UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________ to _____________
Commission file number 0-26074
SPYGLASS, INC.
(Exact name of registrant as specified in its charter)
Delaware 37-1258139
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1240 E. Diehl Road, 4th Floor, Naperville, IL 60563 (630) 505-1010
(Address of principal executive offices, zip code, registrant's
telephone number, including area code)
_________________________________________________
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such report)
and (2) has been subject to such filing requirements for the past 90
days. Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 9, 1999
Common Stock (par value $.01 per share) 16,525,110
<PAGE> 2
Spyglass, Inc.
Form 10-Q
Index
Page No.
Part I. Financial Information
Item 1. Consolidated Statements of Operations
Three Months Ended June 30, 1999 and 1998
Nine Months Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets
June 30, 1999 and September 30, 1998 4
Consolidated Statement of Changes in
Stockholders' Equity
Nine Months Ended June 30, 1999 5
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1999 and 1998 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
<PAGE> 3
SPYGLASS, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
(In thousands, except June 30, June 30,
per share amounts) 1999 1998 1999 1998
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<TABLE>
<S> <C> <C> <C> <C>
Net revenues:
Internet technology $ 2,433 $ 3,241 $ 8,550 $ 8,712
Service 4,799 2,435 11,873 6,299
------- ------- -------- -------
Total net revenues 7,232 5,676 20,423 15,011
Cost of revenues:
Internet technology 399 651 1,170 1,449
Service 2,270 935 6,147 2,162
------- ------- -------- -------
Total cost of
revenues 2,669 1,586 7,317 3,611
------- ------- -------- -------
Gross profit 4,563 4,090 13,106 11,400
Operating expenses
and other:
Sales and marketing 1,934 2,371 6,239 6,930
Research and
development, net of
funding received of
$500 and $750 in 1998,
respectively 2,060 2,017 5,705 9,126
General and
administrative 1,296 1,674 4,159 5,156
One-time acquisition
costs 259 - 259 496
------- ------- -------- -------
Total operating
expenses and other 5,549 6,062 16,362 21,708
------- ------- -------- -------
Loss from operations (986) (1,972) (3,256) (10,308)
Other income, net 338 286 1,024 950
------- ------- -------- -------
Loss before income tax (648) (1,686) (2,232) (9,358)
Income tax benefit - - - -
------- ------- -------- -------
Net loss $ (648) $(1,686) $ (2,232) $(9,358)
======= ======= ======== =======
Net loss per common share-
basic and diluted $ (0.04) $ (0.11) $ (0.14) $ (0.65)
Weighted average number
of common shares
outstanding-basic and
diluted 16,217 14,750 15,986 14,432
====== ====== ====== ======
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE> 4
SPYGLASS, INC.
Consolidated Balance Sheets
(Unaudited)
June 30, September 30,
(In thousands) 1999 1998
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<TABLE>
<C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,119 $ 22,706
Accounts receivable, net of allowance
for doubtful accounts of $392
and $429,respectively 4,931 4,704
Unbilled accounts receivable 1,763 902
Prepaid expenses and other current
assets 4,305 2,489
--------- ---------
Total current assets 41,118 30,801
Properties and equipment, net 3,290 3,888
Other assets 177 291
--------- ---------
Total Assets $ 44,585 $ 34,980
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,154 $ 1,678
Royalties payable 697 541
Deferred revenues 1,342 861
Accrued compensation and related
benefits 1,348 1,624
Accrued expenses and other liabilities 367 419
--------- ---------
Total current liabilities 5,908 5,123
Long-term deferred revenues 298 50
--------- ---------
Total liabilities 6,206 5,173
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value,
2,000,000 shares authorized,
none issued - -
Common stock, $.01 par value,
50,000,000 shares authorized,
16,495,542 and 15,092,953 shares
issued and 16,485,828 and 15,083,239
shares outstanding, respectively 164 150
Additional paid-in capital 62,175 50,546
Accumulated deficit (22,529) (20,297)
Treasury stock at cost, 9,714 shares (55) (55)
Unamortized value of restricted stock (1,376) (537)
--------- ---------
Total stockholders' equity 38,379 29,807
--------- ---------
Total Liabilities and
Stockholders Equity $ 44,585 $ 34,980
========= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE> 5
SPYGLASS, INC.
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Unamortized
Additional Treasury Value of
Common Stock Paid-in Accumulated Common Stock Restricted
--------------- -------------
(In thousands, except per share amounts) Shares Amount Capital Deficit Shares Amount Stock Issued
---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 15,083,239 $ 150 $ 50,546 $ (20,297) 9,714 $ (55) $ (537)
Sale of common stock to
General Instrument 700,000 7 7,385
Exercise of stock options 586,578 6 3,010
Exercise of employee stock
purchase plan stock options 22,411 - 214
Issuance of restricted stock 93,600 1 1,020 (1,045)
Amortization of deferred compensation
relating to issuance of restricted stock 206
Net loss (2,232)
----------- -------- --------- ---------- ------ -------- ----------
Balance at June 30, 1999 16,485,828 $ 164 $ 62,175 $ (22.529) 9,714 $ (55) $ (1,376)
=========== ======== ========== ========== ====== ======== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE> 6
SPYGLASS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended June 30,
(In thousands) 1999 1998
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<TABLE>
<C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,232) $ (9,358)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,465 1,572
Amortization 371 988
Loss on disposal of fixed assets 15 12
Amortization of deferred compensation related
to issuance of restricted stock 206 390
Bad debt provision 175 309
Incentive stock option compensation - 15
Changes in operating assets and liabilities:
Accounts and long-term receivables (402) (1,111)
Unbilled accounts receivable (861) -
Prepaid expenses, other current assets and
other assets (2,073) (188)
Accounts payable 476 26
Royalties payable 156 (345)
Deferred revenues 729 (464)
Accrued compensation and related benefits (276) (878)
Accrued expenses and other liabilities (52) 127
-------- --------
Net cash used in operating activities (2,303) (8,905)
-------- --------
Cash flows from investing activities:
Cash acquired in business combination - 574
Short-term investments, net activity - 4,929
Proceeds from sale of fixed assets 10 82
Capital expenditures (892) (544)
-------- --------
Net cash provided by (used in) investing
activities (882) 5,041
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 3,206 1,618
Proceeds from issuance of preferred stock - 1,000
Proceeds from issuance of common stock - 4
Sale of common stock to General Instrument 7,392 -
Purchase of treasury common stock - (55)
------- --------
Net cash provided by financing activities 10,598 2,567
------- --------
Net increase (decrease) in cash and cash
equivalents 7,413 (1,297)
Cash and cash equivalents at beginning of period 22,706 24,097
------- --------
Cash and cash equivalents at end of period $ 30,119 $ 22,800
======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE> 7
Notes to the Consolidated Financial Statements
(Unaudited)
June 30, 1999
Note 1. Basis of Presentation
The accompanying financial statements have been prepared by the
Company in accordance with generally accepted accounting principles,
although certain information and footnote disclosures normally
included in the Company's audited annual financial statements have
been condensed or omitted. In the opinion of management, the
accompanying unaudited financial statements include all adjustments
(consisting only of normal recurring items) necessary for a fair
presentation of the Company's financial position, results of
operations and cash flows at the dates and for the periods indicated.
It is suggested that these interim financial statements be read in
connection with the audited financial statements for the fiscal years
ended September 30, 1998, 1997 and 1996 which are included in the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998 and the Supplemental Consolidated Financial
Statements and related Supplemental Management's Discussion and
Analysis of Financial Condition and Results of Operations of
Spyglass, Inc. filed with Form S-3 on July 19, 1999.
The results of operations for the three and nine months ended
June 30, 1999 are not necessarily indicative of the results of
operations to be expected for the full fiscal year.
Note 2. Acquisition of Navitel Communications, Inc.
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 information appliances. 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.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Spyglass, Inc. ("Spyglass" or the "Company") was
organized as an Illinois corporation in February 1990 and
reincorporated in Delaware in May 1995. Spyglass entered the
Internet market during fiscal 1994 and, from fiscal 1994 through
fiscal 1996, focused its efforts on developing, marketing and
distributing Internet client and server technologies for
incorporation into a variety of Internet-based software products and
services. Since fiscal 1997, the Company has been focusing on the
development, marketing and distribution of its technologies and
services to the Internet information appliance marketplace, and,
since May 1999, increased its focus on the Interactive Television
("ITV") and Mobile Data Services ("MDS") vertical markets. 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 markets within the Internet information
appliance marketplace.
Spyglass provides its customers with expertise, software and
professional services that enable them to rapidly develop cost-
effective Internet-enabled information appliances. Spyglass
professional services include custom engineering for defining,
developing and delivering complete, end-to-end project solutions.
Spyglass solutions have been integrated into a variety of products,
including but not limited to television set-top boxes, screen and
cellular phones, televisions, office equipment, medical devices and
industrial controls. In addition, SurfWatch, a leading content
filtering software designed to block unwanted material from the
Internet, has been deployed by several major corporations, schools
and ITV service providers.
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 is developing and integrating new
Internet cable services and technologies for GI's next generation
digital set-top platforms. This work is being performed through a
newly-formed subsidiary of the Company, Spyglass DSIC, Inc., referred
to as Acadia Application Integration Center ("Acadia"), in which GI
holds a 10% minority interest and which GI has an option to purchase
at fair market value under certain circumstances. The Company has
established a new facility for this Solutions Center in Lexington,
Massachusetts with dedicated resources for the execution of this
contract, which is expected to provide Spyglass a minimum of $20
million in revenues over three years.
In March 1999, the Company and Microsoft Corporation
("Microsoft") entered into agreements under which the Company
licensed technology and will provide services over a three-year
<PAGE> 9
period to Microsoft to develop and integrate multiple Windows CE-
based applications for Internet information appliance manufacturers
that are developing products utilizing the Windows CE operating
system. The agreements are expected to provide the Company with a
minimum of $20 million in revenues over three years. In October
1999, the Company expects to move dedicated resources to a new
facility in Menlo Park, California to facilitate the anticipated
growth of this Solutions Center.
In April 1999, Spyglass acquired Navitel Communications,
Inc. ("Navitel") in a transaction accounted for as a pooling of
interests. In connection with the acquisition, Spyglass issued an
aggregate of 1,148,520 shares of its common stock to the stockholders
of Navitel. In addition, Navitel optionholders received equivalent
options for shares of Spyglass common stock in exchange for their
outstanding options for Navitel common stock. 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.
Quarter Ended June 30, 1999 Compared with Quarter Ended June 30, 1998
Internet technology revenues for the quarter ended June 30, 1999
decreased $808,000 or 25%, to $2,433,000 from $3,241,000 for the
quarter ended June 30, 1998. This decrease was due to a decrease in
the number of licensing contracts signed during the quarter,
resulting from an increased focus on developing the Profession
Services business. Management expects to continue to experience
quarter to quarter variances in its ability to execute license
agreements which require large up-front license fee commitments due
to the relative immaturity of the information appliance marketplace
and the many factors that affect the timing of potential customer
product development projects. The Company continually reviews its
sales process with the goal of shortening its sales cycle.
Service revenues for the quarter ended June 30, 1999, which
include both professional services revenues and revenues from
customer support agreements, increased $2,364,000, or 97%, to
$4,799,000 from $2,435,000 for the quarter ended June 30, 1998. This
increase was primarily due to revenues generated from Solutions
Center contracts with Microsoft and General Instrument, both of which
were executed in the current fiscal year. The Company expects
professional service revenues to increase in absolute dollars, and as
a percentage of total net revenues, during the remainder of fiscal
1999 as compared to the quarter ended June 30, 1999. Service
revenues from customer support agreements, as a percentage of total
net revenues, are expected to decline slightly during the same period
as compared to the quarter ended June 30, 1999.
<PAGE> 10
Gross profit as a percentage of total net revenues was 63% for
the quarter ended June 30, 1999 compared to 72% for the quarter ended
June 30, 1998. This decline was due to a higher proportion of lower
margin service revenues and a reduction in service revenue gross
margin to 53% in the quarter ended June 30, 1999 from 62% in the
quarter ended June 30, 1998. Gross profit, as a percentage of total
net revenues, is expected to continue to be lower for the remainder
of fiscal 1999 than in fiscal 1998 as service revenues are expected
to increase further as a percentage of total revenues. This trend,
however, could vary on a quarter to quarter basis as the quantity and
value of signed technology license agreements may vary from quarter
to quarter.
Sales and marketing expenses for the quarter ended June 30, 1999
decreased $437,000, or 18%, to $1,934,000 from $2,371,000 for the
quarter ended June 30, 1998 and decreased as a percentage of total
net revenues to 27% from 42%. Factors contributing to this decrease
included a decrease in salary and related personnel of $121,000 due
to a reduction in sales and marketing staff. Direct marketing and
public relations costs decreased $157,000 as efforts were streamlined
in preparation for a new marketing campaign targeting the ITV and MDS
vertical markets. Also, travel related expenses decreased $95,000
due to the timing and nature of customer related travel and trade
shows. Sales and marketing expenses for the remainder of fiscal 1999
are expected to increase as advertising and public relations
campaigns are launched to reflect the increased focus of the Company
on the ITV and MDS vertical markets.
Research and development expenses for the quarter ended June
30, decreased as a percentage of total net revenues to 28% from 36%
for the quarter ended June 30, 1998, but were virtually the same in
absolute dollars. Decreases in salary and related personnel costs
of $108,000 due to re-deploying a portion of the development
engineering staff into professional services roles, as reflected by
the increased cost of service revenues, were offset by increased
facility expenses of $150,000. The Company anticipates that its
direct investment in research and development will increase during
the remainder of fiscal 1999. The company believes that these
increased investments, when combined with its retained ownership of
the engineering developments of its professional service engineers,
will provide sufficient funding of its research and development
activities for the remainder of fiscal 1999.
General and administrative expenses for the quarter ended June
30, 1999 decreased $378,000, or 23%, to $1,296,000 from $1,674,000
for the quarter ended June 30, 1998 and decreased as a percentage of
total net revenues to 18% from 29%. This decrease is primarily due
to a decrease in facility related costs of $176,000, and decreases in
salary and related personnel costs of $135,000, due to a decline in
general and administrative headcount.
The Company recorded a charge to operating expenses of
$259,000, or $0.02 per share, for direct acquisition costs in
connection with the acquisition of Navitel during the quarter ended
June 30, 1999. These costs consisted primarily of professional fees.
<PAGE> 11
The Company recorded no income tax benefit for the quarters
ended June 30, 1999 and 1998. The Company believes that it is
appropriate to defer recognition of potential tax benefits until such
time when its return to profitability can provide assurances that
these tax benefits will be realized.
Nine Months Ended June 30, 1999 Compared with Nine Months Ended June
30, 1998
Internet technology revenues for the nine months ended June
30, 1999 decreased $162,000 or 2%, to $8,550,000 compared to
$8,712,000 for the nine months ended June 30, 1998. This decrease
was due primarily to a decrease in the dollar value and number of
licensing contracts signed during fiscal 1999, resulting from an
increased focus on developing the Professional Services business.
Service revenues for the nine months ended June 30, 1999
increased $5,574,000, or 88%, to $11,873,000 compared to $6,299,000
for the nine months ended June 30, 1998. This increase was due to an
increase in the number and dollar value of professional services
agreements resulting from an increased focus on building an
integrated development and service organization that provides
customized solutions to its customers within the vertical markets of
the Internet information appliance marketplace.
Gross profit as a percentage of revenues was 64% for the nine
months ended June 30, 1999 compared to 76% for the nine months ended
June 30, 1998 due to a higher mix of lower margin service revenues
and a decline in service revenue gross margin. Gross margins on
service revenue decreased to 48% for the nine months ended June 30,
1999, from 66% for the nine months ended June 30, 1998. Acceptance
of certain lower gross margin professional services engagements in
order to both further the development of long-term strategic
relationships and to increase overall utilization of services staff
were the primary factors in this decline. The decrease in gross
margin on service revenues was partially offset by higher gross
margins realized on Internet technology revenues due to lower royalty
costs associated with those revenues.
Sales and marketing expenses for the nine months ended June 30,
1999 decreased $691,000, or 10%, to $6,239,000 from $6,930,000 for
the nine months ended June 30, 1998, and decreased as a percentage of
total net revenues to 31% from 46%. This decrease resulted primarily
from a reduction in compensation and personnel expenses of $353,000
incurred as a result of a reduction in sales and marketing staff, as
well as a $389,000 decrease in direct marketing activities as efforts
were streamlined in preparation for a new marketing campaign
targeting the ITV and MDS vertical markets.
Research and development expenses for the nine months ended
June 30, 1999 decreased $3,421,000, or 37%, to $5,705,000 from
$9,126,000 for the nine months ended June 30, 1998 and decreased as
a percentage of total net revenues to 28% from 61%. The decrease
was due primarily to a decrease in salary costs and related
personnel expenses of $3,090,000 related to the increased
utilization of development engineers in a professional services
role, as reflected by the increased cost of service revenues, and
to an overall reduction in research and development engineering
staff.
<PAGE> 12
General and administrative expenses for the nine months ended
June 30, 1999 decreased $997,000, or 19%, to $4,159,000 from
$5,156,000 for the nine months ended June 30, 1998 and decreased as
a percentage of total net revenues to 20% from 34%. Decreases of
$460,000 in salary and related personnel expenses were due to a
reduction in general and administrative staff and recruiting
expenses. In addition, general and administrative facility related
costs decreased by $299,000 due to a reduction in the number of
Company facilities. These decreases were partially offset by a
$221,000 increase in legal expenses primarily related to pending
litigation as discussed in Part II, Item 1.
In connection with the acquisition of Navitel on April 16, 1999,
the Company recorded a charge to operating expenses of $259,000, or
$0.02 per share, for direct acquisition related costs. In addition,
the acquisition of AllPen Software on November 14, 1997, resulted in
the Company recording, in the quarter ending December 31, 1997, a
charge to operating expenses of $496,000 or $0.03 per share, for
direct acquisition related costs. In both cases, these costs
consisted primarily of professional fees.
The Company recorded no income tax benefit for the nine months
ended June 30, 1999 and 1998. The Company believes that it is
appropriate to defer recognition of potential tax benefits until such
time when its return to profitability can provide assurances that
these tax benefits will be realized.
Liquidity and Capital Resources
As of June 30, 1999, the Company had no debt and had cash and
cash equivalents of $30,119,000 and working capital of $35,210,000.
The Company's operating activities used cash of $2,303,000 and
$8,905,000 for the nine months ended June 30, 1999 and June 30,
1998, respectively. In October 1998, the Company received
$7,392,000 in cash from GI for the purchase by GI of 700,000 shares
of the Company's common stock.
The Company's unbilled accounts receivable balance increased
to $1,763,000 at June 30, 1999 from $902,000 at September 30, 1998.
This increase was primarily due to an increase in professional
services contracts which are generally billed fifteen days after
month-end.
The Company's capital expenditures totaled $892,000 and $544,000
for the nine months ended June 30, 1999 and 1998, respectively. The
increase was due primarily to expenditures relating to the October
1998 agreement with GI to form a new digital cable software
integration center which has required the purchases of computer
hardware and office furniture. The company does not currently have
any material capital expenditure commitments for the remainder of
fiscal 1999.
The Company believes that its current cash and cash equivalents,
together with funds expected to be generated from operations, will be
sufficient to finance the Company's operations through at least the
twelve-month period ending June 30, 2000.
<PAGE> 13
Future Operating Results
This Form 10-Q contains a number of forward-looking
statements. Any statements contained herein (including without
limitation statements to the effect that the Company or its
management "believes", "expects", "anticipates, "plans" and
similar expressions) that relate to future events or conditions
should be considered forward-looking statements. There are a
number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-
looking statements. These factors include, without limitation,
those set forth below.
During fiscal 1997, the Company announced a new strategic
focus on the Internet information appliance marketplace. The
Company has been focused on the development, marketing and
distribution of its technologies and services to the Internet
information appliance marketplace, and since May 1999, increased
its focus on the ITV and MDS vertical markets. 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
these two vertical sectors within the Internet information
appliance marketplace. Because this is a relatively new and
undeveloped marketplace, 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
marketplace.
The Company derived approximately 50.5% of its revenues
for the quarter ended June 30, 1999 from three customers. As the
Internet information appliance marketplace 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 information appliance marketplace 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
marketplace. In particular, commercial use of the Internet
continues to be constrained by the need for reliable processes such
as security measures for electronic commerce as well as the need
for regularly available customer support. In addition, the market
for Internet software products is characterized by rapidly changing
technology, evolving industry standards and customer demands, and
frequent product introductions and enhancements, which make it
difficult to predict whether any initial commercial acceptance of
the Company's products can be sustained over a period of time.
<PAGE> 14
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
information appliance 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, 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.
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.
<PAGE> 15
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.
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 calendar year 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
continued to test additional Spyglass products. Test plans for
current Spyglass products and third-party software are scheduled to
be completed by August 31, 1999. We anticipate that all currently
available Spyglass products will be tested no later than October 15,
1999. Spyglass has contracted an external consultant to assist in
certain Year 2000 testing of Spyglass products
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 are
expected to be replaced by September 30, 1999. In addition, one key
<PAGE> 16
piece of telecommunications equipment is due to receive a software
upgrade by the end of September, 1999 to ensure Year 2000 compliance.
According to the remaining network equipment vendors' Year 2000
certification matrices, the remainder of the Spyglass'internal
hardware/software systems are in compliance.
Spyglass' approach to ensuring compliance on the hardware,
operating systems, and applications used internally 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 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 used internally.
A large portion of Spyglass' Year 2000 compliance efforts has
focused on our internal enterprise applications which affect many 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
compliant or have planned upgrades which will bring them into
compliance by the end of September, 1999.
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
<PAGE> 17
approximately $10,000 for external consultants. The use of external
consultants is expected to remain minimal. The Company estimates it
will incur approximately $75,000 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company exports products to diverse geographic areas.
Substantially all foreign sales, however, are transacted in U.S.
dollars and therefore the Company is not exposed to significant
foreign currency market risk. Additionally, the Company does not
believe it has any material market risk exposures with regard to
foreign derivatives or other financial instruments.
<PAGE> 18
Part II. Other Information
Item 1. Legal Proceedings
On January 28, 1999, the Company and certain of its officers
and directors were named as defendants in a purported class action
lawsuit filed in the United States District Court for the Northern
District of Illinois (Eastern Division). Thereafter, eleven
substantially similar actions were filed in the same Court. All
complaints principally claim that the defendants violated federal
securities laws allegedly by making false and misleading
statements and by failing to disclose material information
concerning the Company's financial performance during the
purported class period of October 21, 1998 through January 4,
1999. The complaints further allege that certain officers and/or
directors of the Company sold stock in the open market during the
class period and seek unspecified damages. On April 20, 1999 the
Court granted the plaintiff's motion to consolidate the lawsuits
into a single complaint, which plaintiffs filed on May 7, 1999.
On May 21, 1999, the defendants filed a motion to dismiss the
consolidated amended complaint as against all defendants, which
the plaintiffs opposed on June 10, 1999. Thereafter, the
defendants filed a reply brief in support of their motion to
dismiss on June 24, 1999. On July 20, 1999 the Court denied the
defendants' motion to dismiss and ordered the case to proceed to
discovery. On August 4, 1999, defendants filed their answer to the
consolidated amended complaint. Although the Company believes
that it and the other defendants have meritorious defenses to the
claims made in the complaint and intends to contest the action
vigorously, an adverse resolution of the lawsuit could have a
material adverse affect on the Company's financial condition and
results of operations in the period in which the litigation is
resolved. The Company is not presently able to reasonably
estimate potential losses, if any, related to the complaint.
On June 25, 1999, Spyglass, Inc. filed a complaint with
the U.S. District Court for the Northern District of California.
The Complaint alleges that N2H2 Incorporated ("N2H2"), of Seattle,
Washington, has infringed Spyglass' U.S. Patent No. 5,884,033 for
an Internet filtering system. The complaint asks the Court both
to enjoin further infringement by N2H2 and to award monetary
damages. On August 2, 1999 N2H2 filed its answer which included a
denial that the patent-in-suit is infringed, assertions that the
patent-in-suit is invalid and unenforceable, and counterclaims
against Spyglass. Spyglass believes that the assertions set forth
in the complaint are meritorious. Spyglass, Inc. is not presently
able to reasonably estimate potential awards or losses, if any,
related to this matter.
Item 2. Changes in Securities and Use of Proceeds
On April 16, 1999, the Company issued 1,148,520 shares of common
stock in connection with the acquisition of Navitel. In addition,
Navitel optionholders received equivalent options for shares of
Spyglass common stock in exchange for their outstanding options for
common stock. These securities were issued to the stockholders of
Navitel under the exemptions from registration set forth in Section
4(2) of the Securities Act of 1933, as amended. No underwriters were
involved in such transaction.
<PAGE> 19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
The exhibits are listed in the accompanying Index to Exhibits
immediately following the signature page.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on April 30, 1999 and a report
on Form 8-K/A on June 30, 1999 relating to the acquisition of Navitel
Communications, Inc.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Spyglass, Inc.
Registrant
Date: August 13, 1999 /s/ Gary Vilchick
Gary Vilchick
Executive Vice President,
Finance, Administration and
Operations and Chief
Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
10.11 Senior Management Retention
Agreement between the Registrant
and Daryl J. Dahlberg dated July 7, 1999.*
27 Financial Data Schedule
* Management contract or compensatory plan or arrangement
filed as an Exhibit to this form pursuant to Item 6(a) of Form 10-Q.
EXHIBIT 10.11
SPYGLASS, INC.
Senior Management Retention Agreement
Daryl Dahlberg
Naperville Corporate Center
1240 East Diehl Road
Naperville, IL 60563
Dear Daryl:
Spyglass, Inc. (the "Company") recognizes that, as is the case
with many publicly-held corporations, the possibility of a change in
control of the Company exists and that such possibility, and the
uncertainty and questions which it may raise among key personnel, may
result in the departure or distraction of key personnel to the
detriment of the Company and its stockholders.
The Board of Directors of the Company (the "Board") has
determined that appropriate steps should be taken to reinforce and
encourage the continued employment and dedication of the Company's
key personnel, including yourself, without distraction from the
possibility of a change in control of the Company and related events
and circumstances.
As inducement for and in consideration of your remaining in its
employ, the Company agrees that you shall receive the severance
benefits set forth in this letter agreement (the "Agreement") in the
event your employment with the Company is terminated under the
circumstances described below subsequent to a Change in Control of
the Company (as defined below).
1. Certain Definitions.
As used herein, the following terms shall have the following
respective meanings:
1.1 "Change in Control" shall mean:
<PAGE>
(a) the acquisition by an individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person")
of beneficial ownership (within the meaning of Rule 13d_3 promulgated
under the Exchange Act) of 20% or more of either (i) the then-
outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock") or (ii) the combined voting power of the then-
outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company
Voting Securities"); provided, however, that for purposes of this
subsection (a), the following acquisitions shall not constitute a
Change in Control: (i) any acquisition directly from the Company,
(ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company, or (iv) any
acquisition by any corporation pursuant to a transaction which
complies with clauses (i), (ii) and (iii) of subsection (c) of this
Section 1.1; or
(b) individuals who, as of the date hereof, constitute
the members of the Board (the "Incumbent Directors") cease for any
reason to constitute at least a majority of the Board; provided,
however, that any individual becoming a director subsequent to the
date hereof whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least a majority
of the Incumbent Directors shall be deemed to be an Incumbent
Director (except that this proviso clause shall not apply to any
individual whose initial election as a director occurs as a result of
an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the
Board); or
<PAGE>
(c) the consummation of a reorganization, merger or
consolidation involving the Company or a sale or other disposition of
all or substantially all of the assets of the Company (a "Business
Combination"), unless, immediately following such Business
Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding Company
Common Stock and Outstanding Company Voting Securities immediately
prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of the then-outstanding shares of common
stock and the combined voting power of the then-outstanding voting
securities entitled to vote generally in the election of directors,
respectively, of the resulting or acquiring corporation in such
Business Combination in substantially the same proportions as their
ownership, immediately prior to such Business Combination, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, respectively, (ii) no Person (excluding any resulting or
acquiring corporation in such Business Combination or any employee
benefit plan (or related trust) of the Company or of such resulting
or acquiring corporation in such Business Combination) beneficially
owns, directly or indirectly, 30% or more of the then outstanding
shares of common stock of such resulting or acquiring corporation in
such Business Combination, or of the combined voting power of the
then_outstanding voting securities of such corporation (except to the
extent that such ownership existed prior to the Business Combination)
and (iii) at least half of the members of the board of directors of
the resulting or acquiring corporation in such Business Combination
were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for
such Business Combination; or
<PAGE>
(d) approval by the stockholders of the Company of a
complete liquidation or dissolution of the Company.
1.2 "Cause" shall mean:
(a) your willful failure to substantially perform your
reasonable assigned duties as an officer of the Company (other than
any such failure resulting from incapacity due to physical or mental
illness), which failure is not cured within 30 days after a written
demand for substantial performance is delivered to you by the Board
which specifically identifies the manner in which the Board believes
that you have not substantially performed your duties; or
(b) your willful engagement in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this Section 1.2, no act or failure to act, on
your part shall be considered "willful" unless it is done, or omitted
to be done, by you in bad faith and without reasonable belief that
your action or omission was in the best interests of the Company.
1.3 "Good Reason" shall mean the occurrence, without your
written consent, of any of the following circumstances unless such
circumstance is fully corrected prior to the Date of Termination
specified in the Notice of Termination (each as defined below) given
in respect thereof (provided that such right of correction by the
Company shall only apply to the first Notice of Termination for Good
Reason given by you):
(a) the assignment to you (without your written consent)
of any duties inconsistent in any respect with your position
(including status, offices, titles and reporting requirements),
authority or responsibilities in effect as immediately prior to the
Change in Control, or any other action by the Company which results
in a diminution in such position, authority or responsibilities,
<PAGE>
excluding for this purpose an isolated, insubstantial and inadvertent
action not taken in bad faith and which is remedied by the Company
promptly after receipt of written notice thereof given by you;
(b) a reduction in your annual base salary as in effect
on the date hereof or as the same may be increased from time to time;
(c) the failure by the Company to (i) continue in effect
any material compensation or benefit plan in which you participate
immediately prior to the Change in Control, unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan, (ii) continue your
participation therein (or in such substitute or alternative plan) on
a basis not materially less favorable, both in terms of the amount of
benefits provided and the level of your participation relative to
other participants, as existed at the time of the Change in Control
or (iii) award cash bonuses to you in amounts and in a manner
substantially consistent with past practice in light of the Company's
financial performance;
(d) the failure by the Company to continue to provide
you with benefits substantially similar to those enjoyed by you under
any of the Company's life insurance, medical, health and accident, or
disability plans in which you were participating at the time of the
Change in Control, the taking of any action by the Company which
would directly or indirectly materially reduce any of such benefits,
or the failure by the Company to provide you with the number of paid
vacation days to which you are entitled on the basis of years of
service with the Company in accordance with the Company's normal
vacation policy in effect at the time of the Change in Control;
<PAGE>
(e) a change by the Company in the location at which you
perform your principal duties for the Company to a new location that
is both (i) outside a radius of 35 miles from your principal
residence at the time of the Change in Control and (ii) more than 20
miles from the location at which you perform your principal duties
for the Company at the time of the Change in Control; or a
requirement by the Company that you travel on Company business to a
substantially greater extent than required immediately prior to the
Change in Control;
(f) the failure of the Company to obtain a reasonably
satisfactory agreement from any successor to assume and agree to
perform this Agreement, as required by Section 5; or
(g) a purported termination of your employment which is
not effected pursuant to a Notice of Termination satisfying the
requirements of Sections 3.2 and 6, which purported termination shall
not be effective for purposes of this Agreement.
For purposes of this Agreement, any good faith determination of
"Good Reason" made by the Board shall be conclusive, provided that
Incumbent Directors then comprise a majority of the Board.
1.4 "Disability" shall mean your absence from the full-
time performance of your duties with the Company for six consecutive
months as a result of incapacity due to mental or physical illness
which is determined to be total and permanent by a physician selected
by the Company or its insurers and acceptable to you or your legal
representative.
2. Term of the Agreement. The term of this Agreement (the
"Term") shall commence on as of the date hereof and shall continue in
effect through December 31, 1998; provided, however, that commencing
on January l, 1999 and each January l thereafter, the Term shall be
automatically extended for one additional year unless, not later than
<PAGE>
October 31 of the preceding calendar year, the Company shall have
given you written notice that the Term will not be extended. This
Agreement, and all rights and obligations of the parties hereunder,
shall expire upon (a) the expiration of the Term if a Change in
Control has not occurred during the Term, (b) the date 24 months
after the date of the Change in Control, if you are still employed by
the Company as of such date, or (c) the fulfillment by the Company of
all of its obligations under Section 4 if your employment with the
Company terminates within 24 months following a Change in Control.
3. Employment Status; Termination Following Change in Control.
3.1 Not Employment Contract. You acknowledge that this
Agreement does not constitute a contract of employment or impose on
the Company any obligation to retain you as an employee and that this
Agreement does not prevent you from terminating your employment at
any time. If your employment with the Company terminates for any
reason and subsequently a Change in Control shall occur, you shall
not be entitled to any benefits hereunder.
3.2 Termination of Employment. Any termination of your
employment by the Company or by you within 24 months following a
Change in Control of the Company during the Term shall be
communicated by written notice of termination ("Notice of
Termination") to the other party hereto in accordance with Section 6.
If such employment termination is for Cause, Good Reason or
Disability, the Notice of Termination shall so state. The "Date of
Termination" shall mean the effective date of such termination as
specified in the Notice of Termination (provided that no such Notice
of Termination shall specify an effective date less than fifteen days
or more than 120 days after the date such Notice of Termination is
delivered).
<PAGE>
4. Rights Upon Termination.
4.1 Compensation. You shall be entitled to the following
benefits if a Change in Control occurs during the Term and your
employment with the Company terminates within 24 months following
such Change in Control:
(a) Termination Without Cause or for Good Reason. If
your employment with the Company is terminated by the Company (other
than for Cause, Disability or your death) or by you for Good Reason
within 24 months following a Change in Control, then you shall be
entitled to the following benefits:
(i) the Company shall pay to you in a lump sum in
cash within 30 days after the Date of Termination the aggregate of
the following amounts:
(1)the sum of (A) your annual base salary
through the Date of Termination, (B) the product of (x) the annual
bonus paid or payable (including any bonus or portion thereof which
has been earned but deferred) for the most recently completed fiscal
year and (y) a fraction, the number of which is the number of days in
the current fiscal year through the Date of Termination, and the
denominator of which is 365 and (C) the amount of any compensation
previously deferred by you (together with any accrued interest or
earnings thereon) and any accrued vacation pay, in each case to the
extent not theretofore paid (the sum of the amounts described in
clauses (A), (B), and (C) shall be hereinafter referred to as the
"Accrued Obligations"); and
(2)the amount equal to the sum of (A) your
highest annual base salary during the five-year period prior to the
Change in Control and (B) your highest annual bonus during the five-
year period prior to the Change in Control.
<PAGE>
(ii) for 12 months after your Date of Termination,
or such longer period as may be provided by the terms of the
appropriate plan, program, practice or policy, the Company shall
continue to provide benefits to you and your family at least equal to
those which would have been provided to you and them in accordance
with the applicable plans, programs, practices and policies in effect
on the Date of Termination (excluding any savings and/or retirement
plans) if your employment had not been terminated; provided, however,
that if you become reemployed with another employer and are eligible
to receive medical or other welfare benefits under another employer-
provided plan, the medical and other welfare benefits described
herein shall not be provided to the extent the same are provided
under such other plan during such applicable period of eligibility;
and
(iii) to the extent not theretofore paid or
provided, the Company shall timely pay or provide to you any other
amounts or benefits required to be paid or provided or which you are
eligible to receive following your termination of employment under
any plan, program, policy or practice or contract or agreement of the
Company and its affiliated companies (such other amounts and benefits
shall be hereinafter referred to as the "Other Benefits").
(b) Resignation without Good Reason; Termination for
Death or Disability. If you voluntarily terminate your employment
within 24 months following a Change in Control, excluding a
termination for Good Reason, or if your employment is terminated by
reason of your death or Disability within 24 months following a
Change in Control, the Company shall (i) pay you, in a lump sum in
cash within 30 days after the Date of Termination, the Accrued
Obligations and (ii) timely pay or provide to you the Other Benefits.
<PAGE>
(c) Termination for Cause. If your employment is
terminated by the Company for Cause within 24 months following a
Change in Control, the Company shall (i) pay you, in a lump sum in
cash within 30 days after the Date of Termination, the sum of (A)
your annual base salary through the Date of Termination and (B) the
amount of any compensation previously deferred by you, in each case
to the extent not theretofore paid, and (ii) timely pay or provide to
you the Other Benefits.
4.2 Taxes. Payments under this Agreement shall be made
without regard to whether the deductibility of such payments (or any
other payments to or for your benefit) would be limited or precluded
by Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code") and without regard to whether such payments (or any other
payments) would subject you to the federal excise tax levied on
certain "excise parachute payments" under Section 4999 of the Code;
provided, that if the total of all payments to or for your benefit,
after deduction of all federal taxes (including the tax set forth in
Section 4999 of the Code, if applicable) with respect to such
payments (the "total after-tax payments"), would be increased by the
limitation or elimination of any payment under this Agreement,
amounts payable under this Agreement shall be reduced to the extent,
and only to the extent, necessary to maximize the total after-tax
payments. The determination as to whether and to what extent
payments under this agreement are required to be reduced in
accordance with the preceding sentence shall be made by agreement
between you and the independent public accounting firm of the Company
(whose fees and expenses shall be borne solely by the Company). To
the extent that any elimination or reduction of payments is made in
accordance with this Section 4.2, the determination as to which
payments shall be eliminated or reduced shall be made by you.
<PAGE>
4.3 Mitigation. Except as provided in Section 4.1(a)(ii)
hereof, you shall not be required to mitigate the amount of any
payment or benefits provided for in this Section 4 by seeking other
employment or otherwise, nor shall the amount of any payment or
benefits provided for in this Section 4 be reduced by any
compensation earned by you as a result of employment by another
employer, by retirement benefits or by offset against any amount
claimed to be owed by you to the Company or otherwise.
4.4 Expenses. The Company agrees to pay as incurred, to the
full extent permitted by law, all legal fees and expenses which you
may reasonably incur as a result of any claim or contest by the
Company, you or others regarding the validity or enforceability of,
or liability under, any provision of this Agreement or any guarantee
of performance thereof (including as a result of any contest by you
regarding the amount of any payment or benefits pursuant to this
Agreement), plus in each case interest on any delayed payment at the
applicable Federal rate provided for in Section 7872(f)(2)(A) of the
Code.
5. Successors; Binding Agreement.
5.1 The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all
or substantially all of the business or assets of the Company
expressly to assume and agree to perform this Agreement to the same
extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain an
assumption of this Agreement at or prior to the effectiveness of any
succession shall be a breach of this Agreement and shall constitute
Good Reason if you elect to terminate your employment, except that
for purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the Date of
<PAGE>
Termination. As used in this Agreement, "Company" shall mean the
Company as defined above and any successor to its business or assets
as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
5.2 This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amount would still be payable
to you hereunder if you had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to your devisee, legatee or other
designee or if there is no such designee, to your estate.
6. Notice. All notices, instructions and other communications
given hereunder or in connection herewith shall be in writing. Any
such notice, instruction or communication shall be sent either (i) by
registered or certified mail, return receipt requested, postage
prepaid, or (ii) via a reputable nationwide overnight courier
service, in each case addressed to the Chief Executive Officer of the
Company, at Naperville Corporate Center, 1240 East Diehl Road,
Naperville, Illinois 60563, and to you at the address shown above (or
to such other address as either the Company or you may have furnished
to the other in writing in accordance herewith). Any such notice,
instruction or communication shall be deemed to have been delivered
two business days after it is sent by registered or certified mail,
return receipt requested, postage prepaid, or one business day after
it is sent via a reputable nationwide overnight courier service.
7. Miscellaneous.
7.1 For purposes of this Agreement, your employment with the
Company shall not be deemed to have terminated if you continue to be
employed by a subsidiary of the Company.
<PAGE>
7.2 The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force
and effect.
7.3 The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the
State of Delaware.
7.4 No waiver by you at any time of any breach of, or
compliance with, any provision of this Agreement to be performed by
the Company shall be deemed a waiver of that or any other provision
at any subsequent time.
7.5 This Agreement may be executed in counterparts, each of
which shall be deemed to be an original but both of which together
will constitute one and the same instrument.
7.6 Any payments provided for hereunder shall be paid net of
any applicable withholding required under federal, state or local
law.
7.7 This Agreement sets forth the entire agreement of the
parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or
written, by any officer, employee or representative of any party
hereto; and any prior agreement of the parties hereto in respect of
the subject matter contained herein is hereby terminated and
canceled.
If this accurately reflects our agreement on the subject matter
hereof, kindly sign and return to the Company the enclosed copy of
this letter, which will then constitute our agreement on this
subject.
<PAGE>
Sincerely,
SPYGLASS, INC.
By: /s/ Douglas P. Colbeth
Agreed to this 7th day of July, 1999
/s/ Daryl J. Dahlberg
(Signature)
Daryl J. Dahlberg
(Print Name)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
statements for the period ended June 30, 1999 and September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998<F1>
<PERIOD-END> JUN-30-1999 SEP-30-1998
<CASH> 30,119 22,706
<SECURITIES> 0<F1> 0<F1>
<RECEIVABLES> 5,323<F2> 5,133<F2>
<ALLOWANCES> 392<F2> 429<F2>
<INVENTORY> 0<F1> 0<F1>
<CURRENT-ASSETS> 41,118 30,801
<PP&E> 3,290 3,888
<DEPRECIATION> 0<F1> 0<F1>
<TOTAL-ASSETS> 44,585 34,980
<CURRENT-LIABILITIES> 5,908 5,123
<BONDS> 0<F1> 0<F1>
0<F1> 0<F1>
0<F1> 0<F1>
<COMMON> 164 150
<OTHER-SE> 38,215 29,657
<TOTAL-LIABILITY-AND-EQUITY> 44,585 34,980
<SALES> 2,433 11,661
<TOTAL-REVENUES> 7,232 21,169
<CGS> 399 1,843
<TOTAL-COSTS> 2,669 5,560
<OTHER-EXPENSES> 5,549 26,892
<LOSS-PROVISION> 0<F1> 0<F1>
<INTEREST-EXPENSE> 0<F1> 0<F1>
<INCOME-PRETAX> (986) (11,283)
<INCOME-TAX> 0<F1> 0<F1>
<INCOME-CONTINUING> (648) (10,030)
<DISCONTINUED> 0<F1> 0<F1>
<EXTRAORDINARY> 0<F1> 0<F1>
<CHANGES> 0<F1> 0<F1>
<NET-INCOME> (648) (10,030)
<EPS-BASIC> (.04) (.69)
<EPS-DILUTED> (.04) (.69)
<FN>
<F1>Amounts inapplicable or not disclosed as a separate line on the Consolidated
Balance Sheets or Consolidated Statement of Operations are reported as 0 herein.
<F2>Notes and accounts receivable-trade are reported net of allowances for doubtful
accounts in the Consolidated Balance Sheets.
</FN>
</TABLE>
