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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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
(Address of principal executive offices, including zip code)
(630) 505-1010
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
TRADED ON THE NASDAQ NATIONAL MARKET
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
----
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant on December 10, 1999, based upon the closing sale price of the Common
Stock on the Nasdaq National Market on that date as reported in The Wall Street
Journal, was approximately $391,175,000. On that date, the number of shares of
Common Stock outstanding, excluding 77,214 shares held as treasury shares, was
16,991,092.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1999 Annual Report to Stockholders for fiscal 1999
are incorporated by reference in Parts II and IV hereof. The Annual Report shall
be deemed "filed" with the Commission only with respect to those portions
specifically incorporated by reference herein. Portions of the registrant's
definitive Proxy Statement for its Annual Meeting of Stockholders for fiscal
1999, which will be filed with the Securities and Exchange Commission within 120
days after the end of the Company's fiscal year, are incorporated by reference
into Part III hereof.
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
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. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Future Operating Results" incorporated by reference into
Item 7 of this Annual Report on Form 10-K. Discussions containing forward
looking statements may be found in the materials set forth under "Item 1.
Business" and incorporated by reference in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's opinions only as of the date hereof. The Company undertakes
no obligation to revise or publicly release the results of any revision to these
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
ITEM 1. BUSINESS
GENERAL
Spyglass, Inc. ("Spyglass" or the "Company") is a leading provider of strategic
Internet consulting, software and professional services that enable content
providers, service operators, and device manufacturers to capitalize on the
potential of the Internet. Particularly active in the interactive television
("ITV") and mobile data ("MD") markets, Spyglass offers end-to-end solutions to
many of the world's premier organizations. As a leader in providing Internet
technologies, Spyglass delivers solutions that enable information appliance
users to access device-specific applications and receive time-critical
information utilizing the Internet.
Spyglass solutions have helped customers Internet-enable a variety of devices as
well as deliver HTML-based applications to information appliances such as
television set-top boxes, televisions, gaming devices, wireless phones,
navigation devices, Internet screen phones, office equipment, medical devices
and industrial controls.
A central element of the Company's business strategy is marketing its Internet
solutions to original equipment manufacturers ("OEMs"), network service
operators, value-added service providers, Internet content aggregators, and
Internet content providers, primarily using a direct sales force. The Company
chose this approach to enable it to leverage the marketing, distribution and
development resources of much larger organizations that are strategically
focused on offering value-added products and services that leverage the
Internet. Spyglass intends to continue to increase the performance,
functionality and flexibility of its technology offerings and breadth of its
services, to meet the evolving needs of information appliance users. In doing
so,
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the Company will continue to invest in building customer awareness of
the Spyglass name and the range of information appliance solutions available
from Spyglass.
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 subsidiary of the Company, in
which GI holds a 10% minority interest and which GI will have an option to
purchase at fair market value under certain circumstances. The Company opened a
new facility for this solutions center in Lexington, Massachusetts with
dedicated resources for the execution of the GI agreement, which is expected to
provide Spyglass $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 period to Microsoft to develop and integrate multiple Windows
CE-based applications for information appliance manufacturers that are
developing products utilizing the Windows CE operating system. The agreements
are expected to provide the Company with $20 million in revenues over three
years. In November 1999, the Company moved 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.
On September 20, 1999 the Company signed a definitive agreement to sell
SurfWatch Software Inc. ("SurfWatch"), a subsidiary of the Company, to JSB
Software Technologies, plc ("JSB"). The transaction was completed on November 4,
1999, and was effected through the sale of all the issued and outstanding
capital stock of SurfWatch for consideration of $17 million cash and $12 million
in JSB equity securities. This transaction resulted in a pre-tax gain of
approximately $27 million.
In the first quarter of the fiscal year ending September 30, 2000 the Company
recorded a non-recurring restructuring charge consisting primarily of severance
and related personnel costs associated with the organizational realignment of
the Company's professional services group. This realignment was completed in
November 1999 and resulted in a restructuring charge of approximately $860,000.
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THE INTERNET
Developed in 1969, the Internet is a worldwide network that links thousands of
public and private computer networks. The World Wide Web ("Web") was introduced
in 1992 using the Internet network. The Web is based on a client/server system
in which certain computers ("servers") store files and respond to requests
issued by remote computers ("clients" ) to download the files, thus allowing
users around the world to view and use the information stored on a single
server.
The Internet has emerged as a global communications medium enabling pervasive
electronic communications and access to shared information throughout the world.
According to International Data Corporation ("IDC"), the number of worldwide
Internet users is forecasted to grow from an estimated 196 million users at the
end of 1999 to 502 million users at the end of 2003. To facilitate increased
Internet network traffic as a result of this projected growth of users, certain
"infrastructure" elements must expand. These elements include: widespread,
inexpensive Internet access, either through Internet access providers or online
services, expansion of high-speed communications channels to accommodate the
increasing number and size of files and Web pages available for downloading, and
multiple types of access devices, including information appliances, available to
each user.
THE INFORMATION APPLIANCE MARKET
As high-speed communication channels are expanded, the Company anticipates
widespread Internet access will become available over both wireless and wireline
networks from a multitude of information appliances. IDC estimates that the
annual worldwide information appliance shipments will increase from
approximately 13.9 million units in 1999 to 55.7 million units in 2002.
Additionally, IDC forecasts the worldwide information appliance installed base
will grow from an estimated 25.9 million at the end of 1999 to 150.9 million at
the end of 2002. Spyglass has focused its resources on providing Internet
solutions, including technology, consulting, and professional services,
primarily to customers in the ITV and MD markets. In addition, within its
solutions centers Spyglass has committed substantial resources dedicated to the
development and integration of various software applications utilizing
information appliances such as set-top platforms for ITV, Internet screen
phones, and other devices.
THE ITV MARKET OPPORTUNITY
The ITV market encompasses the delivery of interactive content, applications and
services via new mediums such as televisions and other similar information
appliances. The ITV market opportunity is highly dependent on mass adoption and
use of the television and related appliances within the home for accessing
Internet-based applications and services. The convergence of television and the
Internet delivers numerous HTML-based applications to viewers, including
one-click purchasing, interactive gaming, video-on-demand, electronic
programming guides, e-commerce, email, instant messaging, and browsing. Examples
of ITV customer opportunities for Spyglass include set-top box manufacturers,
television manufacturers, independent software vendors, cable operators,
value-added service providers, satellite television service providers, cable and
satellite infrastructure providers, Internet service providers, Internet content
aggregators, and Internet content providers. Spyglass currently has a number of
announced customer and partner relationships in the ITV market including CMI
Worldwide, GI,
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GTE, IBM, InterAct, Interactive Channel, LG Electronics, Motorola, Nokia,
PowerTV, Rockwell Collins, Sony, Thomson Multimedia, VM Labs, and WorldGate.
THE MD MARKET OPPORTUNITY
The MD market encompasses the delivery of Internet-based content and services
over mobile or wireless communications medium. The MD market opportunity is
highly dependent on mass adoption and use of mobile Internet-enabled devices
such as mobile phones, laptops, personal digital assistants ("PDAs"), navigation
devices, digital automobile dashboards, and other handheld devices. The Company
anticipates that Internet applications such as email, instant messaging, stock
trading and quotes, remote access to corporate intranets, delivery of
location-specific information such as directions, weather and traffic reports,
delivery of news items such as sports scores and world-events, and a variety of
other services will be available from mobile devices. Examples of MD customer
opportunities for Spyglass include mobile phone handset manufacturers,
navigation device manufacturers, automobile electronics manufacturers, telecom
network service operators, telecom infrastructure providers, Internet service
providers, Internet content aggregators, and Internet content providers.
Spyglass currently has a number of announced customer and partner relationships
in the MD market including Fujitsu, Inktomi, Microsoft, Nokia, Riverbed
Technologies, Seiko Epson, and Telenor Mobile.
SPYGLASS TECHNOLOGIES
Spyglass technologies deliver the embedded Internet and infrastructure solutions
needed to effectively connect a variety of information appliances to the
Internet and leverage the wealth of online information and communication
options. Spyglass has focused its product development efforts on technologies
targeted to the ITV and MD markets.
SPYGLASS DEVICE MAIL
Spyglass Device Mail is an embedded email technology designed specifically for
televisions, mobile phones, and handheld computers. Spyglass Device Mail is
designed to run on embedded or real-time operating systems that are commonly
used by information appliances. Spyglass Device Mail has relatively small memory
requirements and supports SMTP and IMAP4 Internet messaging standards. Spyglass
Device Mail is designed using the same underlying technology as Spyglass Device
Mosaic, allowing for an integrated Web content and email application set.
Spyglass Device Mail is designed to work with any Internet service provider,
eliminating the need for a proprietary dial-up network.
SPYGLASS DEVICE MOSAIC AND SPYGLASS THINGUI LIBRARY
Spyglass Device Mosaic is a standards-based Internet browser technology designed
specifically for use with information appliances. Spyglass Device Mosaic's
modular design makes it scalable across a broad range of information appliances.
The modular design allows for features to be added to support the latest needs
of televisions and set-top boxes; alternatively, a stripped down version can be
embedded in more memory-constrained Internet screen phones and handheld devices.
To reduce memory requirements, Spyglass Device Mosaic comes bundled with its own
graphics library, the Spyglass ThinGUI Library, which enables rich graphical
user interface
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functionality. Easily ported to a variety of popular real-time operating
systems, Spyglass Device Mosaic enables consumer electronics manufacturers to
add Web functionality to products quickly, cutting development costs and sharply
reducing time to market.
SPYGLASS MICROSERVER
Spyglass MicroServer is a standards-based Web server that can be embedded in
devices such as set-top boxes, copiers, printers, and industrial controls with
limited memory capacity. Application user interfaces for Spyglass MicroServer
enabled devices are authored in HTML and may be used with any commercial Web
browser. Typical applications utilizing Spyglass MicroServer include providing
operational or status information to a user, updating a device's internal
database, or initiating a device action, such as running a diagnostic. Spyglass
MicroServer has been ported to many of the leading real-time operating systems.
SPYGLASS PRISM
Spyglass Prism is a server-based content delivery and transformation platform
designed to efficiently bring the Internet to information appliances. Spyglass
Prism dynamically transforms richly formatted HTML authored Web content into
formats that match the relatively limited display capabilities of information
appliances such as mobile phones, navigation devices, and PDAs. In addition,
Spyglass Prism can deliver standard HTML authored Web pages to Wireless
Application Protocol ("WAP") compliant mobile phones and other WAP enabled
wireless devices. Spyglass Prism takes into account bandwidth, latency, display
size, and other factors by dynamically converting content for optimal delivery
and display on a wide variety of information appliances. For example, with a WAP
enabled mobile phone, Spyglass Prism converts memory and bandwidth intensive
color images into a simpler, grayscale format, resizes those images for the
phone's smaller display, and delivers the content in the wireless markup
language ("WML") specified by WAP.
SURFWATCH
In November 1999, Spyglass completed a transaction to sell SurfWatch, including
ownership of all SurfWatch products, to JSB. Spyglass will continue to sell
SurfWatch products to customers in the ITV market under a reseller agreement
with JSB. Following the sale of SurfWatch, Spyglass will no longer market
SurfWatch products to other content filtering markets including education,
corporate and home markets.
SurfWatch is an easy-to-use, effective software application for screening
unwanted material from the Internet. SurfWatch blocks access to a comprehensive
list of sites in "core" categories pertaining to sexually explicit material,
violence, drugs/alcohol/tobacco, hate speech, and gambling; users can block all
chat access as well. SurfWatch provides the user many customizable features
including the ability to administer different levels of Web access and filtering
among different users and the ability to add productivity categories such as
entertainment, games, job search, sports and travel.
Spyglass has also received a patent from the U.S. Patent Office for its core
filtering technology and processes. The patent is titled "Internet Filtering
System for Filtering Data Transferred over the Internet, Utilizing Immediate and
Deferred Filtering Actions." The patented technology
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includes the steps of maintaining a database of filters, comparing information
in an Internet request to filtering information in one or more of the filter
databases, and determining whether to prevent or allow the transmission in
response to the comparison. Following the sale of SurfWatch to JSB, Spyglass has
retained ownership of this patent and has licensed the patent to JSB.
WAP MICROBROWSER
Spyglass enhanced its WAP solutions for wireless customers through an exclusive
reseller agreement with Nokia that grants Spyglass the worldwide distribution
rights to license Nokia's WAP Microbrowser to manufacturers of mobile phones,
PDAs, and other wireless devices. Spyglass will also provide engineering
services to manufacturers for the customization and integration of the Nokia WAP
Microbrowser with the manufacturer's platform. The WAP Microbrowser is a WAP
compliant browser technology designed and optimized for use in mobile phones and
other wireless devices to enable access to Internet and intranet information.
The WAP Microbrowser can display content written in WML that can be delivered to
the device using Spyglass Prism content transformation technology.
SPYGLASS PROFESSIONAL SERVICES
Spyglass provides strategic consulting and comprehensive professional services
to help customers rapidly develop and deploy cost-effective Internet-enabled
information appliances and Internet-based services. Spyglass provides its
customers with a broad range of professional services including custom
engineering for defining, developing and delivering complete, end-to-end project
solutions. In addition, Spyglass provides its customers with technology support
services.
PROFESSIONAL SERVICES
Spyglass frequently provides it customers with comprehensive services throughout
their product development cycle, including strategic consulting, design and
implementation services, custom application development, quality testing and
documentation services, and systems integration services. These services are
provided on a project basis to assist customers in developing unique products or
services utilizing Spyglass technologies and other third-party technologies.
This group consists of senior consulting managers, experienced engineering
developers, senior technologists and architects, technical writers and quality
assurance specialists.
SOLUTIONS CENTERS
During fiscal 1999, Spyglass signed multi-year services contracts with GI and
Microsoft. Spyglass built a solutions center for each of these customers, each
of which consists of dedicated engineering resources committed to helping these
customers with Internet-based information appliances initiatives. For GI,
Spyglass is providing engineering services to assist with development and
integration of software applications for their ITV digital set-top platforms.
For
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Microsoft, Spyglass is providing engineering services for the development,
integration, testing and support of various Windows CE-based information
appliances.
CUSTOMER SUPPORT
Most of the Company's customers enter into support agreements with the Company
for annual fees based on the number of products licensed, platforms supported
and copies distributed. These support agreements entitle the customer to the
backup technical support described below as well as product updates and
enhancements.
The Company tracks all support requests through a series of customer databases
that maintain current status reports as well as historical logs of customer
interaction. Support specialists diagnose and solve technical problems related
not only to the Company's products, but also to other software and technologies
which are integrated with the Company's products. In addition, support
specialists provide the customer with direct access to the Company's development
engineers and report customer and end-user feedback to the Company's development
staff. Other types of support provided to the customer include technical
reports, documentation, status reports for product upgrades and updates, and
support during beta test and pre-release cycles.
As of December 10, 1999, the Company employed 77 employees in its professional
services organization.
SALES AND MARKETING
The Company markets its Internet solutions using a direct sales model. On a
limited basis, the company also markets its technologies using value-added
resellers. Customer opportunities for Spyglass technologies include OEMs,
information appliance manufacturers, platform developers, telecom and cable
network service operators, telecom and cable infrastructure providers, Internet
service providers, value-added service providers, Internet content aggregators,
and Internet content developers that incorporate Internet technology into their
products and services. Spyglass has adopted this marketing model to increase its
presence in the market, and to leverage the marketing, distribution, and
development resources of its customers.
Marketing resources are focused on direct marketing and advertising campaigns
and participation in the engineering and trade conferences related to these
markets and industries. In addition, the Company is targeting public relations
efforts at industry analysts, the business and trade press, and other media
relevant to the information appliance market.
The Company's license arrangements with its customers typically provide for a
non-exclusive license to incorporate Spyglass technology into the customers'
products and services. These licenses generally provide for a technology access
fee and for royalties based on the number of units sold, which may include
up-front minimum royalty commitments. In some instances, Spyglass receives per
subscriber fees based on the number of subscribers using an Internet service
that incorporates Spyglass technology.
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Sales to Microsoft represented 22.4% and 39.5% of total net revenues in fiscal
1999 and 1997, respectively. Sales to GI represented 11.6% of total net revenues
in fiscal 1999. Sales to Motorola represented 14.5% of total net revenues in
fiscal 1998.
As of December 10, 1999, the Company had 14 employees in marketing and 10 in
sales. The Company currently operates sales offices located in Lexington,
Massachusetts, Morristown, New Jersey, Marina del Rey, California, Brussels,
Belgium, Hampshire, United Kingdom and Tokyo, Japan.
PRODUCT DEVELOPMENT
An important factor in Spyglass' ability to deliver innovative Internet
solutions to its customers is the technologies the Company can leverage in the
creation of customized solutions for its customers. Spyglass has a suite of
embedded Internet and infrastructure technologies that it continues to develop
in order to support the latest Internet technologies and standards. By
proactively investing in such technologies, Spyglass is able to offer its
customers the benefits of improved time to market, higher quality, and lower
costs.
The Company's primary development efforts are focused on embedded Internet
technologies for HTML rendering and browsing and content transformation and
delivery technologies that enhance the performance and functionality of
information appliances connected to the Internet.
In order to respond to rapidly changing technology and competitive conditions,
the Company may seek to enhance or expand its product offerings. In doing so,
the Company may enter into new agreements with third parties which could include
both licensing or acquiring one or more complementary technologies, as well as
investing in, partnering with or acquiring another company developing or
marketing one or more complementary technologies.
Because many of the significant technologies incorporated in the Spyglass
product suite are implementations of Internet standard protocols which are
constantly evolving, the Company actively participates in a number of Internet
standards-setting groups and technical conferences, including W3C Consortium,
WAP Forum and ATVEF (Advanced TV Enhancement Forum).
As of December 10, 1999, the Company's research and development staff, which is
responsible for product development, quality assurance, technical communication
and product coordination, consisted of 37 full-time employees. From time to time
the Company employs independent contractors for software development,
documentation, artistic design and quality reviews. For the fiscal years ended
September 30, 1999, 1998 and 1997, research and development expenses were
$7,970,000, $10,670,000 and $16,768,000, respectively, net of funding received
from Microsoft of $1,606,000 and $250,000 in fiscal years 1998 and 1997,
respectively. Net research and development expenses, as a percentage of revenues
were 26.9%, 50.4% and 78.7% in the fiscal years 1999, 1998 and 1997,
respectively.
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COMPETITION
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 technology and service providers such as
BSQUARE, Liberate Technologies, Microsoft, OpenTV, Oracle, Phone.com, Sun
Microsystems, online 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 development resources.
Spyglass Device Mail competes with email products that have been integrated with
information appliance browsers offered by Liberate Technologies, Microsoft,
Phone.com, PowerTV, and a variety of smaller companies.
Spyglass Device Mosaic competes with technologies developed by companies
providing lightweight Web browsers for the information appliance market
including JavaSoft, Liberate Technologies, Microsoft, and Planet Web. All of
these companies are licensing their Web browser and other solutions to OEMs and
network service operators. In addition, Spyglass may compete with start-up
companies in specific market sectors.
Spyglass MicroServer competes with other thin, embeddable Web server
technologies, including those provided by 3Soft, Agranat, emWare, Integrated
Systems and Wind River Systems. The market for Web server technologies is
competitive and faces pricing pressures due to multiple competitors attempting
to establish a market position. In addition, Integrated Systems and Wind River
Systems have a marketing advantage by offering a Web server bundled with the
respective company's real-time operating system technology. The barriers to
entry for the embedded Web server market are low, as the amount of software
required for a server is small.
Spyglass Prism competes with technologies developed by Argo Interactive, plc,
AvantGo, and Oracle. In addition, Spyglass may compete with start-up companies
in specific market sectors.
The Company faces competition for SurfWatch products from Elron, JSB, The
Learning Company, N2H2, NetNanny, Secure Computing, WebSENSE, and a number of
small start-up companies. Following the sale of SurfWatch to JSB on November 4,
1999, Spyglass only competes with filtering market participants to the extent
they offer a filtering product to the ITV market.
The WAP Microbrowser competes with a wireless phone browser from Phone.com. The
Company anticipates competition for the WAP Microbrowser from other large
telecom infrastructure providers, although the Company is not currently aware of
other WAP Microbrowser technologies commercially available.
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In its professional services offerings, Spyglass competes with other technology
and service providers and technology consulting and development companies such
as BSquare, IBM, Liberate Technologies, Phone.com, PSW Technologies, Sun
Microsystems, as well as numerous other technology competitors and small
start-up companies. In addition, Spyglass often competes with the prospect
company's or customer's in-house research and development staff to some extent.
Competition among the current and future suppliers of Internet software and
services could result in significant price competition. Moreover, many of the
Company's current and potential competitors have significantly greater
financial, technical, marketing and other resources than the Company. There can
be no assurance that the Company will be able to compete successfully against
current and future sources of competition or that the competitive pressures
faced by the Company will not adversely affect the Company's revenues or gross
margins.
PROPRIETARY RIGHTS
The Spyglass Device Mosaic product was initially a commercial derivative version
of NCSA Mosaic(TM). NCSA Mosaic was developed by the National Center for
Supercomputing Applications at the University of Illinois at Urbana-Champaign.
In May 1994, the Company and the University entered into an agreement which was
subsequently amended (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 provided for royalties based on Spyglass'
net revenues from Device Mosaic, and included cumulative minimum quarterly
royalties. The University Agreement had an initial term of five years. In June
1999, the Company and the University amended this Agreement and the Company will
no longer pay royalties for a license to the NCSA Mosaic product and will only
pay the University a minimal royalty associated with the Company's use of the
University's trademark "Mosaic(TM)". The University is no longer restricted from
the commercial licensing of the NCSA Mosaic product.
Spyglass has registered the name "SPYGLASS", the red "S" logo, the name
"SURF-WATCH", and the tag line "MAKE THE NET WORK" in the United States.
Spyglass has also received trademark registrations for the name "SPYGLASS" in a
number of foreign jurisdictions. Spyglass has filed additional trademark
applications in the United States and in foreign jurisdictions.
Spyglass relies upon patent, copyright, trade secret and confidentiality
agreements and/or license agreements with its customers, employees and other
third parties to protect its proprietary technology. However, effective
intellectual property protections may not be available in every country in which
Spyglass' products and services are provided. Spyglass has been issued and
continues to seek patent protection from the U.S. Patent and Trademark Office
for its technologies. However, there can be no assurance that the steps taken by
Spyglass to protect its proprietary technologies will be adequate to prevent
misappropriation thereof by a third-party, or that a third-party will not be
able to independently develop similar technologies. In addition,
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there can be no assurance that other parties will not assert technology
infringement claims against Spyglass.
Spyglass licenses technology from a number of vendors for incorporation into
Spyglass products. Examples of such licensed technologies include security
products, image conversion products and databases.
EMPLOYEES
As of December 10, 1999, Spyglass employed 164 persons, including 24 in sales
and marketing, 37 in research and development, 77 in professional services and
26 in finance and administrative functions. None of the Company's employees are
represented by a labor union and Spyglass considers its employee relations to be
good.
ITEM 2. PROPERTIES
The Company's executive offices are located in Naperville, Illinois (27,841
square feet) and are occupied under a lease that expires in January 2004. The
Company also leases facilities in Lexington, Massachussets, Los Gatos,
California, and Menlo Park, California. The Company leases sales offices in San
Ramon, California, Morristown, New Jersey, Marina del Rey, California, and
Tokyo, Japan.
ITEM 3. LEGAL PROCEEDINGS
On January 28, 1999, the Company and certain of its officers and directors were
named as defendants in a 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 claimed 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 class period of October 21, 1998 through January 4, 1999.
The complaints further alleged that certain officers and/or directors of the
Company sold stock in the open market during the class period and sought
unspecified damages.
On April 20, 1999 the Court granted the plaintiffs' 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. 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 denying liability. The case
was certified as a class action by the Court on August 31, 1999.
<PAGE> 13
On December 16, 1999 the parties filed a Settlement Stipulation with the Court
and requested preliminary approval, which the Court granted on December 21,
1999. The Settlement, in which all defendants continue to deny wrongdoing and
which will only become effective upon final Court approval, provides that the
Company's directors and officers liability insurer will pay to the plaintiffs
$1.55 million in exchange for a full release of, and dismissal of all claims
brought by the class against, the Company and all of the individual defendants.
A final settlement approval hearing has been scheduled by the Court for March
24, 2000.
Although the Company believes that it and the other defendants have meritorious
defenses to the claims made in the complaint, if the settlement does not become
final, 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.
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 for an
Order enjoining further infringement by N2H2 and for monetary damages. N2H2
filed an answer to the complaint which includes a denial that the patent-in-suit
is infringed and assertions both that the patent-in-suit is invalid and that
Spyglass is liable to N2H2. Spyglass believes that the counts set forth in its
complaint are meritorious and intends to vigorously pursue the lawsuit. The
Court has preliminarily set March 5, 2001 as the date that trial will begin.
Spyglass, Inc. is not presently able to reasonably estimate potential awards or
losses, if any, related to this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
quarter ended September 30, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position(s) with the Company
- --------------------------- --- ----------------------------
Douglas P. Colbeth......... 44 Chairman of the Board and Chief
Executive Officer
Daryl J. Dahlberg.......... 48 Vice President, Finance & Information
Systems
Martin J. Leamy............ 42 Director, President and Chief Operating
Officer
Randall T. Littleson....... 34 Executive Vice President and General
Manager
John S. Pigott............. 44 Vice President of Sales
<PAGE> 14
Gary L. Vilchick........... 45 Executive Vice President, Finance,
Administration and Operations and Chief
Financial Officer
Mr. Colbeth has been Chairman of the Company since August 1999, and has been
Chief Executive Officer and a director of the Company since he joined the
Company in April 1991. Mr. Colbeth was also President of the Company from April
1991 through August 1999. Prior to joining the Company, Mr. Colbeth spent four
years at Stellar/Stardent Computer Corp., a high-end graphics workstation
supplier, in various management positions, most recently as Vice
President/General Manager of its AVS software business unit. From January 1979
until March 1987, Mr. Colbeth was employed in various sales and management
positions at Prime Computer, Inc., a minicomputer vendor. Mr. Colbeth received
his B.S. degree in economics from Siena College in 1977 and has completed
graduate studies in managerial economics at Rensselaer Polytechnic Institute.
Mr. Dahlberg joined the Company as Controller in January 1998 and was promoted
to Vice President Finance & Information Systems in July 1999. Prior to joining
the Company, Mr. Dahlberg was employed by Seagate Software, Inc., a developer of
data management software solutions, as Finance Director-Europe from August 1996
through December 1997 and by Seagate Software SMG (formerly Palindrome Corp.) as
Executive Director of Finance and Operations from September 1994 through August
1996. Prior to that, Mr. Dahlberg was Controller for Palindrome Corporation from
June 1992 through August 1994. Mr. Dahlberg received his B.S. degree in
accounting from the University of Illinois in 1976. Mr. Dahlberg is a Certified
Public Accountant.
Mr. Leamy joined the Company in August 1999 as President and Chief Operating
Officer. Prior to joining the Company, Mr. Leamy was Senior Vice President,
Systems Management Solutions from January 1995 to August 1999 and Director,
Client/Server Products from July 1991 to December 1994 for PLATINUM Technology
Inc. Mr. Leamy received his B.S. degree in computer science from Bradley
University in 1979.
Mr. Littleson joined the Company as Director, Product Marketing in June 1996 and
was promoted to Vice President, Marketing in October 1996, to Vice President and
General Manager in February 1998 and to Executive Vice President and General
Manager in September 1999. Prior to joining the Company, Mr. Littleson served in
various management positions for Seagate Software SMG (formerly Palindrome
Corp.), a developer of data management software solutions, for six years and a
systems engineer for Novell prior to that. Mr. Littleson received his B.S.
degree in computer sciences and communications from the University of Michigan
in 1987 and a master's degree in business administration from Keller Graduate
School of Management in 1994.
Mr. Pigott joined Spyglass as Vice President of Sales in November 1999. Prior to
joining the Company, Mr. Pigott was Regional Vice President for Cerner
Corporation, a supplier of clinical and management information/knowledge systems
for healthcare organizations throughout the world. Prior to his role at Cerner,
Mr. Pigott worked more than 17 years at IBM, a developer and
<PAGE> 15
manufacturer of advanced information technologies and provider of professional
solutions and services, holding positions ranging from Regional Manager of
Software Marketing, to Western Executive for Healthcare Solutions. Mr. Pigott
received his B.S. degree in industrial engineering from Stanford University in
1978.
Mr. Vilchick joined the Company in December 1995 as Executive Vice President,
Finance, Administration and Operations and Chief Financial Officer. Prior to
joining the Company, Mr. Vilchick was the Vice President of Finance for Pitney
Bowes Logistics Systems, a provider of technology for supply chain management
solutions, for three years, and Controller for Pitney Bowes Management Services
for four years prior to that. Mr. Vilchick received his B.S. degree in
accounting from the University of Rhode Island. Mr. Vilchick is a Certified
Public Accountant.
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company had 567 shareholders of record as of December 10, 1999.
The additional information required by this Item is incorporated herein by
reference from the sections entitled "Selected Financial Data - Dividend Policy"
and "Selected Quarterly Data - Market Price Per Share" in the Company's Annual
Report to Stockholders for the fiscal year ended September 30, 1999 (the "Annual
Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference from
the section entitled "Selected Financial Data" in the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated herein by reference from
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference from
the financial statements contained in the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning directors of the Company is
incorporated herein by reference from the section entitled "Election of
Directors--Directors of the Company" included in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders for the fiscal year ended
September 30, 1999, which will be filed with the Securities and Exchange
commission within 120 days of the Company's fiscal year end (the "1999 Proxy
Statement"). The information required by this Item concerning executive officers
of the Company is included in Part I of this Annual Report on Form 10-K under
the section captioned "Executive Officers of the Registrant". The information
required by this Item concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated herein by reference from the
section entitled "Other Matters--Section 16(a) Beneficial Ownership Reporting
Compliance" included in the 1999 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference from
the sections entitled "Election of Directors--Compensation Committee Interlocks
and Insider Participation", "Election of Directors--Compensation of Directors",
"Executive Compensation" and "Executive Compensation--Employment Agreements"
included in the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference from
the section entitled "Beneficial Ownership of Voting Stock" included in the 1999
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is not applicable.
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial information is incorporated by reference into
Part II hereof from the Annual Report.
(a) 1. FINANCIAL STATEMENTS:
Report of Independent Auditors
Consolidated Balance Sheets at September 30,
1999 and 1998
Consolidated Statements of Operations for the years
ended September 30, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the
years ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years
ended September 30, 1999, 1998 and 1997
Notes to the Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENT SCHEDULES:
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable,
not required, or the information required is included in the financial
statements or notes thereto.
(a) 3. EXHIBITS
The exhibits are listed in the accompanying Index to Exhibits
immediately following the signature page.
(b) REPORTS ON FORM 8-K
None.
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on December 20, 1999.
Spyglass, Inc.
By: /s/ Douglas P. Colbeth
---------------------------
Douglas P. Colbeth
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below as of December 20, 1999 by the following persons on behalf
of the registrant and in the capacities indicated.
/s/ Douglas P. Colbeth
- -----------------------
Douglas P. Colbeth
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
/s/ Gary L. Vilchick
- -----------------------
Gary L. Vilchick
Executive Vice President, Finance, Administration
and Operations and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Martin J. Leamy
- ------------------------
Martin J. Leamy
Director, President and Chief Operating Officer
/s/ Charles T. Brumback
- -------------------------
Charles T. Brumback
Director
/s/ Brian J. Jackman
- -------------------------
Brian J. Jackman
Director
/s/ John Shackleton
- -------------------------
John Shackleton
Director
<PAGE> 20
SPYGLASS, INC.
SCHEDULE II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance at
beginning costs and to other (1) end of
Description of period expenses accounts Deductions period
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1999
Allowance for doubtful accounts $ 429,000 301,000 -- 236,000 $ 494,000
SEPTEMBER 30, 1998
Allowance for doubtful accounts $ 350,000 309,068 13,000 243,068 $ 429,000
SEPTEMBER 30, 1997
Allowance for doubtful accounts $ 470,000 1,029,051 -- 1,149,051 $ 350,000
</TABLE>
(1)- Bad debt write-offs
<PAGE> 21
INDEX TO EXHIBITS
Exhibit No. Description
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant, as amended
3.2(2) By-laws of the Registrant
4.1(2) Specimen certificate for shares of Common Stock
10.1(2) 1991 Stock Option Plan *
10.2(11) 1995 Stock Incentive Plan, as amended *
10.3(2) 1995 Director Stock Option Plan *
10.4(2) Employment and Confidentiality Agreement between the
Registrant and Douglas P. Colbeth, dated April 1, 1991 *
10.5(7) Senior Management Retention Agreement between the Registrant
and Doug Colbeth, dated November 1, 1996 *
10.6(12) Senior Management Retention Agreement between the Registrant
and Daryl Dahlberg, dated July 7, 1999 *
10.7(7) Senior Management Retention Agreement between the Registrant
and Gary Vilchick, dated November 1, 1996 *
10.8(7) Senior Management Retention Agreement between the Registrant
and Randall T. Littleson, dated November 1, 1996 *
10.9 Senior Management Retention Agreement between the Registrant and
Martin J. Leamy, dated August 24, 1999 *
10.10 Employment and Confidentiality Agreement between the
Registrant and Martin J. Leamy, dated August 24, 1999 *
10.11 Senior Management Retention Agreement between the Registrant
and John S. Pigott, dated December 10, 1999 *
<PAGE> 22
10.12(3) Standard form of Employment and Confidentiality Agreement
10.13(2) OEM/Source License Agreement, dated December 12, 1994, between
the Registrant and Microsoft Corporation
10.14(4), (5) Amendment No. 1 to the OEM/Source License Agreement between the
Registrant and Microsoft Corporation, dated September 26, 1995
10.15(4), (5) Technology Cooperation Agreement, Including Amendment of
OEM/Source License Agreement between the Registrant and Microsoft
Corporation, dated December 6, 1995
10.16 (7), (5) Amendment No. 1, dated September 30, 1996, to the Technology
Cooperation Agreement, Including Amendment ofEM/Source License
Agreement between the Registrant and Microsoft Corporation,
dated December 6, 1995
10.17(8) Amendment No. 2 to the Technology Cooperation Agreement,
Including Amendment of OEM/Source License Agreement between the
Registrant and Microsoft Corporation, dated January 21, 1997
10.18(3), (5) RSA Data Security, Inc.-BSAFE/TIPEM OEM Master License Agreement,
dated August 8, 1995
<PAGE> 23
10.19(9) Office Lease Agreement between American National Bank and Trust
Company of Chicago Trust No. 43194 and the Registrant, dated
May 28, 1997
10.20(6) Standard Form of Invention and Non-Disclosure Agreement
10.21(6) Standard Form of Non-Disclosure Agreement
10.22(10), (5) Source Code License and Distribution Agreement between the
Company and Motorola, Inc., dated as of June 25, 1998
10.23(13), (5) Amendment No. 1 to the Source Code License and Distribution
Agreement between the Company and Motorola, Inc., dated as of
June 25, 1998
10.24(13), (5) Common Stock and Warrant Purchase Agreement between the Company
and General Instrument Corporation, dated October 19, 1998
10.25(13), (5) Digital Software Integration Center Sourcing Agreement between
the Company and General Instrument Corporation, dated
November 1, 1998
10.26(13), (5) Operating Agreement between the Company and General Instrument
Corporation, dated October 19, 1998
10.27(11), (5) Assignment, Assumption and Amendment of Development and License
Agreement between the Registrant and Microsoft Corporation,
dated March 31, 1999
10.28(11), (5) Development and License Agreement between Navitel Communications,
Inc. and Microsoft Corporation, dated November 23, 1998
10.29 + Amendment No. 1 to Digital Software Integration Center Sourcing
Agreement between the Company and General Instrument Corporation,
dated November 1, 1998
10.30 + Amendment No. 1 1999, to Common Stock and Warrant Purchase
Agreement between the Company and General Instrument Corporation,
dated October 19, 1998
10.31 Amendment No. 1, effective as of February 1, 2000, to Office
Lease Agreement between American National Bank
<PAGE> 24
and Trust Company of Chicago Trust No. 43194 and the Registrant,
dated May 28, 1997
13.1 Portions of the Annual Report to Stockholders for the fiscal
year ended September 30, 1999 (only those portions specifically
incorporated by reference herein are filed herewith)
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
(1) Incorporated herein by reference from the Company's Registration Statement
on Form S-8 (File No. 333-04357) Filed on May 23, 1996.
(2) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (File No. 33-92174).
(3) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1995, as amended by an Annual
Report on Form 10-K/A filed on May 17, 1996.
(4) Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995, as amended by a
Quarterly Report on Form 10-Q/A filed on May 17, 1996.
(5) Confidential treatment previously granted by the Securities and Exchange
Commission as to certain portions, which are omitted and filed separately
with the Commission.
(6) Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996.
(7) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1996.
(8) Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1996.
<PAGE> 25
(9) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997.
(10) Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.
(11) Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
(12) Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999.
(13) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1998
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
* Management contract or compensatory plan or arrangement filed as an Exhibit
to this form pursuant to Items 14(a) and 14(c) of Form 10-K.
<PAGE> 1
EXHIBIT 10.9
SPYGLASS, INC.
Senior Management Retention Agreement
Mr. Martin J. Leamy
c/o Spyglass, Inc.
1240 E Diehl Road
Naperville, Illinois 60563
Dear Mr. Leamy:
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> 2
(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
(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
2
<PAGE> 3
all of the individuals and entities who were the beneficial owners of the
Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of the then-outstanding shares of common stock and the
combined voting power of the then-outstanding voting securities entitled to vote
generally in the election of directors, respectively, of the resulting or
acquiring corporation in such Business Combination in substantially the same
proportions as their ownership, immediately prior to such Business Combination,
of the Outstanding Company Common Stock and Outstanding Company Voting
Securities, respectively, (ii) no Person (excluding any resulting or acquiring
corporation in such Business Combination or any employee benefit plan (or
related trust) of the Company or of such resulting or acquiring corporation in
such Business Combination) beneficially owns, directly or indirectly, 30% or
more of the then outstanding shares of common stock of such resulting or
acquiring corporation in such Business Combination, or of the combined voting
power of the then-outstanding voting securities of such corporation (except to
the extent that such ownership existed prior to the Business Combination) and
(iii) at least half of the members of the board of directors of the resulting or
acquiring corporation in such Business Combination were members of the Incumbent
Board at the time of the execution of the initial agreement, or of the action of
the Board, providing for such Business Combination; or
(d) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
1.2 "Cause" shall mean:
(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
3
<PAGE> 4
(b) your willful engagement in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this Section 1.2, no act or failure to act, on
your part shall be considered "willful" unless it is done, or omitted to be
done, by you in bad faith and without reasonable belief that your action or
omission was in the best interests of the Company.
1.3 "Good Reason" shall mean the occurrence, without your written
consent, of any of the following circumstances unless such circumstance is fully
corrected prior to the Date of Termination specified in the Notice of
Termination (each as defined below) given in respect thereof (provided that such
right of correction by the Company shall only apply to the first Notice of
Termination for Good Reason given by you):
(a) the assignment to you (without your written consent) of any
duties inconsistent in any respect with your position (including status,
offices, titles and reporting requirements), authority or responsibilities in
effect as immediately prior to the Change in Control, or any other action by the
Company which results in a diminution in such position, authority or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company
promptly after receipt of written notice thereof given by you;
(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
4
<PAGE> 5
of your participation relative to other participants, as existed at the time of
the Change in Control or (iii) award cash bonuses to you in amounts and in a
manner substantially consistent with past practice in light of the Company's
financial performance;
(d) the failure by the Company to continue to provide you with
benefits substantially similar to those enjoyed by you under any of the
Company's life insurance, medical, health and accident, or disability plans in
which you were participating at the time of the Change in Control, the taking of
any action by the Company which would directly or indirectly materially reduce
any of such benefits, or the failure by the Company to provide you with the
number of paid vacation days to which you are entitled on the basis of years of
service with the Company in accordance with the Company's normal vacation policy
in effect at the time of the Change in Control;
(e) a change by the Company in the location at which you perform
your principal duties for the Company to a new location that is both (i) outside
a radius of 35 miles from your principal residence at the time of the Change in
Control and (ii) more than 20 miles from the location at which you perform your
principal duties for the Company at the time of the Change in Control; or a
requirement by the Company that you travel on Company business to a
substantially greater extent than required immediately prior to the Change in
Control;
(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.
5
<PAGE> 6
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, 1999; provided, however, that commencing on January l, 2000 and each January
l thereafter, the Term shall be automatically extended for one additional year
unless, not later than October 31 of the preceding calendar year, the Company
shall have given you written notice that the Term will not be extended. This
Agreement, and all rights and obligations of the parties hereunder, shall expire
upon (a) the expiration of the Term if a Change in Control has not occurred
during the Term, (b) the date 24 months after the date of the Change in Control,
if you are still employed by the Company as of such date, or (c) the fulfillment
by the Company of all of its obligations under Section 4 if your employment with
the Company terminates within 24 months following a Change in Control.
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.
6
<PAGE> 7
3.2 Termination of Employment. Any termination of your employment by
the Company or by you within 24 months following a Change in Control of the
Company during the Term shall be communicated by written notice of termination
("Notice of Termination") to the other party hereto in accordance with Section
6. If such employment termination is for Cause, Good Reason or Disability, the
Notice of Termination shall so state. The "Date of Termination" shall mean the
effective date of such termination as specified in the Notice of Termination
(provided that no such Notice of Termination shall specify an effective date
less than fifteen days or more than 120 days after the date such Notice of
Termination is delivered).
4. Rights Upon Termination.
4.1 Compensation. You shall be entitled to the following benefits if
a Change in Control occurs during the Term and your employment with the Company
terminates within 24 months following such Change in Control:
(a) Termination Without Cause or for Good Reason. If your
employment with the Company is terminated by the Company (other than for Cause,
Disability or your death) or by you for Good Reason within 24 months following a
Change in Control, then you shall be entitled to the following benefits:
(i) the Company shall pay to you in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
(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
7
<PAGE> 8
amounts described in clauses (A), (B), and (C) shall be hereinafter referred to
as the "Accrued Obligations"); and
(2) the amount equal to the sum of (A) your highest
annual base salary during the five-year period prior to the Change in Control
and (B) your highest annual bonus during the five-year period prior to the
Change in Control
(ii) for 12 months after your Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan, program,
practice or policy, the Company shall continue to provide benefits to you and
your family at least equal to those which would have been provided to you and
them in accordance with the applicable plans, programs, practices and policies
in effect on the Date of Termination (excluding any savings and/or retirement
plans) if your employment had not been terminated; provided, however, that if
you become reemployed with another employer and are eligible to receive medical
or other welfare benefits under another employer-provided plan, the medical and
other welfare benefits described herein shall not be provided to the extent the
same are provided under such other plan during such applicable period of
eligibility; and
(iii) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to you any other amounts or benefits
required to be paid or provided or which you are eligible to receive following
your termination of employment under any plan, program, policy or practice or
contract or agreement of 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
8
<PAGE> 9
the Date of Termination, the Accrued Obligations and (ii) timely pay or provide
to you the Other Benefits.
(c) Termination for Cause. If your employment is terminated by
the Company for Cause within 24 months following a Change in Control, the
Company shall (i) pay you, in a lump sum in cash within 30 days after the Date
of Termination, the sum of (A) your annual base salary through the Date of
Termination and (B) the amount of any compensation previously deferred by you,
in each case to the extent not theretofore paid, and (ii) timely pay or provide
to you the Other Benefits.
4.2 Taxes. Payments under this Agreement shall be made without
regard to whether the deductibility of such payments (or any other payments to
or for your benefit) would be limited or precluded by Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code") and without regard to
whether such payments (or any other payments) would subject you to the federal
excise tax levied on certain "excise parachute payments" under Section 4999 of
the Code; provided, that if the total of all payments to or for your benefit,
after deduction of all federal taxes (including the tax set forth in Section
4999 of the Code, if applicable) with respect to such payments (the "total
after-tax payments"), would be increased by the limitation or elimination of any
payment under this Agreement, amounts payable under this Agreement shall be
reduced to the extent, and only to the extent, necessary to maximize the total
after-tax payments. The determination as to whether and to what extent payments
under this agreement are required to be reduced in accordance with the preceding
sentence shall be made by agreement between you and the independent public
accounting firm of the Company (whose fees and expenses shall be borne solely by
the Company). To the extent that any elimination or reduction of payments is
made in accordance with this Section 4.2, the determination as to which payments
shall be eliminated or reduced shall be made by you.
4.3 Mitigation. Except as provided in Section 4.1(a)(ii) hereof, you
shall not be required to mitigate the amount of any payment or benefits provided
for in this
9
<PAGE> 10
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 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
10
<PAGE> 11
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.
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.
11
<PAGE> 12
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 cancelled.
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.
Sincerely,
SPYGLASS, INC.
By: /s/ Douglas Colbeth
Agreed to this 24th day of August, 1999
/s/ Martin J. Leamy
- ---------------------------------------
(Signature)
Martin J. Leamy
- ---------------------------------------
(Print Name)
12
<PAGE> 1
EXHIBIT 10.10
SPYGLASS, INC.
EMPLOYMENT AND CONFIDENTIALITY AGREEMENT
In consideration of employment by Spyglass, Inc. (the "Company") of the
undersigned employee ("Employee"), it is understood and agreed as follows:
1. EMPLOYMENT. The Company hereby employs the Employee as PRESIDENT and
CHIEF OPERATING OFFICER, and the Employee hereby accepts employment
from the Company upon the terms and conditions set forth in this
Agreement.
2. COMPENSATION. For all services rendered by the Employee under this
agreement, the Company shall pay the Employee the compensation
determined from time to time by the Company's Board of Directors,
payable, net of payroll deductions, in 24 equal installments per year
on the 15th day and the last day of each month during the term of this
agreement. Employee's initial gross salary, until redetermined by the
Company's Board of Directors, shall be Twenty Thousand Dollars
($20,000.00) per month. The employee will also be eligible to earn up
to an additional 50% of salary in performance based cash bonuses
determined each year by the Compensation Committee.
3. FRINGE BENEFITS. In addition to the compensation described in paragraph
2 above, Employee shall be entitled to benefits, such as paid time off,
health and dental insurance, retirement benefits, and other benefits
generally provided employees of the Company from time to time, if any
4. INCENTIVE STOCK OPTIONS/RESTRICTED STOCK. (a) In addition to the
compensation set forth in paragraph 2 above, the Company shall issue to
Employee 150,000 Incentive Stock Options at the standard ISO vesting
schedule with an option price equal to the market price on the date of
the grant (these will be issued within 90 days of employment). In
addition, the company will issue the employee 50,000 shares of
Restricted Stock priced at $.01/SHARE. These have a four year vesting
schedule (25%/yr.), but the vesting rights can be accelerated (to 100%
vesting) if the company achieves $100 MILLION in annual revenues and
$18 MILLION in operating profits in a fiscal year during or before FY
2002.
(i) Voluntary Termination. If Employee voluntarily
terminates, vesting will stop on the date of
termination.
(ii) Termination for Cause. If the Company terminates
Employee for cause, the employee will stop vesting on
the termination date:
<PAGE> 2
(iii) Termination Without Cause. If the Company terminates
Employee without cause the employee will forward vest
one additional year from the termination date.
(iv) Definition of Cause. For purposes of this Agreement,
any one or more of the following acts or omissions by
Employee shall constitute "cause" for termination: a)
conflict of interest, b) unethical or illegal
activity, c) gross negligence in the performance of
or repeated failure to perform his duties as Chief
Operating Officer of the Company. The Board of
Directors of the Company shall have the sole
authority to determine "cause" hereunder.
5. SEVERANCE PAY. If Employee is terminated without cause, the Company
shall pay Employee, as severance pay, twelve months salary and benefits
(based upon the employee's most recent twelve months salary). The
employee would not be eligible for any cash performance bonuses during
the twelve month period following termination.
6. EMPLOYEE WORK STANDARDS. Employee will (a) serve the Company (and such
of its subsidiary or parent companies as the Company may designate)
faithfully, diligently and to the best of Employee's ability under the
direction of the Board of Directors of the Company, (b) in the course
of employment, devote his best efforts and substantially all of his
time, attention and energy to the performance of his duties to the
Company and (c) not do anything inconsistent with Employee's duties to
the Company.
7. CONFIDENTIAL INFORMATIONS OF OTHERS. Employee agrees that in the course
of employment with the Company he or she will not use, disclose to the
Company, or induce the Company to use, any confidential information or
documents belonging to others.
8. LIST OF PRIOR INVENTIONS. All inventions which Employee has made prior
to employment by the Company are excluded from the scope of this
Agreement. As a matter of record, Employee has set forth on Exhibit A
hereto a complete list of inventions, discoveries, or improvements
which might relate to the Company's business and which have been made
by Employee prior to employment with the Company. Employee represents
that such list is complete.
9. CONFIDENTIAL INFORMATION OF THE COMPANY. As used in this Agreement,
the term "Confidential Information" means any and all confidential,
<PAGE> 3
proprietary or secret information, including that conceived or
developed by Employee, applicable to or in any way related to (i) the
present or future business of the Company, (ii) the research and
development of the Company, or (iii) the business of any customer or
vendor of the Company. Such Confidential Information of the Company
includes, by way of example and without limitation, trade secrets,
formulas, data, program documentation, algorithms, source codes, object
codes, improvements, inventions, techniques, all plans or strategies
for marketing, development and pricing, and all information concerning
existing or potential customers or vendors. Confidential Information of
the Company also includes all similar information disclosed to the
Company by other persons.
10. PROTECTION OF THE COMPANY'S CONFIDENTIAL INFORMATION. Employee
acknowledges that the Confidential Information of the Company is a
special, valuable, and unique asset of the Company, and Employee agrees
at all times during the period of his or her employment, and for a
period of three (3) years after termination of such employment, not to
disclose for any purpose and to keep in strict confidence and trust all
of such Confidential Information. Employee agrees during and for the
three (3) year period after the period of such employment not to use,
directly or indirectly, any Confidential Information other than in the
course of performing duties as an employee of the Company, nor will
Employee directly or indirectly disclose any Confidential Information
or anything relating to it to any person or entity except, with the
Company's consent, as may be necessary to the performance of Employee's
duties as an employee of the Company. Employee will abide by Company
policies and rules established from time to time by it for the
protection of its Confidential Information.
11. RETURN OF MATERIALS. Upon termination of employment with the Company,
and regardless of the reason for such termination, Employee will leave
with, or promptly return to, the Company all documents, records,
notebooks, magnetic tapes, disks or other materials, including all
copies, in his or her possession or control which contain Confidential
Information of the Company or any other information concerning the
Company, its products, services or customers, whether prepared by the
Employee or others.
12. INVENTIONS AS SOLE PROPERTY OF THE COMPANY. Any inventions,
discoveries, concepts or ideas, or expressions thereof, whether or not
subject to patents, copyrights, trademarks or service mark protections,
and whether or not reduced to practice, conceived or developed by
Employee while employed with the Company which relate to or result from
the actual or anticipated business, work, research or investigation of
the Company shall be the sole and exclusive property of the Company.
Employee will do all things reasonably requested by the Company to
assign to and vest in the Company the
<PAGE> 4
entire right, title and interest to any such inventions, discoveries,
concepts, ideas or expressions thereof.
Notwithstanding the foregoing, the provisions of this
agreement do not apply to an invention for which no equipment,
supplies, facility, or Confidential Information of the Company
was used and which was developed entirely on the Employee's
own time, unless (a) the invention relates (I) to the business
of the Company, or (ii) to the Company's actual or
demonstrably anticipated research or development, or (b) the
invention results from any work performed by the Employee for
the Company.
13. OUTSIDE EMPLOYMENT. Employee agrees that during the period of his or
her employment, Employee will not, without the Company's prior written
approval, directly or indirectly engage in any outside employment
activity relating to any line of business in which the Company is
engaged, or which would otherwise conflict with or adversely affect in
any way Employee's performance of his or her employment obligation to
the Company.
14. COVENANT NOT TO COMPETE FOR TWO YEARS. Employee agrees that at all
times during the period of his or her employment and for a period of
two years following termination of employment, Employee will not,
without the Company's prior written approval, directly or indirectly
engage in any business activities individually, or as a partner,
stockholder, or employee, which are competitive with the business
activities of the Company or those of its subsidiary or parent
companies. In addition, Employee will not solicit, call on, or induce
others to solicit or call on, directly or indirectly, any customers or
prospective customers of the Company for the purpose of inducing them
to purchase or lease a product or service which may compete with any
product or service of the Company.
15. IDENTIFICATION OF SUBSEQUENT EMPLOYMENT. Employee agrees that for a
period of two years following termination of employment, Employee, upon
request of the Company, will identify in writing within seven days of
the request, the nature of Employee's actual or planned business
activities, including the name and address of any intended or actual
employer.
16. WAIVER OF COVENANT NOT TO COMPETE. The Company agrees that upon
receipt of written notice from Employee pursuant to Paragraph 13 above
it will, in good faith, consider a waiver of the covenant not to
compete set forth in Paragraph 12 above. A condition of a waiver of the
covenant not to compete shall be that the Company obtains complete and
continuing assurance, satisfactory to it, that the company's
Confidential Information will in all respects be fully protected.
Notwithstanding any waiver that may be granted by the Company, the
Company reserves all rights under this Agreement for the protection of
its Confidential
<PAGE> 5
Information. This includes the right to enforce the covenant not to
compete if the Company has reason to believe that Employee has
breached, or will breach, the obligations under this Agreement not to
use or disclose the Company's Confidential Information.
17. NON-SOLICITATION OF COMPANY'S EMPLOYEES. Employee agrees that during
his or her employment with Company, and for a period of two years
following termination of such employment, with or without cause,
Employee will not, directly or indirectly, hire any current or future
employee of the Company, or hsolicit or induce, or attempt to solicit
or induce, any current or future employee of the Company to leave the
Company for any reason.
18. INJUNCTION. Employee acknowledges that irreparable harm will be
suffered by the Company in the event of the breach by Employee of any
of his or her obligations under this Agreement, and that the Company
will be entitled, in addition to its other rights, to enforce such
obligations by an injunction or decree of specific performance from a
court having proper jurisdiction.
Any claims asserted by Employee against the Company shall not
constitute a defense in any injunction action brought by the Company to
obtain specific enforcement of this Agreement.
19. LAWS; OTHER AGREEMENTS. Employee represents that Employee's employment
by the Company will not violate any law or duty by which he or she is
bound, and will not conflict with or violate any agreement or
instrument to which Employee is a party or by which he or she is bound.
20. AUTHORIZATION TO MODIFY RESTRICTIONS. Employee acknowledges that the
restrictions contained in this Agreement are reasonable, but agrees
that if a court having proper jurisdiction holds a particular
restriction unreasonable, that restriction shall be modified to the
extent necessary in the opinion of such court to make it reasonable,
and that the remaining provisions of this agreement shall nonetheless
remain in full force and effect.
21. NO DURATION OF EMPLOYMENT. The Company and Employee each acknowledge
and agree that Employee's employment with the Company is not for any
duration and that such employment may be terminated by either the
Company or Employee at any time and for any reason, with or without
cause.
22. GENERAL.
<PAGE> 6
a. If the Company is successful in a suit or proceeding to enforce
this Agreement, Employee will pay the Company's costs of bringing
such suit or proceeding, including reasonable attorneys' fees.
b. Any notice required or permitted to be given under this Agreement
shall be made either
(i) by personal delivery to Employee or, in the case of
the Company, to the Company's principal office
("Principal Office") located at 1240 East Diehl Road
Naperville, Illinois 60563
(ii) in writing and sent by registered mail, postage
prepaid, to Employee's residence or, in the case of
the Company, to the Company's Principal Office.
c. This Agreement shall be binding upon Employee and his or her
heirs, executors, assigns, and administrators and shall inure to
the benefit of the Company, its successors and assigns and any
subsidiary or parent of the Company.
d. This Agreement shall be governed by and construed in accordance
with the laws of the State of Illinois.
e. This Agreement represents the entire agreement between Employee
and the Company and supersedes any and all previous oral or
written communications, representations or agreements. This
Agreement may be modified only by a duly authorized and executed
writing.
EMPLOYEE: OFFICER:
By:/s/ Martin J. Leamy By: /s/ Douglas P. Colbeth
------------------------- -----------------------------
Printed Name Martin J. Leamy Printed Name: Douglas P. Colbeth
Title: President and COO Title: Chief Executive Officer
Date: 8-24-99 Date: 8-17-99
CAUTION TO EMPLOYEE: This Agreement affects important rights. DO
NOT sign it unless you have read it carefully and are satisfied
that you understand it completely.
<PAGE> 1
EXHIBIT 10.11
SPYGLASS, INC.
Senior Management Retention Agreement
Mr. John S. Pigott
c/o Spyglass, Inc.
1240 E Diehl Road
Naperville, Illinois 60563
Dear Mr. Pigott:
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> 2
(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
(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
2
<PAGE> 3
individuals and entities who were the beneficial owners of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly, more than
60% of the then-outstanding shares of common stock and the combined voting power
of the then-outstanding voting securities entitled to vote generally in the
election of directors, respectively, of the resulting or acquiring corporation
in such Business Combination in substantially the same proportions as their
ownership, immediately prior to such Business Combination, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities, respectively,
(ii) no Person (excluding any resulting or acquiring corporation in such
Business Combination or any employee benefit plan (or related trust) of the
Company or of such resulting or acquiring corporation in such Business
Combination) beneficially owns, directly or indirectly, 30% or more of the then
outstanding shares of common stock of such resulting or acquiring corporation in
such Business Combination, or of the combined voting power of the
then-outstanding voting securities of such corporation (except to the extent
that such ownership existed prior to the Business Combination) and (iii) at
least half of the members of the board of directors of the resulting or
acquiring corporation in such Business Combination were members of the Incumbent
Board at the time of the execution of the initial agreement, or of the action of
the Board, providing for such Business Combination; or
(d) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
1.2 "Cause" shall mean:
(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
3
<PAGE> 4
(b) your willful engagement in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company. For
purposes of this Section 1.2, no act or failure to act, on your part shall be
considered "willful" unless it is done, or omitted to be done, by you in bad
faith and without reasonable belief that your action or omission was in the best
interests of the Company.
1.3 "Good Reason" shall mean the occurrence, without your written
consent, of any of the following circumstances unless such circumstance is fully
corrected prior to the Date of Termination specified in the Notice of
Termination (each as defined below) given in respect thereof (provided that such
right of correction by the Company shall only apply to the first Notice of
Termination for Good Reason given by you):
(a) the assignment to you (without your written consent) of any
duties inconsistent in any respect with your position (including status,
offices, titles and reporting requirements), authority or responsibilities in
effect as immediately prior to the Change in Control, or any other action by the
Company which results in a diminution in such position, authority or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company
promptly after receipt of written notice thereof given by you;
(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
4
<PAGE> 5
of your participation relative to other participants, as existed at the time of
the Change in Control or (iii) award cash bonuses to you in amounts and in a
manner substantially consistent with past practice in light of the Company's
financial performance;
(d) the failure by the Company to continue to provide you with
benefits substantially similar to those enjoyed by you under any of the
Company's life insurance, medical, health and accident, or disability plans in
which you were participating at the time of the Change in Control, the taking of
any action by the Company which would directly or indirectly materially reduce
any of such benefits, or the failure by the Company to provide you with the
number of paid vacation days to which you are entitled on the basis of years of
service with the Company in accordance with the Company's normal vacation policy
in effect at the time of the Change in Control;
(e) a change by the Company in the location at which you perform
your principal duties for the Company to a new location that is both (i) outside
a radius of 35 miles from your principal residence at the time of the Change in
Control and (ii) more than 20 miles from the location at which you perform your
principal duties for the Company at the time of the Change in Control; or a
requirement by the Company that you travel on Company business to a
substantially greater extent than required immediately prior to the Change in
Control;
(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.
5
<PAGE> 6
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, 2000; provided, however, that commencing on January l, 2001 and each January
l thereafter, the Term shall be automatically extended for one additional year
unless, not later than October 31 of the preceding calendar year, the Company
shall have given you written notice that the Term will not be extended. This
Agreement, and all rights and obligations of the parties hereunder, shall expire
upon (a) the expiration of the Term if a Change in Control has not occurred
during the Term, (b) the date 24 months after the date of the Change in Control,
if you are still employed by the Company as of such date, or (c) the fulfillment
by the Company of all of its obligations under Section 4 if your employment with
the Company terminates within 24 months following a Change in Control.
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.
6
<PAGE> 7
3.2 Termination of Employment. Any termination of your employment by
the Company or by you within 24 months following a Change in Control of the
Company during the Term shall be communicated by written notice of termination
("Notice of Termination") to the other party hereto in accordance with Section
6. If such employment termination is for Cause, Good Reason or Disability, the
Notice of Termination shall so state. The "Date of Termination" shall mean the
effective date of such termination as specified in the Notice of Termination
(provided that no such Notice of Termination shall specify an effective date
less than fifteen days or more than 120 days after the date such Notice of
Termination is delivered).
4. Rights Upon Termination.
4.1 Compensation. You shall be entitled to the following benefits if
a Change in Control occurs during the Term and your employment with the Company
terminates within 24 months following such Change in Control:
(a) Termination Without Cause or for Good Reason. If your
employment with the Company is terminated by the Company (other than for Cause,
Disability or your death) or by you for Good Reason within 24 months following a
Change in Control, then you shall be entitled to the following benefits:
(i) the Company shall pay to you in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
(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
7
<PAGE> 8
amounts described in clauses (A), (B), and (C) shall be hereinafter referred to
as the "Accrued Obligations"); and
(2) the amount equal to the sum of (A) your highest
annual base salary during the five-year period prior to the Change in Control
and (B) your highest annual bonus during the five-year period prior to the
Change in Control
(ii) for 12 months after your Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan, program,
practice or policy, the Company shall continue to provide benefits to you and
your family at least equal to those which would have been provided to you and
them in accordance with the applicable plans, programs, practices and policies
in effect on the Date of Termination (excluding any savings and/or retirement
plans) if your employment had not been terminated; provided, however, that if
you become reemployed with another employer and are eligible to receive medical
or other welfare benefits under another employer-provided plan, the medical and
other welfare benefits described herein shall not be provided to the extent the
same are provided under such other plan during such applicable period of
eligibility; and
(iii) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to you any other amounts or benefits
required to be paid or provided or which you are eligible to receive following
your termination of employment under any plan, program, policy or practice or
contract or agreement of 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
8
<PAGE> 9
the Date of Termination, the Accrued Obligations and (ii) timely pay or provide
to you the Other Benefits.
(c) Termination for Cause. If your employment is terminated by
the Company for Cause within 24 months following a Change in Control, the
Company shall (i) pay you, in a lump sum in cash within 30 days after the Date
of Termination, the sum of (A) your annual base salary through the Date of
Termination and (B) the amount of any compensation previously deferred by you,
in each case to the extent not theretofore paid, and (ii) timely pay or provide
to you the Other Benefits.
4.2 Taxes. Payments under this Agreement shall be made without
regard to whether the deductibility of such payments (or any other payments to
or for your benefit) would be limited or precluded by Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code") and without regard to
whether such payments (or any other payments) would subject you to the federal
excise tax levied on certain "excise parachute payments" under Section 4999 of
the Code; provided, that if the total of all payments to or for your benefit,
after deduction of all federal taxes (including the tax set forth in Section
4999 of the Code, if applicable) with respect to such payments (the "total
after-tax payments"), would be increased by the limitation or elimination of any
payment under this Agreement, amounts payable under this Agreement shall be
reduced to the extent, and only to the extent, necessary to maximize the total
after-tax payments. The determination as to whether and to what extent payments
under this agreement are required to be reduced in accordance with the preceding
sentence shall be made by agreement between you and the independent public
accounting firm of the Company (whose fees and expenses shall be borne solely by
the Company). To the extent that any elimination or reduction of payments is
made in accordance with this Section 4.2, the determination as to which payments
shall be eliminated or reduced shall be made by you.
4.3 Mitigation. Except as provided in Section 4.1(a)(ii) hereof, you
shall not be required to mitigate the amount of any payment or benefits provided
for in this
9
<PAGE> 10
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 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
10
<PAGE> 11
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.
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.
11
<PAGE> 12
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 cancelled.
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.
Sincerely,
SPYGLASS, INC.
By: /s/ Douglas Colbeth
Agreed to this 10th day of December, 1999
/s/ Mr. John S. Pigott
- ---------------------------------------
(Signature)
Mr. John S. Pigott
- ---------------------------------------
(Print Name)
12
<PAGE> 1
EXHIBIT 10.29
Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.
AMENDMENT #1
This Amendment #1 dated the 3rd day of May, 1999 (the "Amendment Date") is
hereby incorporated in its entirety into the Digital Software Integration Center
Sourcing Agreement dated November 1, 1998 by and between Spyglass, Inc.
("Spyglass") and General Instrument Corporation ("GI") (the "Agreement").
WHEREAS pursuant to Section 13.16 of the Agreement, the Parties hereby desire to
amend the Agreement as follows subject to the terms and conditions set forth in
the Agreement and as set forth below.
NOW, THEREFORE, in consideration of the premises and mutual covenants contained
herein, the Parties agree to amend the Agreement as follows:
I. DEFINITIONS. The Parties have agreed to change the name of the Digital
Software Integration Center ("DSIC") to Acadia Application Integration Center
("Acadia"). Therefore, the Agreement shall be amended such that any reference to
DSIC shall be read to mean Acadia.
All other defined terms used in this Amendment #1 shall have the same meanings
as set forth in the Agreement and any references to Sections, Exhibits or
appendices shall refer to those in the Agreement, unless specified otherwise.
II. TERM. Delete the first sentence in Section 11.1 in its entirety and replace
with the following:
"11.1 Term. The initial term of this Agreement will begin on the
Effective Date and will terminate December 31, 2001 (the "Term"). The first year
of the Term shall cover the period from the Effective Date through December 31,
1999. All subsequent years of the Term shall be twelve (12) calendar months,
beginning on January 1st and ending on December 31st of the relevant year for
the remainder of the Term."
The above modification under this Section II shall have no effect whatsoever on
the terms of any other agreements between the Parties whether or not they are
associated with or reference, the Agreement or its prior termination date.
III. EXHIBIT B, PAYMENT SCHEDULE, DEDICATED RESOURCES. Insert the following
after "Project Manager":
<TABLE>
<CAPTION>
"POSITION ANNUAL RATE YEAR 1 ANNUAL RATE YEAR 2 ANNUAL RATE YEAR 3
<S> <C> <C> <C>
Director of Architecture *** *** ***
Director of Delivery *** *** ***
</TABLE>
Spyglass/GI Confidential Page 1
<PAGE> 2
IV. EXHIBIT B, PAYMENT SCHEDULE, POSITION DESCRIPTION. Insert the following
after "Project Manager":
"Director of Architecture - Knowledgeable in aspects of software
product design and development. The Director of Architecture will have day to
day management responsibilities and will be responsible for maintaining the
technical vision. Core functions of the Director of Architecture include:
o maintain an overview of the platform requirements
o assess the technical impact of changes to the platform(s) - to
include both head-end and set-top units
o act as a focal point for key design decisions and for resolving
any conflicts between the Systems Engineering, Systems
Integration & Test, and Application Engineering teams
o establish overall hardware and software configurations in
support of GI and ISVs
o establish and maintain system availability (e.g. failure rates),
performance and sizing models
o assist ISVs to establish and maintain traceability from their
application requirements to the GI platform design
o monitor the development, test, and support activities to
identify potential problems early so that timely corrective
action can be taken
o authorize deliverable documents (e.g. SDK technical
documentation) for technical status prior to release
o plan and conduct technical design reviews and ISV intake
meetings
o assist in the formulation and review the system development
methodology, test methodology and standards
o provide advice and direction to the development teams on the
detailed design and development in the context of the overall
program
Director of Delivery - Knowledgeable in aspects of the management of
contractual obligation to GI (and ISVs). The Director of Delivery will have day
to day management responsibilities and will be responsible fore maintaining the
project management vision. Core functions of the Director of Delivery in
managing the lifecycle support process include:
o documentation
o training
o configuration management
o requirements management & tracking
o defect management
o procurement
o work delegation & monitoring
o risk management
o transfer to operational use"
Spyglass/GI Confidential Page 2
<PAGE> 3
Confidential Materials omitted and filed separately with the Securities
and Exchange Commission. Asterisks denote omissions.
V. EXHIBIT C, STAFFING SCHEDULE. Delete in its entirety and replace with the
following:
"EXHIBIT C
A. Staffing Schedule
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Total Total Total
Position Year 1 Year 1 Year 1 Year 1 Year 1 Year 2 Year 3
(10/1/98 - (4/1/99- (7/1/99 - (10/1/99 - (10/1/98- (1/1/00 - (1/1/01 -
3/31/99) 6/30/99) 9/30/99) 12/31/99) 12/31/99) 12/31/00) 12/31/01)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Project Manager *** *** *** *** *** *** ***
- -----------------------------------------------------------------------------------------------------------------------
Architect *** *** *** *** *** *** ***
- -----------------------------------------------------------------------------------------------------------------------
Engineer *** *** *** *** *** *** ***
- -----------------------------------------------------------------------------------------------------------------------
QA *** *** *** *** *** *** ***
- -----------------------------------------------------------------------------------------------------------------------
Technical Writer *** *** *** *** *** *** ***
- -----------------------------------------------------------------------------------------------------------------------
Management *** *** *** *** *** *** ***
- -----------------------------------------------------------------------------------------------------------------------
System Administration *** *** *** *** *** *** ***
- -----------------------------------------------------------------------------------------------------------------------
Administration *** *** *** *** *** *** ***
- -----------------------------------------------------------------------------------------------------------------------
Director of *** *** *** *** *** *** ***
Architecture
- -----------------------------------------------------------------------------------------------------------------------
Director of Delivery *** *** *** *** *** *** ***
- -----------------------------------------------------------------------------------------------------------------------
TOTALS *** *** *** *** *** *** ***
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Personnel Qualifications
1. Project Manager
2. Architect
3. Engineer
4. QA
5. Technical Writer
6. Management
7. System Administration
8. Administration
9. Director of Architecture
10. Director of Delivery"
Spyglass/GI Confidential Page 3
<PAGE> 4
VI. EXHIBIT D. Add the following to Exhibit D:
"KEY EMPLOYEES
o Project Manager(s)
o Architect(s)
o Director of Architecture
o Director of Delivery
o Engineers in the role of technical lead for an ISV
The Parties agree that the above Key Employees list is subject to
periodic reviews by the Management Committee, pursuant to Section 4.2;
provided, however that any additions to or modifications of such list
shall only be effective if made in writing and signed by both Parties."
VII. Statement of Work, Exhibit A-1.
Delete the first paragraph in its entirety and replace with the following:
"This Statement of Work, Exhibit A-1 dated the last date of the signatures
hereto (the "Effective Date") is hereby incorporated in its entirety into that
certain Digital Software Integration Center Sourcing Agreement between Spyglass,
Inc. ("Spyglass") and General Instrument Corporation ("General Instrument")
dated November 1, 1998 (the "Agreement"). General Instrument and Spyglass are
hereafter sometimes referred to herein collectively as "Parties" and
individually as "Party.""
VIII. This Amendment #1 shall become a part of the Agreement and shall be read
together with the Agreement as a single document. To the extent that there are
any conflicts between the terms and conditions of the Agreement and the terms
and conditions of this Amendment #1, this Amendment #1 shall control. All other
terms and conditions of the Agreement, to the extent unchanged by this
Amendment, shall remain in full force and effect.
IN WITNESS WHEREOF, the Parties have caused this Amendment to be
executed by their duly authorized officers, as of the date first written above.
SPYGLASS, INC. GENERAL INSTRUMENT CORPORATION
By: /s/ Marty S. Leamy By: /s/ David E. Robinson
Date 12/10/99 Date 11/23/99
Name: Martin S. Leamy Name: David E. Robinson
Title: President and C.O.O. Title: Senior Vice President and
General Manager,
Digital Network Systems
Spyglass/GI Confidential Page 4
<PAGE> 1
EXHIBIT 10.30
Confidential Materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.
AMENDMENT
This Amendment is made and entered into as of the 30th day of November,
1999 and amends the Common Stock and Warrant Purchase Agreement executed by the
Parties on October 19, 1998 and the three (3) Common Stock Purchase Warrants set
forth as Exhibits A, B, and C, issued to General Instrument Corporation ("GI")
by Spyglass, Inc. ("Spyglass") (collectively, the "Agreement"). GI and Spyglass
are sometimes referred to herein individually as a "Party" and collectively as
"Parties."
RECITALS
The Parties entered into that certain Operating Agreement dated October 19, 1998
(the "Operating Agreement");
Thereafter the Parties entered into that certain Digital Software Integration
Center Sourcing Agreement dated November 1, 1998 (the "DSIC Agreement").
Contemporaneously with the execution of the Operating Agreement, Spyglass issued
to GI three warrants issued October 19, 1998, allowing GI to purchase ***, ***,
and *** shares of Spyglass common stock for ***, ***, and *** respectively, upon
the occurrence of certain events as set forth therein (collectively the
"Warrants").
Subsequently, the Parties determined that the reference to the DSIC Agreement
contained in Exhibits A, B, and C of the Agreement, the Warrants included a
reference to an incorrect date.
The Parties hereby desire to amend the Warrants as follows to correct this
erroneous date.
FOR AND IN CONSIDERATION OF the mutual benefits accruing and expected to
accrue hereunder, the Parties hereby amend said Warrants as follows:
In line 6 of subsection 1(b) of each Exhibit A, B, and C, replace "October 19,
1998" with "November 1, 1998".
In order to avoid any potential future confusion, the Parties acknowledge and
agree that the references in each of the Warrants to the underlying apply to the
DSIC Agreement and the Parties agree to waive any and all future claims or
arguments to the contrary.
All other terms and conditions in the Agreement and each of the Warrants,
to the extent unchanged by this Amendment, shall remain in full force and
effect.
IN WITNESS WHEREOF the Parties have caused this Amendment to be executed
by their duly authorized representatives.
GENERAL INSTRUMENT CORPORATION SPYGLASS, INC.
By: /s/ Richard Smith By: /s/ Marty Leamy
Title: Executive Vice President Title: President and C.O.O.
Date: 11/30/99 Date: 11/30/99
<PAGE> 1
EXHIBIT 10.31
FIRST AMENDMENT TO OFFICE LEASE
THIS FIRST AMENDMENT TO OFFICE LEASE (this "First Amendment") is made
this 24th day of August, 1999 by and between PW/MS OP SUB I, LLC ("Landlord")
and SPYGLASS, INC., a Delaware corporation ("Tenant").
W I T N E S S E T H:
A. Landlord's predecessor in title and Tenant entered into a certain
Office Lease (the "Lease") dated May 28, 1997, whereby Landlord's predecessor in
title leased to Tenant certain premises consisting of 27,841 rentable square
feet of office space on the fourth floor of the building located at 1240 East
Diehl Road, Naperville, Illinois, for a lease term expiring on January 31, 2000.
B. Tenant was incorrectly designated as an Illinois corporation in the
Lease but was at the time of execution of the Lease and remains a Delaware
corporation.
C. Landlord acquired title to the aforesaid building and succeeded to
the interest of the landlord under the Lease.
D. Tenant desires to extend the lease term of the Lease and Landlord is
willing to grant such extension, subject to the terms and provisions hereinafter
set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and
legal sufficiency of which are hereby acknowledged, Landlord and Tenant hereby
agree as follows:
1. DEFINITIONS. Each capitalized term used in this First Amendment
shall have the same meaning as is ascribed to such capitalized term in the
Lease, unless otherwise provided for herein.
2. EXTENSION OF TERM. The Term of the Lease is extended for one
additional term (the "Extension Term") of five (5) years, commencing on February
1, 2000 and expiring on January 31, 2005, unless sooner terminated as is
otherwise provided in the Lease, and subject to renewal as is provided in
Paragraph 6 below. All of the terms and provisions contained in the Lease shall
continue to apply with respect to the Extension Term, except as otherwise
provided in this First Amendment.
3. MONTHLY BASE RENT. The Monthly Base Rent payable under the Lease for
the Extension Term shall be as follows:
<TABLE>
<CAPTION>
Period Monthly Base Rent
------ -----------------
<S> <C>
2/1/00 - 1/31/01 $48,721.75
2/1/01 - 1/31/02 50,183.40
2/1/02 - 1/31/03 51,688.90
2/1/03 - 1/31/04 53,239.57
2/1/04 - 1/31/05 54,836.76
</TABLE>
<PAGE> 2
4. ADJUSTMENTS TO MONTHLY BASE RENT. Tenant shall continue to pay all
adjustments to Monthly Base Rent under Article 22 of the Lease during and for
the entire Extension Term continuing to use a Tenant's Proportionate Share of
20.00%, except, that effective as of February 1, 2000, the base year under
subsections 22.02(1), 22.02(2) and 22.07 of the Lease shall be changed to the
calendar year of 2000 (but Tenant shall continue to pay when due under Article
22 of the Lease, all adjustments and readjustments to Monthly Base Rent owing
through January 31, 2000 using a base year of 1998).
5. CONDITION OF PREMISES. No agreement of Landlord to alter, remodel,
decorate, clean or improve the Premises or the Building and no representation or
warranty regarding the condition of the Premises or the Building or regarding
any other matter of any kind or nature has been made by or on behalf of Landlord
to Tenant under or by reason of this First Amendment, except that Landlord
agrees to provide Tenant with a tenant improvement allowance (the "Allowance")
to reimburse Tenant for the actual documented, out-of-pocket costs hereafter
paid by Tenant for permanent leasehold improvements to the Premises and for
furniture moving costs to, from and within the Premises, but in no event shall
the Allowance exceed $139,205 (i.e. $5.00 per rentable square foot of the
Premises). The Allowance shall be disbursed in no more than three (3)
installments to Tenant, each such installment to be paid within thirty (30) days
after Landlord's receipt of a written draw request therefor from Tenant,
together with interim or final lien waivers (as appropriate), owner (tenant)
affidavits and sworn contractor statements, from Tenant and from all
contractors, subcontractors and suppliers performing lienable work or services
to the Premises in connection with such draw request and which evidence the
completion of all work and/or services for which Tenant seeks reimbursement from
the Allowance. Notwithstanding anything herein to the contrary, with respect to
any work being performed by Landlord, its agent or contractors: (a) Tenant shall
not be required to comply with the requirements of Article 10 of the Lease; and
(b) Tenant shall not be required to obtain the lien waivers and/or affidavits
and statements referred to above. Any portion of the Allowance not properly
drawn by Tenant on or before February 1, 2001 shall be deemed waived by Tenant
and shall not be paid to Tenant or credited against Rent. All work to be
performed in or to the Premises by or on behalf of Tenant shall be performed in
accordance with Article 10 of the Lease, as amended pursuant to Paragraph 10(f)
below.
6. RENEWAL OPTION.
(a) Tenant shall have one (1) option to further renew the Term for one
additional period of three (3) years, such period to follow immediately upon the
expiration of the Extension Term. The aforesaid renewal option is hereinafter
called the "Renewal Option" and the aforesaid renewal term is hereinafter called
the "Second Extension Term." The Renewal Option shall apply to all (but not less
than all) of the Premises demised under the Lease, as hereby amended, as of the
Expiration Date of the Extension Term. The Renewal Option is granted upon the
following terms and conditions:
(1) Tenant gives Landlord written notice of its election to
exercise the Renewal Option not later than the date which is nine (9) months
prior to the commencement date of the Second Extension Term; and
(2) Tenant is not in monetary or other material default
(beyond applicable cure periods) under the Lease, as hereby amended, either on
the date Tenant exercises the Renewal Option, or unless waived in writing by
Landlord, on the commencement date of the Second Extension Term.
(b) If Tenant exercises the Renewal Option:
<PAGE> 3
(1) The Second Extension Term shall commence on February 1,
2005 and shall expire on January 31, 2008;
(2) The annual rate of base rent per rentable square foot
payable for the Second Extension Term shall be equal to the "market rate".
Tenant shall pay adjustments to Monthly Base Rent for the Second Extension Term
immediately upon the commencement date of the Second Extension Term, utilizing
for purposes of such adjustments a base year under subsections 22.02(1),
22.02(2) and 22.02(7) of the Lease which is the calendar year 2005.
(3) Tenant shall not be entitled to receive any rent abatement
or cash allowance for the Second Extension Term; and
(4) Tenant shall accept the Premises on the commencement date
of the Second Extension Term in an "as-is" physical condition, without any
representation, build-out or allowance from Landlord with respect to the
condition or improvement thereof.
All of the provisions of the Lease, as hereby amended, to the extent not
inconsistent with the above provisions, shall apply to the Second Extension
Term, provided that Tenant may not again exercise the Renewal Option so as to
further extend the Term beyond the expiration of the Second Extension Term.
(c) If Tenant exercises the Renewal Option, Landlord and Tenant shall
execute and deliver an amendment to the Lease reflecting the further renewal of
the Term on the terms provided above, which amendment shall be executed and
delivered prior to the commencement date of the Second Extension Term.
(d) For purposes of this Paragraph 6, "market rate" shall mean the
prevailing fair market annual rate of base rent per square foot of rentable area
(including all fixed and indexed adjustments to said rate), and all adjustments
for increases in operating expenses and taxes (including corresponding base
years), as determined by Landlord, which Landlord (and other landlords) are
obtaining for gross leases with 3-year lease terms in effect on or about the
commencement date of the Second Extension Term for "as-is" office space located
in the Naperville Corporate Center Subdivision (i.e. the five office buildings
located at 1717 N. Naper Boulevard, 1230 East Diehl Road, 1240 East Diehl Road,
1245 East Diehl Road and 1250 East Diehl Road), which space is comparable to the
Premises in area and improvement. Landlord agrees to give Tenant a written
notice ("Landlord's Notice") designating the market rate for the Second
Extension Term within 30 days after Landlord's receipt of a written request from
Tenant requesting such a designation, which request may not be given earlier
than the date which is 12 months prior to the Expiration Date of the Extension
Term. If Tenant does not approve Landlord's designation of the market rate,
Tenant may elect not to exercise the Renewal Option, in which event the Term
shall expire on the expiration of the Extension Term (i.e. January 31, 2005).
(e) The Renewal Option shall automatically terminate and become null
and void upon the earlier to occur of (1) the expiration or termination of the
Lease, (2) the termination of Tenant's right to possession of the Premises, (3)
the assignment of the Lease by Tenant, in whole or in part (other than to an
"affiliate", as defined in Section 8.01 of the Lease), (4) the sublease by
Tenant of the Premises, or any part thereof (other than to an "affiliate", as
defined in Section 8.01 of the Lease), (5) the recapture by Landlord of any
portion of the Premises under Section 8.02 of the Lease (other than pursuant to
a recapture arising from a proposed sublease to an "affiliate", as defined in
Section 8.01 of the Lease), or (6) the failure of Tenant to timely or properly
exercise the Renewal Option.
3
<PAGE> 4
7. PARKING. Effective as of the commencement date of the Extension
Term, Article 27 of the Lease is amended to change from 6 to 10, the number of
parking spaces which shall be reserved for Tenant's exclusive use, subject to
and in accordance with the provisions of said Article 27. Landlord, at its sole
cost, within thirty (30) days after the full execution of this First Amendment
shall provide Tenant with signage for 8 additional reserved parking spaces
(which currently number two), at a location designated by Landlord and approved
by Tenant, which approval shall not be unreasonably withheld.
8. SECURITY DEPOSIT. Landlord shall continue to hold and apply during
the Extension Term (and the Second Extension Term, if applicable), the
$46,285.66 Security Deposit now held by Landlord under Article 4 of the Lease.
9. NOTICES. Effective as of the date hereof, Article 25 of the Lease is
amended such that notices to Landlord shall be addressed as follows:
PW/MS OP SUB I, LLC
c/o Gale & Wentworth Real Estate Advisors, LLC
200 Campus Drive, Suite 200
Florham Park, New Jersey 07932
Attention: Marc L. Ripp, General Counsel
10. GENERAL AMENDMENTS TO LEASE. Effective as of the date hereof, the
Lease is amended as follows:
(a) Article 3 of the Lease is amended to provide that until further
notice, payments of Rent shall be made by checks payable to the order of "PW/MS
OP SUB I, LLC" and mailed to Gale & Wentworth Real Estate Advisors, LLC, 200
Campus Drive, Suite 200, Florham Park, New Jersey 07932;
(b) Section 5.01 of the Lease is amended to add the following sentence
at the end of said Section 5.01: "All services provided by Landlord under this
Section 5.01 shall be of a first class nature comparable to other office
buildings in Naperville, Illinois which are similar in age and class with the
Building";
(c) Section 5.04 of the Lease is amended to insert the following words
after the words "Section 26.07 below" in the third line on Page 4A of the Lease:
"provided, however, that any Y2K compliance failure of any
Building system or component shall not be considered an event
of force majeure herein";
(d) Section 8.01 of the Lease is amended to:
(i) substitute the number "30" for the number "45" in the
second sentence of said Section 8.01;
(ii) substitute the words "received by Tenant (sublandlord)
from" for the words "due from" in the third sentence of said Section 8.01;
(iii) delete clause (i) in the seventh sentence of said
Section 8.01; and
4
<PAGE> 5
(iv) delete clause (iv) in the seventh sentence of said
Section 8.01;
(e) Section 8.02 of the Lease is amended to:
(i) substitute the words "14 days' for the words "20 days" in
the third sentence of said Section 8.02; and
(ii) insert the words "(i.e. by plus or minus 15% of the
rentable area contained in the space designated in Tenant's Notice)" after the
words "different than the space designated in Tenant's Notice" in the sixth
sentence of said Section 8.02.
(f) Article 10 of the Lease is amended to insert the words "(which
consent shall not be reasonably withheld or delayed)".
(g) Sections 11.01 and 11.02 of the Lease are deleted in their entirety
and the following Sections are substituted in lieu thereof:
"11.01 TENANT INDEMNIFICATION
Tenant agrees to indemnify and hold harmless Landlord, its members, the
managing agent of the Building, and each of their respective officers,
directors, agents and employees, from and against any and all liabilities,
claims, demands, costs and expenses of every kind and nature (including
attorneys' fees), including those arising from any injury or damage to any
person, property or business sustained in, on or about the Premises, the
Building or such Lot 3 of the Resubdivision of Lot 3, and (a) resulting from the
negligence of Tenant, its employees, agents, servants, invitees, licensees or
subtenants, or (b) resulting from the failure of Tenant to perform its
obligations under this Lease; provided, however, Tenant's obligations under this
Paragraph shall not apply to injury or damage resulting from the negligence of
Landlord, its members, the managing agent of the Building, or any of their
respective officers, directors, agents or employee or damage covered by
insurance carried by Landlord (or required to be carried by Landlord under this
Lease). If any such proceeding is brought against Landlord, its members, the
managing agent of the Building, or any of their respective officers, directors,
agents or employees, Tenant covenants to defend such proceeding at its sole cost
by legal counsel reasonably satisfactory to Landlord, if requested by Landlord.
The indemnification obligations contained in this Section 11.01 shall survive
the expiration or termination of this Lease.
11.02 LANDLORD INDEMNIFICATION
Landlord agrees to indemnify and hold harmless Tenant, its officers,
directors, agents and employees, from and against any and all liabilities,
claims, demands, costs and expenses of every kind and nature (including
attorneys' fees), including those arising from any injury or damage to any
person, property or business, sustained in, on or about the common areas of the
Building or such Lot 3 of the Resubdivision of Lot 3, and (a) resulting from the
negligence of Landlord, its employees, agents, servants, invitees or licensees,
or (b) resulting from the failure of Landlord to perform its obligations under
this Lease; provided, however, Landlord's obligations under this Paragraph shall
not apply to injury or damage resulting from the negligence of Tenant or any of
its officers, directors, agents or employees or damage covered by insurance
carried by Tenant (or required to be carried by Tenant under this Lease). If any
such proceeding is brought against Tenant, or any of its officers, directors,
agents or employees, Landlord covenants to defend such
5
<PAGE> 6
proceeding at its sole cost by legal counsel reasonably satisfactory to Tenant,
if requested by Tenant. The indemnification obligations contained in this
Section 11.02 shall survive the expiration or termination of this Lease".
(h) Section 12.04 of the Lease is amended to add the following
sentence at the end of said Section 12.04:
"Landlord shall pay upon demand, all costs and expenses,
including reasonable attorneys' fees, incurred by Tenant in enforcing
Landlord's obligations under this Lease or resulting from Landlord's
default under this Lease".
(i) Article 14 of the Lease is amended to:
(i) substitute the words "200% of the Adjusted Monthly Base
Rent applicable under this Lease as of the expiration or termination of the most
recent Term of this Lease" for the words "200% of the fair rental value of the
Premises, as determined by Landlord (but in no event less than 200% of the
Adjusted Monthly Base Rent then applicable under this Lease)" in the first
sentence of said Article 14; and
(ii) delete the fourth (last) sentence of said Article 14;
(j) Section 15.01 of the Lease is amended to delete clause (2) of the
first sentence of said Section 15.01 and to insert the following clause in lieu
thereof:
"(2) proceed to repair or restore the Premises or the Building
(other than movable trade fixtures and personal property of Tenant)".
(k) Section 22.01D of the Lease is amended to substitute the
words"advertising expenses;" for the words "or advertising expenses." at the end
of the third sentence of said Section 22.01D and to add the following words at
the end of said amended sentence:
"any ground lease payments (other than ground rental payments which
constitute a direct pass-through of Operating Expenses, or any
component thereof); all amounts paid to Landlord or to subsidiaries or
affiliates of Landlord for goods or services in or for the Building to
the extent such amounts exceed the amounts that would have been paid if
such services had been rendered by, or such goods purchased from
independent third parties not controlled by or affiliated with Landlord
on a competitive basis; provided, however, that nothing contained
herein shall conflict with or otherwise be deemed to reduce Landlord's
obligation to manage and operate the Building in accordance with the
provisions of this Lease and nothing contained in this clause shall
restrict Landlord's right to hire an affiliate of Landlord to manage
the Building, to pay such affiliate the aggregate amount permitted
above to be paid for management fees and compensation, and to include
such aggregate amount in the Operating Expenses; Landlord's general
corporate overhead and general and administrative expenses; and add-on
charges related to defaulted obligations of Landlord including, but not
limited to, tax and/or assessment penalties and interest and late
charges.
(l) Section 22.05 of the Lease is amended to substitute the following
words for clause (b) in the third (last) sentence of said Section 22.05:
6
<PAGE> 7
"(b) the main office of Landlord's manager, Gale & Wentworth
Real Estate Advisors, LLC, 200 Campus Drive, Suite 200, Florham Park,
New Jersey 07932".
(m) Article 24 of the Lease is amended to insert the following
Section at the end of said Article 24:
"24.03 NON-DISTURBANCE. Notwithstanding anything contained in
Section 24.01 above to the contrary, Tenant's obligation to subordinate
this Lease to any such mortgage, trust deed or ground lease shall be
conditioned upon Tenant's receipt of an agreement from the ground
lessor, mortgagee or holder of such trust deed, as the case may be,
that this Lease shall not be terminated nor Tenant's possession of the
Premises disturbed by reason of the foreclosure of such mortgage or
trust deed or termination of such ground lease, so long as Tenant is
not in default under this Lease (beyond any applicable grace period).
Tenant agrees to execute the standard form of Subordination,
Non-Disturbance and Attornment Agreement utilized by such ground
lessor, mortgagee or holder of such trust deed."
(n) Section 26.07 of the Lease is deleted and the following
Section is substituted in lieu thereof:
"26.07. FORCE MAJEURE.
Neither party shall be deemed in default with respect to any
of the terms, covenants, conditions and provisions of this Lease on
such party's part to be performed if such party fails to timely perform
same and such failure is due in whole or in part to any strike,
lockout, labor trouble (whether legal or illegal), civil disorder,
inability to procure materials, failure of power, restrictive
governmental laws or regulations, riots, insurrections, war, fuel
shortages, accidents, casualties, Act of God, acts caused directly or
indirectly by the other party (or such other party's agents, employees
or invitees), mechanical breakdown, repair, servicing or any other
cause beyond the reasonable control of such first party; provided,
however, that nothing contained herein is intended, nor shall be
construed to extend (a) the due date for payment of any installment of
Rent under this Lease, or (b) the date upon which Tenant is obligated
to surrender and vacate the Premises upon the expiration or termination
of this Lease, or (c) the due date for payment of any monetary
obligation of either party under this Lease".
11. BROKER. Tenant represents to Landlord that except for CB Richard
Ellis, Inc. and Pollina Corporate Real Estate, Inc. (the "Brokers",
collectively), Tenant has not dealt with any real estate broker, salesperson or
finder in connection with this First Amendment, and no such person initiated or
participated in the negotiation of this First Amendment or is entitled to any
commission in connection herewith. Tenant hereby agrees to indemnify, defend and
hold Landlord, its property manager and their respective employees harmless from
and against any and all liabilities, claims, demands, actions, damages, costs
and expenses (including attorneys' fees) arising from either (i) a claim for a
fee or commission made by any broker (other than the Brokers) claiming to have
acted by or on behalf of Tenant in connection with this First Amendment, or (ii)
a claim of, or right to, lien under the Statutes of Illinois relating to real
estate broker liens with respect to any broker (other than the Brokers) retained
by Tenant.
7
<PAGE> 8
12. BINDING EFFECT. The Lease, as amended hereby, shall continue in
full force and effect, subject to the terms and provisions thereof and hereof.
In the event of any conflict between the terms of the Lease and the terms of
this First Amendment, the terms of this First Amendment shall control. This
First Amendment shall be binding upon and inure to the benefit of Landlord,
Tenant and their respective successors and permitted assigns.
13. SUBMISSION. Submission of this First Amendment by Landlord or
Landlord's agent, or their respective agents or representatives, to Tenant for
examination and/or execution shall not in any manner bind Landlord and no
obligations on Landlord shall arise under this First Amendment unless and until
this First Amendment is fully signed and delivered by Landlord and Tenant;
provided, however, the execution and delivery by Tenant of this First Amendment
to Landlord or Landlord's agent, or their respective agents or representatives,
shall constitute an irrevocable offer by Tenant to extend the Term of the Lease
on the terms and conditions herein contained, which offer may not be revoked for
ten (10) business days after such delivery.
8
<PAGE> 9
14. LIMITATION OF LIABILITY. The provisions of Section 26.05 of the
Lease are incorporated herein by this reference and shall apply to limit the
liability of Landlord under this First Amendment.
IN WITNESS WHEREOF, this First Amendment is executed as of the day and
year aforesaid.
TENANT:
SPYGLASS, INC., a Delaware corporation
By: /s/ Douglas Colbeth
Title: President/CEO
LANDLORD:
WITNESSED BY: PW/MS OP SUB I, LLC
By: PW/MS MANAGEMENT CO., INC.
/s/ Marc Leonard Ripp, Esq. By: GALE & WENTWORTH REAL
Marc Leonard Ripp, Esq. ESTATE ADVISORS, LLC
Corporate Secretary
By: /s/ Robert Martie
Robert R. Martie
Senior Vice President
WITNESSED BY: AGENT FOR LANDLORD:
PW/MS MANAGEMENT CO., INC.
/s/ Marc Leonard Ripp, Esq. By: GALE & WENTWORTH REAL
Marc Leonard Ripp, Esq. ESTATE ADVISORS, LLC
Corporate Secretary
By: /s/ Robert Martie
Robert R. Martie,
Senior Vice President
9
<PAGE> 1
EXHIBIT 13.1
Selected Financial Data
The following table sets forth selected financial data of the Company as of and
for the five years ended September 30, 1999, 1998, 1997, 1996 and 1995. The
selected financial data has been derived from the Company's audited historical
consolidated financial statements. This financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto appearing elsewhere in this document.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
(In thousands, except per share amounts) 1999(4) 1998(4) 1997(3)(4) 1996(3)(4)(5) 1995(2)(3)(5)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total net revenues $ 29,610 $ 21,169 $ 21,295 $ 22,307 $ 12,141
Gross profit 19,481 15,610 18,267 20,277 10,380
Income (loss) from operations (3,279) (11,283) (15,677) 3,153 3,025
Net income (loss) (1,897) (10,032) (14,151) 2,952 2,176
Net income (loss) available to common
stockholders $( 1,897) $(10,032) $(14,151) $ 2,952 $ 1,985
Earnings (loss) per common share-basic (1):
Net income (loss) $( 0.12) $( 0.69) $( 1.07) $ 0.23 $ 0.27
Net income (loss) available to common
stockholders $( 0.12) $( 0.69) $( 1.07) $ 0.23 $ 0.25
Weighted average number of common shares
outstanding 16,029 14,543 13,238 12,768 8,111
Earnings (loss) per common share-diluted (1):
Net income (loss) $( 0.12) $( 0.69) $( 1.07) $ 0.21 $ 0.23
Net income (loss) available to common
stockholders $( 0.12) $( 0.69) $( 1.07) $ 0.21 $ 0.21
Weighted average number of common shares
outstanding 16,029 14,543 13,238 14,023 9,383
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 29,348 $ 22,706 $ 29,026 $ 34,201 $ 34,872
Working capital 35,199 25,678 29,233 38,598 35,550
Total assets 45,773 34,980 42,048 48,908 43,509
Total stockholders' equity 39,248 29,807 36,162 43,393 37,614
</TABLE>
(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, and
1995 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, 1999, 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> 2
(5) Selected financial data for the years ended September 30, 1996 and 1995
includes the results of Stonehand Inc., OS Technologies Corporation and
SurfWatch Software, Inc. which were acquired in fiscal 1996 transactions
accounted for as poolings of interests.
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.
SELECTED QUARTERLY DATA
The following table sets forth certain quarterly financial information of the
Company for fiscal years 1999 and 1998. This information has been derived from
the consolidated quarterly financial statements of the Company which are
unaudited but which, in the opinion of management, have been prepared on the
same basis as the audited consolidated financial statements included herein and
include all adjustments (consisting only of normal recurring items) necessary
for a fair presentation of the financial results for such periods. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this document.
<TABLE>
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
-------------------------------------------------------------------------------------------------
(In thousands, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31,
except per share amounts) 1999 1999 1999 1998 1998 1998 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Total net revenues $9,187 $7,232 $7,419 $5,772 $6,158 $5,676 $5,081 $4,254
Gross profit 6,375 4,563 4,980 3,563 4,210 4,090 3,932 3,378
Loss from operations (23) (986) (260) (2,010) (975) (1,972) (3,589) (4,747)
Net income (loss) 335 (648) 109 (1,693) (674) (1,686) (3,279) (4,393)
PER SHARE AND SHARE DATA(1):
Net income (loss) per share-
basic $0.02 ($0.04) $0.01 ($0.11) ($0.05) ($0.11) ($0.23) ($0.31)
Weighted average number of
common shares outstanding-
Basic 16,310 16,217 16,049 15,714 14,878 14,750 14,272 14,166
Net income (loss) per share-
diluted $0.02 ($0.04) $0.01 ($0.11) ($0.05) ($0.11) ($0.23) ($0.31)
Weighted average number of
common shares outstanding-
diluted 17,694 16,217 17,403 15,714 14,878 14,750 14,272 14,166
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Selected quarterly data for the years ended September 30, 1999 and 1998
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------
SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31,
1999 1999 1999 1998 1998 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $20 1/2 $23 1/2 $20 1/4 $32 1/4 $15 5/16 $15 3/8 $9 9/16 $12
Low $10 3/8 $ 8 5/8 $ 8 7/8 $ 9 $ 9 5/8 $ 8 1/4 $4 1/4 $ 4 1/16
</TABLE>
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
This discussion should be read in conjunction with the Company's
consolidated financial statements included herein. This Management's Discussion
and Analysis of Financial Condition and Results of Operations and the
accompanying Consolidated Financial Statements and Notes thereto have been
prepared to reflect the retroactive effect of Spyglass, Inc.'s ("Spyglass" or
the "Company") 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.
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 products and
services. Since fiscal 1997, the Company has been focusing on the development,
marketing and distribution of its technologies and services to the information
appliance market, and beginning May 1999, increased its focus on the interactive
television ("ITV") and mobile data ("MD") markets.
Spyglass provides its customers with strategic Internet consulting,
software and professional services that enable them to rapidly develop and
deploy cost-effective Internet-enabled information appliances and Internet-based
services. 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
television set-top boxes, Internet screen phones, wireless phones, televisions,
office equipment, medical devices and industrial controls. In addition,
SurfWatch content filtering software, designed to block unwanted material from
the Internet, has been deployed by several major corporations, schools and ITV
services.
The Company licenses technology from a number of third-party vendors
for incorporation into the Company's products and pays license fees and/or
royalties for such use. These fees 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
<PAGE> 4
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.
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 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 subsidiary of the Company, in
which GI holds a 10% minority interest and which GI will have an option to
purchase at fair market value under certain circumstances. The Company has
opened a new facility for this solutions center in Lexington, Massachusetts with
dedicated resources for the execution of the GI agreement, which is expected to
provide Spyglass $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 period to Microsoft to develop and integrate
multiple Windows CE-based applications for information appliance manufacturers
that are developing products utilizing the Windows CE operating system. The
agreements are expected to provide the Company with $20 million in revenues over
three years. In November 1999, the Company moved 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 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.
On September 20, 1999 the Company signed a definitive agreement to sell
SurfWatch Software Inc. ("SurfWatch") to JSB Software Technologies, plc ("JSB").
The transaction was completed on November 4, 1999, and was effected through the
sale of all the issued and outstanding capital stock of SurfWatch for
consideration of $17 million cash and $12 million in JSB equity securities. This
transaction resulted in a pre-tax gain of approximately $27 million.
In the first quarter of the fiscal year ended September 30, 2000 the
Company recorded a non-recurring restructuring charge consisting primarily of
severance and related personnel costs associated with the organizational
realignment of the Company's professional services group. This realignment was
completed in November 1999 and resulted in a restructuring charge of
approximately $860,000.
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, 1999, 1998 and 1997.
<PAGE> 5
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET REVENUES
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
----------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES:
Internet technology 45.6% 55.1% 69.2%
Service 54.4 44.9 30.8
----- ----- -----
Total net revenues 100.0 100.0 100.0
COST OF REVENUES:
Internet technology 4.1 8.7 7.0
Service 30.1 17.6 11.2
----- ----- -----
Total cost of revenues 34.2 26.3 18.2
----- ----- -----
Gross profit 65.8 73.7 81.8
OPERATING EXPENSES AND OTHER:
Sales and marketing 27.8 43.0 59.5
Research and development 26.9 50.4 126.1
General and administrative 21.3 31.3 59.9
Restructuring charge -- -- 6.8
One-time acquisition costs 0.9 2.3 --
----- ----- -----
Total operating expenses and other 76.9 127.0 252.3
Loss from operations (11.1) (53.3) (170.5)
Other income, net 4.7 5.9 11.5
----- ----- -----
Loss before income taxes (6.4) (47.4) (159.0)
Income tax benefit -- -- --
----- ----- -----
Net loss (6.4)% (47.4)% (159.0)%
===== ===== ======
</TABLE>
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED WITH FISCAL YEAR ENDED
SEPTEMBER 30, 1998
Internet technology revenues for the year ended September 30, 1999
increased $1,832,000, or 16%, to $13,493,000 compared to $11,661,000 for the
year ended September 30, 1998. The increase was largely attributable to a
$2,632,000 increase in SurfWatch license revenue which included a $2,000,000 fee
paid by JSB to license Spyglass' patented Internet filtering system. The
remaining $632,000 increase in SurfWatch revenues, coupled with increases in
license revenues from device manufacturers was more than offset by a decline in
revenues from licensing of desktop software applications, in addition to
software acquired in the AllPen acquisition that is no longer marketed. Internet
technology revenues to be derived from subsequent royalties under a contract
will be realized as customers commercially deploy information appliances
utilizing the Company's technology and the royalty revenue stream commences. The
Company expects Internet technology revenues to increase during fiscal 2000, as
compared to fiscal 1999 Internet technology revenues excluding SurfWatch
revenues.
Service revenues, which include both professional services revenues and
revenues from customer support agreements, increased $6,609,000, or 70%, to
$16,117,000 for the year ended September 30, 1999 compared to $9,508,000 for the
year ended September 30, 1998. This increase was due to management's focus on
building an integrated development and service organization that provides
customized solutions to
<PAGE> 6
its customers within the ITV and MD markets. The October 1998 agreement with GI
is expected to provide at least $17,100,000 in professional services revenue
over the next two years. Additionally, the April 1999 agreement with Microsoft
is expected to provide approximately $15,800,000 in professional services
revenues over the next two and a half years. As a result, the Company expects
service revenues during fiscal 2000 to increase both in absolute dollars and as
a percentage of total net revenues over fiscal 1999.
Gross profit, as a percentage of revenues, was 65.8% for the year ended
September 30, 1999 compared to 73.7% for the year ended September 30, 1998. This
reduction was primarily a result of higher service revenues as a percentage of
total net revenues, and a decline in gross margins from service revenues from
60.9% in fiscal 1998 to 44.7% in fiscal 1999. The Company expects gross profit,
as a percentage of revenues, to decline slightly throughout fiscal 2000 as
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.
Sales and marketing expenses for the year ended September 30, 1999
decreased $883,000, or 10%, to $8,218,000 from $9,101,000 for the year ended
September 30, 1998, and decreased as a percentage of revenues to 27.8% from
43.0%. Factors contributing to this decrease were $457,000 in reduced
compensation and related personnel expenses resulting from a reduction of sales
and marketing staff, and a reduction in compensation expense related to
amortization of restricted stock issued to certain officers of the Company.
Additionally, the Company decreased its fiscal 1999 marketing program
expenditures by $452,000 as programs were streamlined to shift focus from the
broader information appliance market, to primarily the ITV and MD markets. The
Company expects sales and marketing expenses for fiscal 2000 to increase in
absolute dollars but decrease as a percentage of revenue, as compared to fiscal
1999.
Research and development expenses for the year ended September 30, 1999
decreased $2,700,000, or 25%, to $7,970,000 compared to $10,670,000 for the year
ended September 30, 1998, and decreased as a percentage of revenues to 26.9%
from 50.4%. The decrease in research and development expenses was due primarily
to a decrease in compensation and related personnel expenses of $3,098,000 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. This
decrease was partially offset by increased expenditures of $423,000, related
primarily to an increased allocation of shared information system costs. 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
2000 to decrease both in dollars and as a percentage of revenues, as compared to
fiscal 1999.
General and administrative expenses decreased $313,000, or 5%, to
$6,313,000 for the year ended September 30, 1999 from $6,626,000 for the year
ended September 30, 1998, and decreased as a percentage of revenues to 21.3%
from 31.3%. The decrease was a result of a $103,000 reduction in compensation
and related personnel expenses, and a $526,000 reduction in facility costs as
well as increased allocation of information system costs to other departments
within Spyglass. These decreases were partially offset by increased legal
expenses of $447,000 primarily related to pending shareholder and patent
litigation. The Company expects general and administrative costs to remain
constant in absolute dollars, but decline as a percentage of revenues, in fiscal
2000 as compared to fiscal 1999.
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 connection with the acquisition of
AllPen in November 1997, the Company recorded a charge to operating expenses of
<PAGE> 7
$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 fiscal years 1999 and
1998. 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, 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 information appliance manufacturers. Internet technology
revenues from vendors of desktop software applications, excluding SurfWatch
revenues, decreased $3,986,000 while revenues from information appliance
manufacturers increased $5,752,000.
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. 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 information appliance market.
This resulted in an increase in the number and dollar value of professional
services agreements.
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.
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 related 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 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 information appliance 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 information appliance market.
Research and development expenses for the year ended September 30, 1998
decreased $6,098,000, or 36%, 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 compensation 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.
<PAGE> 8
Navitel received $1,606,000 and $250,000 from Microsoft during fiscal 1998 and
1997, respectively, as funding for research and development expenses which was
netted against research and development expenditures.
General and administrative expenses decreased $1,339,000, or 17%, 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 compensation and related personnel expenses of $580,000 due
primarily to the issuance of restricted stock to officers of the Company.
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 information appliance 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 in November 1997, the
Company recorded a charge to operating expenses of $496,000 or $0.03 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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had no debt and had cash, cash
equivalents, and short-term investments of $29,348,000 and working capital of
$35,199,000. The Company's operating activities used cash of $2,454,000,
$9,194,000 and $7,791,000 for the fiscal years ended September 30, 1999, 1998
and 1997, respectively.
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. In addition, $1,606,000 and
$250,000 in cash was received by Navitel from Microsoft during fiscal 1998 and
1997, respectively, for research and development expenses.
In November 1999, the Company received $17,000,000 in cash and
$12,000,000 in JSB securities for the sale to JSB of all the issued and
outstanding capital stock of SurfWatch. 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.
<PAGE> 9
The Company's current net accounts and unbilled accounts receivables
increased to $9,630,000 at September 30, 1999 from $5,606,000 at September 30,
1998. This increase was primarily due to an increase in revenues for the fourth
quarter of fiscal 1999 as compared to the fourth quarter of fiscal 1998.
The Company's capital expenditures totaled $2,020,000, $656,000 and
$3,524,000 for the fiscal years ended September 30, 1999, 1998 and 1997,
respectively. These consisted primarily of computer hardware and software,
office furniture, and leasehold improvements for new employees and for the new
solutions center in Lexington, Massachusetts. The Company had no material
commitments for capital expenditures at September 30, 1999.
The Company believes that its current cash and cash equivalents, as
well as anticipated cash flow from operations, will be sufficient to finance the
Company's cash flow requirements through at least fiscal 2000.
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 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
information appliance market. The Company has been focused on the development,
marketing and distribution of its technologies and services to the broader
information appliance market, and since May 1999, has increased its focus on the
ITV and MD markets. Because this is a relatively 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 22.4% and 39.5% of its revenues for the fiscal
years ended September 30, 1999 and September 30, 1997, respectively from
Microsoft Corporation. Sales to GI represented 11.6 % of the Company's revenues
for the fiscal year ended September 30, 1999, and sales to Motorola Corporation
represented 14.5% of revenues for the fiscal year ended September 30, 1998. As
the information appliance 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 information appliance 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,
<PAGE> 10
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 information appliance technology
vendors and service providers such as BSQUARE, Liberate, Microsoft, OpenTV,
Oracle, Phone.com, Sun Microsystems, on-line service companies, Internet access
providers and networking software companies. Additionally, the Company considers
a significant source of competition for its Internet solutions to be the
prospect company's internal resources.
The Company has provided its solutions to content providers, service
operators and device manufacturers within the cable and satellite television,
wireless, telecommunications, office equipment, automotive and industrial
control markets who then deploy products and/or services within these markets.
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 and services, 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 or service 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 are difficult to adjust in the short term. 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 has been 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> 11
As it relates to Spyglass products, the task force has substantially completed
the testing phase of its overall plan. As a result of this phase, the Company
has determined that all Spyglass products and technologies currently marketed
and sold are Year 2000 compliant. Spyglass defines Year 2000 compliance as it
relates to Spyglass products only and Spyglass compliance testing is limited to
Spyglass products only. Spyglass emphasizes that for a system to be Year 2000
compliant, all interdependent products which comprise the system must be
compliant, including hardware, operating systems and application software. Older
versions of certain Spyglass products and technologies currently available can
be made Year 2000 compliant with the proper patch upgrade. Despite Spyglass'
assessment and testing, 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 to Spyglass products, the task force has 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 of its overall plan,
the Company received direct confirmation that all material internally used
systems will operate in the year 2000.
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 have been and will be
applying this checklist to each inventoried system and, if necessary, will
perform appropriate upgrades. All critical systems have been tested live to
ensure compliance. All systems not defined as critical will have been verified
by a random sampling of live tests prior to the end of the calendar year.
Equipment and software for which Year 2000 compliance information is unavailable
or not guaranteed by vendors will be retired and replaced.
Several pieces of non-compliant network hardware have been decommissioned and
replaced by upgraded Year 2000 compliant platforms. According to the equipment
vendors' Year 2000 certifications, the remaining Spyglass network hardware and
software systems are in compliance.
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 were completed
for the Company's two key internal systems during the quarter ended September
30, 1999, which brought them into compliance.
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.
<PAGE> 12
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 September 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 $116,000. In addition,
the Company has spent approximately $25,000 for external consultants. The use of
external consultants is expected to remain minimal. The Company estimates it
will incur approximately $65,000 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.
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> 13
SPYGLASS, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
(In thousands, except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Internet technology $ 13,493 $ 11,661 $ 17,194
Service 16,117 9,508 4,101
-------- -------- --------
Total net revenues 29,610 21,169 21,295
Cost of revenues:
Internet technology 1,220 1,843 1,535
Service 8,909 3,716 1,493
-------- -------- --------
Total cost of revenues 10,129 5,559 3,028
-------- -------- --------
Gross profit 19,481 15,610 18,267
Operating expenses and other:
Sales and marketing 8,218 9,101 8,311
Research and development, net of
funding received of $1,606 and $250
in 1998 and 1997, respectively 7,970 10,670 16,768
General and administrative 6,313 6,626 7,965
Restructuring charge -- -- 900
One-time acquisition costs 259 496 --
-------- -------- --------
Total operating expenses and other 22,760 26,893 33,944
Loss from operations (3,279) (11,283) (15,677)
Other income, net 1,382 1,251 1,526
-------- -------- --------
Loss before income taxes (1,897) (10,032) (14,151)
Income tax benefit -- -- --
-------- -------- --------
Net loss $ (1,897) $(10,032) $(14,151)
======== ======== ========
Net loss per common share-basic and diluted $ (0.12) $ (0.69) $ (1.07)
Weighted average number of common
shares outstanding-basic and diluted 16,029 14,543 13,238
======== ======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE> 14
SPYGLASS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30,
(In thousands, except share amounts) 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,613 $ 22,706
Short-term investments 10,735 --
Accounts receivable, net of allowance for
doubtful accounts of $494 and $429, respectively 8,731 4,704
Unbilled accounts receivable 899 902
Prepaid expenses and other current assets 2,420 2,489
-------- --------
Total current assets 41,398 30,801
Properties and equipment, net 3,897 3,888
Other assets 478 291
-------- --------
TOTAL ASSETS $ 45,773 $ 34,980
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,396 $ 1,678
Royalties payable 397 541
Deferred revenues 1,477 861
Accrued compensation and related benefits 1,680 1,624
Accrued expenses and other liabilities 249 419
-------- --------
Total current liabilities 6,199 5,123
Long-term deferred revenues 326 50
-------- --------
Total liabilities 6,525 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,
16,581,731 and 15,083,239 shares issued and 16,504,517
and 15,073,525 shares outstanding, respectively 165 150
Additional paid-in capital 62,221 50,546
Accumulated deficit (22,194) (20,297)
Treasury stock at cost, 77,214 and 9,714 shares, respectively (56) (55)
Unamortized value of restricted stock issued (888) (537)
-------- --------
Total stockholders' equity 39,248 29,807
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,773 $ 34,980
======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE> 15
SPYGLASS, INC.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
(In thousands, except share amounts) SHARES AMOUNT CAPITAL DEFICIT
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996 12,968,065 $ 129 $ 39,340 $ 3,924
Exercise of stock options 497,882 5 731
Exercise of employee stock purchase plan
stock options 45,396 1 362
Issuance of incentive stock options 80
Conversion of preferred stock into
common 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
Amortization of deferred compensation
relating to issuance of restricted stock
Purchase of treasury stock
Conversion of preferred stock into
common 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)
Sale of common stock to
General Instrument 700,000 7 7,385
Exercise of stock options 656,913 7 3,240
Exercise of employee stock
purchase plan stock options 47,979 -- 467
Issuance of restricted stock 93,600 1 1,020
Repurchase of restricted stock (437)
Amortization of deferred compensation
relating to issuance of restricted stock
Net loss (1,897)
---------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1999 16,581,731 $ 165 $ 62,221 $ (22,194)
========== =========== =========== ===========
<CAPTION>
TREASURY UNAMORTIZED
COMMON STOCK VALUE OF
----------------------- RESTRICTED
(In thousands, except share amounts) SHARES AMOUNT STOCK ISSUED
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996 -- $ -- $ --
Exercise of stock options
Exercise of employee stock purchase plan
stock options
Issuance of incentive stock options
Conversion of preferred stock into
common stock
Accelerated vesting of options
Net loss
---------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1997 -- -- --
Adjustment for acquisition accounted
for as a pooling of interests
Exercise of stock options
Exercise of employee stock purchase
plan stock options
Issuance of restricted stock (1,011)
Amortization of deferred compensation
relating to issuance of restricted stock
Purchase of treasury stock 9,714 (55) 474
Conversion of preferred stock into
common stock
Accelerated vesting of options
Net loss
---------- ----------- ----------
BALANCE AT SEPTEMBER 30, 1998 9,714 (55) (537)
Sale of common stock to
General Instrument
Exercise of stock options
Exercise of employee stock
purchase plan stock options
Issuance of restricted stock (1,020)
Repurchase of restricted stock 67,500 (1) 437
Amortization of deferred compensation
relating to issuance of restricted stock 232
Net loss
---------- ----------- ----------
BALANCE AT SEPTEMBER 30, 1999 77,214 $ (56) $ (888)
========== =========== ===========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE> 16
SPYGLASS, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,897) $(10,032) $(14,151)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,982 2,097 1,752
Amortization 869 1,315 157
Loss on disposal of fixed assets 19 15 99
Issuance of warrants to purchase common stock
in exchange for non-cash common stock -- 42 --
Amortization of deferred compensation related
to issuance of restricted stock 232 474 --
Bad debt provision 308 309 1,029
Stock option compensation -- 113 312
Changes in operating assets and liabilities:
Accounts and long-term receivables (4,285) (783) 3,155
Unbilled accounts receivable 3 (902) --
Prepaid expenses, other current assets and other assets (1,037) (54) (1,015)
Accounts payable 718 (368) 474
Royalties payable (144) 196 (358)
Deferred revenues 892 (819) (307)
Accrued compensation and related benefits 56 (993) 955
Research and development funding advance -- 144 --
Accrued expenses and other liabilities (170) 52 107
-------- -------- --------
Net cash used in operating activities (2,454) (9,194) (7,791)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in business combination -- 574 --
Short-term investments, net activity (10,735) 4,929 12,664
Net proceeds from sale of fixed assets 10 82 32
Capital expenditures (2,020) (656) (3,524)
-------- -------- --------
Net cash provided by (used in) investing activities (12,745) 4,929 9,172
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 3,714 1,917 1,099
Proceeds from issuance of preferred stock -- 1,000 3,000
Proceeds from issuance of common stock 1 12 --
Proceeds from issuance of convertible notes payable -- -- 2,009
Sale of common stock to General Instrument 7,392 -- --
Purchase of treasury stock (1) (55) --
-------- -------- --------
Net cash provided by financing activities 11,106 2,874 6,108
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (4,093) (1,391) 7,489
Cash and cash equivalents at beginning of period 22,706 24,097 16,608
-------- -------- --------
Cash and cash equivalents at end of period $ 18,613 $ 22,706 $ 24,097
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ -- $ 6 $ 28
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
<PAGE> 17
SPYGLASS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Operations
Spyglass, Inc. ("Spyglass" or the "Company ") develops, markets and distributes
Internet client and server technologies designed to be incorporated into a
variety of Internet-based products, including but not limited to wireless
phones, Internet screen phones, televisions, television set-top boxes, office
equipment, network computers and Internet access services. The Company's
technology offerings include Spyglass Device Mosaic, Spyglass Prism, Nokia's WAP
Microbrowser, Spyglass MicroServer, Spyglass Device Mail, Spyglass Thin GUI
Library and SurfWatch products. These technologies are used to bring Internet
functionality to customer's products and services. The Company also offers
Internet consulting and custom engineering services through its professional
services organization.
On November 4, 1999, the Company sold SurfWatch Software, Inc.("Surfwatch") to
JSB Software Technologies, plc ("JSB") for cash and securities in JSB. See Note
14.
On April 16, 1999, the Company acquired Navitel Communications, Inc. ("Navitel")
in a transaction accounted for as a 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 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.
There were no intercompany transactions between the Company and Navitel prior to
the merger and there were no significant accounting reclassifications required
to conform the financial reporting of the two companies. The following
information shows revenue and net income of the separate companies during the
periods preceding the combination (in thousands):
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
MARCH 31, 1999 1998 1997
---------------- ---------------------------------------
<S> <C> <C> <C>
Revenue:
Spyglass $ 10,822 $ 20,494 $ 21,295
Navitel 2,369 675 --
------------------------------------------------------
$ 13,191 $ 21,169 $ 21,295
======== ======== ========
Net income (loss):
Spyglass $ (2,102) (8,016) (9,735)
Navitel 518 (2,016) (4,416)
------------------------------------------------------
$ (1,584) $(10,032) $(14,151)
======== ======== ========
</TABLE>
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
<PAGE> 18
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 subsidiary of the Company, in
which GI holds a 10% minority interest and which GI will have an option to
purchase at fair market value under certain circumstances.
On November 14, 1997, the Company acquired AllPen Software ("AllPen") in a
transaction accounted for as a pooling of interests. AllPen, located in Los
Gatos, California, develops software solutions and technologies and provides
professional services for the information appliance market. 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 $0.03 per share for direct
acquisition related costs consisting primarily of professional fees.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
each of its wholly-owned subsidiaries. The functional currency of the Company's
wholly-owned foreign subsidiaries is the U.S. dollar. 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 presentation. Furthermore, the consolidated financial
statements have been prepared to reflect the retroactive effect of Spyglass'
acquisition of Navitel, consummated in April 1999.
University of Illinois Agreement
The Spyglass Device Mosaic product was initially a commercial derivative version
of NCSA Mosaic(TM). NCSA Mosaic was developed by the National Center for
Supercomputing Applications at the University of Illinois at Urbana-Champaign.
In May 1994, the Company and the University entered into an agreement which was
subsequently amended (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 provided for royalties based on Spyglass'
net revenues from Device Mosaic, and included cumulative minimum quarterly
royalties. The University Agreement had an initial term of five years. In June
1999, the Company and the University amended this Agreement and the Company will
no longer pay royalties for a license to the NCSA Mosaic product and will only
pay the University a minimal royalty associated with the Company's use of the
University's trademark "Mosaic(TM)." The University is no longer restricted from
the commercial licensing of the NCSA Mosaic product.
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
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 U.S.Treasury.
<PAGE> 19
Other Assets
The Company licenses certain technologies 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 $162,000 and
$857,000 of these prepaid royalties are included in prepaid expenses and other
current assets and approximately $4,000 and $118,000 are included in other
assets at September 30, 1999 and 1998, 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") 97-2, Software
Revenue Recognition. Internet technology revenues are generally recognized after
execution of a license agreement and delivery of the product, provided there are
no remaining obligations relating to development, upgrades, new releases, or
other future deliverables, and provided that the license fee is fixed or
determinable, and collection of the fee is probable. For contracts entered into
after October 1, 1998, the Company allocates revenue between the elements of the
arrangements based on the vendor-specific objective evidence of the fair value
of each of the elements. 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.
In December 1998, the American Institute of Certified Public Accountants issued
SOP 98-9, "Modifications of SOP 97-2, Software Revenue Recognition With Respect
to Certain Transactions." SOP 98-9 amends SOP 98-4 to extend the deferral of the
application of some passages provided by SOP 98-4 through fiscal years beginning
on or before March 15, 1999. All provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company believes the adoption of SOP 98-9 will not have a material effect on its
results of operations or financial condition.
Research and Development
Research and development costs are expensed as incurred. During fiscal 1998 and
1997, Navitel received payments from Microsoft of $1,606,000 and $250,000,
respectively, for funding of software development for an Internet screen phone
product. Research and development expense in these years has been recorded net
of these payments.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
$346,000, $758,000, and $386,000 for the years ended September 30, 1999, 1998,
and 1997, respectively.
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.
<PAGE> 20
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. In
years where the company incurs a net loss, the weighted average number of common
shares outstanding, basic and diluted, will be the same. Accordingly, the
weighted average number of common shares outstanding used in the earnings per
share calculations was 16,029,000 shares, 14,543,000 shares and 13,238,000
shares for the fiscal years ended September 30, 1999, 1998, and 1997,
respectively.
Comprehensive Loss
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", as of
December 31, 1998. Under SFAS No. 130, the Company is required to display
comprehensive income (loss) and its components as part of the financial
statements. Other comprehensive income includes changes in equity that are
excluded from net income (loss). Specifically, SFAS No. 130 requires unrealized
holding gains and losses on available-for-sale securities to be included in
accumulated and other comprehensive income. The Company has no material
components of other comprehensive loss and, as a result, the comprehensive loss
is the same as the net loss for all periods presented.
Segment Reporting
Effective October 1, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 changes the way
companies report selected segment information in annual financial statements and
requires companies to report selected segment information in interim financial
reports to stockholders. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company operates solely in one segment, and therefore the adoption of this
statement had no impact on the Company's financial statements.
NOTE 2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of cash equivalents and short-term investments at
amortized cost:
<TABLE>
<CAPTION>
SEPTEMBER 30,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $ 5,269 $16,680
Money market 13,075 5,871
------- -------
Cash equivalents 18,344 22,551
Cash 269 155
------- -------
TOTAL CASH AND CASH EQUIVALENTS $18,613 $22,706
======= =======
Commercial paper $10,735 $ --
------- -------
TOTAL SHORT-TERM INVESTMENTS $10,735 $ --
======= =======
</TABLE>
Since commercial paper is 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 these securities until maturity.
<PAGE> 21
NOTE 3. PROPERTIES AND EQUIPMENT
Properties and equipment and related accumulated depreciation were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
(In thousands) 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment and software $ 6,667 $ 5,650
Furniture, fixtures and office equipment 2,361 2,070
Leasehold improvements and other 1,098 583
------- -------
10,126 8,303
Less: Accumulated depreciation (6,229) (4,415)
------- -------
PROPERTIES AND EQUIPMENT, NET $ 3,897 $ 3,888
======= =======
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE 4. MICROSOFT AGREEMENTS
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.
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 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 Internet screen phone software
applications as developed.
The July 1997 Agreement called for sharing of all licensing revenues received by
either company related to the Internet 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 received as funding for research and
development expenses and netted against research and development expenditures.
In February 1998, Navitel entered into an agreement to perform certain
development services on behalf of Microsoft related to Windows CE and the
Internet 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 90% complete as of September 30,
1998. As such, Navitel recognized $675,000 of revenue from this agreement during
fiscal 1998. The remaining $75,000 was recognized during fiscal 1999.
NOTE 5. INCOME TAXES
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
Foreign 213 121 94
State -- -- --
----- ----- -----
Total current 213 121 94
----- ----- -----
Deferred:
Federal (213) (121) (94)
State -- -- --
----- ----- -----
Total deferred (213) (121) (94)
----- ----- -----
PROVISION FOR INCOME TAXES $ -- $ -- $ --
===== ====== =====
</TABLE>
<PAGE> 22
A reconciliation of income tax expense to the statutory federal income tax rate
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
1999 1998 1997
- ----------------------------------------------------------------------------
<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 % 4.8 %
Valuation allowance (38.8)% (38.8)% (38.8)%
EFFECTIVE TAX RATE 0.0 % 0.0 % 0.0 %
==== ==== ====
</TABLE>
Significant components of the Company's net deferred tax assets were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accounts receivable $ 230 $ 189
Accrued expenses and other liabilities 191 209
Net operating loss carryforwards 15,774 12,157
Research and development tax credit carryforwards 2,440 2,275
Foreign tax credit carryforwards 639 366
Amortization of deferred compensation relating
to issuance of restricted stock -- 184
Alternative minimum tax credit carryforwards 10 10
Other -- 85
-------- --------
Deferred tax assets 19,284 15,475
-------- --------
DEFERRED TAX LIABILITIES:
Depreciation (47) (14)
-------- --------
Deferred tax liabilities (47) (14)
-------- --------
Net deferred tax assets 19,237 15,461
Deferred tax asset valuation allowance (19,237) (15,461)
-------- --------
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.
<PAGE> 23
As of September 30, 1999, the Company had net operating loss carryforwards for
income tax purposes of approximately $40,706,000 which expire in the years
2006-2019. Of this amount, $21,426,000 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 $8,298,000. Of
this tax benefit, $2,669,000 was credited to paid-in capital to offset deferred
tax liabilities. The remaining $5,629,000 is available to offset future deferred
tax liabilities as a credit to paid-in capital.
As of September 30, 1999, the Company had research and development credit
carryforwards of approximately $2,440,000, which are available to offset future
income tax liabilities and expire in the years 2006-2019.
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.
The valuation allowance increased by $3,776,000 and $5,275,000 for the fiscal
years ended September 30, 1999 and 1998, 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
In July 1997, Navitel issued 7,935,571 shares of Series A, B, and C convertible
preferred stock, $.001 par value per share, for $5,509,103. On May 27, 1998,
Navitel issued 1,204,820 shares of Series C convertible preferred stock for
$1,000,000. All convertible preferred stock was converted to shares of Spyglass
common stock on April 16, 1999 in connection with the acquisition of Navitel by
Spyglass, as discussed in Note 1.
NOTE 7. 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, the holders of these common stock purchase
warrants exercised their rights to purchase a combined 233,500 shares of
Navitel's common stock, which were converted to Spyglass common stock in
connection with the Navitel acquisition, as discussed in Note 1.
NOTE 8. STOCK INCENTIVE PLANS
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") which was terminated 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 for a
nominal amount from
<PAGE> 24
the Company under terms which provide for vesting over a period of time and a
right of repurchase in favor of the Company of the unvested portion of the
common stock subject to the award upon the termination of the recipient's
employment or other relationship with the Company. The plans, except for the
1995 Director Option Plan, are administered by the Compensation Committee of the
Board of Directors, which selects the persons to whom stock options and
restricted stock awards are granted and determines the number of shares of
common stock covered by the option or award, its exercise price or purchase
price, its vesting schedule and, in the case of stock options, its expiration
date.
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 $24,000, $112,000 and $312,000 for the years ended September 30,
1999, 1998 and 1997, 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.
As a result of the acquisition of Navitel described in Note 1, the Company
substituted options covering 100,883 shares of Spyglass common stock for options
issued under the Navitel option plan and assumed the rights and obligations of
Navitel with respect to such outstanding options. The terms of the Navitel
option plan required accelerated vesting of up to 50% of the unvested options in
the event of the sale or merger of Navitel with the remaining unvested options
vesting over a period not to exceed one year from the closing date. As of
September 30, 1999, there were options to purchase 72,055 shares outstanding, of
which options for 63,897 shares were exercisable.
1995 STOCK INCENTIVE PLAN
The maximum number of shares of common stock which may be issued pursuant to the
1995 Incentive Plan is 4,250,000 shares, subject to certain anti-dilution
adjustments. Options granted under the 1995 Incentive Plan 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, 1999, options to
purchase approximately 681,000 shares are available for issuance.
The 1995 Incentive Plan further provides for the granting of stock appreciation
rights ("SARs") subject to certain conditions and limitations to holders of
options under the 1995 Incentive Plan. SARs permit optionees to surrender an
exercisable option for any amount equal to the excess of the market price of the
common stock over the option price when the right is exercised. There have been
no SARs issued under this plan.
Furthermore, the 1995 Incentive Plan provides for the granting of 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
293,600 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 granted for a purchase price of $0.01 per share (and had a fair value
range of $5.063 - $13.25 on the date of issue) under this plan as of September
30, 1999. As of September 30, 1999, 67,500 of such shares had been repurchased
by the Company at a price of $.01 per share. Upon issuance of stock under the
plan, unearned compensation equivalent to the excess of the market value at
<PAGE> 25
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 that may be issued is 200,000 shares, subject to certain
anti-dilution adjustments. Each director initially elected to the Board of
Directors, who is not otherwise an employee, 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, 1999, options for 95,000 shares were
outstanding, of which 31,200 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 equal to 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
1999, 1998 and 1997, 47,979 shares, 74,323 shares and 45,396 shares were issued
under the Stock Purchase Plan, respectively. As of September 30, 1999, a total
of 413,901 shares of common stock were reserved for future issuance.
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.
A summary of activity under the plans is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 2,508,540 $ 5.27 2,107,061 $ 5.49 2,128,801 $ 8.40
Granted 1,642,260 10.05 1,922,396 3.95 1,339,488 9.38
Exercised (797,051) 4.02 (883,481) 1.75 (497,882) 1.62
Forfeited (488,945) 7.32 (637,436) 6.76 (863,346) 11.86
--------- --------- ---------
Outstanding, end of year 2,864,804 $ 7.85 2,508,540 $ 5.27 2,107,061 $ 5.49
========= ========= =========
Weighted average remaining contractual life 8.45 8.54 8.81
Options exercisable at year-end 753,697 752,313 633,766
Weighted average fair value of
options granted during the year $ 8.48 $ 4.93 $ 11.75
</TABLE>
<PAGE> 26
A summary of information on stock options outstanding as of September 30, 1999
follows:
<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.08-$4.375 609,086 6.68 $2.7632 352,545 $1.7070
$5.3125-$6.875 581,396 7.99 $6.1006 290,407 $6.2914
$7.00-$9.25 518,941 8.93 $8.6628 72,397 $7.4328
$9.50-$10.6875 480,381 8.93 $9.8228 32,748 $9.9914
$10.875-$11.375 357,500 9.77 $10.9240 5,600 $11.2500
$12.875-$13.25 317,500 9.72 $13.0728 -- --
--------- -------
$0.08-$13.25 2,864,804 8.45 $7.8539 753,697 $4.4540
========= =======
</TABLE>
STOCK BASED COMPENSATION
Pro-forma information, as required by Statement of Financial Accounting
Standards No. 123, is as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
(In thousands, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss as reported $( 1,897) $( 10,032) $( 14,151)
========== ========== ==========
Pro forma net loss $( 4,707) $( 13,864) $( 18,933)
========== ========== ==========
Net loss per share as reported $( 0.12) $( 0.69) $( 1.07)
========== ========== ==========
Pro forma net loss per share $( 0.29) $( 0.95) $( 1.43)
========== ========== ==========
</TABLE>
In determining the fair value of the options, Spyglass used the Black-Scholes
model and assumed a risk free interest rate of 5.78%, 4.23%, and 6.0% and an
expected stock price volatility of 99.8%, 90.0%, and 70.2% for 1999, 1998,
<PAGE> 27
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 and
1997: no dividend yield or volatility; risk free interest rate of 4.23%, 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 9. 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' 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.
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' outstanding common stock and Directors were excluded from the Exchange
Program. Stock option disclosures in Note 8 have been adjusted to reflect
options for approximately 235,000 shares which were forfeited as a result of the
Exchange Program.
NOTE 10. 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,
subject to an annual limit. The Company, at the discretion of the Board of
Directors, may make contributions to the Plan. Spyglass contributed $269,500,
$273,200 and $269,000 to the Plan in fiscal 1999, 1998 and 1997, respectively.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under non-cancelable operating lease
agreements and has sublease agreements expiring at various dates through fiscal
2005. At September 30, 1999, approximate future minimum lease commitments and
receipts under these leases and subleases were as follows:
<PAGE> 28
<TABLE>
<CAPTION>
Minimum Lease Sublease Receipts
(In thousands) Commitments
------------- -----------------
<S> <C> <C>
2000 $2,522 $455
2001 2,494 455
2002 2,446 228
2003 2,304 -
2004 2,105 -
2005 727 -
</TABLE>
- --------------------------------------------------------------------------------
Total rent expense under non-cancelable operating leases was approximately
$1,565,000, $1,633,000 and $1,429,000 for the years ended September 30, 1999,
1998 and 1997, respectively, net of sublease amounts of $703,000, $243,000 and
$31,000, respectively.
NOTE 12: SIGNIFICANT CUSTOMERS AND EXPORT REVENUES
Sales to a significant customer represented 22.4% and 39.5% of total net
revenues in fiscal 1999 and 1997, respectively. Sales to another significant
customer represented 11.6% of total net revenues in fiscal 1999. Sales to a
third significant customer represented 14.5% of total net revenues in fiscal
1998. Significant accounts receivable balances representing 46.7% of net
accounts receivable were attributable to three customers at the end of fiscal
1999. At the end of fiscal 1998, 38.6% of net accounts receivable were
attributable to three customers. Significant unbilled accounts receivable
balances representing 54.2% of total unbilled accounts receivable were
attributable to two customers at the end of fiscal 1999. At the end of fiscal
1998, 84.0% of total unbilled accounts receivable were attributable to four
customers.
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 areas were as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Japan $ 3,064 $ 1,488 $ 583
Other International 2,879 899 1,113
--------------------------------------------
Total net export revenues $ 5,943 $ 2,387 $ 1,696
============================================
</TABLE>
NOTE 13. 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 information appliance 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.
<PAGE> 29
NOTE 14. SUBSEQUENT EVENTS
On September 20, 1999 the Company signed a definitive agreement to sell
Surfwatch Software Inc. to JSB. This transaction was completed on November 4,
1999, at which time Spyglass received consideration of $17 million cash and
800,000 shares of JSB (EASDAQ: JSBS) valued at $12 million on the date of the
transaction. This transaction resulted in a pre-tax gain of approximately $27
million.
In the first quarter of the fiscal year ending September 30, 2000 the Company
recorded a non-recurring restructuring charge consisting primarily of severance
and related personnel costs associated with the organizational realignment of
the Company's professional services group. This realignment was completed in
November 1999 and resulted in a restructuring charge of approximately $860,000.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Spyglass, Inc.
We have audited the consolidated balance sheets of Spyglass Inc. and
subsidiaries as of September 30, 1999 and 1998, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
each of the three years in the period ended September 30, 1999. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Spyglass, Inc. and
subsidiaries at September 30, 1999 and 1998, and the consolidated results of
their operations and their cash flows for the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.
Ernst and Young LLP
Chicago, Illinois
October 19, 1999,
except for Note 14,
as to which the date is November 4, 1999
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant Jurisdiction of Incorporation
- ------------------------------ -----------------------------
Spyglass International, Inc. Delaware
Stonehand Inc. Massachusetts
OS Technologies Corporation Massachusetts
Spyglass Europe Ltd. United Kingdom
AllPen Software, Inc. California
Spyglass DSIC, Inc. Delaware
Navitel Communications, Inc. California
<PAGE> 1
EXHIBIT 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Spyglass, Inc. of our report dated October 19, 1999, except for Note 14 as to
which the date is November 4, 1999, included in the 1999 Annual Report to
Stockholders of Spyglass, Inc.
Our audits also included the financial statement schedule of Spyglass, Inc.
listed in Item 14(a). These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
on Form S-3 (File Nos. 333-06943, 333-08255, 333-08253, 333-14643, 333-42511,
and 333-83211) and on Form S-8 (File Nos. 33-95164, 33-95160, 33-95162,
33-95158, 333-2312, 333-04357, 333-40831, 333-47121, and 333-82351) of Spyglass,
Inc. of our report dated October 19, 1999, except for Note 15 as to which the
date is November 4, 1999, with respect to the financial statements incorporated
herein by reference, and our report included in the preceding paragraph with
respect to the financial statement schedule included in this Annual Report (Form
10-K) of Spyglass, Inc.
/s/ Ernst & Young LLP
Chicago, Illinois
December 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 18,613
<SECURITIES> 0
<RECEIVABLES> 9,225
<ALLOWANCES> 494
<INVENTORY> 0
<CURRENT-ASSETS> 41,398
<PP&E> 10,126
<DEPRECIATION> 6,229
<TOTAL-ASSETS> 45,773
<CURRENT-LIABILITIES> 6,199
<BONDS> 0
0
0
<COMMON> 165
<OTHER-SE> 39,083
<TOTAL-LIABILITY-AND-EQUITY> 45,773
<SALES> 29,610
<TOTAL-REVENUES> 29,610
<CGS> 1,220
<TOTAL-COSTS> 10,129
<OTHER-EXPENSES> 22,760
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,897)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,897)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,897)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
