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 December 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 February 10, 1999
Common Stock
(par value $.01 per share) 15,052,246
<PAGE>
Index
Page No.
Part I. Financial Information
Item 1. Consolidated Statements of Operations
Three Months Ended December 31, 1998 and 1997 3
Consolidated Balance Sheets
December 31, 1998 and September 30, 1998 4
Consolidated Statement of Changes in
Stockholders' Equity Three Months Ended
December 31, 1998 5
Consolidated Statements of Cash Flows
Three Months Ended December 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
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
<TABLE>
SPYGLASS, INC.
Consolidated Statemetns of Operations
Three Months Ended December 31,
(In thousands, except per share 1998 1997
amounts)
<S> <C> <C>
Net revenues:
Internet technology $ 1,865 $ 2,590
Service 2,658 1,664
------ ------
Total net revenues 4,523 4,254
Cost of revenues:
Internet technology 311 331
Service 1,375 545
------ ------
Total cost of revenues 1,686 876
------ ------
Gross profit 2,837 3,378
Operating expenses and other:
Sales and marketing 2,174 2,295
Research and development 1,821 3,118
General and administrative 1,372 1,459
One-time acquisition costs - 496
------ ------
Total operating expenses and other 5,367 7,368
------ ------
Loss from operations (2,530) (3,990)
Other income, net 314 342
------ ------
Loss before income taxes (2,216) (3,648)
Income tax benefit - -
------ ------
Net loss $ (2,216) $ (3,648)
======= =======
Loss per common share-basic and
diluted $ (0.15) $ (0.28)
Weighted average number of common
shares outstanding-basic and
diluted 14,566 13,018
====== ======
See accompanying Notes to the Consolidated Financial Statements
3
</TABLE>
<PAGE>
<TABLE>
SPYGLASS, INC.
Consolidated Balance Sheets
(Unaudited)
December 31, September 30,
(In thousands) 1998 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,539 $ 22,655
Accounts receivable, net of
allowance for doubtful accounts
of $418 and $429, respectively 4,601 4,704
Unbilled accounts receivable 945 902
Prepaid expenses and other current
assets 2,568 2,461
------ ------
Total current assets 37,653 30,722
Properties and equipment, net 3,164 3,585
Other assets 169 268
------ ------
Total Assets $ 40,986 $ 34,575
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,692 $ 1,493
Royalties payable 412 541
Deferred revenues 552 786
Accrued compensation and related
benefits 1,072 1,466
Accrued expenses and other
liabilities 322 163
----- -----
Total current liabilities 4,050 4,449
Long-term deferred revenues 50 50
----- -----
Total liabilities 4,100 4,499
----- ------
Stockholders' equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized,
none issued - -
Common stock, $.01 par value,
50,000,000 shares authorized,
15,002,695 and 13,944,433 shares
issued and 14,992,981 and
13,934,719 shares outstanding,
respectively 150 139
Additional paid-in capital 53,452 43,886
Accumulated deficit (15,573) (13,357)
Treasury stock at cost, 9,714 shares (55) (55)
Unamortized value of restricted
stock issued (1,088) (537)
------ ------
Total stockholders' equity 36,886 30,076
------ -------
Total Liabilities and
Stockholders Equity $ 40,986 $ 34,575
====== ======
See accompanying Notes to the Consolidated Financial Statements
4
</TABLE>
<PAGE>
<TABLE>
SPYGLASS, INC.
Consolidated Statement of Changes in Stockholders' Equity
Unamortized
Additional Treasury Value of
Common Stock Paid-in Accumulated Common Stock Restriced
Shares Amount Capital Deficit Shares Amount Stock Issued
(In thousands,except per
per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 13,934,719 $ 139 $ 43,886 $ (13,357) 9,714 $ (55) $ (537)
Sale of common stock to
General Instrument 700,000 7 7,385
Exercise of stock options 307,376 3 1,598
Issuance of restricted stock 60,600 1 583
Amortization of deferred
compensation relating to (583)
issuance of restricted stock 32
Net loss (2,216)
---------- ----- -------- ---------- ----- ------ --------
Balance at December 31, 1998 15,002,695 $ 150 $ 53,452 $ (15,573) 9,714 $ (55) $ (1,088)
========== ===== ======== ========== ===== ====== =========
See accompanying Notes to the Consolidated Financial Statements
5
</TABLE>
<PAGE>
<TABLE>
SPYGLASS, INC.
Consolidated Statements of Cash Flows
Three Months Ended December 31,
(In thousands) 1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (2,216) $ (3,648)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation 472 498
Amortization 216 311
Loss on disposal of fixed assets 30 -
Amortization of deferred compensation
related to issuance of restricted
stock 32 -
Bad debt provision 175 178
Changes in operating assets and
liabilities:
Accounts and long-term receivables (72) 587
Unbilled accounts receivable (43) -
Prepaid expenses, other current assets
and other assets (224) (185)
Accounts payable 199 (231)
Royalties payable (129) -
Deferred revenues (234) 26
Accrued compensation and related
benefits (394) (902)
Accrued expenses and other liabilities 159 57
------- -------
Net cash used in operating activities (2,029) (3,309)
------- -------
Cash flows from investing activities:
Cash acquired in business combination - 574
Short-term investments, net activity - 4,929
Proceeds from sale of fixed assets - 25
Capital expenditures (80) (202)
------ ------
Net cash provided by (used in) investing
activities (80) 5,326
------ ------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,601 66
Sale of common stock to General
Instrument 7,392 -
------ ------
Net cash provided by financing
activities 8,993 66
------ ------
Net increase in cash and cash
equivalants 6,884 2,083
Cash and cash equivalents at
beginning of period 22,655 22,841
------- -------
Cash and cash equivalents at end
of period $ 29,539 $ 24,924
========= =========
See accompanying Notes to the Consolidated Financial Statements
6
</TABLE>
<PAGE>
Notes to the Consolidated Financial Statements
(Unaudited)
December 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, 1998, 1997 and 1996 which are included in the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998.
The results of operations for the three months ended December
31, 1998 are not necessarily indicative of the results of operations
to be expected for the full fiscal year.
Note 2. Revenue Recognition
The Company has adopted the provisions of Statement of Position
("SOP") No. 97-2, Software Revenue Recognition, as amended by SOP 98-
4, "Deferral of Effective Date of Certain Provisions of SOP 97-2",
effective October 1, 1998. SOP 97-2 and SOP 98-4 provide guidance on
applying generally accepted accounting principles for recognizing
revenue on software transactions and supercede SOP 91-1. Application
of SOP 97-2 and 98-4 did not have a material impact on the Company's
current revenue recognition practices. However, certain provisions
of SOP No. 97-2 are currently being reviewed by the accounting
profession with the objective of providing additional guidance on
implementation of the SOP. Depending upon the outcome of this review
and the issuance of implementation guidelines and potential
interpretations, the Company may be required to modify its revenue
recognition policies and business practices, and such change could
have the effect of deferring the recognition of revenue.
Note 3. Transactions with General Instrument
In October 1998, General Instrument Corporation ("GI") acquired
700,000 shares of the Company's common stock for $7,392,000 and also
acquired warrants to purchase an additional 700,000 shares. The
warrants have exercise prices ranging from $13.20 to $14.78 per share
(subject to adjustment in certain circumstances), and become
exercisable on varying dates over a five-year period. In connection
with this investment, the Company and GI entered into a three-year
agreement under which the Company will develop and integrate new
Internet cable services and technologies for GI. This work will be
performed through a newly formed subsidiary of the Company, in which
GI will hold a 10% minority interest and which GI will have an option
to purchase at fair market value under certain circumstances.
<PAGE>
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
integrate its development, professional services and marketing
resources. This change has allowed Spyglass to target its tailored
solutions to the needs of the various vertical sectors within the
Internet device market.
Spyglass provides its customers with expertise, software and
professional services that enable them to rapidly develop cost-
effective Internet-enabled devices. Spyglass professional services
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, industrial
controls, 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.
In October 1998, General Instrument Corporation ("GI") acquired
700,000 shares of the Company's common stock for $7,392,000 and also
acquired warrants to purchase an additional 700,000 shares. The
warrants have exercise prices ranging from $13.20 to $14.78 per share
(subject to adjustment in certain circumstances), and become
exercisable on varying dates over a five-year period. In connection
with this investment, the Company and GI entered into a three-year
agreement under which the Company will develop and integrate new
Internet cable services and technologies for GI. This work will be
performed through a newly-formed subsidiary of the Company, in which
GI will hold a 10% minority interest and which GI will have an option
to purchase at fair market value under certain circumstances.
The Company licenses technology from a number of third-party
vendors for incorporation into the Company's products. As a result,
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 and other royalties are reflected in cost of Internet
technology revenues.
<PAGE>
Quarter Ended December 31, 1998 Compared with Quarter End December
31, 1997
Internet technology revenues for the quarter ended December 31,
1998 decreased $725,000 or 28%, to $1,865,000 from $2,590,000 for the
quarter ended December 31, 1997. This decrease was due to a decrease
in the number of licensing contracts signed during the quarter. In
the quarter ended December 31, 1998, certain potential customers
delayed their purchase decisions as they continued to evaluate their
product requirements and the timing of their product development
projects. Additionally, the Company experienced customer hesitation
in entering into licensing agreements which require large up-front
license fee commitments. The Company continues to review its sales
process in order to shorten its sales cycle.
Service revenues for the quarter ended December 31, 1998, which
include both professional services revenues and revenues from
customer support agreements, increased $994,000, or 60%, to
$2,658,000 from $1,664,000 for the quarter ended December 31, 1997.
Revenues from professional services increased $1,042,000 for the
quarter ended December 31, 1998 as compared to the quarter ended
December 31, 1997. This increase was due to management's focus on
building an integrated development and service organization that
provides customized solutions to its customers within the vertical
sectors of the Internet device market. This focus resulted in an
increase in the number and dollar value of professional services
agreements. Revenues from customer support agreements decreased
$48,000 during the same time period. The Company expects
professional service revenues to increase in absolute dollars and as
a percentage of total net revenues, during the remainder of fiscal
1999. Service revenues from customer support agreements, as a
percentage of total net revenues, are expected to decline slightly
during the same period.
Gross profit as a percentage of total net revenues was 62.7% for
the quarter ended December 31, 1998 compared to 79.4% for the quarter
ended December 31, 1997. This decline was a result of a larger
portion of total revenue consisting of lower margin service revenue
than in the corresponding prior year period. Gross profit, as a
percentage of total net revenues, is expected to continue to be lower
than in fiscal 1998 because management expects service revenue to
continue to comprise a larger portion of total revenues. This trend,
however, could vary on a quarter to quarter basis as the quantity and
value of signed technology license agreements may vary from quarter
to quarter.
Sales and marketing expenses for the quarter ended December 31,
1998 decreased $121,000, or 5%, to $2,174,000 from $2,295,000 for the
quarter ended December 31, 1997 and decreased as a percentage of
total net revenues to 48.1% from 53.9%. Factors contributing to this
decrease included a reduction in compensation and personnel expenses
incurred as a result of a reduction in sales and marketing staff as
well as a reduction in direct marketing costs.
Research and development expenses for the quarter ended
December 31, 1998 decreased $1,297,000, or 42%, to $1,821,000 from
$3,118,000 for the quarter ended December 31, 1997 and decreased as
a percentage of total net revenues to 40.3% from 73.3%. The
decrease in research and development expenses was due primarily to
a decrease in salary costs and related personnel expenses of
$1,129,000 as a result of the increased utilization of development
<PAGE>
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. The Company believes that its
direct investment in research and development is sufficient when
combined with its retained ownership in the engineering
developments of its professional service engineers.
General and administrative expenses for the quarter ended
December 31, 1998 decreased $87,000, or 6%, to $1,372,000 from
$1,459,000 for the quarter ended December 31, 1997 and decreased as a
percentage of total net revenues to 30.3% from 34.3%. This decrease
is primarily a result of a decrease in salary and related personnel
costs due to a decline in general and administrative headcount and a
reduction in software expenditures, partially offset by an increase
in legal costs primarily related to the General Instrument
transactions discussed above.
In connection with the acquisition of AllPen Software on
November 14, 1997, the Company recorded, in the quarter ended
December 31, 1997, a charge to operating expenses of $496,000 or
$0.04 per share for direct acquisition related costs. These costs
consisted primarily of professional fees.
The Company recorded no income tax benefit for the quarters
ended December 31, 1998 and 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 December 31, 1998, the Company had no debt and had cash
and cash equivalents of $29,539,000 and working capital of
$33,603,000. The Company's operating activities used cash of
$2,029,000 and $3,309,000 for the three months ended December 31,
1998 and 1997, respectively. In October 1998, the Company received
$7,392,000 in cash from GI for the purchase by GI of 700,000 shares
of the Company's common stock.
The Company's net accounts and unbilled receivable balance
decreased slightly to $5,546,000 at December 31, 1998 from
$5,606,000 at September 30, 1998, primarily due to a decrease in
revenues partially offset by the timing of payments on certain
licensing and professional services contracts.
The Company's capital expenditures totaled $80,000 and $202,000
for the three months ended December 31, 1998 and 1997, respectively.
In October 1998, the Company entered into an agreement with GI to
form a new digital cable software integration center. The formation
of the integration center will require the purchase of computer
hardware and software and office furniture. While no commitments for
such expenditures have been formally entered into, the Company
estimates that such expenditures will range from $250,000 to $425,000
during fiscal 1999.
The Company believes that its current cash and cash equivalents
will be sufficient to finance the Company's operations through at
least December 31, 1999.
<PAGE>
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 a new strategic
focus on the Internet device market. The Company is now 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 the Company's products and services or
the extent to which the Company will be successful in penetrating
this market.
The Company derived approximately 24% of its revenues for the
quarter ended December 31, 1998 from one customer. As the Internet
device market develops, the Company expects to continue to derive a
significant portion of its revenues from a relatively limited number
of customers. Although the Company expects that its reliance on any
particular customer will decline as the Internet device market
develops and its customer base expands, the failure of the Company to
enter into a sufficient number of licensing agreements or sustain
revenues from major customers during a particular period could have a
material adverse effect on the Company's future operating results.
The Company's future results of operations will also be
largely dependent upon a number of factors relating to the further
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. 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 vendors and service providers such as Oracle, Sun
Microsystems, Microsoft, on-line service companies, Internet access
providers and networking software companies. Additionally, the
Company considers a significant source of competition for its
Internet technologies and professional services to be the prospect
company's internal resources.
<PAGE>
The Company provides its products and services to manufacturers
and service providers within the cable and satellite television,
wireless, telecommunications, office equipment, automotive and
industrial control markets who then 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 and the market acceptance of its customers' products,
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. 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 or service agreements, the terms of
the Company's licensing and service 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 license technologies
and provide services to new customers in that quarter and the
timing of product deployment by its customers. The Company
typically structures its professional services 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 have a disproportionate adverse
effect on the Company's operating results in any given period.
Impact of Year 2000
The "Year 2000" issue refers to the problem of certain computer
programs using abbreviated years with two digits and thus being
unable to distinguish, for example, whether the year "00" means 1900
or 2000 which may lead to such software failing to operate or
operating with erroneous results.
The Company has assembled a cross-department task force to
address the Year 2000 issue. The task force is addressing Spyglass
products, third-party software and products used by the Company and
software utilized by third parties that perform services for the
Company.
There have been no significant developments in the Company's
Year 2000 plan since that disclosed in it's Form 10-K filed in
December 1998.
<PAGE>
The task force has completed the assessment phase of its overall
plan. The assessment phase included a review of Spyglass products
and, as a result of these initial assessments, the Company has
determined that all new Spyglass products and technologies currently
licensed are Year 2000 compliant or will be so certified as new
versions and utilities are released. However, known or unknown
errors or defects in Spyglass' products could result in delay or loss
of revenue, diversion of development resources, increased service and
warranty costs or damage to Spyglass' reputation, any of which could
materially adversely affect Spyglass' results of operations or
financial condition. In addition, the task force investigated other
associated Year 2000 issues such as ensuring that third-party
software used internally and other products and services supplied to
Spyglass are Year 2000 compliant. This investigation included but
was not limited to review of vendor and related Web sites and direct
confirmation with significant vendors. The majority of Spyglass'
computer programs have been purchased and implemented over the last
three years. As a result, most of these programs were Year 2000
compliant when purchased or have since been upgraded with Year 2000
compliant software upgrades. In the event third party internally
used systems are not Year 2000 compliant, the Company's ability to
process vendor transactions and perform certain other functions could
be impaired. Additionally, Spyglass has no legacy (mainframe)
systems, which are the source of much of the current concern
regarding Year 2000 compliance. During the assessment phase, the
Company received direct confirmation that most material internally
used systems will operate in the year 2000.
The task force is currently in the second of its efforts, the
testing phase. In the testing phase, the task force will conduct
testing to confirm Year 2000 compliance on products and services in
which Year 2000 compliance is in question. For those products and
services that fail testing or are assessed as non-compliant, Spyglass
will implement any required software modifications and/or
replacements of those products so that such products will function
properly with respect to dates in the year 2000. The task force has
a May 1999 target date to complete its testing efforts. Upon
completion of its testing phase, the task force will determine a time
period during which to implement any necessary changes.
Spyglass does not currently have any information with regard to
Year 2000 compliance of any of its customers. As is the case with
all similarly situated companies, Spyglass' results of operations
could be materially impacted if its customers encounter Year 2000
issues unrelated to Spyglass products and services. In such a
scenario, it is reasonably likely that these customers would channel
resources into products and activities unrelated to products that
utilize Spyglass technologies and/or services, potentially limiting
Spyglass' future revenues from these customers.
The Company does not currently have a contingency plan in the
event that Spyglass products or third-party products and services
incur Year 2000 problems. Such a plan will be devised if and when it
has been determined that overall Year 2000 compliance is in question.
As of December 31, 1998, the only Year 2000 cost incurred by the
Company has been the value of the time, based on standard hourly
rates for employees, spent by the task force, which approximates
$60,000. The Company estimates it will incur approximately $240,000
in future expenses to ensure systems will function properly with
<PAGE>
respect to dates in the year 2000. These expenses are not expected
to have a material impact on the financial position, cash flow or
operations of the Company.
The costs and scope of the Company's Year 2000 compliance
efforts are based on management's best estimates which utilize
numerous assumptions of future events. However, there can be no
guarantee that these estimates and assumptions will be realized.
Furthermore, the actual impact of the Year 2000 issue could
materially differ from that anticipated.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company exports products to diverse geographic areas.
Substantially all foreign sales, however, are transacted in U.S.
dollars and therefore the Company is not exposed to significant
foreign currency market risk.
<PAGE>
Part II.
Other Information
Item 1. Legal Proceedings
The Company and certain of its officers and directors were named
as defendants in a purported class action lawsuit filed in the United
States District Court for the Northern District of Illinois (Eastern
Division) on January 28, 1999. The Complaint principally claims that
the defendants violated federal securities laws allegedly by making
false and misleading statements and by failing to disclose material
information concerning the Company's financial performance during the
purported class period of October 20, 1998 through January 4, 1999.
The Complaint further alleges that certain officers and/or directors
of the Company sold stock in the open market during the class period
and seeks unspecified damages. Although the Company believes that it
and the other defendants have meritorious defenses to the claims made
in the Complaint and intends to contest the action vigorously, an
adverse resolution of the lawsuit could have a material adverse
affect on the Company's financial condition and results of operation
in the period in which the litigation is resolved. The Company is
not presently able to reasonably estimate potential losses, if any,
related to the Complaint.
Item 2. Changes in Securities and Use of Proceeds
On October 19, 1998, the Company issued and sold 700,000 shares
of the Company's common stock to General Instrument Corporation
("GI") for $7,392,000 and also issued to GI warrants to purchase an
additional 700,000 shares of common stock. The warrants have
exercise prices ranging from $13.20 to $14.78 per share (subject to
adjustment in certain circumstances), and become exercisable on
varying dates over a five-year period. These securities were sold to
GI under the exemptions from registration set forth in Section 4(2)
of the Securities Act of 1933, as amended. No underwriters were
involved in such transaction.
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.
<PAGE>
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: February 12, 1999 /s/ Gary Vilchick
Gary Vilchick
Executive Vice President,
Finance, Administration and
Operations and Chief
Financial Officer
<PAGE>
INDEX TO EXHIBITS
Sequential
Page
Exhibit No. Description Number
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1998 AND 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 29,539,000
<SECURITIES> 0
<RECEIVABLES> 5,019,000
<ALLOWANCES> 418,000
<INVENTORY> 0
<CURRENT-ASSETS> 37,653,000
<PP&E> 3,164,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 40,986,000
<CURRENT-LIABILITIES> 4,050,000
<BONDS> 0
0
0
<COMMON> 150,000
<OTHER-SE> 36,736,000
<TOTAL-LIABILITY-AND-EQUITY> 40,986,000
<SALES> 1,865,000
<TOTAL-REVENUES> 4,523,000
<CGS> 311,000
<TOTAL-COSTS> 1,686,000
<OTHER-EXPENSES> 5,367,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,216,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,216,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,216,000)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
