-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UXpcnyy8QJ45r2mDNEqJN62vC3FCOWw/82MyG4rJB6FhW6Lz0jLIrm25DfdmLa// KXJEnXWjXTwSJz6NIwp5QQ== 0000950137-97-004112.txt : 19971223 0000950137-97-004112.hdr.sgml : 19971223 ACCESSION NUMBER: 0000950137-97-004112 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971222 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPYGLASS INC CENTRAL INDEX KEY: 0000945256 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 371258139 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26074 FILM NUMBER: 97742164 BUSINESS ADDRESS: STREET 1: 1230 EAST DIEHL RD STE 304 CITY: NAPERVILLE STATE: IL ZIP: 60563 BUSINESS PHONE: 7085051010 MAIL ADDRESS: STREET 1: 1230 EAST DIEHL RD CITY: NAPERVILLE STATE: IL ZIP: 60563 10-K 1 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------------- Commission file number 0-26074 SPYGLASS, INC. (Exact name of Registrant as Specified in its Charter) DELAWARE (State or other jurisdiction of incorporation or organization) 37-1258139 (I.R.S. Employer 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) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g)of the Act: $0.01 PAR VALUE COMMON STOCK (Title of Class) Traded on the Nasdaq National Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the Common Stock held by non-affiliates of the registrant on October 31, 1997, based upon the closing sale price of the Common Stock on the Nasdaq National Market on that date as reported in The Wall Street Journal, was approximately $105,982,695. Registrant had 13,236,114 shares of Common Stock outstanding as of December 8, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1997 Annual Report to Stockholders for fiscal 1997 are incorporated by reference in Parts II and IV hereof. The Annual Report shall be deemed "filed" with the Commission only with respect to those portions specifically incorporated by reference herein. Portions of the registrant's definitive Proxy Statement for its Annual Meeting of Stockholders for fiscal 1997, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Company's fiscal year, are incorporated by reference into Part III hereof. ================================================================================ 2 PART I 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. 3 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. 2 4 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 3 5 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 4 6 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 5 7 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. 6 8 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, 7 9 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. 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. 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. 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
NAME AGE POSITION(S) WITH THE COMPANY - ---- --- ---------------------------- Douglas P. Colbeth........................ 42 President, Chief Executive Officer and Director Randall T. Littleson...................... 32 Vice President, Marketing Michael F. Tyrrell........................ 38 Executive Vice President, Business Development Gary L. Vilchick.......................... 43 Executive Vice President, Finance, Administration and Operations and Chief Financial Officer Timothy M.P. Seamans...................... 38 Vice President and General Manager, Professional Services and Chief Information Officer Richard M. Houle.......................... 42 Executive Vice President, Development and Services Michael Sears............................. 40 Vice President and General Manager, SurfWatch Software Division
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 8 10 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. 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"). 9 11 ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated herein by reference from the section entitled "Selected Financial Data" in the Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated herein by reference from the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information required by this Item is not applicable. 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. 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. 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. 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. 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is not applicable. 10 12 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following financial information is incorporated by reference into Part II hereof from the Annual Report 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, 1997 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. 11 13 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.
SIGNATURE --------- /s/ DOUGLAS P. COLBETH President, Chief Executive Officer and - ----------------------------------------------------- Director (Principal Executive Officer) Douglas P. Colbeth /s/ GARY L. VILCHICK Executive Vice President, Finance, - ----------------------------------------------------- Administration and Operations and Chief Gary L. Vilchick Financial Officer (Principal Financial and Accounting Officer) /s/ TIM KRAUSKOPF Director - ----------------------------------------------------- Tim Krauskopf /s/ BRIAN J. JACKMAN Director - ----------------------------------------------------- Brian J. Jackman /s/ RAY ROTHROCK Director - ----------------------------------------------------- Ray Rothrock /s/ STEVEN R. VANA-PAXHIA Director - ----------------------------------------------------- Steven R. Vana-Paxhia
12 14 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 13 15 SPYGLASS, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED BALANCE AT BEGINNING COSTS AND TO OTHER (1) END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- ---------- ---------- -------- ---------- ---------- SEPTEMBER 30, 1997 Allowance for doubtful accounts....... $ 470,000 1,029,051 -- 1,149,051 $ 350,000 SEPTEMBER 30, 1996 Allowance for doubtful accounts....... $ 180,209 301,034 -- 11,243 $ 470,000 SEPTEMBER 30, 1995 Allowance for doubtful accounts....... $ 2,300 184,070 -- 6,161 $ 180,209 SEPTEMBER 30, 1997 Valuation allowance for income taxes................................. $1,477,000 3,093,000 -- -- $4,570,000 SEPTEMBER 30, 1996 Valuation allowance for income taxes................................. $ 0 1,477,000 -- -- $1,477,000 SEPTEMBER 30, 1995 Valuation allowance for income taxes................................. $ 0 -- -- -- $ 0
- ------------------------- (1) Bad debt write-offs 14 16 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1 (1) Amended and Restated Certificate of Incorporation of the Registrant, as amended 3.2 (2) By-laws of the Registrant 4.1 (2) Specimen certificate for shares of Common Stock 10.1 (2) 1991 Stock Option Plan 10.2 (4) 1995 Stock Incentive Plan, as amended 10.3 (2) 1995 Director Stock Option Plan 10.4 (2) Employment and Confidentiality Agreement between the Registrant and Douglas P. Colbeth dated April 1, 1991 10.5 (2) Employment and Confidentiality Agreement between the Registrant and Michael F. Tyrrell dated April 29, 1991 10.6 (7) Senior Management Retention Agreement between the Registrant and Doug Colbeth, dated November 1, 1996 10.7 (7) Senior Management Retention Agreement between the Registrant and Tim Krauskopf, dated November 1, 1996 10.8 (7) Senior Management Retention Agreement between the Registrant and Michael Tyrrell, dated November 1, 1996 10.9 (7) Senior Management Retention Agreement between the Registrant and Gary Vilchick, dated November 1, 1996 10.10(7) Senior Management Retention Agreement between the Registrant and Randall T. Littleson, dated November 1, 1996 10.11(7) Senior Management Retention Agreement between the Registrant and Richard Houle, dated November 1, 1996 10.12 Senior Management Retention Agreement between the Registrant and Michael Sears, dated June 2, 1997 10.13 Senior Management Retention Agreement between the Registrant and Timothy Seamans, dated November 1, 1996 10.14(3) Standard form of Employment and Confidentiality Agreement 10.15(2) NCSA Mosaic Software License Agreement between the Registrant and the Board of Trustees for the University of Illinois dated May 10, 1994, as amended by amendment No. 1 dated May 10, 1994, amendment No. 2 dated August 4, 1994 and amendment No. 3 dated March 21, 1995(5) 10.16(3) Amendment No. 4 to NCSA Mosaic Software License Agreement between the Registrant and the Board of Trustees for the University of Illinois, dated June 28, 1995(5) 10.17(2) OEM/Source License Agreement, dated December 12, 1994, between the Registrant and Microsoft Corporation. 10.18(4) Amendment No. 1 to the OEM/Source License Agreement between the Registrant and Microsoft Corporation, dated September 26, 1995(5) 10.19(4) Technology Cooperation Agreement, Including Amendment of OEM/Source License Agreement between the Registrant and Microsoft Corporation dated December 6, 1995(5) 10.20(7) Amendment No. 1, dated September 30, 1996, to the Technology Cooperation Agreement, Including Amendment of OEM/Source License Agreement between the Registrant and Microsoft Corporation, dated December 6, 1995(5)
15 17 10.21(8) Amendment No. 2 to the Technology Cooperation Agreement, Including Amendment of OEM/Source License Agreement between the Registrant and Microsoft Corporation, dated January 21, 1997. 10.22(3) RSA Data Security, Inc.-BSAFE/TIPEM OEM Master License Agreement dated August 8, 1995(5) 10.23(6) Sub-Lease Agreement between Rust Environment & Infrastructure, Inc. and the Registrant dated February 6, 1996 10.24 Office Lease Agreement between American National Bank and Trust Company of Chicago Trust No. 43194 and the Registrant dated May 28, 1997 10.25(6) Standard Form of Invention and Non-Disclosure Agreement 10.26(6) Standard Form of Non-Disclosure Agreement 11.1 Statement Regarding Computation of Earnings per Share 13.1 Portions of the Annual Report to Shareholders for the fiscal year ended September 30, 1997 (only those portions specifically incorporated by reference herein are filed herewith). 21 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 23.2 Consent of Independent Accountants 27 Financial Data Schedule
- ------------------------- (1) Incorporated herein by reference from the Company's Registration Statement on Form S-8 (File No. 333-04357) filed on May 23, 1996. (2) Incorporated herein by reference from the Company's Registration Statement on Form S-1 (File No. 33-92174). (3) Incorporated herein by reference from the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, as amended by an Annual Report on Form 10-K/A filed on May 17, 1996. (4) Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, as amended by a Quarterly Report on Form 10-Q/A filed on May 17, 1996. (5) Confidential treatment previously granted by the Securities and Exchange Commission as to certain portions. (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. 16 EX-10.12 2 SENIOR MANAGEMENT RETENTION AGREEMENT/SEARS 1 EXHIBIT 10.12 SPYGLASS, INC. Senior Management Retention Agreement Michael Sears Spyglass, Inc. 175 S. San Antonio Rd Los Altos, CA 94022 Dear Michael: Spyglass, Inc. (the "Company") recognizes that, as is the case with many publicly-held corporations, the possibility of a change in control of the Company exists and that such possibility, and the uncertainty and questions which it may raise among key personnel, may result in the departure or distraction of key personnel to the detriment of the Company and its stockholders. The Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued employment and dedication of the Company's key personnel, including yourself, without distraction from the possibility of a change in control of the Company and related events and circumstances. As inducement for and in consideration of your remaining in its employ, the Company agrees that you shall receive the severance benefits set forth in this letter agreement (the "Agreement") in the event your employment with the Company is terminated under the circumstances described below subsequent to a Change in Control of the Company (as defined below). 1. Certain Definitions. 2 As used herein, the following terms shall have the following respective meanings: 1.1 "Change in Control" shall mean: (a) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 1.1; or (b) individuals who, as of the date hereof, constitute the members of the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the Incumbent Directors shall be deemed to be an Incumbent Director (except that this proviso clause shall not apply to any individual whose initial election as a director occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board); or 3 (c) the consummation of a reorganization, merger or consolidation involving the Company or a sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), unless, immediately following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation in such Business Combination in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively, (ii) no Person (excluding any resulting or acquiring corporation in such Business Combination or any employee benefit plan (or related trust) of the Company or of such resulting or acquiring corporation in such Business Combination) beneficially owns, directly or indirectly, 30% or more of the then outstanding shares of common stock of such resulting or acquiring corporation in such Business Combination, or of the combined voting power of the then-outstanding voting securities of such corporation (except to the extent that such ownership existed prior to the Business Combination) and (iii) at least half of the members of the board of directors of the resulting or acquiring corporation in such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. 1.2 "Cause" shall mean: 4 (a) your willful failure to substantially perform your reasonable assigned duties as an officer of the Company (other than any such failure resulting from incapacity due to physical or mental illness), which failure is not cured within 30 days after a written demand for substantial performance is delivered to you by the Board which specifically identifies the manner in which the Board believes that you have not substantially performed your duties; or (b) your willful engagement in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this Section 1.2, no act or failure to act, on your part shall be considered "willful" unless it is done, or omitted to be done, by you in bad faith and without reasonable belief that your action or omission was in the best interests of the Company. 1.3 "Good Reason" shall mean the occurrence, without your written consent, of any of the following circumstances unless such circumstance is fully corrected prior to the Date of Termination specified in the Notice of Termination (each as defined below) given in respect thereof (provided that such right of correction by the Company shall only apply to the first Notice of Termination for Good Reason given by you): (a) the assignment to you (without your written consent) of any duties inconsistent in any respect with your position (including status, offices, titles and reporting requirements), authority or responsibilities in effect as immediately prior to the Change in Control, or any other action by the Company which results in a diminution in such position, authority or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by you; 5 (b) a reduction in your annual base salary as in effect on the date hereof or as the same may be increased from time to time; (c) the failure by the Company to (i) continue in effect any material compensation or benefit plan in which you participate immediately prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, (ii) continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the Change in Control or (iii) award cash bonuses to you in amounts and in a manner substantially consistent with past practice in light of the Company's financial performance; (d) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's life insurance, medical, health and accident, or disability plans in which you were participating at the time of the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; (e) a change by the Company in the location at which you perform your principal duties for the Company to a new location that is both (i) outside a radius of 35 miles from your principal residence at the time of the Change in Control and (ii) more than 20 miles from the location at which you perform your principal duties for the Company at the time of the Change in Control; or a requirement by the Company that you travel on Company business to a substantially greater extent than required immediately prior to the Change in Control; 6 (f) the failure of the Company to obtain a reasonably satisfactory agreement from any successor to assume and agree to perform this Agreement, as required by Section 5; or (g) a purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Sections 3.2 and 6, which purported termination shall not be effective for purposes of this Agreement. For purposes of this Agreement, any good faith determination of "Good Reason" made by the Board shall be conclusive, provided that Incumbent Directors then comprise a majority of the Board. 1.4 "Disability" shall mean your absence from the full-time performance of your duties with the Company for six consecutive months as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to you or your legal representative. 2. Term of the Agreement. The term of this Agreement (the "Term") shall commence on as of the date hereof and shall continue in effect through December 31, 1998; provided, however, that commencing on January l, 1999 and each January l thereafter, the Term shall be automatically extended for one additional year unless, not later than October 31 of the preceding calendar year, the Company shall have given you written notice that the Term will not be extended. This Agreement, and all rights and obligations of the parties hereunder, shall expire upon (a) the expiration of the Term if a Change in Control has not occurred during the Term, (b) the date 24 months after the date of the Change in Control, if you are still employed by the Company as of such date, or (c) the fulfillment by the Company of all of its obligations under Section 4 if your employment with the Company terminates within 24 months following a Change in Control. 7 3. Employment Status; Termination Following Change in Control. 3.1 Not Employment Contract. You acknowledge that this Agreement does not constitute a contract of employment or impose on the Company any obligation to retain you as an employee and that this Agreement does not prevent you from terminating your employment at any time. If your employment with the Company terminates for any reason and subsequently a Change in Control shall occur, you shall not be entitled to any benefits hereunder. 3.2 Termination of Employment. Any termination of your employment by the Company or by you within 24 months following a Change in Control of the Company during the Term shall be communicated by written notice of termination ("Notice of Termination") to the other party hereto in accordance with Section 6. If such employment termination is for Cause, Good Reason or Disability, the Notice of Termination shall so state. The "Date of Termination" shall mean the effective date of such termination as specified in the Notice of Termination (provided that no such Notice of Termination shall specify an effective date less than fifteen days or more than 120 days after the date such Notice of Termination is delivered). 4. Rights Upon Termination. 4.1 Compensation. You shall be entitled to the following benefits if a Change in Control occurs during the Term and your employment with the Company terminates within 24 months following such Change in Control: (a) Termination Without Cause or for Good Reason. If your employment with the Company is terminated by the Company (other than for Cause, Disability or your death) or by you for Good Reason within 24 months following a Change in Control, then you shall be entitled to the following benefits: (i) the Company shall pay to you in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: 8 (1) the sum of (A) your annual base salary through the Date of Termination, (B) the product of (x) the annual bonus paid or payable (including any bonus or portion thereof which has been earned but deferred) for the most recently completed fiscal year and (y) a fraction, the number of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (C) the amount of any compensation previously deferred by you (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (A), (B), and (C) shall be hereinafter referred to as the "Accrued Obligations"); and (2) the amount equal to the sum of (A) your highest annual base salary during the five-year period prior to the Change in Control and (B) your highest annual bonus during the five-year period prior to the Change in Control. (ii) for 12 months after your Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue to provide benefits to you and your family at least equal to those which would have been provided to you and them in accordance with the applicable plans, programs, practices and policies in effect on the Date of Termination (excluding any savings and/or retirement plans) if your employment had not been terminated; provided, however, that if you become reemployed with another employer and are eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall not be provided to the extent the same are provided under such other plan during such applicable period of eligibility; and (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to you any other amounts or benefits required to be paid or provided or which you are eligible to receive following your termination of employment under any plan, program, policy or practice or contract or agreement of 9 the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Resignation without Good Reason; Termination for Death or Disability. If you voluntarily terminate your employment within 24 months following a Change in Control, excluding a termination for Good Reason, or if your employment is terminated by reason of your death or Disability within 24 months following a Change in Control, the Company shall (i) pay you, in a lump sum in cash within 30 days after the Date of Termination, the Accrued Obligations and (ii) timely pay or provide to you the Other Benefits. (c) Termination for Cause. If your employment is terminated by the Company for Cause within 24 months following a Change in Control, the Company shall (i) pay you, in a lump sum in cash within 30 days after the Date of Termination, the sum of (A) your annual base salary through the Date of Termination and (B) the amount of any compensation previously deferred by you, in each case to the extent not theretofore paid, and (ii) timely pay or provide to you the Other Benefits. 4.2 Taxes. Payments under this Agreement shall be made without regard to whether the deductibility of such payments (or any other payments to or for your benefit) would be limited or precluded by Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and without regard to whether such payments (or any other payments) would subject you to the federal excise tax levied on certain "excise parachute payments" under Section 4999 of the Code; provided, that if the total of all payments to or for your benefit, after deduction of all federal taxes (including the tax set forth in Section 4999 of the Code, if applicable) with respect to such payments (the "total after-tax payments"), would be increased by the limitation or elimination of any payment under this Agreement, amounts payable under this Agreement shall be reduced to the extent, and only to the extent, necessary to maximize the total after-tax payments. The determination as to whether and to what extent payments under this 10 agreement are required to be reduced in accordance with the preceding sentence shall be made by agreement between you and the independent public accounting firm of the Company (whose fees and expenses shall be borne solely by the Company). To the extent that any elimination or reduction of payments is made in accordance with this Section 4.2, the determination as to which payments shall be eliminated or reduced shall be made by you. 4.3 Mitigation. Except as provided in Section 4.1(a)(ii) hereof, you shall not be required to mitigate the amount of any payment or benefits provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefits provided for in this Section 4 be reduced by any compensation earned by you as a result of employment by another employer, by retirement benefits or by offset against any amount claimed to be owed by you to the Company or otherwise. 4.4 Expenses. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which you may reasonably incur as a result of any claim or contest by the Company, you or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by you regarding the amount of any payment or benefits pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. 5. Successors; Binding Agreement. 5.1 The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of 11 this Agreement at or prior to the effectiveness of nay succession shall be a breach of this Agreement and shall constitute Good Reason if you elect to terminate your employment, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 5.2 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or if there is no such designee, to your estate. 6. Notice. All notices, instructions and other communications given hereunder or in connection herewith shall be in writing. Any such notice, instruction or communication shall be sent either (i) by registered or certified mail, return receipt requested, postage prepaid, or (ii) via a reputable nationwide overnight courier service, in each case addressed to the Chief Executive Officer of the Company, at Naperville Corporate Center, 1240 East Diehl Road, Naperville, Illinois 60563, and to you at the address shown above (or to such other address as either the Company or you may have furnished to the other in writing in accordance herewith). Any such notice, instruction or communication shall be deemed to have been delivered two business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one business day after it is sent via a reputable nationwide overnight courier service. 7. Miscellaneous. 12 7.1 For purposes of this Agreement, your employment with the Company shall not be deemed to have terminated if you continue to be employed by a subsidiary of the Company. 7.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 7.3 The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware. 7.4 No waiver by you at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company shall be deemed a waiver of that or any other provision at any subsequent time. 7.5 This Agreement may be executed in counterparts, each of which shall be deemed to be an original but both of which together will constitute one and the same instrument. 7.6 Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. 7.7 This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled. If this accurately reflects our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter, which will then constitute our agreement on this subject. 13 Sincerely, SPYGLASS, INC. By: /s/Gary Vilchick ------------------------------------ Gary Vilchick ------------------------------------ (Print Name) Executive VP and CFO ------------------------------------ (Print Title) Agreed to this 2nd day of June, 1997 /s/ Michael Sears - ------------------------------------ (Signature) Michael Sears - ------------------------------------ (Print Name) VP and General Manager SurfWatch - ------------------------------------ (Print Title) EX-10.13 3 SENIOR MGMT RETENTION AGREEMENT/SEAMANS 1 EXHIBIT 10.13 SPYGLASS, INC. Senior Management Retention Agreement Tim Seamans Spyglass, Inc. Naperville Corporate Center 1240 E. Diehl Road Naperville, IL 60563 Dear Mr. Seamans: Spyglass, Inc. (the "Company") recognizes that, as is the case with many publicly-held corporations, the possibility of a change in control of the Company exists and that such possibility, and the uncertainty and questions which it may raise among key personnel, may result in the departure or distraction of key personnel to the detriment of the Company and its stockholders. The Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued employment and dedication of the Company's key personnel, including yourself, without distraction from the possibility of a change in control of the Company and related events and circumstances. As inducement for and in consideration of your remaining in its employ, the Company agrees that you shall receive the severance benefits set forth in this letter agreement (the "Agreement") in the event your employment with the Company is terminated under the circumstances described below subsequent to a Change in Control of the Company (as defined below). 1. Certain Definitions. 2 As used herein, the following terms shall have the following respective meanings: 1.1 "Change in Control" shall mean: (a) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 1.1; or (b) individuals who, as of the date hereof, constitute the members of the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the Incumbent Directors shall be deemed to be an Incumbent Director (except that this proviso clause shall not apply to any individual whose initial election as a director occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board); or 3 (c) the consummation of a reorganization, merger or consolidation involving the Company or a sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), unless, immediately following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation in such Business Combination in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively, (ii) no Person (excluding any resulting or acquiring corporation in such Business Combination or any employee benefit plan (or related trust) of the Company or of such resulting or acquiring corporation in such Business Combination) beneficially owns, directly or indirectly, 30% or more of the then outstanding shares of common stock of such resulting or acquiring corporation in such Business Combination, or of the combined voting power of the then-outstanding voting securities of such corporation (except to the extent that such ownership existed prior to the Business Combination) and (iii) at least half of the members of the board of directors of the resulting or acquiring corporation in such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. 1.2 "Cause" shall mean: 4 (a) your willful failure to substantially perform your reasonable assigned duties as an officer of the Company (other than any such failure resulting from incapacity due to physical or mental illness), which failure is not cured within 30 days after a written demand for substantial performance is delivered to you by the Board which specifically identifies the manner in which the Board believes that you have not substantially performed your duties; or (b) your willful engagement in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this Section 1.2, no act or failure to act, on your part shall be considered "willful" unless it is done, or omitted to be done, by you in bad faith and without reasonable belief that your action or omission was in the best interests of the Company. 1.3 "Good Reason" shall mean the occurrence, without your written consent, of any of the following circumstances unless such circumstance is fully corrected prior to the Date of Termination specified in the Notice of Termination (each as defined below) given in respect thereof (provided that such right of correction by the Company shall only apply to the first Notice of Termination for Good Reason given by you): (a) the assignment to you (without your written consent) of any duties inconsistent in any respect with your position (including status, offices, titles and reporting requirements), authority or responsibilities in effect as immediately prior to the Change in Control, or any other action by the Company which results in a diminution in such position, authority or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of written notice thereof given by you; 5 (b) a reduction in your annual base salary as in effect on the date hereof or as the same may be increased from time to time; (c) the failure by the Company to (i) continue in effect any material compensation or benefit plan in which you participate immediately prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, (ii) continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the Change in Control or (iii) award cash bonuses to you in amounts and in a manner substantially consistent with past practice in light of the Company's financial performance; (d) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's life insurance, medical, health and accident, or disability plans in which you were participating at the time of the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; (e) a change by the Company in the location at which you perform your principal duties for the Company to a new location that is both (i) outside a radius of 35 miles from your principal residence at the time of the Change in Control and (ii) more than 20 miles from the location at which you perform your principal duties for the Company at the time of the Change in Control; or a requirement by the Company that you travel on Company business to a substantially greater extent than required immediately prior to the Change in Control; 6 (f) the failure of the Company to obtain a reasonably satisfactory agreement from any successor to assume and agree to perform this Agreement, as required by Section 5; or (g) a purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Sections 3.2 and 6, which purported termination shall not be effective for purposes of this Agreement. For purposes of this Agreement, any good faith determination of "Good Reason" made by the Board shall be conclusive, provided that Incumbent Directors then comprise a majority of the Board. 1.4 "Disability" shall mean your absence from the full-time performance of your duties with the Company for six consecutive months as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to you or your legal representative. 2. Term of the Agreement. The term of this Agreement (the "Term") shall commence on as of the date hereof and shall continue in effect through December 31, 1998; provided, however, that commencing on January l, 1999 and each January l thereafter, the Term shall be automatically extended for one additional year unless, not later than October 31 of the preceding calendar year, the Company shall have given you written notice that the Term will not be extended. This Agreement, and all rights and obligations of the parties hereunder, shall expire upon (a) the expiration of the Term if a Change in Control has not occurred during the Term, (b) the date 24 months after the date of the Change in Control, if you are still employed by the Company as of such date, or (c) the fulfillment by the Company of all of its obligations under Section 4 if your employment with the Company terminates within 24 months following a Change in Control. 7 3. Employment Status; Termination Following Change in Control. 3.1 Not Employment Contract. You acknowledge that this Agreement does not constitute a contract of employment or impose on the Company any obligation to retain you as an employee and that this Agreement does not prevent you from terminating your employment at any time. If your employment with the Company terminates for any reason and subsequently a Change in Control shall occur, you shall not be entitled to any benefits hereunder. 3.2 Termination of Employment. Any termination of your employment by the Company or by you within 24 months following a Change in Control of the Company during the Term shall be communicated by written notice of termination ("Notice of Termination") to the other party hereto in accordance with Section 6. If such employment termination is for Cause, Good Reason or Disability, the Notice of Termination shall so state. The "Date of Termination" shall mean the effective date of such termination as specified in the Notice of Termination (provided that no such Notice of Termination shall specify an effective date less than fifteen days or more than 120 days after the date such Notice of Termination is delivered). 4. Rights Upon Termination. 4.1 Compensation. You shall be entitled to the following benefits if a Change in Control occurs during the Term and your employment with the Company terminates within 24 months following such Change in Control: (a) Termination Without Cause or for Good Reason. If your employment with the Company is terminated by the Company (other than for Cause, Disability or your death) or by you for Good Reason within 24 months following a Change in Control, then you shall be entitled to the following benefits: (i) the Company shall pay to you in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: 8 (1) the sum of (A) your annual base salary through the Date of Termination, (B) the product of (x) the annual bonus paid or payable (including any bonus or portion thereof which has been earned but deferred) for the most recently completed fiscal year and (y) a fraction, the number of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (C) the amount of any compensation previously deferred by you (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (A), (B), and (C) shall be hereinafter referred to as the "Accrued Obligations"); and (2) the amount equal to the sum of (A) your highest annual base salary during the five-year period prior to the Change in Control and (B) your highest annual bonus during the five-year period prior to the Change in Control. (ii) for 12 months after your Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue to provide benefits to you and your family at least equal to those which would have been provided to you and them in accordance with the applicable plans, programs, practices and policies in effect on the Date of Termination (excluding any savings and/or retirement plans) if your employment had not been terminated; provided, however, that if you become reemployed with another employer and are eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall not be provided to the extent the same are provided under such other plan during such applicable period of eligibility; and (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to you any other amounts or benefits required to be paid or provided or which you are eligible to receive following your termination of employment under any plan, program, policy or practice or contract or agreement of 9 the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Resignation without Good Reason; Termination for Death or Disability. If you voluntarily terminate your employment within 24 months following a Change in Control, excluding a termination for Good Reason, or if your employment is terminated by reason of your death or Disability within 24 months following a Change in Control, the Company shall (i) pay you, in a lump sum in cash within 30 days after the Date of Termination, the Accrued Obligations and (ii) timely pay or provide to you the Other Benefits. (c) Termination for Cause. If your employment is terminated by the Company for Cause within 24 months following a Change in Control, the Company shall (i) pay you, in a lump sum in cash within 30 days after the Date of Termination, the sum of (A) your annual base salary through the Date of Termination and (B) the amount of any compensation previously deferred by you, in each case to the extent not theretofore paid, and (ii) timely pay or provide to you the Other Benefits. 4.2 Taxes. Payments under this Agreement shall be made without regard to whether the deductibility of such payments (or any other payments to or for your benefit) would be limited or precluded by Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and without regard to whether such payments (or any other payments) would subject you to the federal excise tax levied on certain "excise parachute payments" under Section 4999 of the Code; provided, that if the total of all payments to or for your benefit, after deduction of all federal taxes (including the tax set forth in Section 4999 of the Code, if applicable) with respect to such payments (the "total after-tax payments"), would be increased by the limitation or elimination of any payment under this Agreement, amounts payable under this Agreement shall be reduced to the extent, and only to the extent, necessary to maximize the total after-tax payments. The determination as to whether and to what extent payments under this 10 agreement are required to be reduced in accordance with the preceding sentence shall be made by agreement between you and the independent public accounting firm of the Company (whose fees and expenses shall be borne solely by the Company). To the extent that any elimination or reduction of payments is made in accordance with this Section 4.2, the determination as to which payments shall be eliminated or reduced shall be made by you. 4.3 Mitigation. Except as provided in Section 4.1(a)(ii) hereof, you shall not be required to mitigate the amount of any payment or benefits provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefits provided for in this Section 4 be reduced by any compensation earned by you as a result of employment by another employer, by retirement benefits or by offset against any amount claimed to be owed by you to the Company or otherwise. 4.4 Expenses. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which you may reasonably incur as a result of any claim or contest by the Company, you or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by you regarding the amount of any payment or benefits pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. 5. Successors; Binding Agreement. 5.1 The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of 11 this Agreement at or prior to the effectiveness of any succession shall be a breach of this Agreement and shall constitute Good Reason if you elect to terminate your employment, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 5.2 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or if there is no such designee, to your estate. 6. Notice. All notices, instructions and other communications given hereunder or in connection herewith shall be in writing. Any such notice, instruction or communication shall be sent either (i) by registered or certified mail, return receipt requested, postage prepaid, or (ii) via a reputable nationwide overnight courier service, in each case addressed to the Chief Executive Officer of the Company, at Naperville Corporate Center, 1240 East Diehl Road, Naperville, Illinois 60563, and to you at the address shown above (or to such other address as either the Company or you may have furnished to the other in writing in accordance herewith). Any such notice, instruction or communication shall be deemed to have been delivered two business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one business day after it is sent via a reputable nationwide overnight courier service. 7. Miscellaneous. 12 7.1 For purposes of this Agreement, your employment with the Company shall not be deemed to have terminated if you continue to be employed by a subsidiary of the Company. 7.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 7.3 The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware. 7.4 No waiver by you at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company shall be deemed a waiver of that or any other provision at any subsequent time. 7.5 This Agreement may be executed in counterparts, each of which shall be deemed to be an original but both of which together will constitute one and the same instrument. 7.6 Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. 7.7 This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled. If this accurately reflects our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter, which will then constitute our agreement on this subject. 13 Sincerely, SPYGLASS, INC. By: /s/Douglas P. Colbeth ------------------------------------------ Douglas P. Colbeth ------------------------------------------ (Print Name) President & CEO ------------------------------------------ (Print Title) Agreed to this 1st day of November, 1996 /s/ T.M.P. Seamans - ----------------------------------- (Signature) T.M.P. Seamans - ----------------------------------- (Print Name) V.P. OF I.S. & CIO - ----------------------------------- (Print Title) EX-10.24 4 OFFICE LEASE AGREEMENT 1 EXHIBIT 10.24 OFFICE LEASE NAPERVILLE CORPORATE CENTER SUBDIVISION BETWEEN AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO TRUST NO. 43194 as Landlord AND SPYGLASS, INC. as Tenant 1240 East Diehl Road Naperville, Illinois 2 TABLE OF CONTENTS
NO. DESCRIPTION PAGE - --- ----------- ------- 1. BASIC LEASE PROVISIONS AND IDENTIFICATION OF EXHIBITS 1.01 BASIC LEASE PROVISIONS 1 1.02 IDENTIFICATION OF EXHIBITS 2 2. PREMISES AND TERM 2 2.01 LEASE OF PREMISES 2 2.02 TERM OF LEASE 2 2.03 INSTALLATION OF EQUIPMENT BY TENANT 2 2.04 AGREEMENT STATING COMMENCEMENT AND EXPIRATION DATES OF LEASE 2 3. RENT 2 4. SECURITY DEPOSIT 3 5. SERVICES 3 5.01 LANDLORD'S GENERAL SERVICES 3 5.02 ADDITIONAL AND AFTER-HOUR SERVICES 3 5.03 TENANT'S UTILITIES 4 5.04 DELAYS IN FURNISHING SERVICES 4 6. POSSESSION, USE AND ENJOYMENT 4 6.01 POSSESSION AND USE OF PREMISES 4 6.02 QUIET ENJOYMENT 5 7. CONDITION OF PREMISES 5 B. ASSIGNMENT AND SUBLETTING 5 8.01 ASSIGNMENT AND SUBLETTING 5 8.02 RECAPTURE 6 9. MAINTENANCE AND REPAIR 6 9.01 LANDLORD'S MAINTENANCE AND REPAIR 6 9.02 TENANT'S MAINTENANCE AND REPAIR 7 10. ALTERATIONS AND IMPROVEMENTS SUBSEQUENT TO INITIAL OCCUPANCY 7 10.01 TENANT'S ALTERATIONS SUBSEQUENT TO INITIAL OCCUPANCY 7 10.02 LIENS 8 11. WAIVER OF CLAIMS AND INDEMNITY 8 11.01 WAIVER 8 11.02 INDEMNIFICATION 8 12. LANDLORD'S REMEDIES 9 12.01 EVENTS OF DEFAULT 9 12.02 LANDLORD'S REMEDIES 9 12.03 TRUSTEE IN BANKRUPTCY 10 12.04 ATTORNEYS' FEES 10 13. SURRENDER OF PREMISES 10 14. HOLDING OVER 10 15. DAMAGE BY FIRE OR OTHER CASUALTY 11 15.01 SUBSTANTIAL UNTENANTABILITY 11 15.02 INSUBSTANTIAL UNTENANTABILITY 11 15.03 RENT ABATEMENT 11 15.04 DEFINITIONS 11 16. EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . 12 16.01 SUBSTANTIAL TAKING . . . . . . . . . . . . . 12
3 16.02 INSUBSTANTIAL TAKING . . . . . . . . . . . . . 12 16.03 COMPENSATION . . . . . . . . . . . . . . . . . 12 17. TENANT'S INSURANCE . . . . . . . . . . . . . . . . 12 18. RULES AND REGULATIONS . . . . . . . . . . . . . . . . . I 13 19. LANDLORD'S RIGHTS . . . . . . . . . . . . . . . . . . . 14 20. ESTOPPEL CERTIFICATE . . . . . . . . . . . . . . . . . . 15 21. INTENTIONALLY DELETED . . . . . . . . . . . . . . . . . 15 22. ADJUSTMENTS TO MONTHLY BASE RENT . . . . . . . . . . . . 16 22.01 DEFINITIONS . . . . . . . . . . . . . . . . . . . 16 22.02 ADJUSTMENTS TO MONTHLY BASE RENT. . . . . . . . . 17 22.03 PROJECTIONS . . . . . . . . . . . . . . . . . 17 22.04 READJUSTMENTS . . . . . . . . . . . . . . . . 17 22.05 BOOKS AND RECORDS . . . . . . . . . . . . . . 18 22.06 NO DECREASES IN MONTHLY BASE RENT 18 22.07 PARTIAL OCCUPANCY FOR OPERATING EXPENSES 18 23. REAL ESTATE BROKERS 18 24. SUBORDINATION AND ATTORNMENT 18 24.01 SUBORDINATION 18 24.02 ATTORNMENT 19 25. NOTICES 19 26. MISCELLANEOUS 19 26.01 LATE CHARGES 19 26.02 ENTIRE AGREEMENT 19 26.03 NO OPTION 20 26.04 ACCORD AND SATISFACTION 20 26.05 LIMITATION OF LIABILITY 20 26.06 BINDING EFFECT 20 26.07 FORCE MAJEURE 20 26.08 CAPTIONS 21 26.09 APPLICABLE LAW 21 26.10 TIME 21 26.11 LANDLORD'S RIGHT TO PERFORM TENANT'S DUTIES 21 26.12 TENANT'S REMEDIES 21 26.13 RIDERS 21 26.14 CONSENT 21 27. PARKING 21
4 OFFICE LEASE 1. BASIC LEASE PROVISIONS AND IDENTIFICATION OF EXHIBITS 1.01 BASIC LEASE PROVISIONS A. BUILDING & ADDRESS: 1240 East Diehl Road Building 1240 East Diehl Road Naperville, Illinois 60563 B. LANDLORD & ADDRESS: American National Bank and Trust Company of Chicago, not individually but solely as Trustee under a Trust Agreement dated June 12, 1978 and known as Trust No. 43194 c/o Bellemead Management Co., Inc. 280 Corporate Center Four Becker Farm Road Roseland, New Jersey 07068 C. TENANT & CURRENT ADDRESS: Spyglass, Inc. 1240 East Diehl Road Naperville, Illinois 60563 D. DATE OF LEASE: May 28,1997 E. LEASE TERM: Two (2) years F. COMMENCEMENT DATE OF TERM: February 1, 1998 G. EXPIRATION DATE OF TERM: January 31, 2000 H. MONTHLY BASE RENT: * I. RENTABLE SQUARE FEET OF THE PREMISES UPON WHICH MONTHLY BASE RENT AND ADJUSTED MONTHLY BASE RENT IS CALCULATED: 27,864 FLOOR: 4th J. SECURITY DEPOSIT: $46,285.66 K. BROKER: CB Commercial Real Estate Group, Inc. and Grubb & Ellis Company L. RENTABLE SQUARE FEET OF THE BUILDING: 139,184 square feet M. TENANT'S PROPORTIONATE SHARE: 20.00% Monthly Annual Rate of Base Rent *Period Base Rent Per Rentable Square Foot 2/l/98 - 1/31/99 $46,285.66 $19.95 2/l/99 - 1/31/00 47,445.70 20.45 Page 1 5 1.02 IDENTIFICATION OF EXHIBITS The exhibits set forth below and attached to this Lease are incorporated in this Lease by this reference and are hereby made a part of this Lease: EXHIBIT A - Plan of Premises EXHIBIT B - Intentionally Deleted EXHIBIT C - Cleaning Specifications 2. PREMISES AND TERM 2.01 LEASE OF PREMISES Landlord leases to Tenant and Tenant leases from Landlord the premises (the "Premises") outlined in red on Exhibit A, which are contained in the office building described in 1.01A (the "Building"), upon the following terms and conditions. 2.02 TERM OF LEASE The term of this Lease (the "Term") shall commence on the date (the "Commencement Date") which is set forth in 1.61 F of this Lease. The Term shall expire on the date (the "Expiration Date") specified in Paragraph 1.01G of this Lease unless sooner terminated as otherwise provided in this Lease. 2.03 INSTALLATION OF EQUIPMENT BY TENANT If prior to the Commencement Date, Tenant shall enter the Premises to make any installation of Tenant's equipment, fixtures or furnishings, Landlord shall have no liability or obligation for the care or preservation of Tenant's property. 2.04 AGREEMENT STATING COMMENCEMENT AND EXPIRATION DATES OF LEASE Upon request by Landlord or Tenant after the Commencement Date, Landlord and Tenant will sign and deliver to each other an agreement in form and substance satisfactory to Landlord setting forth the Commencement Date and the Expiration Date. 3. RENT Tenant agrees to pay to Landlord c/o Bellemead Management Co., Inc., a New Jersey corporation, 280 Corporate Center, Four Becker Farm Road, Roseland, New Jersey 07068, or at such other place designated by Landlord, without any prior notice or demand and without any set-off or deduction whatsoever, base rent at the initial monthly rate stated in 1.01H ("Monthly Base Rent"). Monthly Base Rent is subject to adjustment pursuant to Article 22, and as adjusted is called "Adjusted Monthly Base Rent." Monthly Base Rent and Adjusted Monthly Base Rent shall be paid monthly in advance on the first day of each month of the Term. Monthly Base Rent and Adjusted Monthly Base Rent shall be prorated for partial months within the Term. All charges, costs and sums required to be paid by Tenant to Landlord under this Lease, in addition to Monthly Base Rent and Adjusted Monthly Base Rent, shall be considered additional rent, and Monthly Base Rent, Adjusted Monthly Base Rent and additional rent shall be collectively called "Rent". Tenant's covenant to pay Rent shall be independent of every other covenant in this Lease. Page 2 6 4. SECURITY DEPOSIT As security for the performance of its obligations under this Lease and the Work Agreement, Tenant upon its signing of this Lease shall pay to Landlord a security deposit (the "Security Deposit") in the amount stated in 1.01J. The Security Deposit may be applied by Landlord to cure any default of Tenant under this Lease or the Work Agreement, and upon notice by Landlord of such application, Tenant shall replenish the Security Deposit in full by promptly paying to Landlord the amount so applied. Landlord shall not pay any interest on the Security Deposit. Within 45 days after the Expiration Date, Landlord shall return to Tenant the balance, if any, of the Security Deposit. The Security Deposit shall not be deemed an advance payment of Rent or a measure of damages for any default by Tenant under this Lease, nor shall it be a bar or defense to any action which Landlord may at any time commence against Tenant. 5. SERVICES 5.01 LANDLORD'S GENERAL SERVICES Landlord shall provide the following services (subject to the provisions of this Lease and applicable legal restrictions): (1) heat and air-conditioning in the Premises, Monday through Friday, from 8:00 A.M. to 6:00 P.M., Saturday from 8:00 A.M. to 1:00 P.M., Sunday and national holidays excepted, in sufficient amount to maintain an average temperature in the Premises between 65 degrees Fahrenheit and 80 degrees Fahrenheit, provided that the Premises are not occupied by more than an average of one person for each 150 square feet of actual floor space in the Premises and provided further that no machine or equipment is located in the Premises which affects the temperature otherwise maintained in the Premises; (2) city water from the regular Building fixtures for drinking, lavatory and toilet purposes only; (3) cleaning services in the Premises Monday through Friday, excluding Saturdays, Sundays and national holidays (observed), substantially in accordance with the cleaning specifications attached hereto as Exhibit C; and which services shall be provided by bonded cleaning personnel; and (4) passenger elevator service in common with other tenants of the Building, 24 hours per day, 7 days per week, subject to applicable laws and emergencies. Notwithstanding the provisions of this Paragraph 5.01, nothing in this Paragraph 5.01 shall affect or reduce Tenant's obligation to pay any escalation in Operating Expenses as set forth in 22.02 of this Lease. 5.02 ADDITIONAL AND AFTER-HOUR SERVICES Landlord shall not be obligated to furnish any services or utilities, other than those stated in 5.01 above. If Landlord elects to furnish services or utilities requested by Tenant in addition to those listed in 5.01 or at times other than those stated in 5.01, Tenant shall pay to Landlord the charges specified by Landlord for such services and utilities, within 10 days after billing by Landlord. If Tenant fails to make any such payment, Landlord may, without notice to Tenant and in addition to Landlord's other remedies under this Lease, discontinue any or all of such additional or after-hour services. No such discontinuance of any service shall result in any liability of Landlord to Tenant, or be considered an eviction or a disturbance of Tenant's use of the Premises, or relieve Tenant from its obligation to pay all Rent when due or from any other obligation of Tenant under this Lease. Page 3 7 5.03 TENANT'S UTILITIES Tenant, at Tenant's cost and expense, shall make arrangements directly with the telephone company for telephone service and the installation of wires and cables therefor. Tenant shall pay for all telephone and electric service used or consumed in the Premises, including without limitation the cost of such installation of wires and cables for such service. Any installation of telephone service in the Premises by Tenant shall be in compliance with the National Electric Code 300-22. Landlord, at its option, may purchase electricity in bulk for the Building, and supply electricity to Tenant for its use in the Premises. Tenant's electrical usage shall be measured by an electronic meter. In such event, Tenant shall pay to Landlord (or to any electrical contractor retained by Landlord to provide billing and accounting services for such electrical service) all charges for electricity used in the Premises within 10 days after each bill is rendered. Any such charges billed by Landlord (or Landlord's electrical contractor) shall not exceed the charges which Tenant would otherwise be required to pay if Tenant purchased such electricity directly from the public utility company providing electricity to the Building. 5.04 DELAYS IN FURNISHING SERVICES Notwithstanding anything to the contrary set forth in this Lease, Landlord shall not be liable for damages for any failure to furnish or delay in furnishing any service or utility described in 5.01 or 5.02 above if such failure or delay is caused in whole or in part by any one or more of the causes specified in 26.07 of this Lease. No such failure or delay caused in whole or in part by any one or more of the causes specified in 26.07 of this Lease shall result in any liability of Landlord to Tenant or be deemed to be an eviction or disturbance of Tenant's use or possession of the Premises, or relieve Tenant from its obligation to pay all Rent when due or from any other obligation of Tenant under this Lease. See Insert on page 4A. 6. POSSESSION, USE AND ENJOYMENT 6.01 POSSESSION AND USE OF PREMISES Tenant shall be entitled to possession of the Premises upon the date stated in Section 1.01F. Tenant shall occupy and use the Premises for general office purposes only. Tenant shall not occupy or use the Premises or permit the use or occupancy of the Premises for any purpose or in any manner which: (1) is unlawful or in violation of any applicable legal, governmental or quasi-governmental requirement, ordinance or rule (including the rules of the Board of Fire Underwriters); (2) may be dangerous to persons or property; (3) may invalidate or increase the amount of premiums for any policy of insurance affecting the Building or covering its operation or violate the terms thereof and if any additional amounts of insurance premiums are payable as a result of Tenant's occupancy or use of the Premises, Tenant shall pay to Landlord the additional amounts on demand; (4) may create a nuisance, disturb any other tenant of the Building or the occupants of neighboring property or injure the reputation of the Building; (5) will conflict with any exclusive rights granted to any other tenant in the Building; or Page 4 8 Notwithstanding the foregoing, if as a result of an act or omission of Landlord (as distinguished from an act or omission of Tenant or the occurrence of an event of force majeure as defined in Section 26.07 below), electricity, heating, air conditioning, restroom facilities, or passenger elevator service to the Premises, as described in Section 5.01 above, is not furnished to the Premises, and if as a result thereof the Premises, or a "material part" (as defined below) of the Premises is rendered untenantable or inaccessible for a period of five (5) consecutive business days, and Tenant does not occupy the Premises, or such material part thereof which is rendered untenantable or inaccessible, during such 5-business day period, then as Tenant's sole remedy for such failure to furnish such service, Adjusted Monthly Base Rent payable for such portion of the Premises which Tenant does not so occupy shall abate for the period commencing on the expiration of said five (5) business day period and expiring on the date such service is restored or Tenant is able to resume occupancy of the Premises or such material part thereof, as the case may be. As used herein, the phrase "material part" shall mean an amount in excess of fifty percent (50%) of the rentable area of the Premises. Page 4A 9 (6) will violate the provisions of any covenant, condition, restriction, agreement or document which is recorded in the office of the Recorder of DuPage County, Illinois and which affects all or any part of the Building or Lot 3 of the Resubdivision of Lot 3 in the Naperville Corporate Center Subdivision in Naperville, Illinois. 6.02 QUIET ENJOYMENT So long as Tenant is not in default under this Lease, Tenant shall be entitled to peaceful and quiet enjoyment of the Premises, subject to (1) the provisions of this Lease, (ii) any governmental action, and (iii) any cause beyond the reasonable control of Landlord. 7. CONDITION OF PREMISES Tenant shall be conclusively presumed to have accepted the Premises in the condition existing on the date Tenant first takes possession of the Premises and to have waived all claims relating to the condition of the Premises. No agreement of Landlord to alter, remodel, decorate, clean or improve the Premises or the Building and no representation or warranty regarding the condition of the Premises or the Building or regarding any other matter of any kind or nature has been made by or on behalf of Landlord to Tenant, except as expressly stated in this Lease. 8. ASSIGNMENT AND SUBLETTING 8.01 ASSIGNMENT AND SUBLETTING Without the prior written consent of Landlord, Tenant shall not (i) sublease all or any part of the Premises, or assign, convey, encumber, mortgage, pledge, hypothecate or otherwise transfer or permit the transfer of the interest of Tenant in this Lease, in whole or in part, by operation of law or otherwise, or (ii) permit the use and occupancy of all or any part of the Premises by any party other than Tenant, its agents, employees, invitees and guests., If Tenant desires to assign Tenant's interest in this Lease or enter into any sublease of all or any part of the Premises, Tenant shall, after compliance with Paragraph 8.02 below, deliver written notice of such intent to Landlord, together with (x) a copy of the proposed assignment or sublease, (y) such current financial information regarding the proposed subtenant or assignee as is reasonably necessary for Landlord to determine its creditworthiness, and (z) such background information regarding the proposed subtenant or assignee as is reasonably necessary for Landlord to determine its identity, reputation and type of business, at least 45 days prior to the effective date of the proposed assignment or commencement date of the term of the proposed sublease. Any sublease approved by Landlord shall be expressly subject to the terms and conditions of this Lease, and Tenant, in addition to Tenant's other obligations under this Lease, shall pay to Landlord on the first day of each month during the term of such sublease 50% of the excess of all rent and other consideration due from the subtenant for such month over that portion of the Adjusted Monthly Base Rent due under this Lease for said month which is allocable on a square footage basis to the space sublet,**. In the event of an approved assignment of this Lease by Tenant, Tenant shall pay to Landlord as and when received by Tenant, 50% of all sums and other consideration received by Tenant from Tenant's assignee,**. In the event of any approved sublease or approved assignment, Tenant shall not be released or discharged from any liability, whether past, present or future, under this Lease, including any renewal term of this Lease approved by Landlord. For the purpose of this Paragraph, an assignment shall be considered to include a change in the majority ownership or control of Tenant if Tenant is a partnership or a corporation whose shares of stock are not traded publicly,***. In no event shall (i) any sublease of all or any part of the Premises be for a term of less than six (6) months, (ii) Tenant enter into one or more subleases of all or any part of the Premises which permit more than two subtenants to occupy all or any part of the Premises at the same time, (iii) the,- net effective annual rent per rentable square foot (as Page 5 10 *Landlord agrees that Landlord's consent to a proposed assignment or sublease shall not be unreasonably withheld. **after deduction of the reasonable and appropriate out-of-pocket costs paid by Tenant in connection with such transfer for build-out (which costs shall be amortized over the term of the transfer), brokerage commissions and attorneys' fees. ***but only if the net worth of Tenant after such change of control is less than the net worth of Tenant immediately prior to such, change in control (and Tenant shall provide to Landlord upon request current financial statements of Tenant before and after such change in control). Page 5A 11 determined by Landlord) payable by the subtenant under any sublease, taking into account all rental adjustments and subtenarit concessions (e.g., rental abatements, improvement allowances, relocation allowances and lease take-over obligations), be substantially less than prevailing market net effective annual rent per rentable square foot (as determined Landlord) then in effect for comparable space in the Building, taking into account the prevailing market rental adjustments and tenant concessions for such comparable space, or (iv) any assignee or subtenant be in existing tenant of the Naperville Corporate Center Subdivision, or an affiliate of such existing tenant. See Insert on Page 6A. 8.02 RECAPTURE If Tenant desires to assign this Lease (other than to an affiliate) or to sublease all or any part of the Premises (other than to an affiliate), Tenant shall give Landlord written notice of such intent ("Tenant's Notice") prior to Tenant entering into such assignment or sublease, which Tenant's Notice shall identify the space to be subleased and the proposed commencement date of the term of such sublease, or the proposed effective date of such assignment, as the case may be. Landlord shall thereupon have the option to exclude from the Premises covered by this Lease (i) all of the Premises, if Tenant's Notice specifies a proposed assignment, or (ii) the portion of the Premises described in Tenant's Notice, if Tenant's Notice specifies a proposed sublease, which exclusion shall be effective as of the proposed effective date of assignment or the proposed commencement date of sublease, as the case may be, as specified in Tenant's Notice. Landlord may exercise said option by giving Tenant written notice within 20 days after receipt by Landlord of Tenant's Notice of the proposed assignment or sublease. If Landlord exercises said option, Tenant shall surrender possession of the space to be excluded from this Lease on the effective date of exclusion of said space from this Lease, and neither party hereto shall have any further rights or liabilities with respect to said space under this Lease except as otherwise specified in this Lease. Effective as of the date of exclusion of any portion of the Premises covered by this Lease pursuant-to this paragraph: (i) the Monthly Base Rent specified in l.0lH shall be reduced in the same proportion as the number of square feet as determined by Landlord of the portion of the Premises so excluded bears to the number of square feet as determined by Landlord of the Premises immediately prior to such exclusion; (ii) the square feet of the Premises specified in 1.01 I shall be decreased by the number of square feet as determined by Landlord of the portion of the Premises so excluded; (iii) Tenant's Proportionate Share shall be adjusted accordingly; and (iv) there shall be no restrictions on Landlord reletting the portion of the Premises so excluded to any other tenant, including, without limitation, any proposed sublessee or assignee of Tenant. If Landlord does not exercise said option, Tenant may not thereafter enter into a sublease., for space which is different than the space designated in Tenant's Notice, or for a term commencing on a date other than the date designated in Tenant's Notice, nor may Tenant enter into a sublease for the space designated in Tenant's Notice after the date which is 120 days after the date that Tenant's Notice is delivered to Landlord, nor may Tenant assign this Lease effective after a date which is 120 days after the date that Tenant's Notice is delivered to Landlord, without again complying with the provisions of this Paragraph 8.02 and affording Landlord the right to recapture space as hereinabove provided. 9. MAINTENANCE AND REPAIR 9.01 LANDLORD'S MAINTENANCE AND REPAIR Subject to the provisions of 5.03, 9.02, 26.07 and the other provisions of this Lease,Landlord, at its expense, shall maintain and make necessary repairs to the structural elements and exterior windows of the Building and the standard electrical, plumbing, heating, ventilation and air conditioning systems located in the Building; provided, however: (1) Landlord shall not be responsible for the maintenance or repair of any such systems which are located within the Premises and are supplemental or special to the Building's standard systems; Page 6 12 Notwithstanding anything contained herein to the contrary, Tenant shall have the right to assign this Lease or sublease the premises, or any part thereof, to an "affiliate" without the prior written consent of Landlord, bit upon not less than 10 days' prior written notice to Landlord and subject to all of the other provisions of this Lease, specifically including, without limitation, the continuation of liability of Tenant under this Lease. For purposes of this Lease, "affiliate" shall mean any person, corporation or other entity controlling, controlled by, or under common control with Spyglass, Inc., an Illinois corporation ("Spyglass") (or any successor to Spyglass as a result of merger or consolidation, or any purchaser of all or substantially all -the assets of Spyglass). The term "control" as used herein shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such controlled entity through the ownership, directly or indirectly, of more than fifty percent (50%) of the voting or equity securities in any such controlled entity. In the event of an assignment of this Lease, the assignee shall expressly assume the obligations of the Tenant under this Lease pursuant to a written assumption agreement delivered to, Landlord. Page 6a 13 (2) Landlord shall not be responsible for any maintenance or repair of any floor or wall coverings; and (3) the cost of performing any of maintenance or repair caused by the negligence or act of Tenant, its employees, agents, servants, licensees, subtenants, contractors or invitees, or the failure of Tenant to perform any of its obligations under this Lease, shall be paid by Tenant (but only to the extent such costs are not covered by Landlord's insurance). Notwithstanding the foregoing provisions of this Paragraph 9.01, nothing in this Paragraph 9.01 shall affect or reduce Tenant's obligation to pay any escalation in Operating Expenses as set forth in 22.02 of this Lease. 9.02 TENANTS MAINTENANCE AND REPAIR Tenant, at its expense, shall keep, maintain and repair premises and all contents therein in good order and operating condition (ordinary wear and tear and damage by fire or other casualty excepted) and in accordance with all applicable legal, governmental and quasi- governmental requirements, ordinances and rules (including the Board of Fire Underwriters). By way of inclusion and not limitation, Tenant, at its expense, shall maintain and repair in good operating condition the electrical, lighting, plumbing, heating, ventilating and air conditioning systems in the Premises which are supplemental or special to the Building's standard systems, and Tenant shall pay for all maintenance, repair and replacement of all lighting fixtures', electrical switches, electrical outlets, lamps, bulbs, tubes, ballasts and starters in the Premises. 10. ALTERATIONS AND IMPROVEMENTS SUBSEQUENT TO INITIAL OCCUPANCY 10.01 TENANT'S ALTERATIONS SUBSEQUENT TO INITIAL OCCUPANCY Tenant shall not, without the prior written consent of Landlord, make or cause to be made any alterations, improvements, additions or installations in or to the Premises subsequent to the initial occupancy of the Premises by Tenant*. If Landlord so consents, before commencement of any such work or delivery of any materials into the Premises or the Building, Tenant shall furnish to Landlord for approval: architectural plans and specifications, names and addresses of all contractors, contracts, necessary permits and licenses, certificates of insurance and instruments of indemnification against any and all claims, costs, expenses, damages and liabilities which may arise in connection with such work, all in such form and amount as may be satisfactory to Landlord. In addition, prior to commencement of any such work or delivery of any materials into the Premises, Tenant shall provide Landlord with evidence reasonably satisfactory to Landlord of Tenant's ability to pay for such work and materials in full, and, if requested by Landlord,** shall deposit with Landlord at such time such security for the payment of said work and materials as Landlord may require. Tenant agrees to hold Landlord, its partners, the managing agent of the Building and each of their respective agents and employees forever harmless against all claims and liabilities of every kind, nature and description which may arise out of or in any way be connected with such work. All such work shall be performed only by union contractors or mechanics approved by Landlord and which are licensed, bonded and insured under policies satisfactory to Landlord. Such work shall be performed at such time during normal business hours and in such manner as Landlord may from time to time designate. Tenant's agents, contractors, workmen, mechanics and suppliers shall work in harmony and not interfere with Landlord's agents, and contractors or the general operation of the Building. If at any time such work shall cause or threaten to cause disharmony or interference, including labor disharmony, Landlord may revoke Tenant's authority to continue to perform such work. Tenant shall pay the cost of all such work. Upon completion of such work, Tenant shall furnish Landlord with contractors' affidavits and full and final waivers of lien and receipted bills covering all labor and materials expended. All such work shall be in compliance with all applicable legal, governmental and quasi-governmental requirements, ordinances and rules (including the Board of Fire Underwriters), and ail requirements of applicable insurance companies. All such work shall be done in a good and workmanlike manner and with the use of good grades of materials. Tenant shall permit Landlord, if Landlord so desires, to supervise construction operations in connection with such work; (at no charge to Tenant except as provided in Section 26.14 below) provided, however, that such supervision or right to supervise by Page 7 *, ** See Insert an Page 7A 14 *Notwithstanding the foregoing, Tenant may without Landlord's prior written consent and without providing architectural plans and names of contractors to Landlord, but subject to all of the other provisions of this Article 8, make decorative or cosmetic changes to the Premises (e.g. painting, wall coverings, floor coverings and hanging of pictures), provided that each such change or series of related changes, (a) is non-structural, (b) does not affect any mechanical, electrical or plumbing systems, fixtures or equipment, (c) is not visible from the exterior of the Building, (d) does not cost in excess of $10,000, and (d) does not require the issuance of a building permit. **and if the cost of the alteration will exceed $15,000, Page 7A 15 Landlord shall not constitute any warranty by Landlord to Tenant of the adequacy of the design, workmanship or quality of such work or materials for Tenant's intended use or impose any liability upon Landlord in connection with the performance of such work*. All alterations, improvements, additions and installations to or on the Premises shall (subject to Article 13) become part of the Premises at the time of their installation and shall remain in the Premises at the expiration or termination of this Lease, or termination of Tenant's right of possession of the Premises, without compensation or credit to Tenant, 10.02 LIENS Tenant shall not permit any lien or claim for lien of any mechanic, laborer or supplier or any other lien to be filed against the Building, the real estate on which the Building is located, the Premises, or any part of such property arising out of work performed, or alleged to have been performed by, or at the direction of, or on behalf of Tenant. If any such lien or claim for lien is filed Tenant shall within 30 days after such filing either have such lien or claim for lien released of record or shall deliver to Landlord a bond or other security in form, content, amount, and issued by a company satisfactory to Landlord indemnifying Landlord, its partners, the managing agent of the Building and others designated by Landlord against all costs and liabilities resulting from such lien or claim for lien and the foreclosure or attempted foreclosure thereof. If Tenant fails to have such lien or claim for lien so released or to deliver such bond to Landlord, Landlord, in addition to the other rights and remedies under this Lease and without investigating the validity of such lien, may pay or discharge the same and Tenant shall reimburse Landlord upon demand for the amount so paid by Landlord, including Landlord's expenses and reasonable attorneys' fees. 11. WAIVER OF CLAIMS AND INDEMNITY 11.01 WAIVER To the full extent permitted by law, Tenant hereby releases and waives all claims against Landlord, its beneficiary, the managing agent of the Building and each of their respective officers, directors, agents and employees for injury or damage to person, property or business sustained in, on or about the Building or the Premises or Lot 3 of the Resubdivision of Lot 3 in the Naperville Corporate Center Subdivision in Naperville, Illinois by Tenant, its agents or employees other than damage caused by the negligence of Landlord, its beneficiary, the managing agent of the Building, or any of their respective agents or employees. To the full extent permitted by law, Tenant hereby waives trial by jury in any action, proceeding or counterclaim brought by Landlord against Tenant on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use of or occupancy of the Premises and/or any emergency, statutory or other remedy. To the full extent permitted by law, Tenant agrees that, in the event Landlord commences any summary proceeding for possession of the Premises, Tenant will not interpose any counterclaim of any nature or description in any such proceeding. 11.02 INDEMNIFICATION Tenant agrees to indemnify and hold harmless Landlord, its beneficiary, the managing agent of the Building, and each of their respective officers, directors, agents and employees, from and against any and all liabilities, claims, demands, costs and expenses of every kind and nature (including attorneys' fees), including those arising from any injury or damage to any person, property or business, sustained in, on or about the Premises, the Building or such Lot 3 of the Resubdivision of Lot 3,and (a)resulting from the negligence of tenant, its employees, agents, servants, invitees, licensees or subtenants, or (b)resulting from the failure of Tenant to perform its obligations under this Lease; provided, however, Tenant's obligations under this Paragraph shall not apply to injury or damage resulting from the negligence of Landlord, its beneficiary, the managing agent of the Building, or any of their respective officers, directors, agents or employees,*** If any such proceeding is brought against Landlord, its beneficiary, the managing agent of the Building, or any of their respective officers, directors, agents or employees, Tenant covenants to defend such *, **,*** See Insert on Page 8A Page 8 16 *If Landlord elects to supervise construction operations, Landlord's supervision shall not unreasonably impede or delay the progress of the work. **unless Landlord advises Tenant at the time of Landlord's consent to any alteration that Landlord will require Tenant to remove same at the expiration or termination of this Lease, in which event Tenant, at its expense, shall remove same at the expiration or termination of this Lease and repair all damage caused by the installation or removal of such alteration. ***or damage covered by insurance carried by Landlord (or required to be carried by Landlord under this Lease). Page 8A 17 proceeding at its sole cost by legal counsel reasonably satisfactory to Landlord, if requested by Landlord. 12. LANDLORD'S REMEDIES 12.01 EVENTS OF DEFAULT Each of the following shall constitute an event of default by Tenant under this Lease: Tenant fails to pay any installment of Rent when due,; Tenant fails to observe or perform any of the other covenants, conditions or provisions of this Lease be observed or performed by Tenant and fails to cure such default within 30 days after written notice to Tenant**; the interest of Tenant in this Lease is levied upon under execution or other legal process; a petition is filed by or against Tenant to declare Tenant bankrupt or seeking a plan of reorganization or arrangement under any Chapter of the Bankruptcy Code, or any amendment, replacement or substitution therefor or to delay payment of, reduce or modify Tenant's debts, or any petition is filed or other action taken to reorganize or modify Tenant's capital structure or to dissolve Tenant; Tenant is declared insolvent by law or any assignment of Tenant's property is made for the benefit of creditors; a receiver is appointed for Tenant or Tenant's property; (and such petition is not vacated witin 60 days after same is filed) 12.02 LANDLORD'S REMEDIES Upon the occurrence of an event of default by Tenant under this Lease, Landlord, at its option, without further notice or demand to Tenant, may in addition to all other rights and remedies provided in this Lease, at law or in equity: A. Terminate this Lease and Tenant's right of possession of the Premises, and recover all damages to which Landlord is entitled under law. Landlord's damages shall specifically include, without limitation (1) all Landlord's expenses of reletting (including repairs, alterations, improvements, additions, decorations, legal fees and brokerage commissions), plus (2) the aggregate sum which at the time of such termination represents the excess, if any, of the present value of the aggregate Adjusted Monthly Base Rent which would have been payable by Tenant under this Lease for the balance of the Term (conclusively presuming that adjustments to Monthly Base Rent on account of increases in Taxes and Operating Expenses shall increase at the average annual rate of increase thereof during the portion of the Term occurring prior to the termination date but not exceeding 3 years), over the then present value of the then aggregate fair rental value of the Premises for the balance of the Term (allowing for a reasonable period of exposure on the open market before realization of such fair rental value and deducting the then market tenant concessions such as rent abatements and construction allowances), such present value to be computed in each case on the basis of a 3% per annum discount from the respective dates upon which such rentals would have been payable hereunder had this Lease not been terminated. The amount set forth in the preceding sentence shall be automatically considered accelerated and immediately due and payable in full by Tenant to Landlord upon Landlord's election to terminate this Lease. Landlord's right to terminate this Lease may also be exercised at any time after the election by Landlord under Paragraph B below to terminate Tenant's right to possession of the Premises. B. Terminate Tenant's right of possession of the Premises without terminating this Lease, in which event Landlord shall use reasonable efforts to, relet the Premises, or any part thereof for the account of Tenant, for such rent and term and upon such terms and conditions as are*** For purposes of such reletting, Landlord is authorized to decorate, repair, alter and improve the Premises to the extent reasonably necessary. If Landlord does not relet the Premises, then Tenant shall pay Landlord monthly on the first day of each month during the period that Tenant's right of possession is terminated, a sum equal to the amount of Rent due under this Lease for such month (less any amount which Landlord could have realized if Landlord relet the Premises to a *, **, *** See Insert on Page 9A Page 9 18 *and with respect only to each of the first two (2) such failures occurring in any year of the Term, such failure continues for 5 days after Landlord gives Tenant written notice of such failure-, **provided, however, that if such failure is not susceptible to being cured within such 30-day period and Tenant immediately commences such cure, such 30-day period shall be extended so long as Tenant is actively, diligently and continuously attempting to effectuate such cure (but in no event shall said 30-day period be extended by more than an additional 30 days). ***commercially reasonable under the circumstances; provided, however, that Landlord shall not be obligated to relet or attempt to relet the Premises on a priority basis over other unleased or unoccupied space in the Building or in other buildings then comprising the Naperville Corporate Center. Page 9A 19 reputable, creditworthy substitute tenant procured by Tenant and presented to Landlord in writing, which substitute tenant was ready, willing and able to lease the entire Premises from Landlord under a lease in form identical to the form of this Lease). If the Premises are relet and a sufficient sum is not realized from such reletting after payment of all Landlord's expenses of reletting (including repairs, alterations, improvements, additions, decorations, legal fees and brokerage commissions) to satisfy the payment of Rent due under this Lease for any month, Tenant shall pay Landlord any such deficiency monthly upon demand. Tenant agrees that Landlord may file suit to recover any sums due to Landlord under this section from time to time and that such suit or recovery of any amount due Landlord shall not be any defense to any subsequent action brought for any amount not previously reduced to judgment in favor of Landlord. If Landlord elects to terminate Tenant's right to possession only without terminating this Lease, Landlord may, at its option, enter into the Premises, remove Tenant's signs and other evidences of tenancy, and take and hold possession thereof, as stated in Article 13; provided, however, that such entry and possession shall not terminate this Lease or release Tenant, in whole or in part, from Tenant's obligation to pay the Rent reserved hereunder for the full Term or from any other obligation of Tenant under this Lease. 12.03 TRUSTEE IN BANKRUPTCY In the event a petition is filed by or against Tenant seeking a plan of reorganization or arrangement under any Chapter of the Bankruptcy Code, Landlord and Tenant agree, to the extent permitted by law, that the trustee in bankruptcy shall determine within 60 days after commencement of the case, whether to assume or reject this Lease. 12.04 ATTORNEYS' FEES Tenant shall pay upon demand, all costs and expenses, including reasonable attorneys' fees, incurred by Landlord in enforcing Tenant's obligations under this Lease or resulting from Tenant's default under this Lease. 13. SURRENDER OF PREMISES Upon the expiration or termination of this Lease or termination of Tenant's right of possession of the Premises, Tenant shall surrender and vacate the Premises immediately and deliver possession thereof to Landlord in a clean, good and tenantable condition, ordinary wear and damage by casualty loss excepted. Upon any, termination which occurs other than by reason of Tenant's default, Tenant shall be entitled to remove from the Premises prior to such termination all moveable trade fixtures and personal property of Tenant without credit or compensation from Landlord, provided Tenant immediately shall repair all damage resulting from such removal and shall restore the Premises to a tenantable condition. In the event possession of the Premises is not immediately delivered to Landlord or if Tenant shall fail to remove any moveable trade fixtures or personal property which Tenant is entitled to remove, Landlord may remove same without any liability to Tenant. Any moveable trade fixtures and personal property which may be removed from the Premises by Tenant but which are not so removed, and all improvements made by Tenant to the Premises, shall be conclusively presumed to have been abandoned by Tenant and title to such property shall pass to Landlord without any payment or credit, and Landlord may, at its option and at Tenant's expense, store, keep and/or dispose of such property. 14. HOLDING OVER Tenant shall pay Landlord the fair rental value of the Premises, as determined by Landlord (but in no event less than 150% of the Adjusted Monthly Base Rent the first then-applicable under this Lease) for the first month or partial month during which Tenant retains possession of the Premises, or any part of the Premises, after the expiration or termination of this Lease, and 200% of the fair rental value of the Premises, as determined by Landlord (but in no event less than 200% of the Adjusted monthly Base Rent then applicable under this Lease) for each subsequent month or partial month during which Tenant retains, possession of the Premises, or any part of the Premises, after the expiration or termination of this lease. Tenant shall also indemnify Landlord against all liabilities and Page 10 20 damages sustained by Landlord by reason of any such retention of possession. The provisions of this Article shall not constitute a waiver by Landlord of any re-entry rights of Landlord available under this Lease or by law. If Tenant retains possession of the Premises, or any part of the Premises, for 30 days after the expiration or termination of this Lease, then Landlord, at Landiord's election expressed in written notice to Tenant but not otherwise, may, in addition to all other rights and remedies available to Landlord under this Lease, constitute such holding over- as a renewal of this Lease for a period of one year on the same provisions as are set forth in this Lease, but for a Monthly Base Rent equal to the then fair monthly base rental value of the Premises, as determined by Landlord (but in no event less than the Monthly Base Rent then payable by Tenant under this Lease). 15. DAMAGE BY FIRE OR OTHER CASUALTY 15.01 SUBSTANTIAL UNTENANTABILITY If either the Premises or the Building is rendered substantially untenantable by fire or other casualty, Landlord may elect by giving Tenant written notice within 90 days after the date of said fire or casualty, either to: (1) terminate this Lease as of the date of the fire or other casualty; or (2) proceed to repair or restore the Premises or the Building, other than leasehold improvements and personal property installed by Tenant, to substantially the same condition as existed immediately prior to such fire or casualty. If Landlord elects to proceed pursuant to subsection (2) above, Landlord's notice shall contain Landlord's reasonable estimate of the time required to substantially complete such repair or restoration. If such estimate indicates that the time so required will exceed 180 days from the date of the casualty, then Tenant shall have the right to terminate this Lease as of the date of such casualty by giving written notice to Landlord not later than 20 days after the date of Landlord's notice. If Landlord's estimate indicates that the repair or restoration can be substantially completed within 180 days, or if Tenant fails to exercise its said right to terminate this Lease, this Lease shall remain in force and effect, See Insert 1 on page 11A). 15.02 INSUBSTANTIAL UNTENANTABILITY If the Premises are damaged by fire or other casualty but is not rendered substantially untenantable, then Landlord shall diligently proceed to repair and restore the damaged portions thereof, other than the leasehold improvements and personal property installed by Tenant, to substantially, the same condition as existed immediately prior to such fire or casualty, unless such damage occurs during the last 12 months of the Term, in which event Landlord shall have the right to terminate this Lease as of the date of such fire or other casualty by giving written notice to Tenant within 30 days after the date of such fire or other casualty. (See Insert 2 on Page 11A) 15.03 RENT ABATEMENT If all or any part of the Premises are damaged by fire or other casualty and this Lease is not terminated, Adjusted Monthly Base Rent shall abate for all or that part of the Premises which are untenantable on a per diem and proportionate area basis from the date of the fire or other casualty until Landlord has substantially completed the repair and restoration work in the Premises which it is required to perform, provided, that as a result of such fire or other casualty, Tenant does not occupy the portion of the Premises which are untenantable during such period. 15.04 DEFINITIONS (See Insert 3 on Page 11A) Page 11 21 INSERT 1 provided, however, that if the repair or restoration is not substantially completed within 180 days after the date of commencement of such repair or restoration work (subject to 26.07), then Tenant shall have the right to terminate this Lease by giving written notice to Landlord not later than 20 days after the expiration of said 180-day period. INSERT 2 If the repair or restoration is not substantially completed within 90 days after the date of commencement of such repair or restoration work (subject to 26.07), then Tenant shall have the right to terminate this Lease by, giving written notice to Landlord not later than 20 days after the expiration of said 90-day period. INSERT 3 As used in this Article 15 "substantial untenantability" shall mean 40% or more of the rentable area of the Premises is rendered untenantable. Page 11A 22 16. EMINENT DOMAIN 16.01 SUBSTANTIAL TAKING If all or any part of the Premises or the Building is permanently taken or condemned by any competent authority for any public use or purpose (including a deed given in lieu of condemnation), which renders the Premises substantially untenantable, this Lease shall terminate as of the date title vests in such authority, and Adjusted Monthly Base Rent shall be apportioned as of said date. 16.02 INSUBSTANTIAL TAKING If any part of the Premises or the Building is taken or condemned for any public use or purpose (including a deed given in lieu of condemnation) and this Lease is not terminated pursuant to 16.01, Adjusted Monthly Base Rent shall be reduced for the period of such taking by an amount which bears the same ratio to Adjusted Monthly Base Rent then in effect as the number of square feet as determined by Landlord of the Premises so taken or condemned, if any, bears to the number of square feet of the Premises specified in 1.01I. Landlord, upon receipt and to the extent of the award in condemnation or proceeds of sale, shall make necessary repairs and restorations (exclusive of leasehold improvements and personal property installed by Tenant) to restore the Premises remaining to as near its former condition as circumstances will permit, and to the Building to the extent necessary to constitute the portion of same not so taken or condemned as a complete architectural unit. In the event of any taking or condemnation described in this 16.02, the square feet of the Premises stated in 1.01I and the square feet of the Building stated in 1.01L shall be reduced, respectively, by the number of square feet as determined by Landlord of the portion of the Premises, if any, and the Building, if any, so taken or condemned, and Tenant's Proportionate Share shall be adjusted accordingly, for all purposes under this Lease. 16.03 COMPENSATION Landlord shall be entitled to receive the entire price or award from any such sale, taking or condemnation without any payment to Tenant, and Tenant hereby assigns to Landlord Tenant's interest, if any, in such award. Tenant shall have no claim or right to any price or award as a result of any such sale, taking or condemnation because of this Lease or the unexpired term of this Lease or the premature termination of this Lease or any option to extend the term of this Lease or to lease additional space in the Building, (See Insert 1 on Page 12A) 16.04 DEFINITION (See Insert 2 on Page 12A) 17. TENANT'S INSURANCE Tenant, at its expense, shall maintain in force during the Term: (1) comprehensive general public liability insurance, which shall include coverage for personal liability, contractual liability, tenant's legal liability, bodily injury, death and property damage, all on an occurrence basis with respect to the business carried on, in or from the Premises and Tenant's use and occupancy of the Premises, with coverage for any one occurrence or claim of not less than $1,000,000 or such other amount as Landlord may reasonably require upon not less than six months' prior written notice, which insurance shall include Landlord, its partners and the managing agent of the Building as named insureds and shall protect Landlord in respect of claims by Tenant as if Landlord were separately insured; and (2) insurance against such other perils and in such amounts as Landlord may from time to time reasonably require upon not less than 30 days' prior written notice, such requirement to be made on the basis that the required insurance is Page 12 23 INSERT 1 provided, however, that Tenant may make a separate claim for the cost of Tenant's trade.fixtures and relocation costs, so long as such claim does not diminish Landlord's award. INSERT 2 As used in this Article 16, "substantially untenantable" shall mean a taking whereby 40% or more of the rentable area of the Premises is rendered untenantable. Page 12A 24 customary at the time for prudent tenants of properties similar to the Building in the Naperville, Illinois area. All insurance required to be maintained by Tenant shall be on terms and with insurers reasonably acceptable to Landlord. Each of the aforesaid policies shall contain an undertaking by the insurer that no material change adverse to Landlord or Tenant will be made, and such policy will not lapse or be cancelled, except after not less than 30 days' prior written notice to Landlord of the intended change, lapse or cancellation. Tenant shall furnish to Landlord, if and whenever requested by it, certificates or other evidences acceptable to Landlord as to the insurance from time to time effected by Tenant and its renewal or continuation in force. 17.02 See Insert on Page 13A 17.03 See Insert on Page 13A 18. RULES AND REGULATIONS Tenant agrees that Tenant and each of Tenant's employees, agents and invitees shall comply with the following rules and regulations and with all reasonable modifications and additions thereto which Landlord may from time to time make: (1) Any sign, lettering, picture, notice or advertisement installed within the Premises which is visible from the public corridors within the Building shall be installed in such manner and be of such character and style as Landlord shall approve in writing. No sign, lettering, picture, notice or advertisement shall be placed on any outside window or in a position to be visible from outside the Building; (2) Tenant shall not use the name of the Building for any purpose other than Tenant's business address; (3) Tenant shall not use the name of the Building for Tenant's business address after Tenant vacates the Premises; (4) Sidewalks, entrances, passages, courts, corridors, halls, elevators and stairways in and about the Premises shall not be obstructed nor shall objects be placed against glass partitions, doors or windows which would be unsightly from the corridors of the Building or from the exterior of the Building; (5) No animals, pets, bicycles or other vehicles shall be brought or permitted to be in the Building or the Premises; (6) Room to room canvasses to solicit business from other tenants of the Building are not permitted; (7) Tenant shall not waste electricity, water or air conditioning and shall cooperate fully with Landlord to assure the most effective and efficient operation of the heating and air conditioning systems of the Building. All controls shall be adjusted only by authorized building personnel; (8) All corridor doors shall remain closed at all times; (9) No locks or similar devices shall be attached to any door except by Landlord and Landlord shall have the right to retain a key to all such locks; except that Tenant may elect to retain all keys to the door(s) to any high security room or area in the Premises; provided, however (i) Landlord shall not be obligated to provide janitorial service to such room or area and (ii) Tenant shall pay for the repair of any damage to such door(s) caused by any emergency entry into such room or area; (10) Tenant assumes full responsibility for protecting the Premises from theft, robbery and pilferage. Except during Tenant's normal business hours, Tenant shall keep all doors to the Premises locked and other means of entry to the Premises closed and secured; (11) Only machinery or mechanical devices of a nature directly related to Tenant's ordinary use of the Premises shall be installed, placed or used in the Premises and the installation and use of all such machinery and mechanical devices is subject to the other rules contained in this Article 18 and the other portions of this Lease; (12) All cleaning, repairing, janitorial, decorating, painting or other services and work in and about the Premises shall be done only by authorized Building personnel; (13) Safes, furniture, equipment, machines and other large or bulky articles shall be brought to the Building and into and out of the Premises at such times and in such manner as the Landlord shall direct (including the designation of elevator) and at Tenant's sole risk and cost. Prior to Tenant's removal of such articles from the Building, Tenant shall obtain written authorization of the office of the Building and shall present such authorization to a designated employee of Landlord; (14) Tenant shall not in any manner deface or damage the Building; (15) Inflammables such as gasoline, kerosene, naphtha and benzene, or explosives or any other articles of an intrinsically dangerous Page 13 *except that Tenant may elect to retain all keys to the door(s) to any high security room or area in the Premises; provided, however (i) Landlord shall not be obligated to provide janitorial service to such room or area and (ii) Tenant shall pay for the repair of any damage to such door(s) caused by any emergency entry into such room or area; 25 17.02 LANDLORD'S INSURANCE. Landlord shall maintain in force during the Term: (1) comprehensive general public liability insurance; and (2) all risks (hazard) insurance and rent loss insurance on the Building. 17.03 RELEASE OF LIABILITY .AND WAIVER OF SUBROGATION Notwithstanding any provision in this Lease to the contrary, each party hereto waives any and every claim which arises or may arise in its favor and against the other party hereto, or anyone claiming through or under either of them, by way of subrogation or otherwise, during the Term (or upon the expiration or termination of the Term of this Lease) for any and all loss of, or damage to, or condition of, the Premises, the Building and property located on or within the foregoing, resulting from fire or any other casualty or peril which would be insured under any fire and all-risk (or extended risk) property damage insurance policy, or a peril which is actually insured, whether or not such loss or damage is caused by the fault or negligence of the other party or anyone for whom such other party may be responsible, or otherwise due to any other cause for which such party would have liability under applicable laws, and whether or not such insurance is in effect or the amount of coverage by such insurance. Such waivers shall be in addition to, and not in limitation or derogation of, any other waiver or release contained in this Lease with respect to any loss or damage to property of the parties hereto. Inasmuch as the above mutual waivers will preclude the assignment of any aforesaid claim by way of subrogation (or otherwise) to an insurance company (or any other person), each party hereto hereby agrees immediately to give to each insurance company which has issued to its policies of fire and extended coverage insurance, written notice of the terms of such mutual waivers, and to have such insurance policies properly endorsed, if necessary, to prevent the invalidation of such insurance coverages by reason of such waivers. *provided, however, that Tenant may install a coffee maker and microwave oven for use solely by Tenant's employees and not for sale to the public; Page 13A 26 nature are not permitted in the Building or Premises; (16) Tenant shall ascertain from Landlord the maximum amount of electrical current which can safely be used in the Premises, taking into account the capacity of the electric wiring of the Building and the Premises and the needs of other tenants, and shall not use more than such safe capacity. Landlord's consent to the installation of electrical equipment shall not relieve Tenant from the obligation not to use more electricity than such safe capacity; (17) To the extent permitted by law, Tenant shall not permit picketing or other union activity involving its employees in the Building, except in those locations and subject to time and other limitations as to which Landlord may give prior written consent; (18) Tenant shall not enter into or upon the roof of the Building or any storage, heating, ventilation, air-conditioning, mechanical or elevator machinery housing areas; (19) Tenant shall not distribute literature, flyers, handouts or pamphlets of any type in any of the common areas of the Building, without the prior written consent of Landlord; (20) Tenant shall not cook, otherwise prepare or sell any food or beverages in or from the Premises; provided, however, that Tenant may install a coffee maker and microwave oven for use solely by Tenant's employees and not for sale to the public; (21) Tenant shall not permit the use of any apparatus for sound production or transmission in such manner that the sound so transmitted or produced shall be audible or vibrations therefrom shall be detectable beyond the Premises; (22) Tenant shall keep all electrical and mechanical apparatus free of vibration, noise and air waves which may be transmitted beyond the Premises; (23) Tenant shall not permit objectionable odors or vapors to emanate from the Premises; (24) Tenant shall not place a load upon any floor of the Premises exceeding the floor load capacity for which such floor was designed or allowed by law to carry; (25) No floor covering shall be affixed to any floor in the Premises by means of glue or other adhesive, unless the installation procedure is approved by Landlord; and (26) Tenant shall comply with all rules and regulations established by Landlord pursuant to clause (6) of Paragraph 19 of this Lease. Landlord shall not be responsible for the violation of any of the foregoing rules and regulations by other tenants of the, Building and shall use reasonable efforts to enforce the same against other tenants, provided, however, that Landlord shall not be obligated to institute any legal action or proceeding to enforce same. 19. LANDLORD'S RIGHTS Landlord shall have the following rights exercisable without notice (except as expressly provided to the contrary, in this Lease) and without being deemed an eviction or disturbance of Tenant's use or possession of the Premises or giving rise to any claim for set-off or abatement of Rent: (1) To change the name or street address of the Building; provided, if any such change is voluntarily made by Landlord (as opposed to one required by law) and Landlord does not provide Tenant with at least 90 days prior written notice of such change, then Landlord agrees to reimburse Tenant for the reasonable documented out-of-pocket costs paid by Tenant to reprint Tenant's stationery and other business materials which are then in stock and which are rendered obsolete by reason of such change; (2) To install, affix and maintain all signs on the exterior of the Building, the interior of the Building and/or on Lot 3 of the Resubdivision of Lot 3 in the Naperville Corporate Center Subdivision in Naperville, Illinois; (3) To designate and/or approve prior to installation, all types of signs, window shades, blinds, drapes, awnings or other similar items, and all internal lighting that may be visible from the exterior of the Premises; (4) To display the Premises to prospective tenants at reasonable hours during the last 12 months of the Term; (5) To change the arrangement,size, configuration and/or decoration of entrances, exits, doors, closets, atriums, storage areas, corridors, boiler rooms, mechanical rooms, elevators, washrooms, hallways, lobbies, trash and rubbish areas and stairs in or about the Building and to change the arrangement, size and/or configuration of the parking areas, driveways, entrances, exits and all other areas on Lot 3 of the Resubdivision of Lot 3 in the Naperville Corporate Center Subdivision in Naperville, Illinois, provided that no such change shall materially adversely affect access to the Premises; (6) to establish such reasonable and appropriate rules and regulations (in addition to those set forth in the preceding Paragraph 18) as are satisfactory to Landlord for the use by Tenant and its employees, guests and invitees of any of the areas set forth in the preceding clause (5); (7) To grant to any party the exclusive right to conduct any business or render any service in or to the Building, provided such exclusive right shall not operate to prohibit Tenant from using the Premises for the purposes permitted hereunder; (8) To prohibit the placing of vending or dispensing machines of any kind in or about the Premises; (9) To have access for Landlord and other tenants of the Building to any mail chutes and boxes located in or on the Premises according to the rules of the United States Post Office; (10) To close the Building after normal business hours, except that Tenant and its employees and invitees shall be entitled to admission to the Building at all times under such regulations as Landlord prescribes; (11) To take any and all reasonable measures, including inspections and repairs to the Premises or to the Building, Page 14 27 as may be necessary or desirable in the operation or protection thereof; (12) To retain at all times master keys or pass keys to the Premises; (13) To install, operate and maintain security systems which monitor, by closed circuit television or otherwise, all persons entering and leaving the Building; (14) To install and maintain pipes, ducts, conduits, wires and structural elements located in the Premises which serve other parts or other tenants of the Building; and (15) To amend this Lease upon the reasonable request of the holder of any mortgage or trust deed now or hereafter existing encumbering the Building to incorporate into this Lease the standard protections required by such holder provided, however, that no such amendment shall operate to increase the Rent owing under this Lease or to materially affect Tenant's rights or obligations under this Lease. Tenant shall sign any such amendment; provided, however, that if Tenant fails to execute and deliver to Landlord any amendment pursuant to this clause (15) within ten (10) days after Landlord delivers a copy thereof to Tenant, Tenant hereby irrevocably and unconditionally designates Landlord as Tenant's agent and attorney-in-fact to execute any such amendment for Tenant. It is hereby expressly agreed that the power of attorney hereby granted by Tenant to Landlord pursuant to this clause (15) is a power coupled with an interest, may not be revoked by Tenant and shall be binding on Tenant and its successors and permitted assigns. 20. ESTOPPEL CERTIFICATE Tenant shall from time to time after the date of this Lease, upon not less than 10 days' prior written request by Landlord, or any mortgagee or ground lessor of the Building, or any prospective purchaser of the Building, deliver to Landlord, or such mortgagee, ground lessor or purchaser, a statement in writing signed by Tenant certifying: (1) That this Lease is unmodified and in full force and effect or, if there have been modifications, that this Lease, as modified, is in full force and effect; (2) The amount of Adjusted Monthly Base Rent then payable under this Lease and the date to which Rent has been paid; (3) That Landlord is not in default under this Lease or any work letter agreement, or, if in default, a detailed description of such default(s); (4) That Tenant is or is not in possession of the Premises, as the case may be; and (5) Such other information as may be reasonably requested. 21. INTENTIONALLY DELETED Page 15 28 22. ADJUSTMENTS TO MONTHLY BASE RENT 22.01 DEFINITIONS For the purposes of this Article 22, the following words and phrases shall have the following meanings: A. "Adjustment Date" shall mean each January 1 occurring within the Term. B. "Adjustment Year" shall mean each calendar year during which an Adjustment Date occurs. D. "Operating Expenses" shall mean all costs, expenses and disbursements of every kind and nature which Landlord shall pay or become obligated to pay in connection with the management, operation, maintenance, replacement and repair of the Building, all or any part of Lot 3 of the Resubdivision of Lot 3 (and any other land which serves the Building) in the Naperville Corporate Center Subdivision in Naperville, Illinois, and the personal property, fixtures, machinery, equipment, systems and apparatus located in, on or used in connection with such Building and/or land. Operating Expenses shall include, among other items, (i) management fees,(not to exceed 5% of stabilized rents), and (ii) current depreciation as determined by Landlord of capital improvements to the Building made after December 31, 1989 which are required by law or which are reasonably necessary as determined by Landlord for the operation, maintenance or repair of the Building or all or any part of said Lot 3 of the Resubdivision of Lot 3 (and any other land which serves the Building) in the Naperville Corporate Center Subdivision in Naperville, Illinois or any other property described in the preceding sentence. Notwithstanding the foregoing, Operating Expenses shall not include real estate brokerage and leasing commissions or salaries of executives of Landlord's managing agent senior to the person managing the Building; depreciation on improvements made on or prior to December 31, 1989; interest or principal payments on Landlord's debts; costs for which Landlord is reimbursed by any tenant (other than through rent adjustment provisions in tenant leases), any insurer or any other third party; costs of enforcement(including attorneys' fees) of any lease; costs of renovation or improvement of any tenant Premises; costs of remedying any violation of law existing prior to the Commencement Date; costs of complying with any insurance requirement imposed prior to the Commencement Date; or advertising expenses. E. "Taxes" shall mean all federal, state and local governmental taxes, assessments and charges (including transit or transit district taxes or assessments) of every kind or nature including without limitation general real estate taxes, (but excluding special assessments levied or assessed prior to December 31, 1989), which Landlord shall pay or become obligated to pay because of or in connection with the ownership, leasing, management, control or operation of the Building (including all or any portion of Lot 3 of the Resubdivision of Lot 3 and any other land which serves the Building in the Naperville Corporate Center Subdivision in Naperville, Illinois), or of the personal property, fixtures, machinery, equipment, systems and apparatus located therein or used in connection therewith (including any rental or similar taxes levied in lieu of or in addition to general real and/or personal property taxes). For purposes hereof, Taxes for any year shall be Taxes which are due for payment or paid in that year rather than Taxes which are assessed or become a lien during such year. There shall be included in Taxes for any year the amount of all fees, costs and expenses (including reasonable attorneys' fees) paid by Landlord during such year in seeking or obtaining in good faith and in a commercially reasonable manner any refund or reduction of Taxes. Taxes in any year shall be reduced by the net amount of any tax refund received by Landlord during such year. Taxes shall not include any federal, state or local sales, use, franchise, capital stock, inheritance, general income, gift or estate taxes, except that if a change occurs in the method of taxation resulting in whole or in part in the substitution of any such taxes, or any other assessment, for any Taxes as above defined, such substituted taxes or assessments. F. "Tenant's Proportionate Share" shall mean the amount set forth in 1.01M of this Lease. Tenant's proportionate share is calculated by dividing the number of square feet of page 16 29 the Premises as set forth in 1.01I by the number of square feet of the Building as set forth in 1.01L. 22.02 ADJUSTMENTS TO MONTHLY BASE RENT Effective as of each Adjustment Date to and including the day immediately preceding the following Adjustment Date, Monthly Base Rent shall be increased by an amount equal to one twelfth (1 /12th) of the sum of: (1) Tenant's Proportionate Share of the excess of Taxes for the Adjustment Year in which such Adjustment Date occurs over Taxes for the calendar year 1998; Plus (2) Tenant's Proportionate Share of the excess of Operating Expenses for the Adjustment Year in which such Adjustment Date occurs over Operating Expenses for the calendar year 1998; 22.03 PROJECTIONS For the purpose of calculating Taxes and Operating Expenses for any Adjustment Year, Landlord may make reasonable estimates, forecasts or projections (collectively, the "Projections") of Taxes and Operating Expenses for such Adjustment. Within approximately 60 days following each Adjustment Date, Landlord shall deliver to Tenant a written statement setting forth the Projections of Operating Expenses and Taxes for the Adjustment Year in which such Adjustment Date occurs, and providing a calculation of the increase in installments of Monthly Base Rent to become effective as of said Adjustment Date; provided, however, that the failure of Landlord to provide any such statement within said period shall not relieve Tenant from its obligation to continue to pay Adjusted Monthly Base Rent at the rate then in effect under this Lease, and, within ten days following the date on which Landlord delivers such statement to Tenant, Tenant shall pay any increases in Monthly Base Rent reflected thereby effective retroactively to the most recently preceding Adjustment Date. 22.04 READJUSTMENTS On or about April 1st following the end of each Adjustment Year, or at such later time as Landlord shall be able to determine the actual amounts of Operating Expenses and Taxes for the Adjustment Year last ended, Landlord shall notify Tenant in writing of such actual amounts. If such actual amounts exceed the Projections for such Adjustment Year, then Tenant shall, within 30 days after the date of such written notice from Landlord, pay to Landlord an amount equal to the excess of the Adjusted Monthly Base Rent payable for the Adjustment Year last ended based upon actual Operating Expenses and Taxes for such year over the total Adjusted Monthly Base Rent paid by Tenant during such Adjustment Year. The obligation to make such payments shall survive the expiration or earlier termination of the Term. If the total Adjusted Monthly Base Rent paid by Tenant during such Adjustment Year exceeds the amount thereof payable for such year based upon actual Operating Expenses and Taxes for such Adjustment Year, then Landlord shall credit such excess to installments of Adjusted Monthly Base Rent payable after the date of Landlord's notice until such excess has been exhausted, or if this Lease shall expire prior to full application of such excess, Landlord shall pay to Tenant the balance thereof not theretofore applied against Rent. No interest or penalties shall accrue on any amounts which Tenant is obligated to pay to Landlord or which Landlord is obligated to credit or pay to Tenant by reason of this Paragraph. Page 17 30 22.05 BOOKS AND RECORDS Landlord shall maintain books and records showing Operating Expenses and Taxes in accordance with sound accounting and management practices. The books and records shall be available to Tenant for inspection, upon prior reasonable notice. Such inspection shall take place, at Landlord's election, either at (a) the offices of the Building or (b) the main office of Bellemead Management Co., Inc., 280 Corporate Center, Four Becker Farm Road, Roseland, New Jersey 07068. 22.06 NO DECREASES IN MONTHLY BASE RENT Notwithstanding anything to the contrary contained in this Lease, Monthly Base Rent shall not be adjusted or decreased pursuant to this Article 22 below the amount set forth in 1.01H. 22.07 PARTIAL OCCUPANCY FOR OPERATING EXPENSES For the purpose of calculating Operating Expenses for the calendar year 1998, if the average number of rentable square feet occupied by tenants during the calendar year 1998 in the Building is less than 132,225 rentable square feet, Landlord shall make a determination ("Landlord's 1998 Determination") of what the Operating Expenses for the calendar year 1998 would have been if during the entire calendar year 1998 an average of 132,225 rentable square feet Were occupied by tenants in the Building. Landlord's 1998 Determination shall be binding and conclusive upon Tenant and shall for all purposes of this Lease be deemed to be the Operating Expenses for the calendar year 1998. For the purpose of calculating Operating Expenses for any Adjustment Year, if the average number of rentable square feet occupied by tenants during such Adjustment Year in the Building is less than 132,225 rentable square feet, Landlord shall make a determination ("Landlord's Adjustment Year Determination") of what the Operating Expenses for such Adjustment Year would have been if during all of such Adjustment Year an average of 132,225 rentable square feet were occupied by tenants in the Building. Landlord's Adjustment Year Determination of Operating Expenses for any Adjustment Year shall be binding and conclusive upon Tenant and shall for all purposes of this Lease be deemed to be the Operating Expenses for such Adjustment Year. 23. REAL ESTATE BROKERS Tenant represents and warrants to Landlord that, except for the brokers named in 1.01K, Tenant has not dealt with any real estate broker, salesperson, or finder in connection with this Lease, and no such person initiated or participated in the negotiation of this Lease, or showed the Premises to Tenant. Tenant agrees to indemnify, defend and hold harmless Landlord, its partners, the managing agent of the Building and their respective agents and employees from and against any and all liabilities and claims for commissions and fees arising out of a breach of the foregoing representation and warranty. Landlord shall be responsible for the payment of all commissions payable by reason of this Lease to the broker, if any, specified in 1.01K, based upon the leasing commission policy of Landlord applicable to the Building as of the date of this Lease. 24. SUBORDINATION AND ATTORNMENT 24.01 SUBORDINATION This Lease and the rights of Tenant hereunder are expressly subject and subordinate to any ground lease of the land underlying the Building now or hereafter existing and all amendments, renewals, modifications and extensions of and to any said ground lease, and to the lien of any one or more mortgage or trust deed specified by Landlord now or hereafter existing encumbering the Building, or any part thereof, or said Page 18 31 land or ground leasehold estate, and all amendments, renewals, modifications and extensions of and to each said mortgage or trust deed, and to all advances made or hereafter to be made upon the security of each said mortgage or trust deed. Tenant agrees to promptly sign and deliver to Landlord such further instruments subordinating this Lease to any such ground lease or to the lien of each such mortgage or trust deed as may be requested in writing by Landlord from time to time. 24.02 ATTORNMENT In the event of the cancellation or termination of any such ground lease in accordance with its provisions or by the surrender of such ground leasehold estate, whether voluntary, involuntary or by operation of law, or by summary proceedings, or the foreclosure of any such mortgage or trust deed by voluntary agreement or otherwise, or the commencement of any judicial action seeking such foreclosure, Tenant, at the request of the then Landlord, shall attorn to and recognize such ground lessor, mortgagee, holder of such trust deed or purchaser in foreclosure as Tenant's Landlord under this Lease. Tenant agrees to sign and deliver at any time upon request of such ground lessor, mortqagee., holder, purchaser, or any of their successors, any instrument to further evidence such attornment. 25. NOTICES All notices required or permitted to be given under this Lease shall be in writing and shall be deemed given and delivered, whether or not received, on the date when personally delivered (and receipted for) or two days following the date when deposited in the United States Mail, postage prepaid and properly addressed, certified mail, return receipt requested, at the following addresses: (1) To Landlord: c/o Bellemead Management Co., Inc., 280 Corporate Center, Four Becker Farm Road, Roseland, New Jersey 07068 or such other address as Landlord shall designate by written notice to Tenant with copies to Property Manager, Bellemead Development Corporation, 1240 E. Diehl Road, Naperville, Illinois 60563 and to Neil T. Neumark, Schwartz, Cooper, Greenberger & Krauss, 180 North LaSalle Street, Suite 2700, Chicago, Illinois 60601; and (2) To Tenant: At the address specified in 1.01C prior to the Commencement Date, and at the Premises after the Commencement Date, or such other address as Tenant shall designate by written notice to Landlord. Any notice given to Tenant by Bellemead Management Co., Inc., the managing agent of the Building, shall be deemed as valid as if given by Landlord and shall be binding upon Tenant. 26. MISCELLANEOUS 26.01 LATE CHARGES All delinquent Rent shall bear interest at the maximum rate permitted by law or 2% in excess of the Prime Rate as published by The First National Bank of Chicago as in effect from time to time, whichever is less, from the date due until paid. 26.02 ENTIRE AGREEMENT This Lease and the Exhibits attached hereto contain the entire agreement between landlord and Tenant concerning the Premises and there are no other agreements, either oral or written, between Landlord and Tenant. Page 19 32 26.03 NO OPTION The signing of this Lease by Tenant and delivery of same to Landlord does not constitute a reservation of or option for the Premises or an agreement by Landlord to enter into a Lease and this Lease shall become effective only if and when Landlord signs and delivers this Lease to Tenant; provided, however, the signing and delivery by Tenant of this Lease to Landlord shall constitute an irrevocable offer by Tenant to lease the Premises on the terms and conditions contained in this Lease, which offer may not be withdrawn or revoked by Tenant for 10 business days after such signing and delivery to Landlord. If Tenant is a corporation, it shall deliver to Landlord, concurrently with the delivery to Landlord of a copy of this Lease signed by Tenant, certified resolutions of Tenant's directors authorizing the signing and delivery of this Lease and the performance by Tenant of its obligations under this Lease. 26.04 ACCORD AND SATISFACTION No payment by Tenant or receipt by Landlord of a lesser amount than any installment or payment of Rent due shall be deemed to be other than on account of the amount due, and no endorsement or statement on any check or any letter accompanying any check or payment of Rent shall be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or payment of Rent and Landlord may pursue any other remedies available to Landlord. No receipt of money by Landlord from Tenant after the termination of this Lease or Tenant's right of possession of the Premises shall reinstate, continue or extend the Term. 26.05 LIMITATION OF LIABILITY Notwithstanding anything to the contrary herein provided, each and every term, covenant, condition and provision of this Lease is hereby made specifically subject to the provisions of this Paragraph 26.05. The term "Landlord" as used in this Lease means only the owner or lessor for the time being of the Building, so that in the event of any conveyance of such interest and the transfer to the transferee of any funds then being held under this Lease by such owner, Landlord shall be and hereby is entirely freed and relieved of any and all obligations of Landlord hereunder thereafter accruing, and it shall be deemed without further agreement between the parties and such grantee(s) that the grantee has assumed and agreed to observe and perform all obligations of Landlord hereunder. It is specifically understood and agreed that notwithstanding anything to the contrary herein provided or otherwise provided at law or in equity, there shall be absolutely no personal liability in excess of its interest in tire Building to Landlord or any successor in interest thereto (whether the same be an individual, joint venture, trust, land trust, tenancy in common, firm or partnership, general, limited or otherwise) or on the part of the members of any firm, partnership or joint venture or other unincorporated Landlord with respect to any of the terms, covenants and/or conditions of this Lease; in the event of a breach or default by Landlord, or any successor in interest thereof, of any of its obligations under this Lease, Tenant shall look solely to the then Landlord for the satisfaction of each and every remedy of Tenant, such exculpation of personal and additional liability which is in excess of such interest in the Building to be absolute and without any exception whatsoever. 26.06 BINDING EFFECT This Lease shall be binding upon and inure to the benefit of Landlord and its successors and assigns. This Lease shall be binding upon and inure to the benefit of Tenant and its successors and permitted assigns. 26.07 FORCE MAJEURE Landlord shall not be deemed in default with respect to any of the terms, covenants, conditions and provisions of this Lease on Landlord's part to be performed if Landlord fails to timely perform same and such failure is due in whole or in part to any strike, lockout, labor trouble (whether legal or illegal), civil disorder, inability to procure materials, failure of power, restrictive governmental laws or regulations, riots, insurrections, war, fuel shortages, accidents, casualties, Acts of God, acts caused directly or indirectly by Tenant (or Tenant's Page 20 33 agents, employees or invitees), mechanical breakdown, repair, servicing or any other cause beyond the reasonable control of Landlord. 26.08 CAPTIONS The Article and Paragraph captions in this Lease are inserted only as a matter of convenience and in no way define, limit, construe, or describe the scope or intent of such Articles and Paragraphs. 26.09 APPLICABLE LAW This Lease shall be construed in accordance with the laws of the State of Illinois. 26.10 TIME Time is of the essence of this Lease and the performance of all obligations hereunder. 26.11 LANDLORD'S RIGHT TO PERFORM TENANT'S DUTIES If Tenant fails timely to perform any of its duties under this Lease Landlord shall have the@ right (but not the obligation), after the expiration of any notice and cure period or grace period elsewhere under this Lease expressly granted to Tenant for the performance of such duty, to perform such duty on behalf and at the expense of Tenant without further prior notice to Tenant, and all sums expended or expenses incurred by Landlord in performing such duty shall be deemed to be additional Rent under this Lease and shall be due and payable upon demand by Landlord. 26.12 TENANT'S REMEDIES Tenant agrees that in the event of a default by Landlord under this Lease, Tenant shall give written notice thereof to all mortgagees and ground lessors of the Premises, or any interest therein, and a period of 30 days within which to cure or cause to be cured such default, prior to proceeding to enforce any rights or remedies of Tenant under this Lease. 26.13 RIDERS All Riders attached hereto and signed both by Landlord and Tenant shall be deemed to be a part hereof and are hereby incorporated into this Lease. 26.14 CONSENT In any and all cases where Landlord's consent or approval is required under this Lease, Tenant shall, upon Landlord's demand, reimburse Landlord, as additional rent, for all reasonable and appropriate costs and expenses, including but not limited to architectural, engineering and legal fees, which Landlord incurs in determining whether to grant its consent or approval. See Insert on page 21A. 27. PARKING So long as Tenant is not in default under this Lease, Tenant and its agents, invitees and employees shall have a license to use (in accordance with the provisions of this Lease) in the aggregate 3.3 parking spaces in the location specified by Landlord on Lot 3 of the Resubdivision of Lot 3 (and/or on any other adjacent parcels of land designated by Landlord) in the Naperville Corporate Center Subdivision in Naperville, Illinois for each 1,000 useable square feet of the Premises (as determined by Landlord's architect) for the purpose of parking automobiles used by any of such persons;* Provided, (1) neither Tenant nor its agents, invitees or employees shall use in the aggregate more than such number of parking spaces on such Lot 3 of the Resubdivision of Lot 3 (or adjacent parcels of land); *6 of which said parking spaces shall be reserved parking spaces for Tenant's exclusive use at a location designated by Landlord and the remainder of said parking spaces shall be unreserved parking spaces; Page 21 34 26.15 TERMINATION OPTION In the event Tenant vacates or abandons the Premises for a period of at least 30 days, Landlord shall have the option to terminate this Lease, without termination fee or penalty payable by or to Landlord or Tenant, by giving Tenant written notice of termination at any time thereafter. Page 21A 35 (2) Tenant acknowledges, understands and agrees that Landlord shall not be liable or responsible for enforcing such license or preventing any violation thereof; and (3) Landlord shall have the right (in addition to all other remedies available to Landlord under this Lease, at law or in equity) to revoke such license in the event of any condemnation or taking by any lawful authority of any part of such Lot 3 of the Resubdivision of Lot 3 which reduces the number of parking spaces which serve the Building or in the event of any other occurrence not caused by Landlord which reduces the number of parking spaces which serve the Building or in the event of the use by Tenant or its agents, invitees or employees in the aggregate of more than such number of parking spaces which are hereby licensed to Tenant, or in the event of any default by Tenant under this Lease or in the event Tenant uses parking spaces in an area other than the area specified by Landlord. 36 LANDLORD: TENANT: - --------- ------- AMERICAN NATIONAL BANK AND TRUST SPYGLASS, INC. an Illinois corporation COMPANY OF CHICAGCO, not personally, but solely as Trustee under Trust Agreement dated June 12, 1978 and known as Trust No. 43194 Title. *(4) Landlord shall not be obligated to "police" or enforce Tenant's exclusive right to use said reserved parking spaces against other tenants, users or invitees of the Building, nor to tow any unauthorized vehicle from said reserved spaces; and (5) if 20% or more of the unreserved parking spaces now serving the Building are taken or condemned for any public use or purpose (and the Premises are not correspondingly reduced in area by reason of such taking or condemnation) and if Landlord fails to provide or make available to Tenant comparable alternative parking spaces elsewhere in the Naperville Corporate Center or in the general vicinity of the Building, then Tenant may terminate this Lease by giving Landlord written notice within 20 days after such taking or condemnation. Page 22 37 EXHIBIT A - Diagram of Fourth Floor (Floorplan) 5/28/97 38 EXHIBIT C BELLEMEAD MANAGEMENT CO., INC. Cleaning Specification
SERVICES TO BE PERFORMED FREQUENCY - ------------------------ --------- COMMON AREAS, LOBBIES, ELEVATORS, ETC. - -------------------------------------- 1. Sweep all flooring using a dust treated mop then wet mop. Remove all gum, tar, etc., from floors. Nightly 2. Empty and damp clean ashtrays and screens. Nightly 3. Clean and service ash urns. Nightly 4. Clean and sanitize drinking fountains. Nightly 5. Spot clean entrance door glass. Nightly 6. Sweep all stairwells. Remove all gum, tar, etc. from floors. Nightly 7. Elevator cab to be wiped clean. Nightly 8. Elevator floors to be vacuumed. Nightly 9. Vacuum elevator door tracks with a nozzle. Nightly 10. Lobby entrance doors and windows to be washed completely. Weekly 11. Lobby walls, glass, etc., cleaned thoroughly. Weekly 12. Elevator cab to be thoroughly cleaned and polished. Weekly 13. High dust all horizontal surfaces above hand height. Monthly 14. Machine scrub all hard floors. Monthly RESTROOMS 1. Sweep and wash all restroom floors using proper disinfectants. Nightly 2. Wash and polish all mirrors, powder shelves, bright work and enamel surfaces in all restrooms Nightly 3. Scour, wash and disinfect all basins, bowls and urinals. Nightly 4. Wash and disinfect all toilet seats. Nightly 5. Hand dust and clean, washing where necessary all partitions, tile, walls, dispensers and receptacles, in all restrooms. Nightly 6. Supply and fill all liquid soap dispensers, toilet paper holders and C-fold paper towel dispensers. Nightly 7. Wash and sanitize all waste receptacles. Weekly 8. Wet wipe all wall and stall surfaces. Weekly
C-1 39 9. Machine scrub all floor surfaces with approved germicidal solution. Weekly 10. Flush all toilet bowls and urinals with Saniflush or equal. Weekly 11. High dust all horizontal surfaces including shelves, ledges, moldings, pipes, ducts, heating outlets, etc. Monthly 12. Wash and sanitize all metal partitions. Monthly TENANT AREAS - ------------ 1. Empty and clean all wastepaper receptacles, empty and damp wipe all ashtrays Nightly 2. Sweep and/or dust mop all non-carpeted areas, then wet mop. Nightly 3. Vacuum all carpeted areas. Nightly 4. All stone, ceramic tile, marble, terrazzo and other unwaxed flooring to be swept and wet mopped. Nightly 5. Hand dust and wipe clean ill office furniture. Nightly 6. Spot clean counters and desk tops for coffee stains, etc. Nightly 7. Wipe clean all brass and other bright work. Nightly 8. Wash and disinfect all fountains and coolers. Nightly 9. Dust and clean all sand urns. Replace sand as necessary. Nightly 10. Hand dust chair rails, baseboard trim (low dusting only). Nightly 11. Dust all leather or leather type furniture. Nightly 12. Dust all open closet shelving. Nightly 13. All office furniture to be vacuumed with a nozzle. Weekly 14. All closet shelving, coat racks, etc. to be dusted. Weekly 15. Vacuum with a nozzle around the base of all walls, furniture, desks Weekly 16. Hand dust and wipe clean all window sills, wall paneling, partitions. Wash as required. Weekly 17. Remove all finger marks from entrance doors, door frames, and switch plates. Weekly 18. Hand dust all door and other ventilating louvers. Weekly
WINDOW CLEANING - EIGHT TIMES PER YEAR - -------------------------------------- Window cleaning services will be rendered Monday through Friday during working hours, except during legal holidays. 1. Wash all windows, inside and outside. 2. Wash interior glass partitions, transoms, etc. C-2 EX-11.1 5 COMPUTATION OF EARNINGS 1 EXHIBIT 11.1 SPYGLASS, INC. COMPUTATION OF NET INCOME PER SHARE (1)
Year Ended September 30, ------------------------------------------ 1997 1996 1995 ------------ ----------- ---------- Net income (loss) ($ 9,735,000) $ 3,460,000 $2,176,000 ------------ ----------- ---------- Weighted average shares outstanding: Common stock 12,090,000 11,618,800 8,272,876 Common stock equivalents calculated by treasury stock method applied to option, and warrants issued (2) - 1,219,292 1,150,542 ------------ ----------- ---------- Weighted average common shares and equivalents 12,090,000 12,838,062 9,423,418 ------------ ----------- ---------- Net income (loss) per share ($ 0.81) $ 0.27 $ 0.23
(1) - This exhibit should be read in conjunction with "Summary of Operations and Significant Accounting Policies-Per Share Information" in Note 1 of the Notes to the Consolidated Financial Statements. (2) - Stock options granted prior to the beginning of each reporting period have been included in the calculation of common stock equivalents as if they were outstanding for the entire period (using the treasury sock method). Common stock equivalents are not included for fiscal year 1997 as the effect of their inclusion would be anti-dilutive. EX-13.1 6 ANNUAL REPORT 1 EXHIBIT 13.1 SELECTED FINANCIAL DATA The following table sets forth selected financial data of the Company for and as of the five years ended September 30, 1997, 1996, 1995, 1994, and 1993. The selected financial data has been derived from the Company's audited consolidated financial statements. This financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto.
FISCAL YEARS ENDED SEPTEMBER 30, ----------------------------------------------------------------------- (In thousands, except per share amounts) 1997 1996 1995 1994 1993(1) - ------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Total net revenues $ 21,295 $ 22,307 $ 12,141 $ 4,667 $ 1,375 Gross profit 18,267 20,277 10,380 3,580 1,152 Income (loss) from operations (11,357) 3,667 3,025 770 (388) Income (loss) before cumulative effect of change in accounting (9,735) 3,460 2,176 584 (320) Net income (loss) (9,735) 3,460 2,176 1,384 (320) Net income (loss) available to common stockholders ($9,735) $ 3,460 $ 1,985 $ 1,127 $ (577) PER SHARE AND SHARE DATA: Earnings (loss) per common and common equivalent share (2): Income (loss) before cumulative effect of change in accounting ($0.81) $ 0.27 $ 0.23 $ 0.08 $ (0.13) Net income (loss) ($0.81) $ 0.27 $ 0.23 $ 0.18 $ (0.13) Net income (loss) available to common stockholders ($0.81) $ 0.27 $ 0.21 $ 0.15 $ (0.23) Weight average number of common shares and equivalents outstanding 12,090 12,838 9,423 7,685 2,514 BALANCE SHEET DATA: Cash and cash equivalents $ 22,841 $ 16,490 $ 34,872 $ 1,606 $ 757 Short-term investments 4,929 17,593 - - - Working capital 28,844 39,117 35,550 2,174 661 Total assets 40,580 48,769 43,509 5,871 1,167 Redeemable convertible preferred stock - - - 3,393 3,135 Total stockholders' equity $ 35,567 $ 43,891 $ 37,614 $ (756) $(2,227)
(1)- Selected financial data for the year ended September 30, 1993 does not include the results of Stonehand Inc., SurfWatch Software, Inc. or OS Technologies Corporation which were acquired in fiscal 1996 in transactions accounted for as pooling of interests. The selected financial data of such companies for such fiscal year does not materially affect the results shown above. (2)-On November 28, 1995, the Board of Directors declared a two-for-one common stock split, effected in the form of a 100% stock dividend, paid December 20, 1995, to stockholders of record as of December 6, 1995. All share and per share data have been restated to reflect the two-for-one common stock split for all periods presented. DIVIDEND POLICY: The Company has never paid cash dividends on its capital stock. The Company currently intends to retain earnings, if any, to support its growth strategy and does not anticipate paying cash dividends in the foreseeable future. 4 2 SELECTED QUARTERLY DATA The following table sets forth certain quarterly financial information of the Company for fiscal years 1997 and 1996. This information has been derived from the consolidated quarterly financial statements of the Company which are unaudited but which, in the opinion of management, have been prepared on the same basis as the audited consolidated financial statements included herein and include all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the financial results for such periods. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto.
THREE MONTHS ENDED (UNAUDITED) -------------------------------------------------------------------------------------------------- (In thousands except SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, per share amounts) 1997 1997 1997 1996 1996 1996 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Total net revenues $ 3,179 $ 2,216 $12,015 $ 3,885 $ 6,551 $ 6,003 $ 5,000 $ 4,753 Gross profit 2,494 1,539 10,808 3,426 5,961 5,484 4,562 4,270 Income (loss) from operations (5,031) (6,150) 2,755 (2,931) 921 1,008 876 862 Net income (loss) (4,708) (5,533) 2,051 (1,545) 1,004 862 752 842 PER SHARE AND SHARE DATA: Earnings (loss) per common and equivalent share (2): Net income (loss) $ (0.38) $ (0.45) $ 0.16 $ (0.12) $ 0.08 $ 0.07 $ 0.06 $ 0.07 Weighted average number of common shares and equivalents outstanding 12,325 12,187 12,736 12,694 12,750 12,853 12,962 12,929
(1) - Includes a one-time licensing fee of $8,000,000 from Microsoft Corporation. (2) - On November 28, 1995, the Board of Directors declared a two-for-one common stock split, effected in the form of a 100% stock dividend, paid December 20, 1995, to stockholders of record as of December 6, 1995. All share and per share data have been restated to reflect the two-for-one common stock split for all periods presented. MARKET PRICE PER SHARE The following table sets forth, for the periods indicated, the high and low sales prices of the Common Stock of the Company on the Nasdaq National Market, as reported by Nasdaq.
THREE MONTHS ENDED ------------------------------------------------------------------------------------------------- SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, 1997 1997 1997 1996 1996 1996 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- High $ 10 1/2 $ 11 $ 14 1/8 $ 19 1/2 $ 23 5/8 $ 34 7/8 $ 55 3/4 $ 61 Low $ 7 3/16 $ 6 $ 7 $ 10 $ 12 $ 19 1/8 $ 18 $ 16 1/2
5 [LOGO] 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Spyglass, Inc. ("Spyglass" or the "Company") was organized as an Illinois corporation in February 1990 and reincorporated in Delaware in May 1995. Spyglass entered the Internet market during fiscal 1994 and from fiscal 1994 through fiscal 1996, focused its efforts on developing, marketing and distributing Internet client and server technologies for incorporation into a variety of Internet-based software products and services. Beginning in fiscal 1997, the Company focused 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, Internet Service Providers (ISPs) and internetworking hardware providers. These technologies enable Internet connectivity through highly scalable embedded browers and servers, and provide performance enhancements, content filtering and conversion through an integrated suite of infrastructure servers. Spyglass Professional Services offers 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 Internet-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. Prior to fiscal 1994, the Company focused its efforts on the scientific data visualization tools market; this product line was sold in fiscal 1995. Spyglass acquired Stonehand Inc. ("Stonehand"), OS Technologies Corporation ("OS Tech") and SurfWatch Software, Inc. ("SurfWatch"), in fiscal 1996 in transactions accounted for as poolings of interests. All financial information presented includes the accounts and results of operations of these companies for all periods presented. In November 1997, Spyglass acquired AllPen Software in a transaction accounted for as a pooling of interests. See Note 13 to the Consolidated Financial Statements. The Company pays royalties to the University of Illinois with respect to licenses of Spyglass Device Mosaic. In addition, the Company pays royalties to RSA Data Security, Inc. with respect to licenses of the Company's technologies containing certain RSA code, to Sun Microsystems, Inc. with respect to licenses of the Company's technologies containing certain Java code. These royalties are reflected in cost of technology and product revenues. On January 21, 1997, the Company amended its license arrangement with Microsoft Corporation ("Microsoft") to convert Microsoft's existing license for the Spyglass Mosaic browser technology into a fully paid-up license in consideration of an additional $8,000,000 payment from Microsoft. Spyglass recognized the revenue from this payment in the quarter ended March 31, 1997. Management believes that its results of operations, presented without giving effect to this one-time event, provides a more accurate presentation of the Company's ongoing business. Accordingly, the following analyses for the fiscal year ended September 30, 1997, including amounts and percentages, exclude the $8,000,000 of revenue as well as the associated $600,000 of cost of sales and $400,000 of sales expense for the fiscal year ended September 30, 1997. Approximately 39.5% of the Company's revenues for fiscal 1997 were attributable to Microsoft. FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER 30, 1996 - ------------------------------------------------------------------------------ Technology revenues for the year ended September 30, 1997 decreased $10,272,000, or 53%, to $9,194,000 compared to $19,466,000 for the year ended September 30, 1996. This decrease in technology revenues was due primarily to a significant decline in revenues from vendors of desktop software applications combined with slower than anticipated development of the Internet device market as the Company redirected its strategic focus to this market during fiscal 1997. Specifically, technology revenues from vendors of desktop software applications decreased to $6,353,000 from $17,971,000 while revenues from device manufacturers increased to $2,841,000 from $1,495,000. During this period of strategic redirection, initial technology license revenues will typically comprise a smaller component of total expected license revenue than in the past, until such time as customer devices utilizing the company's technology are introduced commercially and the contractual royalty revenue stream commences. Therefore, the Company expects its revenue growth to be limited during fiscal 1998 as the Company continues to focus its efforts on the Internet device market. Service revenues, which include revenues from both customer support agreements and professional services agreements, increased $1,260,000, or 44%, to $4,101,000 for the year ended September 30, 1997 compared to $2,841,000 for the year ended September 30, 1996. The increase in service revenues was due primarily to the increase in the number of professional services agreements entered into by the Company. Revenues from professional services were $2,179,000 in fiscal 1997 compared to $559,000 for fiscal 1996. The Company expects professional services revenues to increase both in absolute dollars and as a percentage of revenues during fiscal 1998, while service revenues from customer support agreements are expected to decline slightly during the same period. Gross profit as a percentage of revenues was 81.8% for the year ended September 30, 1997 compared to 90.9% for the year ended September 30, 1996. This decrease in gross profit percentage resulted primarily from an increase in professional services revenues as a percentage of both total revenues and service revenues, which have significantly higher costs as a percentage of revenues than technology and product revenues. Additionally, the cost of service revenues increased, as a percentage of service revenues, to 36.4% for fiscal 1997 from 4.2% for fiscal 1996. The Company expects gross profit as a percentage of revenues to decline slightly throughout fiscal 1998 as professional services revenues as a percentage of total revenues increase. Sales and marketing expenses for the year ended September 30, 1997 increased $1,948,000, or 33%, to $7,911,000 from $5,963,000 for the year ended September 30, 1996, and increased as a percentage of revenues to 59.5% from 26.7%. The increased expenses reflected staff additions in sales, marketing and customer services to support the sale 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 4 RESULTS OF OPERATIONS - --------------------- The following table sets forth certain financial data as a percentage of total net revenues for the fiscal years ended September 30, 1997, 1996, and 1995:
PERCENTAGE OF TOTAL NET REVENUES ------------------------------- FOR THE FISCAL YEARS ENDED SEPTEMBER 30, ---------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- NET REVENUES: Internet technology revenues 69.2% 87.3% 81.3% Data visualization product revenues - - 12.5 Service revenues 30.8 12.7 6.2 -------- -------- -------- Total net revenues 100.0 100.0 100.0 COST OF REVENUES: Cost of technology and product revenues 7.0 8.6 14.5 Cost of service revenues 11.2 0.5 - -------- -------- -------- Total cost of revenues 18.2 9.1 14.5 -------- -------- -------- Gross profit 81.8 90.9 85.5 Operating expenses and other: Sales and marketing 59.5 26.7 27.2 Research and development 102.6 30.6 22.7 General and administrative 50.9 17.2 17.8 Gain on sale of data visualization product line - - (7.1) Restructuring charge 6.8 - - -------- -------- -------- Income (loss) from operations (138.0) 16.4 24.9 Other income 12.2 7.8 4.7 -------- -------- -------- Income (loss) before income taxes (125.8) 24.2 29.6 Provision for income taxes - 8.7 11.7 -------- -------- -------- Net income (loss) (125.8)% 15.5% 17.9% ======== ======== ========
and marketing of Spyglass technologies, which increased the cost of salary and related personnel expenses by $1,309,000 and increased related facility costs by $412,000 between fiscal 1997 and fiscal 1996. Advertising costs decreased $336,000 between these periods due to the cancellation of a monthly advertising service fee associated with previous marketing programs targeting the desktop marketplace. The Company expects sales and marketing expenses for fiscal 1998 to remain approximately the same, in dollars, as in fiscal 1997. Research and development expenses for the year ended September 30, 1997 increased $6,843,000, or 101%, to $13,644,000 compared to $6,801,000 for the year ended September 30, 1996, and increased as a percentage of revenues to 102.6% from 30.6%. The increase in research and development costs was due primarily to costs of additional personnel required to provide enhancements to existing technologies as well as the relocation of personnel to geographic areas in which higher salaries are required, all of which increased the costs of salary and related personnel expenses by $4,642,000 for fiscal 1997 compared to fiscal 1996. Additionally, facility costs increased $1,870,000 between these periods as the Company consolidated its Champaign, Illinois research and development operations into its Naperville, Illinois and Cambridge, Massachusetts operations, which have higher facility costs than the Champaign facility. The Company believes that it has been necessary to make significant investments in research and development and acquisitions of new technologies to remain competitive and establish a leadership position in the emerging Internet device market. The Company expects its research and development expenses in fiscal 1998 to remain approximately the same in dollars as in fiscal 1997. General and administrative expenses increased $2,923,000, or 76%, to $6,769,000 for the year ended September 30, 1997 from $3,846,000 for the year ended September 30, 1996 and increased as a percentage of revenues to 50.9% from 17.2%. The increase in general and administrative expenses was due primarily to increases in personnel at corporate headquarters, which increased salary and related personnel expenses by $2,076,000. Bad debt expense increased by $728,000 as the Company wrote-off certain accounts receivable balances related to its desktop software application business as the Company transitioned to the Internet device market. Additionally, in order to effectively and rapidly transition the focus of the Company from the desktop market to the Internet device market it was necessary to incur significantly more conference, travel and meeting expenses, which increased general and administrative expenses by $495,000 for fiscal 1997 compared to fiscal 1996. The Company expects general and administrative costs to decline, both in dollars and as a percent of revenues, in fiscal 1998. On March 10, 1997, the Company consolidated its Champaign, Illinois development operations with its Naperville, Illinois and Cambridge, 7 [LOGO] 5 Massachusetts operations. This consolidation reflects the Company's evolution from its desktop focus to the Internet device market and the realignment of its product development activities with the needs of this market. As a result, a restructuring charge of $900,000 was recorded in the second quarter of fiscal 1997 and consists primarily of severance and related personnel costs of $730,000 and lease cancellation and other exit costs of $170,000. Included in the charge for personnel costs was $100,000 of compensation expense related to the acceleration of the exercisability of certain stock options. The decrease in facility costs related to the closing of the Champaign facility has been offset by expansion within existing facilities as well as expansion into new facilities. The Company recorded no income tax benefit for the fiscal year ended September 30, 1997 as compared to a provision for income taxes of $1,951,000 for the fiscal year ended September 30, 1996. This reflects a decision by the Company not to recognize income tax benefits associated with the Company's operating loss generated during fiscal 1997. The Company believes that it is appropriate to defer recognition of potential tax benefits until such time when its return to profitability can provide assurances that these tax benefits will be realized. FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER 30, 1995 Technology and product revenues for the year ended September 30, 1996 increased $8,082,000, or 71%, to $19,466,000 compared to $11,384,000 for the year ended September 30, 1995. This increase in technology and product revenues was due primarily to revenues from license agreements with new customers for the Spyglass Mosaic (formerly Client SDK) and, to a lesser extent, the Spyglass Server (formerly Server SDK) and SurfWatch technologies. Approximately 12.1% of the Company's revenues for fiscal 1996 were attributable to a license from one customer. Internet technology revenues, as a percentage of revenues, increased to 87.3% during the 1996 fiscal year from 81.3% during the 1995 fiscal year. The Company sold its data visualization product line in September 1995 and reported no revenues from this product line for the year ended September 30, 1996 compared to $1,513,000 in the year ended September 30, 1995. Service revenues for the year ended September 30, 1996 increased $2,084,000, or 75%, to $2,841,000 compared to $757,000 for the year ended September 30, 1995. During the third quarter of fiscal 1996, the Company formed a professional services group to service the Internet device market. The increase in service revenues was due primarily to the increase in the number of support agreements with new customers for Spyglass Mosaic and the Spyglass Server in addition to continuing support agreements with existing customers. Revenues from professional services approximated $560,000 in fiscal 1996. Gross profit as a percentage of revenues was 90.9% for the year ended September 30, 1996 compared to 85.5% for the year ended September 30, 1995. This increase in gross profit percentage resulted primarily from lower royalty costs reflecting changes in product mix. This change in product mix resulted from the sale of the data visualization product line in September 1995 (which had higher royalty costs as a percentage of revenue than Spyglass Mosaic) and the introduction of the Spyglass Server in July 1995, which has now been incorporated into the Spyglass Server (which has lower royalty costs as a percentage of revenue than Spyglass Mosaic). Sales and marketing expenses for the year ended September 30, 1996 increased $2,660,000, or 81%, to $5,963,000 from $3,303,000 for the year ended September 30, 1995, but decreased slightly as a percentage of revenues to 26.7% from 27.2%. The increased expenses reflected higher sales commission costs (which increased by $343,000 in fiscal 1996 from fiscal 1995) due to increased revenues in addition to staff additions in sales, marketing, and customer support (which increased the cost of salary and related personnel expenses by $1,394,000 in fiscal 1996 from in fiscal 1995). Additionally, certain marketing initiatives, which included a print campaign to increase awareness of its products among the business and technology communities, accounted for $530,000 of the increase in sales and marketing expenses for the year ended September 30, 1996 as compared to the year ended September 30, 1995. Research and development expenses for the year ended September 30, 1996 increased $4,045,000, or 147%, to $6,801,000 compared to $2,756,000 for the year ended September 30, 1995, and increased as a percentage of revenues to 30.6% from 22.7%. The increase in research and development costs was due primarily to costs associated with enhancements to existing technologies as well as the development of the Software Development Kits, the SurfWatch ProServer and other new technologies. General and administrative expenses for the year ended September 30, 1996 increased $1,687,000, or 78%, to $3,846,000 from $2,159,000 for the year ended September 30, 1995 but declined slightly as a percentage of revenues to 17.2% from 17.8%. The increase in general and administrative expenses was due primarily to increases in personnel, (which increased salary and related personnel expenses by $797,000 for fiscal 1996 from fiscal 1995), as well as expenses incurred by the Company related to the acquisitions of Stonehand, OS Tech and SurfWatch. In fiscal 1995, the Company recorded a pre-tax gain, net of transaction expenses, of $863,000 on the sale of its data visualization product line. The approximate after-tax contribution to income was $523,000, or $0.06 per share. Interest income, included in other income on the financial statements, for the year ended September 30, 1996 increased $1,243,000, or 253%, to $1,734,000 from $491,000 for the year ended September 30, 1995. This increase in interest income is primarily due to an increase in cash and cash equivalents and short-term investments as a result of the Company's initial public offering in June 1995. The provision for income taxes for the year ended September 30, 1996 increased $536,000 to $1,951,000 from $1,415,000 for the year ended September 30, 1995. The provision for income taxes as a percentage of income before income taxes approximated 36% in fiscal 1996 as compared to 39% in fiscal 1995. This decrease in the effective tax rate is due to increased research and development tax credits for the fiscal year ended September 30, 1996. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1997, the Company had no debt and had cash 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 and cash equivalents of $22,841,000, short-term investments of $4,929,000 and working capital of $28,844,000. The Company's operating activities used cash of $4,114,000 and $822,000 for the fiscal year ended September 30, 1997 and 1996, respectively, and provided cash of $715,000 for the fiscal year ended September 30, 1995. The Company's cash flows for fiscal 1997 were impacted by the $7,500,000 in cash received from Microsoft during the quarter ended March 31, 1997 in connection with the amendment to the Company's license arrangement as discussed in the Overview section. The Company's net accounts receivable decreased to $4,042,000 at September 30, 1997 from $8,226,000 at September 30, 1996. This decrease was primarily due to a decrease in revenues, increased collection efforts and the write-off of approximately $1,150,000 of accounts receivable balances related to desktop software vendors. The Company's capital expenditures totaled $3,330,000, $2,905,000 and $1,034,000 for the fiscal years ended September 30, 1997, 1996, and 1995, respectively, and consisted primarily of computer hardware and software. The Company had no material commitments for capital expenditures at September 30, 1997. The Company believes that its current cash and cash equivalents will be sufficient to finance the Company's cash flow needs through at least the fiscal year ending September 30, 1998. FUTURE OPERATING RESULTS This Annual Report contains a number of forward-looking statements. Any statements contained herein (including without limitation statements to the effect that the Company or its management "believes", "expects", "anticipates", "plans" and similar expressions) that are not statements of historical fact should be considered forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below. During fiscal 1997, the Company announced an increased strategic focus on the Internet device market. The Company is focused on the development, marketing and distribution of its technologies and services to the non-PC Internet device marketplace. Because this is a new and undeveloped market, there can be no assurance as to the extent of the demand for 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 revenue growth will be limited during fiscal 1998 as the Company continues to direct its business strategy to the Internet device market, rather than vendors of desktop software applications. In addition, the Company expects to maintain its recent levels of expenditures in product development, marketing and sales in order to position itself as a leader in the Internet device market. The Company's future results of operations will also be largely dependent upon a number of factors relating to development and acceptance of the Internet as a commercial market. In particular, commercial use of the Internet continues to be constrained by the need for reliable processes such as security measures for electronic commerce as well as the need for regularly available customer support and a supporting infrastructure providing widespread Internet accessibility and high-speed communications capabilities. In addition, the market for Internet software products is characterized by rapidly changing technology, evolving industry standards and customer demands, and frequent product introductions and enhancements, which make it difficult to predict whether the initial commercial acceptance of the Company's products can be sustained over a period of time. The market for Internet technologies and services is extremely competitive, and competition is likely to increase in the future. The Company currently faces competition from other Internet device technology and software vendors such as Oracle, Sun Microsystems, Microsoft, on-line service companies, Internet access providers and networking software companies. In licensing its Internet technologies, the Company considers a significant source of competition to be the prospect company's internal software development resources. The Company licenses its products to a variety of companies such as RTOS vendors, consumer and industrial device manufacturers, RBOCs, ISPs and internetworking hardware providers that incorporate the Company's technology into their products and services. The success of the Company is therefore dependent in large part on the performance of its customers, which is outside of the Company's Control. The Company from time to time receives notices alleging that its products infringe third party proprietary rights. For example, the Company has a pending dispute with Unisys Corporation regarding the Graphics Interchange Format. Spyglass has also received a notice from Elk Industries Inc. alleging that one or more products of Spyglass infringe a patent owned by Elk Industries Inc. Patent and similar litigation frequently is complex and expensive and its outcome can be difficult to predict. If, as a result of proprietary rights infringements by any of the Company's products, the Company is required to discontinue sales of certain products, eliminate certain features on its products, or pay royalties to another party, the Company's future operating results could be materially adversely affected. The Company's quarterly operating results have varied and they may continue to vary significantly depending on factors such as the timing of significant license agreements, the terms of the Company's licensing arrangements with its customers and the timing of new product introductions and upgrades by the Company and its competitors. The Company typically structures its license agreements with customers to require commitments for a minimum number of licenses, and license revenues are recognized as the committed licenses are purchased. Additional revenues from a customer will not be earned unless and until the initial committed levels are exceeded. The Company's revenues in any quarter will depend in significant part on its ability to sell licenses to new customers in that quarter, the timing of product deployment by its customers and the ability to sell professional services. The Company typically structures its professional service agreements with customers to recognize revenue on the percentage of completion method of accounting. The Company's expense levels are based in part on expectations of future revenue levels and any shortfall in expected revenue could therefore result in a disproportionate decrease in the Company's net income in any given fiscal period. 9 [LOGO] 7 Consolidated Statements of Operations
FOR THE YEARS ENDED SEPTEMBER 30, (In thousands, except per share amounts) 1997 1996 1995 - ------------------------------------------------------------------------------ Net revenues: Internet technology revenues $ 17,194 $ 19,466 $ 9,871 Data visualization product revenues - - 1,513 Service revenues 4,101 2,841 757 --------- --------- -------- Total net revenues 21,295 22,307 12,141 Cost of revenues: Cost of technology and product revenues 1,535 1,912 1,761 Cost of service revenues 1,493 118 - --------- --------- -------- Total cost of revenues 3,028 2,030 1,761 --------- --------- -------- Gross profit 18,267 20,277 10,380 Operating expenses and other: Sales and marketing 8,311 5,963 3,303 Research and development 13,644 6,801 2,756 General and administrative 6,769 3,846 2,159 Gain on sale of data visualization product line - - (863) Restructuring charge 900 - - --------- --------- -------- Income (loss) from operations (11,357) 3,667 3,025 Other income 1,622 1,744 566 --------- --------- -------- Income (loss) before income taxes (9,735) 5,411 3,591 Provision for income taxes - 1,951 1,415 --------- --------- -------- Net income (loss) (9,735) 3,460 2,176 Accretion of preferred stock dividends - - (191) --------- --------- -------- Net income (loss) available to common stockholders $ (9,735) $ 3,460 $ 1,985 ========= ========= ======== Earnings (loss) per common and common equivalent share: Net income (loss) $ (0.81) $ 0.27 $ 0.23 Net income (loss) available to common stockholders $ (0.81) $ 0.27 $ 0.21 Weighted average number of common shares and equivalents outstanding 12,090 12,838 9,423 ========= ========= ========
See accompanying Notes to the Consolidated Financial Statements 10 8 Consolidated Balance Sheets
SEPTEMBER 30, (In thousands) 1997 1996 - ---------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 22,841 $ 16,490 Short-term investments 4,929 17,593 Account receivable, net of allowance for doubtful accounts of $350 and $470, respectively 3,792 7,608 Prepaid expenses and other current assets 2,195 2,094 -------- -------- Total current assets 33,757 43,785 Properties, net 5,037 3,377 Long-term accounts receivable 250 618 Other assets 1,536 989 -------- -------- TOTAL ASSETS $ 40,580 $ 48,769 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 2,162 $ 2,160 Deferred revenues 1,256 1,453 Accrued compensation and related benefits 1,322 952 Accrued expenses and other liabilities 173 103 -------- -------- Total current liabilities 4,913 4,668 Long-term deferred revenues 100 210 -------- -------- Total liabilities 5,013 4,878 -------- -------- Stockholder's equity: Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued - - Common stock, $.01 par value, 50,000,000 shares authorized, 12,362,823 and 11,819,545 shares issued and outstanding, respectively 124 118 Additional paid-in-capital 40,746 39,341 Retained earnings (deficit) (5,303) 4,432 -------- -------- Total stockholders' equity 35,567 43,891 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,580 $ 48,769 ======== ========
See accompanying Notes to the Consolidated Financial Statements 11 [LOGO] 9 Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity
REDEEMABLE CONVERTIBLE PREFERRED STOCK AT NET ISSUANCE PLUS DIVIDEND ACCRETION COMMON STOCK ADDITIONAL RETAINED --------------------------------------- ------------ PAID-IN EARNINGS (In thousands, except share amounts) SERIES A SERIES B TOTAL SHARES AMOUNT CAPITAL (DEFICIT) - -------------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1994 $ 1,148 $ 2,245 $ 3,393 1,659,844 $ 237 $ - $ (1,013) Exercise of stock options 46,602 1 45 Exercise of stock warrants 202,778 2 18 Issuance of incentive stock options 146 Exchange of common stock from no par to $0.01 par (221) 221 Conversion of preferred stock into common stock (1,211) (2,373) (3,584) 1,724,099 17 3,567 Net proceeds from initial public offering 2,070,000 21 32,124 Tax benefit from exercise of stock options 464 Issuance of common stock to effect for two-for-one common stock split 5,703,322 57 (57) Net income 2,176 Accretion of preferred stock dividends 63 128 191 (191) --------- -------- -------- ---------- ------- ---------- --------- BALANCE AT SEPTEMBER 30, 1995 - - - 11,406,645 114 36,528 972 Exercise of stock options 394,499 4 531 Exercise of employee stock purchase plan stock options 18,401 266 Issuance of incentive stock options 80 Tax benefit from exercise of stock options 1,936 Net income 3,460 --------- -------- -------- ---------- ------- ---------- --------- BALANCE AT SEPTEMBER 30, 1996 - - - 11,819,545 118 39,341 4,432 Exercise of stock options 497,882 5 731 Exercise of employee stock purchase plan stock options 45,396 1 362 Issuance of incentive stock options 80 Accelerated vesting of options 232 Net loss (9,735) --------- -------- -------- ---------- ------- ---------- --------- BALANCE AT SEPTEMBER 30, 1997 $ - $ - $ - 12,362,823 $ 124 $ 40,746 $ (5,303) ========= ======== ======== ========== ======= ========== =========
See accompanying Notes to the Consolidated Financial Statements 12 10 Consolidated Statements of Cash Flows
FOR THE YEARS ENDED SEPTEMBER 30, (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (9,735) $ 3,460 $ 2,176 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,899 905 218 Loss on disposal of fixed assets 99 21 - Bad debt provision 1,029 301 184 Deferred income taxes - (406) 888 Incentive stock option compensation 312 80 146 Gain on sale of data visualization product line - - (863) Other - (201) (17) Changes in operating assets and liabilities: Accounts and long-term receivables 3,155 (3,066) (2,552) Prepaid expenses and other current assets (1,008) (1,504) (1,530) Accounts payable 2 694 940 Deferred revenues (307) (1,071) 210 Accrued compensation and related benefits 370 348 463 Accrued expenses and other liabilities 70 (383) 452 ------- ------- ------- Net cash provided by (used in) operating activities (4,114) (822) 715 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of data visualization product line - - 910 Short-term investments, net activity 12,664 (17,593) - Proceeds from sale of fixed assets 32 - - Capital expenditures (3,330) (2,905) (1,034) ------- ------- ------- Net cash provided by (used in) investing activities 9,366 (20,498) (124) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options, including tax related benefits 1,099 2,938 510 Net proceeds from initial public offering - - 32,145 Proceeds from exercise of warrants - - 20 ------- ------- ------- Net cash provided by financing activities 1,099 2,938 32,675 ------- ------- ------- Net increase (decrease) in cash and cash equivalents 6,351 (18,382) 33,266 Cash and cash equivalents at beginning of period 16,490 34,872 1,606 ------- ------- ------- Cash and cash equivalents at end of period $22,841 $16,490 $34,872 ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $ 28 $ 169 $ 80
See accompanying Notes to the Consolidated Financial Statements 13 [LOGO] 11 NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Operations Spyglass, Inc. ("Spyglass" or the "Company") develops, markets and distributes Internet technologies designed to be embedded inside various end-user products, including, but not limited to televisions, office equipment, television set-top boxes, network computers and Internet access services. Spyglass technology offerings include the Spyglass Device Mosaic (formerly Spyglass Mosaic), Spyglass Prism, Spyglass MicroServer, SurfWatch and SurfWatch for Microsoft, Netscape and Oracle Proxy Servers. Spyglass also offers Internet consulting and custom engineering services through its Professional Services organization. Theses technologies are used to bring Internet functionality to customers' products and services. In November 1997, the Company acquired AllPen Software in a transaction accounted for as a pooling of interests. See Note 13. In May 1996, the Company formed Spyglass International, Inc., a wholly-owned subsidiary. Spyglass International, Inc. is a U.S. subsidiary that has one branch office in Japan. In January 1997, the Company formed Spyglass Europe Ltd., a wholly-owned subsidiary of Spyglass International, Inc. with an office in England. In April 1996, the Company acquired OS Technologies Corporation ("OS Tech") and SurfWatch Software, Inc. ("SurfWatch") in transactions accounted for as pooling of interests. As a result, all financial information prior to April 17, 1996 and April 24, 1996 includes the accounts and results of operations of OS Tech and SurfWatch, respectively, for all periods presented. In February 1996, the Company acquired Stonehand Inc. ("Stonehand"), in a transaction accounted for as pooling of interests. As a result, all financial information prior to February 2, 1996 includes the accounts and results of operations of Stonehand for all periods presented. On November 28, 1995, the Board of Directors declared a two-for-one common stock split effected in the form of a 100% stock dividend paid on December 20, 1995 to stockholders of record as of December 6, 1995. All share and per share information in the accompanying consolidated financial statements and related notes thereto have been restated to reflect the two-for-one common stock split for all periods presented. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances between the companies have been eliminated. University of Illinois Agreement The Spyglass Device Mosaic product is a commercial derivative version of NCSA Mosaic(TM). NCSA Mosaic was developed by the National Center for Supercomputing Applications at the University of Illinois at Urbana-Champaign. In May 1994, the Company and the University entered into an agreement (as amended to date, the "University Agreement") granting the Company the exclusive (subject to approximately 10 previously granted licenses), worldwide right to develop, distribute and sublicense commercial client browsers based on NCSA Mosaic. The University Agreement provides for royalties based on Spyglass' net revenues from Device Mosaic, and includes cumulative minimum quarterly royalties. The University Agreement has an initial term of five years, with automatic one-year renewals, and is terminable in the event of a material breach by the Company of its obligations thereunder. Under the University Agreement, the Company was required to provide the University with source code versions of Spyglass Mosaic through Release 2.5. The University will have the right (subject to certain restrictions) to incorporate these releases of Spyglass Mosaic into new releases of NCSA Mosaic, which will continue to be available on a free-with-copyright basis to organizations for non-commercial academic and research use only. However, the University is not permitted to make NCSA Mosaic available for distribution by resellers other than the Company. The University Agreement gives the Company the exclusive right (with certain limited exceptions) to use the University's trademarks "Mosaic(TM)" and "NCSA Mosaic(TM)" and its spinning globe logo in connection with Mosaic on a royalty-free basis (with certain limited exceptions). In addition, the Company has the exclusive right (with certain limited exceptions) to use these marks in connection with the sale of other products for a royalty payment based on net revenues derived from such products. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents For the purposes of the balance sheet and statement of cash flows, all highly liquid investments with original maturities of three months or less are considered cash equivalents. Investments The Company accounts for its investments in debt and equity securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company has classified its marketable debt securities in the held-to-maturity category based upon its intent and ability to hold the securities to maturity. The appropriate classification of debt securities is determined at the time of purchase and is re-evaluated as of each balance sheet date. Securities classified as held-to-maturity are reported at amortized cost. Realized gains and losses and declines in value of securities judged to be other-than-temporary are included in other income. Investments with original maturities between three and twelve months are considered short-term investments. Short-term investments consist of debt securities such as commercial paper, time deposits, certificates of deposit, bankers' acceptances, and marketable direct obligations of the United States Treasury. Other Assets The Company licenses certain technology from third parties and records prepaid royalty costs associated with these licenses. These costs are deferred and amortized based upon revenues. It is the Company's policy to periodically review and evaluate whether the benefits associated with these prepaid royalties are expected to be realized and, therefore, deferral and amortization is appropriate. 14 Notes to the Consolidated Financial Statements 12 Approximately $441,000 and $550,000 of these prepaid royalties are included in prepaid expenses and other current assets and approximately $1,431,000 and $989,000 are included in other assets at September 30, 1997 and September 30, 1996, respectively. Properties Properties are stated at cost less accumulated depreciation. Depreciation is determined for financial reporting purposes using the straight line method over the estimated useful lives of the assets, which range from 3 to 7 years. Depreciation for income tax reporting purposes is determined using accelerated depreciation methods. Revenue Recognition The Company recognizes revenues from software licensing arrangements in accordance with the provisions of Statement of Position 91-1, Software Revenue Recognition, issued by the American Institute of Certified Public Accountants. Internet technology revenues are generally recognized as the licenses are purchased by customers, provided the license agreement does not allow for extended payment terms, and there are no significant remaining obligations under the contract. Data visualization product revenue was recognized upon shipment. Service revenues are comprised of revenues from customer support and professional services agreements. Revenue from the sale of support agreements is recognized over the term of the agreement using the straight-line method and related costs are included in operating expenses under the sales and marketing classification. Revenue from professional services agreements is recognized on the percentage of completion method and related costs are reported as a cost of service revenues. Accounting for Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, if the Company's stock option plans are considered fixed plans, no compensation expense is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. If the option grants are not fixed, the Company recognizes compensation expense based on the intrinsic value on the measurement date. The Company has included the disclosure provision of SFAS No. 123, Accounting for Stock-Based Compensation, which requires pro-forma information regarding net income and earnings per share determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. Per Share Information Earnings per share for fiscal years 1995 and 1996 are based on the weighted average number of shares of common stock and common stock equivalents outstanding during periods presented, computed using the treasury stock method. Common stock equivalents are not included in fiscal 1997 as the effect of inclusion would be anti-dilutive. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share which becomes effective for the Company's fiscal year ending September 30, 1998. The adoption will not have a material impact on the Company's earnings per share disclosures. Advertising Costs The Company expenses advertising costs as incurred. Segment Reporting In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which becomes effective for the Company's fiscal year ending September 30, 1999. SFAS No. 131 broadens the definition of operating segments and requires additional disclosures about such segments. The Company anticipates that the adoption of this standard will result in segment reporting and is currently evaluating its operating segments. Reclassification Certain prior year amounts have been reclassified to conform with the current year's presentation. NOTE 2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The following is a summary of cash equivalents and short-term investments at amortized cost:
September 30, (In thousands) 1997 1996 - ------------------------------------------------------------------------------- Commercial paper $ 11,919 $ 4,776 Corporate debt - 1,973 U.S. treasury notes 1,000 - Money market 9,773 9,513 --------- --------- Cash equivalents 22,692 16,262 Cash 149 228 --------- --------- TOTAL CASH AND CASH EQUIVALENTS $ 22,841 $ 16,490 ========= ========= Commercial paper $ 1,925 $ 997 Corporate debt securities - 10,740 U.S. treasury notes 3,004 5,856 --------- --------- TOTAL SHORT-TERM INVESTMENTS $ 4,929 $ 17,593 ========= =========
Since these securities are short-term in nature, changes in market interest rates would not have a significant impact on the fair value of these securities. These securities are carried at amortized cost which approximates fair value. It is the intent of the Company to hold its investments until maturity. NOTE 3. PROPERTIES Properties and related accumulated depreciation were as follows:
September 30, ------------------------------- (In thousands) 1997 1996 - ------------------------------------------------------------------------------------ Computer equipment and software $ 5,198 $ 2,545 Furniture, fixtures and office equipment 1,897 1,571 Leasehold improvements and other 405 420 ------- ------- 7,500 4,536 Less: Accumulated depreciation (2,463) (1,159) ------- ------- PROPERTIES, NET $ 5,037 $ 3,377 ======= ======= - ------------------------------------------------------------------------------------
15 [LOGO] 13 NOTE 4. INCOME TAXES The components of the provision for income taxes were as follows:
For the Years Ended September 30, ---------------------------------- (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------ Current: Federal $ - $ - $ 3 Foreign 94 152 60 State - - - ----- ------ ------ Total current 94 152 63 ----- ------ ------ Deferred: Federal (94) 1,444 1,100 State - 355 252 ----- ------ ------ Total deferred (94) 1,799 1,352 ----- ------ ------ PROVISION FOR INCOME TAXES $ - $1,951 $1,415 ===== ====== ======
A reconciliation of income tax expense to the statutory federal income tax rate follows:
For the Years Ended September 30, --------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------- Federal income taxes at 34.0% 34.0% 34.0% statutory rate State income taxes, net of federal income tax benefit - % 4.3% 4.6% Valuation allowance (34.0%) - % - % Other - % (2.2%) 0.8% ------ ----- ----- EFFECTIVE TAX RATE - % 36.1% 39.4% ====== ===== =====
Significant components of the Company's net deferred tax assets were as follows:
September 30, --------------------- (In thousands) 1997 1996 - -------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS: Accounts payable $ 627 $ 836 Deferred revenue 211 282 Accrued expenses and other liabilities 308 410 Net operating loss carryforwards 5,234 3,459 Research and development tax credit carryforwards 947 341 Foreign tax credit carryforwards 246 152 Alternative minimum tax credit carryforwards 10 10 ----- ----- Deferred tax assets 7,583 5,490 ----- ----- DEFERRED TAX LIABILITIES: Depreciation (78) (103) Accounts and notes receivable (2,133) (2,840) Prepaid expenses and other assets (802) (1,070) ----- ----- Deferred tax liabilities (3,013) (4,013) ----- ----- Net deferred tax assets $4,570 $1,477 Deferred tax asset valuation allowance (4,570) (1,477) ----- ----- NET DEFERRED TAX ASSETS (LIABILITIES) $ - $ - ====== ======
- -------------------------------------------------------------------------------- As of September 30, 1997, the Company had net operating loss carryforwards for income tax purposes of approximately $13,524,000 which expire in the years 2006-2012. Of this amount, $10,253,000 relates to tax deductions generated by the exercise of incentive stock options by employees which will be available to reduce future income tax liabilities by a total of $3,968,000. Of this tax benefit, $1,700,000 was credited to paid in capital in fiscal 1996 to offset deferred tax liabilities. The remaining $2,268,000 is available to offset future deferred tax liabilities as a credit to paid in capital. The Company recorded credits to paid-in-capital of $2,205,000 and $464,000 in fiscal 1996 and 1995, respectively, as a result of such exercises of incentive stock options by employees. No such credits to paid-in-capital were recorded in fiscal 1997. As of September 30, 1997, the Company had research and development credit carryforwards of approximately $947,000 which are available to offset future income tax liabilities and expire in the years 2006-2012. The valuation allowance increased by $3,093,000 and $1,477,000 for the fiscal years ended September 30, 1997 and 1996, respectively, and relates primarily to increases in net operating loss carryforwards. The Company has established the valuation allowance to defer recognition of potential tax benefits until such time that operating results can provide assurance that these tax benefits will be recognized. NOTE 5. STOCK INCENTIVE PLANS The Company has a 1995 Director Stock Option Plan ("1995 Director Option Plan") and a 1995 Stock Incentive Plan ("1995 Incentive Plan") which replaced the Company's 1991 Stock Option Plan ("1991 Option Plan") and the 1991 Employee Stock Bonus Plan ("1991 Bonus Plan") effective June 27, 1995, when the Company completed its initial public offering. Accordingly, options under the 1991 Option Plan and the 1991 Bonus Plan are not granted in years after 1995 but remain outstanding. The above plans enable the Company to grant options to purchase common stock, to make awards of restricted common stock and to issue certain other equity-related securities of the Company to any full or part-time employees, officers, directors, consultants or independent contractors of the Company. Stock options entitle the optionee to purchase common stock from the Company for a specified exercise price during a period specified in the applicable option agreement. Restricted stock awards entitle the recipient to purchase common stock from the Company under terms which provide for vesting over a period of time and a right of repurchase in favor of the Company of the unvested portion of the common stock subject to the award upon the termination of the recipient's employment or other relationship with the Company. The plans, except for the 1995 Director Option Plan, are administered by the Compensation Committee of the Board of Directors, which selects the persons to whom stock options and restricted stock awards are granted and determines the number of shares of common stock covered by the option or award, its exercise price or purchase price, its vesting schedule and, in the case of stock options, its expiration date. 16 Notes to the Consolidated Financial Statements (continued) 14 Furthermore, the above plans stipulate that the exercise price of any incentive stock option shall not be less than 100% of the fair market value of the common stock at the date of the grant or less than 110% of the fair market value in the case of optionees holding more than 10% of the total combined voting power of all classes of stock of the Company. The exercise periods of incentive stock options cannot exceed 10 years from the date of grant, except for incentive stock options granted to optionees holding more than 10% of the total combined voting power of all classes of stock, which must be exercised within 5 years. Non-qualified stock options, if any, must be exercised within the time period set forth in the option agreement. Any portion not exercised within the terms as stipulated in the option agreement shall be forfeited. The Company records as compensation expense the excess, if any, of the estimated fair market value of the common stock at the date of option grant over the option exercise price. Any compensation expense is recognized ratably over the vesting period of the options. The Company recorded compensation expense of approximately $80,000, $80,000 and $146,000 for the years ended September 30, 1997, 1996 and 1995, respectively, relating to options granted with an exercise price below the estimated fair market value of the common stock. The Company recorded compensation expense of $232,000 in fiscal 1997 relating to options whose vesting schedule was accelerated. Options granted prior to October 1994 and subsequent to the Company's initial public offering have an exercise price approximating the fair market value of the common stock as of their grant date. 1995 STOCK INCENTIVE PLAN The maximum number of shares of common stock which may be issued pursuant to the 1995 Incentive Plan is 2,550,000 shares, subject to certain anti-dilution adjustments. Options generally become exercisable over four years, commencing on the one-year anniversary of the date of grant, and accumulate if not exercised. Options to purchase 2,224,999 and 967,099 shares of common stock, at prices ranging from $.43 to $28.375 per share and from $0.43 to $28.375 per share, had been granted as of September 30, 1997 and 1996, respectively. The 1995 Incentive Plan further provides for the granting of stock appreciation rights ("SARs") subject to certain conditions and limitations to holders of options under the 1995 Incentive Plan. SARs permit optionees to surrender an exercisable option for any amount equal to the excess of the market price of the common stock over the option price when the right is exercised. There have been no SARs issued under this plan. Furthermore, the 1995 Incentive Plan provides for the granting of performance share awards entitling recipients to acquire shares of common stock upon the attainment of specified performance goals, as determined by the Board of Directors. No performance share awards have been issued under this plan. 1995 DIRECTOR STOCK OPTION PLAN Under the Company's 1995 Director Stock Option Plan, the maximum number of shares of common stock which may be issued is 200,000 shares, subject to certain anti-dilution adjustments. Each director who is not otherwise and employee initially elected to the Board of Directors is granted an option, on the date of initial election, to purchase 20,000 shares of common stock. Each such director is also granted, on the date of each Annual Meeting of Stockholders, an option to purchase 5,000 shares. Options become exercisable over four years, commencing on the one-year anniversary of the date of grant, and accumulate if not exercised. As of September 30, 1997, options for 29,600 shares were exercisable. 1995 EMPLOYEE STOCK PURCHASE PLAN Under the Company's 1995 Employee Stock Purchase Plan ("Stock Purchase Plan"), employees are granted the opportunity to purchase the Company's common stock. The first offering under the Plan commenced on August 16, 1995 and concluded February 15, 1996. Subsequent offerings begin on February 16 and August 16 of each year and conclude on August 15 and February 15, respectively. The price at which the employees may purchase the common stock is 85% of the closing price of the Company's common stock on the Nasdaq National Market on the date the offering period commences or terminates, whichever is lower. A total of 600,000 shares of common stock have been reserved under this plan. In fiscal 1997 and 1996, 45,396 and 18,401 shares were issued under the Stock Purchase Plan, respectively. 1991 STOCK OPTION PLAN The 1991 Option Plan was terminated effective June 27, 1995, when the Company completed its initial public offering, and was replaced by the 1995 Stock Incentive Plan. Options granted under the 1991 Option Plan generally become exercisable in four equal annual installments, commencing on the date of grant and continuing through the third anniversary of the date of grant, and accumulate if not exercised. At September 30, 1997, options to purchase 1,520,132 shares of common stock, at prices ranging from $0.08 to $4.125 per share, had been granted. 17 [LOGO] 15 A summary of the 1995 Stock Incentive Plan, 1995 Director Stock Option Plan and the 1991 Stock Option Plan transactions follows:
SEPTEMBER 30, - --------------------------------------------------------------------------- 1997 1996 1995 -------------- -------------- -------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES PRICE SHARES PRICE SHARES PRICE - ----------------------------------------------------------------------------------------------------- Outstanding, beginning of year 1,989,590 $ 8.98 1,493,004 $ 2.06 872,438 $0.08 Granted 1,292,900 9.07 910,099 17.10 731,922 4.23 Exercised (497,882) 1.62 (394,499) 1.21 (94,454) 0.49 Forfeited (814,369) 12.56 (19,014) 10.85 (16,902) 2.20 --------- --------- --------- Outstanding, end of year 1,970,239 $ 5.85 1,989,590 $ 8.98 1,493,004 $2.06 ========= ========= ========= Weighted average contractual life 8.79 8.43 8.67 Options exercisable at year-end 600,469 658,758 602,252 Weighted average fair value of options granted during the year $12.16 $5.39
A summary of information on stock options outstanding as of September 30, 1997 follows:
Options Outstanding Options Exercisable ----------------------------------------------------- --------------------------- Weighted Weighted Weighted Range of Average Average Average Average Average Exercise Number Remaining Exercise Number Exercise Prices Outstanding Contractual Life Price Exercisable Price - --------------------------------------------------------------------------------------------------------- $0.08 269,550 5.69 $ 0.08 269,550 $ 0.08 $0.40-$0.43 139,933 7.36 $ 0.41 93,898 $ 0.41 $3.00-$4.13 39,950 7.62 $ 4.01 30,200 $ 3.99 $6.88-$10.25 1,489,369 9.52 $ 7.11 198,502 $ 6.96 $10.69-$14.63 16,750 9.35 $11.33 280 $14.63 $17.44-$20.38 4,687 8.05 $17.69 4,039 $17.73 $42.50 10,000 8.32 $42.50 4,000 $42.50 --------- ---- ------ ------- ------ $0.08-$42.50 1,970,239 8.79 $ 5.85 600,469 $ 3.01 ========= =======
STOCK BASED COMPENSATION Pro-forma information, as required by Statement of Financial Accounting Standards No. 123, is as follows:
SEPTEMBER 30, -------------------- (In thousands, except per share data) 1997 1996 - -------------------------------------------------------------------------------- Net income (loss) as reported ($ 9,735) $3,460 ======== ====== Pro forma net income (loss) ($14,308) $1,306 ======== ====== Net income (loss) per share as reported ($0.81) $0.27 Pro forma net income (loss) per share ($1.18) $0.10
In determining the fair value of the options, the Company used the Black-Scholes model and assumed a risk free interest rate of 6.0% for all years, expected lives of the options ranging from five to six years, an expected stock price volatility of 70.2% and no dividends. The Black-Scholes option valuation model was developed for used in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, it requires the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the estimated valuations may not necessarily provide a reliable measure of the fair value of the Company's options. The pro forma disclosures under SFAS No. 123 are not likely to be representative of the effects on pro forma disclosures for future years. Because this standard is applicable only to options granted subsequent to December 31, 1994, the pro forma effect will not be fully reflected until 1998. NOTE 6. STOCK OPTION EXCHANGE PROGRAM The Company uses stock options as a significant element of the compensation of employees, in part because it believes options provide an incentive to employees to maximize shareholder value, stock options also serve as a means of retaining employees. Because the market value of the Company's common stock in early 1997 had fallen significantly below the exercise price of most outstanding options, the value of such stock options as a means of motivating and retaining employees had been significantly diminished. The Board of Directors concluded that the Company needed to restore the value of the existing stock options as a means of motivating and retaining employees in order to promote to successful implementation of the Company's growth strategies. 18 Notes to the Consolidated Financial Statements (continued) 16 As a result, on April 8, 1997, the Board of Directors approved a stock option exchange program (the "Exchange Program"), pursuant to which full-time permanent employees holding stock options under the Company's 1995 Stock Incentive Plan were given the opportunity to exchange the unexercised portion of such options (the "Existing Options") for new options (the "New Options") on a basis of four shares of common stock for every five shares covered by the Existing Option and having an exercise price of $6.875 per share (the fair market value of the Company's common stock on such date). The New Options expire 10 years from the date of grant and have the same vesting schedule and other terms as the Existing Option cancelled in exchange therefor. Option holders who own more than 1% of the Company's outstanding common stock and Directors were excluded from the Exchange Program. Stock option disclosures in Note 5 have been adjusted to reflect approximately 235,000 options which were forfeited as a result of the Exchange Program. NOTE 7. 401(k) SAVINGS PLAN The Company has a salary reduction 401(k) retirement savings plan (the "Plan") covering substantially all of the Company's employees. Participating employees may contribute an amount up to 15% of their eligible compensation, subject to an annual limit. The Company, at the discretion of the Board of Directors, may make contributions to the Plan. The Company contributed $269,000, $118,300 and $31,600 to the Plan in fiscal 1997, 1996, and 1995, respectively. NOTE 8. COMMITMENTS AND CONTINGENCIES The Company leases office facilities under non-cancelable operating lease agreements expiring at various dates through fiscal 2002. At September 30, 1997, approximate future minimum lease commitments under these leases were as follows: (In thousands) - -------------------------------------------------------------------------------- 1998 $1,448 1999 1,340 2000 973 2001 592 2002 271 ------ $4,624 ====== - -------------------------------------------------------------------------------- Total rent expense under non-cancelable operating leases was approximately $1,324,000, $689,000 and $269,000 for the years ended September 30, 1997, 1996 and 1995, respectively. NOTE 9. EXPORT REVENUES The Company exports products to diverse geographic areas. Net export revenues by geographic area were as follows:
FOR THE YEARS ENDED SEPTEMBER 30, --------------------------------- (In thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------- Japan $ 583 $ 2,094 $ 708 Other international 1,113 1,594 1,338 ------- ------- ------- TOTAL NET EXPORT REVENUES $ 1,696 $ 3,688 $ 2,046 ======= ======= =======
NOTE 10. SALE OF DATA VISUALIZATION PRODUCT LINE In September 1995, the Company sold its data visualization product line to a stockholder for $910,000. The Company recorded a pre-tax gain, net of transaction expenses, of $863,000. NOTE 11. MICROSOFT AMENDMENT On January 21, 1997, the Company amended its license arrangement with Microsoft Corporation ("Microsoft"). This amendment converted Microsoft's existing license for the Spyglass Mosaic browser technology into a fully paid-up license in consideration of an additional $8,000,000 payment from Microsoft. This payment consisted of $7,500,000 in cash and $500,000 in software and product maintenance. Sales to Microsoft Corporation represented 39.5%, 12.1% and 17.3% of revenues in fiscal 1997, 1996 and 1995, respectively. NOTE 12. RESTRUCTURING CHARGE On March 10, 1997, the Company consolidated its Champaign, Illinois development operations with its Naperville, Illinois and Cambridge, Massachusetts operations. This consolidation reflects Company's evolution from its desktop focus to the Internet device market and the realignment of its product development activities with the needs of this market. A pre-tax restructuring charge of $900,000 was recorded in the second quarter of fiscal 1997 and consists primarily of severance and related personnel costs of $730,000 and lease cancellation and other exit costs of $170,000. Included in the charge for personnel costs was $100,000 of compensation expense related to the acceleration of the exercisability of certain stock options. As of September 30, 1997, the restructuring has been completed. NOTE 13. SUBSEQUENT EVENT On November 14, 1997, the Company acquired AllPen Software ("AllPen"). AllPen, located in Los Gatos, California, develops software solutions and technologies and provides professional services for the Internet device marketplace. These solutions have been successfully applied in television, screenphone, handheld PC, mobile and wireless products. This transaction was effected through the exchange of 639,246 shares of common stock of Spyglass for all the issued and outstanding shares of AllPen. This transaction will be accounted for under the pooling of interests method and, accordingly, historical financial data in future reports will be restated to include AllPen data. The following unaudited pro forma data summarizes the combined results of operations of the Company and AllPen as though the merger had occurred at the beginning of fiscal 1995.
(Unaudited, Pro Forma) Year Ended September 30, ------------------------ (In thousands, except per share data) 1997 1996 1995 - ------------------------------------------------------------------------------ Net revenues $22,823 $24,354 $13,106 Net income (loss) $(9,880) $ 3,605 $ 2,149 Net income (loss) per common and common equivalent share $ (0.78) $ 0.27 $ 0.21
19 [LOGO] 17 [LOGO] SPYGLASS REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Spyglass, Inc. Naperville, Illinois We have audited the consolidated balance sheet of Spyglass, Inc. and subsidiaries as of September 30, 1997, and the related consolidated statements of operations, changes in redeemable convertible preferred stock and shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements 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. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Spyglass, Inc. and subsidiaries at September 30, 1997, and the consolidated results of their operations and their cash flows for the year then ended in accordance with generally accepted accounting principles. /s/ Ernst & Young LLP Chicago, Illinois October 24, 1997 [LOGO] 20 18 Directory [LOGO] SPYGLASS WORLDWIDE HEADQUARTERS SPYGLASS DIRECTORS SPYGLASS, INC. 1240 E. Diehl Road Douglas P. Colbeth Naperville, IL 60563 President and Chief Executive Officer, tel: 630-505-1010 Spyglass, Inc. fax: 630-505-4944 www.spyglass.com Brian J. Jackman President, Tellabs Operations, Inc. SPYGLASS U.S. OPERATIONS Cambridge, MA Timothy K. Krauskopf Los Altos, CA Co-founder, Spyglass, Inc. Los Gatos, CA Marina Del Rey, CA Ray A. Rothrock Morristown, NJ General Partner, Venrock Associates San Ramon, CA Steven R. Vana-Paxhia SPYGLASS INTERNATIONAL OPERATIONS President and Chief Executive Officer, SPYGLASS ASIA PACIFIC INSO Corporation Tokyo, Japan SPYGLASS EXECUTIVE OFFICERS SPYGLASS EUROPE Berkshire, United Kingdom Douglas P. Colbeth President and Chief Executive Officer INTERNET ADDRESSES World Wide Web, www.spyglass.com Richard M. Houle Electronic mail, investor@spyglass.com Executive Vice President Development TRANSFER AGENT Randall T. Littleson Inquiries regarding Shareholder-related Vice President Marketing Services, such as transfers or changes of address, should be directed to: Timothy M. P. Seamans American Stock Transfer & Trust Company Vice President and General Manager 40 Wall Street Professional Services New York, NY 10005 800-937-5449 Michael Sears Vice President and General Manager 10-K FILING SurfWatch Software Division A copy of the Spyglass Annual Report on Form 10-K, filed with the Securities Exchange Michael F. Tyrell Commission, is available to stockholders by Executive Vice President written request to Chandler Bigelow, Manager Business Development of Investor Relations, at the Spyglass Worldwide Headquarters address. Gary L. Vilchick Executive Vice President Finance SHARES LISTED Administration and Operations and Spyglass common stock is traded on the Chief Financial Officer Nasdaq National Market under the ticket Sym- bol SPYG. INDEPENDENT AUDITORS Ernst & Young, LLP Chicago, IL LEGAL COUNSEL Hale and Dorr LLP Boston, MA ANNUAL MEETING Spyglass shareholders are invited to attend our annual shareholder meeting, to be held on February 10, 1998 at 10:00 am at the Holiday Inn in Naperville, Illinois.
EX-21 7 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 Subsidiaries of the Registrant Jurisdiction of Incorporation - ------------------------------ ----------------------------- Spyglass International, Inc. Delaware SurfWatch Software, Inc. California Stonehand Inc. Massachusetts OS Technologies Corporation Massachusetts Spyglass Europe Ltd. Delaware AllPen Software, Inc. California EX-23.1 8 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 Consent of Ernst & Young LLP We consent to the incorporation by reference in the Registration Statements of Spyglass, Inc. on Form S-3 (File Nos. 333-06943, 333-08255, 333-08253, 333-14643 and 333-42511) and on Form S-8 (File Nos. 33-95164, 33-95160, 33-95162, 33-95158, 333-2312, 333-04357 and 333-40831) of Spyglass, Inc. of our reports dated October 24, 1997, with respect to the consolidated financial statements and schedule of Spyglass, Inc. included and incorporated by reference in the Annual Report (Form 10-K) for the year ended September 30, 1997. /s/ Ernst & Young LLP Ernst & Young LLP Chicago, Illinois December 16, 1997 EX-23.2 9 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.2 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 33-95164, 33-95160, 33-95162, 33-95158, 333-2312 and 333-04357) of Spyglass, Inc. of our report dated October 25, 1996, which is incorporated in this Annual Report on Form 10-K. /s/ Price Waterhouse LLP Price Waterhouse LLP Chicago, Illinois December 16, 1997 EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS SEP-30-1997 JUN-30-1997 SEP-30-1997 22,841 0 0 0 0 33,757 5,037 0 40,580 4,913 0 0 0 124 35,443 40,580 0 21,295 1,535 3,028 29,624 0 0 (9,735) 0 (9,735) 0 0 0 (9,735) (.81) (.81) Notes and accounts receivable-trade are reported net of allowances for doubtful accounts in the Consolidated Balance Sheet.
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