As filed with the Securities and Exchange Commission on July 19, 1999
Registration Statement No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM S-3
______________________
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
______________________
SPYGLASS, INC.
(Exact name of registrant as specified in its charter)
______________________
Delaware 37-1258139
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
Naperville Corporate Center
1240 East Diehl Road
Naperville, IL 60703
(630) 505-1010
______________________
Douglas P. Colbeth
President and Chief Executive Officer
Spyglass, Inc.
Naperville Corporate Center
1240 East Diehl Road
Naperville, IL 60703
(630) 505-1010
Approximate date of commencement of proposed sale to public: As
soon as practicable after this Registration Statement becomes
effective.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please
check the following box. .
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, other than securities offered only in
connection with dividend or interest reinvestment plans, check the
following box.__ x__.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for
the same offering. . 333-_______.
<PAGE>
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. . 333-
__________.
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. .
_____________________________________________________________
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of Shares Amount Maximum Maximum
to be to be Offering Aggregate Amount of
Registered Registered Price Offering Registration
Per Share(1) Price(1) Fee
Common Stock, 574,260 $17.713 $10,171,580.25 $2,828.00
$.01 par value
per share........
(1) Estimated solely for purposes of calculating the registration
fee pursuant to Rule 457(c) under the Securities Act and based
upon the average of the high and low prices on the Nasdaq
National Market on July 15, 1999.
The Company hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until
the Company shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until
the Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), shall determine.
<PAGE>
The information in this prospectus is not complete and may be
changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
Subject to completion, dated July 19, 1999
PROSPECTUS
Spyglass, Inc.
574,260 SHARES OF COMMON STOCK
Spyglass, Inc. previously issued 1,148,520 shares of common
stock to the former stockholders of Navitel Communications, Inc. in
connection with our acquisition of that company. This prospectus
relates to resales of 574,260 of those shares.
We will not receive any of the proceeds from the sale of the
shares.
We have agreed to pay certain expenses in connection with the
registration of the shares and to indemnify the selling stockholders
against certain liabilities. The selling stockholders will pay all
underwriting discounts and selling commissions, if any, in connection
with the sale of the shares.
The selling stockholders, or their pledgees, donees, transferees
or other successors in interest, may offer the shares through public
or private transactions at prevailing market prices, at prices
related to prevailing market prices or at privately negotiated
prices. Our common stock is traded on the Nasdaq National Market
("Nasdaq") under the symbol "SPYG." On July 15, 1999, the closing
sale price of the common stock on Nasdaq was $15.625 per share.
The securities offered hereby involve a high degree of risk.
See "Risk Factors" beginning on page 5.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved of these securities or
determined whether this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this prospectus is _______, 1999.
<PAGE> 2
TABLE OF CONTENTS
Page
Where to Find More Information........ 3
Incorporation of Certain Documents By
Reference........................... 3
Special Note Regarding Forward-Looking
Information.......................... 4
The Company........................... 5
Risk Factors.......................... 5
Use of Proceeds....................... 8
Selling Stockholders.................. 8
Plan of Distribution.................. 9
Legal Matters......................... 10
Experts............................... 11
We have not authorized anyone to provide you with information
different from that contained or incorporated by reference in this
prospectus. The selling stockholders are offering to sell, and
seeking offers to buy, shares of Spyglass common stock only in
jurisdictions where offers and sales are permitted. The information
contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or
of any sale of the shares.
<PAGE> 3
WHERE TO FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy
statements, and other documents with the Securities and Exchange
Commission. You may read and copy any document we file at the SEC's
public reference room at Judiciary Plaza Building, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. You should call 1-800-SEC-
0330 for more information on the public reference room. Our SEC
filings are also available to you on the SEC's Internet site at
www.sec.gov. Our common stock is quoted on Nasdaq. Reports, proxy
statements and other information concerning Spyglass may be inspected
at the offices of The Nasdaq Stock Market, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
This prospectus is part of a registration statement that we
filed with the SEC. The registration statement contains more
information than this prospectus regarding Spyglass and its common
stock, including certain exhibits and schedules. You can obtain a
copy of the registration statement from the SEC at the address listed
above or from its Internet site.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate" into this prospectus
information we file with the SEC in other documents. This means that
we can disclose important information to you by referring to other
documents that contain that information. The information
incorporated by reference is considered to be part of this
prospectus, and information that we file with the SEC in the future
and incorporate by reference will automatically update and may
supersede the information contained in this prospectus. We
incorporate by reference the documents listed below and any future
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), prior to the sale of all the shares covered by this
prospectus.
The following documents that have been filed by Spyglass with
the SEC are incorporated herein by reference:
. Our Annual Report on Form 10-K for the year ended September 30,
1998;
. Our Quarterly Report on Form 10-Q for the quarter ended December
31, 1998;
. Our Quarterly Report on Form 10-Q for the quarter ended March
31, 1999;
. Our Current Report on Form 8-K filed on April 30, 1999, as
amended by a Form 8-K/A filed on June 29, 1999; and
. The description of our common stock contained in our
Registration Statement on Form 8-A, including any amendments or
reports filed for the purpose of updating such description.
<PAGE> 4
You may obtain a copy of these documents, at no cost, by writing to:
Spyglass, Inc.
Naperville Corporate Center
1240 East Diehl Road
Naperville, IL 60703
Attention: Investor Relations
Telephone: (630) 505-1010
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains or incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the
Exchange Act. You can identify these forward-looking statements by
our use of the words "believes," "anticipates," "plans," "expects,"
"may," "will," "intends," "estimates" and similar expressions,
whether in the negative or affirmative. Although we believe that
these forward-looking statements reasonably reflect our plans,
intentions and expectations, we cannot guarantee that we actually
will achieve these plans, intentions or expectations. Our actual
results could differ materially from the plans, intentions and
expectations disclosed in the forward-looking statements we make. We
have included important factors in the cautionary statements below
(particularly under the heading "Risk Factors") that we believe could
cause our actual results to differ materially from the forward-
looking statements that we make. We do not intend to update
information contained in any forward-looking statement we make.
<PAGE> 5
THE COMPANY
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, Spyglass 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's 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 television set-top boxes, screen and cellular phones,
televisions, office equipment, medical devices and industrial
controls. In addition, several major corporations have deployed our
SurfWatch product, a leading content filtering software designed to
block unwanted material from the Internet.
Spyglass, Inc. was organized as an Illinois corporation in
February 1990 and reincorporated in Delaware in May 1995. Our
executive offices are located at 1240 Diehl Road, Naperville, IL
60703, our telephone number is (630) 505-1010 and our Internet web
site address is www.spyglass.com. "Spyglass," "Surf-Watch" and "Make
the Net Work" are registered trademarks of Spyglass.
RISK FACTORS
You should carefully consider the risks described below before
making an investment decision. The risks and uncertainties described
below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem
immaterial may also impair our business operations. If any of the
following risks actually occur, our business, financial condition, or
results of operations could be materially adversely affected. In
such case, the trading price of our common stock could decline and
you may lose all or part of your investment.
We operate in a new and undeveloped market.
During fiscal 1997, we announced a new strategic focus on the
Internet device market. We are now focused on the development,
marketing and distribution of our technologies and services to the
non-PC Internet device marketplace. Because this is a new and
undeveloped market, we can provide no assurance as to the extent of
the demand for our products and services or the extent to which we
will be successful in penetrating this market.
We are dependent upon a relatively small number of large customers.
We derived approximately 24% of our revenues for the quarter
ended March 31, 1999 from one customer. As the Internet device
market develops, we expect to continue to derive a significant
portion of our revenues from a relatively limited number of
customers. We expect that our reliance on any particular customer
will decline as the Internet device market develops and our customer
base expands. Any failure to enter into a sufficient number of
licensing agreements or obtain revenues from major customers during a
particular period, however, could have a material adverse effect on
our future operating results.
<PAGE> 6
Our success depends upon the commercial success of the Internet.
Our 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.
We must rapidly respond to technological changes and evolving
customer demands.
The market for Internet software products is characterized by
rapidly changing technology, evolving industry standards and customer
demands, and frequent product introductions and enhancements. This
makes it difficult to predict whether any initial commercial
acceptance of our products can be sustained over a period of time.
We operate in an exceptionally competitive industry.
The market for Internet technologies and services is extremely
competitive, and competition is likely to increase in the future. We
currently face competition from other Internet device technology
vendors and service providers such as Oracle, Sun Microsystems,
Phone.com, Microsoft, on-line service companies, Internet access
providers and networking software companies. Additionally, we
consider a significant source of competition for our Internet
technologies and professional services to be the internal resources
of our potential customers. Any failure to compete successfully
would have a material adverse effect on our future operating results.
We are dependent upon the market success of the products and services
of our customers.
We do not sell our products directly to end-users. Instead, we
provide our 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 our technology into their
products and services. Our success is therefore dependent in large
part on the performance of our customers and the market acceptance of
our customers' products, both of which are outside of our control.
We are subject to claims of intellectual property infringement.
From time to time we receive notices alleging that our 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 our products, we are required to discontinue
sales of certain products, eliminate certain features on our
products, or pay royalties to another party, our future operating
results could be materially adversely affected.
Our quarterly results fluctuate.
Our 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 our licensing and service arrangements with our
customers, and
. the timing of new product introductions and upgrades by us and
our competitors.
We typically structure our 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. Our
<PAGE> 7
revenues in any quarter will depend in significant part on our
ability to license technologies and provide services to new customers
in that quarter and the timing of product deployments by our customers.
We typically structure our professional services agreements with
customers to recognize revenues on the percentage-of-completion
method of accounting.
Our expense levels are based in part on expectations of future
revenue levels and are difficult to adjust in the short-term. As a
result, any shortfall in expected revenue in a particular quarter
would have a disproportionate adverse effect on our net income for
that quarter.
The market price of our common stock is based in large part
on professional securities analysts' expectations that our business
will grow and that we will achieve certain levels of revenue and net
income. If our financial performance in a particular quarter does not
meet the expectations of securities analysts, this may adversely
affect the views of those securities analysts concerning our growth
potential and future financial performance. If the securities
analysts that regularly follow us lower their rating of our common
stock or lower their projections for our future growth and financial
performance, the market price of our common stock is likely to drop
significantly. In addition, in those circumstances the decrease in
the price of our common stock would probably be disproportionate to
the shortfall in our financial performance.
<PAGE> 8
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by
the selling stockholders.
We will bear all costs (excluding any underwriting discounts and
commissions and expenses incurred by the selling stockholders for
brokerage, accounting, tax or legal services or any other expenses
incurred by the selling stockholders in disposing of the shares),
fees and expenses incurred in effecting the registration of the
shares covered by this prospectus, including, without limitation, all
registration and filing fees, Nasdaq listing fees, fees and expenses
of our counsel, fees and expenses of our accountants, and blue sky
fees and expenses.
SELLING STOCKHOLDERS
The selling stockholders are former stockholders of Navitel
Communications, Inc., which we recently acquired. We issued the
shares covered by this prospectus to the selling stockholders in
connection with the acquisition and agreed to register the shares.
The following table sets forth, to the knowledge of Spyglass, certain
information about the selling stockholders as of July 19, 1999.
Name of Number of Number of Number of Shares
Selling Shares of Shares of of Common Stock
Stockholder Common Stock Common Beneficially
Beneficially Stock Owned After
Owned Prior to Offered Offering
Offering(1)(2) Hereby (1)(2)(3)
------------ -------------- ---------- --------------
Adams, 270,250 135,125 135,125
Randy(4)(5)
Daniel Adams 11,031 5,515 5,516
Trust
Emily Adams 11,031 5,515 5,516
Trust
Hannah Adams 11,031 5,516 5,516
Trust
Amundson, 1,655 827 828
Tor(4)
Atchison, 15,828 7,914 7,914
Thomas(4)
Boich, 10,573 5,286 5,287
Michael
D.(6)
Boich, 5,824 2,912 2,912
Michael M.
Center, 1,103 551 552
Ashley(4)
Colligan, 4,749 2,374 2,375
John
Connett, 656 328 328
David(4)
Conway 5,824 2,912 2,912
Family Trust
Dettering, 2,758 1,379 1,379
Bill
DeWitt, 82,730 41,365 41,365
Jennifer
Draper 35,820 17,910 17,910
Associates,
L.P.
Dyer, David 4,495 2,247 2,248
Hogan, 4,495 2,247 2,248
Gerald
Lehmann, 8,990 4,495 4,495
Leonard
MacKenzie, 35,849 17,924 17,925
Bill(4)
Mandel, 4,488 2,244 2,244
Alfred
Microsoft 277,445 138,722 138,723
Corporation(7)
Palo Alto 10,771 5,385 5,386
Design Group
Pearson, 3,033 1,516 1,517
Steve(4)
Poirier, 8,919 4,459 4,460
Francis
Polaris Fund 5,992 2,996 2,996
L.P.
SET 41,617 20,808 20,809
Engineering
Shimonoski, 552 276 276
Janet
Simon, 165,459 82,729 82,730
Robert(4)
Studio Verso 1,770 885 885
Tai, 1,907 953 954
Dianna(4)
Van Wye, 5,515 2,757 2,758
Mitch(4)
Wasatch 96,364 48,182 48,182
Venture
Corp.
__________________________
<PAGE> 9
(1) Except as otherwise indicated, the number of shares beneficially
owned is determined under rules promulgated by the SEC, and the
information is not necessarily indicative of beneficial
ownership for any other purpose. The selling stockholders have
sole voting power and investment power with respect to all
shares listed as owned by the selling stockholders. The number
of shares listed for each stockholder is fewer than 1% of the
number of shares of common stock outstanding.
(2) Of the total shares of common stock listed as owned by the
selling stockholders, a total of 114,852 shares are held in an
escrow account to secure indemnification obligations to Spyglass
of the selling stockholders. It is expected that these shares
(less any shares that may be distributed from the escrow account
to Spyglass in satisfaction of indemnification claims) will be
released from escrow and distributed to the selling stockholders
on April 16, 2000. The number of shares indicated as owned by
each selling stockholders includes those shares (representing
10% of the number of shares listed as beneficially owned by each
selling stockholder) which such selling stockholder is entitled
to receive upon distribution of these shares from the escrow
account.
(3) We do not know when or in what amounts a selling stockholder may
offer shares for sale. The selling stockholders might not sell
any or all of the shares offered by this prospectus. Because
the selling stockholders may offer all or some of the shares
pursuant to this offering, and because there are currently no
agreements, arrangements or understandings with respect to the
sale of any of the shares that will be held by the selling
stockholders after completion of the offering, we cannot
estimate the number of the shares that will be held by the
selling stockholders after completion of the offering. For
purposes of this table, however, we have assumed that, after
completion of the offering, none of the shares covered by this
prospectus will be held by the selling stockholders.
(4) Employee or former employee of Spyglass and/or Navitel. None of
the other selling stockholders has held any position or office
with, or has otherwise had a material relationship with,
Spyglass or any of its subsidiaries within the past three years
other than Microsoft Corporation as indicated in Note (7) below.
(5) Mr. Adams was the former Chief Executive Officer of Navitel.
(6) Mr. Boich was a former Member of the Board of Directors of
Navitel.
(7) Microsoft Corporation and Navitel have entered into a
development and license agreement.
PLAN OF DISTRIBUTION
The shares covered hereby may be offered and sold from time to
time by the selling stockholders, or by their pledgees, donees,
transferees or other successors in interest. The selling
stockholders will act independently of Spyglass in making decisions
with respect to the timing, manner and size of each sale. Such sales
may be made in the over-the-counter market or otherwise, at prices
and under terms then prevailing or at prices related to the then
current market price or in negotiated transactions, including
pursuant to one or more of the following methods:
. purchases by a broker-dealer as principal and resale by
such broker-dealer for its own account pursuant to this
prospectus;
. ordinary brokerage transactions and transactions in which
the broker solicits purchasers;
. block trades in which the broker-dealer so engaged will
attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate
the transaction;
. an over-the-counter distribution in accordance with the
rules of the Nasdaq National Market; and
. in privately negotiated transactions.
<PAGE> 10
To the extent required, this prospectus may be amended and
supplemented from time to time to describe a specific plan of
distribution. In connection with distributions of the shares or
otherwise, the selling stockholders may enter into hedging
transactions with broker-dealers or other financial institutions. In
connection with such transactions, broker-dealers or other financial
institutions may engage in short sales of the common stock in the
course of hedging the positions they assume with selling
stockholders. The selling stockholders may also sell the common
stock short and redeliver the shares to close out such short
positions. The selling stockholders may also enter into option or
other transactions with broker-dealers or other financial
institutions that require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which
shares such broker-dealer or other financial institution may resell
pursuant to this prospectus (as supplemented or amended to reflect
such transaction). The selling stockholders may also pledge shares
to a broker-dealer or other financial institution, and, upon a
default, such broker-dealer or other financial institution may effect
sales of the pledged shares pursuant to this prospectus (as
supplemented or amended to reflect such transaction). In addition,
any shares that qualify for sale pursuant to Rule 144 may be sold
under Rule 144 rather than pursuant to this prospectus.
In effecting sales, broker-dealers or agents engaged by the
selling stockholders, or by their pledgees, donees, transferees or
other successors in interest, may arrange for other broker-dealers to
participate. Broker-dealers or agents may receive commissions,
discounts or concessions from the selling stockholders, or from their
pledgees, donees, transferees or other successors in interest, in
amounts to be negotiated immediately prior to the sale.
In offering the shares covered hereby, the selling stockholders,
or their pledgees, donees, transferees or other successors in
interest, and any broker-dealers and any other participating broker-
dealers who execute sales for the selling stockholders, may be deemed
to be "underwriters" within the meaning of the Securities Act in
connection with such sales, and any profits realized by the selling
stockholders and the compensation of such broker-dealers may be
deemed to be underwriting discounts and commissions.
In order to comply with the securities laws of certain states,
if applicable, the shares must be sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in
certain states the shares may not be sold unless they have been
registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is
available and is complied with.
We have advised the selling stockholders that the anti-
manipulation rules of Regulation M under the Exchange Act may apply
to sales of shares in the market and to the activities of the selling
stockholders and their affiliates. In addition, we will make copies
of this prospectus available to the selling stockholders for the
purpose of satisfying the prospectus delivery requirements of the
Securities Act. The selling stockholders may indemnify any broker-
dealer that participates in transactions involving the sale of the
shares against certain liabilities, including liabilities arising
under the Securities Act.
At the time a particular offer of shares is made, if required, a
prospectus supplement will be distributed that will set forth the
number of shares being offered and the terms of the offering,
including the name of any underwriter, dealer or agent, the purchase
price paid by any underwriter, any discount, commission and other
item constituting compensation, any discount, commission or
concession allowed or reallowed or paid to any dealer, and the
proposed selling price to the public.
We have agreed to indemnify the selling stockholders against
certain liabilities, including certain liabilities under the
Securities Act.
We have agreed with the selling stockholders to keep the
Registration Statement of which this prospectus constitutes a part
effective until the earlier of (1) such time as all of the shares
covered by this prospectus have been disposed of pursuant to and in
accordance with the Registration Statement or (2) April 16, 2000.
LEGAL MATTERS
The validity of the shares offered by this prospectus has been
passed upon by Hale and Dorr LLP.
<PAGE> 11
EXPERTS
The consolidated financial statements and schedule of Spyglass,
Inc. incorporated by reference in its Annual Report on Form 10-K for
each of the two years ended September 30, 1998 and 1997 incorporated
by reference herein, and the financial statements of Navitel
Communications, Inc. for the years ended September 30, 1998 and 1997,
and the period from inception (May 21, 1996) through September 30,
1996 included in Spyglass, Inc.'s Amended Current Report on Form 8-K/A
incorporated by reference herein, and the supplemental consolidated
financial statements of Spyglass, Inc. at September 30, 1998 and 1997,
and for each of the two years in the period ended September 30,
1998, appearing in this Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference.
The financial statements referred to above are included in reliance
upon such reports given on the authority of such firms as experts in
accounting and auditing.
The financial statements for the year ended September 30, 1996
incorporated in this Form S-3 by reference to the Annual Report on
Form 10-K of Spyglass, Inc for the year ended September 30, 1998 have
been so included in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
<PAGE> II-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses to be
incurred in connection with the sale and distribution of the
securities being registered hereby, all of which will be borne by
Spyglass (except any underwriting discounts and commissions and
expenses incurred by the selling stockholders for brokerage,
accounting, tax or legal services or any other expenses incurred by
the selling stockholders in disposing of the shares). All amounts
shown are estimates except the Securities and Exchange Commission
registration fee.
Filing Fee - Securities and Exchange
Commission . . . ...................... $ 2,828.00
Legal fees and expenses ............... $ 10,000.00
Accounting fees and expenses .......... $ 25,000.00
Miscellaneous expenses ................ $ 2,172.00
-----------
Total Expenses ................... $ 40,000.00
===========
Item 15. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of Delaware provides
that a corporation has the power to indemnify a director, officer,
employee or agent of the corporation and certain other persons
serving at the request of the corporation in related capacities
against amounts paid and expenses incurred in connection with an
action or proceeding to which he is or is threatened to be made a
party by reason of such position, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, in any
criminal proceeding, if such person had no reasonable cause to
believe his conduct was unlawful; provided that, in the case of
actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which
such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the adjudicating court determines
that such indemnification is proper under the circumstances.
Article NINTH of the Registrant's Amended and Restated
Certificate of Incorporation, as amended, provides that a director or
officer of the Registrant (a) shall be indemnified by the Registrant
against all expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement reasonably incurred in connection with
any litigation or other legal proceeding (other than an action by or
in the right of the Registrant) brought against him by virtue of his
position as a director or officer of the Registrant if he acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Registrant, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful and (b) shall be indemnified by the
Registrant against expenses (including attorneys' fees) and amounts
paid in settlement reasonably incurred in connection with any action
by or in the right of the Registrant by virtue of his position as a
director or officer of the Registrant if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the
best interests of the Registrant, except that no indemnification
shall be made with respect to any such matter as to which such
director or officer shall have been adjudged to be liable to the
Registrant, unless and only to the extent that a court determines
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, he shall be
indemnified against all expenses (including attorneys' fees)
reasonably incurred by him in connection therewith. Expenses
incurred in defending a civil or criminal action, suit or proceeding
shall be advanced by the Registrant to a
<PAGE> II-2
director or officer, at his request, upon receipt of an undertaking
by the director or officer to repay such amount if it is ultimately
determined that he is not entitled to indemnification.
Indemnification is required to be made unless the Registrant
determines (in the manner provided in the Amended and Restated
Certificate of Incorporation, as amended) that the applicable
standard of conduct required for indemnification has not been met. In
the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an
indemnification payment within 60 days after such payment is claimed
by such person, such person is permitted to petition a court to make
an independent determination as to whether such person is entitled to
indemnification. As a condition precedent to the right of
indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant
has the right to participate in such action or assume the defense
thereof.
Article NINTH of the Registrant's Amended and Restated
Certificate of Incorporation, as amended, further provides that the
indemnification provided therein is not exclusive, and provides that
in the event that the Delaware General Corporation Law is amended to
expand the indemnification permitted to directors or officers, the
Registrant must indemnify those persons to the fullest extent
permitted by such law as so amended.
The Company has purchased a general liability insurance policy
which covers certain liabilities of directors and officers of the
Company arising out of claims based on acts or omissions in their
capacity as directors or officers.
Article EIGHTH of the Registrant's Amended and Restated
Certificate of Incorporation, as amended, provides that, except to
the extent that the General Corporation Law of Delaware prohibits the
elimination or limitation of liability of directors for breaches of
fiduciary duty, no director of the Registrant shall be personally
liable to the Registrant or its stockholders for monetary damages for
any breach of fiduciary duty as a director.
Item 16. Exhibits
EXHIBIT DESCRIPTION
NUMBER
4.1(1) Amended and Restated Certificate of
Incorporation of the Registrant, as amended.
4.2(2) By-laws of the Registrant.
5.1 Opinion of Hale and Dorr LLP.
23.1 Consent of Ernst & Young L.L.P.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Hale and Dorr LLP, included in
Exhibit 5.1 filed herewith.
24.1 Power of Attorney (See page II-4 of this
Registration Statement).
99.1 Supplemental Consolidated Financial Statements
for the years ended September 30, 1998, 1997 and
1996 and related Supplemental Management's
discussion and Analysis of Financial Condition
and Results of Operations of Spyglass, Inc.
(1) Incorporated herein by reference from the Registrant's
Registration Statement on Form S-8 (File No. 333-04357)
filed May 23, 1996.
(2) Incorporated herein by reference from the Registrant's
Registration Statement on Form S-1 (File No. 33-92174).
<PAGE> II-3
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended (the "Securities
Act");
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in this Registration Statement.
Notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective Registration Statement; and
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in this
Registration Statement or any material change to such
information in this Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not
apply if the information required to be included is a post-
effective amendment by those paragraphs is contained in periodic
reports filed by the Company pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), that are incorporated by reference in this
Registration Statement.
(2) That, for the purposes of determining any liability under
the Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at the time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
The Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of
the Registrant's annual report pursuant to Section 13(a) or 15(d) of
the Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating
to the securities offered therein and the offering of such securities
at the time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the indemnification
provisions described herein, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
<PAGE> II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-3
and has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Naperville, State of Illinois, on July 19, 1999.
SPYGLASS, INC.
By:/s/ Gary L. Vilchick
Gary L. Vilchick
Executive Vice President, Finance,
Administration and Operations, and
Chief Financial Officer
<PAGE> II-5
SIGNATURES AND POWER OF ATTORNEY
We, the undersigned officers and directors of Spyglass, Inc.,
hereby severally constitute and appoint Gary L. Vilchick and Patrick
J. Rondeau, and each of them singly, our true and lawful attorneys
with full power to any of them, and to each of them singly, to sign
for us and in our names in the capacities indicated below the
Registration Statement on Form S-3 filed herewith and any and all
pre-effective and post-effective amendments to said Registration
Statement and generally to do all such things in our name and behalf
in our capacities as officers and directors to enable Spyglass, Inc.
to comply with the provisions of the Securities Act of 1933, as
amended, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they
may be signed by our said attorneys, or any of them, to said
Registration Statement and any and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Douglas P. President, Chief July 16, 1999
Colbeth Executive Officer and
Douglas P. Colbeth Director (principal
executive officer)
/s/ Gary L. Vilchick Executive Vice July 16, 1999
President, Finance,
Gary L. Vilchick Administration and
Operations and Chief
Financial Officer
(principal financial and
accounting officer)
/s/ Charles T. Director July 13, 1999
Brumback
Charles T. Brumback
/s/ Brian J. Jackman Director July 14, 1999
Brian J. Jackman
/s/ Timothy K. Director July 16, 1999
Krauskopf
Timothy K. Krauskopf
/s/ John Shackleton Director July 16, 1999
John Shackleton
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER
4.1(1) Amended and Restated Certificate of
Incorporation of the Registrant, as amended.
4.2(2) By-laws of the Registrant.
5.1 Opinion of Hale and Dorr LLP.
23.1 Consent of Ernst & Young L.L.P.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Hale and Dorr LLP, included in
Exhibit 5.1 filed herewith.
24.1 Power of Attorney (See page II-4 of this
Registration Statement).
99.1 Supplemental Consolidated Financial Statements
for the years ended September 30, 1998, 1997 and
1996 and related Supplemental Management's
discussion and Analysis of Financial Condition
and Results of Operations of Spyglass, Inc.
_________________________
(1) Incorporated herein by reference from the Registrant's
Registration Statement on Form S-8 (File No. 333-04357)
filed May 23, 1996.
(2) Incorporated herein by reference from the Registrant's
Registration Statement on Form S-1 (File No. 33-92174).
<PAGE>
EXHIBIT 5.1
HALE AND DORR LLP
COUNSELLORS AT LAW
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
617-526-6000 . FAX 617-526-5000
July 19, 1999
Spyglass, Inc.
Naperville Corporate Center
1240 East Diehl Road
Naperville, IL 60703
Registration Statement on Form S-3
Ladies and Gentlemen:
This opinion is furnished to you in connection with a
Registration Statement on Form S-3 (the "Registration Statement") to
be filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), for the registration of an aggregate of 574,260
shares of Common Stock, $.01 par value per share (the "Shares"), of
Spyglass, Inc., a Delaware corporation (the "Company"). All of the
Shares are being registered on behalf of certain stockholders of the
Company (the "Selling Stockholders").
We have acted as counsel for the Company in connection with the
registration for resale of the Shares. We have examined signed
copies of the Registration Statement to be filed with the Commission.
We have also examined and relied upon the minutes of meetings of the
stockholders and the Board of Directors of the Company as provided to
us by the Company, stock record books of the Company as provided to
us by the Company, the Amended and Restated Certificate of
Incorporation, as amended, and By-Laws of the Company, each as
restated and/or amended to date, and such other documents as we have
deemed necessary for purposes of rendering the opinions hereinafter
set forth.
In our examination of the foregoing documents, we have assumed
the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of
all documents submitted to us as copies, the authenticity of the
originals of such latter documents and the legal competence of all
signatories to such documents.
We express no opinion herein as to the laws of any state or
jurisdiction other than the Delaware General Corporation Law statute
and the federal laws of the United States of America.
Based upon and subject to the foregoing, we are of the opinion
that the Shares have been duly authorized and are validly issued,
fully paid and nonassessable.
It is understood that this opinion is to be used only in
connection with the offer and sale of the Shares while the
Registration Statement is in effect.
<PAGE>
Please note that we are opining only as to the matters expressly
set forth herein, and no opinion should be inferred as to any other
matters.
We hereby consent to the filing of this opinion with the
Commission as an exhibit to the Registration Statement in accordance
with the requirements of Item 601(b)(5) of Regulation S-K under the
Securities Act and to the use of our name therein and in the related
prospectus under the caption "Legal Matters." In giving such
consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the Commission.
Very truly yours,
/s/ HALE AND DORR LLP
HALE AND DORR LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts"
in the Registration Statement (Form S-3) of Spyglass, Inc. for the
registration of 574,260 shares of its common stock, and to the
inclusion therein of our report dated July 16, 1999, with respect to
the supplemental consolidated financial statements of Spyglass Inc.
and to the incorporation by reference of our report dated October 19,
1998, with respect to the consolidated financial statements and
schedule of Spyglass, Inc. incorporated by reference in its Annual
Report on Form 10-K for the year ended September 30, 1998, and to the
incorporation by reference of our report dated June 21, 1999, with
respect to the financial statements of Navitel Communications, Inc.
for the years ended September 30, 1998 and 1997, and the period from
inception (May 21, 1996) through September 30, 1996 included in
Spyglass, Inc.'s Amended Current Report on Form 8-K/A dated June 29,
1999, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
July 19, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this
Registration Statement on Form S-3 of our report dated October 25,
1996 relating to the financial statements and financial statement
schedules for the year ended September 30, 1996, which appears in
Spyglass Inc.'s Annual Report on Form 10-K for the year ended
September 30, 1998. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Chicago, Illinois
July 19, 1999
<PAGE>
Selected Financial Data
The following table sets forth selected financial data of the Company
as of and for the five years ended September 30, 1998, 1997, 1996,
1995 and 1994. The selected financial data for 1998, 1997 and 1996
has been derived from the Company's audited supplemental consolidated
financial statements and the selected financial data for 1995 and
1994 has been derived from the Company's audited historical
consolidated financial statements . This financial data should be
read in conjunction with "Supplemental Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Supplemental Consolidated Financial Statements and Notes thereto
appearing elsewhere in this document.
<TABLE>
<S> <C> <C> <C> <C> <C>
Fiscal Years Ended September 30,
(In thousands, except ________________________________________________
per share amounts) 1998 1997 1996 1995 1994
(4) (4)(3) (4)(3) (3)(2) (3)(2)
______________________________________________________________________________
Statement of Operations Data:
Total net revenues $21,169 $21,295 $ 22,307 $ 12,141 $ 4,667
Gross profit 15,610 18,267 20,277 10,380 3,580
Income(loss) from
operations (11,283) (15,677) 3,153 3,025 770
Income (loss) before
cumulative effect of
change in accounting (10,032) (14,151) 2,952 2,176 584
Net income (loss) (10,032) (14,151) 2,952 2,176 1,384
Net income (loss)
available to common
stockholders ($10,032) ($14,151) $ 2,952 $ 1,985 $ 1,127
Earnings (loss) per common share-basic (1):
Income (loss) before
cumulative effect of
change in accounting ($0.69) ($1.07) $ 0.23 $ 0.27 $ 0.09
Net income (loss) ($0.69) ($1.07) $ 0.23 $ 0.27 $ 0.20
Net income (loss)
available to common
Stockholders ($0.69) ($1.07) $ 0.23 $ 0.25 $ 0.17
Weighted average
number of common
shares outstanding 14,543 13,238 12,768 8,111 6,766
Earnings (loss) per common share-diluted (1):
Income (loss) before
cumulative effect of
change in accounting ($0.69) ($1.07) $ 0.21 $ 0.23 $ 0.08
Net income (loss ($0.69) ($1.07) $ 0.21 $ 0.23 $ 0.19
Net income (loss)
available to common
stockholders ($0.69) ($1.07) $ 0.21 $ 0.21 $ 0.16
Weighted average
number of common
shares outstanding 14,543 13,238 14,023 9,383 7,172
Balance Sheet Data:
Cash and cash
equivalents and short-
term investments $22,706 $29,026 $ 34,201 $ 34,872 $ 1,606
Working capital 25,678 29,233 38,598 35,550 2,174
Total assets 34,980 42,048 48,908 43,509 5,871
Redeemable convertible
preferred stock - - - - 3,393
Total stockholders'
equity (deficit) $29,807 $36,162 $ 43,393 $ 37,614 $ (756)
</TABLE>
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.
(1) In December 1997, the Company adopted Statement of Financial
Accounting Standard No. 128, Earnings per Share ("SFAS No. 128").
SFAS No. 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share.
In periods when the Company incurs a net loss. the basic and diluted
weighted average number of common shares outstanding will be equal.
(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 prior to December 20,
1995 has been restated to reflect the two-for-one common stock split
for all periods presented.
(3) Selected financial data for the years ended September 30, 1997,
1996, 1995 and 1994 does not include the results of AllPen Software
which was acquired in fiscal 1998 in a transaction accounted for as a
pooling of interests. Because the effect of this transaction was
considered immaterial, Spyglass' financial statements were not
restated; instead, the Company's equity accounts were adjusted for
the effect of the pooling.
(4) Selected financial data for the years ended September 30, 1998
and 1997 includes the results of Navitel Communications, Inc. which
was acquired in fiscal 1999 in a transaction accounted for as a
pooling of interests. Selected financial data for the year ended
September 30, 1996 includes the results of Navitel from its
inception, May 21, 1996.
<PAGE>
Selected Quarterly Data (4)
The following table sets forth certain quarterly financial
information of the Company for fiscal years 1998 and 1997. 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 "Supplemental Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Supplemental
Consolidated Financial Statements and Notes thereto appearing
elsewhere in this document.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
___________________________Three Months Ended (Unaudited)________________________
Sept. June March Dec. Sept. June March Dec.
30, 30, 31, 31, 30, 30, 31, 31,
1998 1998 1998 1997 1997 1997 1997 1996
(3) (3) (1)(3) (3)
________________________________________________________________________________
Statement of Operations Data:
Total net $6,158 $5,676 $5,081 $4,254 $3,179 $2,216 $12,015 $3,885
revenues
Gross 4,209 4,090 3,932 3,378 2,494 1,539 10,808 3,426
profit
Income (975) (1,972) (3,589) (4,747) (5,499) (7,945) 1,436 (3,667)
(loss) from
operations
Net income (672) (1,686) (3,279) (4,393) (5,162) (7,379) 700 (2,308)
(loss)
Per Share and Share Data:
Net income
(loss) per $(0.05) $(0.11) $(0.23) $(0.31) $(0.38) $(0.55) $0.05 $(0.18)
share-
basic (2)
Weighted
average
number of 14,878 14,750 14,272 14,166 13,473 13,335 13,147 13,000
Common
shares
outstanding
- basic
Net income
(loss) per $(0.05) $(0.11) $(0.23) $(0.31) $(0.38) $(0.55) $ 0.05 $(0.18)
share-
Diluted (2)
Weighted
average
number of 14,878 14,750 14,272 14,166 13,473 13,335 13,916 13,000
Common
shares
outstanding
-diluted
</TABLE>
(1) Includes a one-time licensing fee of $8,000,000 from Microsoft
Corporation which decreased the net loss by $7,000,000 or $0.58 per
share.
(2) In December 1997, the Company adopted Statement of Financial
Accounting Standard No. 128, Earnings per Share ("SFAS No. 128").
SFAS No. 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share.
In periods when the Company incurs a net loss, the basic and diluted
weighted average number of common shares outstanding will be equal.
(3) Selected quarterly data for the year ended September 30, 1997
does not include the results of AllPen Software which was acquired in
fiscal 1998 in a transaction accounted for as a pooling of interests.
Because the effect of this transaction was considered immaterial,
Spyglass' financial statements were not restated; instead, the
Company's equity accounts were adjusted for the effect of the
pooling.
(4) Selected quarterly data for the years ended September 30, 1998
and 1997 includes the results of Navitel Communications, Inc. which
was acquired in fiscal 1999 in a transaction accounted for as a
pooling of interests.
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.
Three Months Ended
___________________________________________________________________
Sept. June March Dec. Sept. June March Dec.
30, 30, 31, 31, 30, 30, 31, 31,
1998 1998 1998 1997 1997 1997 1997 1996
__________________________________________________________________
High $15 $15 $9 $12 $10 $11 $14 $19
5/16 3/8 9/16 1/2 1/8 1/2
Low $9 $8 $4 $ 4 $ 7 $ 6 $ 7 $10
5/8 1/4 1/4 1/16 3/16
<PAGE>
Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
This discussion should be read in conjunction with the Company's
supplemental consolidated financial statements included herein. This
Supplemental Management's Discussion and analysis of Financial
Condition and Results of Operations and the accompanying supplemental
consolidated financial statements and notes thereto have been
prepared to reflect the retroactive effect of Spyglass, Inc.'s
("Spyglass") acquisition of Navitel Communications, Inc. ("Navitel"),
consummated in April 1999. The acquisition was accounted for as a
pooling of interests, which means that for accounting and financial
reporting purposes, Spyglass' consolidated financial statements have
been restated to present the combined companies' financial position
and results of operations for each period presented. As used herein,
any reference to the "Company" reflects the combined Spyglass and
Navitel results. Any reference to "Spyglass" or "Navitel" reflects
the individual activities of either Spyglass or Navitel,
respectively. Unless the context clearly indicates otherwise, all
financial results described herein reflect the combined Spyglass and
Navitel results.
Spyglass 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.
The Company provides its customers with expertise, software and
professional services that enable them to rapidly develop cost-
effective Internet-enabled devices. The Company's professional
services include custom engineering for defining, developing and
delivering complete, end-to-end project solutions. The Company's
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.
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 ("AllPen) in
a transaction accounted for as a pooling of interests. Because the
effect of this transaction on prior year financial statements was
considered immaterial, such financial statements were not restated;
instead, the Company's equity accounts were adjusted for the effect
of the pooling.
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
<PAGE>
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.
In April 1999, Spyglass acquired Navitel Communications,
Inc. ("Navitel") in a transaction accounted for as a pooling of
interests. All financial information presented includes the accounts
and results of operations of Navitel for all periods presented from
its inception date, May 21, 1996.
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.
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, provide 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.
<PAGE>
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, 1998,
1997 and 1996.
Percentage of Total Net Revenues
for the Fiscal Years Ended September 30,
1998 1997 1996
___________________________________________________________________________
<TABLE>
<S> <C> <C> <C>
Net revenues:
Internet technology 55.1% 69.2% 87.3%
Service 44.9 30.8 12.7
Total net revenues 100.0 100.0 100.0
Cost of revenues:
Internet technology 8.7 7.0 8.6
Service 17.6 11.2 0.5
Total cost of revenues 26.3 18.2 9.1
Gross profit 73.7 81.8 90.9
Operating expenses and other:
Sales and marketing 43.0 59.5 26.7
Research and development 50.4 126.1 32.3
General and administrative 31.3 59.9 17.7
Restructuring charge - 6.8 -
One-time acquisition costs 2.3 - -
Total operating expenses and
other 127.0 252.3 76.7
Income (loss) from operations (53.3) (170.5) 14.2
Other income, net 5.9 11.5 7.8
Income (loss) before income taxes (47.4) (159.0) 22.0
Provision for income taxes - - 8.7
Net income (loss) (47.4)% (159.0)% 13.3%
</TABLE>
<PAGE>
Fiscal Year Ended September 30, 1998 Compared with Fiscal Year
Ended September 30, 1997
Internet technology revenues for the year ended September 30,
1998 increased $2,467,000, or 27%, to $11,661,000 compared to
$9,194,000 for the year ended September 30, 1997. This growth was
due primarily to an increase in licensing revenues from device
manufacturers. One customer accounted for 17% of fiscal 1998
Internet technology revenues. Internet technology revenues from
vendors of desktop software applications, excluding SurfWatch
revenues, decreased $3,986,000 while revenues from device
manufacturers increased $5,752,000. 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. Internet technology
revenues derived from future royalties will be realized as customers
commercially deploy devices utilizing the Company's technology and
the royalty revenue stream commences. The Company expects continued
growth in Internet technology revenues during fiscal 1999 due to the
anticipated increase in product development activities by device
manufacturers in multiple vertical markets.
Service revenues, which include both professional services
revenues and revenues from customer support agreements, increased
$5,407,000, or 132%, to $9,508,000 for the year ended September 30,
1998 compared to $4,101,000 for the year ended September 30, 1997.
Revenues from professional services increased approximately
$6,027,000 for the year ended September 30, 1998 compared to the year
ended September 30, 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 which resulted in an
increase in the number and dollar value of professional services
agreements. Revenues from customer support agreements decreased
$620,000 during the same time period. In October 1998, the Company
announced an agreement with GI which will provide approximately
$20,000,000 in professional services revenue over the next three
years. As a result, the Company expects professional services
revenues during fiscal 1999 to increase both in absolute dollars and
as a percentage of total net revenues over fiscal 1998. Service
revenues from customer support agreements, as a percentage of total
net revenues, are expected to decline during the same period.
Gross profit, as a percentage of revenues, was 73.7% for the
year ended September 30, 1998 compared to 81.7% for the year ended
September 30, 1997. This reduction was partially a result of a
change in the revenue mix, as total net revenue consisted of a higher
percentage of lower margin professional services revenues, and a
reduction in Internet technology margins related to increased product
royalty costs. The Company expects gross profit as a percentage of
revenues to decline slightly throughout fiscal 1999 as professional
services revenues continue to increase as a percentage of total net
revenues. That margin decline is expected to be partially offset by
improved gross margins from Internet technology revenues as royalty
costs associated with third-party software are expected to decline.
<PAGE>
Sales and marketing expenses for the year ended September 30,
1998 increased $1,190,000, or 15%, to $9,101,000 from $7,911,000
for the year ended September 30, 1997, but decreased as a
percentage of revenues to 43.0% from 59.5%. Factors contributing
to this increase were $791,000 in additional compensation and
personnel expenses incurred as a result of the addition of sales
and marketing staff, primarily in international locations as well
as at the Company's SurfWatch business unit, and the compensation
expense related to amortization of restricted stock issued to
certain officers of the Company. Additionally, the Company
increased its fiscal 1998 marketing program expenditures by
$425,000 in its efforts to promote its solutions to customers in
the device market, primarily the television and set-top box market,
and to increase customer and industry awareness of its SurfWatch
products. These increases were partially offset by a decrease in
travel and travel-related expenses of approximately $175,000
primarily due to decreases in trade show expenses resulting from
the shift in focus from the desktop market to the Internet device
market. The Company expects sales and marketing expenses for
fiscal 1999 to remain approximately the same, in dollars, as in
fiscal 1998.
Research and development expenses for the year ended September
30, 1998 decreased $6,098,000, or 36.3%, to $10,670,000 compared to
$16,768,000 for the year ended September 30, 1997, and decreased as
a percentage of revenues to 50.4% from 126.1%. The decrease in
research and development costs was due primarily to a decrease in
salary costs and related personnel expenses of $2,571,000 as a
result of the increased utilization of development engineers in a
professional services role, as reflected by the increase in cost of
service revenues. Additionally, consulting expense decreased by
$1,183,000 primarily due to the reduction in the use of outside
consultants by Navitel due to the hiring of full time personnel by
Navitel. Navitel received $1,606,000 from Microsoft during fiscal
1998 as funding for research and development expenses which was
netted against research and development expenditures. 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. As
a result of the changes noted above, the Company expects its
research and development expenses in fiscal 1999 to decrease both
in dollars and as a percentage of revenues.
General and administrative expenses decreased $1,339,000, or
16.8%, to $6,626,000 for the year ended September 30, 1998 from
$7,965,000 for the year ended September 30, 1997 and decreased as a
percentage of revenues to 31.3% from 59.9%. The decrease was a
result of a $720,000 reduction in bad debt expense, a combined
$541,000 reduction in conference, travel and meeting expenses, and a
$499,000 decrease in consulting expense. This decrease was partially
offset by an increase in salary and related personnel expenses of
$580,000 due primarily to the issuance of restricted stock to
officers of the Company. The Company expects general and
administrative costs to increase in absolute dollars, but decline as
a percent of revenues, in fiscal 1999.
<PAGE>
On March 10, 1997, the Company consolidated its Champaign,
Illinois development operations with its Naperville, Illinois and
Cambridge, Massachusetts operations. This consolidation reflected
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,
consisting 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.
In connection with the acquisition of AllPen Software in
November 1997, the Company recorded a charge to operating expenses of
$496,000 or $0.04 per share for direct acquisition related costs
consisting primarily of professional fees.
The Company recorded no income tax benefit for fiscal years 1998
and 1997. This reflects a decision by the Company not to recognize
income tax benefits associated with the Company's operating losses
generated during such years. The Company believes that it is
appropriate to defer recognition of potential tax benefits until such
time as its return to profitability can provide assurances that these
tax benefits will be realized.
Fiscal Year Ended September 30, 1997 Compared with Fiscal Year
Ended September 30, 1996
Internet 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 Internet 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, Internet 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.
Service revenues 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,
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 net revenues and service
revenues, which have significantly higher costs as a percentage of
revenues than technology 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.
<PAGE>
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 and marketing of Spyglass technologies. These additions
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 associated with previous marketing programs
targeting the desktop marketplace.
Research and development expenses for the year ended September
30, 1997 increased $9,554,000, or 132% $16,768,000 compared to
$7,214,000 for the year ended September 30, 1996, and increased as
a percentage of revenues to 126.1% from 32.3%. The increase in
research and development costs was due primarily to costs of
additional personnel, including outside consultants at the Navitel
location, 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 $7,934,000 for fiscal 1997
when compared to fiscal 1996. Additionally, facility costs
increased $1,970,000 between these periods as the Company
consolidated its Champaign, Illinois research and development
operations into its Naperville, Illinois and Cambridge,
Massachusetts operations, which had higher facility costs than the
Champaign facility and due to the expansion of the Navitel
facility. The Company believes that it was 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.
General and administrative expenses increased $4,018,000, or
102%, to $7,965,000 for the year ended September 30, 1997 from
$3,947,000 for the year ended September 30, 1996 and increased as a
percentage of revenues to 59.9% from 17.7%. 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 $2,671,000. 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 $614,000 for fiscal 1997 compared to
fiscal 1996.
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.
<PAGE>
Liquidity and Capital Resources
As of September 30, 1998, the Company had no debt and had cash
and cash equivalents of $22,706,000 and working capital of
$25,678,000. The Company's operating activities used cash of
$9,194,000, $7,791,000 and $1,202,000 for the fiscal years ended
September 30, 1998, 1997 and 1996, respectively. Additionally, the
Company's operating cash flow for fiscal 1997 was 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 with Microsoft as discussed in the Overview
section as well as $1,606,000 and $250,000 in cash received by
Navitel during fiscal 1998 and 1997, respectively for research and
development expenses.
Subsequent to the end of fiscal 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 current net accounts and unbilled receivables
increased to $5,606,000 at September 30, 1998 from $3,792,000 at
September 30, 1997. This increase was primarily due to an increase
in revenues for the fourth quarter of fiscal 1998.
The Company's capital expenditures totaled $656,000,
$3,524,000 and $2,917,000 for the fiscal years ended September 30,
1998, 1997 and 1996, respectively, and consisted primarily of
computer hardware and software. The Company had no material
commitments for capital expenditures at September 30, 1998. 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, as well as cash flow from operations, will be
sufficient to finance the Company's cash flow requirements through
at least fiscal 1999.
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.
<PAGE>
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 15% of its revenues for the
fiscal year ended September 30, 1998 from Motorola Corporation and
39.5% of its revenues for the fiscal year ended September 30, 1997
from Microsoft Corporation. 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 the initial commercial acceptance of the Company's
solutions 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.
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.
<PAGE>
In October 1997, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") No. 97-2,
Software Revenue Recognition, which superseded SOP No. 91-1. SOP No.
97-2 is effective for the Company's 1999 fiscal year which began on
October 1, 1998 and provides guidance on applying generally accepted
accounting principles for recognizing revenue on software
transactions. Based on the Company's interpretation of the
requirements of SOP No. 97-2, application of this statement is not
expected to have a material impact on the Company's revenue.
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.
<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 most Spyglass products and technologies currently
available are Year 2000 compliant. Certain products and technologies
currently available may not be Year 2000 compliant but will be so
certified prior to the end of 1999 as new versions 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 all
material internally used systems will operate in the year 2000.
The task force is currently in the second phase of its efforts,
the testing phase. In the testing phase, the task force is conducting
testing to confirm Year 2000 compliance on products and services sold
and used by the Company 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.
During the quarter ended June 30, 1999, Spyglass has
continued to test additional Spyglass products. For current Spyglass
products not yet tested, test plans have either been completed or are
scheduled to be completed by August 31, 1999. We anticipate that all
currently available Spyglass technologies will be tested no later
than October 15, 1999. Spyglass has contracted an outside consultant
to assist in certain Year 2000 testing of Spyglass products. The use
of outside consultants has been and is expected to remain minimal.
Several pieces of non-compliant Network hardware have been
decommissioned due to replacement by upgraded platforms. There are
two remaining non-compliant pieces of Network hardware which will be
replaced by September 30, 1999. One key piece of telecommunications
equipment is due to receive a software upgrade by the end of July,
1999 to ensure Year 2000 compliance. According to the remaining
network equipment vendors' Year 2000 certification matrices, the
remainder of the Network hardware/software systems are in compliance.
<PAGE>
Spyglass' approach to ensuring compliance on the hardware,
operating system, and application front is to define a standard
revision for each system component. These definitions have been
created as a benchmark for compliance testing. Spyglass Information
Systems personnel will apply this checklist to each inventoried
system and perform the appropriate upgrades. All critical systems
will be tested live to ensure compliance. All systems not defined as
mission critical will be verified by a random sampling of live tests.
Equipment and software for which Year 2000 compliance information is
unavailable or not guaranteed by vendors will be retired and
replaced. Current goals target the end of September, 1999 to achieve
compliance for hardware, operating systems and applications
A large portion of Spyglass' Year 2000 compliance efforts has
focused on our internal enterprise applications which touch every
aspect of Spyglass' business processes. Established core product
and customization upgrades are planned for the Company's two key
internal systems during the quarter ended September 30, 1999, which
will bring them into compliance. Other financial applications are
either currently compliant or have planned upgrades which will bring
them into compliance within the September quarter.
Spyglass does not currently have reliable information with
regard to Year 2000 compliance 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 June 30, 1999, the majority of Year 2000 compliance costs
incurred by the Company have been the value of the time, based on
standard hourly rates for employees, spent by the task force, which
approximates $95,000. In addition, the Company has spent
approximately $10,000 towards outside consultants. The Company
estimates it will incur approximately $150,000 in future expenses to
ensure systems will function properly with respect to dates in the
year 2000. These expenses are not expected to have a material impact
on the financial position, cash flow or results of 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.
<PAGE>
SPYGLASS, INC.
Supplemental Consolidated Statements of Operations
For the Years Ended September 30,
(In thousands, except per
share amounts) 1998 1997 1996
____________________________________________________________________
<TABLE>
<S> <C> <C> <C>
Net revenues:
Internet technology revenues $ 11,661 $ 17,194 $ 19,466
Service revenues 9,508 4,101 2,841
-------- -------- --------
Total net revenues 21,169 21,295 22,307
Cost of revenues:
Cost of internet technology 1,843 1,535 1,912
Cost of service revenues 3,716 1,493 118
-------- -------- -------
Total cost of revenues 5,559 3,028 2,030
-------- -------- -------
Gross profit 15,610 18,267 20,277
Operating expenses and other:
Sales and marketing 9,101 8,311 5,963
Research and development,
net of funding advance of
$1,606, $250 and $0,
respectively 10,670 16,768 7,214
General and administrative 6,626 7,965 3,947
Restructuring charge - 900 -
One-time acquisition costs 496 - -
-------- ------- -------
Total operating expenses
and other 26,893 33,944 17,124
Income (loss) from operations (11,283) (15,677) 3,153
Other income, net 1,251 1,526 1,750
------- ------- -------
Income (loss) before income taxes (10,032) (14,151) 4,903
Income tax provision - - 1,951
------- ------- -------
Net income (loss) $(10,032) $(14,151) $ 2,952
======== ======== =======
Income (loss) per common share-
basic $ (0.69) $ (1.07) $ 0.23
Income (loss) per common share-
diluted $ (0.69) $ (1.07) $ 0.21
Weighted average number of common
shares outstanding-basic 14,543 13,238 12,768
====== ====== ======
Weighted average number of common
shares outstanding-diluted 14,543 13,238 14,023
====== ====== ======
</TABLE>
See accompanying Notes to the Supplemental Consolidated Financial Statements
<PAGE>
SPYGLASS, INC.
Supplemental Consolidated Balance Sheets
September 30,
(In thousands) 1998 1997
_____________________________________________________________
<TABLE>
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,706 $ 24,097
Short-term investments - 4,929
Accounts receivable, net of allowance
for doubtful accounts of $429 and
$350, respectively 4,704 3,792
Unbilled accounts receivable 902 -
Prepaid expenses and other current
assets 2,489 2,201
-------- ---------
Total current assets 30,801 35,019
Properties and equipment, net 3,888 5,233
Other assets 291 1,796
-------- ---------
Total Assets $ 34,980 $ 42,048
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,678 $ 2,043
Royalties payable 541 345
Deferred revenues 861 1,256
Accrued compensation and related
benefits 1,624 1,932
Research and development funding
advance 144 -
Accrued expenses and other liabilities 275 210
Total current liabilities 5,123 5,786
Long-term deferred revenues 50 100
-------- ---------
Total liabilities 5,173 5,886
-------- ---------
Stockholders' equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized, none
issued - -
Common stock, $.01 par value, 50,000,000
shares authorized, 15,092,683 and
13,511,073 shares issued and 15,082,969
and 13,511,073 shares outstanding,
respectively 150 135
Additional paid-in capital 50,546 46,254
Accumulated deficit (20,297) (10,227)
Treasury stock at cost, 9,714 shares in
1998 (55) -
Unamortized value of restricted stock
issued (537) -
-------- --------
Total stockholders' equity 29,807 36,162
-------- --------
Total Liabilities and Stockholders'
Equity $ 34,980 $ 42,048
======== ========
</TABLE>
See accompanying Notes to the Supplemental Consolidated
Financial Statements
<PAGE>
SPYGLASS, INC.
Supplemental Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> Unamortized
Additional Treasury Value of
(In thousands, except Common Stock Paid-in Accumulated Common Stock Restriced
share amounts) Shares Amount Capital Deficit Shares Amount Stock Issued
________________________________________________________________________________________________
Balance at
September 30, 1995 11,406,645 $ 114 $ 36,528 $ 972 - $ - $ -
Adjustment for pooling
of interests with
Navitel Communications
Inc. 1,148,520 11 (1)
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 2,952
---------- ----- ------- --------- ----- ----- --------
Balance at
September 30, 1996 12,968,065 129 39,340 3,924 - - -
Exercise of stock
otions 497,882 5 731
Exercise of employee
stock purchase plan
stock options 45,396 1 362
Issuance of incentive
stock options 80
Issuance of Navitel
preferred stock 5,509
Accelerated vesting of
options 232
Net loss (14,151)
---------- ----- ------- --------- ------ ----- --------
Balance at
September 30, 1997 13,511,343 135 46,254 (10,227) - - -
Adjustment for
acquisition accounted
for as a pooling of
interests 639,246 6 204 (38)
Exercise of stock
options 658,327 6 1,519
Exercise of employee
stock purchase plan
stock options 74,323 1 391
Issuance of restricted
stock 200,000 2 1,011 (1,011)
Amortization of deferred
compensation relating to
issuance of restricted
stock 474
Purchase of treasury stock 9,714 (55)
Issuance of Navitel
preferred stock 1,152
Accelerated vesting of
options 15
Net loss (10,032)
---------- ----- -------- --------- ----- ----- -------
Balance at
September 30, 1998 15,083,239 $ 150 $ 50,546 $ (20,297) 9,714 $ (55) $ (537)
========== ===== ======== ========= ===== ===== =======
</TABLE>
See accompanying Notes to the Supplemental Consolidated Financial Statements
<PAGE>
SPYGLASS, INC.
Supplemental Consolidated Statements of Cash Flows
For the Years Ended September 30,
<TABLE>
<S> <C> <C> <C>
(In thousands) 1998 1997 1996
----------------------------------------------------------------------
Cash flows from operating
activities:
Net income (loss) $ (10,032) $ (14,151) $ 2,952
Adjustments to reconcile net
income (loss) to net cash
used in operating activities:
Depreciation 2,097 1,752 694
Amortization 1,315 157 211
Loss on disposal of fixed assets 15 99 21
Amortization of deferred
compensation related to
issuance of restricted stock 474 - -
Issuance of warrants to purchase
common stock in exchange for
non-cash common stock 42 - -
Bad debt provision 309 1,029 301
Deferred income taxes - - (406)
Incentive stock option
compensation 113 312 80
Other - - (201)
Changes in operating assets and
liabilities:
Accounts and long-term receivables (783) 3,155 (3,066)
Unbilled accounts receivable (902) - -
Prepaid expenses, other current
assets and other assets (54) (1,015) (1,513)
Accounts payable (368) 474 527
Royalties payable 196 (358) 279
Deferred revenues (819) (307) (1,071)
Accrued compensation and
related benefits (993) 955 373
Research and development funding
advance 144 - -
Accrued expenses and other
liabilities 52 107 (383)
------- ------- -------
Net cash used in operating
activities (9,194) (7,791) (1,202)
-------- ------- -------
Cash flows from investing
activities:
Cash acquired in business
combination 574 - -
Short-term investments, net
activity 4,929 12,664 (17,593)
Proceeds from sale of
fixed assets 82 32 -
Capital expenditures (656) (3,524 (2,917)
------- ------- -------
Net cash provided by (used in)
investing activities 4,929 9,172 (20,510)
------- ------- -------
Cash flows from financing activities:
Proceeds from exercise of stock
options, including tax related
benefits in 1996 1,917 1,099 2,938
Proceeds from issuance of
preferred stock 1,000 3,000 -
Proceeds from issuance of common
stock 12 - 10
Proceeds from issuance of
convertible notes payable - 2,009 500
Purchase of treasury common stock (55) - -
------- ------- -------
Net cash provided by financing
activities 2,874 6,108 3,448
------- ------- -------
Net (decrease) increase in cash
and cash equivalents (1,391) 7,489 (18,264)
Cash and cash equivalents at
beginning of period 24,097 16,608 34,872
------- ------- -------
Cash and cash equivalents at
end of period $ 22,706 $ 24,097 $ 16,608
======= ======= =======
Supplemental disclosure of cash
flow information:
Cash paid for income taxes $ 6 $ 28 $ 169
</TABLE>
See accompanying Notes to the Supplemental Consolidated Financial Statements
<PAGE>
Spyglass, Inc.
Notes to the Supplemental Consolidated Financial Statements
Note 1. Operations and Significant Accounting Policies
Basis of Presentation
The supplemental consolidated financial statements include the
accounts of the Company and each of its wholly-owned subsidiaries.
All intercompany transactions and balances between the companies have
been eliminated in consolidation and certain prior year amounts have
been reclassified to conform with the current year's presentation.
Furthermore, the supplemental consolidated financial statements have
been prepared to reflect the retroactive effect of Spyglass, Inc.'s
("Spyglass") acquisition of Navitel Communications, Inc. ("Navitel"),
consummated in April 1999, through September 30, 1998. As used
herein, any reference to the "Company" reflects the combined Spyglass
and Navitel results. Any reference to "Spyglass" or "Navitel"
reflects the individual activities of either Spyglass or Navitel,
respectively. Unless the context clearly indicates otherwise, all
financial results described herein reflect the combined Spyglass and
Navitel results.
Operations
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. The Company's
technology offerings include Spyglass Device Mosaic (formerly
Spyglass Mosaic), Spyglass Remote Mosaic, Spyglass Prism, Spyglass
MicroServer, Spyglass Device Mail, and SurfWatch client and server
products. The Company also offers Internet consulting and custom
engineering services through its professional services organization.
These technologies are used to bring Internet functionality to
customers' products and services.
On April 16, 1999, the Company acquired Navitel Communications, Inc.
("Navitel") in a transaction accounted for as pooling of interests.
Navitel, located in Menlo Park, California, is engaged in the
business of Internet telephony and software development focused on
Internet technology for non-PC devices. This transaction was
effected through the exchange of 1,148,520 shares of common stock of
Spyglass for all of the issued and outstanding shares of Navitel. As
a result, all financial information includes the accounts and results
of operations of Navitel for all periods presented from its inception
date, May 21, 1996.
On November 14, 1997, the Company acquired AllPen Software ("AllPen")
in a transaction accounted for as pooling of interests. AllPen,
located in Los Gatos, California, develops software solutions and
technologies and provides professional services for the Internet
device marketplace. 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. Because the effect of this
transaction was considered immaterial, Spyglass' financial statements
were not restated; instead, the Company's equity accounts were
adjusted for the effect of the pooling. In connection with the
acquisition of AllPen, the Company recorded a charge to operating
expenses of $496,000 or $0.04 per share for direct acquisition
related costs consisting primarily of professional fees.
<PAGE>
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. The
functional currency of both subsidiaries is the U.S. dollar.
In April 1996, the Company acquired OS Technologies Corporation ("OS
Tech") and SurfWatch Software, Inc. ("SurfWatch") in transactions
accounted for as poolings of interests. As a result, all financial
information 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 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 prior to
December 20, 1995 has been restated to reflect the two-for-one common
stock split for all periods presented.
University of Illinois Agreement
The Spyglass Device Mosaic product is a commercial derivative version
of NCSA Mosaic_. 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 Device 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.
<PAGE>
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
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
prepaid royalty costs are amortized as a percentage of revenues or
over the expected period of use. 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 are appropriate. Approximately $857,000
and $441,000 of these prepaid royalties are included in prepaid
expenses and other current assets and approximately $118,000 and
$1,431,000 are included in other assets at September 30, 1998 and
September 30, 1997, respectively.
Properties and Equipment
Properties and equipment 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 two to seven 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 ("SOP")
91-1, Software Revenue Recognition, issued by the American Institute
of Certified Public Accountants ("AICPA"). 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. Service revenues are comprised of revenues from
customer support and professional services agreements. Revenues from
the sale of support agreements are 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. Revenues from professional services agreements are
recognized on the percentage of completion method based on the hours
incurred relative to total estimated hours for fixed bid contracts or
based on the hours incurred multiplied by the hourly rate for time
and material engagements. Related costs are reported as a cost of
service revenues.
<PAGE>
In October 1997, the AICPA issued SOP No. 97-2, Software Revenue
Recognition, which superseded SOP No. 91-1. SOP No. 97-2 is
effective for the Company's fiscal year beginning October 1, 1998 and
provides guidance on applying generally accepted accounting
principles for software revenue recognition transactions. Based on
the Company's interpretation of the requirements of SOP No. 97-2,
application of this statement is not expected to have a material
impact on the Company's revenues.
Research and Development
Research and development costs are expensed as incurred. During
fiscal 1998 and 1997, Navitel received payments form Microsoft of
$1,606,000 and $250,000, respectively, for funding of software
development for the Internet screen phone. Research and development
expense in these years has been recorded net of these payments.
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 if 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 at an amount at least equal to fair market value, the
Company recognizes compensation expense based on the intrinsic value
on the measurement date. The Company has included the disclosure
provision of Statement of Financial Accounting Standard ("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
In 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share, which was adopted by the Company in December
1997. SFAS No. 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per
share. Basic earnings per share excludes any dilutive effect of
options, warrants and convertible securities. Diluted earnings per
share assumes the conversion of all securities which are exercisable
or convertible into common stock and which would either dilute or not
affect basic earnings per share. All earnings per share amounts for
all periods have been presented and, where necessary, restated to
conform to SFAS No. 128 requirements.
Earnings per 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. Diluted
weighted average shares for 1996 excludes the impact of common stock
options of 11,202 shares because the options' exercise prices were
greater than the average market price of the common stock and,
therefore, the effect would be anti-dilutive.
<PAGE>
The table below reconciles the number of shares utilized in the
earnings per share calculations for the fiscal years ending September
30, 1998, 1997 and 1996, respectively.
For the Fiscal Years Ended
September 30,
(In thousands) 1998 1997 1996
_____________________________________________________________
<TABLE>
<S> <C> <C> <C>
Weighted average number of
common shares outstanding _
basic 14,543 13,238 12,768
Effect of dilutive securities,
stock options - - 1,255
Weighted average number of
common shares outstanding _
diluted 14,543 13,238 14,023
</TABLE>
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 reporting more than one segment and is currently
evaluating its operating segments.
Note 2. Cash Equivalents and Short-term Investments
The following is a summary of cash equivalents and short-term
investments at amortized cost:
September 30,
(In thousands) 1998 1997
____________________________________________________________________
<TABLE>
<S> <C> <C>
Commercial paper $16,680 $ 11,919
U.S. treasury notes - 1,000
Money market 5,871 9,773
------- --------
Cash equivalents 22,551 22,692
Cash 155 1,405
------- --------
Total cash and cash
equivalents $22,706 $ 24,097
======= ========
Commercial paper $ - $ 1,925
U.S. treasury notes - 3,004
------- --------
Total short-term
investments $ - $ 4,929
======= ========
</TABLE>
<PAGE>
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 and Equipment
Properties and equipment and related accumulated depreciation were as
follows:
September 30,
(In thousands) 1998 1997
______________________________________________________________________
<TABLE>
<S> <C> <C>
Computer equipment and software $ 5,650 $ 5,301
Furniture, fixtures and office
equipment 2,070 1,981
Leasehold improvements and other 583 424
------- ------
8,303 7,706
Less: Accumulated depreciation (4,415) (2,473)
------- -------
Properties and equipment, net $ 3,888 $ 5,233
======= =======
</TABLE>
Note 4. Microsoft Agreements
In July 1997, Navitel entered into a Joint Development and License
Agreement ("July 1997 Agreement") with Microsoft in which Navitel
agreed to jointly develop software applications for an Internet
enabled screen phone running on the Windows CE operating system.
Navitel and Microsoft contributed intellectual property, development,
management and marketing resources to the venture and maintained
joint ownership interests in the screen phone software applications
as developed.
The July 1997 Agreement called for sharing of all licensing revenues
received by either company related to the screen phone software
applications. It also required Microsoft to make minimum payments to
Navitel of $1,000,000 per year for funding of the development
efforts, notwithstanding any licensing revenues received. Neither
company received any licensing revenue during fiscal 1998 or 1997.
Navitel received $1,606,000 and $250,000 during fiscal 1998 and 1997,
respectively, which was recorded as funding for research and
development expenses as received and netted against research and
development expenditures. As of September 30, 1998, Navitel's
research and development funding advance liability of $144,000
represented cash received from Microsoft for future research and
development efforts.
In February 1998, Navitel entered into an agreement to perform
certain development services on behalf of Microsoft related to
Windows CE and the screen phone software applications for a third-
party OEM. The Company agreed to perform these services for a fixed
price of $750,000 which was recognized using the percentage of
completion method. Development services related to this agreement
were approximately ninety percent complete as of September, 1998. As
such, Navitel recognized $675,000 of revenue from this agreement
during fiscal 1998.
<PAGE>
Note 5. Income Taxes
The components of the provision for income taxes were as follows:
For the Years Ended September 30,
(In thousands) 1998 1997 1996
_____________________________________________________________________
<TABLE>
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
Foreign 121 94 152
State - - -
---- ----- ------
Total current 121 4 152
---- ----- ------
Deferred:
Federal (121) (94) 1,444
State - - 355
---- ----- ------
Total deferred (121) (94) 1,799
---- ----- ------
Provision for income taxes $ - $ - $1,951
==== ===== ======
</TABLE>
A reconciliation of income tax expense to the statutory federal
income tax rate follows:
For the Years Ended September 30,
1998 1997 1996
___________________________________________________________________
<TABLE>
<S> <C> <C> <C>
Federal income taxes at
statutory rate 34.0 % 34.0 % 34.0%
State income taxes, net
of federal income tax
benefit 4.8 % 4.8 % 2.7%
Valuation allowance (38.8%) (38.8%) - %
Other - % - % 3.1%
------- ------- -----
Effective tax rate - % - % 39.8%
======= ======= =====
</TABLE>
<PAGE>
Significant components of the Company's net deferred tax assets were
as follows:
September 30,
(In thousands) 1998 1997
___________________________________________________________________
<TABLE>
<S> <C> <C>
Deferred tax assets:
Accounts receivable $ 189 $ 151
Accrued expenses and other
liabilities 209 421
Net operating loss carryforwards 12,157 7,830
Research and development tax
credit carryforwards 2,275 1,584
Foreign tax credit carryforwards 366 246
Amortization of deferred
compensation relating to
issuance of restricted stock 184 -
Alternative minimum tax credit
carryforwards 10 10
Other 85 -
------ ------
Deferred tax assets 15,475 10,242
------ ------
Deferred tax liabilities:
Depreciation (14) (56)
----- -----
Deferred tax liabilities (14) (56)
----- -----
Net deferred tax assets $ 15,461 $ 10,186
Deferred tax asset valuation
allowance (15,461) (10,186)
-------- --------
Net deferred tax assets $ - $ -
======== ========
</TABLE>
The Company changed from the cash to accrual basis for tax reporting
purposes at the time of filing its 1997 tax return; as such, 1997
amounts included herein have been restated from the cash to accrual
basis.
As of September 30, 1998, the Company had net operating loss
carryforwards for income tax purposes of approximately $32,372,000
which expire in the years 2006-2012. Of this amount, $13,923,000
relates to tax deductions generated by the exercise of certain
incentive stock options by employees which will be available to
reduce future income tax liabilities by a total of $5,395,000. Of
this tax benefit, $2,669,000 was credited to paid-in capital to
offset deferred tax liabilities. The remaining $2,726,000 is
available to offset future deferred tax liabilities as a credit to
paid-in capital. The Company recorded a credit to paid-in capital of
$2,205,000 in fiscal 1996 as a result of such exercises of incentive
stock options by employees. No such credits to paid-in capital were
recorded in fiscal 1997 or fiscal 1998.
As of September 30, 1998, the Company had research and development
credit carryforwards of approximately $2,275,000, which are available
to offset future income tax liabilities and expire in the years 2006-
2012.
<PAGE>
Under the provisions of the Internal Revenue Code, certain
substantial changes in Navitel's ownership may result in a limitation
on the amount of net operating loss and tax credit carryforwards
available annually to offset any future taxable income. The amount of
this annual limitation is determined based upon Navitel's value prior
to the ownership changes taking place. Subsequent ownership changes,
including the acquisition of the Company by Spyglass, could further
affect the limitation in future years.
The valuation allowance increased by $5,275,000 and $8,481,000 for
the fiscal years ended September 30, 1998 and 1997, 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 6. Convertible Preferred Stock
Series A, B and C Preferred Stock Issuance
On July 1, 1997, Navitel issued 1,831,494 shares of Series A
convertible preferred stock, $.001 par value per share, for $915,747.
Also on July 1, 1997, Navitel issued 2,489,619 shares of Series B
convertible preferred stock, $.001 par value per share, for
$1,593,356. On July 9, 1997, Navitel issued 3,614,458 shares of its
newly authorized Series C convertible preferred stock, $.001 par
value per share for $3,000,000. On May 27, 1998, Navitel issued
1,204,820 shares of Series C convertible preferred stock for
$1,000,000.
Conversion Rights
The Series A, B and C preferred stock is convertible, at the
option of the holder, into common stock of Navitel based upon a
formula which would result in a 1-for-1 exchange at September 30,
1998. All outstanding shares of Series A, B and C preferred stock
shall automatically convert to common stock at the request of at
least a majority of the holders of each such series. Accordingly,
prior to the acquisition of Navitel by Spyglass (See Note 15),
Navitel's Series A, B and C preferred stock was converted to
Navitel's common stock at a 1-to-1 ratio. As such, the converted
shares of Series A, B and C preferred stock are included in the
"Adjustment for pooling of interest with Navitel Communications,
Inc." line item of the Supplemental Consolidated Statements of
Changes in Stockholders' Equity.
Dividend Rights
The holders of Series A, B and C preferred stock are entitled to
receive dividends, as determined by and if declared by the Navitel
Board of Directors, in preference to the holders of common stock.
Series A, B and C preferred stock dividends are non-cumulative and as
of September 30, 1998, no dividends have been declared or paid by
Navitel.
Voting Rights
Holders of the Series A, B and C preferred stock are entitled to one
vote for each share of common stock into which the respective share
of Series A, B and C preferred stock is then convertible.
<PAGE>
Liquidation Rights
In the event of any liquidation, dissolution, merger, sale or winding
up of Navitel, the holders of Series C preferred stock, in preference
to the holders of Series A and B preferred stock and common stock,
and the holders of Series A and B preferred stock, on a parity to
each other and in preference to the holders of common stock, are
entitled to receive an amount equal to $0.83, $0.50 and $0.64 per
share, plus any dividends declared but unpaid on such shares,
respectively.
Note 7. Common Stock
Each share of Navitel's common stock entitles the holder to one vote
on all matters submitted to a vote of Navitel's stockholders.
Navitel common stockholders are entitled to receive dividends, when
and if declared by the Board of Directors, subject to any
preferential dividend rights of the preferred stockholders. The
majority of Navitel's common stock is subject to a stock restriction
agreement which gives Navitel the right of first refusal to acquire
all shares to which a stockholder has received an arms-length
purchase offer at the lesser of the offer price or fair market value.
At September 30, 1998, Navitel had 13,917,652 shares of its common
stock reserved for issuance upon conversion of preferred stock and
exercise of common stock warrants and options.
Note 8. Common Stock Purchase Warrants
In connection with the settlement of disputes arising over services
performed by certain vendors, Navitel issued to those vendors 33,500
and 200,000 warrants to purchase common stock at an exercise price of
$0.08 on March 30, 1998 and June 11, 1998, respectively. Navitel
recorded an expense related to the issuance of these warrants of
$41,638 for the year ended September 30, 1998. Prior to the
acquisition of Navitel by Spyglass (See Note 16), the holders of
these common stock purchase warrants exercised their rights to
purchase a combined 233,500 shares of Navitel's common stock.
Note 9. Stock Incentive Plans
Spyglass
The Company has a 1995 Stock Incentive Plan ("1995 Incentive Plan")
which replaced the Company's 1991 Stock Option Plan ("1991 Option
Plan"), a 1995 Director Stock Option Plan ("1995 Director Option
Plan") and a 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
<PAGE>
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.
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 five 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 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 $15,000,
$312,000 and $80,000 for the years ended September 30, 1998, 1997 and
1996, respectively, relating to options granted with an exercise
price below the estimated fair market value of the common stock and
the acceleration of the vesting of stock options. 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 3,300,000 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. As of
September 30, 1998, options to purchase approximately 449,000 shares
are available for issue.
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.
<PAGE>
Furthermore, the 1995 Incentive Plan provides for the granting of
awards of restricted stock entitling recipients to purchase common
stock from the Company under terms which provide for vesting over a
period of time, as determined by the Board of Directors, 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.
Awards of 200,000 shares of restricted stock, generally vesting over
four years in equal annual installments commencing on the one-year
anniversary of the date of grant, had been purchased for $0.01 per
share (and had a fair value of $5.063 on the date of issue) under
this plan as of September 30, 1998. Upon issuance of stock under the
plan, unearned compensation equivalent to the excess of the market
value at the date of grant over the purchase price is offset against
stockholders' equity and subsequently amortized over the periods
during which the restrictions lapse.
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 an 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, 1998,
options for 77,900 share were outstanding, of which 9,800 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 1998, 1997 and 1996, 74,323,
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.
Options to purchase 1,520,132 shares of common stock, at prices
ranging from $0.08 to $4.125 per share, have been granted.
<PAGE>
A summary of the 1995 Stock Incentive Plan, 1995 Director Stock
Option Plan and the 1991 Stock Option Plan transactions follows:
September 30,
1998 1997 1996
____________________________________________________________________________
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
________________________________________________________________________________
Outstanding,
beginning of year 1,970,239 $5.85 1,989,590 $8.98 1,493,004 $2.06
Granted 1,858,924 4.04 1,292,900 9.07 910,099 17.10
Exercised (858,327) 1.78 (497,882) 1.62 (394,499) 1.21
Forfeited (613,656) 6.97 (814,369) 12.56 (19,014) 10.85
-------- ----- -------- ----- -------- -----
Outstanding, end of
year 2,357,180 $5.57 1,970,239 $5.85 1,989,590 $8.98
========= ===== ========= ===== ========= =====
Weighted average
remaining contractual
life 8.60 8.79 8.43
Options exercisable at
year-end 682,326 600,469 658,758
Weighted average fair
value of options
granted during the
year $4.94 $12.16 $5.39
</TABLE>
A summary of information on stock options outstanding as of September
30, 1998 follows:
Options Outstanding Options Exercisable
______________________________________ ___________________
Weighted Weighted Weighted Weighted
Range of Average Average Average Average
Exercise Number Remaining Exercise Number Exerise
Prices Outstanding Contractual Life Price Exercisable Price
____________________________________________________________________
<TABLE>
<C> <C> <C> <C> <C> <C>
$0.08 165,000 4.92 $0.08 165,000 $0.08
$0.40-
$0.58 154,290 7.53 $0.49 118,144 $0.46
$4.13 -
$5.53 919,815 9.26 $4.94 13,750 $4.13
$6.88 532,665 8.52 $6.88 279,522 $6.88
$7.00-
$9.50 527,510 9.00 $7.82 87,030 $7.35
$10.25-
$11.25 55,000 8.74 $10.63 15,980 $10.27
$42.50 2,900 7.32 $42.50 2,900 $42.50
--------- ---- ------ ------- ------
$0.08-
$42.50 2,357,180 8.60 $ 5.57 682,326 $ 4.36
========= ==== ====== ======= ======
</TABLE>
<PAGE>
Navitel
The Board of Directors of Navitel adopted the 1997 Stock Option Plan
(the "Plan") which provides for the grant of incentive stock options
("ISO's") as well as non-statutory stock options. The Compensation
Committee administers the Plan and has sole discretion to grant
options to purchase shares of Navitel's common stock. The Board of
Directors determines the term of each option, option price, number of
shares for which each option is granted, whether restrictions will be
imposed on the shares subject to options, and the rate at which each
option is exercisable. The exercise price for options granted will be
determined by the Board of Directors.
The maximum number of shares of common stock which may be issued
pursuant to the 1997 Stock Option Plan is 5,000,000 shares. Options
generally become exercisable over three years, commencing on the one-
year anniversary of the date of grant, and accumulate if not
exercised. As of September 30, 1998, options to purchase
approximately 1,798,408 shares are available for issue.
The above plan enables Navitel to grant options to purchase common
stock of the Company to any full or part-time employees, officers,
directors, consultants or independent contractors of Navitel. Stock
options entitle the optionee to purchase common stock from Navitel
for a specified exercise price during a period specified in the
applicable option agreement.
Furthermore, the above plan stipulates 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
Navitel. The exercise price of any non-qualified stock option shall
not be less than 85% of the fair market value of the common stock at
the date of the grant.
The exercise periods of incentive stock options cannot exceed 10
years from the date of grant. For incentive stock options granted to
optionees holding more than 10% of the total combined voting power of
all classes of stock, the exercise period is limited to a maximum of
5 years. Non-qualified stock options, if any, must be exercised
within the time period set forth in the option agreement but cannot
exceed 10 years. Any portion not exercised within the terms as
stipulated in the option agreement shall be forfeited.
Navitel records as compensation expense the excess, if any, of the
fair market value of the common stock at the date of option grant
over the option exercise price. Any compensation expense is
recognized during the period of employee service for which the
incentive was awarded. In the year ended September 30, 1998, Navitel
incurred expense of $97,163 relating to options granted with an
exercise price below the estimated fair market value of the common
stock.
<PAGE>
Activity for the years ended September 30, 1998 and 1997 and the
period ended September 30, 1996 was as follows:
September 30,
1998 1997 1996
__________________ ________________ _________________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
_______________________________________________________________________________
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year 2,481,664 $0.02 2,525,000 $0.01 - $ -
Granted 1,151,250 0.08 845,000 0.02 2,525,000 0.01
Exercised (456,246) 0.03 - - - -
Forfeited (431,322) 0.06 (888,336) 0.01 - -
---------- ----- -------- ----- --------- -----
Outstanding,
end of year 2,745,346 $0.04 2,481,664 $0.02 2,525,000 $0.01
========= ===== ========= ===== ========= ======
Weighted average
remaining
contractual life 8.44 9.14 9.98
Options exercisable
at year-end 1,268,960 603,721 -
Weighted average fair
value of options
granted during the
year $0.25 $0.02 $0.01
</TABLE>
A summary of information on stock options outstanding as of September
30, 1998 follows:
Options Outstanding Options Exercisable
_______________________________________ ______________________
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
__________________________________________________________________________
<TABLE>
<C> <C> <C> <C> <C> <C>
$0.01 1,745,000 8.04 $0.01 1,124,909 $0.01
$0.08 1,000,346 9.15 $0.08 144,051 $0.08
--------- ---- ----- --------- -----
$0.01-
$0.08 2,745,346 8.44 $0.04 1,268,960 $0.02
========== =========
</TABLE>
<PAGE>
Stock-Based Compensation
Pro-forma information, as required by Statement of Financial
Accounting Standards No. 123, is as follows:
For the Fiscal Years Ended September 30,
(In thousands, except per share data) 1998 1997 1996
____________________________________________________________________
<TABLE>
<S> <C> <C> <C>
Net income (loss) as reported ($10,032) ($14,151) $2,952
======= ======= ======
Pro-forma net income (loss) ($13,864) ($18,933) $ 172
======= ======= ======
Net income (loss) per share as reported ($0.69) ($1.07) $ 0.23
Pro-forma net income (loss) per share ($0.95) ($1.43) $ 0.01
</TABLE>
In determining the fair value of the options, Spyglass used the
Black-Scholes model and assumed a risk free interest rate of 4.23%
and 6.0%, and an expected stock price volatility of 90.0% and 70.2%
for 1998 and 1997, respectively. Spyglass also assumed expected
lives of the options ranging from five to six years and no dividends
for all years. The Black-Scholes option valuation model was developed
for use 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 Spyglass' 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
Spyglass' options.
In determining the fair value of the options and warrants, Navitel
used the minimum value method with the following assumptions for
grants during 1998, 1997 and 1996: no dividend yield or volatility;
risk free interest rate of 4.23%, 6.0% and 6.0%; and a weighted
average expected option term of 5 years. 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 Navitel's options.
Note 10. 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 Spyglass'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 Spyglass needed to restore the value of the
existing stock options as a means of motivating and retaining
employees in order to promote the successful implementation of the
Company's growth strategies.
<PAGE>
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
Spyglass'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 Options cancelled in
exchange therefor. Option holders who own more than 1% of Spyglass's
outstanding common stock and Directors were excluded from the
Exchange Program. Stock option disclosures in Note 9 have been
adjusted to reflect options for approximately 235,000 shares which
were forfeited as a result of the Exchange Program.
Note 11. 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 Spyglass employees may contribute an amount up to 15%
of their eligible compensation and participating Navitel employees
may contribute an amount up to 10% 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. Spyglass
contributed $273,200, $269,000 and $118,300 to the Plan in fiscal
1998, 1997 and 1996, respectively. Navitel has not made any
contributions to the Plan through September 30, 1998.
Note 12. Commitments and Contingencies
The Company leases office facilities under non-cancelable operating
lease agreements and has sublease agreements expiring at various
dates through fiscal 2002. At September 30, 1998, approximate future
minimum lease commitments and receipts under these leases and
subleases were as follows:
Minimum
Lease Sublease
(In thousands) Commitments Receipts
____________________________________________________________________
1999 $ 1,865 $ 194
2000 1,420 194
2001 851 194
2002 282 97
Total rent expense under non-cancelable operating leases was
approximately $1,633,000, $1,429,000, and $703,000 for the years
ended September 30, 1998, 1997 and 1996, respectively, net of
sublease amounts of $243,000, $31,000 and $0, respectively.
Note 13. Significant Customers and Export Revenues
In fiscal 1998, sales to a significant customer represented 15.0% of
total net revenues. Sales to another significant customer
represented 39.5% and 12.1% of total net revenues in fiscal 1997 and
1996, respectively.
<PAGE>
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 foreign currency
market risk. Net export revenues by geographic area were as follows:
For the Fiscal Years Ended September 30,
(In thousands) 1998 1997 1996
______________________________________________________________________
<TABLE>
<S> <C> <C> <C>
Japan $ 1,488 $ 583 $ 2,094
Other
international 899 1,113 1,594
------- ------- -------
Total net export
revenues $ 2,387 $ 1,696 $ 3,688
======= ======= =======
</TABLE>
Note 14. Microsoft Amendment
On January 21, 1997, the Company amended its license arrangement with
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.
Note 15. Restructuring Charge
On March 10, 1997, the Company consolidated its Champaign, Illinois
development operations with its Naperville, Illinois and Cambridge,
Massachusetts operations. This consolidation reflected the Company's
evolution from its desktop focus to the Internet device market and
the realignment of its product development activities with the needs
of this market. A pre-tax restructuring charge of $900,000 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. 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 restructuring was completed as of September 30, 1997.
Note 16. Subsequent Events
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>
In November 1998, Navitel entered into a Development and License
Agreement ("November 1998 Agreement") with Microsoft which superseded
the July 1997 Joint Development and License Agreement with Microsoft.
The November 1998 Agreement provided for Navitel to invoice Microsoft
and recognize service revenues based on the hours incurred for
development services multiplied by the hourly rate for time and
materials in exchange for ownership rights to certain intellectual
property related to the application software development for the
Internet screen phone. As such, costs of engineering resources
related to research and development are classified as costs of
service revenues. Microsoft also paid $600,000 to Navitel as an
advance against certain future services to be performed during the
remainder of the fiscal 1999.
On March 31, 1999, Spyglass signed a definitive agreement to acquire
Navitel. On April 16, 1999, Spyglass acquired all of the issued and
outstanding capital stock of Navitel. This transaction was effected
through the exchange of 1,148,520 shares of common stock of Spyglass
for all of the issued and outstanding capital stock of Navitel. In
addition, Navitel's option holders received equivalent options for
shares of Spyglass common stock in exchange for their outstanding
options for common stock of Navitel.
Prior to the acquisition of Navitel by Spyglass, Navitel's
Series A, B and C preferred stock was converted to Navitel's common
stock at a 1-to-1 ratio. In addition, the holders of certain common
stock purchase warrants exercised their rights to purchase 233,500
shares of Navitel's common stock.
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders of Spyglass, Inc.
We have audited the supplemental consolidated balance sheets of
Spyglass, Inc. and subsidiaries (formed as a result of the
combination of Spyglass, Inc. and subsidiaries and Navitel
Communications, Inc.) as of September 30, 1998 and 1997, and the
related consolidated supplemental statements of operations, changes
in shareholders' equity, and cash flows for the years then ended.
The supplemental financial statements give retroactive effect to the
merger of Spyglass, Inc. and subsidiaries and Navitel Communications
on April 16, 1999, which has been accounted for using the pooling of
interests method as described in the notes to the supplemental
consolidated financial statements. These supplemental financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental
financial statements based on our audits. The consolidated financial
statements of Spyglass, Inc. and subsidiaries as of and for the year
ended September 30, 1996 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 supplemental financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Spyglass, Inc. and subsidiaries at September
30, 1998 and 1997, and the consolidated results of their operations
and their cash flows for the two years in the period ended September
30, 1998, after giving retroactive effect to the merger of Navitel
Communications, Inc., as described in the notes to the supplemental
consolidated financial statements, in accordance with generally
accepted accounting principles.
We previously audited and reported on the consolidated statements of
operations and cash flows of Navitel Communications, Inc. for the period
from inception (May 21, 1996) through September 30, 1996, prior to
their restatement for the April 16, 1999 pooling of interests. The
contribution of Navitel Communications, Inc. to revenues and net
income represented 0 percent and 13 percent of the respective
restated totals. Separate financial statements of Spyglass Inc.
included in the September 30, 1996 restated supplemental consolidated
statements of operations, changes in stockholders' equity and cash
flows were audited and reported on separately by other auditors.
We also audited the combination of the accompanying supplemental
consolidated statements of operations, changes in stockholders'
equity and cash flows for the year ended September 30, 1996, after
restatement for the April 16, 1999 pooling of interests; in our
opinion, such supplemental consolidated statements have been
properly combined on the basis described in Note 1 of the notes to
the supplemental consolidated financial statements.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
July 16, 1999
