ITEM 1. BUSINESS
GENERAL
Spyglass(R), Inc. ( "Spyglass" or the "Company" ) develops, markets and distributes Internet enabling technologies, content services and professional services that enable various non-PC devices, including, but not limited to, televisions, office equipment, television set-top boxes, network computers and telephones, to work with the Internet (also referred to as "World Wide Web", "WWW" or the "Web").
The Company began operations in February 1990 and, until 1994, focused substantially all of its resources on its data visualization products sold to the scientific market. The Company sold its data visualization product line in September 1995. Spyglass entered the Internet market during fiscal 1994 and from fiscal 1994 through fiscal 1996, focused its efforts on developing, marketing and distributing Internet client and server technologies for incorporation into a variety of Internet-based software products and services. Beginning in fiscal 1997, the Company began focusing on the development, marketing and distribution of its technologies and services to the non-PC Internet device marketplace.
Spyglass markets embedded solutions to a variety of companies such as the real time operating system (RTOS) vendors, consumer and industrial electronics manufacturers, and office equipment suppliers. Spyglass also provides infrastructure solutions to a variety of companies such as the Regional Bell Operating Companies (RBOCs), telephone companies, cable companies, cellular providers, Internet Service Providers (ISPs) and internetworking hardware providers. These technologies enable Web connectivity through highly scalable embedded browsers and servers, and provide performance enhancements, content filtering and conversion through an integrated suite of infrastructure servers. The Spyglass Professional Services group offers consulting, project management and custom engineering for defining, developing and delivering complete, end-to-end project solutions. Spyglass provides its customers with expertise, software and services that enable them to rapidly deploy cost-effective Web-enabled devices. Spyglass solutions have been integrated into a variety of products, including but not limited to televisions, office equipment, television set-top boxes, network computers, screen and cellular phones. In addition, several major corporations have deployed SurfWatch, a leading content filtering software designed to block unwanted material from the Internet.
A central element of the Company's business strategy is a multi-channel distribution model. The Company, through its scalable, adaptable, modular Internet technologies and services, creates customized solutions for its customers which are incorporated into their products and services for end-users. The Company chose this approach to best meet the varying needs of its customers and because it enables it to leverage the marketing, distribution and development resources of much larger organizations that are strategically focused on offering value-added products and services for the Internet. The Company intends to continue to increase the performance, functionality and flexibility of its technology offerings and breadth of its services to meet the evolving needs of Internet users and to continue to invest in building customer awareness of the Spyglass name and the range of Internet solutions available from Spyglass.
The Company's future results of operations will be largely dependent upon a number of factors relating to development and acceptance of the Internet as a commercial market, particularly use of the Internet through non-PC devices, and the Company's ability to establish its solutions as widely-accepted in the market. See the "Future Operating Results" section incorporated by reference into Item 7 of this Annual Report on Form 10-K.
During fiscal 1997, the Company first directed its strategic focus to the Internet device and infrastructure market. Because this is a new and undeveloped market, there can be no assurance as to the extent of the demand for product offerings similar to those of the Company, or the extent to which the Company will be successful in penetrating this market. Moreover, the Company expects that its revenues and net income may be adversely affected during fiscal 1998 as the Company continues to concentrate its business strategy on the Internet device market, rather than on vendors of desktop software applications.
On November 14, 1997, the Company acquired AllPen Software ("AllPen"). AllPen, based in Los Gatos, California, is a leading systems integration and software development firm focused on Internet technology for non-PC devices. In consideration of the acquisition, Spyglass issued approximately 640,000 shares of common stock and converted outstanding AllPen stock options into options for approximately 360,000 shares of Spyglass common stock. The transaction has been accounted for as a pooling of interests.
THE INTERNET
The Internet is a worldwide network that links thousands of public and private computer networks. The Internet began in 1969 as a project of the Advanced Research Projects Agency ("ARPA") of the U.S. Department of Defense to connect different types of computers across geographically disparate areas. The ARPA network was designed to allow any computer on the network to communicate with any other computer on the network through an open communications protocol known as TCP/IP.
Until the mid-1990's, use of the Internet was generally limited to governmental, educational and commercial organizations with a working knowledge of the UNIX operating system and commands, and the primary use of the Internet was the communication of information via electronic mail. However, there has been a significant growth in the use and popularity of the Internet in the past several years, due in part to the introduction in 1992 of the World Wide Web, a client/server system of hyperlinked multimedia databases.
The WWW is based on a client/server system in which certain computers ("servers") store files and respond to requests issued by remote computers ("clients" ) to download the files, thus allowing multiple, geographically dispersed users to view and use the information stored on a single server. The client must contain software, known as a browser, that can read Hyper Text Markup Language (HTML) documents and follow their hypertext links to retrieve and display linked documents from servers. One limitation on the early growth of the WWW was that the browser software initially provided by the European Laboratory for Research Physics (CERN) was text-based and contained limited retrieval and display capabilities.
In January 1993, the National Center for Supercomputing Applications ("NCSA") at the University of Illinois at Urbana-Champaign introduced NCSA Mosaic for X Window on the UNIX platform, the first intuitive, graphical user interface browser for the WWW. The NCSA Mosaic graphical user interface allows users to access the diverse information archives, data protocols and data formats of the Internet using point-and-click, mouse-driven commands. NCSA Mosaic is offered by NCSA to users on a free-with-copyright basis (making it available for use without charge and without the right to distribute). NCSA released a version of NCSA Mosaic for Windows in September 1993.
In order to support the continued growth and popularity of the Internet, certain "infrastructure" elements must expand to handle the resulting increases in Internet demand and traffic. These elements include widespread, inexpensive Internet access, either through Internet access providers or on-line services, and widely available high-speed communications channels to accommodate the increasing number and size of files available for downloading.
PRODUCTS AND TECHNOLOGIES
Spyglass products and technologies deliver the embedded Internet and infrastructure solutions needed to effectively connect a wide variety of devices to the Internet and leverage the wealth of on-line information and communication options. Spyglass products deliver benefits to a wide range of groups such as consumers, device manufacturers, content providers, internetworking vendors and Internet service providers
Spyglass' solutions provide its partners with a complete array of software and services necessary to make devices work with the Web. Spyglass solutions enable Web connectivity from virtually any device, while providing the infrastructure solutions needed to eliminate performance "bottlenecks" and deliver value-added services such as content filtering and conversion. And, critically important to the mass deployment of these new devices, these solutions ensure that these devices have access to evolving Web content without the need for changes in the original Web content or costly changes to the device's software.
SPYGLASS DEVICE MOSAIC
Spyglass Device Mosaic is the embedded industry's first full-featured, thin browser. Occupying less than 675KB of code when compiled specifically for devices, it supports the latest Internet standard technologies found in desktop browsers many times larger. Moreover, Device Mosaic's modular design makes it scalable across a broad range of devices. Features can be added to support the latest needs of televisions and set-top boxes or a stripped down version can be embedded in more memory-constrained screen phones and hand-held devices. Easily ported to a variety of popular real-time operating systems, Device Mosaic enables consumer electronics manufacturers to add Web functionality to products quickly, cutting development dollars and sharply reducing time to market.
SPYGLASS MICROSERVER
Spyglass MicroServer is a small footprint embedded Web server that enables full HTML page-based monitoring, management and control of devices such as copiers, printers, hubs/routers and manufacturing equipment. It delivers standards-based Web server functionality to multiple concurrent users in as little as 36KB of RAM. Application user interfaces for MicroServer-enabled devices are authored in HTML and may be used with any commercial Web browser. Typical uses include providing operational or status information to a user, updating a device's internal database through information collected via HTML forms, or initiating a device action, such as running a diagnostic utility, based on a user request. Developed specifically for the embedded systems market, MicroServer has already been ported to many of the leading real-time operating systems.
SPYGLASS PRISM
Spyglass Prism is a server-based content conversion solution designed to optimize the performance of the new generation of Web-enabled devices, such as hand-held PCs & Personal Digital Assistants ("PDA"s), televisions, smart phones, cellular phones and pagers. Spyglass Prism can dynamically translate richly- formatted Web content -- HTML, tables, JPEG, frames -- into formats that match the relatively limited display capabilities of non-PC devices. For example, with a PDA, Prism could convert memory and bandwidth intensive color images into a simpler gray-scale format and then resize that image for the PDA's small display screen. These conversions of graphic laden content can reduce access times by as much as 90 percent. Performance is further enhanced by a caching feature that stores previously converted, frequently requested Web content.
SURFWATCH CLIENT
SurfWatch Client from Spyglass is an easy-to-use, effective software application for screening unwanted material from the Internet. SurfWatch Client from Spyglass features:
- The ability to block access to a comprehensive list of sites pertaining to violence, hate crimes, drugs/alcohol, and sex,
- A subscription service for updating the SurfWatch content list,
- A filter manager for defining custom content filters,
- A password protected on/off switch,
- The ability to block objectionable Web, News, FTP, Gopher, and Chat content, and
- Multiple platform availability.
SURFWATCH PROSERVER
SurfWatch ProServer, based on SurfWatch Client, is installed on a Proxy Server and blocks unwanted sexually explicit and other inappropriate material on computers connected to the network-without restricting the access rights of other Internet users. The SurfWatch ProServer software removes no material from the
Internet or any server, but simply blocks it at any local network where it is installed. SurfWatch ProServer screens the World Wide Web, FTP, Gopher and other services. In addition to filters for sexually explicit material, SurfWatch ProServer includes filter options for violence, hate crimes, drugs, alcohol, games, and gambling. SurfWatch ProServer is available in the following editions: Microsoft Proxy Server, Netscape Proxy Server, Oracle Proxy Server, NetApp Proxy Server, FireWall-1 and Spyglass Prism.
The following products were obtained upon Spyglass' acquisition of AllPen Software in November, 1997.
NETHOPPER BROWSER TECHNOLOGY
The NetHopper browser technology is a portable browser technology geared for small memory footprint devices. NetHopper allows users to browse the web from any location at any time, even wirelessly. The NetHopper browser technology can be found in many popular consumer electronics products currently on the market today such as Apple Computer's eMate 300 mobile computer. The NetHopper browser is written to be completely modular. In this way, the NetHopper browser can be ported to a number of other platforms, including several single-purpose devices.
NETHOPPER ENTERPRISE SERVER
The NetHopper Enterprise Server is a Java-based server geared for mobile and/or wireless, non-traditional web clients accessing traditional web-based Internet/Intranet content. As more and more web content is being targeted at large, desktop bound, multimedia computers, the NetHopper Enterprise Server helps bridge the gap between the growing amount of desktop web content to smaller, more consumer oriented devices. Java provides the ability for the NetHopper web server to be scaled for use in large, powerful server computers to much smaller Java-based devices.
EMBEDDEDWEB FOR WINDOWS CE
Targeted at mobile, small memory footprint electronic devices, AllPen's EmbeddedWeb for Windows CE, a technology of AllPen Software, which was acquired by Spyglass in November 1997, provides a means for remote devices to share and publish data via standard web protocols (HTTP, HTML, etc.) By incorporating a lightweight Web server into products such as automobiles, mobile phones, alarm systems, fax machines and televisions, these devices can be easily accessed and/or controlled through the Internet from a standard Web browser.
ALLPEN MOBILE FORMS DATABASE
The AllPen Mobile Forms Database is a mobile database and forms data collection application for the Windows CE operating system. AllPen Mobile Forms Database allows users to create powerful handheld databases that fit their mobile data collection needs. The database exists on handheld devices for easy collection of important data while freeing users from their desktops. All the data collected on the mobile device can be uploaded to the Windows 95 desktop via the Database Export functionality of the AllPen Mobile Forms Database product. Additionally, any database that one may have on their desktop can be imported into the AllPen Mobile Forms Database product for display and manipulation on the mobile CE device.
The AllPen Mobile Forms Database works with all the latest Windows CE devices including the Philips Velo, the HP 320LX, Casio's Cassiopeia, Compaq's PC Companion, LG's Phenom, and NEC's MobilePro.
MARKETING, SALES, AND DISTRIBUTION
The Company distributes its technologies through a multi-channel distribution network of original equipment manufacturers ("OEMs"), value-added resellers ("VARs") and distributors that incorporate Internet technology into their products and services. Spyglass has adopted this distribution model to increase its presence in the marketplace, and to leverage the marketing, distribution and development resources of its
customers. Certain products, such as the SurfWatch products, are also sold directly to end users via direct marketing.
As it expands its technologies to serve the non-PC marketplace, the Company is focusing its marketing efforts on a variety of companies, including but not limited to real time operating system (RTOS) vendors, consumer and industrial device manufacturers, software developers, cable companies, Regional Bell Operating Companies (RBOC) and Internet Service Providers (ISP). Efforts include direct marketing campaigns, advertising campaigns and targeting the engineering and trade conferences and shows focused on these markets and industries. In addition, the Company is targeting public relations efforts at analysts, the trade press and other media relevant to the Internet device market.
The Company's license arrangements with its customers typically provide for a non-exclusive license to incorporate Spyglass technology into the customer's products and services and distribute the Spyglass technology. These licenses generally provide for royalties based on the number of copies distributed and generally include significant minimum royalty commitments.
As of December 10, 1997, the Company had 18 employees in marketing and 18 in sales. The Company currently operates sales offices located in Cambridge, Massachusetts, San Ramon, California, Morristown, New Jersey, Marina del Rey, California, Berkshire, United Kingdom and Tokyo, Japan.
PROFESSIONAL SERVICES
The Spyglass Professional Services organization provides custom solutions and support for its' customers through its professional services and customer services groups. These custom solutions are essential to Spyglass' overall strategy.
Professional Services
The Professional Services group provides strategic consulting, custom engineering, development, systems integration and project management services. These services are provided on a project basis to assist customers in developing unique products or services utilizing Spyglass technologies and other third party technologies. This organization consists of senior consulting managers, experienced engineering developers, senior technologists and architects, technical writers and quality assurance specialists.
Customer Services
Most of the Company's customers enter into support agreements with the Company for annual fees based upon on the number of products licensed, platforms supported and copies distributed. These support agreements entitle the customer to the backup technical support described below, product upgrades and enhancements, and access to certain complementary technologies that are made available by the Company for distribution without charge.
The Company tracks all support requests through a series of customer databases that maintain current status reports as well as historical logs of customer interaction. The Company also assigns a support specialist to each of its customers as a point of contact for resolving issues. These support specialists diagnose and solve technical problems related not only to the Company's products, but also to other software and technologies with which the Company's products interact. In addition, support specialists provide the customer with direct access to the Company's development engineers and report customer and end-user feedback to the Company's development staff. Other types of support provided to the customer include technical reports, documentation, status reports for product upgrades and updates, and support during Beta test and pre-release cycles.
As of December 10, 1997, the Company employed 31 employees in its Professional Services group.
PRODUCT DEVELOPMENT
An important factor in the Company's ability to deliver state-of-the-art solutions to its customers is the technology base the Company can leverage in the creation of customized solutions for its customers. The
Company has a suite of embedded Internet and infrastructure solutions that it continues to develop in order to support the latest Internet technologies and standards. These core technologies form the basis for most of the Company's customer solutions.
The Company's primary development efforts are focused on embedded Internet technologies for HTML rendering and browsing and infrastructure technologies that enhance the performance and functionality of non-PC devices connected to the Internet.
In order to respond to rapidly changing competitive and technological conditions, the Company may seek to enhance or expand its product offerings by licensing one or more complementary technologies or products or acquiring one or more complementary companies.
Because many of the significant technologies incorporated in the Spyglass product suite are implementations of Internet standard protocols which are constantly evolving, the Company actively participates in a number of Internet standards-setting groups and technical conferences.
As of December 10, 1997, the Company's research and development staff, which is responsible for product development, quality assurance, technical communication and product coordination, consisted of 59 full-time employees. From time to time the Company employs independent contractors for software development, documentation, artistic design and quality reviews. For the fiscal years ended September 30, 1997, 1996 and 1995, research and development expenses were $13,644,000, $6,801,000 and $2,756,000, respectively, which represented 64%, 30% and 23% of revenues, respectively.
COMPETITION
The market for Internet software is extremely competitive. Moreover, because the Internet is an open system designed to be freely available to computer users worldwide, and because of the increasing popularity of the Internet, the Company expects that it will encounter increased competition in the future. In developing and licensing its technologies, products and services, the Company competes with other Internet device technology and software vendors, on-line service companies, Internet access providers and networking software companies that have developed their own WWW browsers or server products. In addition, the Company considers a significant source of competition to be the prospective customer's internal software development resources.
Spyglass MicroServer competes with other thin, embeddable Web server technologies, including those provided by 3Soft, Agranat, emWare, Integrated Systems, Inc. and Wind River Systems. The embedded server market is characterized by an abundance of small competitors and two RTOS developers. Many of the smaller competitors are offering their products at extremely competitive prices in an attempt to establish a market position. The RTOS developers have the advantage of being able to offer embedded Web server functionality along with their operating systems. The barriers to entry for the embedded Web server market are very low, as the amount of software required for a server is very small.
Spyglass Device Mosaic also competes with several companies who are providing lightweight Web browsers for the emerging Internet device marketplace. Spyglass competes with a number of small start-up companies in specific vertical markets. Spyglass also competes with Microsoft's Pocket Internet Explorer offering on WindowsCE, Network Computer, Inc. (an Oracle subsidiary) and JavaSoft, which is attempting to adapt the Java environment to embedded devices. All of these companies are licensing their Web browser and other solutions to OEMs.
At this time, the Company believes there are no other content conversion servers that are being offered to the OEM market that directly compete with Spyglass Prism.
The Company also faces competition for its SurfWatch Client product from other companies who have filtering products, such as Cyber Patrol.
In its professional services offerings, Spyglass competes with other technology consulting firms as well as other technology competitors and customers' in-house research and development staff.
Competition among the current and future suppliers of Internet software could result in significant price competition and reductions in the selling price of the Company's products. Moreover, many of the Company's current and potential competitors have significantly greater financial, technical, marketing and other resources than the Company. There can be no assurance that the Company will be able to compete successfully against current and future sources of competition or that the competitive pressures faced by the Company will not adversely affect the Company's revenues or gross margins.
PROPRIETARY RIGHTS
One of the Company's products, Spyglass Device Mosaic, is based in part on technology licensed to the Company under an agreement with the University of Illinois at Urbana-Champaign. This agreement grants the Company the exclusive (subject to previously granted licenses described below) worldwide right to develop, distribute and sublicense commercial derivative versions of NCSA Mosaic, the Web browser that was originally developed at the National Center for Supercomputing Applications on the University of Illinois campus. The University Agreement provides for royalties based on Spyglass' net revenues from Device Mosaic. This University Agreement has an initial term of five years, with automatic one-year renewals, and is terminable in the event of a material breach by the Company of its obligations thereunder.
The University informed the Company that, prior to appointing the Company as its exclusive licensing agent, the University granted certain rights with respect to NCSA Mosaic and the Mosaic trademark to approximately 10 organizations, some of which have developed and market WWW browsers based on NCSA Mosaic.
The University Agreement gives the Company the exclusive right (with certain limited exceptions) to use the University's trademarks "Mosaic" and "NCSA Mosaic" and its spinning globe logo in connection with Spyglass Mosaic products on a royalty-free basis (with certain limited exceptions). In addition, the Company has the exclusive right (with certain limited exceptions) to use these marks in connection with the sale of other products for a royalty payment based on net revenues derived from such products. The University has filed an application to register the "NCSA Mosaic" and "Mosaic" trademarks and the spinning globe logo in the United States.
Spyglass has registered the name "Spyglass", the red "S" logo and the tag line "Make The Net Work" in the United States. In addition, the Company has filed applications to register the name "Spyglass" in various foreign jurisdictions. Spyglass has also registered the name "SurfWatch" in the United States.
AllPen Software, Inc. has registered the following trademarks in the United States: "AllPen", "Nethopper" and "The World in the Palm of your Hand". AllPen Software, Inc. also has filed applications to register the name "Nethopper" in Canada and France and "EmbeddedWeb" in the United States.
The Company relies upon copyright law, trade secret protection and confidentiality and/or license agreements with its employees, customers and others to protect its proprietary technology. Effective trademark, copyright and trade secret protection may not be available in every foreign country in which the Company's products are distributed. The University has no patent protection for NCSA Mosaic, and the Company has filed only one patent application to date to protect its products. There can be no assurance that the steps taken by the Company (or the University) to protect their respective proprietary technologies will be adequate to prevent misappropriation of their technology by third parties, or that third parties will not be able to independently develop similar technology. In addition, there can be no assurance that other parties will not assert technology infringement claims against the Company.
The Company licenses technology from a number of third party product vendors for incorporation into the Company's products. Examples of such licensed technologies include security products, image conversion products and databases. Specifically, the Company announced on September 13, 1995 an agreement with RSA Data Security, Inc. ("RSA") allowing the Company to bundle RSA-security products with its technology offerings. The agreement allows Spyglass to use RSA's BSAFE and TIPEM software developer's kits to build security into Spyglass' technology offerings. BSAFE is a well-known cryptographer's tool kit,
providing the means to add multiple algorithms and modules for encryption and authentication features to any application.
On November 3, 1995, the Company entered into an agreement with the Java Products Group of Sun Microsystems, Inc. to license the JAVA programming language, the HOT JAVA browser and related technology. Under the agreement, the Company is granted the right to distribute the JAVA Runtime interpreter, the HOT JAVA browser and certain JAVA classes and interfaces developed by both Sun and the Company. The Company also has the right to port so-called "platform dependent parts" to other platforms.
EMPLOYEES
As of December 10, 1997, Spyglass employed 162 persons, including 36 in sales and marketing, 59 in research and development, 5 in customer services, 31 in professional services and 31 in finance and administrative functions. None of the Company's employees are represented by a labor union and Spyglass considers its employee relations to be good.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive offices are located in Naperville, Illinois (27,841 square feet) and are occupied under a lease that expires in December 1999. The Company also leases research and development facilities Cambridge, Massachusetts, Los Gatos, California and Los Altos, California. The Company leases sales offices in San Ramon, California, Morristown, New Jersey, Marina del Rey, California, Berkshire, United Kingdom and Tokyo, Japan.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Unisys Corporation ("Unisys") has announced its intention to require the payment of royalties for the use of compression technology associated with the Graphics Interchange Format ("GIF"), a popular file format based on compression technology patented by Unisys. Spyglass Device Mosaic has the ability to decompress files, including files stored in GIF. The assertion of these patent rights by Unisys, if successful, could result in additional royalty costs to the Company or prevent the Company's products from enabling users to view files compressed in GIF.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the quarter ended September 30, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
Mr. Colbeth has been President, Chief Executive Officer and a director of the Company since he joined the Company in April 1991. Prior to joining the Company, Mr. Colbeth spent four years at Stellar/Stardent
Computer Corp., a high-end graphics workstation supplier, in various management positions, most recently as Vice President/General Manager of its AVS software business unit. From January 1979 until March 1987, Mr. Colbeth was employed in various sales and management positions at Prime Computer, Inc., a minicomputer vendor. Mr. Colbeth received his B.S. degree in economics from Siena College in 1977 and has completed graduate studies in managerial economics at Rensselaer Polytechnic Institute.
Mr. Littleson joined the Company as Director, Product Marketing in June 1996 and was promoted to Vice President, Marketing in October 1996. Prior to joining the Company, Mr. Littleson was employed by Seagate Software (formerly Palindrome Corp.), a computer technology company, since 1990, most recently as Director, Product Marketing. Mr. Littleson received his B.S. degree from the University of Michigan in 1987 and his M.B.A. from Keller Graduate School of Management in 1994.
Mr. Tyrrell joined the Company in June 1990 as Vice President, Sales. Mr. Tyrrell has served as Executive Vice President, Business Development since November 1995. Prior to joining the Company, Mr. Tyrrell spent three years as a regional sales manager for Multiflow Computer, Inc., a supercomputer company. Mr. Tyrrell's prior experience includes five years of sales and sales management at Celerity Computing and Prime Computer, Inc. Mr. Tyrrell received his B.S. degree in business administration from the University of New Hampshire.
Mr. Vilchick joined the Company in December 1995 as Executive Vice President, Finance, Administration and Operations and Chief Financial Officer. Prior to joining the Company, Mr. Vilchick was the Vice President of Finance for Pitney Bowes Logistics Systems for three years, and Controller for Pitney Bowes Management Services for four years prior to that. Mr. Vilchick received his B.S. degree in accounting from the University of Rhode Island. Mr. Vilchick is a Certified Public Accountant.
Mr. Seamans joined the Company in July 1996 as Chief Information Officer and was promoted to Vice President and General Manager, Professional Services in addition to Chief Information Officer in May 1997. Prior to joining the Company, Mr. Seamans was Vice President, Product Development and Technology for Pitney Bowes from 1993 to 1996, Director, Large Accounts for J.D. Edwards in 1992 and System Development Manger for Pitney Bowes for six years. Mr. Seamans received his B.S. degree in Business Administration from Bryant College in 1992 with a major in computer science.
Mr. Houle joined the Company in November 1996 as Executive Vice President, Development and Services. Prior to joining the Company, Mr. Houle was employed as the Executive Vice President, Operations for Trimark Technology, Inc. from September 1995 through October 1996. Prior to Trimark, Mr. Houle was employed with Sun Microsystems, Inc. from 1988 through 1995, most recently as Systems Engineering Director.
Mr. Sears joined the Company in June 1997 as Vice President and General Manager of its SurfWatch Software Division. Prior to joining the Company, Mr. Sears was principal of The Reticle Group, a Silicon Valley-based management consulting firm providing business and development counsel for technology companies, from 1996 through June 1997. Prior to that, he spent six years at Sun Microsystems, Inc., most recently serving as chief of staff for SunSoft, Sun's software division. Mr. Sears received a master's degree in business administration from the Stanford Graduate School of Business and a juris doctorate degree from Stanford Law School. Mr. Sears graduated from the United States Naval Academy, and served for five years with the United States Marine Corps, where he rose to the rank of Captain.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference from the sections entitled "Selected Quarterly Data" and "Shares Listed" in the Company's Annual Report to stockholders for the fiscal year ended September 30, 1997 (the "Annual Report").
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference from the section entitled "Selected Financial Data" in the Annual Report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated herein by reference from the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required by this Item is not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein be reference from the financial statements contained in the Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company changed its independent accountants in July 1997 as reported in its Current Report on Form 8-K dated July 15, 1997.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning directors of the Company is incorporated herein by reference from the section entitled "Election of Directors" included in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders for the fiscal year ended September 30, 1997, which will be filed with the Securities and Exchange commission within 120 days of the Company's fiscal year end (the "1997 Proxy Statement"). The information required by this Item concerning executive officers of the Company is included in Part I of this Annual Report on Form 10-K under the section captioned "Executive Officers of the Registrant". The information required by this Item concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" included in the 1997 Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference from the sections entitled "Compensation Committee Interlocks and Insider Participation", "Compensation of Directors", "Executive Compensation" and "Employment Agreements" included in the 1997 Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference from the section entitled "Beneficial Ownership of Voting Stock" included in the 1997 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is not applicable.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial information is incorporated by reference into Part II hereof from the Annual Report
1.Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets at September 30, 1997 and 1996
Consolidated Statements of Operations for the three years ended September 30, 1997
Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity for the three years ended September 30,
Consolidated Statements of Cash Flows for the three years ended September 30, 1997
Notes to the Consolidated Financial Statements
2.Financial Statement Schedules:
Report of Independent Auditors on Financial Statement Schedule
Schedule VIII -- Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable, not required, or the information required is included in the financial statements or notes thereto.
3.Exhibits:
The exhibits are listed in the accompanying Index to Exhibits immediately following the signature page.
(b) Reports on Form 8-K
Current Reports on Form 8-K were filed dated July 15, 1997 to report a change in the Company's independent accountants and dated November 21, 1997 to report the acquisition of AllPen Software.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Spyglass, Inc. -------------------------------------- Registrant
Date: December 18, 1997 /s/ GARY L. VILCHICK ------------------------------------- Gary L. Vilchick Executive Vice President, Finance, Administration and Operations and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of December 18, 1997 by the following persons on behalf of the registrant and in the capacities indicated.
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Spyglass, Inc.
We have audited the consolidated financial statements of Spyglass, Inc. and subsidiaries as of September 30, 1997, and for the year then ended, and have issued our report thereon dated October 24, 1997. Our audit also included the financial statement schedule listed in the Index at Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. The consolidated financial statements and financial statement schedule of Spyglass, Inc. and subsidiaries as of September 30, 1996 and for the years ended September 30, 1996 and 1995 were audited by other auditors whose report dated October 25, 1996 expressed an unqualified opinion on those statements and schedule.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP ------------------------------------- Ernst & Young LLP
Chicago, Illinois October 24, 1997
SPYGLASS, INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
- ------------------------- (1) Bad debt write-offs
INDEX TO EXHIBITS
- ------------------------- (1) Incorporated herein by reference from the Company's Registration Statement on Form S-8 (File No. 333-04357) filed on May 23, 1996.
(2) Incorporated herein by reference from the Company's Registration Statement on Form S-1 (File No. 33-92174).
(3) Incorporated herein by reference from the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, as amended by an Annual Report on Form 10-K/A filed on May 17, 1996.
(4) Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, as amended by a Quarterly Report on Form 10-Q/A filed on May 17, 1996.
(5) Confidential treatment previously granted by the Securities and Exchange Commission as to certain portions.
(6) Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(7) Incorporated herein by reference from the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996.
(8) Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996.