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, 1998
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) (IRS 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 November 11, 1998, the registrant had outstanding
approximately 1,581,000 shares of its Common Stock, par value
$.001 per share.
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1998
INDEX
PART I. FINANCIAL INFORMATION Page No.
Consolidated Balance Sheets 1
Consolidated Statements of Income (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 9
PART II. OTHER INFORMATION 16
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands)
Assets September 30, March 31,
1998 1998
- ---------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,085 $ 1,600
Marketable securities - 449
Accounts receivable (net of
allowance for doubtful
accounts of $6) 613 194
Employee Loans 79 79
Prepaid expenses and other
current assets 228 192
------------- -------------
Total current assets 2,005 2,514
------------- -------------
Property and equipment, at cost:
Furniture, fixtures and equipment 683 598
Less - accumulated depreciation (415) (340)
------------- -------------
Net property and equipment 268 258
------------- -------------
Total assets $ 2,273 $ 2,772
============= =============
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,
1998 1998
- ---------------------------------------------------------------------------
(Unaudited)
Current Liabilities
Accounts payable $ 232 $ 227
Accrued liabilities 281 453
Reserve for litigation 645 645
Deferred royalty income - 153
Reserve for unpaid Chapter 11
claims 25 25
------------ -------------
Total current liabilities 1,183 1,503
Reserve for Chapter 11 and other
stock claims 525 591
------------ -------------
Total liabilities 1,708 2,094
------------ -------------
Commitments and contingencies
Stockholders' Equity:
Class A Convertible Preferred
Stock, $.001 par value, 1,500
shares authorized and 800 and
813 issued and outstanding,
respectively 1 1
Common stock, $.001 par value,
10,000 shares authorized
and 1,581 and 1,557 issued and
outstanding, respectively 2 2
Paid-in capital 71,823 71,740
Accumulated deficit (70,957) (70,758)
------------ -------------
869 985
Treasury stock, 4 shares at cost,
respectively (304) (304)
Accumulated comprehensive loss - (3)
------------ -------------
Total stockholders' equity 565 678
------------ -------------
Total liabilities and
stockholders' equity $ 2,273 $ 2,772
============ =============
See accompanying notes to consolidated financial statements.
2
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Statements of Income (Loss)
(Amounts in thousands,
except per share amounts) Three months ended Six months ended
(Unaudited) September 30, September 30,
(Unaudited) 1998 1997 1998 1997
- -------------------------------- ----------- ----------- ----------- -----------
Revenues:
Licensing revenue $ 524 $ 1,200 $ 2,107 $ 1,312
Merchandise sales, net 5 48 8 101
----------- ----------- ----------- -----------
Total revenues 529 1,248 2,115 1,413
----------- ----------- ----------- -----------
Operating costs and expenses:
Cost of revenues - 21 - 44
Selling, general and
administrative 1,073 1,194 2,386 2,393
----------- ----------- ----------- -----------
Total operating costs
and expenses 1,073 1,215 2,386 2,437
----------- ----------- ----------- -----------
Operating income (loss) (544) 33 (271) (1,024)
----------- ----------- ----------- -----------
Chapter 11 administrative expenses - - - -
----------- ----------- ----------- -----------
Other income (expense), net 5 42 72 103
----------- ----------- ----------- -----------
Net income (loss) $ (539) $ 75 $ (199) $ (921)
=========== =========== =========== ===========
Net income (loss) per common share
Basic $ (.34) $ .06 $ (.13) $ (.78)
=========== =========== =========== ===========
Diluted $ (.34) $ .03 $ (.13) $ (.78)
=========== =========== =========== ===========
Weighted Average Number of
Common Shares used in income
(loss) per common share
calculation
Basic 1,574,000 1,277,000 1,574,000 1,180,000
=========== =========== =========== ===========
Diluted 1,574,000 2,255,000 1,574,000 1,180,000
=========== =========== =========== ===========
Interim results are not indicative of the results expected for a
full year. 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, 1998 1997
- -------------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash flow from operating activities:
Net Income (loss) $ (199) $ (921)
Adjustments to reconcile net loss to net
cash used by operating activities:
Loss on sale of marketable securities 3 -
Issuance of common stock 37
Stock options for board of directors 7 -
Depreciation and amortization 75 63
(Increase) decrease in:
Accounts receivable (419) (946)
Prepaid expenses and other assets (36) (8)
Increase (decrease) in:
Accounts payable 5 48
Accrued expenses (172) (470)
Deferred royalty income (153) -
- -------------------------------------------------------------------------
Net cash used by operating activities (879) (2,197)
- -------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 449 1,759
Purchase of marketable securities - (1,079)
Loans to employees - (34)
Proceeds from sale of property and equipment - 3
Capital expenditures (85) (64)
- -------------------------------------------------------------------------
Net cash provided by investing
activities 364 585
- -------------------------------------------------------------------------
Cash flow from financing activities:
Purchase of treasury stock - (3)
- -------------------------------------------------------------------------
Net cash provided (used) by
financing activities - (3)
- -------------------------------------------------------------------------
Net decrease in cash and cash equivalents (515) (1,615)
Cash and cash equivalents, beginning of year 1,600 3,132
- -------------------------------------------------------------------------
Total cash and cash equivalents, end of year $ 1,085 $ 1,517
============ ===========
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"), are developing software
and related products and services designed to make
Internet/Intranet access a faster, more productive and
enjoyable experience. The Company also owns a portfolio
of patents ("legacy assets") relating to commercially
practicable methods of data transmission over
circuit-switched cellular networks. Prior to 1995,
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 (the "legacy business"). 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.
Spectrum's business objective has been to develop
software and offer related products and services that
make Internet access a faster, more productive and
enjoyable experience. The achievement of this objective
is contingent upon resolution of the financing issues
described below. Spectrum has developed a business plan
based upon this objective which contemplates the
development of a communications software product suite,
the Spectrum INTELLIGENT PIPE(TM), which would address
communications solutions for remote access in the
consumer Internet service and small business markets.
FastLane(TM), the first product of the intended suite, is
a software server that performs compression that
significantly improves the speed of World Wide Web
("Web") access for most dial-up subscribers currently
connecting at speeds up to 56 Kbps. FastLane(TM) is
designed for home users, telecommuters and enterprises
accessing the Internet on dial-up modem connections. On
May 4, 1998, Spectrum announced that it was offering free
trials for a limited time of FastLane(TM), the world's
first Web acceleration service employing this technology.
The service is available to dial-up users accessing the
Web through local, regional, national, and international
Internet Service Providers (ISPs), and does not require
any complex set-up by users. FastLane(TM) is also
available to ISPs looking to provide faster image
downloading speeds to all or part of their subscribers.
During September, the Company's available cash balance
dropped below $400,000 and the Company was in danger of
being unable to remain current on its obligations,
including payroll. The Company, however, was able to
renegotiate two licensing agreements and accelerate the
payment of royalties pursuant to those agreements. The
Company has used these funds for operating expenses while
it attempts to locate an investor or acquirer.
In June 1998, Spectrum began seeking to raise capital to
commercialize and market its FastLane service, and hired
an investment bank in July and another in August to
assist this process. Having failed to identify an
investor, Spectrum announced on October 2, 1998 that it
would continue to seek an investor and consider tender
offers. Spectrum retained two additional consultants to
assist and broaden its efforts in locating an acquirer of
the Company or the technology. Notwithstanding this
extensive effort, as of the date of this report, Spectrum
has been unable to raise capital or attract a tender
offer. Of the companies that Spectrum has contacted,
virtually all have declined and the Company is pursuing
those contacts that are still outstanding. The Company
expects to resolve these outstanding contacts by the end
of November 1998. If these few open contacts do not yield
an investor or acquirer, the Company plans to seek
bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code"). In a
filing under Chapter 11 of the Bankruptcy Code, the
holders of the Company's Class A Preferred Stock have a
preference over the holders of the Company's common stock
pursuant to the terms of a U.S. District Court and
bankruptcy court approved settlement of a securities
related class action lawsuit alleging $676 million in
damages that was filed against the Company in 1993. It is
therefore extremely unlikely that the holders of the
Company's common stock will receive any value in a
Chapter 11 bankruptcy filing. Given the Company's
inability to locate an investor or acquirer to date,
there is a substantial risk that the remaining entities
approached by Spectrum will also decline to invest in or
acquire Spectrum, and the Company will seek bankruptcy
protection. Consistent with the Company's October 2, 1998
announcement, Spectrum has reduced its number of
employees from 19 to 8, but has retained certain key
engineers, while it continues to seek an investor or
acquirer. The Company cannot materially further reduce
its operating expenses without incurring obligations
associated with the termination of employment contracts.
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
5
licenses this technology to leading manufacturers of
integrated circuits and modems and other related data
communications product providers. Spectrum also markets,
through a distributor, direct connect cellular data
transmission activation kits (cellphone software drivers
and cables) to some of the Company's licensees.
Technology licensing comprises the majority of the
Company's operating revenues. The Company is not
currently aware of any significant unlicensed
manufacturers that are infringing the Company's wireless
data patents and therefore does not expect these patents
to provide material future revenues.
(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 raising capital or being acquired as
described in Note 1(a) and if the Company raises capital
thereafter achieving profitable operations and the
ability to generate sufficient cash from operations and
financing sources to meet obligations. 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.
(d) Principles of Consolidation The accompanying consolidated
financial statements include the accounts and results of
operations of the Company's wholly owned subsidiary,
Spectrum Cellular Corporation. All significant
intercompany accounts and transactions have been
eliminated in consolidation.
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, 1998. Certain information and footnote
disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles 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, 1998.
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, 1998 and the
results of its operations and its cash flows for the
interim periods presented.
(e) Income (Loss) Per Common Share The computation of basic
income (loss) per common share is based on the weighted
average number of common shares. The computation of
diluted income per common share is based on the weighted
average number of common shares and common stock
equivalents (convertible preferred shares, stock options
and warrants), if applicable, assumed to be outstanding
during the year.
(f) Licensing Agreements Licensing income is recognized
according to the specific terms of each individual
contract. On June 30, 1998, the Company entered into an
agreement to license the Company's patented technology to
an entity for two non-recurring upfront payments,
$425,000 in July 1998 and $925,000 in October 1998.
During September 1998, in order to continue as a going
concern, the Company amended this agreement to receive
$900,000 in September 1998 instead of $925,000 in October
1998. Also during September 1998, the Company amended
another agreement to receive an upfront payment of
$610,000 in October 1998, instead of a guaranteed
$680,000 payable quarterly through February 2000.
Subsequently, in October 1998, the Company amended this
agreement to receive an upfront payment of $185,000 in
November 1998,
6
instead of royalty payments payable quarterly from
January 2000 through December 2003. The Company is not
currently aware of any significant unlicensed
manufacturers that are infringing the Company's wireless
data patents and therefore does not expect these patents
to provide material future revenues.
(g) Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 requires companies to
recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at
fair value. Historically, the Company has not entered
into derivatives contracts either to hedge existing risks
or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard on January
1, 2000 to affect its financial statements.
2. Statements of Cash Flows
Six months ended
September 30,
-------------------------
1998 1997
-------------------------
(Amounts in thousands)
Supplemental disclosures of
cash flow information:
Cash paid during the year
for interest $ - $ -
Cash paid during the year
for income taxes $ 1 $ 2
Non-cash transactions:
Class A Preferred Stock
issuance $ - $3300
Payments of unsecured claims
via common stock issuance $ - $ 162
Stock options for board of
directors $ 16 $ -
3. Earnings Per Share
Earnings per share for the three and six months ended
September 30, 1998 and 1997 were calculated as follows:
Three Months Ended September 30,
1998 1997
---------------------------------
Basic Diluted Basic Diluted
(Amounts in thousands)
---------------------------------
Net Income (loss) $ (539) $ (539) $ 75 $ 75
================ ===============
Weighted average number
of common shares out-
standing during the year 1,574 1,574 1,277 1,277
Common share equivalents
- - preferred stock - - - 978
Common share equivalents
- - stock options - - - -
---------------- ---------------
Weighted average number
of common shares and common
share equivalents used in
calculation of earnings
per common share 1,574 1,574 1,277 2,255
================ ===============
Earnings per common share $(0.34) $(0.34) $ 0.06 $ 0.03
================ ===============
7
Six Months Ended September 30,
1998 1997
---------------------------------
Basic Diluted Basic Diluted
(Amounts in thousands)
---------------------------------
Net Income (loss) $ (199) $ (199) $ (921) $ (921)
================ ===============
Weighted average number
of common shares out-
standing during the year 1,574 1,574 1,180 1,180
Common share equivalents
- - preferred stock - - - -
Common share equivalents
- - stock options - - - -
---------------- ---------------
Weighted average number
of common shares and common
share equivalents used in
calculation of earnings
per common share 1,574 1,574 1,180 1,180
================ ===============
Earnings per common share $(0.13) $(0.13) $(0.78) $(0.78)
================ ===============
Common stock equivalents were not included in the
computation of weighted average shares outstanding for the
three and six months ended September 30, 1998 because such
inclusion would be anti-dilutive. Stock options were not
included in the computation of weighted average shares
outstanding for the three months ended September 30, 1997
because such inclusion would be anti-dilutive.
4. Comprehensive Income (Loss)
The Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income"
which requires that all components of comprehensive income
and total comprehensive income be reported on one of the
following: a statement of income and comprehensive income, a
statement of comprehensive income or a statement of
stockholders' equity. Comprehensive income is comprised of
net income and all changes to stockholders' equity, except
those resulting from investments by owners (changes in paid
in capital) and distributions to owners (dividends). For all
periods presented, comprehensive income is comprised of
unrealized holding losses on marketable securities.
Comprehensive income and its components consist of the
following:
Six Months Ended
September 30,
1998 1997
(Amounts in thousands)
-----------------------
Net Loss $ (199) $ (918)
Other Comprehensive
income (loss), net
of tax 0 (3)
-----------------------
Comprehensive income
(loss) $ (199) $ (921)
=======================
8
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. The Company's failure to raise capital in the near term,
or be acquired, will prevent the Company from implementing its
business strategy and continuing as a going concern. 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 develops software and related services designed
to make Internet/Intranet access a faster, more productive and
enjoyable experience for users. The Company also owns a portfolio
of patents ("legacy assets") relating to commercially practicable
methods of data transmission over analog circuit-switched
cellular networks. Since January 1995, 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 (the "legacy business"). 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.
As stated above, Spectrum's business objective has been to
develop software and offer related products and services that
make Internet access a faster, more productive and enjoyable
experience. The achievement of this objective is contingent upon
resolution of the financing issues described below and elsewhere
in this report. Spectrum has developed a business plan that
contemplates the development of a communications software product
suite, the Spectrum INTELLIGENT PIPE(TM), which is intended to
address communications solutions for remote access in the
Internet service and small business markets. FastLane(TM), the
first product of the suite, is a software server that performs
compression that significantly improves the speed of World Wide
Web (WWW) access for most dial-up subscribers currently
connecting at speeds up to 56 Kbps. FastLane(TM) is designed for
home users, telecommuters and enterprises accessing the Internet
on dial up modem connections. On May 4, 1998, Spectrum announced
that it was offering free trials for a limited time of
FastLane(TM), the world's first Web acceleration service
employing this technology. The service is available directly to
dial-up users accessing the Web through local, regional,
national, and international Internet Service Providers (ISPs),
and does not require any complex set-up by users. FastLane(TM) is
also available to ISPs looking to provide faster image
downloading speeds to all or part of their subscribers. Users can
sign up for the FastLane(TM) Service on a trial basis on
Spectrum's Web site at www.spectruminfo.com.
The Company has attracted approximately 3,500 users for the
FastLane Web Acceleration Service free trial since its May
introduction, which is below management's expectations. The
Company conducted limited marketing in June focused on the
Northeast, but attracted subscribers nationwide and from more
than 50 international countries. Limited free trials are expected
to continue through the third fiscal quarter, followed by
full-scale operation if the Company raises capital. The Company
is limiting its marketing expenditures to conserve its working
capital, while it seeks to raise additional capital, or be
acquired, to support the growth and marketing of FastLane
Service. Further subscriber growth is therefore expected to be
gradual until such time as the Company begins the marketing
campaign.
In June 1998, Spectrum began seeking to raise capital to
commercialize and market its FastLane service, and hired an
investment bank in July and another in August to assist this
process. Having failed to identify an investor, Spectrum
announced on October 2, 1998 that it would continue to seek an
investor and consider tender offers. Spectrum retained two
additional consultants to assist and broaden its efforts in
locating an acquirer for the Company or the technology.
Notwithstanding this extensive effort, as of the date of this
report, Spectrum has been unable to raise capital or attract a
tender offer. Of the companies that Spectrum has contacted,
virtually all have declined and the Company is pursuing those
contacts that are still outstanding. The Company expects to
resolve these outstanding contacts by the end of November 1998.
If these few open contacts do not yield an investor or acquirer,
the Company plans to seek bankruptcy protection under Chapter 11
of the United States Bankruptcy Code (the "Bankruptcy Code"). In
a filing under Chapter 11 of the Bankruptcy Code, the holders of
the Company's Class A Preferred Stock have a preference over the
holders of the Company's common stock pursuant to the terms of a
U.S. District Court and bankruptcy court approved settlement of a
securities related class action lawsuit alleging $676 million in
damages that was filed against the Company in 1993. It is
therefore
9
extremely unlikely that the holders of the Company's common stock
will receive any value in a Chapter 11 bankruptcy filing. Given
the Company's inability to locate an investor or acquirer to
date, there is a substantial risk that the remaining entities
approached by Spectrum will also decline to invest or acquire
Spectrum and the Company will seek bankruptcy protection.
Consistent with the Company's October 2, 1998 announcement,
Spectrum has reduced its number of employees from 19 to 8, but
has retained certain key engineers, while it continues to locate
an investor or acquirer.
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, through a distributor, 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. The Company is not currently aware of
any significant unlicensed manufacturers that are infringing the
Company's wireless data patents and therefore does not expect
these patents to provide material future revenues.
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 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.
10
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 in thousands)
Quarters Ended September 30, 1998 % 1997 %
- -------------------------------------------------------------------------------------
Revenues $ 529 100 $ 1,248 100
----------- --------- ----------- ---------
Operating costs and expenses:
Cost of revenues - - 21 2
Selling, general and
administrative 1,073 203 1,194 95
----------- --------- ----------- ---------
Total operating costs and expenses 1,073 203 1,215 97
----------- --------- ----------- ---------
Operating income (loss) $ (544) (107) $ 33 3
=========== ========= =========== =========
(Amounts in thousands)
Six months Ended September 30, 1998 % 1997 %
- -------------------------------------------------------------------------------------
Revenues $ 2,115 100 $ 1,413 100
----------- --------- ----------- ---------
Operating costs and expenses:
Cost of revenues - - 44 3
Selling, general and
administrative 2,386 113 2,393 169
----------- --------- ----------- ---------
Total operating costs and expenses 2,386 113 2,437 172
----------- --------- ----------- ---------
Operating income (loss) $ (271) (13) $ (1,024) (72)
=========== ========= =========== =========
Revenues
Revenues decreased approximately $719,000 or 58% for the
quarter ended September 30, 1998 as compared to the quarter ended
September 30, 1997 primarily due to a decrease in licensing
revenues of approximately $676,000 or 56% and decreased
merchandise sales of approximately $43,000 or 90%. Licensing
revenues decreased 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. Revenues for
the quarter ended September 30, 1998 were primarily related to
the acceleration of a guaranteed payment pursuant to this
licensing agreement. Merchandise sales decreased for the quarter
ended September 30, 1998 as compared to the quarter ended
September 30, 1997 because of the effects of a licensing
agreement the Company entered into with a distributor to assume
the Company's activation kit business during the third quarter of
fiscal 1998. Under the agreement, the distributor has committed
to undertake specified marketing efforts intended to stimulate
the market for activated cellular capable modems and will pay the
Company a royalty for each activation kit it sells.
For the six months ended September 30, 1998, revenues
increased approximately $702,000 or 50% when compared to the same
period in the prior year primarily as a result of increased
licensing revenues of approximately $795,000 or 61% offset by
decreased merchandise sales of approximately $93,000 or 92%. The
increase in licensing revenues for the six months ended September
30, 1998 is primarily due to the Company's recognition of
approximately $1,350,000 in revenues and $153,000 of deferred
royalty income in connection with an upfront fee pursuant to a
license agreement that the Company entered into during the
current fiscal year and the acceleration of a guaranteed payment
pursuant to a licensing agreement. This increase was partially
offset by the decrease associated with renegotiated license
agreement the Company entered into in the prior fiscal year. The
Company is not currently aware of any significant unlicensed
manufacturers that are infringing the Company's wireless data
patents and therefore does not expect these patents to provide
material future revenues. As stated above, the decrease in
merchandise sales for the six months ended September 30, 1998 as
compared to the six months ended September 30, 1997 is primarily
due to the effects of a licensing agreement the Company entered
into with a distributor to assume the Company's activation kit
business.
11
Operating Costs and Expenses
Operating costs and expenses for the three months and six
months ended September 30, 1998 decreased approximately $142,000
or 12% and $51,000 or 2%, respectively, when compared to the
three months and six months ended September 30, 1997 primarily
due to decreased selling, general and administrative expenses of
approximately $121,000 or 10% and $7,000 or 0.2%, respectively.
This decrease was also due to decreased cost of sales of
approximately $21,000 or 100% and $44,000 or 100%, respectively
for the quarter and six months ended September 30, 1998. Cost of
sales decreased as a direct result of decreased merchandise sales
for the quarter and six months ended September 30, 1998 as
compared to the same periods in the prior year.
The decrease in selling, general and administrative
expenses for the quarter and six months ended September 30, 1998
as compared to the same periods in the prior year was primarily
the result of decreased outside services of approximately
$228,000 and $233,000, respectively. This decrease is primarily
due to the retention of independent technical contractors to
assist in the development of the Company's Internet remote access
communications software during the prior fiscal year. This
decrease was partially offset by an increase in personnel and
related expenses of approximately $51,000 or 9% and $59,000 or
5%, respectively, for the quarter and six months ended September
30, 1998 when compared to the quarter and six months ended
September 30, 1997. This increase is the direct result of the
Company hiring a Vice President of Marketing to help in the
attraction of FastLane(TM) Web Acceleration Service subscribers.
Web site expenses also increased approximately $39,000 or 100%
and $61,000 or 100%, respectively, for the three and six months
ended September 30, 1998 as compared to the three and six months
ended September 30, 1997. Marketing expenses increased
approximately $6,000 or 100% and $131,000 or 100%, respectively
for the three and six months ended September 30, 1998 when
compared to the same periods in the prior fiscal year. Both Web
site and marketing expenses were related to the introduction of
the Company's FastLane(TM) Web Acceleration Service.
Operating Income (Loss)
For the quarter ended September 30, 1998, the Company
recognized an operating loss of approximately $544,000 as opposed
to an operating gain of approximately $33,000 for the quarter
ended September 30, 1997. This difference of approximately
$577,000 is primarily due to decreased licensing revenues.
For the six months ended September 30, 1998, the Company's
operating loss decreased from $1,024,000 for the six months ended
September 30, 1997 to $271,000 for the six months ended September
30, 1998. This change of $753,000 or 74% is primarily the result
of increased licensing revenues as explained above.
Other Income and Expense
For the three months ended September 30, 1998, other income
decreased approximately $37,000 or 88% as compared to the three
months ended September 30, 1997 primarily due a $35,000 or 85%
decline in interest income. Interest income decreased because the
Company had lower cash balances for the quarter ended September
30, 1998 than during the quarter ended September 30, 1997.
For the six months ended September 30, 1998, other income
decreased approximately $31,000 or 30% when compared to the same
period in the prior fiscal year primarily due to decreased
interest income of approximately $80,000 or 81%. Interest income
decreased because the Company had lower cash balances for the six
months ended September 30, 1998 than during the six months ended
September 30, 1997. This decrease was partially offset by a
settlement of a use tax liability which resulted in an increase
in other income of approximately $43,000 for the six months ended
September 30, 1998 as compared to the six months ended September
30, 1997.
Liquidity and Capital Resources
During September, the Company's available cash balance
dropped below $400,000 and the Company was in danger of being
unable to remain current on its obligations, including payroll.
The Company, however, was able to renegotiate two licensing
agreements and accelerate the payment of royalties pursuant to
those agreements. The Company has used these funds for operating
expenses while it attempts to locate an investor or acquirer. The
Company cannot materially further reduce its operating expenses
without incurring obligations associated with the termination of
employment contracts.
As discussed elsewhere within this report, the Company
projects it will not have adequate near term capital resources to
fund its operations. Near and long term liquidity therefore
depend upon the Company's ability to raise capital or locate an
acquirer, and if the Company raises capital, its ability to
generate a positive cash flow from its Internet products
12
and services, or raise additional capital, thereafter. The
accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, however,
it appears highly unlikely that the Company will successfully
raise capital or be acquired. The consolidated financial
statements do not include any adjustments that might result from
the outcome of these uncertainties.
During the six months ended September 30, 1998, working
capital (current assets less current liabilities) decreased by
approximately $189,000 to $822,000 due to a decrease in cash and
marketable securities of approximately $964,000 offset by an
increase in accounts receivable of approximately $419,000. The
decrease in cash was primarily related to the development and
marketing of FastLane. The change in accounts receivable was
associated with the renegotiation of a license agreement during
September 1998.
Net cash used by operating activities decreased $1,318,000,
from $2,197,000 during the six months ended September 30, 1997 to
$879,000 for the period reported. This decrease was due to the
license agreements the Company renegotiated during September
1998. Also, during the six months ended September 30, 1997, the
Company paid approximately $319,000 in Chapter 11 claims and made
no such payments during the six months ended September 30, 1998.
Net cash provided by investing activities decreased
$221,000 from $585,000 for the six months ended September 30,
1997 to $364,000 for the six months ended September 30, 1998. The
decrease related to the amount of marketable securities sold.
During the periods presented, the Company sold its marketable
securities in order to fund current operations.
There were no financing activities during the six months
ended September 30, 1998. During the six months ended September
30, 1997, the Company purchased approximately $3,000 of treasury
stock.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 requires companies to recognize all
derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. Historically,
the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly,
the Company does not expect adoption of the new standard on
January 1, 2000 to affect its financial statements.
Risk Factors
Overview. Spectrum has suffered and continues to suffer
significant losses from continuing operations. In light of the
continued negative cash flow and limited capital resources, the
Company will not be able to fund the marketing and development of
its Internet software and services with its existing capital
resources and must raise capital to fund its continuing
operations and continue as a going concern or locate an acquirer
for the Company or the technology (See Limited Capital
Resources). The Company has conducted an extensive effort to
raise capital, but to date has been unsuccessful. The number of
realistic sources of funding and the likelihood of successfully
raising capital are becoming greatly diminished. Therefore, there
is substantial risk that the Company will be unsuccessful and
seek bankruptcy protection as described above.
Other significant risks associated with Spectrum's strategy
include, but are not limited to: overcoming the negative image
Spectrum had developed in the past, and its ability to rebuild
credibility in the marketplace; successfully develop software and
services that bring value to Internet subscribers and Internet
Service Provider markets; developing new channels for
distribution; hiring and retaining key technical and marketing
staff to implement the strategy; and competing successfully
within markets where competitors have significantly more
resources and access to capital than the Company. The following
specific risk factors should be considered in evaluating
Spectrum's ability to achieve its business objectives.
Limited Capital Resources. Although the recent reduction in
staff will reduce the Company's selling, general and
administrative expenses, the Company is unable to further
materially reduce its expenses without incurring severance
obligations to terminated executives. A discussion of the
Company's commitments and contingencies is set forth in footnote
6 in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1998. As of September 30, 1998, the Company's
working capital has decreased to approximately $822,000. The
Company therefore has limited capital resources to invest in
product development, service deployment, marketing and selling.
As the Company announced on October 2, 1998, it has been actively
seeking an investor for several months. Given its inability to
stimulate interest to date, there is substantial risk that the
Company's continuing efforts will also be unsuccessful. If the
Company successfully raises capital, it is likely that existing
stockholders' ownership will be materially diluted.
13
Past Operating History. The Company's future and ability to
raise capital must be considered in light of the risks associated
with the past difficulties and negative press encountered by the
Company. Concurrently, to effectively enter the Internet and
services market, Spectrum must establish management and technical
credibility as well as financial viability with potential
customers, investors or acquirer, continue to attract, retain and
motivate qualified persons, and develop market opportunities and
acceptance of its new products. There can be no assurance that
the Company will be successful in addressing such risks.
Changing and Segmented Market; Acceptance of the Company's
Services and Products. The market for the Company's Web
Acceleration Service is large, but difficult and expensive to
penetrate. While the Company believes that its service offers
substantial advantages, there can be no assurance that the
Company's FastLane service will be widely adopted with brand
recognition. Additionally, the margins in the Internet service
businesses are traditionally much lower than software businesses.
The Company's plan to market its service initially to consumers
for $4.95 per month faces uncertainty given the fact that many
Internet services are currently being given away free. In order
to fund the costs associated with its existing infrastructure and
attract a material paying subscriber base the Company must raise
capital or be acquired.
Competition. The market for Internet software and services
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
others. Intel released its Web performance software solution in
January 1998 and three national ISPs announced that they planned
to offer Intel's faster access software as a premium service. It
was also reported that Intel was in discussions with the 30
largest ISPs, the most likely potential reseller market for
Spectrum's software or service. In June 1998, Intel announced
that it was discontinuing its Web performance offering for
business reasons, stating that the product did not ramp as
quickly as Intel would have liked. There can be no assurance that
Spectrum's strategy of marketing directly to end-users will be
successful.
Other technologies that offer faster Internet connections
are currently being developed and deployed, such as cable modems
and DSL. Market forecasts by leading analysts indicate, however,
that dial-up Internet access will continue to be the prevalent
method of access for several years. If the faster access methods
become widely adopted earlier than anticipated, Spectrum's
available market will be reduced accordingly.
Nearly all of these potential competitors have longer
operating histories producing hardware and software products or
offering services, greater name recognition, significant
installed customer bases and significantly greater financial,
technical and marketing resources than the Company. In order to
successfully compete in this market, Spectrum must be able to
build brand recognition and differentiate its services based on
their value proposition, including price, performance and
scalability for additional features. Such competition could
prevent Spectrum from successfully entering the market and
materially adversely affect the Company's business, operating
results or financial condition.
For its legacy business, the Company has appointed a
distributor to sell activation kits to licensees of its
technology and their customers. The license arrangements that the
Company has entered with most manufacturers enable them to sell
activation kits for use with their respective products without
additional royalty obligation. These licensees compete with
Spectrum's primary distributor. The Company is no longer
manufacturing or selling activation kits itself, but earns a
royalty for each kit sold by the primary distributor it has
appointed and certain licensees.
New Product Development and Technological Change. All of
the Company's current revenues have been derived from the
licensing of its proprietary technology and royalties from the
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 its Web Acceleration Service for dial up users of
the Internet.
Sales of the Company's new Internet service depend on the
Company's ability to add substantial value to service providers
or directly to their subscribers. Also, patents owned by others
may cover certain elements of the Company's new technology, which
may require licenses. The Company's inability to introduce and
sell the products and services 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.
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 has appointed a
distributor to attempt to stimulate sales of activation kits.
Although the Company receives a royalty for each kit sold by the
licensee/distributor, the Company does not expect these revenues
to be material given the size of the market.
14
Spectrum's existing OEM channels are not the primary
channels for distribution of its Web Acceleration Service.
Spectrum must market effectively directly to consumer dial-up
Internet users, and must develop new channels that include ISPs
and other Companies with Internet presence. 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 service and software products and
will likely result in continued operating losses and negative
cash flow.
Dependence on Key Personnel. The Company is dependent on
its ability to retain and motivate high quality personnel,
especially its management and highly skilled technical and
operational teams. The further loss of the services of any of its
key executive officers or other key technical employees could
have a material adverse effect on the business or the Company's
ability to raise capital or be acquired. The Company's downsizing
has made it more difficult to implement the Company's strategy of
commercializing its FastLane service.
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, in
March 1997, 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 stock may 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.
15
Spectrum Information Technologies, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Securities Related Proceedings
As previously reported by the Company, during May 1997, the SEC
and Spectrum reached a settlement agreement under which Spectrum
agreed to the entry of an administrative order requiring it to
cease and desist from committing any and future violations of the
registration, antifraud, reporting and record-keeping provisions
of the federal securities laws. Spectrum neither admitted nor
denied the SEC's findings relative to events in 1992 and 1993,
and which relate to the allegations in the SEC's action described
above against the former officer. The SEC did not seek monetary
penalties and recognized that Spectrum's current Chief Executive
Officer and Board of Directors had cooperated in the SEC's
investigation.
In December 1997, the SEC filed a civil lawsuit in the United
States District Court for the Eastern District of New York
against a current employee and former officer of the Company, and
two of the Company's former directors and officers alleging
violations of certain sections of the Securities Exchange Act of
1934 and rules promulgated thereunder, including violations of
Rule 10b-5, related to accounting and disclosure issues with
respect to certain patent and advertising agreements the Company
entered into during 1993 (fiscal 1994) and the exercise of
options to purchase and subsequent sale of Spectrum stock in the
relevant time frame. As previously reported by the Company, the
SEC notified the former officer in April 1996 that it intended to
bring this action. Upon learning of the SEC staff's position and
pending resolution of this issue, the Company at that time
removed the former officer as an executive officer. The former
officer has denied any wrongdoing and is represented by
independent counsel in this matter. The former officer is seeking
to have the Company advance the legal fees that he incurs in
defense of this action pursuant to his Bankruptcy Court approved
employment agreement. The Company and the former officer are in
settlement discussions that are expected to limit the Company's
exposure associated with this claim to approximately $300,000.
From time to time, the Company has been a party to other legal
actions and proceedings incidental to its business. As of the
date of this report, however, the Company knows of no other
pending or threatened legal actions that could have a material
impact on the financial condition of the Company.
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.
16
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: November 23, 1998
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
Chief Financial Officer
17