
regard to whether such payments (or any other payments) would subject you to
the federal excise tax levied on certain "excise parachute payments" under
Section 4999 of the Code; provided, that if the total of all payments to or for
your benefit, after deduction of all federal taxes (including the tax set forth
in Section 4999 of the Code, if applicable) with respect to such payments (the
"total after-tax payments"), would be increased by the limitation or
elimination of any payment under this Agreement, amounts payable under this
Agreement shall be reduced to the extent, and only to the extent, necessary to
maximize the total after-tax payments. The determination as to whether and to
what extent payments under this
<PAGE> 10
agreement are required to be reduced in accordance with the preceding sentence
shall be made by agreement between you and the independent public accounting
firm of the Company (whose fees and expenses shall be borne solely by the
Company). To the extent that any elimination or reduction of payments is made
in accordance with this Section 4.2, the determination as to which payments
shall be eliminated or reduced shall be made by you.
4.3 Mitigation. Except as provided in Section 4.1(a)(ii)
hereof, you shall not be required to mitigate the amount of any payment or
benefits provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment or benefits provided for in this
Section 4 be reduced by any compensation earned by you as a result of
employment by another employer, by retirement benefits or by offset against any
amount claimed to be owed by you to the Company or otherwise.
4.4 Expenses. The Company agrees to pay as incurred, to the
full extent permitted by law, all legal fees and expenses which you may
reasonably incur as a result of any claim or contest by the Company, you or
others regarding the validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance thereof (including
as a result of any contest by you regarding the amount of any payment or
benefits pursuant to this Agreement), plus in each case interest on any delayed
payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of
the Code.
5. Successors; Binding Agreement.
5.1 The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company expressly to assume
and agree to perform this Agreement to the same extent that the Company would
be required to perform it if no such succession had taken place. Failure of
the Company to obtain an assumption of
<PAGE> 11
this Agreement at or prior to the effectiveness of any succession shall be a
breach of this Agreement and shall constitute Good Reason if you elect to
terminate your employment, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "Company" shall
mean the Company as defined above and any successor to its business or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
5.2 This Agreement shall inure to the benefit of and be enforceable
by your personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If you should die
while any amount would still be payable to you hereunder if you had continued
to live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to your devisee, legatee or other
designee or if there is no such designee, to your estate.
6. Notice. All notices, instructions and other communications
given hereunder or in connection herewith shall be in writing. Any such
notice, instruction or communication shall be sent either (i) by registered or
certified mail, return receipt requested, postage prepaid, or (ii) via a
reputable nationwide overnight courier service, in each case addressed to the
Chief Executive Officer of the Company, at Naperville Corporate Center, 1240
East Diehl Road, Naperville, Illinois 60563, and to you at the address shown
above (or to such other address as either the Company or you may have furnished
to the other in writing in accordance herewith). Any such notice, instruction
or communication shall be deemed to have been delivered two business days after
it is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service.
7. Miscellaneous.
<PAGE> 12
7.1 For purposes of this Agreement, your employment with the
Company shall not be deemed to have terminated if you continue to be employed
by a subsidiary of the Company.
7.2 The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
7.3 The validity, interpretation, construction and performance
of this Agreement shall be governed by the laws of the State of Delaware.
7.4 No waiver by you at any time of any breach of, or
compliance with, any provision of this Agreement to be performed by the Company
shall be deemed a waiver of that or any other provision at any subsequent time.
7.5 This Agreement may be executed in counterparts, each of
which shall be deemed to be an original but both of which together will
constitute one and the same instrument.
7.6 Any payments provided for hereunder shall be paid net of
any applicable withholding required under federal, state or local law.
7.7 This Agreement sets forth the entire agreement of the
parties hereto in respect of the subject matter contained herein and supersedes
all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer,
employee or representative of any party hereto; and any prior agreement of the
parties hereto in respect of the subject matter contained herein is hereby
terminated and canceled.
If this accurately reflects our agreement on the subject matter
hereof, kindly sign and return to the Company the enclosed copy of this letter,
which will then constitute our agreement on this subject.
<PAGE> 13
Sincerely,
SPYGLASS, INC.
By: /s/Douglas P. Colbeth
------------------------------------------
Douglas P. Colbeth
------------------------------------------
(Print Name)
President & CEO
------------------------------------------
(Print Title)
Agreed to this 1st day of November, 1996
/s/ T.M.P. Seamans
- -----------------------------------
(Signature)
T.M.P. Seamans
- -----------------------------------
(Print Name)
V.P. OF I.S. & CIO
- -----------------------------------
(Print Title)
<PAGE> 1
EXHIBIT 10.24
OFFICE LEASE
NAPERVILLE CORPORATE
CENTER SUBDIVISION
BETWEEN
AMERICAN NATIONAL BANK
AND TRUST COMPANY OF CHICAGO
TRUST NO. 43194
as Landlord
AND
SPYGLASS, INC.
as Tenant
1240 East Diehl Road
Naperville, Illinois
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
NO. DESCRIPTION PAGE
- --- ----------- -------
<S> <C> <C>
1. BASIC LEASE PROVISIONS AND IDENTIFICATION OF EXHIBITS
1.01 BASIC LEASE PROVISIONS 1
1.02 IDENTIFICATION OF EXHIBITS 2
2. PREMISES AND TERM 2
2.01 LEASE OF PREMISES 2
2.02 TERM OF LEASE 2
2.03 INSTALLATION OF EQUIPMENT BY TENANT 2
2.04 AGREEMENT STATING COMMENCEMENT AND EXPIRATION
DATES OF LEASE 2
3. RENT 2
4. SECURITY DEPOSIT 3
5. SERVICES 3
5.01 LANDLORD'S GENERAL SERVICES 3
5.02 ADDITIONAL AND AFTER-HOUR SERVICES 3
5.03 TENANT'S UTILITIES 4
5.04 DELAYS IN FURNISHING SERVICES 4
6. POSSESSION, USE AND ENJOYMENT 4
6.01 POSSESSION AND USE OF PREMISES 4
6.02 QUIET ENJOYMENT 5
7. CONDITION OF PREMISES 5
B. ASSIGNMENT AND SUBLETTING 5
8.01 ASSIGNMENT AND SUBLETTING 5
8.02 RECAPTURE 6
9. MAINTENANCE AND REPAIR 6
9.01 LANDLORD'S MAINTENANCE AND REPAIR 6
9.02 TENANT'S MAINTENANCE AND REPAIR 7
10. ALTERATIONS AND IMPROVEMENTS SUBSEQUENT TO INITIAL
OCCUPANCY 7
10.01 TENANT'S ALTERATIONS SUBSEQUENT TO INITIAL
OCCUPANCY 7
10.02 LIENS 8
11. WAIVER OF CLAIMS AND INDEMNITY 8
11.01 WAIVER 8
11.02 INDEMNIFICATION 8
12. LANDLORD'S REMEDIES 9
12.01 EVENTS OF DEFAULT 9
12.02 LANDLORD'S REMEDIES 9
12.03 TRUSTEE IN BANKRUPTCY 10
12.04 ATTORNEYS' FEES
10
13. SURRENDER OF PREMISES 10
14. HOLDING OVER 10
15. DAMAGE BY FIRE OR OTHER CASUALTY 11
15.01 SUBSTANTIAL UNTENANTABILITY 11
15.02 INSUBSTANTIAL UNTENANTABILITY 11
15.03 RENT ABATEMENT 11
15.04 DEFINITIONS 11
16. EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . 12
16.01 SUBSTANTIAL TAKING . . . . . . . . . . . . . 12
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
16.02 INSUBSTANTIAL TAKING . . . . . . . . . . . . . 12
16.03 COMPENSATION . . . . . . . . . . . . . . . . . 12
17. TENANT'S INSURANCE . . . . . . . . . . . . . . . . 12
18. RULES AND REGULATIONS . . . . . . . . . . . . . . . . . I 13
19. LANDLORD'S RIGHTS . . . . . . . . . . . . . . . . . . . 14
20. ESTOPPEL CERTIFICATE . . . . . . . . . . . . . . . . . . 15
21. INTENTIONALLY DELETED . . . . . . . . . . . . . . . . . 15
22. ADJUSTMENTS TO MONTHLY BASE RENT . . . . . . . . . . . . 16
22.01 DEFINITIONS . . . . . . . . . . . . . . . . . . . 16
22.02 ADJUSTMENTS TO MONTHLY BASE RENT. . . . . . . . . 17
22.03 PROJECTIONS . . . . . . . . . . . . . . . . . 17
22.04 READJUSTMENTS . . . . . . . . . . . . . . . . 17
22.05 BOOKS AND RECORDS . . . . . . . . . . . . . . 18
22.06 NO DECREASES IN MONTHLY BASE RENT 18
22.07 PARTIAL OCCUPANCY FOR OPERATING EXPENSES 18
23. REAL ESTATE BROKERS 18
24. SUBORDINATION AND ATTORNMENT 18
24.01 SUBORDINATION 18
24.02 ATTORNMENT 19
25. NOTICES 19
26. MISCELLANEOUS 19
26.01 LATE CHARGES 19
26.02 ENTIRE AGREEMENT 19
26.03 NO OPTION 20
26.04 ACCORD AND SATISFACTION 20
26.05 LIMITATION OF LIABILITY 20
26.06 BINDING EFFECT 20
26.07 FORCE MAJEURE 20
26.08 CAPTIONS 21
26.09 APPLICABLE LAW 21
26.10 TIME 21
26.11 LANDLORD'S RIGHT TO PERFORM TENANT'S DUTIES 21
26.12 TENANT'S REMEDIES 21
26.13 RIDERS 21
26.14 CONSENT 21
27. PARKING 21
</TABLE>
<PAGE> 4
OFFICE LEASE
1.
BASIC LEASE PROVISIONS AND IDENTIFICATION OF EXHIBITS
1.01 BASIC LEASE PROVISIONS
A. BUILDING & ADDRESS:
1240 East Diehl Road Building
1240 East Diehl Road
Naperville, Illinois 60563
B. LANDLORD & ADDRESS:
American National Bank and Trust
Company of Chicago, not individually
but solely as Trustee under a Trust
Agreement dated June 12, 1978 and
known as Trust No. 43194
c/o Bellemead Management Co., Inc.
280 Corporate Center
Four Becker Farm Road
Roseland, New Jersey 07068
C. TENANT & CURRENT ADDRESS:
Spyglass, Inc.
1240 East Diehl Road
Naperville, Illinois 60563
D. DATE OF LEASE: May 28,1997
E. LEASE TERM: Two (2) years
F. COMMENCEMENT DATE OF TERM: February 1, 1998
G. EXPIRATION DATE OF TERM: January 31, 2000
H. MONTHLY BASE RENT: *
I. RENTABLE SQUARE FEET OF THE PREMISES
UPON WHICH MONTHLY BASE RENT AND ADJUSTED
MONTHLY BASE RENT IS CALCULATED: 27,864 FLOOR: 4th
J. SECURITY DEPOSIT: $46,285.66
K. BROKER: CB Commercial Real Estate Group, Inc. and Grubb & Ellis
Company
L. RENTABLE SQUARE FEET OF THE BUILDING: 139,184 square feet
M. TENANT'S PROPORTIONATE SHARE: 20.00%
Monthly Annual Rate of Base Rent
*Period Base Rent Per Rentable Square Foot
2/l/98 - 1/31/99 $46,285.66 $19.95
2/l/99 - 1/31/00 47,445.70 20.45
Page 1
<PAGE> 5
1.02 IDENTIFICATION OF EXHIBITS
The exhibits set forth below and attached to this Lease are incorporated in
this Lease by this reference and are hereby made a part of this Lease:
EXHIBIT A - Plan of Premises
EXHIBIT B - Intentionally Deleted
EXHIBIT C - Cleaning Specifications
2.
PREMISES AND TERM
2.01 LEASE OF PREMISES
Landlord leases to Tenant and Tenant leases from Landlord the premises (the
"Premises") outlined in red on Exhibit A, which are contained in the office
building described in 1.01A (the "Building"), upon the following terms and
conditions.
2.02 TERM OF LEASE
The term of this Lease (the "Term") shall commence on the date (the
"Commencement Date") which is set forth in 1.61 F of this Lease. The Term
shall expire on the date (the "Expiration Date") specified in Paragraph 1.01G
of this Lease unless sooner terminated as otherwise provided in this Lease.
2.03 INSTALLATION OF EQUIPMENT BY TENANT
If prior to the Commencement Date, Tenant shall enter the Premises to
make any installation of Tenant's equipment, fixtures or furnishings, Landlord
shall have no liability or obligation for the care or preservation of Tenant's
property.
2.04 AGREEMENT STATING COMMENCEMENT AND EXPIRATION DATES OF LEASE
Upon request by Landlord or Tenant after the Commencement Date, Landlord and
Tenant will sign and deliver to each other an agreement in form and substance
satisfactory to Landlord setting forth the Commencement Date and the Expiration
Date.
3.
RENT
Tenant agrees to pay to Landlord c/o Bellemead Management Co., Inc., a New
Jersey corporation, 280 Corporate Center, Four Becker Farm Road, Roseland, New
Jersey 07068, or at such other place designated by Landlord, without any prior
notice or demand and without any set-off or deduction whatsoever, base rent at
the initial monthly rate stated in 1.01H ("Monthly Base Rent"). Monthly Base
Rent is subject to adjustment pursuant to Article 22, and as adjusted is called
"Adjusted Monthly Base Rent." Monthly Base Rent and Adjusted Monthly Base Rent
shall be paid monthly in advance on the first day of each month of the Term.
Monthly Base Rent and Adjusted Monthly Base Rent shall be prorated for partial
months within the Term. All charges, costs and sums required to be paid by
Tenant to Landlord under this Lease, in addition to Monthly Base Rent and
Adjusted Monthly Base Rent, shall be considered additional rent, and Monthly
Base Rent, Adjusted Monthly Base Rent and additional rent shall be collectively
called "Rent". Tenant's covenant to pay Rent shall be independent of every
other covenant in this Lease.
Page 2
<PAGE> 6
4.
SECURITY DEPOSIT
As security for the performance of its obligations under this Lease
and the Work Agreement, Tenant upon its signing of this Lease shall pay to
Landlord a security deposit (the "Security Deposit") in the amount stated in
1.01J. The Security Deposit may be applied by Landlord to cure any default of
Tenant under this Lease or the Work Agreement, and upon notice by Landlord of
such application, Tenant shall replenish the Security Deposit in full by
promptly paying to Landlord the amount so applied. Landlord shall not pay any
interest on the Security Deposit. Within 45 days after the Expiration Date,
Landlord shall return to Tenant the balance, if any, of the Security Deposit.
The Security Deposit shall not be deemed an advance payment of Rent or a
measure of damages for any default by Tenant under this Lease, nor shall it be
a bar or defense to any action which Landlord may at any time commence against
Tenant.
5.
SERVICES
5.01 LANDLORD'S GENERAL SERVICES
Landlord shall provide the following services (subject to the provisions of
this Lease and applicable legal restrictions):
(1) heat and air-conditioning in the Premises, Monday through
Friday, from 8:00 A.M. to 6:00 P.M., Saturday from 8:00 A.M. to 1:00 P.M.,
Sunday and national holidays excepted, in sufficient amount to maintain an
average temperature in the Premises between 65 degrees Fahrenheit and 80
degrees Fahrenheit, provided that the Premises are not occupied by more
than an average of one person for each 150 square feet of actual floor
space in the Premises and provided further that no machine or equipment is
located in the Premises which affects the temperature otherwise maintained
in the Premises;
(2) city water from the regular Building fixtures for drinking,
lavatory and toilet purposes only;
(3) cleaning services in the Premises Monday through Friday,
excluding Saturdays, Sundays and national holidays (observed),
substantially in accordance with the cleaning specifications attached
hereto as Exhibit C; and which services shall be provided by bonded
cleaning personnel; and
(4) passenger elevator service in common with other tenants of the
Building, 24 hours per day, 7 days per week, subject to applicable laws and
emergencies.
Notwithstanding the provisions of this Paragraph 5.01, nothing in this
Paragraph 5.01 shall affect or reduce Tenant's obligation to pay any escalation
in Operating Expenses as set forth in 22.02 of this Lease.
5.02 ADDITIONAL AND AFTER-HOUR SERVICES
Landlord shall not be obligated to furnish any services or utilities, other
than those stated in 5.01 above. If Landlord elects to furnish services or
utilities requested by Tenant in addition to those listed in 5.01 or at times
other than those stated in 5.01, Tenant shall pay to Landlord the charges
specified by Landlord for such services and utilities, within 10 days after
billing by Landlord. If Tenant fails to make any such payment, Landlord may,
without notice to Tenant and in addition to Landlord's other remedies under
this Lease, discontinue any or all of such additional or after-hour services.
No such discontinuance of any service shall result in any liability of Landlord
to Tenant, or be considered an eviction or a disturbance of Tenant's use of the
Premises, or relieve Tenant from its obligation to pay all Rent when due or
from any other obligation of Tenant under this Lease.
Page 3
<PAGE> 7
5.03 TENANT'S UTILITIES
Tenant, at Tenant's cost and expense, shall make arrangements directly
with the telephone company for telephone service and the installation of wires
and cables therefor. Tenant shall pay for all telephone and electric service
used or consumed in the Premises, including without limitation the cost of such
installation of wires and cables for such service. Any installation of
telephone service in the Premises by Tenant shall be in compliance with the
National Electric Code 300-22. Landlord, at its option, may purchase
electricity in bulk for the Building, and supply electricity to Tenant for its
use in the Premises. Tenant's electrical usage shall be measured by an
electronic meter. In such event, Tenant shall pay to Landlord (or to any
electrical contractor retained by Landlord to provide billing and accounting
services for such electrical service) all charges for electricity used in the
Premises within 10 days after each bill is rendered. Any such charges billed
by Landlord (or Landlord's electrical contractor) shall not exceed the charges
which Tenant would otherwise be required to pay if Tenant purchased such
electricity directly from the public utility company providing electricity to
the Building.
5.04 DELAYS IN FURNISHING SERVICES
Notwithstanding anything to the contrary set forth in this Lease, Landlord
shall not be liable for damages for any failure to furnish or delay in
furnishing any service or utility described in 5.01 or 5.02 above if such
failure or delay is caused in whole or in part by any one or more of the causes
specified in 26.07 of this Lease. No such failure or delay caused in whole or
in part by any one or more of the causes specified in 26.07 of this Lease shall
result in any liability of Landlord to Tenant or be deemed to be an eviction or
disturbance of Tenant's use or possession of the Premises, or relieve Tenant
from its obligation to pay all Rent when due or from any other obligation of
Tenant under this Lease. See Insert on page 4A.
6.
POSSESSION, USE AND ENJOYMENT
6.01 POSSESSION AND USE OF PREMISES
Tenant shall be entitled to possession of the Premises upon the date stated in
Section 1.01F. Tenant shall occupy and use the Premises for general office
purposes only. Tenant shall not occupy or use the Premises or permit the use
or occupancy of the Premises for any purpose or in any manner which:
(1) is unlawful or in violation of any applicable legal,
governmental or quasi-governmental requirement, ordinance or rule
(including the rules of the Board of Fire Underwriters);
(2) may be dangerous to persons or property;
(3) may invalidate or increase the amount of premiums for any
policy of insurance affecting the Building or covering its operation or
violate the terms thereof and if any additional amounts of insurance
premiums are payable as a result of Tenant's occupancy or use of the
Premises, Tenant shall pay to Landlord the additional amounts on demand;
(4) may create a nuisance, disturb any other tenant of the Building
or the occupants of neighboring property or injure the reputation of the
Building;
(5) will conflict with any exclusive rights granted to any other
tenant in the Building; or
Page 4
<PAGE> 8
Notwithstanding the foregoing, if as a result of an act or omission of
Landlord (as distinguished from an act or omission of Tenant or the occurrence
of an event of force majeure as defined in Section 26.07 below), electricity,
heating, air conditioning, restroom facilities, or passenger elevator service to
the Premises, as described in Section 5.01 above, is not furnished to the
Premises, and if as a result thereof the Premises, or a "material part" (as
defined below) of the Premises is rendered untenantable or inaccessible for a
period of five (5) consecutive business days, and Tenant does not occupy the
Premises, or such material part thereof which is rendered untenantable or
inaccessible, during such 5-business day period, then as Tenant's sole remedy
for such failure to furnish such service, Adjusted Monthly Base Rent payable for
such portion of the Premises which Tenant does not so occupy shall abate for the
period commencing on the expiration of said five (5) business day period and
expiring on the date such service is restored or Tenant is able to resume
occupancy of the Premises or such material part thereof, as the case may be. As
used herein, the phrase "material part" shall mean an amount in excess of fifty
percent (50%) of the rentable area of the Premises.
Page 4A
<PAGE> 9
(6) will violate the provisions of any covenant, condition,
restriction, agreement or document which is recorded in the
office of the Recorder of DuPage County, Illinois and which
affects all or any part of the Building or Lot 3 of the
Resubdivision of Lot 3 in the Naperville Corporate Center
Subdivision in Naperville, Illinois.
6.02 QUIET ENJOYMENT
So long as Tenant is not in default under this Lease, Tenant shall be entitled
to peaceful and quiet enjoyment of the Premises, subject to (1) the provisions
of this Lease, (ii) any governmental action, and (iii) any cause beyond the
reasonable control of Landlord.
7.
CONDITION OF PREMISES
Tenant shall be conclusively presumed to have accepted the Premises in
the condition existing on the date Tenant first takes possession of the
Premises and to have waived all claims relating to the condition of the
Premises. No agreement of Landlord to alter, remodel, decorate, clean or
improve the Premises or the Building and no representation or warranty
regarding the condition of the Premises or the Building or regarding any other
matter of any kind or nature has been made by or on behalf of Landlord to
Tenant, except as expressly stated in this Lease.
8.
ASSIGNMENT AND SUBLETTING
8.01 ASSIGNMENT AND SUBLETTING
Without the prior written consent of Landlord, Tenant shall not (i) sublease
all or any part of the Premises, or assign, convey, encumber, mortgage, pledge,
hypothecate or otherwise transfer or permit the transfer of the interest of
Tenant in this Lease, in whole or in part, by operation of law or otherwise, or
(ii) permit the use and occupancy of all or any part of the Premises by any
party other than Tenant, its agents, employees, invitees and guests., If Tenant
desires to assign Tenant's interest in this Lease or enter into any sublease of
all or any part of the Premises, Tenant shall, after compliance with Paragraph
8.02 below, deliver written notice of such intent to Landlord, together with
(x) a copy of the proposed assignment or sublease, (y) such current financial
information regarding the proposed subtenant or assignee as is reasonably
necessary for Landlord to determine its creditworthiness, and (z) such
background information regarding the proposed subtenant or assignee as is
reasonably necessary for Landlord to determine its identity, reputation and
type of business, at least 45 days prior to the effective date of the proposed
assignment or commencement date of the term of the proposed sublease. Any
sublease approved by Landlord shall be expressly subject to the terms and
conditions of this Lease, and Tenant, in addition to Tenant's other obligations
under this Lease, shall pay to Landlord on the first day of each month during
the term of such sublease 50% of the excess of all rent and other consideration
due from the subtenant for such month over that portion of the Adjusted Monthly
Base Rent due under this Lease for said month which is allocable on a square
footage basis to the space sublet,**. In the event of an approved assignment of
this Lease by Tenant, Tenant shall pay to Landlord as and when received by
Tenant, 50% of all sums and other consideration received by Tenant from
Tenant's assignee,**. In the event of any approved sublease or approved
assignment, Tenant shall not be released or discharged from any liability,
whether past, present or future, under this Lease, including any renewal term
of this Lease approved by Landlord. For the purpose of this Paragraph, an
assignment shall be considered to include a change in the majority ownership or
control of Tenant if Tenant is a partnership or a corporation whose shares of
stock are not traded publicly,***. In no event shall (i) any sublease of all or
any part of the Premises be for a term of less than six (6) months, (ii) Tenant
enter into one or more subleases of all or any part of the Premises which
permit more than two subtenants to occupy all or any part of the Premises at
the same time, (iii) the,- net effective annual rent per rentable square foot
(as
Page 5
<PAGE> 10
*Landlord agrees that Landlord's consent to a proposed assignment or sublease
shall not be unreasonably withheld.
**after deduction of the reasonable and appropriate out-of-pocket costs paid by
Tenant in connection with such transfer for build-out (which costs shall be
amortized over the term of the transfer), brokerage commissions and attorneys'
fees.
***but only if the net worth of Tenant after such change of control is less
than the net worth of Tenant immediately prior to such, change in control (and
Tenant shall provide to Landlord upon request current financial statements of
Tenant before and after such change in control).
Page 5A
<PAGE> 11
determined by Landlord) payable by the subtenant under any sublease, taking
into account all rental adjustments and subtenarit concessions (e.g., rental
abatements, improvement allowances, relocation allowances and lease take-over
obligations), be substantially less than prevailing market net effective annual
rent per rentable square foot (as determined Landlord) then in effect for
comparable space in the Building, taking into account the prevailing market
rental adjustments and tenant concessions for such comparable space, or (iv)
any assignee or subtenant be in existing tenant of the Naperville Corporate
Center Subdivision, or an affiliate of such existing tenant. See Insert on
Page 6A.
8.02 RECAPTURE
If Tenant desires to assign this Lease (other than to an affiliate) or
to sublease all or any part of the Premises (other than to an affiliate),
Tenant shall give Landlord written notice of such intent ("Tenant's Notice")
prior to Tenant entering into such assignment or sublease, which Tenant's
Notice shall identify the space to be subleased and the proposed commencement
date of the term of such sublease, or the proposed effective date of such
assignment, as the case may be. Landlord shall thereupon have the option to
exclude from the Premises covered by this Lease (i) all of the Premises, if
Tenant's Notice specifies a proposed assignment, or (ii) the portion of the
Premises described in Tenant's Notice, if Tenant's Notice specifies a proposed
sublease, which exclusion shall be effective as of the proposed effective date
of assignment or the proposed commencement date of sublease, as the case may
be, as specified in Tenant's Notice. Landlord may exercise said option by
giving Tenant written notice within 20 days after receipt by Landlord of
Tenant's Notice of the proposed assignment or sublease. If Landlord exercises
said option, Tenant shall surrender possession of the space to be excluded from
this Lease on the effective date of exclusion of said space from this Lease,
and neither party hereto shall have any further rights or liabilities with
respect to said space under this Lease except as otherwise specified in this
Lease. Effective as of the date of exclusion of any portion of the Premises
covered by this Lease pursuant-to this paragraph: (i) the Monthly Base Rent
specified in l.0lH shall be reduced in the same proportion as the number of
square feet as determined by Landlord of the portion of the Premises so
excluded bears to the number of square feet as determined by Landlord of the
Premises immediately prior to such exclusion; (ii) the square feet of the
Premises specified in 1.01 I shall be decreased by the number of square feet as
determined by Landlord of the portion of the Premises so excluded; (iii)
Tenant's Proportionate Share shall be adjusted accordingly; and (iv) there
shall be no restrictions on Landlord reletting the portion of the Premises so
excluded to any other tenant, including, without limitation, any proposed
sublessee or assignee of Tenant. If Landlord does not exercise said option,
Tenant may not thereafter enter into a sublease., for space which is different
than the space designated in Tenant's Notice, or for a term commencing on a
date other than the date designated in Tenant's Notice, nor may Tenant enter
into a sublease for the space designated in Tenant's Notice after the date
which is 120 days after the date that Tenant's Notice is delivered to Landlord,
nor may Tenant assign this Lease effective after a date which is 120 days after
the date that Tenant's Notice is delivered to Landlord, without again complying
with the provisions of this Paragraph 8.02 and affording Landlord the right to
recapture space as hereinabove provided.
9.
MAINTENANCE AND REPAIR
9.01 LANDLORD'S MAINTENANCE AND REPAIR
Subject to the provisions of 5.03, 9.02, 26.07 and the other provisions of this
Lease,Landlord, at its expense, shall maintain and make necessary repairs to
the structural elements and exterior windows of the Building and the standard
electrical, plumbing, heating, ventilation and air conditioning systems located
in the Building; provided, however:
(1) Landlord shall not be responsible for the maintenance or
repair of any such systems which are located within the
Premises and are supplemental or special to the Building's
standard systems;
Page 6
<PAGE> 12
Notwithstanding anything contained herein to the contrary, Tenant shall have
the right to assign this Lease or sublease the premises, or any part thereof,
to an "affiliate" without the prior written consent of Landlord, bit upon not
less than 10 days' prior written notice to Landlord and subject to all of the
other provisions of this Lease, specifically including, without limitation, the
continuation of liability of Tenant under this Lease. For purposes of this
Lease, "affiliate" shall mean any person, corporation or other entity
controlling, controlled by, or under common control with Spyglass, Inc., an
Illinois corporation ("Spyglass") (or any successor to Spyglass as a result of
merger or consolidation, or any purchaser of all or substantially all -the
assets of Spyglass). The term "control" as used herein shall mean the
possession, direct or indirect, of the power to direct or cause the direction
of the management and policies of such controlled entity through the ownership,
directly or indirectly, of more than fifty percent (50%) of the voting or
equity securities in any such controlled entity. In the event of an assignment
of this Lease, the assignee shall expressly assume the obligations of the
Tenant under this Lease pursuant to a written assumption agreement delivered
to, Landlord.
Page 6a
<PAGE> 13
(2) Landlord shall not be responsible for any maintenance
or repair of any floor or wall coverings; and
(3) the cost of performing any of maintenance or repair caused by
the negligence or act of Tenant, its employees, agents, servants,
licensees, subtenants, contractors or invitees, or the failure of
Tenant to perform any of its obligations under this Lease, shall be
paid by Tenant (but only to the extent such costs are not covered by
Landlord's insurance).
Notwithstanding the foregoing provisions of this Paragraph 9.01, nothing in
this Paragraph 9.01 shall affect or reduce Tenant's obligation to pay any
escalation in Operating Expenses as set forth in 22.02 of this Lease.
9.02 TENANTS MAINTENANCE AND REPAIR
Tenant, at its expense, shall keep, maintain and repair premises and
all contents therein in good order and operating condition (ordinary wear and
tear and damage by fire or other casualty excepted) and in accordance with all
applicable legal, governmental and quasi- governmental requirements, ordinances
and rules (including the Board of Fire Underwriters). By way of inclusion and
not limitation, Tenant, at its expense, shall maintain and repair in good
operating condition the electrical, lighting, plumbing, heating, ventilating
and air conditioning systems in the Premises which are supplemental or special
to the Building's standard systems, and Tenant shall pay for all maintenance,
repair and replacement of all lighting fixtures', electrical switches,
electrical outlets, lamps, bulbs, tubes, ballasts and starters in the Premises.
10.
ALTERATIONS AND IMPROVEMENTS SUBSEQUENT TO INITIAL OCCUPANCY
10.01 TENANT'S ALTERATIONS SUBSEQUENT TO INITIAL OCCUPANCY
Tenant shall not, without the prior written consent of
Landlord, make or cause to be made any alterations, improvements,
additions or installations in or to the Premises subsequent to the
initial occupancy of the Premises by Tenant*. If Landlord so
consents, before commencement of any such work or delivery of any
materials into the Premises or the Building, Tenant shall furnish to
Landlord for approval: architectural plans and specifications, names
and addresses of all contractors, contracts, necessary permits and
licenses, certificates of insurance and instruments of indemnification
against any and all claims, costs, expenses, damages and liabilities
which may arise in connection with such work, all in such form and
amount as may be satisfactory to Landlord. In addition, prior to
commencement of any such work or delivery of any materials into the
Premises, Tenant shall provide Landlord with evidence reasonably
satisfactory to Landlord of Tenant's ability to pay for such work and
materials in full, and, if requested by Landlord,** shall deposit with
Landlord at such time such security for the payment of said work and
materials as Landlord may require. Tenant agrees to hold Landlord,
its partners, the managing agent of the Building and each of their
respective agents and employees forever harmless against all claims
and liabilities of every kind, nature and description which may arise
out of or in any way be connected with such work. All such work shall
be performed only by union contractors or mechanics approved by
Landlord and which are licensed, bonded and insured under policies
satisfactory to Landlord. Such work shall be performed at such time
during normal business hours and in such manner as Landlord may from
time to time designate. Tenant's agents, contractors, workmen,
mechanics and suppliers shall work in harmony and not interfere with
Landlord's agents, and contractors or the general operation of the
Building. If at any time such work shall cause or threaten to cause
disharmony or interference, including labor disharmony, Landlord may
revoke Tenant's authority to continue to perform such work. Tenant
shall pay the cost of all such work. Upon completion of such work,
Tenant shall furnish Landlord with contractors' affidavits and full
and final waivers of lien and receipted bills covering all labor and
materials expended. All such work shall be in compliance with all
applicable legal, governmental and quasi-governmental requirements,
ordinances and rules (including the Board of Fire Underwriters), and
ail requirements of applicable insurance companies. All such work
shall be done in a good and workmanlike manner and with the use of
good grades of materials. Tenant shall permit Landlord, if Landlord
so desires, to supervise construction operations in connection with
such work; (at no charge to Tenant except as provided in Section 26.14
below) provided, however, that such supervision or right to supervise
by
Page 7
*, ** See Insert an Page 7A
<PAGE> 14
*Notwithstanding the foregoing, Tenant may without Landlord's prior written
consent and without providing architectural plans and names of contractors to
Landlord, but subject to all of the other provisions of this Article 8, make
decorative or cosmetic changes to the Premises (e.g. painting, wall coverings,
floor coverings and hanging of pictures), provided that each such change or
series of related changes, (a) is non-structural, (b) does not affect any
mechanical, electrical or plumbing systems, fixtures or equipment, (c) is not
visible from the exterior of the Building, (d) does not cost in excess of
$10,000, and (d) does not require the issuance of a building permit.
**and if the cost of the alteration will exceed $15,000,
Page 7A
<PAGE> 15
Landlord shall not constitute any warranty by Landlord to Tenant of the
adequacy of the design, workmanship or quality of such work or materials for
Tenant's intended use or impose any liability upon Landlord in connection with
the performance of such work*. All alterations, improvements, additions and
installations to or on the Premises shall (subject to Article 13) become part
of the Premises at the time of their installation and shall remain in the
Premises at the expiration or termination of this Lease, or termination of
Tenant's right of possession of the Premises, without compensation or credit to
Tenant,
10.02 LIENS
Tenant shall not permit any lien or claim for lien of any mechanic, laborer
or supplier or any other lien to be filed against the Building, the real estate
on which the Building is located, the Premises, or any part of such property
arising out of work performed, or alleged to have been performed by, or at the
direction of, or on behalf of Tenant. If any such lien or claim for lien is
filed Tenant shall within 30 days after such filing either have such lien or
claim for lien released of record or shall deliver to Landlord a bond or other
security in form, content, amount, and issued by a company satisfactory to
Landlord indemnifying Landlord, its partners, the managing agent of the
Building and others designated by Landlord against all costs and liabilities
resulting from such lien or claim for lien and the foreclosure or attempted
foreclosure thereof. If Tenant fails to have such lien or claim for lien so
released or to deliver such bond to Landlord, Landlord, in addition to the
other rights and remedies under this Lease and without investigating the
validity of such lien, may pay or discharge the same and Tenant shall reimburse
Landlord upon demand for the amount so paid by Landlord, including Landlord's
expenses and reasonable attorneys' fees.
11.
WAIVER OF CLAIMS AND INDEMNITY
11.01 WAIVER
To the full extent permitted by law, Tenant hereby releases and waives
all claims against Landlord, its beneficiary, the managing agent of the
Building and each of their respective officers, directors, agents and employees
for injury or damage to person, property or business sustained in, on or about
the Building or the Premises or Lot 3 of the Resubdivision of Lot 3 in the
Naperville Corporate Center Subdivision in Naperville, Illinois by Tenant, its
agents or employees other than damage caused by the negligence of Landlord, its
beneficiary, the managing agent of the Building, or any of their respective
agents or employees. To the full extent permitted by law, Tenant hereby waives
trial by jury in any action, proceeding or counterclaim brought by Landlord
against Tenant on any matter whatsoever arising out of or in any way connected
with this Lease, the relationship of Landlord and Tenant, Tenant's use of or
occupancy of the Premises and/or any emergency, statutory or other remedy. To
the full extent permitted by law, Tenant agrees that, in the event Landlord
commences any summary proceeding for possession of the Premises, Tenant will
not interpose any counterclaim of any nature or description in any such
proceeding.
11.02 INDEMNIFICATION
Tenant agrees to indemnify and hold harmless Landlord, its beneficiary,
the managing agent of the Building, and each of their respective officers,
directors, agents and employees, from and against any and all liabilities,
claims, demands, costs and expenses of every kind and nature (including
attorneys' fees), including those arising from any injury or damage to any
person, property or business, sustained in, on or about the Premises, the
Building or such Lot 3 of the Resubdivision of Lot 3,and (a)resulting from the
negligence of tenant, its employees, agents, servants, invitees, licensees or
subtenants, or (b)resulting from the failure of Tenant to perform its
obligations under this Lease; provided, however, Tenant's obligations under
this Paragraph shall not apply to injury or damage resulting from the
negligence of Landlord, its beneficiary, the managing agent of the Building, or
any of their respective officers, directors, agents or employees,*** If any
such proceeding is brought against Landlord, its beneficiary, the managing
agent of the Building, or any of their respective officers, directors, agents
or employees, Tenant covenants to defend such
*, **,*** See Insert on Page 8A
Page 8
<PAGE> 16
*If Landlord elects to supervise construction operations, Landlord's
supervision shall not unreasonably impede or delay the progress of the work.
**unless Landlord advises Tenant at the time of Landlord's consent to any
alteration that Landlord will require Tenant to remove same at the expiration
or termination of this Lease, in which event Tenant, at its expense, shall
remove same at the expiration or termination of this Lease and repair all
damage caused by the installation or removal of such alteration.
***or damage covered by insurance carried by Landlord (or required to be
carried by Landlord under this Lease).
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<PAGE> 17
proceeding at its sole cost by legal counsel reasonably satisfactory
to Landlord, if requested by Landlord.
12.
LANDLORD'S REMEDIES
12.01 EVENTS OF DEFAULT
Each of the following shall constitute an event of default by
Tenant under this Lease:
Tenant fails to pay any installment of Rent when due,; Tenant fails
to observe or perform any of the other covenants, conditions or provisions of
this Lease be observed or performed by Tenant and fails to cure such default
within 30 days after written notice to Tenant**; the interest of Tenant in this
Lease is levied upon under execution or other legal process; a petition is
filed by or against Tenant to declare Tenant bankrupt or seeking a plan of
reorganization or arrangement under any Chapter of the Bankruptcy Code, or any
amendment, replacement or substitution therefor or to delay payment of, reduce
or modify Tenant's debts, or any petition is filed or other action taken to
reorganize or modify Tenant's capital structure or to dissolve Tenant; Tenant
is declared insolvent by law or any assignment of Tenant's property is made for
the benefit of creditors; a receiver is appointed for Tenant or Tenant's
property; (and such petition is not vacated witin 60 days after same is filed)
12.02 LANDLORD'S REMEDIES
Upon the occurrence of an event of default by Tenant under this Lease,
Landlord, at its option, without further notice or demand to Tenant, may in
addition to all other rights and remedies provided in this Lease, at law or in
equity:
A. Terminate this Lease and Tenant's right of possession of the Premises,
and recover all damages to which Landlord is entitled under law. Landlord's
damages shall specifically include, without limitation (1) all Landlord's
expenses of reletting (including repairs, alterations, improvements, additions,
decorations, legal fees and brokerage commissions), plus (2) the aggregate sum
which at the time of such termination represents the excess, if any, of the
present value of the aggregate Adjusted Monthly Base Rent which would have been
payable by Tenant under this Lease for the balance of the Term (conclusively
presuming that adjustments to Monthly Base Rent on account of increases in
Taxes and Operating Expenses shall increase at the average annual rate of
increase thereof during the portion of the Term occurring prior to the
termination date but not exceeding 3 years), over the then present value of the
then aggregate fair rental value of the Premises for the balance of the Term
(allowing for a reasonable period of exposure on the open market before
realization of such fair rental value and deducting the then market tenant
concessions such as rent abatements and construction allowances), such present
value to be computed in each case on the basis of a 3% per annum discount from
the respective dates upon which such rentals would have been payable hereunder
had this Lease not been terminated. The amount set forth in the preceding
sentence shall be automatically considered accelerated and immediately due and
payable in full by Tenant to Landlord upon Landlord's election to terminate
this Lease. Landlord's right to terminate this Lease may also be exercised at
any time after the election by Landlord under Paragraph B below to terminate
Tenant's right to possession of the Premises.
B. Terminate Tenant's right of possession of the Premises without
terminating this Lease, in which event Landlord shall use reasonable efforts
to, relet the Premises, or any part thereof for the account of Tenant, for such
rent and term and upon such terms and conditions as are*** For purposes of such
reletting, Landlord is authorized to decorate, repair, alter and improve the
Premises to the extent reasonably necessary. If Landlord does not relet the
Premises, then Tenant shall pay Landlord monthly on the first day of each month
during the period that Tenant's right of possession is terminated, a sum equal
to the amount of Rent due under this Lease for such month (less any amount
which Landlord could have realized if Landlord relet the Premises to a
*, **, *** See Insert on Page 9A
Page 9
<PAGE> 18
*and with respect only to each of the first two (2) such failures occurring in
any year of the Term, such failure continues for 5 days after Landlord gives
Tenant written notice of such failure-,
**provided, however, that if such failure is not susceptible to being cured
within such 30-day period and Tenant immediately commences such cure, such
30-day period shall be extended so long as Tenant is actively, diligently and
continuously attempting to effectuate such cure (but in no event shall said
30-day period be extended by more than an additional 30 days).
***commercially reasonable under the circumstances; provided, however, that
Landlord shall not be obligated to relet or attempt to relet the Premises on a
priority basis over other unleased or unoccupied space in the Building or in
other buildings then comprising the Naperville Corporate Center.
Page 9A
<PAGE> 19
reputable, creditworthy substitute tenant procured by Tenant and presented to
Landlord in writing, which substitute tenant was ready, willing and able to
lease the entire Premises from Landlord under a lease in form identical to the
form of this Lease). If the Premises are relet and a sufficient sum is not
realized from such reletting after payment of all Landlord's expenses of
reletting (including repairs, alterations, improvements, additions,
decorations, legal fees and brokerage commissions) to satisfy the payment of
Rent due under this Lease for any month, Tenant shall pay Landlord any such
deficiency monthly upon demand. Tenant agrees that Landlord may file suit to
recover any sums due to Landlord under this section from time to time and that
such suit or recovery of any amount due Landlord shall not be any defense to
any subsequent action brought for any amount not previously reduced to judgment
in favor of Landlord. If Landlord elects to terminate Tenant's right to
possession only without terminating this Lease, Landlord may, at its option,
enter into the Premises, remove Tenant's signs and other evidences of tenancy,
and take and hold possession thereof, as stated in Article 13; provided,
however, that such entry and possession shall not terminate this Lease or
release Tenant, in whole or in part, from Tenant's obligation to pay the Rent
reserved hereunder for the full Term or from any other obligation of Tenant
under this Lease.
12.03 TRUSTEE IN BANKRUPTCY
In the event a petition is filed by or against Tenant seeking a plan of
reorganization or arrangement under any Chapter of the Bankruptcy Code,
Landlord and Tenant agree, to the extent permitted by law, that the trustee in
bankruptcy shall determine within 60 days after commencement of the case,
whether to assume or reject this Lease.
12.04 ATTORNEYS' FEES
Tenant shall pay upon demand, all costs and expenses, including
reasonable attorneys' fees, incurred by Landlord in enforcing Tenant's
obligations under this Lease or resulting from Tenant's default under this
Lease.
13.
SURRENDER OF PREMISES
Upon the expiration or termination of this Lease or termination of
Tenant's right of possession of the Premises, Tenant shall surrender and vacate
the Premises immediately and deliver possession thereof to Landlord in a clean,
good and tenantable condition, ordinary wear and damage by casualty loss
excepted. Upon any, termination which occurs other than by reason of Tenant's
default, Tenant shall be entitled to remove from the Premises prior to such
termination all moveable trade fixtures and personal property of Tenant without
credit or compensation from Landlord, provided Tenant immediately shall repair
all damage resulting from such removal and shall restore the Premises to a
tenantable condition. In the event possession of the Premises is not
immediately delivered to Landlord or if Tenant shall fail to remove any
moveable trade fixtures or personal property which Tenant is entitled to
remove, Landlord may remove same without any liability to Tenant. Any moveable
trade fixtures and personal property which may be removed from the Premises by
Tenant but which are not so removed, and all improvements made by Tenant to the
Premises, shall be conclusively presumed to have been abandoned by Tenant and
title to such property shall pass to Landlord without any payment or credit,
and Landlord may, at its option and at Tenant's expense, store, keep and/or
dispose of such property.
14.
HOLDING OVER
Tenant shall pay Landlord the fair rental value of the Premises, as
determined by Landlord (but in no event less than 150% of the Adjusted Monthly
Base Rent the first then-applicable under this Lease) for the first month or
partial month during which Tenant retains possession of the Premises, or any
part of the Premises, after the expiration or termination of this Lease,
and 200% of the fair rental value of the Premises, as determined by Landlord
(but in no event less than 200% of the Adjusted monthly Base Rent then
applicable under this Lease) for each subsequent month or partial month during
which Tenant retains, possession of the Premises, or any part of the Premises,
after the expiration or termination of this lease. Tenant shall also
indemnify Landlord against all liabilities and
Page 10
<PAGE> 20
damages sustained by Landlord by reason of any such retention of possession.
The provisions of this Article shall not constitute a waiver by Landlord of any
re-entry rights of Landlord available under this Lease or by law. If Tenant
retains possession of the Premises, or any part of the Premises, for 30 days
after the expiration or termination of this Lease, then Landlord, at Landiord's
election expressed in written notice to Tenant but not otherwise, may, in
addition to all other rights and remedies available to Landlord under this
Lease, constitute such holding over- as a renewal of this Lease for a period of
one year on the same provisions as are set forth in this Lease, but for a
Monthly Base Rent equal to the then fair monthly base rental value of the
Premises, as determined by Landlord (but in no event less than the Monthly Base
Rent then payable by Tenant under this Lease).
15.
DAMAGE BY FIRE OR OTHER CASUALTY
15.01 SUBSTANTIAL UNTENANTABILITY
If either the Premises or the Building is rendered substantially untenantable
by fire or other casualty, Landlord may elect by giving Tenant written notice
within 90 days after the date of said fire or casualty, either to:
(1) terminate this Lease as of the date of the fire or
other casualty; or
(2) proceed to repair or restore the Premises or the
Building, other than leasehold improvements and personal property
installed by Tenant, to substantially the same condition as existed
immediately prior to such fire or casualty.
If Landlord elects to proceed pursuant to subsection (2) above, Landlord's
notice shall contain Landlord's reasonable estimate of the time required to
substantially complete such repair or restoration. If such estimate indicates
that the time so required will exceed 180 days from the date of the casualty,
then Tenant shall have the right to terminate this Lease as of the date of such
casualty by giving written notice to Landlord not later than 20 days after the
date of Landlord's notice. If Landlord's estimate indicates that the repair or
restoration can be substantially completed within 180 days, or if Tenant fails
to exercise its said right to terminate this Lease, this Lease shall remain in
force and effect, See Insert 1 on page 11A).
15.02 INSUBSTANTIAL UNTENANTABILITY
If the Premises are damaged by fire or other casualty but is not
rendered substantially untenantable, then Landlord shall diligently proceed to
repair and restore the damaged portions thereof, other than the leasehold
improvements and personal property installed by Tenant, to substantially, the
same condition as existed immediately prior to such fire or casualty, unless
such damage occurs during the last 12 months of the Term, in which event
Landlord shall have the right to terminate this Lease as of the date of such
fire or other casualty by giving written notice to Tenant within 30 days after
the date of such fire or other casualty. (See Insert 2 on Page 11A)
15.03 RENT ABATEMENT
If all or any part of the Premises are damaged by fire or other
casualty and this Lease is not terminated, Adjusted Monthly Base Rent shall
abate for all or that part of the Premises which are untenantable on a per diem
and proportionate area basis from the date of the fire or other casualty until
Landlord has substantially completed the repair and restoration work in the
Premises which it is required to perform, provided, that as a result of such
fire or other casualty, Tenant does not occupy the portion of the Premises
which are untenantable during such period.
15.04 DEFINITIONS
(See Insert 3 on Page 11A)
Page 11
<PAGE> 21
INSERT 1
provided, however, that if the repair or restoration is not substantially
completed within 180 days after the date of commencement of such repair or
restoration work (subject to 26.07), then Tenant shall have the right to
terminate this Lease by giving written notice to Landlord not later than 20
days after the expiration of said 180-day period.
INSERT 2
If the repair or restoration is not substantially completed within 90 days
after the date of commencement of such repair or restoration work (subject to
26.07), then Tenant shall have the right to terminate this Lease by, giving
written notice to Landlord not later than 20 days after the expiration of said
90-day period.
INSERT 3
As used in this Article 15 "substantial untenantability" shall mean 40% or more
of the rentable area of the Premises is rendered untenantable.
Page 11A
<PAGE> 22
16.
EMINENT DOMAIN
16.01 SUBSTANTIAL TAKING
If all or any part of the Premises or the Building is permanently
taken or condemned by any competent authority for any public use or purpose
(including a deed given in lieu of condemnation), which renders the Premises
substantially untenantable, this Lease shall terminate as of the date title
vests in such authority, and Adjusted Monthly Base Rent shall be apportioned as
of said date.
16.02 INSUBSTANTIAL TAKING
If any part of the Premises or the Building is taken or condemned
for any public use or purpose (including a deed given in lieu of condemnation)
and this Lease is not terminated pursuant to 16.01, Adjusted Monthly Base Rent
shall be reduced for the period of such taking by an amount which bears the
same ratio to Adjusted Monthly Base Rent then in effect as the number of square
feet as determined by Landlord of the Premises so taken or condemned, if any,
bears to the number of square feet of the Premises specified in 1.01I.
Landlord, upon receipt and to the extent of the award in condemnation or
proceeds of sale, shall make necessary repairs and restorations (exclusive of
leasehold improvements and personal property installed by Tenant) to restore
the Premises remaining to as near its former condition as circumstances will
permit, and to the Building to the extent necessary to constitute the portion
of same not so taken or condemned as a complete architectural unit. In the
event of any taking or condemnation described in this 16.02, the square feet of
the Premises stated in 1.01I and the square feet of the Building stated in
1.01L shall be reduced, respectively, by the number of square feet as
determined by Landlord of the portion of the Premises, if any, and the
Building, if any, so taken or condemned, and Tenant's Proportionate Share shall
be adjusted accordingly, for all purposes under this Lease.
16.03 COMPENSATION
Landlord shall be entitled to receive the entire price or award from
any such sale, taking or condemnation without any payment to Tenant, and Tenant
hereby assigns to Landlord Tenant's interest, if any, in such award. Tenant
shall have no claim or right to any price or award as a result of any such
sale, taking or condemnation because of this Lease or the unexpired term of
this Lease or the premature termination of this Lease or any option to extend
the term of this Lease or to lease additional space in the Building, (See
Insert 1 on Page 12A)
16.04 DEFINITION (See Insert 2 on Page 12A)
17.
TENANT'S INSURANCE
Tenant, at its expense, shall maintain in force during the Term:
(1) comprehensive general public liability insurance,
which shall include coverage for personal liability, contractual
liability, tenant's legal liability, bodily injury, death and property
damage, all on an occurrence basis with respect to the business
carried on, in or from the Premises and Tenant's use and occupancy of
the Premises, with coverage for any one occurrence or claim of not
less than $1,000,000 or such other amount as Landlord may reasonably
require upon not less than six months' prior written notice, which
insurance shall include Landlord, its partners and the managing agent
of the Building as named insureds and shall protect Landlord in
respect of claims by Tenant as if Landlord were separately insured;
and
(2) insurance against such other perils and in such
amounts as Landlord may from time to time reasonably require upon not
less than 30 days' prior written notice, such requirement to be made
on the basis that the required insurance is
Page 12
<PAGE> 23
INSERT 1
provided, however, that Tenant may make a separate claim for the cost of
Tenant's trade.fixtures and relocation costs, so long as such claim does not
diminish Landlord's award.
INSERT 2
As used in this Article 16, "substantially untenantable" shall mean a taking
whereby 40% or more of the rentable area of the Premises is rendered
untenantable.
Page 12A
<PAGE> 24
customary at the time for prudent tenants of properties similar to the
Building in the Naperville, Illinois area.
All insurance required to be maintained by Tenant shall be on terms
and with insurers reasonably acceptable to Landlord. Each of the aforesaid
policies shall contain an undertaking by the insurer that no material change
adverse to Landlord or Tenant will be made, and such policy will not lapse or
be cancelled, except after not less than 30 days' prior written notice to
Landlord of the intended change, lapse or cancellation. Tenant shall furnish
to Landlord, if and whenever requested by it, certificates or other evidences
acceptable to Landlord as to the insurance from time to time effected by Tenant
and its renewal or continuation in force.
17.02 See Insert on Page 13A
17.03 See Insert on Page 13A
18.
RULES AND REGULATIONS
Tenant agrees that Tenant and each of Tenant's employees, agents and
invitees shall comply with the following rules and regulations and with all
reasonable modifications and additions thereto which Landlord may from time to
time make: (1) Any sign, lettering, picture, notice or advertisement installed
within the Premises which is visible from the public corridors within the
Building shall be installed in such manner and be of such character and style
as Landlord shall approve in writing. No sign, lettering, picture, notice or
advertisement shall be placed on any outside window or in a position to be
visible from outside the Building; (2) Tenant shall not use the name of the
Building for any purpose other than Tenant's business address; (3) Tenant shall
not use the name of the Building for Tenant's business address after Tenant
vacates the Premises; (4) Sidewalks, entrances, passages, courts, corridors,
halls, elevators and stairways in and about the Premises shall not be
obstructed nor shall objects be placed against glass partitions, doors or
windows which would be unsightly from the corridors of the Building or from the
exterior of the Building; (5) No animals, pets, bicycles or other vehicles
shall be brought or permitted to be in the Building or the Premises; (6) Room
to room canvasses to solicit business from other tenants of the Building are
not permitted; (7) Tenant shall not waste electricity, water or air
conditioning and shall cooperate fully with Landlord to assure the most
effective and efficient operation of the heating and air conditioning systems
of the Building. All controls shall be adjusted only by authorized building
personnel; (8) All corridor doors shall remain closed at all times; (9) No
locks or similar devices shall be attached to any door except by Landlord and
Landlord shall have the right to retain a key to all such locks; except that
Tenant may elect to retain all keys to the door(s) to any high security room or
area in the Premises; provided, however (i) Landlord shall not be obligated to
provide janitorial service to such room or area and (ii) Tenant shall pay for
the repair of any damage to such door(s) caused by any emergency entry into
such room or area; (10) Tenant assumes full responsibility for protecting the
Premises from theft, robbery and pilferage. Except during Tenant's normal
business hours, Tenant shall keep all doors to the Premises locked and other
means of entry to the Premises closed and secured; (11) Only machinery or
mechanical devices of a nature directly related to Tenant's ordinary use of the
Premises shall be installed, placed or used in the Premises and the
installation and use of all such machinery and mechanical devices is subject to
the other rules contained in this Article 18 and the other portions of this
Lease; (12) All cleaning, repairing, janitorial, decorating, painting or other
services and work in and about the Premises shall be done only by authorized
Building personnel; (13) Safes, furniture, equipment, machines and other large
or bulky articles shall be brought to the Building and into and out of the
Premises at such times and in such manner as the Landlord shall direct
(including the designation of elevator) and at Tenant's sole risk and cost.
Prior to Tenant's removal of such articles from the Building, Tenant shall
obtain written authorization of the office of the Building and shall present
such authorization to a designated employee of Landlord; (14) Tenant shall not
in any manner deface or damage the Building; (15) Inflammables such as
gasoline, kerosene, naphtha and benzene, or explosives or any other articles of
an intrinsically dangerous
Page 13
*except that Tenant may elect to retain all keys to the door(s) to any high
security room or area in the Premises; provided, however (i) Landlord shall not
be obligated to provide janitorial service to such room or area and (ii) Tenant
shall pay for the repair of any damage to such door(s) caused by any emergency
entry into such room or area;
<PAGE> 25
17.02 LANDLORD'S INSURANCE.
Landlord shall maintain in force during the Term:
(1) comprehensive general public liability insurance; and
(2) all risks (hazard) insurance and rent loss insurance
on the Building.
17.03 RELEASE OF LIABILITY .AND WAIVER OF SUBROGATION
Notwithstanding any provision in this Lease to the contrary, each
party hereto waives any and every claim which arises or may arise in its favor
and against the other party hereto, or anyone claiming through or under either
of them, by way of subrogation or otherwise, during the Term (or upon the
expiration or termination of the Term of this Lease) for any and all loss of,
or damage to, or condition of, the Premises, the Building and property located
on or within the foregoing, resulting from fire or any other casualty or peril
which would be insured under any fire and all-risk (or extended risk) property
damage insurance policy, or a peril which is actually insured, whether or not
such loss or damage is caused by the fault or negligence of the other party or
anyone for whom such other party may be responsible, or otherwise due to any
other cause for which such party would have liability under applicable laws,
and whether or not such insurance is in effect or the amount of coverage by
such insurance. Such waivers shall be in addition to, and not in limitation or
derogation of, any other waiver or release contained in this Lease with respect
to any loss or damage to property of the parties hereto. Inasmuch as the above
mutual waivers will preclude the assignment of any aforesaid claim by way of
subrogation (or otherwise) to an insurance company (or any other person), each
party hereto hereby agrees immediately to give to each insurance company which
has issued to its policies of fire and extended coverage insurance, written
notice of the terms of such mutual waivers, and to have such insurance policies
properly endorsed, if necessary, to prevent the invalidation of such insurance
coverages by reason of such waivers.
*provided, however, that Tenant may install a coffee maker and microwave oven
for use solely by Tenant's employees and not for sale to the public;
Page 13A
<PAGE> 26
nature are not permitted in the Building or Premises; (16) Tenant shall
ascertain from Landlord the maximum amount of electrical current which can
safely be used in the Premises, taking into account the capacity of the
electric wiring of the Building and the Premises and the needs of other
tenants, and shall not use more than such safe capacity. Landlord's consent to
the installation of electrical equipment shall not relieve Tenant from the
obligation not to use more electricity than such safe capacity; (17) To the
extent permitted by law, Tenant shall not permit picketing or other union
activity involving its employees in the Building, except in those locations and
subject to time and other limitations as to which Landlord may give prior
written consent; (18) Tenant shall not enter into or upon the roof of the
Building or any storage, heating, ventilation, air-conditioning, mechanical or
elevator machinery housing areas; (19) Tenant shall not distribute literature,
flyers, handouts or pamphlets of any type in any of the common areas of the
Building, without the prior written consent of Landlord; (20) Tenant shall not
cook, otherwise prepare or sell any food or beverages in or from the
Premises; provided, however, that Tenant may install a coffee maker and
microwave oven for use solely by Tenant's employees and not for sale to the
public; (21) Tenant shall not permit the use of any apparatus for sound
production or transmission in such manner that the sound so transmitted or
produced shall be audible or vibrations therefrom shall be detectable beyond
the Premises; (22) Tenant shall keep all electrical and mechanical apparatus
free of vibration, noise and air waves which may be transmitted beyond the
Premises; (23) Tenant shall not permit objectionable odors or vapors to emanate
from the Premises; (24) Tenant shall not place a load upon any floor of the
Premises exceeding the floor load capacity for which such floor was designed or
allowed by law to carry; (25) No floor covering shall be affixed to any floor
in the Premises by means of glue or other adhesive, unless the installation
procedure is approved by Landlord; and (26) Tenant shall comply with all rules
and regulations established by Landlord pursuant to clause (6) of Paragraph 19
of this Lease. Landlord shall not be responsible for the violation of any of
the foregoing rules and regulations by other tenants of the, Building and shall
use reasonable efforts to enforce the same against other tenants, provided,
however, that Landlord shall not be obligated to institute any legal action or
proceeding to enforce same.
19.
LANDLORD'S RIGHTS
Landlord shall have the following rights exercisable without notice
(except as expressly provided to the contrary, in this Lease) and without being
deemed an eviction or disturbance of Tenant's use or possession of the Premises
or giving rise to any claim for set-off or abatement of Rent: (1) To change the
name or street address of the Building; provided, if any such change is
voluntarily made by Landlord (as opposed to one required by law) and Landlord
does not provide Tenant with at least 90 days prior written notice of such
change, then Landlord agrees to reimburse Tenant for the reasonable documented
out-of-pocket costs paid by Tenant to reprint Tenant's stationery and other
business materials which are then in stock and which are rendered obsolete by
reason of such change; (2) To install, affix and maintain all signs on the
exterior of the Building, the interior of the Building and/or on Lot 3 of the
Resubdivision of Lot 3 in the Naperville Corporate Center Subdivision in
Naperville, Illinois; (3) To designate and/or approve prior to installation,
all types of signs, window shades, blinds, drapes, awnings or other similar
items, and all internal lighting that may be visible from the exterior of the
Premises; (4) To display the Premises to prospective tenants at reasonable
hours during the last 12 months of the Term; (5) To change the
arrangement,size, configuration and/or decoration of entrances, exits, doors,
closets, atriums, storage areas, corridors, boiler rooms, mechanical rooms,
elevators, washrooms, hallways, lobbies, trash and rubbish areas and stairs in
or about the Building and to change the arrangement, size and/or configuration
of the parking areas, driveways, entrances, exits and all other areas on Lot 3
of the Resubdivision of Lot 3 in the Naperville Corporate Center Subdivision in
Naperville, Illinois, provided that no such change shall materially adversely
affect access to the Premises; (6) to establish such reasonable and appropriate
rules and regulations (in addition to those set forth in the preceding
Paragraph 18) as are satisfactory to Landlord for the use by Tenant and its
employees, guests and invitees of any of the areas set forth in the preceding
clause (5); (7) To grant to any party the exclusive right to conduct any
business or render any service in or to the Building, provided such exclusive
right shall not operate to prohibit Tenant from using the Premises for the
purposes permitted hereunder; (8) To prohibit the placing of vending or
dispensing machines of any kind in or about the Premises; (9) To have access
for Landlord and other tenants of the Building to any mail chutes and boxes
located in or on the Premises according to the rules of the United States Post
Office; (10) To close the Building after normal business hours, except that
Tenant and its employees and invitees shall be entitled to admission to the
Building at all times under such regulations as Landlord prescribes; (11) To
take any and all reasonable measures, including inspections and repairs to the
Premises or to the Building,
Page 14
<PAGE> 27
as may be necessary or desirable in the operation or protection thereof; (12)
To retain at all times master keys or pass keys to the Premises; (13) To
install, operate and maintain security systems which monitor, by closed circuit
television or otherwise, all persons entering and leaving the Building; (14) To
install and maintain pipes, ducts, conduits, wires and structural elements
located in the Premises which serve other parts or other tenants of the
Building; and (15) To amend this Lease upon the reasonable request of the
holder of any mortgage or trust deed now or hereafter existing encumbering the
Building to incorporate into this Lease the standard protections required by
such holder provided, however, that no such amendment shall operate to increase
the Rent owing under this Lease or to materially affect Tenant's rights or
obligations under this Lease. Tenant shall sign any such amendment; provided,
however, that if Tenant fails to execute and deliver to Landlord any amendment
pursuant to this clause (15) within ten (10) days after Landlord delivers a
copy thereof to Tenant, Tenant hereby irrevocably and unconditionally
designates Landlord as Tenant's agent and attorney-in-fact to execute any such
amendment for Tenant. It is hereby expressly agreed that the power of attorney
hereby granted by Tenant to Landlord pursuant to this clause (15) is a power
coupled with an interest, may not be revoked by Tenant and shall be binding on
Tenant and its successors and permitted assigns.
20.
ESTOPPEL CERTIFICATE
Tenant shall from time to time after the date of this Lease, upon not
less than 10 days' prior written request by Landlord, or any mortgagee or
ground lessor of the Building, or any prospective purchaser of the Building,
deliver to Landlord, or such mortgagee, ground lessor or purchaser, a statement
in writing signed by Tenant certifying:
(1) That this Lease is unmodified and in full force and effect or, if
there have been modifications, that this Lease, as modified, is in full
force and effect;
(2) The amount of Adjusted Monthly Base Rent then payable under this
Lease and the date to which Rent has been paid;
(3) That Landlord is not in default under this Lease or any work
letter agreement, or, if in default, a detailed description of such
default(s);
(4) That Tenant is or is not in possession of the Premises, as the
case may be; and
(5) Such other information as may be reasonably requested.
21.
INTENTIONALLY DELETED
Page 15
<PAGE> 28
22.
ADJUSTMENTS TO MONTHLY BASE RENT
22.01 DEFINITIONS
For the purposes of this Article 22, the following words and phrases shall have
the following meanings:
A. "Adjustment Date" shall mean each January 1 occurring within the Term.
B. "Adjustment Year" shall mean each calendar year during which an Adjustment
Date occurs.
D. "Operating Expenses" shall mean all costs, expenses and
disbursements of every kind and nature which Landlord shall pay or become
obligated to pay in connection with the management, operation, maintenance,
replacement and repair of the Building, all or any part of Lot 3 of the
Resubdivision of Lot 3 (and any other land which serves the Building) in the
Naperville Corporate Center Subdivision in Naperville, Illinois, and the
personal property, fixtures, machinery, equipment, systems and apparatus
located in, on or used in connection with such Building and/or land. Operating
Expenses shall include, among other items, (i) management fees,(not to exceed
5% of stabilized rents), and (ii) current depreciation as determined by
Landlord of capital improvements to the Building made after December 31, 1989
which are required by law or which are reasonably necessary as determined by
Landlord for the operation, maintenance or repair of the Building or all or any
part of said Lot 3 of the Resubdivision of Lot 3 (and any other land which
serves the Building) in the Naperville Corporate Center Subdivision in
Naperville, Illinois or any other property described in the preceding sentence.
Notwithstanding the foregoing, Operating Expenses shall not include real estate
brokerage and leasing commissions or salaries of executives of Landlord's
managing agent senior to the person managing the Building; depreciation on
improvements made on or prior to December 31, 1989; interest or principal
payments on Landlord's debts; costs for which Landlord is reimbursed by any
tenant (other than through rent adjustment provisions in tenant leases), any
insurer or any other third party; costs of enforcement(including attorneys'
fees) of any lease; costs of renovation or improvement of any tenant Premises;
costs of remedying any violation of law existing prior to the Commencement
Date; costs of complying with any insurance requirement imposed prior to the
Commencement Date; or advertising expenses.
E. "Taxes" shall mean all federal, state and local governmental
taxes, assessments and charges (including transit or transit district taxes or
assessments) of every kind or nature including without limitation general real
estate taxes, (but excluding special assessments levied or assessed prior to
December 31, 1989), which Landlord shall pay or become obligated to pay because
of or in connection with the ownership, leasing, management, control or
operation of the Building (including all or any portion of Lot 3 of the
Resubdivision of Lot 3 and any other land which serves the Building in the
Naperville Corporate Center Subdivision in Naperville, Illinois), or of the
personal property, fixtures, machinery, equipment, systems and apparatus
located therein or used in connection therewith (including any rental or
similar taxes levied in lieu of or in addition to general real and/or personal
property taxes). For purposes hereof, Taxes for any year shall be Taxes which
are due for payment or paid in that year rather than Taxes which are assessed
or become a lien during such year. There shall be included in Taxes for any
year the amount of all fees, costs and expenses (including reasonable
attorneys' fees) paid by Landlord during such year in seeking or obtaining in
good faith and in a commercially reasonable manner any refund or reduction of
Taxes. Taxes in any year shall be reduced by the net amount of any tax refund
received by Landlord during such year. Taxes shall not include any federal,
state or local sales, use, franchise, capital stock, inheritance, general
income, gift or estate taxes, except that if a change occurs in the method of
taxation resulting in whole or in part in the substitution of any such taxes,
or any other assessment, for any Taxes as above defined, such substituted taxes
or assessments.
F. "Tenant's Proportionate Share" shall mean the amount set forth
in 1.01M of this Lease. Tenant's proportionate share is calculated by dividing
the number of square feet of
page 16
<PAGE> 29
the Premises as set forth in 1.01I by the number of square feet of the Building
as set forth in 1.01L.
22.02 ADJUSTMENTS TO MONTHLY BASE RENT
Effective as of each Adjustment Date to and including the day
immediately preceding the following Adjustment Date, Monthly Base Rent shall be
increased by an amount equal to one twelfth (1 /12th) of the sum of:
(1) Tenant's Proportionate Share of the excess of Taxes for the
Adjustment Year in which such Adjustment Date occurs over Taxes for the
calendar year 1998;
Plus
(2) Tenant's Proportionate Share of the excess of Operating
Expenses for the Adjustment Year in which such Adjustment Date occurs over
Operating Expenses for the calendar year 1998;
22.03 PROJECTIONS
For the purpose of calculating Taxes and Operating Expenses for any Adjustment
Year, Landlord may make reasonable estimates, forecasts or projections
(collectively, the "Projections") of Taxes and Operating Expenses for such
Adjustment. Within approximately 60 days following each Adjustment Date,
Landlord shall deliver to Tenant a written statement setting forth the
Projections of Operating Expenses and Taxes for the Adjustment Year in which
such Adjustment Date occurs, and providing a calculation of the increase in
installments of Monthly Base Rent to become effective as of said Adjustment
Date; provided, however, that the failure of Landlord to provide any such
statement within said period shall not relieve Tenant from its obligation to
continue to pay Adjusted Monthly Base Rent at the rate then in effect under
this Lease, and, within ten days following the date on which Landlord delivers
such statement to Tenant, Tenant shall pay any increases in Monthly Base Rent
reflected thereby effective retroactively to the most recently preceding
Adjustment Date.
22.04 READJUSTMENTS
On or about April 1st following the end of each Adjustment Year, or at
such later time as Landlord shall be able to determine the actual amounts of
Operating Expenses and Taxes for the Adjustment Year last ended, Landlord shall
notify Tenant in writing of such actual amounts. If such actual amounts exceed
the Projections for such Adjustment Year, then Tenant shall, within 30 days
after the date of such written notice from Landlord, pay to Landlord an amount
equal to the excess of the Adjusted Monthly Base Rent payable for the
Adjustment Year last ended based upon actual Operating Expenses and Taxes for
such year over the total Adjusted Monthly Base Rent paid by Tenant during such
Adjustment Year. The obligation to make such payments shall survive the
expiration or earlier termination of the Term. If the total Adjusted Monthly
Base Rent paid by Tenant during such Adjustment Year exceeds the amount thereof
payable for such year based upon actual Operating Expenses and Taxes for such
Adjustment Year, then Landlord shall credit such excess to installments of
Adjusted Monthly Base Rent payable after the date of Landlord's notice until
such excess has been exhausted, or if this Lease shall expire prior to full
application of such excess, Landlord shall pay to Tenant the balance thereof
not theretofore applied against Rent. No interest or penalties shall accrue on
any amounts which Tenant is obligated to pay to Landlord or which Landlord is
obligated to credit or pay to Tenant by reason of this Paragraph.
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<PAGE> 30
22.05 BOOKS AND RECORDS
Landlord shall maintain books and records showing Operating Expenses
and Taxes in accordance with sound accounting and management practices. The
books and records shall be available to Tenant for inspection, upon prior
reasonable notice. Such inspection shall take place, at Landlord's election,
either at (a) the offices of the Building or (b) the main office of Bellemead
Management Co., Inc., 280 Corporate Center, Four Becker Farm Road, Roseland,
New Jersey 07068.
22.06 NO DECREASES IN MONTHLY BASE RENT
Notwithstanding anything to the contrary contained in this Lease, Monthly Base
Rent shall not be adjusted or decreased pursuant to this Article 22 below the
amount set forth in 1.01H.
22.07 PARTIAL OCCUPANCY FOR OPERATING EXPENSES
For the purpose of calculating Operating Expenses for the calendar
year 1998, if the average number of rentable square feet occupied by tenants
during the calendar year 1998 in the Building is less than 132,225 rentable
square feet, Landlord shall make a determination ("Landlord's 1998
Determination") of what the Operating Expenses for the calendar year 1998 would
have been if during the entire calendar year 1998 an average of 132,225
rentable square feet Were occupied by tenants in the Building. Landlord's 1998
Determination shall be binding and conclusive upon Tenant and shall for all
purposes of this Lease be deemed to be the Operating Expenses for the calendar
year 1998. For the purpose of calculating Operating Expenses for any Adjustment
Year, if the average number of rentable square feet occupied by tenants during
such Adjustment Year in the Building is less than 132,225 rentable square feet,
Landlord shall make a determination ("Landlord's Adjustment Year
Determination") of what the Operating Expenses for such Adjustment Year would
have been if during all of such Adjustment Year an average of 132,225 rentable
square feet were occupied by tenants in the Building. Landlord's Adjustment
Year Determination of Operating Expenses for any Adjustment Year shall be
binding and conclusive upon Tenant and shall for all purposes of this Lease be
deemed to be the Operating Expenses for such Adjustment Year.
23.
REAL ESTATE BROKERS
Tenant represents and warrants to Landlord that, except for the
brokers named in 1.01K, Tenant has not dealt with any real estate broker,
salesperson, or finder in connection with this Lease, and no such person
initiated or participated in the negotiation of this Lease, or showed the
Premises to Tenant. Tenant agrees to indemnify, defend and hold harmless
Landlord, its partners, the managing agent of the Building and their respective
agents and employees from and against any and all liabilities and claims for
commissions and fees arising out of a breach of the foregoing representation
and warranty. Landlord shall be responsible for the payment of all commissions
payable by reason of this Lease to the broker, if any, specified in 1.01K,
based upon the leasing commission policy of Landlord applicable to the Building
as of the date of this Lease.
24.
SUBORDINATION AND ATTORNMENT
24.01 SUBORDINATION
This Lease and the rights of Tenant hereunder are expressly subject and
subordinate to any ground lease of the land underlying the Building now or
hereafter existing and all amendments, renewals, modifications and extensions
of and to any said ground lease, and to the lien of any one or more mortgage or
trust deed specified by Landlord now or hereafter existing encumbering the
Building, or any part thereof, or said
Page 18
<PAGE> 31
land or ground leasehold estate, and all amendments, renewals, modifications
and extensions of and to each said mortgage or trust deed, and to all advances
made or hereafter to be made upon the security of each said mortgage or trust
deed. Tenant agrees to promptly sign and deliver to Landlord such further
instruments subordinating this Lease to any such ground lease or to the lien of
each such mortgage or trust deed as may be requested in writing by Landlord
from time to time.
24.02 ATTORNMENT
In the event of the cancellation or termination of any such ground lease in
accordance with its provisions or by the surrender of such ground leasehold
estate, whether voluntary, involuntary or by operation of law, or by summary
proceedings, or the foreclosure of any such mortgage or trust deed by voluntary
agreement or otherwise, or the commencement of any judicial action seeking such
foreclosure, Tenant, at the request of the then Landlord, shall attorn to and
recognize such ground lessor, mortgagee, holder of such trust deed or purchaser
in foreclosure as Tenant's Landlord under this Lease. Tenant agrees to sign
and deliver at any time upon request of such ground lessor, mortqagee., holder,
purchaser, or any of their successors, any instrument to further evidence such
attornment.
25.
NOTICES
All notices required or permitted to be given under this Lease shall
be in writing and shall be deemed given and delivered, whether or not received,
on the date when personally delivered (and receipted for) or two days following
the date when deposited in the United States Mail, postage prepaid and properly
addressed, certified mail, return receipt requested, at the following
addresses:
(1) To Landlord: c/o Bellemead Management Co., Inc., 280 Corporate
Center, Four Becker Farm Road, Roseland, New Jersey 07068 or such other
address as Landlord shall designate by written notice to Tenant with copies
to Property Manager, Bellemead Development Corporation, 1240 E. Diehl Road,
Naperville, Illinois 60563 and to Neil T. Neumark, Schwartz, Cooper,
Greenberger & Krauss, 180 North LaSalle Street, Suite 2700, Chicago,
Illinois 60601; and
(2) To Tenant: At the address specified in 1.01C prior to the
Commencement Date, and at the Premises after the Commencement Date, or such
other address as Tenant shall designate by written notice to Landlord.
Any notice given to Tenant by Bellemead Management Co., Inc., the managing
agent of the Building, shall be deemed as valid as if given by Landlord and
shall be binding upon Tenant.
26.
MISCELLANEOUS
26.01 LATE CHARGES
All delinquent Rent shall bear interest at the maximum rate permitted
by law or 2% in excess of the Prime Rate as published by The First National
Bank of Chicago as in effect from time to time, whichever is less, from the
date due until paid.
26.02 ENTIRE AGREEMENT
This Lease and the Exhibits attached hereto contain the entire agreement
between landlord and Tenant concerning the Premises and there are no other
agreements, either oral or written, between Landlord and Tenant.
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<PAGE> 32
26.03 NO OPTION
The signing of this Lease by Tenant and delivery of same to Landlord
does not constitute a reservation of or option for the Premises or an agreement
by Landlord to enter into a Lease and this Lease shall become effective only if
and when Landlord signs and delivers this Lease to Tenant; provided, however,
the signing and delivery by Tenant of this Lease to Landlord shall constitute
an irrevocable offer by Tenant to lease the Premises on the terms and
conditions contained in this Lease, which offer may not be withdrawn or revoked
by Tenant for 10 business days after such signing and delivery to Landlord. If
Tenant is a corporation, it shall deliver to Landlord, concurrently with the
delivery to Landlord of a copy of this Lease signed by Tenant, certified
resolutions of Tenant's directors authorizing the signing and delivery of this
Lease and the performance by Tenant of its obligations under this Lease.
26.04 ACCORD AND SATISFACTION
No payment by Tenant or receipt by Landlord of a lesser amount than
any installment or payment of Rent due shall be deemed to be other than on
account of the amount due, and no endorsement or statement on any check or any
letter accompanying any check or payment of Rent shall be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice
to Landlord's right to recover the balance of such installment or payment of
Rent and Landlord may pursue any other remedies available to Landlord. No
receipt of money by Landlord from Tenant after the termination of this Lease or
Tenant's right of possession of the Premises shall reinstate, continue or
extend the Term.
26.05 LIMITATION OF LIABILITY
Notwithstanding anything to the contrary herein provided, each and
every term, covenant, condition and provision of this Lease is hereby made
specifically subject to the provisions of this Paragraph 26.05. The term
"Landlord" as used in this Lease means only the owner or lessor for the time
being of the Building, so that in the event of any conveyance of such interest
and the transfer to the transferee of any funds then being held under this
Lease by such owner, Landlord shall be and hereby is entirely freed and
relieved of any and all obligations of Landlord hereunder thereafter accruing,
and it shall be deemed without further agreement between the parties and such
grantee(s) that the grantee has assumed and agreed to observe and perform all
obligations of Landlord hereunder. It is specifically understood and agreed
that notwithstanding anything to the contrary herein provided or otherwise
provided at law or in equity, there shall be absolutely no personal liability
in excess of its interest in tire Building to Landlord or any successor in
interest thereto (whether the same be an individual, joint venture, trust, land
trust, tenancy in common, firm or partnership, general, limited or otherwise)
or on the part of the members of any firm, partnership or joint venture or
other unincorporated Landlord with respect to any of the terms, covenants
and/or conditions of this Lease; in the event of a breach or default by
Landlord, or any successor in interest thereof, of any of its obligations under
this Lease, Tenant shall look solely to the then Landlord for the satisfaction
of each and every remedy of Tenant, such exculpation of personal and additional
liability which is in excess of such interest in the Building to be absolute
and without any exception whatsoever.
26.06 BINDING EFFECT
This Lease shall be binding upon and inure to the benefit of Landlord
and its successors and assigns. This Lease shall be binding upon and inure to
the benefit of Tenant and its successors and permitted assigns.
26.07 FORCE MAJEURE
Landlord shall not be deemed in default with respect to any of the
terms, covenants, conditions and provisions of this Lease on Landlord's part to
be performed if Landlord fails to timely perform same and such failure is due
in whole or in part to any strike, lockout, labor trouble (whether legal or
illegal), civil disorder, inability to procure materials, failure of power,
restrictive governmental laws or regulations, riots, insurrections, war, fuel
shortages, accidents, casualties, Acts of God, acts caused directly or
indirectly by Tenant (or Tenant's
Page 20
<PAGE> 33
agents, employees or invitees), mechanical breakdown, repair, servicing or any
other cause beyond the reasonable control of Landlord.
26.08 CAPTIONS
The Article and Paragraph captions in this Lease are inserted only as a matter
of convenience and in no way define, limit, construe, or describe the scope or
intent of such Articles and Paragraphs.
26.09 APPLICABLE LAW
This Lease shall be construed in accordance with the laws of the State
of Illinois.
26.10 TIME
Time is of the essence of this Lease and the performance of all
obligations hereunder.
26.11 LANDLORD'S RIGHT TO PERFORM TENANT'S DUTIES
If Tenant fails timely to perform any of its duties under this Lease Landlord
shall have the@ right (but not the obligation), after the expiration of any
notice and cure period or grace period elsewhere under this Lease expressly
granted to Tenant for the performance of such duty, to perform such duty on
behalf and at the expense of Tenant without further prior notice to Tenant, and
all sums expended or expenses incurred by Landlord in performing such duty
shall be deemed to be additional Rent under this Lease and shall be due and
payable upon demand by Landlord.
26.12 TENANT'S REMEDIES
Tenant agrees that in the event of a default by Landlord under this
Lease, Tenant shall give written notice thereof to all mortgagees and ground
lessors of the Premises, or any interest therein, and a period of 30 days
within which to cure or cause to be cured such default, prior to proceeding to
enforce any rights or remedies of Tenant under this Lease.
26.13 RIDERS
All Riders attached hereto and signed both by Landlord and Tenant
shall be deemed to be a part hereof and are hereby incorporated into this
Lease.
26.14 CONSENT
In any and all cases where Landlord's consent or approval is required
under this Lease, Tenant shall, upon Landlord's demand, reimburse Landlord, as
additional rent, for all reasonable and appropriate costs and expenses,
including but not limited to architectural, engineering and legal fees, which
Landlord incurs in determining whether to grant its consent or approval. See
Insert on page 21A.
27.
PARKING
So long as Tenant is not in default under this Lease, Tenant and its
agents, invitees and employees shall have a license to use (in accordance with
the provisions of this Lease) in the aggregate 3.3 parking spaces in the
location specified by Landlord on Lot 3 of the Resubdivision of Lot 3 (and/or
on any other adjacent parcels of land designated by Landlord) in the Naperville
Corporate Center Subdivision in Naperville, Illinois for each 1,000 useable
square feet of the Premises (as determined by Landlord's architect) for the
purpose of parking automobiles used by any of such persons;* Provided,
(1) neither Tenant nor its agents, invitees or employees
shall use in the aggregate more than such number of parking spaces on
such Lot 3 of the Resubdivision of Lot 3 (or adjacent parcels of
land);
*6 of which said parking spaces shall be reserved parking spaces for Tenant's
exclusive use at a location designated by Landlord and the remainder of said
parking spaces shall be unreserved parking spaces;
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<PAGE> 34
26.15 TERMINATION OPTION
In the event Tenant vacates or abandons the Premises for a period of
at least 30 days, Landlord shall have the option to terminate this Lease,
without termination fee or penalty payable by or to Landlord or Tenant, by
giving Tenant written notice of termination at any time thereafter.
Page 21A
<PAGE> 35
(2) Tenant acknowledges, understands and agrees that Landlord shall
not be liable or responsible for enforcing such license or preventing any
violation thereof; and
(3) Landlord shall have the right (in addition to all other remedies
available to Landlord under this Lease, at law or in equity) to revoke such
license in the event of any condemnation or taking by any lawful authority of
any part of such Lot 3 of the Resubdivision of Lot 3 which reduces the number
of parking spaces which serve the Building or in the event of any other
occurrence not caused by Landlord which reduces the number of parking spaces
which serve the Building or in the event of the use by Tenant or its agents,
invitees or employees in the aggregate of more than such number of parking
spaces which are hereby licensed to Tenant, or in the event of any default by
Tenant under this Lease or in the event Tenant uses parking spaces in an area
other than the area specified by Landlord.
<PAGE> 36
LANDLORD: TENANT:
- --------- -------
AMERICAN NATIONAL BANK AND TRUST SPYGLASS, INC. an Illinois corporation
COMPANY OF CHICAGCO, not
personally, but solely as
Trustee under Trust Agreement
dated June 12, 1978 and known
as Trust No. 43194
Title.
*(4) Landlord shall not be obligated to "police" or enforce Tenant's exclusive
right to use said reserved parking spaces against other tenants, users or
invitees of the Building, nor to tow any unauthorized vehicle from said
reserved spaces; and
(5) if 20% or more of the unreserved parking spaces now serving the Building
are taken or condemned for any public use or purpose (and the Premises are not
correspondingly reduced in area by reason of such taking or condemnation) and
if Landlord fails to provide or make available to Tenant comparable alternative
parking spaces elsewhere in the Naperville Corporate Center or in the general
vicinity of the Building, then Tenant may terminate this Lease by giving
Landlord written notice within 20 days after such taking or condemnation.
Page 22
<PAGE> 37
EXHIBIT A - Diagram of Fourth Floor (Floorplan)
5/28/97
<PAGE> 38
EXHIBIT C
BELLEMEAD MANAGEMENT CO., INC.
Cleaning Specification
<TABLE>
<CAPTION>
SERVICES TO BE PERFORMED FREQUENCY
- ------------------------ ---------
COMMON AREAS, LOBBIES, ELEVATORS, ETC.
- --------------------------------------
<S> <C>
1. Sweep all flooring using a dust treated mop then wet mop.
Remove all gum, tar, etc., from floors. Nightly
2. Empty and damp clean ashtrays and screens. Nightly
3. Clean and service ash urns. Nightly
4. Clean and sanitize drinking fountains. Nightly
5. Spot clean entrance door glass. Nightly
6. Sweep all stairwells. Remove all gum, tar, etc. from floors. Nightly
7. Elevator cab to be wiped clean. Nightly
8. Elevator floors to be vacuumed. Nightly
9. Vacuum elevator door tracks with a nozzle. Nightly
10. Lobby entrance doors and windows to be washed completely. Weekly
11. Lobby walls, glass, etc., cleaned thoroughly. Weekly
12. Elevator cab to be thoroughly cleaned and polished. Weekly
13. High dust all horizontal surfaces above hand height. Monthly
14. Machine scrub all hard floors. Monthly
RESTROOMS
1. Sweep and wash all restroom floors using proper disinfectants. Nightly
2. Wash and polish all mirrors, powder shelves, bright work and
enamel surfaces in all restrooms Nightly
3. Scour, wash and disinfect all basins, bowls and urinals. Nightly
4. Wash and disinfect all toilet seats. Nightly
5. Hand dust and clean, washing where necessary all partitions,
tile, walls, dispensers and receptacles, in all restrooms. Nightly
6. Supply and fill all liquid soap dispensers, toilet paper
holders and C-fold paper towel dispensers. Nightly
7. Wash and sanitize all waste receptacles. Weekly
8. Wet wipe all wall and stall surfaces. Weekly
</TABLE>
C-1
<PAGE> 39
<TABLE>
<S> <C>
9. Machine scrub all floor surfaces with approved germicidal
solution. Weekly
10. Flush all toilet bowls and urinals with Saniflush or equal. Weekly
11. High dust all horizontal surfaces including shelves,
ledges, moldings, pipes, ducts, heating outlets, etc. Monthly
12. Wash and sanitize all metal partitions. Monthly
TENANT AREAS
- ------------
1. Empty and clean all wastepaper receptacles, empty and damp
wipe all ashtrays Nightly
2. Sweep and/or dust mop all non-carpeted areas, then wet mop. Nightly
3. Vacuum all carpeted areas. Nightly
4. All stone, ceramic tile, marble, terrazzo and other unwaxed
flooring to be swept and wet mopped. Nightly
5. Hand dust and wipe clean ill office furniture. Nightly
6. Spot clean counters and desk tops for coffee stains, etc. Nightly
7. Wipe clean all brass and other bright work. Nightly
8. Wash and disinfect all fountains and coolers. Nightly
9. Dust and clean all sand urns. Replace sand as necessary. Nightly
10. Hand dust chair rails, baseboard trim (low dusting only). Nightly
11. Dust all leather or leather type furniture. Nightly
12. Dust all open closet shelving. Nightly
13. All office furniture to be vacuumed with a nozzle. Weekly
14. All closet shelving, coat racks, etc. to be dusted. Weekly
15. Vacuum with a nozzle around the base of all walls, furniture,
desks Weekly
16. Hand dust and wipe clean all window sills, wall paneling,
partitions. Wash as required. Weekly
17. Remove all finger marks from entrance doors, door frames, and
switch plates. Weekly
18. Hand dust all door and other ventilating louvers. Weekly
</TABLE>
WINDOW CLEANING - EIGHT TIMES PER YEAR
- --------------------------------------
Window cleaning services will be rendered Monday through Friday during working
hours, except during legal holidays.
1. Wash all windows, inside and outside.
2. Wash interior glass partitions, transoms, etc.
C-2
<PAGE> 1
EXHIBIT 11.1
SPYGLASS, INC.
COMPUTATION OF NET INCOME PER SHARE (1)
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1997 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
Net income (loss) ($ 9,735,000) $ 3,460,000 $2,176,000
------------ ----------- ----------
Weighted average shares outstanding:
Common stock 12,090,000 11,618,800 8,272,876
Common stock equivalents
calculated by treasury stock
method applied to option,
and warrants issued (2) - 1,219,292 1,150,542
------------ ----------- ----------
Weighted average common shares and
equivalents 12,090,000 12,838,062 9,423,418
------------ ----------- ----------
Net income (loss) per share ($ 0.81) $ 0.27 $ 0.23
</TABLE>
(1) - This exhibit should be read in conjunction with "Summary of Operations and
Significant Accounting Policies-Per Share Information" in Note 1 of the Notes to
the Consolidated Financial Statements.
(2) - Stock options granted prior to the beginning of each reporting period have
been included in the calculation of common stock equivalents as if they were
outstanding for the entire period (using the treasury sock method). Common stock
equivalents are not included for fiscal year 1997 as the effect of their
inclusion would be anti-dilutive.
<PAGE> 1
EXHIBIT 13.1
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for and
as of the five years ended September 30, 1997, 1996, 1995, 1994, and 1993. The
selected financial data has been derived from the Company's audited consolidated
financial statements. This financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
(In thousands, except per share amounts) 1997 1996 1995 1994 1993(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total net revenues $ 21,295 $ 22,307 $ 12,141 $ 4,667 $ 1,375
Gross profit 18,267 20,277 10,380 3,580 1,152
Income (loss) from operations (11,357) 3,667 3,025 770 (388)
Income (loss) before cumulative effect
of change in accounting (9,735) 3,460 2,176 584 (320)
Net income (loss) (9,735) 3,460 2,176 1,384 (320)
Net income (loss) available to common
stockholders ($9,735) $ 3,460 $ 1,985 $ 1,127 $ (577)
PER SHARE AND SHARE DATA:
Earnings (loss) per common and common
equivalent share (2):
Income (loss) before cumulative
effect of change in accounting ($0.81) $ 0.27 $ 0.23 $ 0.08 $ (0.13)
Net income (loss) ($0.81) $ 0.27 $ 0.23 $ 0.18 $ (0.13)
Net income (loss) available to common
stockholders ($0.81) $ 0.27 $ 0.21 $ 0.15 $ (0.23)
Weight average number of common shares
and equivalents outstanding 12,090 12,838 9,423 7,685 2,514
BALANCE SHEET DATA:
Cash and cash equivalents $ 22,841 $ 16,490 $ 34,872 $ 1,606 $ 757
Short-term investments 4,929 17,593 - - -
Working capital 28,844 39,117 35,550 2,174 661
Total assets 40,580 48,769 43,509 5,871 1,167
Redeemable convertible preferred stock - - - 3,393 3,135
Total stockholders' equity $ 35,567 $ 43,891 $ 37,614 $ (756) $(2,227)
</TABLE>
(1)- Selected financial data for the year ended September 30, 1993 does not
include the results of Stonehand Inc., SurfWatch Software, Inc. or OS
Technologies Corporation which were acquired in fiscal 1996 in transactions
accounted for as pooling of interests. The selected financial data of such
companies for such fiscal year does not materially affect the results shown
above.
(2)-On November 28, 1995, the Board of Directors declared a two-for-one common
stock split, effected in the form of a 100% stock dividend, paid December 20,
1995, to stockholders of record as of December 6, 1995. All share and per
share data have been restated to reflect the two-for-one common stock split
for all periods presented.
DIVIDEND POLICY: The Company has never paid cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support
its growth strategy and does not anticipate paying cash dividends in the
foreseeable future.
4
<PAGE> 2
SELECTED QUARTERLY DATA
The following table sets forth certain quarterly financial information
of the Company for fiscal years 1997 and 1996. This information has been
derived from the consolidated quarterly financial statements of the Company
which are unaudited but which, in the opinion of management, have been prepared
on the same basis as the audited consolidated financial statements included
herein and include all adjustments (consisting only of normal recurring items)
necessary for a fair presentation of the financial results for such periods.
This information should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------------------------------------------
(In thousands except SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31,
per share amounts) 1997 1997 1997 1996 1996 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total net revenues $ 3,179 $ 2,216 $12,015 $ 3,885 $ 6,551 $ 6,003 $ 5,000 $ 4,753
Gross profit 2,494 1,539 10,808 3,426 5,961 5,484 4,562 4,270
Income (loss) from operations (5,031) (6,150) 2,755 (2,931) 921 1,008 876 862
Net income (loss) (4,708) (5,533) 2,051 (1,545) 1,004 862 752 842
PER SHARE AND SHARE DATA:
Earnings (loss) per common and
equivalent share (2):
Net income (loss) $ (0.38) $ (0.45) $ 0.16 $ (0.12) $ 0.08 $ 0.07 $ 0.06 $ 0.07
Weighted average number of
common shares and
equivalents outstanding 12,325 12,187 12,736 12,694 12,750 12,853 12,962 12,929
</TABLE>
(1) - Includes a one-time licensing fee of $8,000,000 from Microsoft
Corporation.
(2) - On November 28, 1995, the Board of Directors declared a two-for-one common
stock split, effected in the form of a 100% stock dividend, paid December 20,
1995, to stockholders of record as of December 6, 1995. All share and per share
data have been restated to reflect the two-for-one common stock split for all
periods presented.
MARKET PRICE PER SHARE
The following table sets forth, for the periods indicated, the high and low
sales prices of the Common Stock of the Company on the Nasdaq National
Market, as reported by Nasdaq.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31,
1997 1997 1997 1996 1996 1996 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $ 10 1/2 $ 11 $ 14 1/8 $ 19 1/2 $ 23 5/8 $ 34 7/8 $ 55 3/4 $ 61
Low $ 7 3/16 $ 6 $ 7 $ 10 $ 12 $ 19 1/8 $ 18 $ 16 1/2
</TABLE>
5
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<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Spyglass, Inc. ("Spyglass" or the "Company") was organized as an
Illinois corporation in February 1990 and reincorporated in Delaware in May
1995. Spyglass entered the Internet market during fiscal 1994 and from fiscal
1994 through fiscal 1996, focused its efforts on developing, marketing and
distributing Internet client and server technologies for incorporation into a
variety of Internet-based software products and services. Beginning in fiscal
1997, the Company focused on the development, marketing and distribution of its
technologies and services to the non-PC Internet device marketplace. Spyglass
markets embedded solutions to a variety of companies such as the real time
operating system (RTOS) vendors, consumer and industrial electronics
manufacturers, and office equipment suppliers. Spyglass also provides
infrastructure solutions 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. These
technologies enable Internet connectivity through highly scalable embedded
browers and servers, and provide performance enhancements, content filtering
and conversion through an integrated suite of infrastructure servers. Spyglass
Professional Services offers custom engineering for defining, developing and
delivering complete, end-to-end project solutions. Spyglass provides its
customers with expertise, software and services that enable them to rapidly
deploy cost-effective Internet-enabled devices. Spyglass solutions have been
integrated into a variety of products, including but not limited to
televisions, office equipment, television set-top boxes, network computers,
screen and cellular phones. In addition, several major corporations have
deployed Surfwatch, a leading content filtering software designed to block
unwanted material from the Internet. Prior to fiscal 1994, the Company focused
its efforts on the scientific data visualization tools market; this product
line was sold in fiscal 1995.
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.
In November 1997, Spyglass acquired AllPen Software in a transaction
accounted for as a pooling of interests. See Note 13 to the Consolidated
Financial Statements.
The Company pays royalties to the University of Illinois with respect
to licenses of Spyglass Device Mosaic. 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.
These royalties are reflected in cost of technology and product revenues.
On January 21, 1997, the Company amended its license arrangement with
Microsoft Corporation ("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, presented without giving
effect to this one-time event, provides a more accurate presentation of the
Company's ongoing business. Accordingly, the following analyses for the fiscal
year ended September 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 fiscal year ended September 30, 1997.
Approximately 39.5% of the Company's revenues for fiscal 1997 were attributable
to Microsoft.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1996
- ------------------------------------------------------------------------------
Technology revenues for the year ended September 30, 1997 decreased
$10,272,000, or 53%, to $9,194,000 compared to $19,466,000 for the year ended
September 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 redirected its strategic focus to this market during fiscal
1997. Specifically, technology revenues from vendors of desktop software
applications decreased to $6,353,000 from $17,971,000 while revenues from device
manufacturers increased to $2,841,000 from $1,495,000. During this period of
strategic redirection, initial technology license revenues will typically
comprise a smaller component of total expected license revenue than in the
past, until such time as customer devices utilizing the company's technology are
introduced commercially and the contractual royalty revenue stream commences.
Therefore, the Company expects its revenue growth to be limited during fiscal
1998 as the Company continues to focus its efforts on the Internet device
market.
Service revenues, which include revenues from both customer support
agreements and professional services agreements, increased $1,260,000, or 44%,
to $4,101,000 for the year ended September 30, 1997 compared to $2,841,000
for the year ended September 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 were
$2,179,000 in fiscal 1997 compared to $559,000 for fiscal 1996. The Company
expects professional services revenues to increase both in absolute dollars and
as a percentage of revenues during fiscal 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 81.8% for the year ended
September 30, 1997 compared to 90.9% for the year ended September 30, 1996.
This decrease in gross profit percentage resulted primarily from an increase in
professional services revenues as a percentage of both total revenues and
service revenues, which have significantly higher costs as a percentage of
revenues than technology and product revenues. Additionally, the cost of
service revenues increased, as a percentage of service revenues, to 36.4% for
fiscal 1997 from 4.2% for fiscal 1996. The Company expects gross profit as a
percentage of revenues to decline slightly throughout fiscal 1998 as
professional services revenues as a percentage of total revenues increase.
Sales and marketing expenses for the year ended September 30, 1997
increased $1,948,000, or 33%, to $7,911,000 from $5,963,000 for the year ended
September 30, 1996, and increased as a percentage of revenues to 59.5% from
26.7%. The increased expenses reflected staff additions in sales, marketing and
customer services to support the sale
6
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE> 4
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth certain financial data as a percentage of total
net revenues for the fiscal years ended September 30, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET REVENUES
-------------------------------
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
----------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES:
Internet technology revenues 69.2% 87.3% 81.3%
Data visualization product revenues - - 12.5
Service revenues 30.8 12.7 6.2
-------- -------- --------
Total net revenues 100.0 100.0 100.0
COST OF REVENUES:
Cost of technology and product revenues 7.0 8.6 14.5
Cost of service revenues 11.2 0.5 -
-------- -------- --------
Total cost of revenues 18.2 9.1 14.5
-------- -------- --------
Gross profit 81.8 90.9 85.5
Operating expenses and other:
Sales and marketing 59.5 26.7 27.2
Research and development 102.6 30.6 22.7
General and administrative 50.9 17.2 17.8
Gain on sale of data visualization product line - - (7.1)
Restructuring charge 6.8 - -
-------- -------- --------
Income (loss) from operations (138.0) 16.4 24.9
Other income 12.2 7.8 4.7
-------- -------- --------
Income (loss) before income taxes (125.8) 24.2 29.6
Provision for income taxes - 8.7 11.7
-------- -------- --------
Net income (loss) (125.8)% 15.5% 17.9%
======== ======== ========
</TABLE>
and marketing of Spyglass technologies, which increased the cost of
salary and related personnel expenses by $1,309,000 and increased related
facility costs by $412,000 between fiscal 1997 and fiscal 1996. Advertising
costs decreased $336,000 between these periods due to the cancellation of a
monthly advertising service fee associated with previous marketing programs
targeting the desktop marketplace. The Company expects sales and marketing
expenses for fiscal 1998 to remain approximately the same, in dollars, as in
fiscal 1997.
Research and development expenses for the year ended September 30, 1997
increased $6,843,000, or 101%, to $13,644,000 compared to $6,801,000 for the
year ended September 30, 1996, and increased as a percentage of revenues to
102.6% from 30.6%. The increase in research and development costs was due
primarily to costs of additional personnel required to provide enhancements to
existing technologies as well as the relocation of personnel to geographic
areas in which higher salaries are required, all of which increased the costs
of salary and related personnel expenses by $4,642,000 for fiscal 1997 compared
to fiscal 1996. Additionally, facility costs increased $1,870,000 between
these periods as the Company consolidated its Champaign, Illinois research and
development operations into its Naperville, Illinois and Cambridge,
Massachusetts operations, 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 in
fiscal 1998 to remain approximately the same in dollars as in fiscal 1997.
General and administrative expenses increased $2,923,000, or 76%, to
$6,769,000 for the year ended September 30, 1997 from $3,846,000 for the year
ended September 30, 1996 and increased as a percentage of revenues to 50.9%
from 17.2%. The increase in general and administrative expenses was due
primarily to increases in personnel at corporate headquarters, which increased
salary and related personnel expenses by $2,076,000. Bad debt expense
increased by $728,000 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 the Internet device market it was necessary to incur significantly
more conference, travel and meeting expenses, which increased general and
administrative expenses by $495,000 for fiscal 1997 compared to fiscal 1996.
The Company expects general and administrative costs to decline, both in
dollars and as a percent of revenues, in fiscal 1998.
On March 10, 1997, the Company consolidated its Champaign, Illinois
development operations with its Naperville, Illinois and Cambridge,
7
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<PAGE> 5
Massachusetts operations. 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. As a result, a
restructuring 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 decrease
in facility costs related to the closing of the Champaign facility has been
offset by expansion within existing facilities as well as expansion into new
facilities.
The Company recorded no income tax benefit for the fiscal year ended
September 30, 1997 as compared to a provision for income taxes of $1,951,000
for the fiscal year ended September 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.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1995
Technology and product revenues for the year ended September 30, 1996
increased $8,082,000, or 71%, to $19,466,000 compared to $11,384,000 for the
year ended September 30, 1995. This increase in technology and product revenues
was due primarily to revenues from license agreements with new customers for
the Spyglass Mosaic (formerly Client SDK) and, to a lesser extent, the Spyglass
Server (formerly Server SDK) and SurfWatch technologies. Approximately 12.1%
of the Company's revenues for fiscal 1996 were attributable to a license from
one customer. Internet technology revenues, as a percentage of revenues,
increased to 87.3% during the 1996 fiscal year from 81.3% during the 1995
fiscal year. The Company sold its data visualization product line in September
1995 and reported no revenues from this product line for the year ended
September 30, 1996 compared to $1,513,000 in the year ended September 30, 1995.
Service revenues for the year ended September 30, 1996 increased
$2,084,000, or 75%, to $2,841,000 compared to $757,000 for the year ended
September 30, 1995. During the third quarter of fiscal 1996, the Company formed
a professional services group to service the Internet device market. The
increase in service revenues was due primarily to the increase in the number of
support agreements with new customers for Spyglass Mosaic and the Spyglass
Server in addition to continuing support agreements with existing customers.
Revenues from professional services approximated $560,000 in fiscal 1996.
Gross profit as a percentage of revenues was 90.9% for the year ended
September 30, 1996 compared to 85.5% for the year ended September 30, 1995.
This increase in gross profit percentage resulted primarily from lower royalty
costs reflecting changes in product mix. This change in product mix resulted
from the sale of the data visualization product line in September 1995 (which
had higher royalty costs as a percentage of revenue than Spyglass Mosaic) and
the introduction of the Spyglass Server in July 1995, which has now been
incorporated into the Spyglass Server (which has lower royalty costs as a
percentage of revenue than Spyglass Mosaic).
Sales and marketing expenses for the year ended September 30, 1996
increased $2,660,000, or 81%, to $5,963,000 from $3,303,000 for the year
ended September 30, 1995, but decreased slightly as a percentage of revenues to
26.7% from 27.2%. The increased expenses reflected higher sales commission
costs (which increased by $343,000 in fiscal 1996 from fiscal 1995) due to
increased revenues in addition to staff additions in sales, marketing, and
customer support (which increased the cost of salary and related personnel
expenses by $1,394,000 in fiscal 1996 from in fiscal 1995). Additionally,
certain marketing initiatives, which included a print campaign to increase
awareness of its products among the business and technology communities,
accounted for $530,000 of the increase in sales and marketing expenses for the
year ended September 30, 1996 as compared to the year ended September 30, 1995.
Research and development expenses for the year ended September 30, 1996
increased $4,045,000, or 147%, to $6,801,000 compared to $2,756,000 for the
year ended September 30, 1995, and increased as a percentage of revenues to
30.6% from 22.7%. The increase in research and development costs was due
primarily to costs associated with enhancements to existing technologies as
well as the development of the Software Development Kits, the SurfWatch
ProServer and other new technologies.
General and administrative expenses for the year ended September 30, 1996
increased $1,687,000, or 78%, to $3,846,000 from $2,159,000 for the year ended
September 30, 1995 but declined slightly as a percentage of revenues to 17.2%
from 17.8%. The increase in general and administrative expenses was due
primarily to increases in personnel, (which increased salary and related
personnel expenses by $797,000 for fiscal 1996 from fiscal 1995), as well as
expenses incurred by the Company related to the acquisitions of Stonehand, OS
Tech and SurfWatch.
In fiscal 1995, the Company recorded a pre-tax gain, net of transaction
expenses, of $863,000 on the sale of its data visualization product line. The
approximate after-tax contribution to income was $523,000, or $0.06 per share.
Interest income, included in other income on the financial statements, for
the year ended September 30, 1996 increased $1,243,000, or 253%, to $1,734,000
from $491,000 for the year ended September 30, 1995. This increase in interest
income is primarily due to an increase in cash and cash equivalents and
short-term investments as a result of the Company's initial public offering in
June 1995.
The provision for income taxes for the year ended September 30, 1996
increased $536,000 to $1,951,000 from $1,415,000 for the year ended September
30, 1995. The provision for income taxes as a percentage of income before
income taxes approximated 36% in fiscal 1996 as compared to 39% in fiscal 1995.
This decrease in the effective tax rate is due to increased research and
development tax credits for the fiscal year ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had no debt and had cash
8
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE> 6
and cash equivalents of $22,841,000, short-term investments of
$4,929,000 and working capital of $28,844,000. The Company's operating
activities used cash of $4,114,000 and $822,000 for the fiscal year ended
September 30, 1997 and 1996, respectively, and provided cash of $715,000 for
the fiscal year ended September 30, 1995. 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 amendment to the
Company's license arrangement as discussed in the Overview section.
The Company's net accounts receivable decreased to $4,042,000 at September
30, 1997 from $8,226,000 at September 30, 1996. This decrease was primarily due
to a decrease in revenues, increased collection efforts and the write-off of
approximately $1,150,000 of accounts receivable balances related to desktop
software vendors.
The Company's capital expenditures totaled $3,330,000, $2,905,000 and
$1,034,000 for the fiscal years ended September 30, 1997, 1996, and 1995,
respectively, and consisted primarily of computer hardware and software. The
Company had no material commitments for capital expenditures at September 30,
1997.
The Company believes that its current cash and cash equivalents will be
sufficient to finance the Company's cash flow needs through at least the fiscal
year ending September 30, 1998.
FUTURE OPERATING RESULTS
This Annual Report contains a number of forward-looking statements. Any
statements contained herein (including without limitation statements to the
effect that the Company or its management "believes", "expects", "anticipates",
"plans" and similar expressions) that are not statements of historical fact
should be considered forward-looking statements. There are a number of
important factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below.
During fiscal 1997, the Company announced an increased strategic focus on
the Internet device market. The Company is focused on the development,
marketing and distribution of its technologies and services to the non-PC
Internet device marketplace. 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
revenue growth will be limited during fiscal 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 maintain
its recent levels of expenditures in product development, marketing and sales
in order to position itself as a leader in the Internet device market.
The Company's future results of operations will also be largely dependent
upon a number of factors relating to development and acceptance of the Internet
as a commercial market. In particular, commercial use of the Internet continues
to be constrained by the need for reliable processes such as security measures
for electronic commerce as well as the need for regularly available customer
support and a supporting infrastructure providing widespread Internet
accessibility and high-speed communications capabilities. In addition, the
market for Internet software products is characterized by rapidly changing
technology, evolving industry standards and customer demands, and frequent
product introductions and enhancements, which make it difficult to predict
whether the initial commercial acceptance of the Company's products can be
sustained over a period of time.
The market for Internet technologies and services is extremely
competitive, and competition is likely to increase in the future. The Company
currently faces competition from other Internet device technology and software
vendors such as Oracle, Sun Microsystems, Microsoft, on-line service companies,
Internet access providers and networking software companies. In licensing its
Internet technologies, the Company considers a significant source of
competition to be the prospect company's internal software development
resources.
The Company licenses its products to a variety of companies such as RTOS
vendors, consumer and industrial device manufacturers, RBOCs, ISPs and
internetworking hardware providers that incorporate the Company's technology
into their products and services. The success of the Company is therefore
dependent in large part on the performance of its customers, which is outside
of the Company's Control.
The Company from time to time receives notices alleging that its products
infringe third party proprietary rights. For example, the Company has a pending
dispute with Unisys Corporation regarding the Graphics Interchange Format.
Spyglass has also received a notice from Elk Industries Inc. alleging that one
or more products of Spyglass infringe a patent owned by Elk Industries Inc.
Patent and similar litigation frequently is complex and expensive and its
outcome can be difficult to predict. If, as a result of proprietary rights
infringements by any of the Company's products, the Company is required to
discontinue sales of certain products, eliminate certain features on its
products, or pay royalties to another party, the Company's future operating
results could be materially adversely affected.
The Company's quarterly operating results have varied and they may
continue to vary significantly depending on factors such as the timing of
significant license agreements, the terms of the Company's licensing
arrangements with its customers and the timing of new product introductions and
upgrades by the Company and its competitors. The Company typically structures
its license agreements with customers to require commitments for a minimum
number of licenses, and license revenues are recognized as the committed
licenses are purchased. Additional revenues from a customer will not be earned
unless and until the initial committed levels are exceeded. The Company's
revenues in any quarter will depend in significant part on its ability to sell
licenses to new customers in that quarter, the timing of product deployment by
its customers and the ability to sell professional services. The Company
typically structures its 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.
9
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<PAGE> 7
Consolidated Statements of Operations
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
(In thousands, except per share amounts) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Internet technology revenues $ 17,194 $ 19,466 $ 9,871
Data visualization product revenues - - 1,513
Service revenues 4,101 2,841 757
--------- --------- --------
Total net revenues 21,295 22,307 12,141
Cost of revenues:
Cost of technology and product revenues 1,535 1,912 1,761
Cost of service revenues 1,493 118 -
--------- --------- --------
Total cost of revenues 3,028 2,030 1,761
--------- --------- --------
Gross profit 18,267 20,277 10,380
Operating expenses and other:
Sales and marketing 8,311 5,963 3,303
Research and development 13,644 6,801 2,756
General and administrative 6,769 3,846 2,159
Gain on sale of data visualization
product line - - (863)
Restructuring charge 900 - -
--------- --------- --------
Income (loss) from operations (11,357) 3,667 3,025
Other income 1,622 1,744 566
--------- --------- --------
Income (loss) before income taxes (9,735) 5,411 3,591
Provision for income taxes - 1,951 1,415
--------- --------- --------
Net income (loss) (9,735) 3,460 2,176
Accretion of preferred stock dividends - - (191)
--------- --------- --------
Net income (loss) available to common
stockholders $ (9,735) $ 3,460 $ 1,985
========= ========= ========
Earnings (loss) per common and common
equivalent share:
Net income (loss) $ (0.81) $ 0.27 $ 0.23
Net income (loss) available to
common stockholders $ (0.81) $ 0.27 $ 0.21
Weighted average number of common
shares and equivalents outstanding 12,090 12,838 9,423
========= ========= ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
10
<PAGE> 8
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30,
(In thousands) 1997 1996
- ----------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,841 $ 16,490
Short-term investments 4,929 17,593
Account receivable, net of allowance for
doubtful accounts of $350 and $470, respectively 3,792 7,608
Prepaid expenses and other current assets 2,195 2,094
-------- --------
Total current assets 33,757 43,785
Properties, net 5,037 3,377
Long-term accounts receivable 250 618
Other assets 1,536 989
-------- --------
TOTAL ASSETS $ 40,580 $ 48,769
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,162 $ 2,160
Deferred revenues 1,256 1,453
Accrued compensation and related benefits 1,322 952
Accrued expenses and other liabilities 173 103
-------- --------
Total current liabilities 4,913 4,668
Long-term deferred revenues 100 210
-------- --------
Total liabilities 5,013 4,878
-------- --------
Stockholder's equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized,
none issued - -
Common stock, $.01 par value, 50,000,000 shares
authorized, 12,362,823 and 11,819,545 shares
issued and outstanding, respectively 124 118
Additional paid-in-capital 40,746 39,341
Retained earnings (deficit) (5,303) 4,432
-------- --------
Total stockholders' equity 35,567 43,891
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,580 $ 48,769
======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
11
[LOGO]
<PAGE> 9
Consolidated Statements of Changes in Redeemable Convertible
Preferred Stock and Stockholders' Equity
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
AT NET ISSUANCE PLUS DIVIDEND ACCRETION COMMON STOCK ADDITIONAL RETAINED
--------------------------------------- ------------ PAID-IN EARNINGS
(In thousands, except share amounts) SERIES A SERIES B TOTAL SHARES AMOUNT CAPITAL (DEFICIT)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 $ 1,148 $ 2,245 $ 3,393 1,659,844 $ 237 $ - $ (1,013)
Exercise of stock options 46,602 1 45
Exercise of stock warrants 202,778 2 18
Issuance of incentive stock options 146
Exchange of common stock from no par
to $0.01 par (221) 221
Conversion of preferred stock into
common stock (1,211) (2,373) (3,584) 1,724,099 17 3,567
Net proceeds from initial public offering 2,070,000 21 32,124
Tax benefit from exercise of stock options 464
Issuance of common stock to effect for
two-for-one common stock split 5,703,322 57 (57)
Net income 2,176
Accretion of preferred stock dividends 63 128 191 (191)
--------- -------- -------- ---------- ------- ---------- ---------
BALANCE AT SEPTEMBER 30, 1995 - - - 11,406,645 114 36,528 972
Exercise of stock options 394,499 4 531
Exercise of employee stock purchase plan
stock options 18,401 266
Issuance of incentive stock options 80
Tax benefit from exercise of stock options 1,936
Net income 3,460
--------- -------- -------- ---------- ------- ---------- ---------
BALANCE AT SEPTEMBER 30, 1996 - - - 11,819,545 118 39,341 4,432
Exercise of stock options 497,882 5 731
Exercise of employee stock purchase plan
stock options 45,396 1 362
Issuance of incentive stock options 80
Accelerated vesting of options 232
Net loss (9,735)
--------- -------- -------- ---------- ------- ---------- ---------
BALANCE AT SEPTEMBER 30, 1997 $ - $ - $ - 12,362,823 $ 124 $ 40,746 $ (5,303)
========= ======== ======== ========== ======= ========== =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
12
<PAGE> 10
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (9,735) $ 3,460 $ 2,176
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,899 905 218
Loss on disposal of fixed assets 99 21 -
Bad debt provision 1,029 301 184
Deferred income taxes - (406) 888
Incentive stock option compensation 312 80 146
Gain on sale of data visualization product line - - (863)
Other - (201) (17)
Changes in operating assets and liabilities:
Accounts and long-term receivables 3,155 (3,066) (2,552)
Prepaid expenses and other current assets (1,008) (1,504) (1,530)
Accounts payable 2 694 940
Deferred revenues (307) (1,071) 210
Accrued compensation and related benefits 370 348 463
Accrued expenses and other liabilities 70 (383) 452
------- ------- -------
Net cash provided by (used in) operating activities (4,114) (822) 715
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of data visualization product line - - 910
Short-term investments, net activity 12,664 (17,593) -
Proceeds from sale of fixed assets 32 - -
Capital expenditures (3,330) (2,905) (1,034)
------- ------- -------
Net cash provided by (used in) investing activities 9,366 (20,498) (124)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, including
tax related benefits 1,099 2,938 510
Net proceeds from initial public offering - - 32,145
Proceeds from exercise of warrants - - 20
------- ------- -------
Net cash provided by financing activities 1,099 2,938 32,675
------- ------- -------
Net increase (decrease) in cash and cash equivalents 6,351 (18,382) 33,266
Cash and cash equivalents at beginning of period 16,490 34,872 1,606
------- ------- -------
Cash and cash equivalents at end of period $22,841 $16,490 $34,872
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 28 $ 169 $ 80
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
13
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<PAGE> 11
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Operations
Spyglass, Inc. ("Spyglass" or the "Company") develops, markets and distributes
Internet technologies 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 technology
offerings include the Spyglass Device Mosaic (formerly Spyglass Mosaic),
Spyglass Prism, Spyglass MicroServer, SurfWatch and SurfWatch for Microsoft,
Netscape and Oracle Proxy Servers. Spyglass also offers Internet consulting
and custom engineering services through its Professional Services organization.
Theses technologies are used to bring Internet functionality to customers'
products and services.
In November 1997, the Company acquired AllPen Software in a transaction
accounted for as a pooling of interests. See Note 13.
In May 1996, the Company formed Spyglass International, Inc., a wholly-owned
subsidiary. Spyglass International, Inc. is a U.S. subsidiary that has one
branch office in Japan. In January 1997, the Company formed Spyglass Europe
Ltd., a wholly-owned subsidiary of Spyglass International, Inc. with an office
in England.
In April 1996, the Company acquired OS Technologies Corporation ("OS Tech") and
SurfWatch Software, Inc. ("SurfWatch") in transactions accounted for as pooling
of interests. As a result, all financial information prior to April 17, 1996
and April 24, 1996 includes the accounts and results of operations of OS Tech
and SurfWatch, respectively, for all periods presented.
In February 1996, the Company acquired Stonehand Inc. ("Stonehand"), in a
transaction accounted for as pooling of interests. As a result, all financial
information prior to February 2, 1996 includes the accounts and results
of operations of Stonehand for all periods presented.
On November 28, 1995, the Board of Directors declared a two-for-one common
stock split effected in the form of a 100% stock dividend paid on December 20,
1995 to stockholders of record as of December 6, 1995. All share and per share
information in the accompanying consolidated financial statements and related
notes thereto have been restated to reflect the two-for-one common stock split
for all periods presented.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany transactions and balances
between the companies have been eliminated.
University of Illinois Agreement
The Spyglass Device Mosaic product is a commercial derivative version
of NCSA Mosaic(TM). NCSA Mosaic was developed by the National Center for
Supercomputing Applications at the University of Illinois at Urbana-Champaign.
In May 1994, the Company and the University entered into an agreement (as
amended to date, the "University Agreement") granting the Company the exclusive
(subject to approximately 10 previously granted licenses), worldwide right to
develop, distribute and sublicense commercial client browsers based on NCSA
Mosaic. The University Agreement provides for royalties based on Spyglass' net
revenues from Device Mosaic, and includes cumulative minimum quarterly
royalties. The University Agreement has an initial term of five years, with
automatic one-year renewals, and is terminable in the event of a material
breach by the Company of its obligations thereunder. Under the University
Agreement, the Company was required to provide the University with source code
versions of Spyglass Mosaic through Release 2.5. The University will have the
right (subject to certain restrictions) to incorporate these releases of
Spyglass Mosaic into new releases of NCSA Mosaic, which will continue to be
available on a free-with-copyright basis to organizations for non-commercial
academic and research use only. However, the University is not permitted to
make NCSA Mosaic available for distribution by resellers other than the
Company. The University Agreement gives the Company the exclusive right (with
certain limited exceptions) to use the University's trademarks "Mosaic(TM)" and
"NCSA Mosaic(TM)" and its spinning globe logo in connection with Mosaic on a
royalty-free basis (with certain limited exceptions). In addition, the Company
has the exclusive right (with certain limited exceptions) to use these marks in
connection with the sale of other products for a royalty payment based on net
revenues derived from such products.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
For the purposes of the balance sheet and statement of cash flows, all highly
liquid investments with original maturities of three months or less are
considered cash equivalents.
Investments
The Company accounts for its investments in debt and equity securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities. The Company
has classified its marketable debt securities in the held-to-maturity category
based upon its intent and ability to hold the securities to maturity. The
appropriate classification of debt securities is determined at the time of
purchase and is re-evaluated as of each balance sheet date. Securities
classified as held-to-maturity are reported at amortized cost. Realized gains
and losses and declines in value of securities judged to be
other-than-temporary are included in other income.
Investments with original maturities between three and twelve months are
considered short-term investments. Short-term investments consist of debt
securities such as commercial paper, time deposits, certificates of deposit,
bankers' acceptances, and marketable direct obligations of the United States
Treasury.
Other Assets
The Company licenses certain technology from third parties and records prepaid
royalty costs associated with these licenses. These costs are deferred and
amortized based upon revenues. It is the Company's policy to periodically
review and evaluate whether the benefits associated with these prepaid
royalties are expected to be realized and, therefore, deferral and amortization
is appropriate.
14
Notes to the Consolidated Financial Statements
<PAGE> 12
Approximately $441,000 and $550,000 of these prepaid royalties are
included in prepaid expenses and other current assets and approximately
$1,431,000 and $989,000 are included in other assets at September 30, 1997 and
September 30, 1996, respectively.
Properties
Properties are stated at cost less accumulated depreciation. Depreciation is
determined for financial reporting purposes using the straight line method over
the estimated useful lives of the assets, which range from 3 to 7 years.
Depreciation for income tax reporting purposes is determined using accelerated
depreciation methods.
Revenue Recognition
The Company recognizes revenues from software licensing arrangements in
accordance with the provisions of Statement of Position 91-1, Software Revenue
Recognition, issued by the American Institute of Certified Public Accountants.
Internet technology revenues are generally recognized as the licenses are
purchased by customers, provided the license agreement does not allow for
extended payment terms, and there are no significant remaining obligations
under the contract. Data visualization product revenue was recognized upon
shipment. Service revenues are comprised of revenues from customer support and
professional services agreements. Revenue from the sale of support agreements
is recognized over the term of the agreement using the straight-line method and
related costs are included in operating expenses under the sales and marketing
classification. Revenue from professional services agreements is recognized on
the percentage of completion method and related costs are reported as a cost of
service revenues.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for its employee stock options. Under APB 25, if the Company's
stock option plans are considered fixed plans, no compensation expense is
recognized because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant. If the
option grants are not fixed, the Company recognizes compensation expense based
on the intrinsic value on the measurement date. The Company has included the
disclosure provision of SFAS No. 123, Accounting for Stock-Based Compensation,
which requires pro-forma information regarding net income and earnings per
share determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement.
Per Share Information
Earnings per share for fiscal years 1995 and 1996 are based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during periods presented, computed using the treasury stock method.
Common stock equivalents are not included in fiscal 1997 as the effect of
inclusion would be anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share which becomes effective for the Company's fiscal year ending
September 30, 1998. The adoption will not have a material impact on the
Company's earnings per share disclosures.
Advertising Costs
The Company expenses advertising costs as incurred.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
becomes effective for the Company's fiscal year ending September 30, 1999.
SFAS No. 131 broadens the definition of operating segments and requires
additional disclosures about such segments. The Company anticipates that the
adoption of this standard will result in segment reporting and is currently
evaluating its operating segments.
Reclassification
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
NOTE 2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of cash equivalents and short-term investments at
amortized cost:
<TABLE>
<CAPTION>
September 30,
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $ 11,919 $ 4,776
Corporate debt - 1,973
U.S. treasury notes 1,000 -
Money market 9,773 9,513
--------- ---------
Cash equivalents 22,692 16,262
Cash 149 228
--------- ---------
TOTAL CASH AND CASH EQUIVALENTS $ 22,841 $ 16,490
========= =========
Commercial paper $ 1,925 $ 997
Corporate debt securities - 10,740
U.S. treasury notes 3,004 5,856
--------- ---------
TOTAL SHORT-TERM INVESTMENTS $ 4,929 $ 17,593
========= =========
</TABLE>
Since these securities are short-term in nature, changes in market interest
rates would not have a significant impact on the fair value of these
securities. These securities are carried at amortized cost which approximates
fair value. It is the intent of the Company to hold its investments until
maturity.
NOTE 3. PROPERTIES
Properties and related accumulated depreciation were as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------
(In thousands) 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment and software $ 5,198 $ 2,545
Furniture, fixtures and office equipment 1,897 1,571
Leasehold improvements and other 405 420
------- -------
7,500 4,536
Less: Accumulated depreciation (2,463) (1,159)
------- -------
PROPERTIES, NET $ 5,037 $ 3,377
======= =======
- ------------------------------------------------------------------------------------
</TABLE>
15
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<PAGE> 13
NOTE 4. INCOME TAXES
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
For the Years Ended September 30,
----------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ 3
Foreign 94 152 60
State - - -
----- ------ ------
Total current 94 152 63
----- ------ ------
Deferred:
Federal (94) 1,444 1,100
State - 355 252
----- ------ ------
Total deferred (94) 1,799 1,352
----- ------ ------
PROVISION FOR INCOME TAXES $ - $1,951 $1,415
===== ====== ======
</TABLE>
A reconciliation of income tax expense to the statutory federal income tax rate
follows:
<TABLE>
<CAPTION>
For the Years Ended September 30,
---------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at 34.0% 34.0% 34.0%
statutory rate
State income taxes, net
of federal income tax benefit - % 4.3% 4.6%
Valuation allowance (34.0%) - % - %
Other - % (2.2%) 0.8%
------ ----- -----
EFFECTIVE TAX RATE - % 36.1% 39.4%
====== ===== =====
</TABLE>
Significant components of the Company's net deferred tax assets were as follows:
<TABLE>
<CAPTION>
September 30,
---------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accounts payable $ 627 $ 836
Deferred revenue 211 282
Accrued expenses and other liabilities 308 410
Net operating loss carryforwards 5,234 3,459
Research and development tax credit carryforwards 947 341
Foreign tax credit carryforwards 246 152
Alternative minimum tax credit carryforwards 10 10
----- -----
Deferred tax assets 7,583 5,490
----- -----
DEFERRED TAX LIABILITIES:
Depreciation (78) (103)
Accounts and notes receivable (2,133) (2,840)
Prepaid expenses and other assets (802) (1,070)
----- -----
Deferred tax liabilities (3,013) (4,013)
----- -----
Net deferred tax assets $4,570 $1,477
Deferred tax asset valuation allowance (4,570) (1,477)
----- -----
NET DEFERRED TAX ASSETS (LIABILITIES) $ - $ -
====== ======
</TABLE>
- --------------------------------------------------------------------------------
As of September 30, 1997, the Company had net operating loss carryforwards for
income tax purposes of approximately $13,524,000 which expire in the years
2006-2012. Of this amount, $10,253,000 relates to tax deductions generated by
the exercise of incentive stock options by employees which will be available to
reduce future income tax liabilities by a total of $3,968,000. Of this tax
benefit, $1,700,000 was credited to paid in capital in fiscal 1996 to offset
deferred tax liabilities. The remaining $2,268,000 is available to offset
future deferred tax liabilities as a credit to paid in capital. The Company
recorded credits to paid-in-capital of $2,205,000 and $464,000 in fiscal 1996
and 1995, respectively, as a result of such exercises of incentive stock options
by employees. No such credits to paid-in-capital were recorded in fiscal 1997.
As of September 30, 1997, the Company had research and development credit
carryforwards of approximately $947,000 which are available to offset future
income tax liabilities and expire in the years 2006-2012.
The valuation allowance increased by $3,093,000 and $1,477,000 for the fiscal
years ended September 30, 1997 and 1996, respectively, and relates primarily to
increases in net operating loss carryforwards. The Company has established the
valuation allowance to defer recognition of potential tax benefits until such
time that operating results can provide assurance that these tax benefits will
be recognized.
NOTE 5. STOCK INCENTIVE PLANS
The Company has a 1995 Director Stock Option Plan ("1995 Director Option Plan")
and a 1995 Stock Incentive Plan ("1995 Incentive Plan") which replaced the
Company's 1991 Stock Option Plan ("1991 Option Plan") and the 1991 Employee
Stock Bonus Plan ("1991 Bonus Plan") effective June 27, 1995, when the Company
completed its initial public offering. Accordingly, options under the 1991
Option Plan and the 1991 Bonus Plan are not granted in years after 1995 but
remain outstanding.
The above plans enable the Company to grant options to purchase common
stock, to make awards of restricted common stock and to issue certain other
equity-related securities of the Company to any full or part-time employees,
officers, directors, consultants or independent contractors of the Company.
Stock options entitle the optionee to purchase common stock from the Company
for a specified exercise price during a period specified in the applicable
option agreement. Restricted stock awards entitle the recipient to purchase
common stock from the Company under terms which provide for vesting over a
period of time and a right of repurchase in favor of the Company of the
unvested portion of the common stock subject to the award upon the termination
of the recipient's employment or other relationship with the Company. The
plans, except for the 1995 Director Option Plan, are administered by the
Compensation Committee of the Board of Directors, which selects the persons to
whom stock options and restricted stock awards are granted and determines the
number of shares of common stock covered by the option or award, its exercise
price or purchase price, its vesting schedule and, in the case of stock
options, its expiration date.
16
Notes to the Consolidated Financial Statements (continued)
<PAGE> 14
Furthermore, the above plans stipulate that the exercise price of any
incentive stock option shall not be less than 100% of the fair market value of
the common stock at the date of the grant or less than 110% of the fair market
value in the case of optionees holding more than 10% of the total combined
voting power of all classes of stock of the Company. The exercise periods of
incentive stock options cannot exceed 10 years from the date of grant, except
for incentive stock options granted to optionees holding more than 10% of the
total combined voting power of all classes of stock, which must be exercised
within 5 years. Non-qualified stock options, if any, must be exercised within
the time period set forth in the option agreement. Any portion not exercised
within the terms as stipulated in the option agreement shall be forfeited.
The Company records as compensation expense the excess, if any, of the
estimated fair market value of the common stock at the date of option grant
over the option exercise price. Any compensation expense is recognized ratably
over the vesting period of the options. The Company recorded compensation
expense of approximately $80,000, $80,000 and $146,000 for the years ended
September 30, 1997, 1996 and 1995, respectively, relating to options granted
with an exercise price below the estimated fair market value of the common
stock. The Company recorded compensation expense of $232,000 in fiscal 1997
relating to options whose vesting schedule was accelerated. Options granted
prior to October 1994 and subsequent to the Company's initial public offering
have an exercise price approximating the fair market value of the common stock
as of their grant date.
1995 STOCK INCENTIVE PLAN
The maximum number of shares of common stock which may be issued pursuant to
the 1995 Incentive Plan is 2,550,000 shares, subject to certain anti-dilution
adjustments. Options generally become exercisable over four years, commencing
on the one-year anniversary of the date of grant, and accumulate if not
exercised. Options to purchase 2,224,999 and 967,099 shares of common stock,
at prices ranging from $.43 to $28.375 per share and from $0.43 to $28.375 per
share, had been granted as of September 30, 1997 and 1996, respectively.
The 1995 Incentive Plan further provides for the granting of stock appreciation
rights ("SARs") subject to certain conditions and limitations to holders of
options under the 1995 Incentive Plan. SARs permit optionees to surrender an
exercisable option for any amount equal to the excess of the market price of
the common stock over the option price when the right is exercised. There have
been no SARs issued under this plan.
Furthermore, the 1995 Incentive Plan provides for the granting of performance
share awards entitling recipients to acquire shares of common stock upon the
attainment of specified performance goals, as determined by the Board of
Directors. No performance share awards have been issued under this plan.
1995 DIRECTOR STOCK OPTION PLAN
Under the Company's 1995 Director Stock Option Plan, the maximum number of
shares of common stock which may be issued is 200,000 shares, subject to
certain anti-dilution adjustments. Each director who is not otherwise and
employee initially elected to the Board of Directors is granted an option, on
the date of initial election, to purchase 20,000 shares of common stock. Each
such director is also granted, on the date of each Annual Meeting of
Stockholders, an option to purchase 5,000 shares. Options become exercisable
over four years, commencing on the one-year anniversary of the date of grant,
and accumulate if not exercised. As of September 30, 1997, options for 29,600
shares were exercisable.
1995 EMPLOYEE STOCK PURCHASE PLAN
Under the Company's 1995 Employee Stock Purchase Plan ("Stock Purchase Plan"),
employees are granted the opportunity to purchase the Company's common stock.
The first offering under the Plan commenced on August 16, 1995 and concluded
February 15, 1996. Subsequent offerings begin on February 16 and August 16 of
each year and conclude on August 15 and February 15, respectively. The price at
which the employees may purchase the common stock is 85% of the closing price of
the Company's common stock on the Nasdaq National Market on the date the
offering period commences or terminates, whichever is lower. A total of
600,000 shares of common stock have been reserved under this plan. In fiscal
1997 and 1996, 45,396 and 18,401 shares were issued under the Stock Purchase
Plan, respectively.
1991 STOCK OPTION PLAN
The 1991 Option Plan was terminated effective June 27, 1995, when the Company
completed its initial public offering, and was replaced by the 1995 Stock
Incentive Plan. Options granted under the 1991 Option Plan generally become
exercisable in four equal annual installments, commencing on the date of grant
and continuing through the third anniversary of the date of grant, and
accumulate if not exercised. At September 30, 1997, options to purchase
1,520,132 shares of common stock, at prices ranging from $0.08 to $4.125 per
share, had been granted.
17
[LOGO]
<PAGE> 15
A summary of the 1995 Stock Incentive Plan, 1995 Director Stock Option Plan and
the 1991 Stock Option Plan transactions follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
- ---------------------------------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 1,989,590 $ 8.98 1,493,004 $ 2.06 872,438 $0.08
Granted 1,292,900 9.07 910,099 17.10 731,922 4.23
Exercised (497,882) 1.62 (394,499) 1.21 (94,454) 0.49
Forfeited (814,369) 12.56 (19,014) 10.85 (16,902) 2.20
--------- --------- ---------
Outstanding, end of year 1,970,239 $ 5.85 1,989,590 $ 8.98 1,493,004 $2.06
========= ========= =========
Weighted average contractual life 8.79 8.43 8.67
Options exercisable at year-end 600,469 658,758 602,252
Weighted average fair value of
options granted during the year $12.16 $5.39
</TABLE>
A summary of information on stock options outstanding as of September 30,
1997 follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ---------------------------
Weighted Weighted Weighted
Range of Average Average Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.08 269,550 5.69 $ 0.08 269,550 $ 0.08
$0.40-$0.43 139,933 7.36 $ 0.41 93,898 $ 0.41
$3.00-$4.13 39,950 7.62 $ 4.01 30,200 $ 3.99
$6.88-$10.25 1,489,369 9.52 $ 7.11 198,502 $ 6.96
$10.69-$14.63 16,750 9.35 $11.33 280 $14.63
$17.44-$20.38 4,687 8.05 $17.69 4,039 $17.73
$42.50 10,000 8.32 $42.50 4,000 $42.50
--------- ---- ------ ------- ------
$0.08-$42.50 1,970,239 8.79 $ 5.85 600,469 $ 3.01
========= =======
</TABLE>
STOCK BASED COMPENSATION
Pro-forma information, as required by Statement of Financial Accounting
Standards No. 123, is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
(In thousands, except per share data) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) as reported ($ 9,735) $3,460
======== ======
Pro forma net income (loss) ($14,308) $1,306
======== ======
Net income (loss) per share as reported ($0.81) $0.27
Pro forma net income (loss) per share ($1.18) $0.10
</TABLE>
In determining the fair value of the options, the Company used the Black-Scholes
model and assumed a risk free interest rate of 6.0% for all years, expected
lives of the options ranging from five to six years, an expected stock price
volatility of 70.2% and no dividends. The Black-Scholes option valuation model
was developed for used in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, it requires
the input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, the estimated
valuations may not necessarily provide a reliable measure of the fair value of
the Company's options.
The pro forma disclosures under SFAS No. 123 are not likely to be
representative of the effects on pro forma disclosures for future years.
Because this standard is applicable only to options granted subsequent to
December 31, 1994, the pro forma effect will not be fully reflected until 1998.
NOTE 6. 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 in
early 1997 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 to successful implementation of the Company's growth
strategies.
18
Notes to the Consolidated Financial Statements (continued)
<PAGE> 16
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 10 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. Stock option disclosures in
Note 5 have been adjusted to reflect approximately 235,000 options which were
forfeited as a result of the Exchange Program.
NOTE 7. 401(k) SAVINGS PLAN
The Company has a salary reduction 401(k) retirement savings plan (the "Plan")
covering substantially all of the Company's employees. Participating employees
may contribute an amount up to 15% of their eligible compensation, subject to
an annual limit. The Company, at the discretion of the Board of Directors, may
make contributions to the Plan. The Company contributed $269,000, $118,300 and
$31,600 to the Plan in fiscal 1997, 1996, and 1995, respectively.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under non-cancelable operating lease
agreements expiring at various dates through fiscal 2002. At September 30,
1997, approximate future minimum lease commitments under these leases were as
follows:
(In thousands)
- --------------------------------------------------------------------------------
1998 $1,448
1999 1,340
2000 973
2001 592
2002 271
------
$4,624
======
- --------------------------------------------------------------------------------
Total rent expense under non-cancelable operating leases was approximately
$1,324,000, $689,000 and $269,000 for the years ended September 30, 1997, 1996
and 1995, respectively.
NOTE 9. EXPORT REVENUES
The Company exports products to diverse geographic areas. Net export revenues
by geographic area were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Japan $ 583 $ 2,094 $ 708
Other international 1,113 1,594 1,338
------- ------- -------
TOTAL NET EXPORT REVENUES $ 1,696 $ 3,688 $ 2,046
======= ======= =======
</TABLE>
NOTE 10. SALE OF DATA VISUALIZATION PRODUCT LINE
In September 1995, the Company sold its data visualization product line to a
stockholder for $910,000. The Company recorded a pre-tax gain, net of
transaction expenses, of $863,000.
NOTE 11. MICROSOFT AMENDMENT
On January 21, 1997, the Company amended its license arrangement with Microsoft
Corporation ("Microsoft"). This amendment converted 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. This
payment consisted of $7,500,000 in cash and $500,000 in software and product
maintenance.
Sales to Microsoft Corporation represented 39.5%, 12.1% and 17.3% of revenues in
fiscal 1997, 1996 and 1995, respectively.
NOTE 12. RESTRUCTURING CHARGE
On March 10, 1997, the Company consolidated its Champaign, Illinois
development operations with its Naperville, Illinois and Cambridge,
Massachusetts operations. This consolidation reflects 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 pre-tax
restructuring 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. As of
September 30, 1997, the restructuring has been completed.
NOTE 13. SUBSEQUENT EVENT
On November 14, 1997, the Company acquired AllPen Software ("AllPen"). AllPen,
located in Los Gatos, California, develops software solutions and technologies
and provides professional services for the Internet device marketplace. These
solutions have been successfully applied in television, screenphone, handheld
PC, mobile and wireless products. This transaction was effected through the
exchange of 639,246 shares of common stock of Spyglass for all the issued and
outstanding shares of AllPen.
This transaction will be accounted for under the pooling of interests method
and, accordingly, historical financial data in future reports will be restated
to include AllPen data. The following unaudited pro forma data summarizes the
combined results of operations of the Company and AllPen as though the merger
had occurred at the beginning of fiscal 1995.
<TABLE>
<CAPTION>
(Unaudited, Pro Forma)
Year Ended September 30,
------------------------
(In thousands, except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $22,823 $24,354 $13,106
Net income (loss) $(9,880) $ 3,605 $ 2,149
Net income (loss) per common and
common equivalent share $ (0.78) $ 0.27 $ 0.21
</TABLE>
19
[LOGO]
<PAGE> 17
[LOGO]
SPYGLASS
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Spyglass, Inc.
Naperville, Illinois
We have audited the consolidated balance sheet of Spyglass, Inc. and
subsidiaries as of September 30, 1997, and the related consolidated statements
of operations, changes in redeemable convertible preferred stock and
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of Spyglass, Inc. and
subsidiaries as of September 30, 1996 and for the years ended September 30,
1996 and 1995, were audited by other auditors whose report dated October 25,
1996, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Spyglass, Inc.
and subsidiaries at September 30, 1997, and the consolidated results of their
operations and their cash flows for the year then ended in accordance with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
October 24, 1997
[LOGO]
20
<PAGE> 18
Directory [LOGO]
<TABLE>
<S> <C>
SPYGLASS WORLDWIDE HEADQUARTERS SPYGLASS DIRECTORS
SPYGLASS, INC.
1240 E. Diehl Road Douglas P. Colbeth
Naperville, IL 60563 President and Chief Executive Officer,
tel: 630-505-1010 Spyglass, Inc.
fax: 630-505-4944
www.spyglass.com Brian J. Jackman
President, Tellabs Operations, Inc.
SPYGLASS U.S. OPERATIONS
Cambridge, MA Timothy K. Krauskopf
Los Altos, CA Co-founder, Spyglass, Inc.
Los Gatos, CA
Marina Del Rey, CA Ray A. Rothrock
Morristown, NJ General Partner, Venrock Associates
San Ramon, CA
Steven R. Vana-Paxhia
SPYGLASS INTERNATIONAL OPERATIONS President and Chief Executive Officer,
SPYGLASS ASIA PACIFIC INSO Corporation
Tokyo, Japan
SPYGLASS EXECUTIVE OFFICERS
SPYGLASS EUROPE
Berkshire, United Kingdom Douglas P. Colbeth
President and Chief Executive Officer
INTERNET ADDRESSES
World Wide Web, www.spyglass.com Richard M. Houle
Electronic mail, [email protected] Executive Vice President Development
TRANSFER AGENT Randall T. Littleson
Inquiries regarding Shareholder-related Vice President Marketing
Services, such as transfers or changes
of address, should be directed to: Timothy M. P. Seamans
American Stock Transfer & Trust Company Vice President and General Manager
40 Wall Street Professional Services
New York, NY 10005
800-937-5449 Michael Sears
Vice President and General Manager
10-K FILING SurfWatch Software Division
A copy of the Spyglass Annual Report on
Form 10-K, filed with the Securities Exchange Michael F. Tyrell
Commission, is available to stockholders by Executive Vice President
written request to Chandler Bigelow, Manager Business Development
of Investor Relations, at the Spyglass
Worldwide Headquarters address. Gary L. Vilchick
Executive Vice President Finance
SHARES LISTED Administration and Operations and
Spyglass common stock is traded on the Chief Financial Officer
Nasdaq National Market under the ticket Sym-
bol SPYG.
INDEPENDENT AUDITORS
Ernst & Young, LLP
Chicago, IL
LEGAL COUNSEL
Hale and Dorr LLP
Boston, MA
ANNUAL MEETING
Spyglass shareholders are invited to attend
our annual shareholder meeting, to be held on
February 10, 1998 at 10:00 am at the Holiday
Inn in Naperville, Illinois.
</TABLE>
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant Jurisdiction of Incorporation
- ------------------------------ -----------------------------
Spyglass International, Inc. Delaware
SurfWatch Software, Inc. California
Stonehand Inc. Massachusetts
OS Technologies Corporation Massachusetts
Spyglass Europe Ltd. Delaware
AllPen Software, Inc. California
<PAGE> 1
EXHIBIT 23.1
Consent of Ernst & Young LLP
We consent to the incorporation by reference in the Registration
Statements of Spyglass, Inc. on Form S-3 (File Nos. 333-06943, 333-08255,
333-08253, 333-14643 and 333-42511) and on Form S-8 (File Nos. 33-95164,
33-95160, 33-95162, 33-95158, 333-2312, 333-04357 and 333-40831) of Spyglass,
Inc. of our reports dated October 24, 1997, with respect to the consolidated
financial statements and schedule of Spyglass, Inc. included and incorporated
by reference in the Annual Report (Form 10-K) for the year ended September 30,
1997.
/s/ Ernst & Young LLP
Ernst & Young LLP
Chicago, Illinois
December 16, 1997
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 33-95164, 33-95160, 33-95162, 33-95158,
333-2312 and 333-04357) of Spyglass, Inc. of our report dated October 25, 1996,
which is incorporated in this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Chicago, Illinois
December 16, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 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> JUN-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 22,841
<SECURITIES> 0
<RECEIVABLES> 0<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 33,757
<PP&E> 5,037
<DEPRECIATION> 0
<TOTAL-ASSETS> 40,580
<CURRENT-LIABILITIES> 4,913
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 35,443
<TOTAL-LIABILITY-AND-EQUITY> 40,580
<SALES> 0
<TOTAL-REVENUES> 21,295
<CGS> 1,535
<TOTAL-COSTS> 3,028
<OTHER-EXPENSES> 29,624
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,735)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,735)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,735)
<EPS-PRIMARY> (.81)
<EPS-DILUTED> (.81)
<FN>
<F1>Notes and accounts receivable-trade are reported net of allowances for
doubtful accounts in the Consolidated Balance Sheet.
</FN>
</TABLE>
