<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 For the transition period from _________ to
_____________
Commission file number 0-26074
SPYGLASS, INC.
(Exact name of registrant as specified in its charter)
Delaware 37-1258139
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1240 E. Diehl Road, 4th Floor, Naperville, IL 60563 (630) 505-1010
(Address of principal executive offices, zip code, registrant's telephone
number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 8, 1998
Common Stock (par value $.01 per share) 13,801,034
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SPYGLASS, INC.
FORM 10-Q
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets
March 31, 1998 and September 30, 1997 3
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997
Six Months Ended March 31, 1998 and 1997 4
Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended March 31, 1998 5
Consolidated Statements of Cash Flows
Six Months Ended March 31, 1998 and 1997 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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SPYGLASS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, SEPTEMBER 30,
(In thousands) 1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,792 $ 22,841
Short-term investments -- 4,929
Accounts receivable, net of allowance for
doubtful accounts of $406 and $350, respectively 3,605 3,792
Prepaid expenses and other current assets 2,294 2,195
------- --------
Total current assets 29,691 33,757
Properties and equipment, net 4,374 5,037
Long-term accounts receivable 150 250
Other assets 828 1,536
------- --------
TOTAL ASSETS $ 35,043 $ 40,580
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,816 $ 2,162
Deferred revenues 914 1,256
Accrued compensation and related benefits 1,600 1,322
Accrued expenses and other liabilities 134 173
------- --------
Total current liabilities 4,464 4,913
Long-term deferred revenues 100 100
------- --------
Total liabilities 4,564 5,013
------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 13,639,251 and 12,362,823 shares
issued and outstanding, respectively 136 124
Additional paid-in capital 42,753 40,746
Accumulated deficit (11,518) (5,303)
Treasury common stock at cost, 9,714 shares held in 1998 (55) --
Unamortized value of restricted stock issued (837) --
------- --------
Total stockholders' equity 30,479 35,567
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,043 $ 40,580
======= ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
3
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SPYGLASS, INC.
Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
(In thousands, except per share amounts) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net revenues:
Internet technology revenues $ 2,881 $10,961 $ 5,471 $ 13,975
Service revenues 2,125 1,054 3,789 1,925
------- ------- -------- --------
Total net revenues 5,006 12,015 9,260 15,900
Cost of revenues:
Cost of internet technology revenues 467 847 798 1,126
Cost of service revenues 644 360 1,189 540
------- ------- -------- --------
Total cost of revenues 1,111 1,207 1,987 1,666
------- ------- -------- --------
Gross profit 3,895 10,808 7,273 14,234
Operating expenses:
Sales and marketing 2,264 2,216 4,559 4,030
Research and development 2,836 3,435 5,954 6,360
General and administrative 1,621 1,502 3,080 3,120
Restructuring charge -- 900 -- 900
One-time acquisition costs -- -- 496 --
------- ------- -------- --------
Total operating expenses 6,721 8,053 14,089 14,410
------- ------- -------- --------
Income (loss) from operations (2,826) 2,755 (6,816) (176)
Other income, net 297 553 639 992
------- ------- -------- --------
Income (loss) before income taxes (2,529) 3,308 (6,177) 816
Income tax provision -- 1,257 -- 310
------- ------- -------- --------
Net income (loss) $(2,529) $ 2,051 $ (6,177) $ 506
======= ======= ======== ========
Income (loss) per common share-basic $ (0.19) $ 0.17 $ (0.47) $ 0.04
Income (loss) per common share-diluted $ (0.19) $ 0.16 $ (0.47) $ 0.04
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
4
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SPYGLASS, INC.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Unamortized
Additional Treasury Value of
Common Stock Paid-in Accumulated Common Stock Restricted
(In thousands, except share amounts) Shares Amount Capital Deficit Shares Amount Stock Issued
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 12,362,823 $124 $40,746 $ (5,303) -- $ -- $ --
Adjustment for acquisition accounted
for as a pooling of interests 639,246 6 204 (38)
Exercise of stock options 399,203 4 598
Exercise of employee stock purchases
plan stock options 37,979 -- 179
Issuance of restricted stock 200,000 2 1,011 (1,013)
Amortization of deferred compensation
related to issuance of restricted stock 176
Purchase of treasury shares 9,714 (55)
Accelerated vesting of options 15
Net loss (6,177)
---------- ---- ------- -------- ----- ----- -------
Balance at March 31, 1998 13,639,251 $136 $42,753 $(11,518) 9,714 $ (55) $ (837)
========== ==== ======= ======== ===== ===== =======
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
5
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SPYGLASS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
(In thousands) 1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (6,177) $ 506
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,606 921
Amortization of deferred compensation related
to issuance of restricted stock 176 --
Bad debt provision 278 258
Deferred income taxes -- 216
Incentive stock option compensation 15 140
Changes in operating assets and liabilities:
Accounts and long-term receivables 447 2,723
Prepaid expenses and other current assets 67 (1,098)
Accounts payable (349) 284
Deferred revenues (716) (532)
Accrued compensation and related benefits (407) 240
Accrued restructuring costs -- 800
Accrued expenses and other liabilities (52) (18)
-------- --------
Net cash(used in) provided by operating activities (5,112) 4,440
-------- --------
Cash flows from investing activities:
Cash acquired in business combination 574 --
Short-term investments, net activity 4,929 1,445
Proceeds from sale of fixed assets 82 --
Capital expenditures (248) (2,018)
-------- --------
Net cash provided by (used in) investing activities 5,337 (573)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options, including
tax related benefits 781 336
Purchase of treasury common stock (55) --
-------- --------
Net cash provided by financing activities 726 336
-------- --------
Net increase in cash and cash equivalents 951 4,203
Cash and cash equivalents at beginning of period 22,841 16,490
-------- --------
Cash and cash equivalents at end of period $ 23,792 $ 20,693
======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
6
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SPYGLASS, INC.
FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared by
the Company in accordance with generally accepted accounting
principles, although certain information and footnote disclosures
normally included in the Company's audited annual financial statements
have been condensed or omitted. In the opinion of management, the
accompanying unaudited financial statements include all adjustments
(consisting only of normal recurring items) necessary for a fair
presentation of the Company's financial position, results of operations
and cash flows at the dates and for the periods indicated. It is
suggested that these interim financial statements be read in connection
with the audited financial statements for the fiscal years ended
September 30, 1997, 1996 and 1995 which are included in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30,
1997.
The results of operations for the three and six months ended
March 31, 1998 are not necessarily indicative of the results of
operations to be expected for the full fiscal year.
NOTE 2. EARNINGS PER SHARE
Earnings per common share - basic was calculated by dividing
net income by the weighted average number of common shares outstanding
during the period. Earnings per share - diluted was calculated by
dividing net income by the sum of the weighted average number of common
shares outstanding plus all common shares that would have been
outstanding if potentially dilutive common shares had been issued. The
table below reconciles the number of shares utilized in the earnings
per share calculations for the three month periods ending March 31,
1998 and 1997, respectively.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
----------------------------
<S> <C> <C>
Net income (loss) $ (2,529) $ 2,051
Income (loss) per common share - basic $ (0.19) $ 0.17
Income (loss) per common share - diluted $ (0.19) $ 0.16
Weighted average number of common shares
outstanding - basic 13,124 12,178
Effect of dilutive securities, stock options -- 769
-------- -------
Weighted average number of common shares
outstanding - diluted 13,124 12,947
</TABLE>
7
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SPYGLASS, INC
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Spyglass, Inc. ("Spyglass" or the "Company") was organized as
an Illinois corporation in February 1990 and reincorporated in Delaware in May
1995. Spyglass entered the Internet market during fiscal 1994 and from fiscal
1994 through fiscal 1996, focused its efforts on developing, marketing and
distributing Internet client and server technologies for incorporation into a
variety of Internet-based software products and services. Since fiscal 1997, the
Company has been focusing on the development, marketing and distribution of its
technologies and services to the non-PC Internet device marketplace. In February
1998, Spyglass reorganized its business to more tightly integrate its
development, professional services and marketing resources targeted to various
vertical markets within the Internet device market in order to provide solutions
tailored to the needs of those markets.
Spyglass provides its customers with expertise, software and
professional services that enable them to rapidly deploy cost-effective
Internet-enabled devices. The professional services offered include custom
engineering for defining, developing and delivering complete, end-to-end project
solutions. Spyglass solutions have been integrated into a variety of products,
including but not limited to televisions, office equipment, television set-top
boxes, network computers and 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.
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. This transaction was accounted for under the pooling of interests
method of accounting. Because the effect of this transaction on prior year
financial statements is considered immaterial, such financial statements have
not been restated but rather the Company's equity accounts have been adjusted
for the effect of the pooling.
The Company licenses technology from a number of third party vendors
for incorporation into the Company's products. Among these, the Company pays
royalties to the University of Illinois with respect to licenses of Spyglass
Device Mosaic, to RSA Data Security, Inc. with respect to licenses of the
Company's technologies containing certain RSA code and to Sun Microsystems, Inc.
with respect to licenses of the Company's technologies containing certain Java
code. These royalties, among others, are reflected in cost of internet
technology revenues.
On January 21, 1997, the Company amended its license arrangement with
Microsoft to convert Microsoft's existing license for the Spyglass Mosaic
browser technology into a fully
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paid-up license in consideration of an additional $8,000,000 payment from
Microsoft. Spyglass recognized the revenue from this payment in the quarter
ended March 31, 1997. Management believes that its results of operations,
without giving effect to this one-time event, present a more accurate
presentation of the Company's ongoing business. Accordingly, the following
analyses, 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 three and six months ended March 31, 1997.
QUARTER ENDED MARCH 31, 1998 COMPARED WITH QUARTER END MARCH 31, 1997
Internet technology revenues for the quarter ended March 31, 1998
decreased $80,000 or 3%, to $2,881,000 compared to $2,961,000 for the quarter
ended March 31, 1997. This decrease in Internet technology revenues was due
primarily to a significant decline in revenues from vendors of desktop software
applications as the Company has directed its strategic focus to the Internet
device market. Specifically, Internet technology revenues from vendors of
desktop software applications, excluding SurfWatch revenues, decreased $885,000
while revenues from device manufacturers increased $493,000. During the
development of the Internet device market, initial Internet technology revenues
on a given contract will typically comprise a smaller component of total
expected Internet technology revenues than was previously recorded in licensing
the desktop software applications. On-going internet technology revenues will
not be realized until such time as customer devices utilizing the Company's
technology are introduced commercially and the contractual royalty revenue
stream commences.
Service revenues for the quarter ended March 31, 1998 increased
$1,071,000, or 102%, to $2,125,000 compared to $1,054,000 for the quarter ended
March 31, 1997. The increase in service revenues was due to the increase in
professional services revenues from the AllPen acquisition. Revenues from
professional services increased approximately $1,258,000 for the quarter ended
March 31, 1998 as compared to the quarter ended March 31, 1997. The Company
expects professional services revenues to increase slightly in absolute dollars
but remain consistent as a percentage of total net revenues during fiscal 1998
as compared to the quarter ended March 31, 1998. Service revenues from customer
support agreements are expected to remain relatively constant, as a percentage
of total net revenues, during the same period.
Gross profit as a percentage of revenues was 77.8% for the quarter
ended March 31, 1998 compared to 84.9% for the quarter ended March 31, 1997.
This reduction was a result of a change in the revenue mix as total net revenue
consisted of a higher percentage of lower margin professional services revenues
as well as a result of increased costs due to the use of third party products,
increasing the Company's royalty costs.
In February 1998, Spyglass reorganized its business to more tightly
integrate its development, professional services and marketing resources
targeted to various markets within the Internet device market in order to
provide solutions tailored to the needs of those markets. In connection with
this integration, the Company incurred costs of approximately $365,000 of which
$56,000 is reflected in sales and marketing expenses and $309,000 is reflected
in research and development expenses for the quarter ended March 31, 1998.
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Sales and marketing expenses for the quarter ended March 31, 1998
increased $448,000, or 25%, to $2,264,000 from $1,816,000 for the quarter ended
March 31, 1997, but remained constant as a percentage of revenues at 45.2%. A
major factor in this increase was $440,000 in additional compensation and
personnel expenses incurred as a result of the addition of sales staff,
particularly in international locations, the addition of marketing staff,
specifically at the Company's SurfWatch business, and the issuance of restricted
stock to officers of the Company. Additionally, during the second quarter of
fiscal 1998, the Company increased its marketing efforts relating to its
SurfWatch location which increased marketing costs by $135,000. These increases
were partially offset by a decrease in travel and travel related expenses of
approximately $128,000 primarily due to a change in location of trade shows
attended and to the reduction in the number of trade shows attended due to the
shift in focus from the desktop market to the Internet device market.
Research and development expenses for the quarter ended March 31, 1998
decreased $599,000, or 17%, to $2,836,000 from $3,435,000 for the quarter ended
March 31, 1997 and decreased as a percentage of revenues to 56.7% from 85.6%.
The decrease in research and development expenses was due primarily to a
decrease in salary costs and related personnel expenses of $452,000 related to
the increased utilization of development engineers in a professional services
role, as reflected by the increase in cost of service revenues, as well as an
overall reduction in engineering staff. Additionally, travel and travel related
costs decreased by $174,000 primarily due to the consolidation of the company's
facilities as well as a reduction in staffing.
General and administrative expenses for the quarter ended March 31,
1998 increased $119,000, or 8%, to $1,621,000 from $1,502,000 for the quarter
ended March 31, 1997 but decreased as a percentage of revenues to 32.4% from
37.4%. This increase was due to an increase in salary and related personnel
expense of $417,000 due in part to the enhancement of the Company's general and
administrative functions and in part to the issuance of restricted stock to
officers of the Company. These increases were partially offset by a decline in
travel and travel related expenses of $153,000 between these periods due
primarily to the consolidation of the Company's facilities in March 1997.
A pre-tax charge of $900,000 ($558,000 or $0.05 per share-basic
after-tax for the three months ended March 31, 1997) was recorded in the second
quarter of fiscal 1997 and consisted primarily of severance and related
personnel costs of $730,000 and lease cancellation and other exit costs of
$170,000 related to the consolidation of the Company's research and development
facilities.
The Company recorded no income tax benefit for the quarter ended March
31, 1998 and a provision for income taxes of $1,257,000 for the quarter ended
March 31, 1997. The Company believes that it is appropriate to defer recognition
of potential tax benefits until such time when its return to profitability can
provide assurances that these tax benefits will be realized.
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SIX MONTHS ENDED MARCH 31, 1998 COMPARED WITH SIX MONTHS ENDED MARCH 31, 1997
Internet technology revenues for the six months ended March 31, 1998
decreased $504,000 or 8%, to $5,471,000 compared to $5,975,000 for the six
months ended March 31, 1997. This decrease in Internet technology revenues was
due primarily to a significant decline in revenues from vendors of desktop
software applications as the Company has directed its strategic focus to the
Internet device market. Specifically, Internet technology revenues from vendors
of desktop software applications, excluding SurfWatch software revenues,
decreased $2,556,000 while internet technology revenues from device
manufacturers increased $1,705,000.
Service revenues for the six months ended March 31, 1998 increased
$1,864,000, or 97%, to $3,789,000 compared to $1,925,000 for the six months
ended March 31, 1997. The increase in service revenues was due to the increase
in professional services revenues from the AllPen acquisition. Revenues from
professional services increased approximately $2,259,000 for the six months
ended March 31, 1998 as compared to the six months ended March 31, 1997.
Gross profit as a percentage of revenues was 78.5% for the six months
ended March 31, 1998 compared to 86.5% for the six months ended March 31, 1997.
This reduction was primarily a result of a change in the revenue mix as total
net revenue consisted of a higher percentage of lower margin professional
services revenues. Similarly, the cost of service revenues increased, as a
percentage of service revenues, to 31.4% for the six months ended March 31, 1998
from 28.1% for the six months ended March 31, 1997 due to the increase in
professional service revenues as a percentage of service revenues. In addition,
the cost of technology revenues increased due to the use of third party
products, increasing the Company's royalty costs.
Sales and marketing expenses for the six months ended March 31, 1998
increased $929,000, or 26%, to $4,559,000 from $3,630,000 for the six months
ended March 31, 1997, and increased as a percentage of revenues to 49.2% from
45.9%. A major factor in this increase was the addition of sales staff,
particularly in international locations, and of marketing staff, specifically at
its SurfWatch location, as well as the issuance of restricted stock to officers
of the Company, all of which accounted for $658,000 of the increase in expense
over the corresponding six month period in the prior year. Additionally, during
the first six months of fiscal 1998, the Company increased its marketing efforts
to include a direct marketing campaign targeted at consumer electronic,
wireless, telecom and office equipment companies as well as increased marketing
campaigns relating to its SurfWatch products. These efforts increased marketing
costs by $353,000. These increases in expense were partially offset by a
decrease in travel and travel related costs of $201,000 primarily due to a
change in location of trade shows attended and to the reduction in the number of
trade shows attended due to the change in focus from the desktop market to the
Internet device market.
Research and development expenses for the six months ended March 31,
1998 decreased $406,000, or 6%, to $5,954,000 from $6,360,000 for the six months
ended March
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31, 1997 and decreased as a percentage of revenues to 64.3% from 80.5%. The
decrease in research and development expenses was due primarily to a decrease in
salary costs and related personnel expenses of $400,000 related to the increased
utilization of development engineers in a professional services role, as
reflected by the increase in cost of service revenues, as well as an overall
reduction in engineering staff. Facility related costs decreased $172,000
between these periods due to the consolidation of the Company's operations in
March 1997. Additionally, travel and travel related costs decreased by $151,000
primarily due to the consolidation of the company's facilities as well as a
reduction in staffing. These decreases in expenses were partially offset by an
increase in consulting costs of $247,000 primarily related to the development of
new SurfWatch products.
General and administrative expenses for the six months ended March 31,
1998 decreased $40,000, or 1%, to $3,080,000 from $3,120,000 for the six months
ended March 31, 1997 and decreased as a percentage of revenues to 33.3% from
39.5%. Salary and related personnel expenses increased $719,000 due in part to
the enhancement of the Company's general and administrative functions and in
part to the issuance of restricted stock to officers of the Company. These
increases were offset by reductions in conference, travel, meeting and
consulting expenses that were required last year as the Company transitioned
from the desktop market to the Internet device market but were not required in
the current fiscal year. These reductions accounted for a decrease in general
and administrative expenses of $557,000 for the first six months of fiscal 1998
compared to the first six months of fiscal 1997. In addition, due to the
consolidation of the Company's facilities in March 1997, general and
administrative facility related costs decreased by $107,000 during this time
period.
A pre-tax charge of $900,000 ($558,000 or $0.05 per share-basic
after-tax for the three months ended March 31, 1997) was recorded in the second
quarter of fiscal 1997 and consisted primarily of severance and related
personnel costs of $730,000 and lease cancellation and other exit costs of
$170,000 related to the consolidation of the Company's research and development
facilities.
In connection with the acquisition of AllPen Software on November 14,
1997, the Company recorded, in the first quarter of 1998, a charge to operating
expenses of $496,000 or $0.04 per share-basic for direct acquisition related
costs. These costs consisted primarily of professional fees.
The Company recorded no income tax benefit for the six months ended
March 31, 1998 and a provision for income taxes of $310,000 for the six months
ended March 31, 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.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had no debt and had cash and cash
equivalents of $23,792,000 and working capital of $25,227,000. The Company's
operating activities used cash
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of $5,112,000 and provided cash of $4,440,000 for the six months ended March 31,
1998 and March 31, 1997, respectively. The Company received $7,500,000 in cash
from Microsoft during the quarter ended March 31, 1997 in connection with the
Company's license arrangement, as discussed in the Overview section.
The Company's net accounts receivable balance decreased to $3,755,000
at March 31, 1998 from $4,042,000 at September 30, 1997. This decrease was
primarily due to a shift in revenues from technology revenues to service
revenues, which are collected as the services are performed, and increased
collection efforts.
The Company's capital expenditures totaled $248,000 and $2,018,000 for
the six months ended March 31, 1998 and 1997, respectively. During the six
months ended March 31, 1997 the Company made significant enhancements to its
computer systems.
The Company believes that its current cash and cash equivalents,
together with funds expected to be generated from operations, will be sufficient
to finance the Company's operations through at least the twelve-month period
ending March 31, 1999.
FUTURE OPERATING RESULTS
This Form 10-Q contains a number of forward-looking statements. Any
statements contained herein (including without limitation statements to the
effect that the Company or its management "believes", "expects", "anticipates",
"plans" and similar expressions) that are not statements of historical fact
should be considered forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. These factors include,
without limitation, those set forth below.
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. The Company expects moderate revenue growth during
the remainder of fiscal 1998 as the Company continues to direct its business
strategy to the Internet device market. The Company expects gross profit as a
percentage of revenues to remain relatively constant throughout the remainder of
fiscal 1998. Research and development, general and administrative costs and
sales and marketing expenses, as a percentage of revenues, are expected to
decline throughout the remainder of fiscal 1998.
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
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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 any 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
real-time operating system vendors, consumer and industrial device
manufacturers, regional bell operating companies, internet service providers 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, Spyglass has
received a notice from Elk Industries Inc. alleging that one or more products of
Spyglass infringe a patent owned by Elk Industries Inc. 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, the timing and success of product introductions
by 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 an initial payment of a source code access
fee or binary access fee and, at times, initial commitments for a minimum number
of licenses. License revenues for those minimum commitments are recognized as
the committed licenses are purchased. Additional license revenues from a
customer will not be earned unless and until the initial committed levels are
exceeded. The Company's revenues in any quarter will depend in significant part
on its ability to sell source and binary fees as well as 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
14
<PAGE> 15
any shortfall in expected revenue could therefore result in a disproportionate
decrease in the Company's net income in any given fiscal period.
IMPACT OF YEAR 2000
The Company has assembled a cross department task force ("task force") to
address the Year 2000 issue. Currently, all new Spyglass products/technologies
sold are Year 2000 compliant or will be so certified as new versions and
utilities are released in 1998. However, the task force is diligently
investigating other associated Year 2000 issues such as ensuring that internal
systems are ready to continue operation without interruption and ensuring that
suppliers to Spyglass are ready to continue operation without interruption, and
has a mid-summer 1998 target date to complete its assessment efforts. Upon
completion of the assessment phase of the Year 2000 compliance process, the task
force will implement any required software modifications and/or replacements so
that internal systems of the Company will function properly with respect to
dates in the year 2000. At this time the Company is unable to estimate the cost
of the above efforts; however, the cost is not expected to have a material
impact on the financial results of the Company.
15
<PAGE> 16
SPYGLASS, INC.
FORM 10-Q
PART II.
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 10, 1998, the following items were voted on at the Annual
Meeting of shareholders:
<TABLE>
<CAPTION>
Proposal For Against Abstain
------------ ------- -------
<S> <C> <C> <C>
1. To elect Brian J. Jackman as a
Class III director to serve for a three-
year term expiring at the Annual
Meeting following the fiscal year
ended September 30, 2000 10,750,837 N/A N/A
2. To approve an amendment to the
Company's 1995 Stock Incentive
Plan increasing the number of shares
of Common Stock issuable under the
Plan from 2,550,000 shares to
3,300,000 shares and the continuance of
the plan, as amended 3,801,082 964,863 88,894
3. To ratify the selection of Ernst & Young
LLP as the Company's independent
auditors for the current fiscal year 10,830,623 100,166 55,933
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
The exhibits are listed in the accompanying Index to Exhibits immediately
following the signature page.
(b) Reports on Form 8-K
None.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Spyglass, Inc.
Registrant
Date: May 14, 1998 /s/ Gary Vilchick
----------------------------------
Gary Vilchick
Executive Vice President, Finance,
Administration and Operations and
Chief Financial Officer
17
<PAGE> 18
INDEX TO EXHIBITS
Sequential
Page
Exhibit No. Description Number
27 Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1998 AND 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 23,792 22,841
<SECURITIES> 0 4,929
<RECEIVABLES> 3,605<F1> 3,792
<ALLOWANCES> 406<F1> 350
<INVENTORY> 0 0
<CURRENT-ASSETS> 29,691 33,757
<PP&E> 4,374 5,037
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 35,043 40,580
<CURRENT-LIABILITIES> 4,464 4,913
<BONDS> 0 0
0 0
0 0
<COMMON> 136 124
<OTHER-SE> 30,343 35,443
<TOTAL-LIABILITY-AND-EQUITY> 35,043 40,580
<SALES> 2,881 10,961
<TOTAL-REVENUES> 5,006 12,015
<CGS> 467 847
<TOTAL-COSTS> 1,111 1,207
<OTHER-EXPENSES> 6,721 8,053
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,826) 2,755
<INCOME-TAX> 0 1,257
<INCOME-CONTINUING> (2,529) 2,051
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,529) 2,051
<EPS-PRIMARY> (0.19) 0.17
<EPS-DILUTED> (0.19) 0.16
<FN>
<F1>Notes and accounts receivable-trade are reported net of allowances for doubtful
accounts in the Consolidated Balance Sheets.
</FN>
</TABLE>
