UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
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 0-15596
SPECTRUM INFORMATION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1940923
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2700 Westchester Avenue, Purchase, New York 10577
(Address of principal executive offices) (Zip Code)
(914) 251-1800
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the latest
practicable date.
Common stock, $.001 par value, 76,675,448 outstanding at February
9, 1996.
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors in Possession)
FORM 10-Q
DECEMBER 31, 1995
INDEX
PART I. FINANCIAL INFORMATION Page No.
Consolidated Balance Sheets 1
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
PART II. OTHER INFORMATION 28
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors in Possession)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND MARCH 31, 1995
(Unaudited)
December 31, March 31,
Assets 1995 1995
- ---------------------------------------------------------------------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 7,968 $ 3,442
Marketable securities 907 785
Accounts receivable, net 6,965 5,793
Inventories 24 377
Prepaid expenses and other current
assets 360 970
Net assets of discontinued operations 4,106
------ ------
Total current assets $16,224 $15,473
Net property and equipment 213 1,270
Intangible assets, net 367 1,551
Notes receivable-related parties 91 91
Other assets - 850
- ---------------------------------------------------------------------------
Total assets $16,895 $19,235
====== ======
See accompanying notes to the consolidated financial statements.
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors in Possession)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND MARCH 31, 1995
(Unaudited)
December 31, March 31,
Liabilities and Stockholders' Equity 1995 1995
- ---------------------------------------------------------------------------
(Amounts in thousands)
Current liabilities:
Accounts payable $ 903 $ 127
Accrued liabilities 1,874 413
Other current liabilities 5,930 5,500
------ -------
Total current liabilities 8,707 6,040
------ -------
Deferred income 33 850
------ -------
Liabilities Subject to Compromise:
Accounts payable and accrued
liabilities 1,485 1,554
Reserve for litigation 4,719 4,719
Reserve for restructuring 2,158 2,158
Net liabilities of discontinued
operations 531 4,630
Other liabilities 185 185
------ ------
Total liabilities subject to compromise 9,078 13,246
------ ------
Total liabilities 17,818 20,136
------ ------
Stockholders' equity:
Paid-in capital 63,961 63,961
Accumulated deficit (64,566) (64,443)
------- ------
(528) (405)
Treasury stock, 100 shares at cost (300) (300)
Unrealized loss on marketable securities (95) (196)
Common Stock, $.001 par value, 110,000
shares authorized; 76,675 issued 77 77
------ ------
Total stockholders' equity (923) (901)
- ---------------------------------------------------------------------------
$16,895 $19,235
====== ======
See accompanying notes to the consolidated financial statements.
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors in Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 1995 AND 1994
(UNAUDITED)
Three Months Nine Months
Ended Dec. 31, Ended Dec. 31,
---------------------------------------------
1995 1994 1995 1994
- ---------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Revenues:
Licensing and other revenue $ 379 $ 686 $ 1,758 $1,118
Merchandise sales, net 125 267 445 1,081
------- ------ ------ ------
Total revenues 504 953 2,203 2,199
------- ------ ------ ------
Operating costs and expenses:
Cost of revenues 67 128 258 445
Selling, general and admin. 1,821 4,094 5,368 10,263
------- ------- ------- -------
Total operating cost
and expenses 1,888 4,222 5,626 10,708
------- ------- ------- -------
Operating loss (1,384) (3,269) (3,423) (8,509)
Professional fees in connection
with Chapter 11 filing (686) - (2,464) -
Other income(expense), net (60) (246) 1,662 (158)
----- ------ ------ ------
Loss from continuing
operations (2,130) (3,515) (4,225) (8,667)
------- ------ ------ ------
Discontinued operations:
Income (loss) from operations of:
Spectrum Global 74 255 790 666
Computer Bay - (3,312) - (4,388)
Gain on Sale of Spectrum Global 773 - 773 -
Gain on disposal of Computer Bay - - 2,539 -
------- ------ ------ ------
Income(loss) from discontinued
operations 847 (3,057) 4,102 (3,722)
------- ------- ------ ------
Cumulative effect of change
in accounting principle - - - 316
------ ------ ------ ------
Net(loss) $ (1,283) $ (6,572) $ (123) $(12,073)
====== ====== ===== ======
Net income (loss) per common
share:
Loss from continuing
operations $ (.03) $ (.05) $ (.05) $ (.11)
Income (loss)from discontinued
operations .01 (.04) .05 (.05)
Cumulative effect of change
in accounting principle - - - -
------ ------ ------ ------
Net loss $ (.02) $ (.09) $ - $ (.16)
=== === === ===
Weighted average
shares outstanding 76,675 76,597 76,675 76,316
====== ====== ====== ======
See accompanying notes to the consolidated financial statements.
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors in Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994
(UNAUDITED)
1995 1994
- ---------------------------------------------------------------------------
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (123) (12,073)
Adjustments to reconcile net income (loss) to net
cash (used by)provided by operating activities:
Depreciation and amortization 288 431
Unrealized gain (loss) on
marketable securities 101 -
Cumulative effect of change in
accounting principle - (209)
Deferred income (817) (525)
Writedown of furniture and equipment 279 -
Gain on disposal of Computer Bay (2,539) -
Gain on sale of building (86) -
Gain on sale of AXCELL (1,616) -
Gain on Sale of Spectrum Global (773) -
(Increase)decrease in:
Accounts receivable (1,172) 951
Inventories 53 (109)
Other assets 1,460 (172)
Increase (decrease) in:
Accounts/notes payable,
Accrued liabilities and other liabilities 2,667 322
Liabilities subject to compromise (69) -
----- -----
Net cash used by continuing operations (2,347) (11,384)
Net cash (used) provided by
discontinued operations (1,801) 9,923
- ---------------------------------------------------------------------------
Net cash used by operating activities (4,148) (1,461)
- ---------------------------------------------------------------------------
CASH FLOWS RELATING TO INVESTING ACTIVITIES:
(Purchase) sale of marketable securities, net (122) 8,744
Purchase of property and equipment (58) (130)
Proceeds from sale of AXCELL 3,000 -
Proceeds from sale of building 734 -
Proceeds from sale of Spectrum Global 4,549 -
----- -----
Net cash provided by continuing
operations 8,103 8,614
Net cash used by discontinued
operations (57) (100)
- ---------------------------------------------------------------------------
Net cash provided by investing
activities 8,046 8,513
- ---------------------------------------------------------------------------
CASH FLOWS RELATING TO FINANCING ACTIVITIES:
Proceeds from exercise of stock
options and warrants - 770
------ ------
Net cash provided by continuing
operations - 770
Net cash used by discontinued
operations (3) (8,609)
- ---------------------------------------------------------------------------
Net cash used by financing activities (3) (7,839)
- ---------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 3,895 (786)
Cash and cash equivalents, unrestricted,
beginning of period 4,409 3,865
----- ------
Cash and cash equivalents, unrestricted, end
of period 8,304 3,079
Cash and cash equivalents, restricted, end of 291 303
period
- ---------------------------------------------------------------------------
Total cash and cash equivalents $ 8,595 $ 3,382
===== =====
Supplemental disclosures of cash
flow information:
Cash paid during the period for interest $ - $ -
Cash paid during the year for income taxes $ 2 $ -
See accompanying notes to the consolidated financial statements.
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. Summary of Significant Accounting Policies
Business
Spectrum Information Technologies, Inc. (the "Company" or
"Spectrum") is a holding company with one continuing subsidiary;
Spectrum Cellular Corporation, a Delaware corporation ("Spectrum
Cellular"). The Company discontinued the operations of its
Dealer Service Business Systems, Inc. subsidiary, a Delaware
corporation d/b/a Data One ("Data One"), in fiscal 1994 and its
Computers Unlimited of Wisconsin, Inc. subsidiary, a Wisconsin
corporation d/b/a Computer Bay ("Computer Bay") in fiscal 1995.
The Company sold its Spectrum Global Services, Inc. ("Spectrum
Global") subsidiary during October 1995 (Note 6).
Spectrum, through its Spectrum Cellular subsidiary, develops
and licenses wireless data transmission technology and designs,
markets and supervises the manufacturing of direct connect data
communication products incorporating that technology. The
Company's wireless data transmission technology utilizes an
error-correction protocol permitting the reliable transmission of
electronic data between two computers over cellular telephone
networks and other wireless communication systems. The Company
also had provided, through its Spectrum Global subsidiary,
telecommunication contract personnel to Fortune 1000 companies.
Bankruptcy Proceedings
On January 26, 1995 ("Petition Date"), the Company and three
of its four subsidiaries (Computer Bay, Data One and Spectrum
Cellular) filed petitions for protection under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy
Court of the Eastern District of New York ("Chapter 11"). The
Company, Data One and Spectrum Cellular, are herein called the
"Debtors in Possession" and together with Computer Bay the
"Debtors." Spectrum Global did not file for bankruptcy. On
February 8, 1995, the United States Trustee appointed an
Unsecured Creditors Committee for Spectrum, Spectrum Cellular
and Data One and another for Computer Bay. On May 25, 1995,
the Bankruptcy Court, upon motion by the Debtors, converted
the Computer Bay Chapter 11 to a case under Chapter 7
of the Bankruptcy Code ("Chapter 7") (Note 2), and an
independent trustee is overseeing the liquidation of
Computer Bay's assets. Spectrum and Spectrum Cellular are
continuing to manage their affairs and operate their business
under Chapter 11 as debtors in possession while formulating a
plan of reorganization. The operations of Data One were
discontinued as of December 31, 1994.
Pursuant to section 362 of the Bankruptcy Code, the
commencement of the Debtors' Chapter 11 case operates as an
automatic stay, applicable to all entities, of the following: (i)
commencement or continuation of a judicial, administrative, or
other proceeding against the Debtors that was or could have been
commenced prior to commencement of the Debtor's Chapter 11 case,
or to recover for a claim that arose before the commencement of
the Debtors' Chapter 11 case; (ii) enforcement of any judgments
against the Debtors that arose before the commencement of the
Debtors' Chapter 11 case; (iii) the taking of any action to
obtain possession of property of the Debtors or to exercise
control over property of the Debtors; (iv) the creation,
perfection or enforcement of any lien against the property of the
Debtors; (v) the taking of any action to collect, assess or
recover a claim against the Debtors that arose before the
commencement of the Debtors' Chapter 11 case; or (vi) the setoff
of any debt owing to the Debtors that arose prior to the
commencement of the Debtors' Chapter 11 case against a claim held
by such creditor or party in interest against the Debtors that
arose before the commencement of the Debtors' Chapter 11 case.
Any entity may apply to the Bankruptcy Court for relief from the
automatic stay so that it may enforce any of the aforesaid
remedies that are automatically stayed by operation of law at the
commencement of the Debtors' Chapter 11 case.
Although the Debtors are authorized to operate their
business as debtors in possession, they may not engage in
transactions outside the ordinary course of business without
first complying with the notice and hearing provisions of the
Bankruptcy Code and obtaining Bankruptcy Court approval. The
Unsecured Creditors' Committees may review and object to
transactions involving the Company that are outside of the
ordinary course of the Company's business, may consult with the
Company concerning the administration of the Company's Chapter 11
case, and may participate in the formulation of a plan of
reorganization. The Company is required to pay certain expenses
of the Unsecured Creditors' Committees, including counsel and
other professional fees, to the extent allowed by the Bankruptcy
Court. Other parties in interest in the Chapter 11 case are also
entitled to be heard on motions made in the Chapter 11 case,
including motions for approval of transactions outside the
ordinary course of business.
For 120 days after the petition date, the Debtors have the
exclusive right to propose and file a plan of reorganization with
the Bankruptcy Court. If the plan is filed, no other party may
file a plan of reorganization until 180 days after the petition
date, during which period the Debtors have the exclusive right to
solicit acceptance of the plan. On January 23, 1996, the
Bankruptcy Court granted the Debtors' request to extend the
filing of the plan of reorganization to March 8, 1996. The
Company filed a plan of reorganization on February 9, 1996
(Note 7).
Basis of Presentation
The accompanying consolidated financial statements of the
Company have been prepared on the basis that it is a going
concern, which contemplates the realization of assets and the
satisfaction of liabilities, except as otherwise disclosed, in
the normal course of business. However, as a result of Chapter
11 proceedings and circumstances relating to this event,
including the Company's recurring losses from operations, such
realization of assets and liquidation of liabilities is subject
to significant uncertainty. Further, the Company's ability to
continue as a going concern is dependent upon the confirmation of
a plan of reorganization by the Bankruptcy Court, achievement of
profitable operations, the sale of non-core assets and the
ability to generate sufficient cash from operations and financing
sources to meet the restructured obligations. Except as
otherwise disclosed, the consolidated financial statements do not
include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the
possible inability of the Company to continue as a going
concern. The Company continues to monitor expenses in order
to conserve cash. During June and July 1995, the Company
received $3,000,000 for the sale of a license to utilize certain
patented technology and the related business (Note 6) and as a
result of the sale, management has downsized the operations of
Spectrum Cellular and sold its Dallas facility. During October
1995, the Company sold its Spectrum Global subsidiary for
approximately $6,101,000, the net proceeds were approximately
$4,549,000. In addition, as part of its plan of reorganization,
the Company is looking to settle all significant litigation.
However, there can be no assurance that these events will
occur according to management's plans. The financial
statements for the nine months ended December 31, 1995
and the year ended March 31, 1995, reflect accounting principles
and practices set forth in AICPA Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code", which the Company adopted as of January 26,
1995, the date of the Company's Chapter 11 filing (Note 5).
The net liabilities of Spectrum, Spectrum Cellular and
Data One, excluding intercompany payables of approximately
$14,384,000, were approximately $923,000 at December 31, 1995.
Principles of Consolidation
These consolidated financial statements include the accounts
and results of operations of the Company and its wholly owned
subsidiaries, Data One, Spectrum Cellular, and Spectrum Global as
of and for the three and nine months ended December 31, 1995 and
1994. Upon conversion of Computer Bay's Chapter 11 case to a case
under Chapter 7 on May 25, 1995, which mandates the liquidation
of Computer Bay, control of Computer Bay has been transferred
from the Company to the Computer Bay trustee. As a result, the
net liabilities of Computer Bay have been eliminated from the
consolidated financial statements of the Company. The Company
discontinued the operations of its Data One subsidiary during
fiscal year 1994 and its Computer Bay subsidiary during fiscal
year 1995, and sold its Spectrum Global subsidiary during October
1995. All intercompany transactions have been eliminated.
The unaudited interim consolidated financial statements have
been prepared on a basis substantially consistent with the
audited statements for the fiscal year ended March 31, 1995.
Certain information and footnote disclosures normally included in
financial statements were prepared in accordance with generally
accepted accounting principles and have been condensed or omitted
pursuant to the rules and regulations of the Securities and
Exchange Commission. The Company believes that the disclosures
contained herein are adequate to make the information presented
not misleading. The unaudited financial statements should be
read in conjunction with the audited financial statements and
accompanying notes in the Company's annual report on Forms 10-K
and 10-K/A for the fiscal year ended March 31, 1995.
In the opinion of management, the accompanying unaudited
consolidated financial statements reflect all adjustments that
are necessary to present fairly the Company's financial position
as of December 31, 1995, and the results of its operations and
its cash flows for the interim periods presented.
Cash, cash equivalents
Cash and cash equivalents include the Company's cash
balances and certificates of deposit that mature in 90 days or
less when acquired. Cash and cash equivalents are carried at
cost plus accrued interest, which approximates market.
Inventories
Inventories consist primarily of merchandise held for resale
and are stated at the lower of cost or market. Cost is
determined by using the first-in, first-out ("FIFO") method.
Inventory is net of a valuation allowance of approximately
$100,000 at December 31, 1995 and March 31, 1995.
Property and Equipment
Property and equipment are depreciated using the straight-
line method over the estimated useful lives of the assets or, in
the case of leasehold improvements, over the lesser of their
estimated useful lives or the remaining term of the lease. The
following is a summary of estimated useful lives:
Building 30 years
Furniture, fixtures and equipment 5 to 7 years
Improvements are capitalized and depreciated over the
remaining useful life of the asset. Maintenance and repairs are
charged to expense as incurred.
Income Taxes
No provision for taxes has been made due to continuing
losses from operations and net operating loss carryforwards.
Income (Loss) Per Common Share
The computation of income (loss) per common share is based
on the weighted average number of common shares outstanding
during the period. Common stock equivalents were not included in
the computation of weighted average shares outstanding because
such inclusion would be anti-dilutive to income (loss) from
continuing operations.
Reclassification
Certain amounts as previously reported have been
reclassified to conform to the December 31, 1995 presentation.
2. Business Combinations, Acquisitions, and Dispositions
Computer Bay
Due to Computer Bay's continuing losses and loss of market
share, the Company officially closed out its Computer Bay
subsidiary on January 25, 1995. Accordingly, Computer Bay has
been reported as a discontinued operation, effective January 25,
1995, and the consolidated financial statements have been
reclassified to report separately the operating results of the
subsidiary. The Company's prior years' operating results have
also been reclassified to reflect the discontinuation of Computer
Bay.
Upon conversion of Computer Bay's Chapter 11 case to a case
under Chapter 7 on May 25, 1995, which mandates the liquidation
of Computer Bay, control of Computer Bay has been transferred
from the Company to the Computer Bay trustee. As a result, the
Company recorded a gain of $2,539,000 by writing off the net
liabilities of Computer Bay. The Computer Bay trustee has filed a
claim with the Bankruptcy Court to substantively consolidate the
Computer Bay liabilities with the liabilities of the Debtors in
Chapter 11. Although there can be no assurance that the Debtors
will be successful defending this claim, the Company does not
believe there are grounds for such consolidation. A trial for
this matter has been scheduled for April 9-11, 1996 in the
Bankruptcy Court.
The following table summarizes the net liabilities of
Computer Bay for the periods presented:
May 25, March 31,
1995 1995
-------------------------------------------------------------
(Amounts in thousands)
Cash $ 218 $ 232
Restricted cash 291 288
Accounts receivable 1,078 1,080
Income taxes receivable 409 409
Property and equipment 100 100
Other assets 129 129
Accounts payable (3,368) (4,864)
Other liabilities (1,396) (1,473)
------ ------
Net liabilities $(2,539) $ (4,099)
===== =====
The summary of Computer Bay's results of discontinued
operations for the periods presented are as follows:
Three Months ended Nine Months ended
December 31, December 31,
1995 1994 1995 1994
------------------- --------------------
(Amounts in thousands) (Amounts in thousands)
Revenues $ - $12,544 $ - $58,038
Net loss - (3,312) - (4,388)
Data One
Effective December 31, 1993, the Company adopted a plan to
discontinue operations at Data One. The operations of Data One
ceased on December 31, 1994. Accordingly, Data One has been
reported as a discontinued operation effective December 31, 1993
and the consolidated financial statements have been reclassified
to report separately the operating results of the subsidiary. The
Company's prior years operating results have also been
reclassified to reflect the discontinuation of Data One.
The following table summarizes the net liabilities of Data
One for the periods presented:
December 31, March 31,
1995 1995
--------------------------------------------------------------
(Amounts in thousands)
Cash $ 118 $ 83
Accounts Receivable 11 41
Other assets 2 3
Accounts payable (144) (144)
Deferred income (253) (253)
Reserve for discontinued operations (158) (175)
Other liabilities (107) ( 86)
--- ---
Net liabilities $ (531) $ (531)
=== ===
Spectrum Global
Effective October 17, 1995, the Company sold its Spectrum
Global subsidiary for cash proceeds of approximately $4,549,000,
after expenses of $325,000. Spectrum Global has been reported as
a discontinued operation for all periods presented.
The following table summarizes the net assets of Spectrum
Global for the periods presented:
October 17, 1995 March 31, 1995
-----------------------------------
(Amounts in thousands)
Cash $ 1,227 $ 651
Accounts Receivable 1,899 1,571
Other Assets 2,237 2,285
Accounts Payable (243) (316)
Other Liabilities (117) (85)
------ ------
Net assets $ 5,003 $ 4,106
====== ======
The following table summarizes the results of discontinued
operations of Spectrum Global for the periods presented:
Three Months ended Nine Months ended
December 31, December 31,
1995 1994 1995 1994
-------------------- ---------------------
(Amounts in thousands) (Amounts in thousands)
Revenues $ 560 $ 2,276 $ 6,877 $ 6,313
Net Income 74 255 790 666
3. Liabilities Subject to Compromise
Liabilities subject to compromise are liabilities recorded
by the Company as of the Petition Date that are expected to be
compromised under a plan of reorganization (Note 1). The
Bankruptcy Court established the bar date by which claims against
the Debtors must be filed if the claimants wish to receive
distribution in Chapter 11 cases as September 7, 1995.
Excluding the material litigation discussed herein (Note 5)
and improperly filed claims by shareholders, approximately 308
claims were filed against the Debtors alleging approximately $5.4
million in creditors' claims. These claims primarily consisted
of approximately: $1.7 million in claims by vendors; $855
thousand in claims by former employees based upon severance and
employment agreements; $1.2 million in indemnification claims for
legal fees and settlement of litigation by former employees; $784
thousand in claims arising from rejected leases; $554 thousand
claimed by a Computer Bay financing company; and $314 thousand
related to a prepaid Data One maintenance contract.
Additionally, the Trustee appointed to administer the Computer
Bay estate filed a claim alleging $4.4 million in damages. The
Company, along with its outside counsel, is evaluating each of
these claims and reconciling them to its books and records.
4. Licensing Agreements
During the nine months ended December 31, 1995 the Company
signed one new non-exclusive licensing agreement pursuant to
which it licensed the use of its patented technology. During the
nine and three months ended December 31, 1994, the Company signed
13 and 6 non-exclusive license agreements, respectively, pursuant
to which it licensed others to use its patented technology.
At December 31, 1995, approximately $5,974,000 is included
in trade and other receivables, to reflect the balance of the
non-refundable license fees due under the licensing agreements.
Additionally, $4,450,000 is included in current liabilities to
reflect the payments which the Company will make in connection
with mutual advertising agreements.
5. Litigation
Bankruptcy Proceedings
On January 26, 1995, the Debtors (Note 1) filed petitions
for relief under Chapter 11 in the United States Bankruptcy Court
for the Eastern District of New York, Case Nos. 195 10690 260,
195 10691 260, 195 10692 260 and 195 10693 260. Spectrum Global
did not file for bankruptcy. On February 8, 1995, the United
States Trustee appointed an Official Committee of Unsecured
Creditors for the Debtors other than Computer Bay and another for
Computer Bay to represent the interests of all unsecured
creditors whose claims arose before the Petition Date. No other
committees have been appointed. On May 25, 1995, the Bankruptcy
Court, upon motion by the Debtors, converted the Computer Bay
proceeding to a case under Chapter 7 of the Bankruptcy Code. An
independent trustee has been appointed to oversee liquidation of
Computer Bay's Chapter 7 estate. The Computer Bay trustee has
filed a claim with the Bankruptcy Court to substantively
consolidate the Computer Bay liabilities with the liabilities of
the Debtors in Chapter 11. Although there can be no assurance
that the Debtors will be successful defending this claim, the
Company does not believe there are grounds for such consolidation.
A trial for this matter has been scheduled for April 9-11, 1996,
in the Bankruptcy Court.
Spectrum and Spectrum Cellular are continuing to manage
their affairs and operate their businesses under Chapter 11 as
debtors in possession while formulating a plan of reorganization.
The operations of Data One were discontinued as of December 31,
1994. By order of the Bankruptcy Court, the bar date for filing
proofs of claim in the Chapter 11 proceedings was established as
September 7, 1995.
Other Legal Proceedings
The Company is involved in various litigations, the most
significant of which are discussed herein.
The Company, certain of its former officers and directors,
one current officer and two employees are defendants in certain
of these matters. All of the proceedings discussed below in which
the Company is named as a defendant or respondent (other than
those pending in the Bankruptcy Court) are stayed pursuant to the
automatic stay provisions of the Bankruptcy Code, as discussed
above. The Company hopes to use the bankruptcy process to resolve
pending litigation. These actions are not stayed, however,
against defendants other than the Company. The Company has
informed former officers and directors and employees of the
Company to whom it had been paying legal expenses related to
these proceedings prior to the Bankruptcy filing that it would no
longer be paying these expenses. The Company has directed these
individuals to seek reimbursement directly from the Company's
insurance providers. The Company has received Bankruptcy Court
approval for payment of limited legal fees incurred by certain
present employees.
Securities Related Legal Proceedings
On February 9, 1994, the class action filed against the
Company, and two of its former officers in May 1993 (In re
Spectrum Information Technologies, Inc. Securities Litigation;
United States District Court for the Eastern District of New
York; Civil Action No. 93-2295) (the "Class Action") was
supplemented to extend the end of the class period from May 21,
1993 to February 4, 1994, to add additional claims against the
Company and the individual defendants, and to add certain of its
then officers as party defendants. In April 1994, a Second
Consolidated Amended Class Action Complaint was filed adding
additional employees as party defendants. The class and certain
subclasses have been certified. A similar putative class action
filed in the United States District Court of the Southern
District of Texas has been transferred and consolidated with the
Class Action.
The plaintiffs in the Class Action claim to have purchased
the Company's securities at prices which the Company and the
individual defendants allegedly artificially inflated by, among
other things: (i) misrepresenting the potential value of the
patent license agreement the Company entered into with AT&T; (ii)
improperly accounting for revenues and expenses in connection
with certain license and advertising agreements; (iii) failing to
disclose the existence of an inquiry initiated by the Securities
and Exchange Commission ("SEC"); and (iv) making statements
regarding the employment of John Sculley. In addition, there are
claims against certain of the individual defendants for improper
insider trading. The Company's former management, based on the
advice of its then counsel, believed it had good and meritorious
defenses to the claims against it. The Company's new management,
along with its new counsel, are involved in the ongoing process
of evaluating the pending litigation. While the effect of the
bankruptcy filing and likely outcome of these claims are
uncertain at this time, the Company hopes to use the bankruptcy
process to assist it in reaching a resolution to this and other
litigation.
On November 8, 1995, the Company reached an agreement in
principle on a framework for settlement of the Class Action
lawsuit that has been pending against the Company and certain of
its present and former employees since May 1993. On January 19,
1996, the Bankruptcy Court approved Spectrum's participation in the
framework. The class plaintiffs in that lawsuit filed a claim
against the Company in its bankruptcy proceedings in the amount
of $676 million. The settlement, if consummated, would be in
satisfaction of that claim as well as all claims between the
Company and the other defendants in the suit.
The settlement is contingent on numerous factors, including
among other things successfully resolving a litigation regarding
insurance coverage (see below), negotiation and execution of a
definitive settlement agreement, the Company's ability to develop
and confirm a plan of reorganization in the Company's pending
bankruptcy proceeding satisfactory to all interested parties
including plaintiffs in the class action, and approval of the
settlement by the United States District Court in which the class
action suit is pending.
Under the terms of the agreement in principle, the Company
and the class plaintiffs have agreed to a framework under which
it is contemplated that the Company will issue to the class
plaintiffs in its plan of reorganization a number of shares of
its preferred stock, which will automatically convert into common
stock at the end of two years, equal in number to the shares
of its common stock to be issued to existing shareholders in the
reorganization. This understanding is subject to contingencies
which could alter the framework of the settlement, including
without limitation the percentage of the Company's stock to be
issued to the class. In a related agreement, the class
plaintiffs are also to receive the proceeds, net of certain fees
and expenses of approximately $1 million, from $10 million of
insurance policies covering the Company's directors and
officers and, in addition, as a result of court supervised
negotiations and on the recommendation of the Court,
$1,350,000 from the various individual defendants in the action
and $250,000 from the Company. Neither the Company nor the
individual defendants acknowledged any wrongdoing in connection
with the agreement in principle.
Among the uncertainties is that insurers that issued
policies for $6 million of the insurance necessary to fund the
settlement have disclaimed coverage. This dispute is the subject
of a litigation pending in the U.S. District Court for the
Eastern District of Long Island, which must be successfully
resolved in order for the settlement to be implemented. The
Company's plan of reorganization must also address other material
litigation, claims by the Company's creditors and the Company's
need for additional capital. There can be no assurance that the
Company will be successful in its efforts to resolve those
matters or that the other conditions to the settlement will be
achieved. The Company's exclusive right to file a plan of
reorganization expires on March 8, 1996.
On July 20, 1994, the Company, certain of its then officers
and directors, and two former officers and directors were served
with a class action complaint. The complaint asserts that Spectrum
knowingly or recklessly made material false statements or omitted
material facts in its financial reporting relating to Computer
Bay prior to announcing the restatement of earnings for the
fiscal year 1992 and the first three quarters of fiscal 1993, to
correct inaccurate accruals of certain items into income. For
pre-trial purposes, this litigation has been consolidated with
the Class Action described above.
In May 1993, the SEC initiated a confidential and informal
fact gathering inquiry apparently directed toward statements the
Company purportedly made regarding the potential value of the
patent license agreement it had entered into in fiscal 1994 with
AT&T. On December 6, 1993, following the Company's dismissal of
its outside auditors, the SEC issued a formal order of
investigation. The Company believes that a focus of the
investigation relates to accounting and disclosure issues with
respect to certain of the patent license and advertising
agreements it entered into during fiscal 1994 and, based on
recent requests for information from the SEC, may also relate to
other activities of the Company's previous management. The
Company is cooperating fully with the investigation.
The accounting treatment at issue in the investigation,
which had been implemented after consultation with the Company's
previous outside auditors and had been disclosed in the Company's
quarterly filings with the SEC, was revised by the Company when
it voluntarily restated its earnings on February 7, 1994.
In October 1994, two individuals commenced an action against
two of the Company's former officers and directors, Silverberg,
et. al. v. Sculley, et. al., in the Superior Court of the State
of California for the County of Los Angeles, Case No. BC 111206.
The claims against the former officers and directors include
breach of fiduciary duty, breach of covenant of good faith and
fair dealing, deceit and misrepresentation, negligent
misrepresentation, mismanagement and gross negligence. The
complaint was subsequently amended to add the Company as a
defendant. In November, 1995, the parties reached a settlement
of this matter, the terms of which are confidential.
In March 1995, Peter Caserta, Spectrum's former chief
executive officer and chairman of the Board, Howard Schor, a
former employee, John Bohrman, a former director, James Paterek,
former president of Spectrum Global (which was sold by Spectrum
in October), and nine other non-Company employees were indicted
on charges of mail and wire fraud relating to activities of the
Caserta Group, a financial services company Mr. Caserta headed.
In January 1996, Mr. Caserta and Mr. Schor pleaded guilty to
certain charges against them.
The United States Attorney's Office for the Eastern District
of New York also informed the Company that it is the subject of
an investigation regarding violations of securities laws that may
have occurred prior to the appointment of the Company's current
CEO and Board of Directors. The Company is cooperating fully with
the investigation.
Patent Related Proceedings
During August 1994, Megahertz Corporation filed a Demand for
Arbitration with the American Arbitration Association in Salt
Lake City, Utah, Case No. 81 184 0008194, seeking a determination
as to whether royalty payments by Megahertz were temporarily
abated under the terms of a license agreement between Megahertz
and Spectrum. Megahertz, in its arbitration request, asked for a
determination of whether the Company has achieved certain
licensing objectives and/or undertaken defined patent enforcement
actions as set forth in the agreement. The parties jointly agreed
to delay this proceeding in December 1994. The arbitration was
subsequently automatically stayed by the Company's bankruptcy
filing. On February 6, 1996, Megahertz, its parent company,
U.S. Robotics, and Spectrum entered into a settlement
agreement with respect to all disputes among them, subject to
the approval of the Bankruptcy Court, which approval is being
sought (Note 7).
On December 5, 1994, the Company filed a lawsuit against
Motorola, Inc. for infringement of claims in six of its patents
covering basic wireless data concepts. Motorola has denied the
allegations in its answer. The case was originally filed in the
United States District Court for the Eastern District of
Virginia, but was transferred to the United States District Court
for the Northern District of Alabama, Northeastern Division, and
is captioned Spectrum Information Technologies, Inc. v. Motorola,
Inc., Civil Action No. 95-U-234-NE. The parties stipulated to
extend the dates in the case's original scheduling order by three
months to permit the parties to pursue settlement discussions.
In January 1996, the parties entered another such stipulation.
Other Proceedings
In January 1994, Robert Fallah, a former financial
consultant instituted a suit, Fallah v. Spectrum Information
Technologies,Inc., Index No. 94-1044, against the Company seeking
$5,790,000 in damages related to purported promises made by the
Company to give the plaintiff certain stock warrants in exchange
for the consultant's services. The plaintiff filed a proof of
claim in the Company's bankruptcy proceeding alleging $5,790,000
in damages. The Company has filed an objection to this claim
in the Bankruptcy Court.
In September 1994, the plaintiff in an action filed against
the Company in April 1994, Blair v. Spectrum Information
Technologies, 162nd District Court of Dallas County, amended his
complaint to add Peter Caserta, a former officer and director of
the Company, as a defendant. The amended complaint charges Mr.
Caserta with breach of fiduciary duty, fraud, negligence and
gross negligence in the alleged failure to allow Mr. Blair to
participate in the Company's stock option plan. The plaintiff
alleges that he was induced to begin employment with Spectrum
Cellular through a promise that he would be allowed to
participate in the Company's stock option plan and alleges breach
of contract, fraud, negligence, breach of fiduciary relationship
and bad faith against all defendants. The plaintiff terminated
his employment with Spectrum Cellular Corporation in August 1994.
Mr. Blair filed a proof of claim in the bankruptcy proceeding
alleging $1 million in damages. The Texas lawsuit is stayed as
to the Company by operation of the automatic stay. Settlement
discussions have taken place between the Company and Mr. Blair's
counsel.
In October 1994, Gene Morgan and Gene Morgan Financial
(collectively, "Gene Morgan") demanded in excess of $8 million
dollars from the Company based on an alleged breach of a
consulting agreement and failure to register certain
underwriter's warrants. Gene Morgan filed a proof of claim in
the bankruptcy proceeding claiming an unsecured nonpriority claim
of $6.3 million alleging breach of contract under warrant. Gene
Morgan, by its assignee, Lowenstein, Sandler, Kohl & Fisher,
filed a proof of claim alleging approximately $1.9 million in
damages arising from the alleged breach of the consulting
agreement. The bankruptcy court has ruled that any claim Morgan
may have under the warrant is subordinated under Section 510(b)
of the bankruptcy code. A trial on this matter is being
conducted before the United States Bankruptcy Court for the
Eastern District of New York.
On July 21, 1995, The Home Insurance Company of Illinois,
the Company's former primary directors' and officers' insurance
carrier, and certain excess carriers (collectively, the "Home"),
filed an adversary proceeding complaint in the Company's bankruptcy
proceeding. In its complaint, the Home seeks rescission of a
renewal of a directors' and officers' liability and company
reimbursement policy issued in June 1993 to the Company for the
benefit of its directors and officers based upon material
misrepresentations and/or omissions in the application for that
policy. The Home also seeks a declaration that coverage is not
afforded under such policy for claims asserted against certain
directors and officers of the Company. The Home alleges that the
Company made certain misrepresentations and/or omissions
regarding the existence of an SEC informal investigation and
suits filed against the Company arising from alleged
misstatements made by the Company regarding the license agreement
it entered in fiscal 1994 with AT&T. The action has been removed
to the United States District Court for the Eastern District
of New York where a trial has been scheduled to begin on
February 20, 1996. The Company believes the Home is obligated to
provide the coverage at issue and intends to defend this action.
In an action against the Company and certain former
employees in the Superior Court of New Jersey, Middlesex County,
entitled Douglas H. Anderson v. Dealer Service Business Systems,
Inc. d/b/a Data One et al., Docket No. L-11315-92, the plaintiff
alleged breach by the Company of an employment contract and age
discrimination by the plaintiff's employer, Data One. The
plaintiff further alleged that the Company and certain former
employees interfered with his employment contract and inflicted
emotional distress. The action is currently stayed against the
Company and Data One by the automatic stay provisions of the
Bankruptcy Code. Subsequently, the individual defendants in the
litigation other than Peter Caserta, the Company's former CEO,
were dropped from the action. The plaintiff and Mr. Caserta
entered a settlement, the terms of which are under seal by court
order. In October 1995, Mr. Andersen filed a proof of claim
against the Company alleging $1.5 million in damages based on the
allegations described above. The Company intends to object to this
claim on the grounds that, among other things, it was not timely
filed. Additionally, Mr. Caserta filed a proof of claim against
the Company alleging that he is entitled to indemnification from
the Company based on the amount he paid to the plaintiff to
settle this matter. Should the Class Action settlement described
above be approved, it is the Company's position that Mr. Caserta's
claim for indemnity will be released.
The Company is also involved in other litigations. The
Company had previously reserved approximately $4.7 million which
had been prior management's estimate of the Company's portion of
any ultimate settlement of the Class Action. The Class Action and
other litigations were factors in the Company's decision to file
for protection under Chapter 11. The effect of the bankruptcy
filing on and the likely outcomes of these claims are uncertain
at this time.
6. Asset Dispositions
On September 21, 1995, Spectrum sold its Spectrum Cellular
facility in Dallas, Texas. The building was sold for
approximately $780,000 resulting in a gain on the sale of
$85,976. Net proceeds from the sale were $734,000, of which the
Company has segregated $72,000 to cover claims related to
property taxes filed by the City and County of Dallas.
In July, 1995, the Company sold its AXCELL business and its
license to certain related patent rights to Telular Corporation
("Telular") for $3,000,000 pursuant to an agreement approved
by the Bankruptcy Court, which resulted in a gain of
approximately $1,616,000. Net proceeds of the sale
were $3,000,000. The patent rights relate to wireless interface
technology and were obtained in a license agreement from Telular,
and are not part of Spectrum's core direct connect patent
portfolio. The sales of AXCELL products were approximately
$132,000 and $894,000 for the nine months ended December 31, 1995
and 1994, respectively, and $152,000 for the three months ended
December 31, 1994.
On September 11, 1995, the Company entered an agreement
to sell all of the capital stock of its wholly owned subsidiary
Spectrum Global Services, Inc. ("Global") to The Lori Corporation
and COMFORCE Corporation (collectively, "Purchaser") for
$6 million, plus a closing adjustment related primarily to
the allocation of salaries and benefits of certain Spectrum and
Global employees. Other members of the purchasing group included
ARTRA Group Incorporated, a corporation organized under the laws
of the State of Pennsylvania, Peter R. Harvey, Marc L. Werner,
James L. Paterek, Michael Ferrentino and Christopher P. Franco.
The sale of Global was subject to bankruptcy court approval and
receipt of higher and better offers. A hearing regarding the
transaction (and any higher and better offers) was held on
October 17, 1995 before the United States Bankruptcy Court for
the Eastern District of New York, following which the court
approved the sale. The Purchaser paid cash for Global's stock at
the October 17th closing. Net proceeds from the sale were
$4,549,000.
Following the sale, Mr. Ferrentino, a vice president of
Global, and Mr. Franco, Spectrum's vice president and former
general counsel, assumed senior management positions with the
Purchaser, and the Purchaser announced that Mr. Paterek,
president of Global, would become a consultant to COMFORCE
Corporation.
7. Subsequent Events
On November 8, 1995, the Company reached an agreement in
principle on a framework for settlement of the Class Action
lawsuit that has been pending against the Company and certain of
its present and former employees since May 1993. On January 19,
1996, the Bankruptcy Court approved the framework for settlement
of the Class Action. The class plaintiffs in that lawsuit filed
a claim against the Company in its bankruptcy proceedings in the
amount of $676 million (Note 5). The settlement, if consummated,
would be in satisfaction of that claim as well as all claims
between the Company and the other defendants in the suit.
On January 23, 1996 the Bankruptcy Court approved the
Company's motions for approval of severance agreements with two
former employees and assumption of modified employment agreements
with certain key employees.
During January, the Company entered employment agreements
with two executive officers: Mikhail Drabkin, as Chief Technical
Officer and Richard duFosse as Vice President - Software
Engineering. Mr. duFosse joined Spectrum on February 6, 1996 and
Mr. Drabkin is scheduled to begin on March 20, 1996. Among other
things, the agreements provide that following confirmation of
Spectrum's plan of reorganization, each will be entitled to a
severance benefit of one year's salary if the Company terminates
their employment without just cause.
Among the litigation pending against Spectrum when it
filed for bankruptcy on January 26, 1995 was an arbitration
(the "Arbitration") instituted by Megahertz Corporation
("Megahertz") (Note 5). Since the institution of the
Arbitration, Megahertz has been acquired by U.S. Robotics
Corporation (collectively, Megahertz and U.S.Robotics
are referred to as "U.S. Robotics"), which is the
successor in interest to the business assets of Megahertz,
including the intellectual property license and
advertising agreements between Megahertz and Spectrum.
On February 6, 1996, Spectrum and U.S. Robotics executed a
settlement in principle, in which, subject to Bankruptcy Court
approval, they will enter a stipulation dismissing the
Arbitration with prejudice, settle all disputes between Spectrum
and U.S. Robotics, consolidate the license and advertising
agreements between Spectrum and U.S. Robotics, alter the manner
and method by which royalties are paid and create a strategic
relationship between Spectrum and U.S. Robotics. The settlement
provides in part that U.S. Robotics will pay Spectrum a
substantial license fee and that Spectrum and U.S. Robotics
will enter a strategic relationship beneficial to Spectrum's
business development. Spectrum expects to file a motion
seeking bankruptcy court approval of the settlement agreement
shortly, which contains confidential information of Spectrum
and U.S. Robotics and will be filed under seal with the court.
In January 1996, the Company and Motorola entered into a
second stipulation to extend for an additional three months
the dates in the original scheduling order in the case pending
before the U.S. District Court for the Northern District of
Alabama in order to permit the parties to pursue settlement
discussions (see note 5 to the consolidated financial statements).
On February 9, 1996, Spectrum filed a Consolidated Plan of
Reorganization Proposed by Spectrum Information Technologies,
Inc. and its Affiliated Debtors (the "Plan") and associated
Disclosure Statement. The Disclosure Statement describes, among
other things, the Plan, Spectrum's proposed business plan, and
the proposed capitalization of Spectrum immediately following the
effective date of the Plan. A hearing with respect to the
Disclosure Statement is scheduled before the Bankruptcy Court for
March 7, 1996. Copies of the Plan and Disclosure Statement will
not be generally distributed until approval of the Disclosure
Statement has been received from the Bankruptcy Court although
they will be available for review in the office of the Clerk
of the Bankruptcy Court. Following such approval, the Company
will file the Disclosure Statement with the Securities and
Exchange Commission and distribute copies to its creditors
and shareholders. Consistent with the agreement in principle
on a framework to settle the Class Action securities litigation
that has been pending against the Company since 1993, the Plan
provides that the Company's current equity holders will be substantially
diluted. The equity distribution, confirmation and effectiveness
of the Plan and implementation of the proposed business plan are
subject to numerous uncertainties set forth in detail in the Plan
and Disclosure Statement. Accordingly, the value of the
Company's common stock remains highly speculative.
The proposed Plan and Disclosure Statement are subject to
amendment, which amendments may be material.
Data One intends to formulate a liquidating plan of
reorganization to be proposed by Data One (the "Liquidating
Plan") and to prepare the related disclosure statement which
will be distributed to creditors of Data One. The disclosure
statement will describe, among other things, the Liquidating
Plan and the proposed distribution to creditors of Data One.
SPECTRUM INFORMATION TECHNOLOGIES, INC AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
ORGANIZATION AND BUSINESS COMBINATION
Spectrum Information Technologies, Inc. (the "Company" or
"Spectrum") is a holding company with one continuing subsidiary,
Spectrum Cellular Corporation ("Spectrum Cellular"). The Company
discontinued the operations of its Dealer Service Business
Systems, Inc. subsidiary d/b/a Data One ("Data One") in fiscal
1994 and its Computer Unlimited of Wisconsin, Inc. subsidiary
d/b/a Computer Bay ("Computer Bay") in fiscal 1995. The Company
sold its Spectrum Global Services, Inc. subsidiary ("Spectrum
Global") on October 17, 1995. Spectrum Global, Data One and
Computer Bay are reflected in the financial statements as
discontinued operations.
Effective January 26, 1995, the Company, Data One, Spectrum
Cellular and Computer Bay filed for reorganization under Chapter
11 of the Federal Bankruptcy Code. On May 25, 1995, the
Bankruptcy Court granted the Company's motion to convert the
Chapter 11 filing for Computer Bay to a case under Chapter 7 and,
as a result, control of Computer Bay has been transferred to the
Computer Bay trustee and no longer rests with the Company.
Chapter 11 Proceedings
As discussed in Note 1 to the consolidated financial
statements, the Company and three of its subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the
United States Bankruptcy Code, as amended, in the United States
Bankruptcy Court for the Eastern District of New York ("Bankruptcy
Court"). The Class Action and other litigations were among the
factors that contributed to the Company's decision to seek
bankruptcy protection in order to position the Company to focus
on its core business.
Due to the Chapter 11 filing, the Company's liquidity
position has been positively affected because the cash
requirements for the payment of accounts payable and other
liabilities, which arose prior to the Chapter 11 filings, are in
most cases deferred until a plan of reorganization is confirmed
by the Bankruptcy Court. The Company's liquidity position has
also been improved by the sale of the AXCELL (registered
trademark) business and related patent rights and Spectrum
Global. The positive effect has been offset by the increased
administrative and professional fees associated with the Chapter
11 filing and resolution of claims subject to compromise.
Management of the Company filed with the Bankruptcy Court
a plan of reorganization on February 9, 1996. The adequacy of
the Company's capital resources and long-term liquidity will
be determined when a plan of reorganization is confirmed by
the Bankruptcy Court (see Liquidity and Capital Resources below).
SUMMARY OF OPERATIONS
The following table sets forth, for the periods indicated,
the percentage relationship that certain items bear to revenue.
This summary provides trend data relating to the Company's normal
recurring operations. Other items of significance are discussed
separately under the captions "Operating Loss", "Other Income and
Expense", and "Discontinued Operations" below. Amounts set forth
below reflect the Company's Data One, Computer Bay and Spectrum
Global subsidiaries as discontinued operations.
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------ ------------------------
1995 % 1994 % 1995 % 1994 %
----- -- ---- -- ---- -- ---- --
(Amounts in thousands)
Licensing
and other
Revenue $ 379 75 686 72 $ 1,758 80 1,118 51
Merchandise
Sales 125 25 267 28 445 20 1,081 49
Total
Revenues $ 504 100 953 100 $ 2,203 100 2,199 100
---- --- --- --- ----- --- ----- ---
Operating
costs
and
expenses:
Cost of
revenue 67 13 128 13 258 12 445 20
Selling,
general
and
admini-
strative
expenses 1,821 362 4,094 430 5,368 243 10,263 467
----- --- ----- ----- ----- --- ----- ---
Total
operating
costs and
expenses $ 1,888 375 4,222 443 5,626 255 10,708 487
----- --- ----- --- ----- --- ------ ---
Operating
loss $(1,384)(275)(3,269) (343)$(3,423) (155)(8,509) (387)
===== === ===== === ===== === ===== ===
Consolidated revenues for the three months ended December
31, 1995 decreased by $449,000 or 47% and increased $4,000 for
the nine months ended December 31, 1995, respectively, as
compared to December 1994. The decrease for the three months
ended December 31, 1995 is due to a decrease of $307,000, or 45%,
and $142,000, or 53%, in royalty/licensing income and product
sales, respectively. Royalties and licensing income decreased
primarily as a result of a disputed royalty agreement with a
certain licensee. The decrease in product sales is due to the
sale of the AXCELL product line. AXCELL sales decreased $152,000
for the three months ended December 31, 1995 as compared to the
prior year.
The increase in consolidated revenues for the nine months
ended December 31, 1995 is due to an increase in
royalty/licensing income of $640,000 or 57% offset by a decrease
in product sales of $636,000 or 59%. Royalties and licensing
income increased primarily as a result of payments received
pursuant to the Megahertz and Rockwell license agreements (see
note 5 to the consolidated financial statements) offset by
decreased royalties due to a disputed royalty agreement with a
certain licensee. The decrease in product sales is due to the
sale of the AXCELL product line. AXCELL sales decreased $762,000
for the nine months ended December 31, 1995 as compared to the
prior year.
Operating costs and expenses decreased approximately
$2,334,000 or 55% and $5,082,000 or 47% during the three and nine
months ended December 31, 1995 as compared to the same periods
ending December 31, 1994. These decreases are primarily due to
the decrease in selling, general and administrative expenses of
approximately $2,273,000 or 56% and $4,895,000 or 48% for the
three and nine months, respectively.
The decrease in selling, general and administrative expenses
for the three and nine months ended December 31, 1995 is
primarily due to the decrease in professional fees (other than
professional fees associated with the Company's bankruptcy
proceeding)of $151,000 and $1,144,000, respectively. These
decreases are primarily due to the stay of legal actions while
the Company is in Chapter 11 bankruptcy proceedings. Decreases in
personnel and related expenses of $464,000 and $702,000,
respectively, and a decrease in travel and entertainment expenses
of $65,000 and $207,000, respectively, are due to the overall
downsizing of the Company. Other administrative expenses
decreased $1,246,000 and $2,372,000, respectively, primarily due
to the Company's move from Manhasset, New York to a smaller
location in Purchase, New York. Advertising expense decreased
$347,000 and $470,000 during the three and nine months ended
December 31, 1995 primarily due to the sale of the AXCELL product
line.
Operating Loss
The Company's operating loss decreased $1,885,000 or 58% and
$5,086,000 or 60% for the three and nine months ended December
31, 1995 as compared to the same periods in the prior year. The
decreases are primarily due to the decreased selling, general and
administrative expenses of 56% and 48%, respectively for the
three and nine month periods reported, as well as a decrease in
cost of goods sold of $61,000 or 48% and $187,000 or 42%,
respectively, for the three and nine months ended December 31,
1995 as compared to the prior year due to the sale of the AXCELL
product line.
Other Expense and Income
Other income increased $186,000 and $1,820,000,
respectively, for the three and nine months ended December 31,
1995 compared to the prior year. The large increase for the nine
months ended December 31, 1995 is primarily due to the gain of
$1,616,000 on the sale of the AXCELL product line.
Discontinued Operations
As of January 25, 1995, the Company closed its Computer Bay
subsidiary which is reflected as a discontinued operation in the
consolidated financial statements. The Company did not record a
provision related to its anticipated loss on a disposal because
the case was converted into a Chapter 7. As a result of the
conversion, the Company has recorded a gain of $2,539,000 by
writing off the net liabilities of Computer Bay. The Computer Bay
trustee has filed a claim in the Bankruptcy Court to
substantively consolidate the Computer Bay liabilities with the
liabilities of the Debtors. However, the Company does not
believe there are grounds for such consolidation. (See note 2 to
consolidated financial statements).
As of October 17, 1995, the Company sold its Spectrum Global
subsidiary which is reflected as a discontinued operation in the
consolidated financial statements(See note 7 to consolidated
financial statements).
Data One intends to formulate a liquidating plan of
reorganization to be proposed by Data One (the "Liquidating
Plan") and to prepare the related disclosure statement
which will be distributed to creditors of Data One.
The disclosure statement will describe, among other
things, the Liquidating Plan and the proposed distribution
to creditors of Data One.
Cumulative Effect of Change in Accounting Principle
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," effective for fiscal years beginning after December
15, 1993. The cumulative effect of adopting SFAS No. 115 as of
April 1, 1994 resulted in a increase in income of approximately
$316,000 (see note 1 to the consolidated financial statements).
Liquidity and Capital Resources
Since inception, the Company has experienced significant
operating losses and operating cash flow deficits which
ultimately caused the Company to restructure its largest
subsidiary, Computer Bay, as a discontinued operation and to file
for bankruptcy protection under Chapter 11 on January 26, 1995
(see Chapter 11 proceedings above).
During the nine months ended December 31, 1995, working
capital (current assets less current liabilities) decreased by
approximately $1,916,000 to $7,517,000. This decrease is
primarily due to an increase in accrued liabilities of $1,461,000
primarily due to professional fees associated with bankruptcy
related issues.
Net cash used by continuing operations decreased
approximately $9,037,000 when compared to the prior year
primarily as a result of the Company's net loss from
operating activities decreasing from $12,073,000 for the
nine months ended December 31, 1994 to $123,000 for the
nine months ended December 31, 1995. In addition,
through downsizing and bankruptcy protection relating
to litigations and indemnifications, the Company was
able to decrease its operating expenses as compared to
the prior year. An increase in accrued expenses primarily
related to bankruptcy professional fees was also
responsible for the decrease in cash used.
Net cash provided by investing activities decreased
$467,000 for nine months ended December 31, 1995 when compared
to the prior fiscal year due to the cash proceeds from
the sales of the Global subsidiary, AXCELL product line
and real property in Dallas, as compared to the cash proceeds
from the sale of marketable securities in fiscal 1995. Capital
expenditures amounted to approximately $58,000 for the nine
months ended December 31, 1995. These expenditures are primarily
related to office relocation and rejected capital leases.
Capital expenditures for the nine months ended December 31, 1994
were approximately $130,000. The Company has no material
commitments outstanding as of quarter end; however, the Company
anticipates that capital expenditures may increase as a result of
anticipated efforts to further develop core technology.
There were no financing activities during the nine months
ended December 31, 1995. During the nine months ended December
31, 1994, certain persons exercised stock options and warrants
which resulted in a $770,000 increase in cash.
For the nine months ended December 31, 1995 net cash
required by discontinued operations was $1,861,000 as compared to
net cash provided by discontinued operations of $1,214,000 for
the nine months ended December 31, 1994.
As part of its plan of reorganization the Company is
attempting to settle all significant litigation. The adequacy of
the Company's capital resources and long-term liquidity will be
determined when a plan of reorganization is confirmed by the
Bankruptcy Court. However, the uncertainties relating to the
confirmation of a plan of reorganization and the continuing
losses (see Operating Loss above) raise substantial doubt about the
Company's ability to continue as a going concern (see note 1 to
consolidated financial statements). The Company continues
to evaluate the performance of the continuing subsidiaries
in order to conserve cash. In July 1995, the Company
received $3,000,000 for the sale of its AXCELL business
and the related license to certain patent rights to Telular
Corporation ("Telular") (see note 6 to the consolidated financial
statements). As a result of the sale, the operations of Spectrum
Cellular have been downsized.
As of October 17, 1995, the Company sold its Spectrum Global
subsidiary for net cash proceeds of approximately $4,549,000
after expenses of $325,000 (see note 6 to the consolidated
financial statements).
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors in Possession)
FORM 10-Q
December 31, 1995
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Chapter 11 Reorganization Under The Bankruptcy Code
On January 26, 1995, the Debtors (see note 1 to the
consolidated financial statements) filed petitions for
relief under Chapter 11 in the United States Bankruptcy Court
for the Eastern District of New York, Case Nos. 195 10690 260,
195 10691 260, 195 10692 260 and 195 10693 260. Spectrum Global
did not file for bankruptcy. On February 8, 1995, the United
States Trustee appointed an Official Committee of Unsecured
Creditors for the Debtors, other than Computer Bay, and another
for Computer Bay to represent the interests of all unsecured
creditors whose claims arose before the Petition Date. No other
committees have been appointed. On May 25, 1995, the Bankruptcy
Court, upon motion by the Debtors, converted the Computer Bay
Chapter 11 case to a case under Chapter 7 of the Bankruptcy Code.
An independent trustee has been appointed to oversee liquidation
of Computer Bay's Chapter 7 estate, and the Company no longer has
control over the Computer Bay estate. Spectrum and Spectrum
Cellular are continuing to manage their affairs and operate their
businesses under Chapter 11 as debtors in possession while
formulating a plan of reorganization. The operations of Data One
were discontinued as of December 31, 1994. By order of the
Bankruptcy Court, the bar date for filing proofs of claim in the
Chapter 11 proceeding was established as September 7, 1995.
Excluding the material litigation discussed herein
(see note 5 to the consolidated financial statements) and
improperly filed claims by shareholders, approximately 308
claims were filed against the Debtors alleging approximately $5.4
million in creditors' claims. These claims primarily consisted
of approximately: $1.7 million in claims by vendors; $855
thousand in claims by former employees based upon severance and
employment agreements; $1.2 million in indemnification claims for
legal fees and settlement of litigation by former employees; $784
thousand in claims arising from rejected leases; $554 thousand
claimed by a Computer Bay financing company; and $314 thousand
related to a prepaid Data One maintenance contract.
Additionally, the Trustee appointed to administer the Computer
Bay estate filed a claim alleging $4.4 million in damages. The
Company, along with its outside counsel, is evaluating each of
these claims and reconciling them to its books and records.
Pursuant to section 362 of the Bankruptcy Code, the
commencement of the Company's Chapter 11 case operates as a stay,
applicable to all entities, of the following: (i) commencement or
continuation of a judicial, administrative, or other proceeding
against the Company that was or could have been commenced prior
to commencement of the Company's Chapter 11 case, or to recover
for a claim that arose before the commencement of the Company's
Chapter 11 case; (ii) enforcement of any judgments against the
Company that arose before the commencement of the Company's
Chapter 11 case; (iii) the taking of any action to obtain
possession of property of the Company or to exercise control over
property of the Company; (iv) the creation, perfection or
enforcement of any lien against the property of the Company; (v)
the taking of any action to collect, assess or recover a claim
against the Company that arose before the commencement of the
Company's Chapter 11 case; or (vi) the setoff of any debt owing
to the Company that arose prior to the commencement of the
Company's Chapter 11 case against a claim held by such creditor
or party-in-interest against the Company that arose before the
commencement of the Company's Chapter 11 case. Any entity may
apply to the Bankruptcy Court for relief from the automatic stay
so that it may enforce any of the aforesaid remedies that are
automatically stayed by operation of law at the commencement of
the Company's Chapter 11 case.
Although the Company is authorized to operate its business
as debtor in possession, it may not engage in transactions
outside of the ordinary course of business without first
complying with the notice and hearing provisions of the
Bankruptcy Code and obtaining Bankruptcy Court approval. The
Unsecured Creditors' Committee may review and object to
transactions involving the Company that are outside of the
ordinary course of the Company's business, may consult with the
Company concerning the administration of the Company's Chapter 11
case, and may participate in the formulation of a plan of
reorganization. The Company is required to pay certain expenses
of the Unsecured Creditors' Committee, including counsel and
other professional fees, to the extent allowed by the Bankruptcy
Court. Other parties in interest in the Chapter 11 case are also
entitled to be heard on motions made in the Chapter 11 case,
including motions for approval of transactions outside the
ordinary course of business.
The Bankruptcy Court has approved the Company's retention
of: (i) Cleary, Gottlieb, Steen & Hamilton as its outside
general counsel; (ii) BDO Seidman, LLP ("BDO Seidman") as its
independent auditors; (iii) Sixbey, Friedman, Leedom and Ferguson
as its outside patent counsel; (iv) Executive Manning Corporation
as a human resources and management consultant; and (v) the
Gordian Group, L.P. as a financial advisor to assist in its
reorganization.
As debtor in possession, the Company has the right, under
the relevant provisions of the Bankruptcy Code, to assume or
reject executory contracts, including real property leases.
Certain parties to such executory contracts with the Company,
including parties to such real property leases, may file motions
with the Bankruptcy Court seeking to require the Company to
assume or reject those contracts or leases. In this context,
"assumption" means that the Company cures or provides adequate
assurance that it will cure all existing defaults under contract
or lease and provides adequate assurance of future performance
under the contract or lease. "Rejection," which is a remedy
available under the relevant provisions of the Bankruptcy Code,
means that the Company is relieved of its obligations to perform
further under the contract or lease. Rejection of an executory
contract or lease constitutes a breach of that contract
immediately before the date of filing of the petition and gives
the nondebtor party the right to assert a claim against the
bankruptcy estate for damages arising out of the breach which
shall be allowed or disallowed as if such claims had arisen
before the date of the filing of the petition.
The Company has received Bankruptcy Court approval to assume
certain modified employment contracts with other employees with
preexisting employment agreements, eliminating some contractual
perquisites and creating at-will employment relationships with
certain of these employees. The Company rejected all leases for
automobiles leased on behalf of employees. Additionally, the
Company has rejected the real property lease associated with its
former Manhasset, New York headquarters and leases for certain
furniture and equipment.
Prepetition claims that were contingent, unliquidated, or
disputed as of the commencement of the Chapter 11 case,
including, without limitation, those that arise in connection
with rejection of executory contracts, may be allowed or
disallowed depending on the nature of the claim. Such claims may
be fixed by the Bankruptcy Court or otherwise agreed upon by the
parties.
Under the Bankruptcy Code, an allowed claim of a creditor
that is secured by a lien on property of the Company's estate, or
that is subject to a valid right of setoff, is a secured claim to
the extent of the value of such creditor's interest in such
property, or to the extent of the amount subject to setoff, as
the case may be, and is an unsecured claim to the extent that the
value of such creditor's interest or the amount so subject to
setoff is less than the amount of such allowed claim. Generally,
claims for unmatured interest are not allowable. To the extent
that an allowed claim is secured by property whose value, after
recovery of the reasonable, necessary costs and expense of
preserving or disposing of such property, is greater than the
amount of such claim the creditor generally is allowed interest
on such claim and any reasonable fees, costs, or charges provided
for under the agreement which such claim rose.
Plan of Reorganization - Procedures.
For 120 days after the Petition Date, the Company has the
exclusive right to propose and file a plan of reorganization with
the Bankruptcy Court. If the Company files a plan of
reorganization during the 120 day exclusivity period, no other
party may file a plan of reorganization until 180 days after the
Petition Date, during which period, the Company has the exclusive
right to solicit acceptance of the plan. If the Company fails to
file a plan during the 120-day exclusivity period or such
additional time period ordered by the Bankruptcy Court (the
"Exclusivity Period") or, after such plan has been filed, fails
to obtain acceptance of such plan from impaired classes of
creditors and equity security holders during the exclusive
solicitation period or such additional time period ordered by the
Bankruptcy Court, any party-in-interest, including a creditor, an
equity security holder, a committee of creditors, or an indenture
trustee, may file a plan of reorganization in the Chapter 11
proceedings. Additionally, if the Bankruptcy Court were to
appoint a Chapter 11 trustee, any party-in-interest may file a
plan, regardless of whether any additional time remains in the
Company's Exclusivity Period. On January 23, 1996 the Bankruptcy
Court granted the Company's request to extend the Exclusivity
Period to March 8, 1996. The Company filed a plan of reorganization
on February 9, 1996 (see Other Proceedings below).
The Company filed with its Chapter 11 petition a list
containing the names and addresses of its twenty largest known
creditors for the Company and for each of the three filing
subsidiaries. The Company, Spectrum Cellular and Data One have,
within the time periods set by the Bankruptcy Court, filed with
the Bankruptcy Court schedules of assets and liabilities and
other schedules and statements of affairs as required by
Bankruptcy Rules and by the Local Rules of the Bankruptcy Court.
Section 501 of the Bankruptcy Code allows any creditor or
indenture trustee to file a proof of claim with the Bankruptcy
Court and any equity security holder to file a proof of interest
with the Bankruptcy Court. A claim or interest, proof of which is
filed under Bankruptcy Code Section 501, is deemed allowed,
unless a party-in-interest (including the Company) objects
thereto. If an objection is made to the allowance of a claim, the
Bankruptcy Court, after notice and hearing will determine the
amount, validity, and priority of such claim. The last date (bar
date) for filing proofs of claim or interest was established by
order of the Bankruptcy Court as September 7, 1995.
These claims are liabilities subject to compromise under a
plan of reorganization (See note 3 to the consolidated financial
statements).
Now that a plan has been filed with the Bankruptcy Court on
February 9, 1996, it will be sent with a disclosure statement
approved by the Bankruptcy Court after notice and hearing, to
members of all classes of impaired creditors and equity security
holders entitled to vote with ballots for acceptance or rejection.
Such hearing has been scheduled for March 7, 1996. The proposed
Plan and Disclosure Statement are subject to amendment, which
amendments may be material. Following acceptance or
rejection of any plan by impaired classes of creditors
and equity security holders, the Bankruptcy Court at
a hearing on notice would consider whether to confirm the plan.
Among other things, to confirm a plan, the Bankruptcy Court is
required to find that (i) each holder of a claim or interest of
an impaired class of creditors and equity security holders either
has accepted the plan or will receive or retain under the plan on
account of such claim or interest property of a value, as of the
effective date of the plan, that is not less than the amount that
such holder would so receive or retain if the Company were
liquidated under Chapter 7 of the Bankruptcy Code on such date,
(ii) if any class of claims is impaired under the plan, at least
one class of claims that is impaired under the plan has accepted
the plan, and (iii) confirmation of the plan is not likely to be
followed by the liquidation or need for further financial
reorganization of the Company or any successor, unless such
liquidation or reorganization is proposed in the plan.
If at least one class of claims that is impaired under the
plan has accepted the plan, and certain other requirements of the
Bankruptcy Code relating to plan confirmation are satisfied, the
proponent of the plan may invoke the so-called "cramdown"
provisions of section 1129(b) of the Bankruptcy Code. Under
these provisions, the Bankruptcy Court, on request of the
proponent of the plan, shall confirm the plan if the plan does not
discriminate unfairly, and is fair and equitable, with respect to
each class of claims or interests that is impaired under, and has
not accepted, the plan. As used in the Bankruptcy Code, the
phrases "discriminate unfairly" and "fair and equitable" have
narrow and specific meanings. A "cramdown" might result in
holders of the Company's Common Stock receiving no property or
other value for their equity security interests. Because of this
and other possibilities, the value of the Company's Common Stock
is highly speculative.
The Company intends to formulate a liquidating plan of
reorganization to be proposed by Dealer Service Business Systems
d/b/a Data One (the "Liquidating Plan") and to prepare the
associated disclosure statement which will be distributed to
creditors of Data One. The disclosure statement will describe,
among other things, the Liquidating Plan and the proposed
distribution to creditors of Data One.
Other Proceedings
On November 8, 1995, the Company reached an agreement in
principle on a framework for settlement of the Class Action
lawsuit that has been pending against the Company and certain of
its present and former employees since May 1993. On January 19,
1996, the Bankruptcy Court approved the framework for settlement
of the Class Action. The class plaintiffs in that lawsuit filed
a claim against the Company in its bankruptcy proceedings in the
amount of $676 million (see note 5 to consolidated financial
statements). The settlement, if consummated, would be in
satisfaction of that claim as well as all claims between the
Company and the other defendants in the suit.
The settlement is contingent on numerous factors, including
among other things successfully resolving a litigation regarding
insurance coverage (see note 5 to consolidated financial
statements), negotiation and execution of a definitive settlement
agreement, the Company's ability to develop and confirm a plan of
reorganization in the Company's pending bankruptcy proceeding
satisfactory to all interested parties including plaintiffs in
the class action, and approval of the settlement by the United
States District Court in which the class action suit is pending.
Under the terms of the agreement in principle, the Company
and the class plaintiffs have agreed to a framework under which
it is contemplated that the Company will issue to the class
plaintiffs under its Plan a number of shares of its preferred
stock, which will automatically convert into common stock at
the end of two years, equal in number to the common stock
to be issued to existing shareholders under the Plan. This
understanding is subject to contingencies which could alter
the framework of the settlement, including without limitation
the percentage of the Company's stock to be issued to the class.
In a related agreement, the class plaintiffs are also to receive
the proceeds, net of certain fees and expenses amounting to
approximately $1 million, from $10 million of insurance policies
covering the Company's directors and officers and, in addition, as
a result of court supervised negotiations and on the recommendation
of the Court, $1,350,000 from the various individual defendants in
the action and $250,000 from the Company. Neither the Company nor the
individual defendants acknowledged any wrongdoing in connection with
the agreement in principle.
Among the uncertainties is that insurers that issued
policies for $6 million of the insurance necessary to fund the
settlement have disclaimed coverage. This dispute is the subject
of a litigation pending in the U.S. District Court for the
Eastern District of Long Island, which must be successfully
resolved in order for the settlement to be implemented (see note
5 to consolidated financial statements). The Company's plan of
reorganization must also address other material litigation,
claims by the Company's creditors and the Company's need for
additional capital. There can be no assurance that the Company
will be successful in its efforts to resolve those matters or
that the other conditions to the settlement will be achieved.
The Company's exclusive right to file a plan of reorganization
expires on March 8, 1996.
On February 9, 1996, Spectrum filed a Consolidated Plan of
Reorganization Proposed by Spectrum Information Technologies,
Inc. and its Affiliated Debtors (the "Plan") and associated
Disclosure Statement. The Disclosure Statement describes, among
other things, the Plan, Spectrum's proposed business plan, and
the proposed capitalization of Spectrum immediately following the
effective date of the Plan. A hearing with respect to the
Disclosure Statement is scheduled before the Bankruptcy Court for
March 7, 1996. Copies of the Plan and Disclosure Statement will
not be distributed until approval of the Disclosure Statement has
been received from the Bankruptcy Court although they will be
available for review in the office of the Clerk of the Bankruptcy
Court. Following such approval, the Company will file the
Disclosure Statement with the Securities and Exchange Commission
and distribute copies to its creditors and shareholders. Consistent
with the agreement in principle on a framework to settle the
Class Action litigation that has been pending against the Company
since 1993, the Plan provides that the Company's current equity
holders will be substantially diluted. The equity distribution,
confirmation and effectiveness of the Plan and implementation of
the proposed business plan are subject to numerous uncertainties
set forth in detail in the Plan and Disclosure Statement.
Accordingly, the value of the Company's common stock remains highly
speculative.
The proposed Plan and Disclosure Statement are subject to
amendment, which amendments may be material.
Data One intends to formulate a liquidating plan of
reorganization to be proposed by Data One (the "Liquidating
Plan") and to prepare the related disclosure statement which
will be distributed to creditors of Data One. The disclosure
statement will describe, among other things, the Liquidating
Plan and the proposed distribution to creditors of Data One.
On January 23, 1996 the Bankruptcy Court approved the
Company's motions for approval of severance agreements with
two former employees and assumption of modified employment
agreements with certain key employees.
During January, the Company entered employment agreements
with two executive officers: Mikhail Drabkin, as Chief Technical
Officer and Richard duFosse as Vice President - Software
Engineering. Mr. duFosse joined Spectrum on February 6, 1996 and
Mr. Drabkin is scheduled to begin on March 20, 1996. Among
other things, the agreements provide that following confirmation
of Spectrum's plan of reorganization, each will be entitled to a
severance benefit of one year's salary if the Company terminates
their employment without just cause.
Among the litigation pending against Spectrum when it filed
for bankruptcy on January 26, 1995 was an arbitration (the
"Arbitration") instituted by Megahertz Corporation ("Megahertz")
(see note 5 to the consolidated financial statements). Since the
institution of the Arbitration, Megahertz has been acquired by
U.S. Robotics Corporation (collectively, Megahertz and U.S.
Robotics are referred to as "U.S. Robotics"), a subsidiary of
which is the successor in interest to the business assets of
Megahertz, including the intellectual property license and
advertising agreements between Megahertz and Spectrum. On
February 6, 1996, Spectrum and U.S. Robotics executed a
settlement in principle, in which, subject to Bankruptcy Court
approval, they will enter a stipulation dismissing the
Arbitration with prejudice, settle all disputes between Spectrum
and U.S. Robotics, consolidate the license and advertising
agreements between Spectrum and U.S. Robotics, alter the manner
and method by which royalties are paid and create a strategic
relationship between Spectrum and U.S. Robotics. The settlement
provides in part that U.S. Robotics will pay Spectrum a
substantial license fee and that Spectrum and U.S. Robotics will
enter a strategic relationship beneficial to Spectrum's business
development. Spectrum has applied to the bankruptcy court for
approval of the settlement, which contains confidential
information of Spectrum and U.S. Robotics and has been filed
under seal with the court.
In January 1996, the Company and Motorola entered into a
second stipulation to extend for an additional three months
the dates in the original scheduling order in the case pending
before the U.S. District Court for the Northern District of
Alabama in order to permit the parties to pursue settlement
discussions (see note 5 to the consolidated financial statements).
Certain other material litigation in which the Company is
involved is described in Note 5 to the consolidated financial
statements.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
No.
2. Stock Purchase Agreement, dated September 11,
1995, by and among the Company and The Lori Corporation, COMFORCE
Corporation, et al. has been previously filed as an exhibit to the
Company's Current Report on Form 8-K dated October 17, 1995 and
incorporated herein by reference.
27. Financial Data Schedule
99. Disclosure Statement with Respect to the
Consolidated Plan of Reorganization Proposed by Spectrum
Information Technologies, Inc. and Spectrum Cellular Corporation
Dated as of: February 8, 1996.
B. Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated
October 17, 1995, which included: Item 2, "Acquisition or
Disposition of Assets" reporting the sale of the Company's
subsidiary, Spectrum Global Services, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
Dated: February 13, 1996
SPECTRUM INFORMATION TECHNOLOGIES, INC.
By /s/ Donald J. Amoruso
-----------------------------------
Donald J. Amoruso
Chief Executive Officer and
Chairman of the Board of Directors
By /s/ Barry J. Hintze
-----------------------------------
Barry J. Hintze
Controller and
Principal Accounting Officer