UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period 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 0-15596
SPECTRUM INFORMATION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1940923
(State of incorporation) (I.R.S. Employer
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 by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
YES X NO
--- ---
As of October 17, 1997, the registrant had outstanding
approximately 1,365,000 shares of its Common Stock, par value
$.001 per share.
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1997
INDEX
PART I. FINANCIAL INFORMATION Page No.
- ------- --------------------- --------
Consolidated Balance Sheets 1
Consolidated Statements of Loss 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7
PART II. OTHER INFORMATION 15
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands)
Assets September 30, March 31,
1997 1997
- --------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,517 $ 3,132
Marketable securities 1,527 2,176
Accounts receivable (net of
allowance for doubtful accounts
of $86) 1,268 288
Prepaid expenses and other
current assets 247 239
------------- -------------
Total current assets 4,559 5,835
------------- -------------
Property and equipment, at cost:
Furniture, fixtures and equipment 538 542
Less - accumulated depreciation (338) (334)
------------- -------------
Net property and equipment 200 208
------------- -------------
Total assets $ 4,759 $ 6,043
============= =============
See accompanying notes to consolidated financial statements.
1
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands)
Liabilities and Stockholders' Equity September 30, March 31,
1997 1997
- ---------------------------------------------------------------------------
(Unaudited)
Current Liabilities
Accounts payable $ 97 $ 49
Accrued liabilities 1,213 1,243
Reserve for unpaid Chapter 11 claims 25 465
------------ -------------
Total current liabilities 1,335 1,757
Reserve for Chapter 11 and other stock claims 981 2,125
------------ -------------
Total liabilities 2,316 3,882
------------ -------------
Commitments and contingencies
Stockholders' Equity:
Class A Convertible Preferred Stock,
$001 par value, 1,500 share authorized
and 941 and 1,022 issued and outstanding,
respectively 1 1
Common stock, $.001 par value,
10,000 shares authorized and
1,365 and 1,022 issued and outstanding,
respectively 1 1
Paid-in capital 71,351 70,170
Accumulated deficit (68,602) (67,681)
------------ -------------
2,751 2,491
Treasury stock, 1 shares at cost,
respectively (303) (300)
Unrealized loss on marketable
securities (5) (30)
------------ -------------
Total stockholders' equity 2,443 2,161
------------ -------------
Total liabilities and
stockholders' equity $ 4,759 $ 6,043
============ =============
See accompanying notes to consolidated financial statements.
2
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Statements of
Loss (Amounts in thousands,
except per share amounts) Three months ended Six months ended
(Unaudited) September 30, September 30,
1997 1996 1997 1996
- ------------------------ ----------- ----------- ----------- -----------
Revenues:
Licensing revenue $ 1,200 $ 579 $ 1,312 $ 1,337
Merchandise sales, net 48 72 101 122
----------- ----------- ----------- -----------
Total revenues 1,248 651 1,413 1,459
----------- ----------- ----------- -----------
Operating costs and
expenses:
Cost of revenues 21 17 44 41
Selling, general
and administrative 1,194 1,213 2,393 2,547
----------- ----------- ----------- -----------
Total operating costs
and expenses 1,215 1,230 2,437 2,588
----------- ----------- ----------- -----------
Operating income (loss) 33 (579) (1,024) (1,129)
----------- ----------- ----------- -----------
Chapter 11 administrative
expenses - (59) - (388)
----------- ----------- ----------- -----------
Other income
(expense), net 42 (29) 103 67
----------- ----------- ----------- -----------
Net income (loss) $ 75 $ (667) $ (921) $(1,450)
=========== =========== =========== ===========
Primary earnings (loss)
per common share: $ .03 $ (.65) $ (.78) $ (1.42)
=========== =========== =========== ===========
Weighted Average Number
of Common Shares used
in primary calculation 2,255,000 1,022,000 1,180,000 1,022,000
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
Six months ended September 30, 1997 1996
- ---------------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash flow from operating activities:
Net income (loss) $ (921) $ (1,450)
Adjustments to reconcile net loss to
net cash used by continuing activities:
Depreciation and amortization 63 65
Gain on sale of marketable securities (6) -
Loss on sale of equipment 6 -
Issuance of common stock 37 -
(Increase) decrease in:
Accounts receivable (946) 671
Prepaid expenses and other assets (8) (225)
Increase (decrease) in:
Accounts payable, accrued liabilities
and other liabilities (422) (2,702)
Liabilities subject to compromise - (124)
------------ -------------
Net cash used by continuing
operations (2,197) (3,765)
Net cash used by
discontinued operations - (1)
- ---------------------------------------------------------------------------
Net cash used by operating
activities (2,197) (3,766)
- ---------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 1,759 -
Purchase of marketable securities (1,079) (3,772)
Loans to employees (34)
Proceeds from sale of property and equipment 3 -
Capital expenditures (64) (80)
- ---------------------------------------------------------------------------
Net cash (used) provided by investing
activities 585 (3,852)
- ---------------------------------------------------------------------------
Cash flow from financing activities:
Purchase of treasury stock (3) -
- ---------------------------------------------------------------------------
Net cash provided (used) by
financing activities (3) -
- ---------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (1,615) (7,618)
Cash and cash equivalents, beginning of year 3,132 13,123
- ---------------------------------------------------------------------------
Total cash and cash equivalents, end of
period (including cash
amounts in net assets of discontinued
operations) $1,517 $5,505
============ =============
Supplemental disclosures of cash
flow information:
Cash paid during the year
for interest $ - $ -
Cash paid during the
year for income taxes $ 2 $ 2
See accompanying notes to consolidated financial statements.
4
Spectrum Information Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
(a) Business
Spectrum Information Technologies, Inc., a Delaware
corporation ("Spectrum"), and its subsidiaries (collectively, the
"Company"), own a portfolio of patents ("legacy assets") relating
to commercially practicable methods of data transmission over
circuit-switched cellular networks. For several years preceding
current management, Spectrum was operating as a holding company
of several operating subsidiaries with primary emphasis on being
an intellectual property company focused on generating revenues
from royalties associated with the licensing of its proprietary
technology. Since January 1995, Spectrum's current management has
implemented strategies to resolve the many financial, legal and
litigation problems inherited from prior years and has refocused
the business direction of the Company.
While continuing to rely on license fees, royalties and
the sale of products related to its patents for revenues (the
"legacy business"), Spectrum's business objective is to become a
key provider of value-added Internet remote access communications
software and related products. This software is expected to
enable more efficient Internet/Intranet information access and is
designed primarily for use over dial up land lines, but will also
be applicable for use over wireless links. The intended software
will not be covered by Spectrum's existing patent portfolio. (See
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.)
Spectrum's proprietary wireless data transmission
technology enables transmission of data between portable computer
devices over existing analog cellular telephone networks.
Spectrum licenses its technology to leading manufacturers of
integrated circuits and modems and to other related data
communications product providers. Spectrum also developed direct
connect cellular data transmission activation kits (cellphone
software drivers and cables) and markets them to some of the
Company's licensees. These two components - marketing of
activation kits and technology licensing - are the current
sources of operating revenues.
The Company expects to continue to experience operating
losses while it attempts to successfully develop and market its
new line of remote access communications software and related
products to increase revenues and achieve profitability.
The Company consummated its plan of reorganization under
Chapter 11 of the United States Bankruptcy Code on March 31,
1997. As part of the plan of reorganization, the Company
consolidated Spectrum's bankruptcy estate with that of Spectrum
Cellular Corporation ("Cellular"). Spectrum and Cellular are now
conducting the Company's core business on an operating basis as a
single entity.
(b) 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, because of the Company's
recurring losses from continuing 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 achievement of the business
objectives described in Note 1(a) and profitable operations
therefrom and the ability to generate sufficient cash from
operations and financing sources to meet obligations. The Company
carefully monitors all expenses in order to conserve cash and
continues to assess alternatives to minimize negative cash flow.
However, there can be no assurance that these objectives will be
met or that acceptable alternatives will be found. 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.
(c) Use of Estimates
In preparing financial statements in conformity with
generally accepted accounting principles, management is required
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
5
(d) Principles of Consolidation
These consolidated financial statements include the
accounts and results of operations of the Company and its wholly
owned subsidiary Cellular as of and for the six months ended
September 30, 1997 and 1996. The Company discontinued the
operations of its Data One subsidiary during fiscal year 1994 and
its Computer Bay subsidiary during fiscal year 1995. Data One was
liquidated in Chapter 11 on October 4, 1996. 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. 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, 1997.
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 Form 10-K
for the fiscal year ended March 31, 1997.
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 September 30, 1997, and the results of its operations and
its cash flows for the interim periods presented. Interim period
results are not necessarily indicative of full year results of
operations.
(e) Revenue
On September 30, 1997, the Company entered an agreement
with a leading modem chipset manufacturer that converted its
existing master license agreement to a broader license under the
Company's legacy technology. The new agreement provides for a
non-recurring significant up front payment and guaranteed
increased royalty payments over the next two years. Under the
terms of the revised agreement, however, the Company expects
reduced royalties from certain of the chipset manufacturer's
customers because the chipset manufacturer is allowed to sell
certain chipsets with full pass through rights to the Company's
technology without need for an additional sublicense from the
Company. Under the agreement, the Company will continue to be the
preferred source of cables used to activate cellular capable
modems. The agreement also provides for a strategic relationship
where the parties will meet to discuss product development and
possible future business arrangements.
(f) Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard ("SFAS") No.
128, "Earnings per Share" which is effective for both interim and
annual periods ending after December 15, 1997. The Company will
adopt SFAS 128 for fiscal quarter ending December 31, 1997. The
adoption of this standard is not expected to have a material
impact on the Company's income (loss) per common share
computation.
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard ("SFAS") No.
130, "Reporting Comprehensive Income" which establishes standards
for reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required
to be recognized under current accounting standards as components
of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial
statements. SFAS 130 is effective for fiscal years beginning
after December 15, 1997 and requires comparative information for
earlier years to be restated. The adoption of this standard is
not expected to have a material impact on the Company's financial
statements.
2. Subsequent Event
The Company has entered a license agreement in October 1997 with
a distributor to assume some or all of the Company's activation
kit business. Under the agreement, the distributor has committed
to undertake specified marketing efforts to stimulate the market
for activated cellular capable modems and will pay the Company a
royalty for each activation kit it sells.
6
Spectrum Information Technologies, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This report contains forward looking statements that are
based on current expectations about Spectrum's business, its
business strategy and management's beliefs and assumptions. Words
such as "expects," "anticipates," "intends," "potential,"
"believes" and similar expressions are intended to identify
forward looking statements. These statements are not guarantees
of future performance and are subject to significant risk and
uncertainty and actual results may differ materially from what is
expressed. A discussion of the risk factors regarding the
implementation of the Company's business strategy is set forth
herein. Additional information regarding the Company's strategy
and associated risks is included in the Company's Annual Report
on Form 10-K as filed with the Securities and Exchange
Commission.
Business
The Company owns a portfolio of patents ("legacy assets")
relating to commercially practicable methods of data transmission
over circuit-switched cellular networks. For several years
preceding current management, Spectrum was operating as a holding
company of several operating subsidiaries with primary emphasis
on being an intellectual property company focused on generating
revenues from royalties associated with the licensing of its
proprietary technology. Since January 1995, Spectrum's current
management has been implementing strategies to resolve the many
financial and legal problems inherited from prior years and to
refocus the business direction of the Company. One of the
Company's strategies was to seek protection and reorganize under
Chapter 11 of the United States Bankruptcy Code. On March 31,
1997, the Company consummated its plan of reorganization and
emerged from bankruptcy (See Consummation of the Plan of
Reorganization). While continuing to rely on license fees,
royalties and the sale of products related to its patents for
revenues (the "legacy business"), Spectrum's business objective
is to become a provider of value-added Internet remote access
dial up communications software and related products.
Spectrum's mission is to develop software that makes
Internet/Intranet access a more productive experience. As
described in the Company's Annual Report on Form 10-K, Spectrum
is developing a communications software product suite, the
Spectrum INTELLIGENT PIPE(TM) that is intended to address
communications solutions for remote access in the corporate and
the service provider markets. FASTLANE(TM), the first product of
the suite, is being designed as a software server implementation
to double the speed of World Wide Web (WWW) access for most
dial-up subscribers currently connecting at advertised speeds up
to 56 kbps. Developed primarily for Internet Service Providers
(ISPs), On-line Service Providers (OSPs) and corporate
enterprises, FASTLANE(TM) is intended to offer improvements in
access performance, operational costs and customer satisfaction.
FASTLANE(TM) combines proprietary architecture with
optimized processing techniques and is intended to enable more
efficient information transfer over wide area networks using
Internet and Intranet technologies. It is designed to minimize
the inefficiencies inherent in Internet interactions between
standard Web browsers and Web servers. The software attacks the
problem of limited bandwidth on the final connection between the
remote user and the Internet or corporate Intranet. Developed
primarily for dial up access, FASTLANE(TM) uses Content
Management Agents (CMAs) that processes the data on one side of
an Internet connection and transmits it to the user. This
technology can be adopted to provide a wide variety of value
added capabilities between network connected clients and servers
with the addition of client software for future releases of the
INTELLIGENT PIPE(TM) suite of software. Spectrum's initial set of
CMAs are used in FASTLANE(TM) and designed to accelerate Web
browsing speed.
As with any software, implementation is complex and time
consuming. The Company has completed a client/server engineering
evaluation demonstration version of FASTLANE(TM) that it has
selectively exhibited and will shortly distribute to potential
customers, analysts and trade magazines for evaluation. The
demonstration version improves the Web browsing speed on average
by nearly two times. The Company has received feedback on the
intended features and implementation of FASTLANE(TM) from
potential corporate and ISP customers and has been redesigning
certain aspects of FASTLANE(TM) to address this feedback. These
design changes have pushed the intended beta version release from
later this calendar year to the first quarter of next year.
Commercial release is expected several months after beta testing
is complete. The software is still in the development stage and
requires improved performance and user interface characteristics
and improved robustness before it will be suitable for beta
testing or commercial release. There can be no assurances that
Spectrum will successfully complete the development of this
software and introduce it according to Spectrum's development
schedule. Even if the software is completed and performs up to
the Company's expectations, there can be no assurances that a
market will develop for the Company's product or that competing
technologies or products will not capture the opportunity before
Spectrum. (See Risk Factors.)
7
With respect to Spectrum's legacy business, Spectrum's
proprietary wireless data transmission technology enables
transmission of data between portable computer devices over
existing analog cellular telephone networks. Spectrum licenses
this technology to leading manufacturers of integrated circuits
and modems and other related data communications product
providers. Spectrum also markets direct connect cellular data
transmission activation kits (cellphone software drivers and
cables) to some of the Company's licensees. These two components
- - marketing of activation kits and technology licensing -
comprise the Company's operating revenues during this fiscal
year. Because of the minimal revenues in this business area, the
Company expects to continue to experience operating losses while
it attempts to successfully develop and market its new line of
remote access communications software and related products to
increase revenues. (See Liquidity and Capital Resources.)
Spectrum has reduced the operating expenses associated with
its legacy business and is leveraging its legacy assets to
increase working capital necessary to help fund the Company's
remote access Internet software development efforts. During the
quarter reported, Spectrum entered an agreement with a leading
modem chipset manufacturer that converted its existing master
license agreement to a broader license under Spectrum's legacy
technology. The new agreement provides for a significant up front
payment and guaranteed increased royalty payments over the next
two years. Under the terms of the revised agreement, however, the
Company expects reduced royalties from certain of the chipset
manufacturer's customers because the chipset manufacturer is
allowed to sell certain chipsets to its customers with full pass
through rights to Spectrum's technology without need for an
additional sublicense from Spectrum. Under the agreement,
Spectrum will continue to be the preferred source of cables used
to activate cellular capable modems. The agreement also provides
for a strategic relationship where the parties will meet to
discuss product development and possible future business
arrangements. Spectrum also entered a license agreement in
October 1997 with a distributor to assume some or all of the
Company's activation kit business. Under the agreement, the
distributor has committed to undertake specified marketing
efforts to stimulate the market for activated cellular capable
modems and will pay Spectrum a royalty for each activation kit it
sells.
Spectrum continues to investigate other alternatives to
maximize the value of its legacy assets and improve the
performance of its legacy business. However, management does not
believe that the successful implementation of any or all of these
alternatives with respect to the legacy business will be
sufficient to completely offset operating losses without
successful implementation of the strategy related to the new
remote access Internet software business.
Consummation of the Plan of Reorganization
On January 26, 1995 (the "Petition Date"), as part of
management's effort to stem the Company's substantial financial
losses and focus on its core technology, the Company, together
with its wholly-owned subsidiaries, Computers Unlimited of
Wisconsin, Inc., a Wisconsin corporation d/b/a Computer Bay
("Computer Bay"), Dealer Services Business Systems, Inc., a
Delaware corporation d/b/a Data One ("Data One") and Spectrum
Cellular Corporation ("Cellular") (collectively, the "Debtors"),
filed petitions for relief under Chapter 11 of the Federal
Bankruptcy Code (the "Chapter 11 proceeding"). A fourth wholly
owned subsidiary Spectrum Global Services, Inc. ("Spectrum
Global"), a Delaware Corporation, did not file for bankruptcy and
was sold by the Company effective October 17, 1995. Spectrum
Global was not essential to the Company's legacy business or its
current direction. Upon motion by the Debtors, the United States
Bankruptcy Court for the Eastern District of New York (the
"Bankruptcy Court") converted the action for Computer Bay to a
case under Chapter 7 of the Bankruptcy Code. A trustee is
overseeing the liquidation of Computer Bay's assets and the
Company no longer has control over the Computer Bay estate. Data
One consummated a separate liquidating plan of reorganization on
October 4, 1996, which had been unanimously supported by Data
One's voting creditors.
In March 1996, the Bankruptcy Court approved the Company's
Third Amended Disclosure Statement (the "Disclosure Statement")
with respect to the Third Amended Consolidated Plan of
Reorganization Proposed by Spectrum and Cellular (the "Plan")
dated as of March 18, 1996 finding the Disclosure Statement
adequate for distribution and vote by interested parties. As
contemplated by the Plan, the bankruptcy estates of Spectrum and
Cellular have been substantively consolidated. On August 14,
1996, the United States Bankruptcy Court of the Eastern District
of New York entered an order confirming the Plan, as amended. On
March 31, 1997, the Company consummated the Plan (the "Effective
Date"). The Plan provided all administrative creditors with full
payment (unless a lesser amount was agreed upon or ordered by the
Bankruptcy Court) and all general unsecured creditors with 100%
of the value of their claims plus 6% interest per annum from the
filing date thereon. It also settled the class action lawsuits of
approximately $676,000,000 filed against the Company by the
payment by the Company of $250,000 and the delivery of
approximately 45% of the equity ownership in Spectrum to a
trustee to be distributed to the members of the class. In
addition, under the settlement, the plaintiffs are to receive the
proceeds, net of certain fees and expenses, from insurance
policies covering the liabilities of the Company's directors and
officers and, as a result of court supervised negotiations and at
the recommendation of the District Court, approximately
$1,350,000 (in cash or publicly traded securities) from the
various individual defendants in the action. Although existing
Spectrum shareholders were substantially diluted under the terms
of the Plan, such shareholders obtained the majority of the 45%
equity ownership in Spectrum set aside for existing shareholders
and certain creditors. The Plan also called for
8
management, employees and non-executive directors of the Company
participating in developing the Plan to receive the remaining 10%
ownership.
As part of the plan of reorganization, Spectrum
consolidated the Company's bankruptcy estate with that of
Cellular. Spectrum and Cellular are now conducting the Company's
core business on an operating basis as a single entity.
Results 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. Amounts set forth below reflect the
Company's Data One subsidiary as a discontinued operation.
(Amounts in thousands)
Three Months Ended September 30, 1997 % 1996 %
- -------------------------------- -----------------------------------------------
Revenues $ 1,248 100 $ 651 100
----------- --------- ---------- -------
Operating costs and expenses:
Cost of revenues 21 2 17 3
Selling, general and
administrative 1,194 95 1,213 186
----------- --------- ---------- -------
Total operating costs
and expenses 1,215 97 1,230 189
----------- --------- ---------- -------
Operating income (loss) $ 33 3 $(579) (89)
=========== ========= ========== =======
(Amounts in thousands)
Six Months Ended September 30, 1997 % 1996 %
- -------------------------------------------------------------------------------
Revenues $ 1,413 100 $ 1,459 100
----------- --------- ---------- ---------
Operating costs and expenses:
Cost of revenues 44 3 41 3
Selling, general and
administrative 2,393 169 2,547 174
----------- --------- --------- -------
Total operating costs
and expenses 2,437 172 2,588 177
----------- --------- --------- -------
Operating loss $ (1,024) (72) $(1,129) (77)
=========== ========= ========= =======
Revenues
Revenues increased approximately $597,000 or 92% for the
quarter ended September 30, 1997 as compared to the quarter ended
September 30, 1996 primarily due to a renegotiated licensing
agreement the Company entered into with a leading modem chipset
manufacturer which resulted in the recognition of approximately
$1,152,000 in licensing income for September 1997. (See
Business). Licensing revenue for the quarter ended September 30,
1996 includes the last installment of an upfront license fee
pursuant to the original license agreement it entered into with
the same leading modem chipset manufacturer in fiscal 1994.
For the six months ended September 30, 1997, revenues
decreased approximately $46,000 or 3% as compared to the six
months ended September 30, 1996. Revenues for the six months
ended September 30, 1997 consist primarily of the license fee
received pursuant to the renegotiated agreement discussed above.
During the six months ended September 30, 1996, revenues
consisted primarily of quarterly installment payments of the
license fee pursuant to the original agreement with the same
chipset manufacturer and a payment related to the settlement of a
dispute over past royalties with another of the Company's
licensees.
Operating Costs and Expenses
Operating costs and expenses for the three and six months
ended September 30, 1997 decreased approximately $15,000 or 1%
and $151,000 or 6%, respectively, when compared to the three and
six months ended September 30, 1996 primarily due to decreased
selling, general and administrative expenses of approximately
$19,000 or 2% and $154,000 or 6%, respectively.
9
The decrease in selling, general and administrative
expenses for the quarter and six months ended September 30, 1997
was primarily the result of a decrease in legal fees of $141,000
or 71% and $392,000 or 75%, respectively, due to the reduction of
non-bankruptcy related litigation. Insurance expense decreased
approximately $33,000 or 41% and $68,000 or 35%, respectively for
the three and six months ended September 30, 1997 as compared to
the three and six months ended September 30, 1996, primarily as a
result of decreased directors' and officers' insurance premiums.
License expense decreased approximately $49,000 and $38,000,
respectively for the three and six months ended September 30,
1997 as compared to the three and six months ended September 30,
1996, primarily as a result of a renegotiated license agreement.
These decreases were offset by an increase in outside services of
approximately $236,000 or 288% and $378,000 or 268%,
respectively, for the quarter and six months ended September 30,
1997 as compared to the same periods in the prior year due to the
retention of independent technical contractors to assist in the
development of the Company's Internet remote access
communications software.
Operating Income/Loss
For the quarter ended September 30, 1997, the Company
recorded an operating gain of approximately $33,000 as compared
to an operating loss of approximately $579,000 for the quarter
ended September 30, 1996. This $612,000 improvement is primarily
due to increased licensing revenues.
For the six months ended September 30, 1997, the operating
loss decreased approximately $151,000 or 6% as compared to the
six months ended September 30, 1996 primarily due to decreased
selling, general and administrative expenses offset by decreased
revenues.
Other Income and Expense
For the three months ended September 30, 1997, the Company
recorded other income of $42,000, compared to a loss of $29,000
during the same period last year. For the six months ended
September 30, 1997, other income increased $36,000 to $103,000,
as compared to the quarter and six months ended September 30,
1996. In September 1996, the Company sold an investment which
resulted in a loss of approximately $142,000. Interest income
decreased approximately $70,000 or 63% and $104,000 or 51%,
respectively, for the three and six months ended September 30,
1997 as compared to the three and six months ended September 30,
1996 because the Company had lower cash balances for the quarter
and six months ended September 30, 1997 than during the periods
ended September 30, 1996 as a result of creditor payments of
approximately $3,250,000 pursuant to the consummation of the Plan
of Reorganization.
Liquidity and Capital Resources
Since inception, the Company has experienced significant
operating losses from continuing operations and operating cash
flow deficits which ultimately caused the Company to reorganize
under Chapter 11 bankruptcy protection. The Company expects
operating losses to continue until such time as it successfully
develops and markets a new line of communications software. The
Company continues to review expenses in order to conserve cash
and is investigating alternatives to address the continued
negative ash flow. The Company is also continuing to monitor the
Company's opportunity to successfully build revenues from its new
software development and marketing efforts.
During the six months ended September 30, 1997, working
capital (current assets less current liabilities) decreased by
approximately $854,000 due to a decrease in cash and marketable
securities of $2,264,000 offset by an increase in accounts
receivable of approximately $980,000 and a decrease in chapter 11
reserves of approximately $440,000. The decrease in cash is due
to the payment of approximately $1,742,000 in operating expenses
and $455,000 in bonus expenses for all employees, primarily in
accordance with Bankruptcy Court approved success bonus and
employment contracts. The increase in accounts receivable is due
to the license agreement the Company entered into on September
30, 1997.
Net cash used by operating activities decreased from
$3,766,000 for the six months ended September 30, 1996 to
$2,197,000 for the quarter ended September 30, 1997. The decrease
of $1,569,000 was primarily due to the reduction of bankruptcy
related expenditures of approximately $2,957,000 in 1996, offset
by the decreased cash received from licensing accounts receivable
of approximately $1,053,000 as compared to 1996 and bonus
expenses of $455,000 paid in 1997.
The Company reported net cash used by investing activities
of $3,852,000 for the six months ended September 30, 1996 as
compared to net cash provided by investing activities of $585,000
for the six months ended September 30, 1997. The marketable
securities component of investing activities changed due to a
$2,693,000 reduction in the purchase of marketable securities in
1997 as compared to 1996 and the $1,759,000 proceeds from the
sale of marketable securities in 1997. The Company also extended
loans,
10
collateralized by common stock, totaling $34,000, to certain of
its employees to pay the withholding taxes associated with the
distribution of common stock pursuant to the Company's stock
incentive plans. Further, capital expenditures decreased
approximately $16,000 for the six months ended September 30, 1997
as compared to the six months ended September 30, 1996. These
expenditures primarily relate to equipping the technical
development office in the Boston, Massachusetts area. Capital
expenditures for the year ended March 31, 1998 are expected to be
approximately $250,000.
Net cash used by financing activities increased to $3,000
for the six months ended September 30, 1997 due to the purchase
of treasury stock. There were no financing activities for the six
months ended September 30, 1996.
The Company projects it will have adequate near term (i.e.,
over the next 12 months) capital resources to fund its
operations. Management believes the Company's long term (i.e.,
beyond 12 months) liquidity depends upon the Company's ability to
develop and sell the INTELLIGENT PIPE(TM) remote access
communications software suite and related products to generate a
positive cash flow from its reorganized business. The Company's
long term liquidity also depends on its ability to improve the
performance of its legacy business (See Business) and to raise
additional capital. The accompanying financial statements have
been prepared assuming the Company will continue as a going
concern, however, there can be no assurance that the Company will
be able to successfully achieve management's plans. The financial
statements do not include any adjustments that might result from
the outcome of these uncertainties.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard ("SFAS") No.
128, "Earnings per Share" which is effective for both interim and
annual periods ending after December 15, 1997. The Company will
adopt SFAS 128 for fiscal quarter ending December 31, 1997. The
adoption of this standard is not expected to have a material
impact on the Company's income (loss) per common share
computation.
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard ("SFAS") No.
130, "Reporting Comprehensive Income" which establishes standards
for reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required
to be recognized under current accounting standards as components
of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial
statements. SFAS 130 is effective for fiscal years beginning
after December 15, 1997 and requires comparative information for
earlier years to be restated. The adoption of this standard is
not expected to have a material impact on the Company's financial
statements.
Risk Factors
Overview. Spectrum has suffered significant losses from
continuing operations in each fiscal year since inception. Even
after the Company's recent restructuring, management does not
believe that the sales of its existing legacy products and
expected royalty revenues associated with the licensing of its
existing proprietary technology will be sufficient to reverse
losses given the Company's operating performance and expenses.
Management expects to have a continued negative cash flow while
the Company attempts to develop and market a new line of
Internet/Intranet communications software and related products to
increase revenue. This anticipated negative cash flow combined
with the Company's limited capital resources creates a
significant risk that the Company will have difficulty funding
the marketing and development of its communications software with
its existing capital resources. (See Limited Capital Resources.)
Risks associated with Spectrum's strategy include, but are
not limited to: improving the financial performance in the legacy
business; overcoming the negative image Spectrum has developed in
the past, and its ability to rebuild credibility in the
marketplace; successfully developing software products that bring
value to remote users of data communications in corporate and
Internet Service Provider markets; developing new channels for
distribution; hiring and retaining key technical and marketing
staff to implement the strategy; competing successfully within
markets where competitors have significantly more resources and
access to capital than the Company; realization of market
forecasts regarding remote access (landline and wireless) market
growth in the corporate and service provider market segments; and
the ability of the Company to raise additional capital, if
necessary. The following specific risk factors should be
considered in evaluating Spectrum's ability to achieve a
successful turnaround.
Past Operating History. The Company's future must be
considered in light of the risks associated with the past
difficulties and negative press encountered by the Company. To
address these risks, the Company must, among other things,
address the financial performance of its legacy business.
Concurrently, to effectively enter the communications software
market, Spectrum must
11
establish management and technical credibility as well as
financial viability with potential customers, continue to
attract, retain and motivate qualified persons, and develop new
technologies and commercialize products and services
incorporating such technologies. There can be no assurance that
the Company will be successful in addressing such risks.
Changing and Segmented Market; Acceptance of the Company's
Products. The market for the Company's dial-up remote access
Internet software and related products is substantially and
rapidly changing (primarily due to the Internet phenomena,
convergence of computers, communications and entertainment, and
deregulation of the telecommunications industry) and is
characterized by both large established providers and an
increasing number of market entrants who, exploiting market and
technology discontinuities and segmentation, have introduced or
developed remote access software products. As is typical in the
case of a growing and changing industry, demand and market
acceptance for recently introduced products and services are
subject to a high level of uncertainty. While the Company
believes that its software and related products will offer
substantial advantages, there can be no assurance that the
Company's products will be successfully developed or become
widely adopted.
Because the market for the Company's existing products and
prospective software products is rapidly changing, it is
difficult to predict the future segmentation and size of this
market. There can be no assurance that the market segments for
the Company's products will develop or that the Company's
products will be adopted. If the market segments fail to develop,
develop more slowly than expected or become saturated with
competitors, or if the Company's products do not achieve market
acceptance, the Company's business, operating results and
financial condition will be materially adversely affected.
Competition. The Company's key current competitors in its
legacy business include Megahertz, a subsidiary of 3Com,
Motorola, Compaq and AT&T prior to its breakup. Effective
September 30, 1996, AT&T completed the divestiture of Lucent
Technologies, Inc. ("Lucent"), which had previously sold its AT&T
Paradyne unit. Spectrum is engaged in discussions with AT&T,
Lucent and Paradyne regarding the effect of the breakup on an
intellectual property license between AT&T and Spectrum. This
breakup has provided an opportunity to discuss modification to
the existing license agreement between Spectrum and AT&T and new
relationships with the entities that were spun off, however,
there can be no assurance that these discussions will result in
favorable business arrangements. The Company currently considers
Sierra Wireless, Inc. and PCSI (a subsidiary of Cirrus Logic,
Inc.) as other potential competitors primarily due to their
alternative methods of wireless data signal delivery, such as
CDPD. The conversion of the master license agreement discussed
above (see Business) will allow other companies to compete in the
legacy business.
The market for remote access Internet software is intensely
competitive and subject to rapid technological change. The
Company expects competition to persist, intensify and increase in
the future. Companies that have announced Web performance
software or software/hardware solutions similar or related to
Spectrum's technology include Compaq, Intel and Shiva. Intel has
announced that it is currently testing its Web performance
software solution with ISPs and that it plans to release the
software later this year. These and other potential competitors
have longer operating histories producing software products,
greater name recognition, significant installed customer bases
and significantly greater financial, technical and marketing
resources than the Company. Such competition could materially
adversely affect the Company's business, operating results or
financial condition.
Synergies may exist between the Company and its
competitors. Spectrum is engaged in assessing and evaluating such
synergies and potential partnerships. However, there can be no
assurance that these activities will result in favorable business
arrangements.
New Product Development and Technological Change.
Substantially all of the Company's current and near term revenues
are expected to be derived from the licensing of its proprietary
technology and sale of its associated activation kit products.
Given the limited revenue being generated and expected to be
generated from this existing business, it is essential for
Spectrum to generate revenues from other sources.
The Company's ability to design, develop, test, market and
support its remote access Internet communications software and
related products and enhancements on a timely basis that meet
changing customer needs and respond to technological developments
and emerging industry standards is also critical to the Company's
long term success. Time to market is essential to the success of
the FASTLANE(TM) software product. There can be no assurance that
the Company will successfully complete the development and
marketing of this new software and related products in a timely
manner that successfully compete with Intel's and other announced
similar products or that the software products meet changing
customer needs and respond to such technological changes or
evolving industry standards. Future sales of the Company's new
Internet remote access software products will be highly dependent
on software products that add substantial value to end users and
data communications infrastructure providers. Also, certain
elements of the Company's new technology may be covered by
patents owned by others which may require licenses. The Company's
inability to introduce and sell the products that it is currently
developing in a timely manner or to successfully expand its
product offerings on a timely basis will have a material adverse
effect on the Company's business, operating results or financial
condition.
12
Evolving Distribution Channels. Spectrum has historically
sold its legacy business activation kit products to its
licensees, most of which are original equipment manufacturers
("OEMs") in the modem industry. Given the limited distribution of
its products through these channels, the Company is considering
alternative marketing plans regarding the legacy business. Even
if the Company decides to adopt a different method of
distribution for its legacy products, there are no assurances
that its sales performance will improve.
Spectrum does not expect that its existing OEM channels
will be the primary channels for distribution of its new line of
remote access software that is under development, and will need
to develop new channels that may include other data
communications OEM's, infrastructure service providers and
software companies. Spectrum has not previously sold products
into these channels. Failure to develop new channels will inhibit
the Company's ability to generate revenues from the Company's new
software products and will likely result in continued operating
losses and negative cash flow.
The Company plans to develop a limited sales force and
expand its marketing at the appropriate time. There can be no
assurance that such internal expansion will be successfully
completed, or that the Company's sales and marketing efforts will
enable it to successfully compete against the significantly more
extensive and well-funded sales and marketing operations of
current or potential competitors. The Company's inability to
effectively manage its internal expansion could have a material
adverse effect on the Company's business, operating results or
financial condition.
Management of Growth. The timely execution necessary for
the Company to fully exploit the market window for its products
and services requires an effective planning and management
process. The Company continues to seek to hire highly skilled
technical staff but due to the competitive high demand for
software skills, the Company is also dependent upon outside
services for aspects of its software development. To manage its
growth, the Company must continue to implement and improve its
operational and financial systems and to expand, train and manage
its employee base. There can be no assurance that the Company
will be able to successfully implement these activities on a
timely basis. Further, the Company will be required to manage
multiple relationships with various customers and other third
parties. Although the Company believes that it has made adequate
allowances for the initial costs and risks associated with this
expansion, there can be no assurance that the Company's systems,
procedures or controls will be adequate to support the Company's
operations or that the Company's management will be able to
achieve in a timely manner the expansion necessary to fully
exploit the market window for the Company's products and
services. If the Company is unable to manage growth effectively,
the Company's business, operating results and financial condition
will be materially adversely affected.
Dependence on Key Personnel. The Company is dependent on
its ability to retain and motivate high quality personnel,
especially its management and highly skilled engineering and
software development teams. The loss of the services of any of
its executive officers or other key employees could have a
material adverse effect on the business, operating results or
financial condition of the Company.
The Company's future success also depends on its continuing
ability to identify, attract, hire, train and retain other highly
qualified technical personnel. Competition for such personnel is
intense, and given Spectrum's past history and performance, there
can be no assurance that the Company will be able to attract,
assimilate or retain other highly qualified technical and
managerial personnel in the future. The inability to attract and
retain the necessary technical and managerial personnel could
have a material adverse effect upon the Company's business,
operating results or financial condition.
Limited Capital Resources. The Company has limited capital
resources to invest in product development and marketing and
selling. It is critical, therefore, to the Company's business,
operating results and financial condition that timely new product
introduction and market acceptance is achieved. Any delays in
product shipments will have a material adverse effect on the
Company's business, operating results and financial condition. As
the Company's existing capital resources are depleted by
continuing operations including investment in new product
development and losses associated with its legacy business, it
becomes increasingly likely that the Company will need to raise
capital to fund the development and marketing of its new
communications software product. Spectrum's management believes
that it will need to raise capital and has begun to investigate
alternatives for so doing. As part of Spectrum's bankruptcy
reorganization efforts, between October of 1995 and January of
1996, the Company through its financial advisor contacted 48
potential investors regarding interest in investing or developing
a strategic relationship with Spectrum, none of whom expressed an
interest at that time when product strategies were in their early
stages. There can be no assurances that Spectrum's new
communications software development efforts will interest
potential investors.
Market Listing; Volatility of Stock Price. Spectrum was
delisted from the NASDAQ National Market in April 1995. Since
then, the Company's common stock has been traded on the OTC
Bulletin Board. Since the Company's emergence from Chapter 11,
the market for the Company's common stock has been relatively
illiquid and subject to wide fluctuations. There can be no
assurance that an active public market for the common stock will
develop or be sustained. Further, the market price of the
Company's common
13
stock may continue to be highly volatile based on quarterly
variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, or
other events or factors.
Shares Eligible for Future Sale. The preferred stock
that was issued to the plaintiffs to settle class action
litigation pursuant to the Plan is convertible to common stock
upon request of the holder and automatically converts to common
stock on March 31, 1999. Conversion to common stock of a
significant number of shares of preferred stock and a subsequent
sale in the public market could adversely affect the future
market price for the common stock.
14
Spectrum Information Technologies, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 10, 1997, the United States Patent and
Trademark Office notified the Company that, at the request of
Compaq Computer Corporation ("Compaq"), it had declared an
interference proceeding to establish whether the Company or
Compaq is the inventor of certain claimed subject matter within
the Company's issued U.S. Patent No. 5,249,218, one of the
Company's portfolio of six issued patents relating to wireless
data transmission. The interference is in its earliest stages and
neither Compaq nor Spectrum have submitted arguments supporting
their respective claim of ownership to the Patent Office. The
parties jointly requested and received an extension of time to
file preliminary statements and motions while the parties engaged
in settlement discussions. The Company does not expect the
interference proceeding to materially impact Spectrum's legacy
business because the Company believes that most commercially
practicable methods to transmit data via circuit switched
cellular networks are covered by other claims in the '218 Patent
or the Company's other issued patents. The proceeding does not
relate to the Company's Internet software development.
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.
---
27 Financial Data Schedule
B. Reports on Form 8-K
None
15
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: October 29, 1997
SPECTRUM INFORMATION TECHNOLOGIES, INC.
By /s/ Donald J. Amoruso
----------------------
Donald J. Amoruso
President, Chief Executive Officer and
Chairman of the Board of Directors
By /s/ Barry J. Hintze
----------------------
Barry J. Hintze
Controller and
Principal Accounting Officer