<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _________ to _____________
Commission file number 0-26074
SPYGLASS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 37-1258139
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1240 E. Diehl Road, 4th Floor, Naperville, IL 60563 (630) 505-1010
------------------------------------------------------------------
(Address of principal executive offices, zip code, registrant's telephone
number, including area code)
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 8, 2000
- --------------------------------------- --------------------------
Common Stock (par value $.01 per share) 17,402,567
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SPYGLASS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Statements of Operations
Three Months Ended March 31, 2000 and 1999
Six Months Ended March 31, 2000 and 1999 3
Consolidated Balance Sheets
March 31, 2000 and September 30, 1999 4
Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended March 31, 2000 5
Consolidated Statements of Cash Flows
Six Months Ended March 31, 2000 and 1999 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
2
<PAGE> 3
SPYGLASS, INC.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
(In thousands, except per share amounts) 2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues:
Internet technology $ 3,326 $ 4,252 $ 6,637 $ 6,117
Service 5,754 3,167 10,656 7,074
---------- ---------- ---------- ----------
Total net revenues 9,080 7,419 17,293 13,191
Cost of revenues:
Internet technology 135 460 414 771
Service 3,799 1,979 7,117 3,877
---------- ---------- ---------- ----------
Total cost of revenues 3,934 2,439 7,531 4,648
---------- ---------- ---------- ----------
Gross profit 5,146 4,980 9,762 8,543
Operating expenses and other:
Sales and marketing 2,143 2,131 4,278 4,305
Research and development 1,290 1,824 2,872 3,645
General and administrative 1,681 1,285 3,776 2,863
Restructuring & other one-time charges 300 -- 1,159 --
---------- ---------- ---------- ----------
Total operating expenses and other 5,414 5,240 12,085 10,813
---------- ---------- ---------- ----------
Loss from operations (268) (260) (2,323) (2,270)
Gain on sale of Surfwatch -- -- 27,380 --
Gain on sale of JSB marketable securities 26,784 -- 26,784 --
Other income, net 908 369 1,436 686
---------- ---------- ---------- ----------
Income (loss) before income taxes 27,424 109 53,277 (1,584)
Income tax provision 12,811 -- 13,852 --
---------- ---------- ---------- ----------
Net Income (loss) $ 14,613 $ 109 $ 39,425 $ (1,584)
========== ========== ========== ==========
Net income (loss) per common share - basic $ 0.86 $ 0.01 $ 2.35 $ (0.10)
Net income (loss) per common share - diluted $ 0.74 $ 0.01 $ 2.05 $ (0.10)
Weighted average number of common
shares outstanding - basic 16,921 16,049 16,759 15,830
========== ========== ========== ==========
Weighted average number of common
shares outstanding - diluted 19,818 17,403 19,245 15,830
========== ========== ========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
3
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SPYGLASS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
MARCH 31, SEPTEMBER 30,
(In thousands, except share amounts) 2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 65,224 $ 18,613
Short-term investments 16,645 10,735
Marketable securities - JSB 25,067 --
Accounts receivable, net of allowance for
doubtful accounts of $489 and $494, respectively 5,107 8,731
Unbilled accounts receivable 1,779 899
Prepaid expenses and other current assets 2,300 2,420
--------- ---------
Total current assets 116,122 41,398
Properties and equipment, net 4,404 3,897
Investment in restricted securities - JSB 4,000 --
Other assets 447 478
--------- ---------
TOTAL ASSETS $ 124,973 $ 45,773
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,663 $ 2,396
Royalties payable 299 397
Deferred revenues 1,664 1,477
Income taxes payable 114 --
Deferred income taxes 8,216 --
Accrued compensation and related benefits 1,773 1,680
Accrued expenses and other liabilities 1,016 249
--------- ---------
Total current liabilities 15,745 6,199
Long-term deferred revenues 110 326
--------- ---------
Total liabilities 15,855 6,525
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value, 50,000,000 shares authorized,
17,215,171 and 16,581,731 shares issued and 17,205,273
and 16,504,517 shares outstanding, respectively 171 165
Additional paid-in capital 80,246 62,221
Retained earnings (deficit) 17,231 (22,194)
Accumulated other comprehensive income 12,851 --
Treasury stock at cost, 9,898 and 77,214 shares, respectively (55) (56)
Unamortized value of restricted stock issued (1,326) (888)
--------- ---------
Total stockholders' equity 109,118 39,248
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 124,973 $ 45,773
========= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
4
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SPYGLASS, INC.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS/
------------------------- PAID-IN (ACCUMULATED
(In thousands, except share amounts) SHARES AMOUNT CAPITAL DEFICIT)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1999 16,581,731 $ 165 $ 62,221 $ (22,194)
Exercise of stock options 622,940 6 4,500
Issuance of restricted stock 10,500 -- 840
Amortization of deferred compensation
relating to issuance of restricted stock
Unrealized gain on equity securities
Tax benefit from exercise of stock options 12,685
Purchase of treasury stock --
Net Income 39,425
---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 2000 17,215,171 $ 171 $ 80,246 $ 17,231
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
TREASURY ACCUMULATED UNAMORTIZED
COMMON STOCK OTHER VALUE OF
------------------------- COMPREHENSIVE RESTRICTED
(In thousands, except share amounts) SHARES AMOUNT INCOME STOCK ISSUED
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1999 77,214 $ (56) $ -- $ (888)
Exercise of stock options
Issuance of restricted stock (67,500) 1 (841)
Amortization of deferred compensation
relating to issuance of restricted stock 403
Unrealized gain on equity securities 12,851
Tax benefit from exercise of stock options
Purchase of treasury stock 184 --
Net Income
---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 2000 9,898 $ (55) $ 12,851 $ (1,326)
========== ========== ========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
5
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SPYGLASS, INC.
Consolidated Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
(In thousands) 2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 39,425 $ (1,584)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 920 993
Amortization 164 296
Gain on sale of Surfwatch subsidiary (27,380) --
Gain on sale of marketable securities - JSB (26,784) --
Tax benefit from exercise of stock options 12,685
Loss on disposal of fixed assets 5 12
Amortization of deferred compensation related
to issuance of restricted stock 403 82
Bad debt provision 197 182
Changes in operating assets and liabilities:
Accounts and long-term receivables 2,142 (2,574)
Unbilled accounts receivable (880) (293)
Prepaid expenses, other current assets and other assets (88) (664)
Accounts payable 369 (339)
Royalties payable (98) 36
Deferred revenues 546 1,043
Accrued compensation and related benefits 278 (194)
Income taxes payable 114 --
Accrued expenses and other liabilities (175) (115)
---------- ----------
Net cash provided by (used in) operating activities 1,843 (3,119)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities - JSB 30,784 --
Proceeds from sale of Surfwatch subsidiary 17,000 --
Short-term investments, net activity (5,910) --
Net proceeds from sale of fixed assets 5 9
Capital expenditures (1,617) (401)
---------- ----------
Net cash provided by (used in) investing activities 40,262 (392)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock to General Instrument -- 7,392
Proceeds from exercise of stock options 4,506 2,201
---------- ----------
Net cash provided by financing activities 4,506 9,593
---------- ----------
Net increase in cash and cash equivalents 46,611 6,082
Cash and cash equivalents at beginning of period 18,613 22,706
---------- ----------
Cash and cash equivalents at end of period $ 65,224 $ 28,788
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 1,000 $ --
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
6
<PAGE> 7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company in
accordance with generally accepted accounting principles, although certain
information and footnote disclosures normally included in the Company's audited
annual financial statements have been condensed or omitted. In the opinion of
management, the accompanying unaudited financial statements include all
adjustments (consisting only of normal recurring items) necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows at the dates and for the periods indicated. It is suggested that these
interim financial statements be read in conjunction with the audited financial
statements for the fiscal years ended September 30, 1999, 1998 and 1997 which
are included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1999.
The results of operations for the three months and six months ended March 31,
2000 are not necessarily indicative of the results of operations to be expected
for the full fiscal year.
NOTE 2. PER SHARE INFORMATION
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.
The table below reconciles the number of shares utilized in the earnings per
share calculations for the three and six months ended March 31, 2000, and 1999,
respectively.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
March 31, March 31,
(In thousands) 2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding - basic 16,921 16,049 16,759 15,830
Effect of dilutive securities, stock warrants 539 -- 395 --
Effect of dilutive securities, stock options 2,358 1,354 2,091 --
---------- ---------- ---------- ----------
Weighted average number of common shares
outstanding - diluted 19,818 17,403 19,245 15,830
========== ========== ========== ==========
</TABLE>
7
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NOTE 3. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income, net of taxes, for the three and six month periods
ended March 31, 2000, totaled $27,464,000 and $52,276,000, respectively,
compared to a comprehensive income of $109,000 and a comprehensive loss of
$1,584,000 in the corresponding prior periods, respectively. The components of
comprehensive income (loss) for the three and six months ended March 31, 2000
and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(In thousands) MARCH 31, MARCH 31,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ 14,613 $ 109 $ 39,425 $ (1,584)
Unrealized gains on securities, net of tax 12,851 -- 12,851 --
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 27,464 $ 109 $ 52,276 $ (1,584)
========== ========== ========== ==========
</TABLE>
Accumulated other comprehensive income at March 31, 2000 and September 30, 1999,
which consisted of unrealized gain on securities, were $12,851,000 and $0,
respectively.
NOTE 4. DEFERRED COMPENSATION PLAN
Effective November 1, 1999 the Company instituted a nonqualified, unfunded
deferred compensation plan which permits officers and highly compensated
employees to elect to defer receipt of up to 75% of their annual salary and up
to 100% of their bonus and/or commission. Effective January 1, 2000, the Company
began to provide a matching contribution of $.50 for each dollar deferred up to
an annual per participant maximum of $10,000. Participants are 100% vested in
their deferral account and vest in the Company's matching account based on the
number of years in which they have participated in the plan. Acceleration to
100% of the Company's matching account may occur under certain circumstances
such as retirement, disability, death, or a change in control, as defined in the
plan. Gains or losses are posted to a participant's account in accordance with
their selection of certain measurement funds specified in the plan.
The accompanying consolidated balance sheet for March 31, 2000 includes the
deferred compensation and Company's matching liability, including investment
earnings thereon, that are owed to the participants. The accompanying
consolidated balance sheet for March 31, 2000 also includes investments held in
a newly established deferred compensation trust. The Company believes that its
funding of this trust is adequate to provide, on a present value basis, for its
respective future liabilities created with respect to the combined projected
deferral amounts through December 31, 2000. These investments remain assets of
the Company and are available to general creditors of the Company in the event
of the Company's insolvency.
8
<PAGE> 9
NOTE 5. JSB SOFTWARE TECHNOLOGIES, PLC
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"). 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 $27.4 million.
Additionally, as a result of this transaction, $25 million of the Company's net
operating loss carryforwards was utilized to offset most of the related tax
liability.
During the quarter ended March 31, 2000 the Company sold one-third of
the shares received from JSB. Before taxes, the sale of JSB shares generated
cash proceeds to the Company of approximately $31 million and resulted in a
pre-tax gain of approximately $26.8 million. As of March 31, 2000, the Company
continues to hold shares representing approximately 6 percent of the outstanding
equity of JSB. The remaining JSB shares held by the Company had a market value
in excess of $50 million on March 31, 2000 and a cost basis of $8 million.
NOTE 6. RESTRUCTURING CHARGE
In the first quarter of fiscal 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 $859,000 in the three months ended
December 31, 1999. Approximately $170,000 of this restructuring charge was
included in accrued expenses and other liabilities at March 31, 2000.
NOTE 7. MERGER WITH OPENTV CORP.
On March 26, 2000 the Company entered into an agreement with OpenTV Corp., a
British Virgin Islands corporation ("OpenTV"), under which the Company agreed to
merge with a wholly-owned subsidiary of OpenTV. As a result of the merger, the
Company will become a wholly-owned subsidiary of OpenTV. This merger
transaction, in which the stockholders of the Company will receive 0.7236 of an
OpenTV Class A Ordinary Share in exchange for each share of common stock held by
them, is expected to be accounted for as a purchase and is expected to close
during the quarter ending September 30, 2000, subject to various conditions,
including customary regulatory approvals and approval by the stockholders of
OpenTV and the stockholders of the Company. During the quarter ended March 31,
2000 the Company recorded a non-recurring charge of $300,000 consisting
primarily of legal and consulting fees incurred in connection with the
anticipated merger with OpenTV. The entire $300,000 of this non-recurring charge
was included in accrued expenses and other liabilities at March 31, 2000.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Spyglass, Inc. ("Spyglass" or the "Company") was organized as an
Illinois corporation in February 1990 and reincorporated in Delaware in May
1995. Spyglass entered the Internet market during fiscal 1994 and, from fiscal
1994 through fiscal 1996, focused its efforts on developing, marketing and
distributing Internet client and server technologies for incorporation into a
variety of Internet-based 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 help 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, Internet screen phones, wireless
phones, navigation devices, office equipment, medical devices and industrial
controls.
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 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 $27.4 million. Spyglass will continue
to sell SurfWatch products in the ITV market under a reseller agreement with JSB
but will no longer market those products to other content filtering markets
including education, corporate and home markets. Spyglass has also retained
ownership of a patent received from the U.S. Patent Office for its core
filtering technology and processes and has licensed the patent to JSB.
During the quarter ended March 31, 2000 the Company sold one-third of
the shares received from JSB in connection with the SurfWatch transaction.
Before taxes, the sale of JSB shares generated cash proceeds to the Company of
approximately $31 million and resulted in a pre-tax gain of approximately $26.8
million. As of March 31, 2000 the Company continues to hold shares of JSB
representing approximately 6 percent of the outstanding equity of JSB. The
remaining JSB shares held by the Company had a market value in excess of $50
million on March 31, 2000 and a cost basis of $8 million.
10
<PAGE> 11
In the first quarter of fiscal 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 $859,000 in the three months ended
December 31, 1999. Approximately $170,000 of this restructuring charge was
included in accrued expenses and other liabilities at March 31, 2000.
On March 26, 2000 the Company entered into an agreement with OpenTV
Corp., a British Virgin Islands corporation ("OpenTV"), under which the Company
agreed to merge with a wholly-owned subsidiary of OpenTV. As a result of the
merger, the Company will become a wholly-owned subsidiary of OpenTV. This merger
transaction, in which the stockholders of the Company will receive 0.7236 of an
OpenTV Class A Ordinary Share in exchange for each share of common stock held by
them, is expected to be accounted for as a purchase and is expected to close
during the quarter ending September 30, 2000, subject to various conditions,
including customary regulatory approvals and approval by the stockholders of
OpenTV and the stockholders of the Company. During the quarter ended March 31,
2000 the Company recorded a non-recurring charge of $300,000 consisting
primarily of legal and consulting fees incurred in connection with the
anticipated merger with OpenTV. The entire $300,000 of this non-recurring charge
was included in accrued expenses and other liabilities at March 31, 2000.
Management believes that its results of operations, without giving
effect to these one-time events, present a more accurate presentation of the
Company's ongoing business. Accordingly, the following analyses for the three
and six months ended March 31, 2000, including amounts and percentages, exclude
the approximately $26.8 million gain from the sale of JSB stock and the related
income tax provisions of $12.5 million, the $27.4 million gain from the sale of
SurfWatch and the related state and alternative minimum tax provisions of
$988,000, as well as the $300,000 non-recurring charge related to the merger
with OpenTV and the $859,000 restructuring charge.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 COMPARED WITH QUARTER ENDED MARCH 31, 1999
Internet technology revenues for the quarter ended March 31, 2000
decreased $926,000 or 22%, to $3,326,000 from $4,252,000 for the quarter ended
March 31, 1999. Excluding $1,302,000 of prior year second fiscal quarter revenue
associated with SurfWatch Software, a subsidiary sold by Spyglass in November
1999, Internet technology revenues increased $376,000 or 13% in the quarter
ended March 31, 2000 as compared to the quarter ended March 31, 1999. This
increase was due to an increase in the dollar value of licensing contracts
signed during the quarter, primarily strong licensing revenue from Spyglass
Device Mosaic. Management expects fiscal 2000 Internet technology revenues to
exceed fiscal 1999 Internet technology revenues excluding SurfWatch revenues,
but also expects that the Company will continue to experience quarter to quarter
variances due its reliance on the execution of a relatively limited number of
11
<PAGE> 12
large licensing agreements, and the associated uncertainty of the sales cycle
related to those transactions. As a result, if one or more of these significant
license agreements do not close within any quarter, the Company's revenue and
earnings for that quarter would be adversely affected.
Service revenues for the quarter ended March 31, 2000, which include
both professional services revenues and revenues from customer support
agreements, increased $2,587,000 or 82%, to $5,754,000 from $3,167,000 for the
quarter ended March 31, 1999. This increase was primarily due to revenues
generated in the quarter ended March 31, 2000 from the Company's Solution Center
in Lexington, Massachusetts. This Solution Center provides services to Motorola
Broadband Communications Sector (formerly General Instrument Corp.) with
dedicated resources in a facility that was established in the first fiscal
quarter of the prior fiscal year. Because this Solution Center was established
in the first fiscal quarter of the prior fiscal year, it generated only minimal
revenue during the second quarter of fiscal 1999 as compared to the second
quarter of fiscal 2000. The Company expects quarterly professional services
revenues to increase in absolute dollars, and as a percentage of total net
revenues, during the remainder of fiscal 2000 when compared to corresponding
periods in the prior fiscal year.
Gross profit as a percentage of total net revenues was 57% for the
quarter ended March 31, 2000 compared to 67% for the quarter ended March 31,
1999. This reduction was primarily a result of higher service revenues as a
percentage of total net revenues, and a decline in gross margin from services
from 38% in the second quarter of fiscal 1999 to 34% in the second quarter of
the current fiscal year. The decline in service revenue gross margin was
associated with a change in the staffing of the Spyglass Professional Services
organization. Beginning with fiscal 2000, the Company has organized a dedicated
professional service group, and all costs associated with that group are
reflected in cost of services revenue. In the prior fiscal year, exclusive of
Solution Center employees, all engineers were treated as research and
development staff, and only the cost of their time spent on customer engagements
was reclassified to cost of services revenue. As a result, time spent on
activities such as training, meetings and other administrative functions were
reflected in research and development. Technology revenue gross margin improved
to 95% in the current quarter from 89% in the corresponding prior year period,
as a result of a reduction in royalty costs associated with third-party
software. This improvement partially offset the decline in service revenue
margins.
Gross profit, as a percentage of total net revenues, is expected to be
lower for the remainder of fiscal 2000 than in fiscal 1999 as service revenues,
which typically have lower gross margins than technology revenues, will continue
to compose a higher percentage of total revenues. This trend, however, could
fluctuate from quarter to quarter as the quantity and value of signed technology
license agreements may vary.
Sales and marketing expenses for the quarters ended March 31, 2000 and
March 31, 1999 were virtually the same in absolute dollars, but decreased as a
percentage of total net revenues to 24% from 29%. An increase in marketing
program expenses due to the initiation of a new advertising campaign in the
second quarter 2000 and an increase in travel expenses were offset primarily by
a reduction in payroll expenses and marketing programs as a result of the sale
of
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SurfWatch. Sales and marketing expenses for the remainder of fiscal 2000 are
expected to increase slightly as a result of the hiring of new sales personnel
and the launch of new advertising and public relations campaigns related to the
Company's increased focus on the ITV and MD markets
Research and development expenses for the quarter ended March 31, 2000,
decreased $534,000 or 29%, to $1,290,000 from $1,824,000 for the quarter ended
March 31, 1999, and decreased as a percentage of total net revenues to 14% from
25%. This decrease primarily was due to a shift of costs related to the creation
of a dedicated professional services staff in fiscal 2000, as discussed above,
and the reduction in payroll expenses due to reduced research and development
staffing resulting from the sale of SurfWatch. The Company anticipates that its
direct investment in research and development will remain constant or increase
slightly in absolute dollars during the remainder of fiscal 2000 as compared to
the quarter ended March 31, 2000. The Company believes that the planned level of
investment, when combined with its retained ownership of the engineering
developments of its professional service engineers, will provide sufficient
funding of its research and development activities for the remainder of fiscal
2000.
General and administrative expenses for the quarter ended March 31,
2000 increased $396,000, or 31%, to $1,681,000 from $1,285,000 for the quarter
ended March 31, 1999 and increased as a percentage of total net revenues to 19%
from 17%. The increase in absolute dollars is due to an increase in legal and
consultant expenses of $200,000 due to patent litigation and other legal
services, an increase in facility expenses of $116,000 related primarily to a
one-time rent abatement in the prior year and an increase in compensation and
related employee expenses of $66,000. The increase in compensation and related
employee expenses is due primarily to an increase in restricted stock
compensation expenses partially offset by a decrease in salary expenses due in
part to the sale of Surfwatch. The Company expects general and administrative
expenses to decline slightly for the remaining quarters in fiscal 2000, as
compared to the quarter ended March 31, 2000, in part due to an anticipated
reduction in the need for outside legal services.
During the quarter ended March 31, 2000 the Company recorded a
non-recurring charge of $300,000 consisting primarily of legal and consulting
fees incurred in connection with the anticipated merger with OpenTV.
The Company recorded an income tax provision for the quarter ended
March 31, 2000 based on an estimated annualized effective tax rate of 26%. No
income tax provision for the quarter ended March 31, 1999 was recorded due to
the utilization of loss carryforwards.
SIX MONTHS ENDED MARCH 31, 2000 COMPARED WITH SIX MONTHS ENDED MARCH 31, 1999
Internet technology revenues for the six months ended March 31, 2000
increased $520,000 or 9%, to $6,637,000 compared to $6,117,000 for the six
months ended March 31, 1999. Excluding a decline of $1,619,000 in SurfWatch
revenues, a subsidiary sold by Spyglass
13
<PAGE> 14
in November 1999, Internet Technology revenues increased $2,139,000 or 52% in
the six month period ended March 31, 2000 over the comparable prior year period.
This increase was due primarily to an increase in the dollar value of licensing
contracts signed during the current year.
Service revenues for the six months ended March 31, 2000 increased
$3,582,000, or 51%, to $10,656,000 compared to $7,074,000 for the six months
ended March 31, 1999. This increase was primarily due to revenues generated in
the six months ended March 31, 2000 from the Company's Solution Center in
Lexington, Massachusetts servicing Motorola Broadband Communications Sector
(formerly General Instrument Corp) which generated only minimal revenue during
the corresponding prior period.
Gross profit as a percentage of revenues was 56% for the six months
ended March 31, 2000 compared to 65% for the six months ended March 31, 1999 due
to a higher mix of service revenues and a decline in service revenue gross
margin. Gross margins on service revenue decreased to 33% for the six months
ended March 31, 2000 from 45% for the six months ended March 31, 1998. The
decline in service revenue gross margin was associated with a change in the
staffing of the Spyglass Professional Services organization. Beginning with
fiscal 2000, the Company has organized a dedicated professional service group,
and all costs associated with that group are reflected in cost of service
revenue. In the prior fiscal year, exclusive of Solution Center employees, all
engineers were treated as research and development staff, and only the cost of
their time spent on customer engagements was reclassified to cost of services
revenue. As a result, time spent on activities such as training, meetings and
other administrative functions were reflected in research and development. The
decline in service revenue gross margin was offset, in part, by higher gross
margins realized on Internet technology revenue due to a reduction in royalty
costs associated with third-party software.
Sales and marketing expenses for the six months ended March 31, 2000
and March 31, 1999 were virtually the same in absolute dollars, but decreased as
a percentage of total net revenues to 25% from 33% in those periods. An increase
in sales commissions due to higher revenues and an increase in travel expenses
were offset primarily by decreases in payroll expenses and marketing programs as
a result of the sale of SurfWatch.
Research and development expenses for the six months ended March 31,
2000 decreased $773,000, or 21%, to $2,872,000 from $3,645,000 for the six
months ended March 31, 1999 and decreased as a percentage of total net revenues
to 17% from 28%. The decrease was due primarily to the shift in costs from
research and development to cost of professional service revenues related to the
creation of a dedicated professional services group discussed above, and the
reduction in payroll expenses due to lower research and development staffing
resulting from the sale of SurfWatch.
General and administrative expenses for the six months ended March 31,
2000 increased $913,000, or 32%, to $3,776,000 from $2,863,000 for the six
months ended March 31, 1999 and remained a constant 22% of total net revenues.
The increase in absolute dollars was due to an increase in legal and consultant
expenses of $622,000 due to patent litigation and other legal
14
<PAGE> 15
services, an increase in facility expenses of $164,000 related primarily to a
one-time rent abatement in the prior year, and an increase in compensation and
related employee expenses of $144,000. The increase in compensation and related
employee expenses was due primarily to an increase in restricted stock
compensation expenses partially offset by a decrease in salary expenses due in
part to the sale of Surfwatch.
During the six months ended March 31, 2000 the Company recorded a
non-recurring charge of $300,000 consisting primarily of legal and consulting
fees incurred in connection with the anticipated merger with OpenTV, and a
non-recurring restructuring charge of $859,000 consisting primarily of severance
and related personnel costs associated with the organizational realignment of
the Company's professional services group.
The Company recorded an income tax provision for the six months ended
March 31, 2000 based on an annualized effective tax rate of 26%. No tax benefit
was recorded for the six months ended March 31, 1999. The Company believed that
it was appropriate to defer recognition of potential tax benefits until such
time when its return to profitability provided assurances that these tax
benefits would be realized.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had no debt and had cash, cash
equivalents, and short-term investments of $81,869,000, and working capital of
nearly $100,377,000. The Company's operating activities provided cash of
$1,843,000 and used cash of $3,119,000 for the six months ended March 31, 2000
and March 31, 1999, respectively.
In February 2000, the Company received $30,784,000 in cash from the
sale of JSB marketable securities. In November 1999, the Company received
$17,000,000 in cash from the sale of SurfWatch Software, Inc. to JSB.
The Company's accounts receivable and unbilled accounts receivable
balance decreased to $6,886,000 at March 31, 2000 from $9,630,000 at September
30, 1999. This decrease was primarily due to shorter payment terms on contracts
entered into during the quarter ended March 31, 2000 as compared to the quarter
ended September 30, 1999.
The Company's capital expenditures totaled $1,617,000 and $401,000 for
the six months ended March 31, 2000 and 1999, respectively. The increase was due
primarily to expenditures related to the Company's new Menlo Park Solution
Center, continued build-out of the Lexington Solution Center, workstations for
new employees and upgrades to the Company's corporate infrastructure and
development networks. The Company does not currently have any material capital
expenditure commitments for the remainder of fiscal 2000.
The Company believes that its current cash and cash equivalents,
together with funds expected to be generated from operations, will be sufficient
to finance the Company's operations through at least the twelve-month period
ending March 31, 2001.
15
<PAGE> 16
FACTORS AFFECTING OPERATING RESULTS
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements. Any statements contained herein (including without limitation
statements to the effect that the Company or its management "believes",
"expects", "anticipates", "plans" and similar expressions) that relate to future
events or conditions should be considered forward-looking statements. There are
a number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below.
SPYGLASS HAS FOCUSED ON A TARGET MARKET THAT IS RELATIVELY NEW AND UNDEVELOPED
AND MAY NOT BE SUCCESSFUL IN PENETRATING THIS MARKET.
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.
SPYGLASS' QUARTERLY REVENUES AND OPERATING RESULTS ARE NOT INDICATIVE OF FUTURE
PERFORMANCE AND ARE DIFFICULT TO FORECAST.
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 typically 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 service
agreements with customers to recognize revenue based 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.
SPYGLASS' QUARTERLY REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY
DUE TO ITS LENGTHY SALES CYCLE.
The purchase of Spyglass' products and services involves significant
commitment of capital and other resources by its customers. Spyglass may need to
educate potential customers
16
<PAGE> 17
on the use and benefits of its products and services. Spyglass customers often
spend a substantial time performing internal reviews and obtaining expenditure
approvals as well as time spent considering a wide range of issues before
committing to purchase products and services from Spyglass. As a result of these
and other factors, Spyglass' sales cycle varies significantly between customers
and often extends between six and twelve months, or longer. Because of the
length of the sales cycle with many of its customers, Spyglass has a limited
ability to accurately forecast the timing and amount of specific sales. Any
delay in anticipated sales of its products and services can cause Spyglass'
quarterly revenues and operating results to fluctuate significantly.
SPYGLASS DERIVES A SIGNIFICANT PERCENTAGE OF ITS REVENUE FROM A LIMITED NUMBER
OF CUSTOMERS, AND THE LOSS OF ANY SIGNIFICANT CUSTOMER COULD HAVE AN ADVERSE
EFFECT ON ITS OPERATING RESULTS.
Spyglass derived approximately 68% of its revenue during the quarter
ended March 31, 2000 from three customers. In addition, Spyglass derived
approximately 22% and 40% of its revenues for the fiscal years ended September
30, 1999 and September 30, 1997, respectively from Microsoft. Spyglass derived
approximately 12% of its revenues for the fiscal year ended September 30, 1999
from Motorola Broadband Communications Sector (formerly General Instrument) and
Spyglass derived approximately 15% of its revenues for the fiscal year ended
September 30, 1998 from Motorola Corporation. As the information appliance
market develops, Spyglass expects to continue to derive a significant portion of
its revenues from a relatively limited number of customers. Although Spyglass
expects that its reliance on any particular customer will decline as the
information appliance market develops and its customer base expands, the failure
of Spyglass to enter into a sufficient number of licensing agreements or sustain
revenues from major customers during a particular period could have an adverse
effect on Spyglass' future operating results.
BECAUSE THE INFORMATION APPLIANCE MARKET IS NEWLY EMERGING, THE POTENTIAL SIZE
OF THIS NEW MARKET OPPORTUNITY AND THE TIMING OF ITS DEVELOPMENT ARE UNCERTAIN.
Because the information appliance market is newly emerging, the
potential size of this new market opportunity and the timing of its development
are uncertain. In addition, the information appliance market is characterized by
rapidly changing technology, evolving industry standards and customer demands,
and frequent product introductions and enhancements, which make it difficult to
predict whether the initial commercial acceptance of Spyglass' solutions can be
sustained over a period of time. Spyglass' future operating results are largely
dependent upon the commercialization and broad acceptance by consumers and
businesses of a wide variety of information appliances including, among others,
television set-top boxes, televisions, gaming devices, wireless smart phones,
navigation devices, Internet screen phones and Web terminals.
Broad acceptance of all information appliances will depend on many
factors such as the willingness of large numbers of consumers to use devices
other than personal computers to access the Internet; the development of content
and applications for information appliances; and the continued emergence of
industry standards that facilitate the distribution of content over the Internet
to information appliances. If the market for information appliances does not
develop or develops more slowly than anticipated, Spyglass' revenues may not
grow as anticipated.
17
<PAGE> 18
THE MARKET FOR SPYGLASS' PRODUCTS AND SERVICES IS SUBJECT TO EXTREME
COMPETITION, WHICH COULD ADVERSELY AFFECT SPYGLASS' BUSINESS.
The market for Internet technologies and services is extremely
competitive, and competition is likely to increase in the future. Spyglass
currently faces competition from other Internet information appliance technology
vendors and service providers such as BSQUARE, Liberate Technologies, Microsoft,
OpenTV (until completion of the merger), Oracle, Phone.com, Sun Microsystems,
on-line service companies, Internet access providers and networking software
companies. Spyglass anticipates additional competition from other established
and emerging companies. Additionally, Spyglass considers a significant source of
competition for its Internet solutions to be the prospect company's internal
resources. Spyglass expects competition to persist and intensify as the
information appliance market develops and competitors focus on additional
product and service offerings. Increased competition could result in price
reductions, reduced gross margins, longer sales cycles, fewer customer orders,
reduced revenues and loss of market share, any of which could adversely affect
Spyglass' business.
SPYGLASS' SUCCESS IS DEPENDENT IN LARGE PART ON THE ABILITY OF ITS CUSTOMERS TO
SUCCESSFULLY DEPLOY THEIR PRODUCTS AND SERVICES.
Spyglass 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 Spyglass 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 Spyglass' control.
INTERNATIONAL EXPANSION IS AN IMPORTANT PART OF SPYGLASS' GROWTH STRATEGY AND
INVOLVES SPECIFIC RISKS WHICH MAY LIMIT SPYGLASS' ABILITY TO GROW INTERNATIONAL
REVENUES.
International sales of products and services accounted for 20%, 11% and
8% of Spyglass' total revenues in the years ended September 30, 1999, 1998 and
1997, respectively, and for 13% of Spyglass' revenues in the six months ended
March 31, 2000. Spyglass expects international sales to continue to account for
a significant portion of Spyglass' revenues, especially as Spyglass increases
its sales and marketing activities with respect to international licensing of
Spyglass' technologies and providing customer development and support services
to international customers. Accordingly, Spyglass' success will depend, in part,
upon international economic conditions and upon Spyglass' ability to manage
international sales and marketing operations. To successfully expand
international revenues, Spyglass must establish additional foreign operations,
hire additional personnel, increase its capacity to provide customer development
and support services and increase its foreign direct and indirect sales forces.
This expansion will require significant management attention and resources,
which could divert attention from other aspects of Spyglass' business. To the
extent Spyglass is unable to expand its international operations in a timely
manner, Spyglass' international revenue growth, if any, may be limited.
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<PAGE> 19
SPYGLASS MAY BE SUBJECT TO LITIGATION REGARDING PROPRIETARY RIGHTS THAT COULD
HAVE AN ADVERSE EFFECT ON ITS BUSINESS.
Spyglass 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 Spyglass'
products, Spyglass is required to discontinue sales of certain products,
eliminate certain features on its products, or pay royalties to another party,
Spyglass' future operating results could be adversely affected.
SPYGLASS MAY BE UNABLE TO ADEQUATELY PROTECT ITS PROPRIETARY RIGHTS.
Spyglass' future success is dependent on its ability to protect its
proprietary rights to the technologies used in its products. If not adequately
protected, Spyglass competitors could use the intellectual property that
Spyglass has developed to enhance their products and services, which could harm
Spyglass' business. Spyglass relies on patent protection, copyright and
trademark laws, trade secrets, confidentiality provisions and other contractual
provision, to protect its proprietary rights, but these legal means afford
Spyglass only limited protection.
SPYGLASS MUST ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL IN A COMPETITIVE
LABOR MARKET.
Spyglass' future success is dependent on its ability to hire additional
members of its management team and other key employees. Competition for such
personnel is intense. Spyglass has experienced, and it expects to continue to
experience in the future, difficulty in hiring highly skilled employees with the
appropriate qualifications, particularly qualified technical personnel. If
Spyglass does not succeed in attracting new personnel or retaining and
motivating its current personnel, Spyglass' business could be adversely
affected.
In addition, Spyglass provides its customers comprehensive services
including strategic consulting, product design, custom application development,
porting, integration, quality assurance testing, product support and third party
project management services. Spyglass derived 54%, 45%, and 31% of its revenue
during the years ended September 30, 1999, 1998 and 1997, respectively, and 62%
of its revenue in the six months ended March 31, 2000 from providing these
services to its customers. Spyglass' ability to attract new personnel or retain
and motivate its current personnel that are skilled in providing each of these
specific categories of services could impact Spyglass' ability to grow its
services revenue as anticipated.
SPYGLASS MAY BE UNABLE TO SUCCESSFULLY MANAGE CHANGES IN ITS BUSINESS.
Spyglass has experienced a period of significant growth. This growth
has placed significant demands on its management and strains on its resources.
Spyglass' ability to manage changes in its business will depend on its ability
to continue to enhance its operating, financial and management information
systems. Spyglass' personnel, systems and controls may not be adequate to
support its growth, if any. If Spyglass is unable to manage change effectively,
maintain the quality of its products and services and retain key personnel, its
operating results and financial condition could be significantly affected.
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<PAGE> 20
SPYGLASS MAY BE UNABLE TO MAKE ATTRACTIVE ACQUISITIONS OR INVESTMENTS OR
INTEGRATE ACQUIRED COMPANIES.
As part of Spyglass' business strategy, Spyglass plans to continue to
acquire or make investments in complementary businesses, products, services or
technologies to increase its product and service offerings and obtain new
technologies. However, Spyglass may not be able to identify suitable acquisition
or investment candidates. Even if Spyglass does identify suitable candidates,
Spyglass may not be able to make such acquisitions or investments on
commercially acceptable terms. If Spyglass buys a business, it could have
difficulty in assimilating that company's personnel, operations, products,
services or technologies into Spyglass' operations. These difficulties could
disrupt Spyglass' ongoing business, distract its management and employees,
increase its expenses and adversely affect its results of operations.
Spyglass has acquired several businesses. Achieving the anticipated
benefits of these acquisitions depends in part upon whether the integration of
these businesses is accomplished in an efficient, effective and timely manner.
In some cases, the difficulty associated with integrating these businesses may
be increased by the necessity of coordinating geographically separated
organizations. There can be no assurance that all of the anticipated benefits of
these acquisitions will be achieved. If Spyglass is unable to successfully
develop and market products and product enhancements as a result of these
acquisitions, Spyglass may not realize new enhanced revenue.
THE MARKET PRICE FOR SPYGLASS COMMON STOCK COULD BE EXTREMELY VOLATILE AND MAY
RESULT IN LITIGATION AGAINST SPYGLASS.
The stock market has experienced significant price and volume
fluctuations, and the market price for Spyglass common stock could be volatile.
In the past, following periods of volatility in the market price of a company's
securities, stockholders have often instituted securities class action
litigation. Litigation could result in substantial costs and a diversion of
management's attention and resources.
SPYGLASS' CHARTER DOCUMENTS MAY INHIBIT A TAKEOVER.
Provisions in Spyglass' certificate of incorporation and bylaws may
have the effect of delaying or preventing a change of control or changes in
Spyglass' management that a stockholder might consider favorable. These
provisions include, among others:
o the division of the Board of Directors into three separate
classes;
o the establishment of advance notice requirements for director
nominations and actions to be taken at stockholder meetings;
o the right of the Board to elect a director to fill a vacancy
created by the expansion of the Board, and
o the requirement that a special meeting of stockholders be
called by the Board of Directors or the President.
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<PAGE> 21
IMPACT OF YEAR 2000
The Company has not experienced any material problems with its computer
systems relating to distinguishing twenty-first century dates from twentieth
century dates, which are generally referred to as year 2000 problems. The
Company is also not aware of any material year 2000 problems with our vendors,
business service providers, customers or distribution partners. Accordingly, the
Company does not anticipate incurring material expenses or experiencing any
material operational disruptions as a result of any year 2000 problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company exports products to diverse geographic areas. Substantially
all foreign sales, however, are transacted in U.S. dollars and therefore the
Company is not exposed to significant foreign currency market risk.
Additionally, except as noted below, the Company does not believe it has any
material market risk exposures with regard to foreign derivatives or other
financial instruments.
As a result of the sale of SurfWatch to JSB on November 4, 1999,
Spyglass received 800,000 shares of JSB common stock which on the date of the
transaction were valued at $12,000,000. After the sale of a portion of these
shares during the quarter ended March 31, 2000, the 533,333 remaining shares had
a market value of approximately $50,100,000 on March 31, 2000. Due to
restrictions on the sale of these shares, Spyglass has reflected a partial
increase in the value of its investment in these securities to $30,400,000 with
the unrealized gain, net of tax, reflected in the Shareholders' Equity section
of the Consolidated Balance Sheet. Spyglass' investment in these securities is
subject to volatility in economic and market conditions.
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<PAGE> 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 28, 1999, the Company and certain of its officers and directors were
named as defendants in a purported class action lawsuit filed in the United
States District Court for the Northern District of Illinois (Eastern Division).
Thereafter, eleven substantially similar actions were filed in the same Court.
All complaints principally 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 purported 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
plaintiff's motion to consolidate the lawsuits into a single complaint, which
plaintiffs filed on May 7, 1999. On May 21, 1999, the defendants filed a motion
to dismiss the consolidated amended complaint as against all defendants, which
the plaintiffs opposed on June 10, 1999. 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 all liability. Thereafter, although the Company and all of
the individual defendants continued to deny any wrongdoing, an agreement to
settle the matter was reached and preliminarily approved by the Court on
December 23, 1999. The entire settlement amount of $1.55 million was paid into
escrow by the Company's Directors and Officers Liability insurer. The settlement
provides that all claims against the Company and the individual defendants will
be dismissed upon entry of a final judgment. On March 24, 2000, a final fairness
hearing was held before U.S. Magistrate Judge Rosemond who thereafter issued his
report and recommendation to the District Court that the settlement be approved
and that a final judgment be entered dismissing the action. The Magistrate
Judge's report has been taken under advisement by the District Court. On May 9,
2000, the District Court issued an Order requesting that Plaintiff's counsel
submit additional information in support of the request for approval of
settlement on behalf of the class. Plaintiff's counsel has informed the Company
that it plans to submit the requested information. Once the judgment is entered
by the District Court, the settlement will become final after the expiration of
the thirty day appeal period.
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, infringed Spyglass' U.S. Patent
No. 5,884,033 for an Internet filtering system. The complaint asked the Court
both to enjoin further infringement by N2H2 and to award monetary damages. On
August 2, 1999 N2H2 filed its answer, alleging that the patent-in-suit was
invalid, unenforceable, and did not infringe and sought an award of attorneys'
fees for Spyglass' filing of the complaint. On January 18, 2000, Spyglass and
N2H2 entered into a settlement agreement. Under the terms of the settlement
agreement, Spyglass granted N2H2 a non-exclusive license under the
patent-in-suit in exchange for an undisclosed amount of money. As a result of
the settlement, the lawsuit was dismissed by the Court on January 26, 2000.
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<PAGE> 23
On December 29, 1999, Spyglass, Inc. received formal notice of an alleged breach
by Spyglass of its obligations under its Professional Services Agreement with
New GMS, Inc. ("New GMS") dated November 13, 1998. This notice requested a
"cure" to the purported breach within thirty days, such cure period to expire on
January 31, 2000. On January 10, 2000 Spyglass responded to this notice
indicating that it was not in breach and that pursuant to the agreement between
the parties, it was continuing to work on the project. On February 3, 2000, New
GMS informed Spyglass that the contract was terminated as of January 31, 2000
due to Spyglass' failure to cure its purported breach; however, New GMS also
indicated a desire to resolve the matter informally. Spyglass responded on
February 7, 2000 indicating that it was not in breach of its agreement with New
GMS but was willing to discuss an amicable resolution. No informal resolution
was reached. On March 1, 2000, Spyglass was served with a complaint by New GMS.
The complaint alleged that Spyglass had breached the agreement between the
parties and committed fraud in the inducement of the agreement between the
parties. The complaint seeks $6,005,000 in compensatory damages, plus
unspecified punitive damages and attorneys' fees. The complaint names Spyglass
and its former employee Wayne Yurtin. Spyglass has agreed to pay for Mr.
Yurtin's representation and to indemnify him to the extent that he would have
been entitled to indemnity had he been a current employee of Spyglass. On March
13, 2000, Spyglass received a first amended complaint from New GMS. The amended
complaint contained essentially the same allegations as the original complaint,
but corrected minor factual errors. Spyglass and Mr. Yurtin answered the first
amended complaint on May 4, 2000. Further, Spyglass and Mr. Yurtin filed their
cross complaint for breach of contract and common counts on May 4, 2000.
Spyglass and Mr. Yurtin have been served with discovery by New GMS and expect to
serve New GMS with discovery in the coming weeks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 7, 2000, the following proposals were voted on at the
Annual Meeting of stockholders:
<TABLE>
<CAPTION>
Proposal For Against /Withheld Abstain
-------- ------------ ----------------- -------
<S> <C> <C> <C>
1. To elect John Shackleton as a Class II
director to serve for a three-year term
expiring at the Annual Meeting following
the fiscal year ended September 30, 2002 13,411,609 171,095 N/A
To elect Martin J. Leamy as a Class II
director to serve for a three-year term
expiring at the Annual Meeting following
the fiscal year ended September 30, 2002 13,411,709 170,995 N/A
2. To approve an amendment to the
Company's 1995 Stock Incentive
Plan increasing the number of shares
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C> <C> <C>
of Common Stock issuable under the
Plan from 4,250,000 shares to
5,050,000 shares and the continuance of
the plan, as amended 12,211,010 1,348,780 22,914
3. To ratify the selection of Ernst & Young
LLP as the Company's independent
auditors for the current fiscal year 13,541,289 28,296 13,119
</TABLE>
In addition to the two directors listed above who were elected at the
meeting, the terms of the following directors continued after the meeting; Brian
J. Jackman, Douglas P. Colbeth and Charles T. Brumback.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
The exhibits are listed in the accompanying Index to Exhibits immediately
following the signature page.
(b) Reports on Form 8-K
On March 29, 2000, the Company filed a Current Report on Form 8-K dated March
26, 2000 relating to the Agreement and Plan of Merger and Reorganization, dated
March 26, 2000, among the Company, OpenTV Corp. and Sonnet Acquisition Corp.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Spyglass, Inc.
Registrant
Date: May 11, 2000 /s/ Gary Vilchick
----------------------------------------
Gary Vilchick
Executive Vice President, Finance,
Administration and Operations and
Chief Financial Officer
25
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 (1) Agreement and Plan of Merger and Reorganization,
dated March 26, 2000, among the Company, OpenTV
Corp., and Sonnet Acquisition Corp.
10.2 1995 Stock Incentive Plan as amended
27 Financial Data Schedule
</TABLE>
(1) Incorporated herein by reference from the Company's Current Report on Form
8-K dated March 26, 2000.
<PAGE> 27
EXHIBIT 10.2
SPYGLASS, INC.
1995 STOCK INCENTIVE PLAN, AS AMENDED
1. Purpose
The purpose of this 1995 Stock Incentive Plan (the "Plan") of Spyglass,
Inc., a Delaware corporation (the "Company"), is to advance the interests of the
Company by enhancing its ability to attract and retain key employees,
consultants and others who are in a position to contribute to the Company's
future growth and success.
2. Definitions
"Award" means any Option, Stock Appreciation Right, Performance Shares,
Restricted Stock or Unrestricted Stock awarded under the Plan.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means a committee of not less than two members of the Board
appointed by the Board to administer the Plan, provided that if and when the
Common Stock is registered under Section 12 of the Exchange Act, each member of
the Committee shall be a "Non-Employee Director" within the meaning of Rule
16b-3 under the Exchange Act ("Rule 16b-3").
"Common Stock" means the Common Stock, $.01 par value per share, of the
Company.
"Company" means Spyglass, Inc. and, except where the context otherwise
requires, all present and future subsidiaries of Spyglass, Inc. as defined in
Section 424(f) of the Code.
"Designated Beneficiary" means the beneficiary designated by a
Participant, in a manner determined by the Board, to receive amounts due or
exercise rights of the Participant in the event of the Participant's death. In
the absence of an effective designation by a Participant, Designated Beneficiary
shall mean the Participant's estate.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
"Fair Market Value" means, with respect to Common Stock or any other
property, the fair market value of such property as determined by the Board in
good faith or in the manner established by the Board from time to time.
"Incentive Stock Option" means an option to purchase shares of Common
Stock awarded to a Participant under Section 6 which is intended to meet the
requirements of Section 422 of the Code or any successor provision.
"Nonstatutory Stock Option" means an option to purchase shares of
Common Stock awarded to a Participant under Section 6 which is not intended to
be an Incentive Stock Option.
"Option" means an Incentive Stock Option or a Nonstatutory Stock
Option.
"Participant" means a person selected by the Board to receive an Award
under the Plan.
"Performance Shares" mean shares of Common Stock which may be earned by
the achievement of performance goals established for a Participant under Section
8.
"Reporting Person" means a person subject to Section 16 of the Exchange
Act or any successor provision.
<PAGE> 28
"Restricted Period" means the period of time selected by the Board
during which shares subject to a Restricted Stock Award may be repurchased by or
forfeited to the Company.
"Restricted Stock" means shares of Common Stock awarded to a
Participant under Section 9.
"Stock Appreciation Right" or "SAR" means a right to receive any excess
in Fair Market Value of shares of Common Stock over the exercise price awarded
to a Participant under Section 7.
"Unrestricted Stock" means shares of Common Stock awarded to a
Participant under Section 9(c).
3. Administration
The Plan will be administered by the Board. The Board shall have
authority to make Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable
from time to time, and to interpret the provisions of the Plan. The Board's
decisions shall be final and binding. No member of the Board shall be liable for
any action or determination relating to the Plan made in good faith. To the
extent permitted by applicable law, the Board may delegate to one or more
executive officers of the Company the power to make Awards to Participants who
are not Reporting Persons and all determinations under the Plan with respect
thereto, provided that the Board shall fix the maximum amount of such Awards to
be made by such executive officers and a maximum amount for any one Participant.
To the extent permitted by applicable law, the Board may appoint a Committee to
administer the Plan and, in such event, all references to the Board in the Plan
shall mean such Committee or the Board. All decisions by the Board or the
Committee pursuant to the Plan shall be final and binding on all persons having
or claiming any interest in the Plan or in any Award.
4. Eligibility
All of the Company's employees, officers, directors, consultants and
advisors who are expected to contribute to the Company's future growth and
success, other than persons who have irrevocably elected not to be eligible, are
eligible to be Participants in the Plan. Incentive Stock Options may be awarded
only to persons eligible to receive Incentive Stock Options under the Code.
5. Stock Available for Awards
(a) Subject to adjustment under subsection (b) below, Awards may be
made under the Plan for up to 5,050,000 shares of Common Stock. If any Award in
respect of shares of Common Stock expires or is terminated unexercised or is
forfeited for any reason or settled in a manner that results in fewer shares
outstanding than were initially awarded, the shares subject to such Award or so
surrendered, as the case may be, to the extent of such expiration, termination,
forfeiture or decrease, shall again be available for award under the Plan,
subject, however, in the case of Incentive Stock Options, to any limitation
required under the Code and provided that shares made available pursuant to this
sentence shall be available for Awards to Reporting Persons only to the extent
consistent with Rule 16b-3. Shares issued under the Plan may consist in whole or
in part of authorized but unissued shares or treasury shares.
(b) In the event that the Board, in its sole discretion, determines
that any stock dividend, extraordinary cash dividend, recapitalization,
reorganization, merger, consolidation, split-up, spin-off, combination or other
similar transaction affects the Common Stock such that an adjustment is required
in order to preserve the benefits or potential benefits intended to be made
available under the Plan, then the Board, subject, in the case of Incentive
Stock Options, to any limitation required under the Code, shall equitably adjust
any or all of (i) the number and kind of shares in respect of which Awards may
be made under the Plan, (ii) the number and kind of shares subject to
outstanding Awards, and (iii) the award, exercise or conversion price with
respect to any of the foregoing, and if considered appropriate, the Board may
make provision for a cash payment with respect to an outstanding Award, provided
that the number of shares subject to any Award shall always be a whole number.
(c) The Board may grant Awards under the Plan in substitution for stock
and stock based awards held by employees of another corporation who concurrently
become employees of the Company as a result of a merger or
<PAGE> 29
consolidation of the employing corporation with the Company (or a subsidiary of
the Company) or the acquisition by the Company (or a subsidiary of the Company)
of property or stock of the employing corporation. The substitute Awards shall
be granted on such terms and conditions as the Board considers appropriate in
the circumstances.
(d) Subject to adjustment under Section 5(b), the maximum number of
shares with respect to which an Award may be granted to any employee under the
Plan shall not exceed 300,000 per calendar year. For purposes of calculating
such maximum number, (a) an Award shall continue to be treated as outstanding
notwithstanding its repricing, cancellation or expiration and (b) the repricing
of an outstanding Award or issuance of a new Award in substitution for a
cancelled Award shall be deemed to constitute the grant of a new additional
Award separate from the original grant of the Award that is repriced or
cancelled.
6. Stock Options
(a) General
(i) Subject to the provisions of the Plan, the Board may award
Incentive Stock Options and Nonstatutory Stock Options, and determine the number
of shares of Common Stock to be covered by each Option, the option price of such
Option and the conditions and limitations applicable to the exercise of such
Option. The terms and conditions of Incentive Stock Options shall be subject to
and comply with Section 422 of the Code, or any successor provision, and any
regulations thereunder.
(ii) The Board shall establish the exercise price at the time
each Option is awarded. In the case of Incentive Stock Options, such price shall
not be less than 100% of the Fair Market Value of the Common Stock on the date
of award.
(iii) Each Option shall be exercisable at such times and
subject to such terms and conditions as the Board may specify in the applicable
Award or thereafter. The Board may impose such conditions with respect to the
exercise of Options, including conditions relating to applicable federal or
state securities laws, as it considers necessary or advisable.
(iv) Options granted under the Plan may provide for the
payment of the exercise price by delivery of cash or check in an amount equal to
the exercise price of such Options or, to the extent permitted by the Board at
or after the award of the Option, by (A) delivery of shares of Common Stock
owned by the optionee for at least six months (or such shorter period as is
approved by the Board), valued at their Fair Market Value, (B) delivery of a
promissory note of the optionee to the Company on terms determined by the Board,
(C) delivery of an irrevocable undertaking by a broker to deliver promptly to
the Company sufficient funds to pay the exercise price or delivery of
irrevocable instructions to a broker to deliver promptly to the Company cash or
a check sufficient to pay the exercise price, (D) payment of such other lawful
consideration as the Board may determine, or (E) any combination of the
foregoing.
(v) The Board may provide for the automatic award of an Option
upon the delivery of shares to the Company in payment of the exercise price of
an Option for up to the number of shares so delivered.
(vi) The Board may at any time accelerate the time at which
all or any part of an Option may be exercised.
(b) Incentive Stock Options
Options granted under the Plan which are intended to be
Incentive Stock Options shall be subject to the following additional terms and
conditions:
(i) All Incentive Stock Options granted under the Plan shall,
at the time of grant, be specifically designated as such in the option agreement
covering such Incentive Stock Options. The Option exercise period shall not
exceed ten years from the date of grant.
<PAGE> 1
(ii) If any employee to whom an Incentive Stock Option is to
be granted under the Plan is, at the time of the grant of such option, the owner
of stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company (after taking into account the attribution of
stock ownership rule of Section 424(b) and of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option granted to
such individual:
(x) The purchase price per share of the Common Stock
subject to such Incentive Stock Option shall not be less than 110% of
the Fair Market Value of one share of Common Stock at the time of
grant; and
(y) The option exercise period shall not exceed five
years from the date of grant.
(iii) For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options, in
the aggregate, become exercisable for the first time in any one calendar year
for shares of Common Stock with an aggregate Fair Market Value (determined as of
the respective date or dates of grant) of more than $100,000.
(iv) No Incentive Stock Option may be exercised unless, at the
time of such exercise, the Participant is, and has been continuously since the
date of grant of his or her Option, employed by the Company, except that:
(x) an Incentive Stock Option may be exercised within
the period of three months after the date the Participant ceases to be
an employee of the Company (or within such lesser period as may be
specified in the applicable option agreement), provided, that the
agreement with respect to such Option may designate a longer exercise
period and that the exercise after such three-month period shall be
treated as the exercise of a Nonstatutory Stock Option under the Plan;
(y) if the Participant dies while in the employ of
the Company, or within three months after the Participant ceases to be
such an employee, the Incentive Stock Option may be exercised by the
Participant's Designated Beneficiary within the period of one year
after the date of death (or within such lesser period as may be
specified in the applicable Option agreement); and
(z) if the Participant becomes disabled (within the
meaning of Section 22(e)(3) of the Code or any successor provision
thereto) while in the employ of the Company, the Incentive Stock Option
may be exercised within the period of one year after the date of death
(or within such lesser period as may be specified in the applicable
Option agreement).
For all purposes of the Plan and any Option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
(v) Incentive Stock Options shall not be assignable or
transferable by the person to whom they are granted, either voluntarily or by
operation of law, except by will or the laws of descent and distribution, and,
during the life of the optionee, shall be exercisable only by the optionee.
7. Stock Appreciation Rights
(a) The Board may grant SARs entitling recipients on exercise of the
SAR to receive an amount, in cash or Common Stock or a combination thereof (such
form to be determined by the Board), determined in whole or in part by reference
to appreciation in the Fair Market Value of the Common Stock between the date of
the Award and the exercise of the Award. A SAR shall entitle the Participant to
receive, with respect to each share of Common Stock as to which the SAR is
exercised, the excess of the share's Fair Market Value on the date of exercise
over its Fair Market Value on the date the SAR was granted. The Board may also
grant SARs that provide that, following a change in control of the Company (as
defined by the Board at the time of the Award), the holder of such SAR will be
entitled to receive, with respect to each share of Common Stock subject to the
SAR, an amount equal to the
<PAGE> 2
excess of a specified value (which may include an average of values) for a share
of Common Stock during a period preceding such change in control over the Fair
Market Value of a share of Common Stock on the date the SAR was granted.
(b) SARs may be granted in tandem with, or independently of, Options
granted under the Plan. A SAR granted in tandem with an Option which is not an
Incentive Stock Option may be granted either at or after the time the Option is
granted. A SAR granted in tandem with an Incentive Stock Option may be granted
only at the time the Option is granted.
(c) When SARs are granted in tandem with Options, the following
provisions will apply:
(i) The SAR will be exercisable only at such time or times,
and to the extent, that the related Option is exercisable and will be
exercisable in accordance with the procedure required for exercise of the
related Option.
(ii) The SAR will terminate and no longer be exercisable upon
the termination or exercise of the related Option, except that a SAR granted
with respect to less than the full number of shares covered by an Option will
not be reduced until the number of shares as to which the related Option has
been exercised or has terminated exceeds the number of shares not covered by the
SAR.
(iii) The Option will terminate and no longer be exercisable
upon the exercise of the related SAR.
(iv) The SAR will be transferable only with the related
Option.
(v) A SAR granted in tandem with an Incentive Stock Option may
be exercised only when the market price of the Common Stock subject to the
Option exceeds the exercise price of such Option.
(d) A SAR not granted in tandem with an Option will become exercisable
at such time or times, and on such conditions, as the Board may specify.
(e) The Board may at any time accelerate the time at which all or any
part of the SAR may be exercised.
8. Performance Shares
(a) The Board may make Performance Share Awards entitling recipients to
acquire shares of Common Stock upon the attainment of specified performance
goals. The Board may make Performance Share Awards independent of or in
connection with the granting of any other Award under the Plan. The Board in its
sole discretion shall determine the performance goals applicable under each such
Award, the periods during which performance is to be measured, and all other
limitations and conditions applicable to the awarded Performance Shares;
provided, however, that the Board may rely on the performance goals and other
standards applicable to other performance plans of the Company in setting the
standards for Performance Share Awards under the Plan.
(b) Performance Share Awards and all rights with respect to such Awards
may not be sold, assigned, transferred, pledged or otherwise encumbered.
(c) A Participant receiving a Performance Share Award shall have the
rights of a stockholder only as to shares actually received by the Participant
under the Plan and not with respect to shares subject to an Award but not
actually received by the Participant. A Participant shall be entitled to receive
a stock certificate evidencing the acquisition of shares of Common Stock under a
Performance Share Award only upon satisfaction of all conditions specified in
the agreement evidencing the Performance Share Award.
(d) The Board may at any time accelerate or waive any or all of the
goals, restrictions or conditions imposed under any Performance Share Award.
<PAGE> 3
9. Restricted and Unrestricted Stock
(a) The Board may grant Restricted Stock Awards entitling recipients to
acquire shares of Common Stock, subject to the right of the Company to
repurchase all or part of such shares at their purchase price (or to require
forfeiture of such shares if purchased at no cost) from the recipient in the
event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable Restricted Period or Restricted
Periods established by the Board for such Award. Conditions for repurchase (or
forfeiture) may be based on continuing employment or service or achievement of
pre-established performance or other goals and objectives.
(b) Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered, except as permitted by the Board, during the
applicable Restricted Period. Shares of Restricted Stock shall be evidenced in
such manner as the Board may determine. Any certificates issued in respect of
shares of Restricted Stock shall be registered in the name of the Participant
and, unless otherwise determined by the Board, deposited by the Participant,
together with a stock power endorsed in blank, with the Company (or its
designee). At the expiration of the Restricted Period, the Company (or such
designee) shall deliver such certificates to the Participant or if the
Participant has died, to the Participant's Designated Beneficiary.
(c) The Board may, in its sole discretion, grant (or sell at a purchase
price determined by the Board, which shall not be lower than 85% of Fair Market
Value on the date of sale) to Participants shares of Common Stock free of any
restrictions under the Plan ("Unrestricted Stock").
(d) The purchase price for each share of Restricted Stock and
Unrestricted Stock shall be determined by the Board of Directors and may not be
less than the par value of the Common Stock. Such purchase price may be paid in
the form of past services or such other lawful consideration as is determined by
the Board.
(e) The Board may at any time accelerate the expiration of the
Restricted Period applicable to all, or any particular, outstanding shares of
Restricted Stock.
10. General Provisions Applicable to Awards
(a) Applicability of Rule 16b-3. Those provisions of the Plan which
make an express reference to Rule 16b-3 shall apply to the Company only at such
time as the Company's Common Stock is registered under the Exchange Act, or any
successor provision, and then only to Reporting Persons.
(b) Reporting Person Limitations. Notwithstanding any other provision
of the Plan, to the extent required to qualify for the exemption provided by
Rule 16b-3, (i) any Option, SAR, Performance Share Award or other similar right
related to an equity security issued under the Plan to a Reporting Person shall
not be transferable other than by will or the laws of descent and distribution
or pursuant to a qualified domestic relations order as defined by the Code or
Title I or the Employee Retirement Income Security Act ("ERISA"), or the rules
thereunder, and shall be exercisable during the Participant's lifetime only by
the Participant or the Participant's guardian or legal representative, and (ii)
the selection of a Reporting Person as a Participant and the terms of his or her
Award shall be determined only in accordance with the applicable provisions of
Rule 16b-3.
(c) Documentation. Each Award under the Plan shall be evidenced by an
instrument delivered to the Participant specifying the terms and conditions
thereof and containing such other terms and conditions not inconsistent with the
provisions of the Plan as the Board considers necessary or advisable. Such
instruments may be in the form of agreements to be executed by both the Company
and the Participant, or certificates, letters or similar documents, acceptance
of which will evidence agreement to the terms thereof and of this Plan.
(d) Board Discretion. Except as otherwise provided by the Plan, each
type of Award may be made alone, in addition to or in relation to any other type
of Award. The terms of each type of Award need not be identical, and the Board
need not treat Participants uniformly. Except as otherwise provided by the Plan
or a particular Award, any determination with respect to an Award may be made by
the Board at the time of award or at any time thereafter.
<PAGE> 4
(e) Termination of Status. Subject to the provisions of Section
6(b)(iv), the Committee shall determine the effect on an Award of the
disability, death, retirement, authorized leave of absence or other termination
of employment or other status of a Participant and the extent to which, and the
period during which, the Participant's legal representative, guardian or
Designated Beneficiary may exercise rights under such Award.
(f) Mergers, Etc. In the event of a consolidation, merger or other
reorganization in which all of the outstanding shares of Common Stock are
exchanged for securities, cash or other property of any other corporation or
business entity (an "Acquisition") or in the event of a liquidation of the
Company, the Board of Directors of the Company, or the board of directors of any
corporation assuming the obligations of the Company, may, in its discretion,
take any one or more of the following actions as to outstanding Awards: (i)
provide that such Awards shall be assumed, or substantially equivalent Awards
shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof) on such terms as the Board determines to be appropriate, (ii)
upon written notice to Participants, provide that all unexercised Options or
SARs will terminate immediately prior to the consummation of such transaction
unless exercised by the Participant within a specified period following the date
of such notice, (iii) in the event of an Acquisition under the terms of which
holders of the Common Stock of the Company will receive upon consummation
thereof a cash payment for each share surrendered in the Acquisition (the
"Acquisition Price"), make or provide for a cash payment to Participants equal
to the difference between (A) the Acquisition Price times the number of shares
of Common Stock subject to outstanding Options or SARs (to the extent then
exercisable at prices not in excess of the Acquisition Price) and (B) the
aggregate exercise price of all such outstanding Options or SARs in exchange for
the termination of such Options and SARs, and (iv) provide that all or any
outstanding Awards shall become exercisable or realizable in full prior to the
effective date of such Acquisition.
(g) Withholding. The Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in respect of Awards under the Plan no later than the date of the
event creating the tax liability. In the Board's discretion, and subject to such
conditions as the Board may establish, such tax obligations may be paid in whole
or in part in shares of Common Stock, including shares retained from the Award
creating the tax obligation, valued at their Fair Market Value. The Company may,
to the extent permitted by law, deduct any such tax obligations from any payment
of any kind otherwise due to the Participant.
(h) Foreign Nationals. Awards may be made to Participants who are
foreign nationals or employed outside the United States on such terms and
conditions different from those specified in the Plan as the Board considers
necessary or advisable to achieve the purposes of the Plan or comply with
applicable laws.
(i) Amendment of Award. The Board may amend, modify or terminate any
outstanding Award, including substituting therefor another Award of the same or
a different type, changing the date of exercise or realization and converting an
Incentive Stock Option to a Nonstatutory Stock Option, provided that the
Participant's consent to such action shall be required unless the Board
determines that the action, taking into account any related action, would not
materially and adversely affect the Participant.
(j) Cancellation and New Grant of Options. The Board of Directors shall
have the authority to effect, at any time and from time to time, with the
consent of the affected optionees, (i) the cancellation of any or all
outstanding Options under the Plan and the grant in substitution therefor of new
Options under the Plan covering the same or different numbers of shares of
Common Stock and having an option exercise price per share which may be lower or
higher than the exercise price per share of the cancelled Options or (ii) the
amendment of the terms of any and all outstanding Options under the Plan to
provide an option exercise price per share which is higher or lower than the
then current exercise price per share of such outstanding Options.
(k) Conditions on Delivery of Stock. The Company will not be obligated
to deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan (i) until all
conditions of the Award have been satisfied or removed, (ii) until, in the
opinion of the Company's counsel, all applicable federal and state laws and
regulations have been complied with, (iii) if the outstanding Common Stock is at
the time listed on any stock exchange, until the shares to be delivered have
been listed or authorized to be listed on such exchange upon official notice of
notice of issuance, and (iv) until all other legal matters in connection with
the issuance and delivery of such shares have been approved by the Company's
counsel. If the sale of Common Stock has not been registered under the
Securities Act of 1933, as amended, the Company may require, as a condition to
exercise of the Award, such representations or agreements as the Company may
consider appropriate to
<PAGE> 5
avoid violation of such Act and may require that the certificates evidencing
such Common Stock bear an appropriate legend restricting transfer.
11. Miscellaneous
(a) No Right To Employment or Other Status. No person shall have any
claim or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or service
for the Company. The Company expressly reserves the right at any time to dismiss
a Participant free from any liability or claim under the Plan, except as
expressly provided in the applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
under the Plan until he or she becomes the record holder thereof.
(c) Exclusion from Benefit Computations. No amounts payable upon
exercise of Awards granted under the Plan shall be considered salary, wages or
compensation to Participants for purposes of determining the amount or nature of
benefits that Participants are entitled to under any insurance, retirement or
other benefit plans or programs of the Company.
(d) Effective Date and Term. The Plan shall become effective upon the
closing of the Company's initial public offering. No Award granted under the
Plan shall become effective until the Plan shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve months after the date of the Board's adoption of the Plan, no Options
previously granted under the Plan shall be deemed to be Incentive Stock Options
and no Incentive Stock Options shall be granted thereafter. No Award may be made
under the Plan after May 7, 2005, but Awards previously granted may extend
beyond that date.
(e) Amendment of Plan. The Board may amend, suspend or terminate the
Plan or any portion thereof at any time, provided that no amendment shall be
made without stockholder approval if such approval is necessary to comply with
any applicable tax or regulatory requirement. Amendments requiring stockholder
approval shall become effective when adopted by the Board of Directors, but no
Incentive Stock Option granted after the date of such amendment shall become
exercisable (to the extent that such amendment to the Plan was required to
enable the Company to grant such Incentive Stock Option to a particular
Participant) unless and until such amendment shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any Incentive Stock
Options granted on or after the date of such amendment shall terminate to the
extent that such amendment to the Plan was required to enable the Company to
grant such option to a particular Participant.
(f) Governing Law. The provisions of the Plan shall be governed by and
interpreted in accordance with the laws of the State of Delaware.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED MARCH 31, 2000 AND SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> SEP-30-2000 SEP-30-1999
<PERIOD-END> MAR-31-2000 SEP-30-1999
<CASH> 65,224 18,613
<SECURITIES> 25,067<F1> 0<F1>
<RECEIVABLES> 5,596<F2> 9,225<F2>
<ALLOWANCES> 489<F2> 494<F2>
<INVENTORY> 0<F1> 0<F1>
<CURRENT-ASSETS> 116,122 41,398
<PP&E> 4,404 3,897
<DEPRECIATION> 0<F1> 0<F1>
<TOTAL-ASSETS> 124,973 45,773
<CURRENT-LIABILITIES> 15,745 6,199
<BONDS> 0<F1> 0<F1>
0<F1> 0<F1>
0<F1> 0<F1>
<COMMON> 171 165
<OTHER-SE> 108,947 39,083
<TOTAL-LIABILITY-AND-EQUITY> 124,973 45,773
<SALES> 3,326 13,493
<TOTAL-REVENUES> 9,080 29,610
<CGS> 135 1,220
<TOTAL-COSTS> 3,934 10,129
<OTHER-EXPENSES> 5,414 22,760
<LOSS-PROVISION> 0<F1> 0<F1>
<INTEREST-EXPENSE> 0<F1> 0<F1>
<INCOME-PRETAX> (268) (3,279)
<INCOME-TAX> 12,811<F1> 0<F1>
<INCOME-CONTINUING> 14,613 (1,897)
<DISCONTINUED> 0<F1> 0<F1>
<EXTRAORDINARY> 0<F1> 0<F1>
<CHANGES> 0<F1> 0<F1>
<NET-INCOME> 14,613 (1,897)
<EPS-BASIC> 0.86<F1> (0.12)<F1>
<EPS-DILUTED> 0.74<F1> (0.12)<F1>
<FN>
<F1>Amounts inapplicable or not disclosed as a separate line on the Consolidated
Balance Sheets or Consolidated Statement of Operations are reported as 0 herein.
<F2>*-Notes and accounts receivable-trade are reported net of allowances for
doubtful accounts in the Consolidated Balance Sheets.
</FN>
</TABLE>
