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 December 31, 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.)
P.O. Box 1006, New York, New York 10268
(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 January 19, 1999, the registrant had outstanding 7,048,698 shares of its
Common Stock, par value $.001 per share.
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 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 8
PART II. OTHER INFORMATION 15
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands)
Assets December 31, March 31,
1998 1998
- -------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,060 $ 1,600
Marketable securities - 449
Refunds receivable 24 -
Accounts receivable (net of allowance
for doubtful Accounts of $0 at
December 31, 1998 and $6 at March 31, 1998) - 194
Employee Loans - 79
Prepaid expenses and other current assets 8 192
---------- ---------
Total current assets 1,092 2,514
---------- ---------
Property and equipment, at cost:
Furniture, fixtures and equipment 301 598
Less - accumulated depreciation (162) (340)
Less - allowance for impairment of idle
equipment (139) -
---------- ---------
Net property and equipment - 258
---------- ---------
Total assets $ 1,092 $ 2,772
---------- ---------
See accompanying notes to consolidated financial statements.
1
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share amounts)
December 31, March 31,
Liabilities and Stockholders' Equity 1998 1998
- -------------------------------------------------------------------------------
(Unaudited)
Current Liabilities
Accounts payable $ 64 $ 227
Accrued liabilities 55 453
Reserve for litigation - 645
Deferred royalty income - 153
Reserve for unpaid Chapter 11 claims - 25
---------- ---------
Total current liabilities 119 1,503
Reserve for Chapter 11 and other stock claims - 591
---------- ---------
Total liabilities 119 2,094
---------- ---------
Stockholders' Equity:
Class A Convertible Preferred Stock, $.001
par value, 1,500,000 shares authorized and
800,283 shares outstanding, converts to
common 3/31/99 on a share for share basis 1 1
Common stock, $.001 par value, 10,000,000
shares authorized and 7,048,698 and
1,557,000 issued and outstanding,
respectively 7 2
Paid-in capital 73,366 71,740
Accumulated deficit (72,017) (70,758)
---------- ---------
1,357 985
Treasury stock, at cost, (61,805 shares
acquired from 1994 through 1998) (384) (304)
Accumulated comprehensive loss - (3)
---------- ---------
Total stockholders' equity 973 678
---------- ---------
Total liabilities and stockholders' equity $ 1,092 $ 2,772
---------- ---------
See accompanying notes to consolidated financial statements.
2
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Statements of Loss (Unaudited)
(Amounts in thousands, except per share amounts) Three months ended Nine months ended
December 31, December 31,
1998 1997 1998 1997
- ------------------------------------------------- ------------ ----------- ------------ -----------
Revenues:
Licensing revenue $ 209 $ 38 $ 2,316 $ 1,350
Merchandise sales, net - 30 8 131
------------ ----------- ------------ -----------
Total revenues 209 68 2,324 1,481
------------ ----------- ------------ -----------
Operating costs and expenses:
Cost of revenues - 8 - 52
Selling, general and administrative 1,668 1,217 4,054 3,610
------------ ----------- ------------ -----------
Total operating costs and expenses 1,668 1,225 4,054 3,662
------------ ----------- ------------ -----------
Operating loss (1,459) (1,157) (1,730) (2,181)
------------ ----------- ------------ -----------
Other income (expense), net 399 35 471 138
------------ ----------- ------------ -----------
Net loss $ (1,060) $ (1,122) $ (1,259) $ (2,043)
------------ ----------- ------------ -----------
Net loss per common share
Basic and diluted $ (.50) $ (.79) $ (.65) $ (1.62)
Weighted Average Number of
Common Shares used in income (loss)
per common share calculation:
Basic and diluted (See Note 1 (d)) 2,104,000 1,413,000 1,926,000 1,258,000
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)
Nine months ended December 31, 1998 1997
- -----------------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash flow from operating activities:
Net loss $ (1,259) $ (2,043)
Adjustments to reconcile net loss to net cash
used by Operating activities:
Loss (gain) on sale of marketable securities 3 (6)
Loss on disposal of property and equipment 81 6
Issuance of common stock - 37
Stock options granted to directors and
consultants 33 -
Write-off of employee loans 79 -
(Gain) on litigation settlement (416) -
Provision for the impairment of idle equipment 139 -
Depreciation and amortization 109 95
(Increase) decrease in:
Refunds receivable (24)
Accounts receivable 194 246
Prepaid expenses and other assets 184 40
Increase (decrease) in:
Accounts payable (163) 120
Accrued expenses (398) (441)
Reserve for litigation (229) -
Deferred royalty income (153) -
Reserve for unpaid chapter 11 claims (25) -
- -----------------------------------------------------------------------------
Net cash used by operating activities (1,845) (1,946)
- -----------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of marketable securities 449 1,759
Purchase of marketable securities - -
Loans to employees - (34)
Proceeds from sale of property and equipment 3 3
Capital expenditures (74) (114)
- -----------------------------------------------------------------------------
Net cash provided by investing activities 378 1,614
- -----------------------------------------------------------------------------
Cash flow from financing activities:
Purchase of treasury stock (80) (3)
Proceeds from the issuance of common stock 800 -
Proceeds from the exercise of common stock options 207 -
- -----------------------------------------------------------------------------
Net cash provided (used) by financing activities 927 (3)
- -----------------------------------------------------------------------------
Net decrease in cash and cash equivalents (540) (335)
Cash and cash equivalents, beginning of year 1,600 3,132
- -----------------------------------------------------------------------------
Total cash and cash equivalents, end of year $ 1,060 $ 2,797
------------ ------------
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
On December 11, 1998, Spectrum Information Technologies, Inc., a
Delaware corporation (the "Company"), entered into a Stock Purchase
Agreement with Powers & Co., the principal of which is Lawrence M.
Powers, pursuant to which Powers & Co. purchased 3,000,000 shares of
the Company's common stock par value $.001 (which totaled
approximately 54.9% of the outstanding aggregate shares of voting
stock of the Company at the time) and an option to acquire an
additional 1,800,000 shares of the Company's common stock at an
exercise price of $0.15 per share, for an aggregate purchase price of
$600,000. As a result of this transaction and subsequent equity
investments and option exercises, an aggregate of $1,007,000 of new
equity was invested in the Company. Additionally, as a result of this
transaction, all of the Company's senior management and Board of
Directors were replaced. The Company's new senior management and Board
intend to change the direction and nature of the Company's business.
The Company is now doing business as Siti-Sites.com and is seeking to
establish several web-sites for the marketing of products and services
over the Internet.
The Company is planning to change its corporate name to
Siti-Sites.com, Inc. but will retain its stock symbol "SITI". The name
change is subject to shareholder approval and will be presented at the
next meeting of the Company's shareholders, scheduled within the next
several months. Shareholders owning approximately two-thirds of the
issued and outstanding shares of Common Stock have expressed approval
of the name change as being in the best interest of the Company and
its shareholders.
Historically, the Company was operating as a holding company of
several operating subsidiaries generating revenues from royalties for
licensing its patents relating to wireless data transmission over
cellular networks. From January 1995 through December 11, 1998, the
Company's former management had to resolve the many financial and
legal problems inherited from prior years and to refocus the business
direction of the Company. One strategy was to seek protection and
reorganization under Chapter 11 of the Bankruptcy Code. The Company
consummated a plan of reorganization and emerged from bankruptcy on
March 31, 1997. Thereafter, the Company spent substantial monies to
develop and patent new software and related products for use in
Internet data transmission. In particular, the Company developed
FastLane , a software product which performs compression improving the
speed of World Wide Web access for most dial-up subscribers. However,
financing could not be found to continue with such product and its
marketing. In June 1998, the Company began seeking to raise capital or
attract an acquisition, and by December 1998 the Company had wound
down its overhead and operations and was on the verge of filing, a
second time, for bankruptcy protection.
The Company does not expect the former businesses to provide any
material future revenues. The Company is trying to sell the patents
and technologies, but does not anticipate their sale, if it occurs,
will be a significant source of revenue. In substance, the new
investors acquired control of a corporate shell with all of its known
existing obligations paid or provided for prior to closing, enabling
them to make a fresh start.
Currently, the Company's cash assets are being conserved and new
management is in preliminary discussions with respect to two new
web-sites which it currently hopes to finance and develop with
technical/marketing partners. No assurance can be given that these
discussions will lead to the joint ventures planned, or that they will
not require additional financing as they go through testing and
initial marketing phases. Because of the emerging nature of its
business, management has closed the offices previously rented by the
Company and postponed the expense of obtaining corporate office space
until the new business affiliations have been completed, which may
result in shared space with co-venturers. Management continues to
operate from its personal offices. The Company has placed into storage
certain computer equipment which it hopes to use for its planned
web-sites. No employees have yet been put on salary, and present
management has been working without salary and may continue to do so
for an undetermined period of time. The primary expenses at this date
are accounting and legal costs.
5
(b) Basis of Presentation
The accompanying unaudited consolidated financial statements, which
include the accounts of the Company and its wholly owned subsidiaries,
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q. All significant intercompany transactions and accounts
have been eliminated in consolidation. In the opinion of management,
all adjustments considered necessary for a fair presentation have been
included.
(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) Loss Per Common Share
The computation of basic 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. Because of the substantial sales of
common stock and options in December 1998, the weighted average number
of 2,104,000 shares of common stock is not fully reflective of the
7,048,698 shares outstanding as of December 31, 1998.
(e) Licensing Agreements
Licensing income was 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 (pre-dating
its 1997 reorganization) to an entity for two non-recurring up-front
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 up-front 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 up-front payment of $185,000 in
November 1998, instead of royalty payments payable quarterly from
January 2000 through December 2003. On December 18, 1998 the Company
sold to Charles Leedom, a patent attorney with Sixbey, Friedman,
Leedom & Ferguson, the Omnimodal Patent numbers 5,854,985 and
5,761,621 for the price of $4,000 cash and $8,000 in prepaid legal
services. These final license and royalty payments are the last
expected by management on this technology, and the Company does not
expect these patents to provide any material future revenues.
(f) Equipment
On December 31, 1998 equipment with a net book value of $139,229 was
not in service. An allowance for the impairment of the value was
established for $139,229. The equipment is being stored for possible
future use in its proposed Internet businesses, if and when they
develop.
(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
6
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
Nine months ended
December 31,
---------------------------
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 Convertible Preferred Stock issuance $ - $ 300
Payments of unsecured claims via common stock
issuance $ - $ 162
Stock issued to prior management and staff $ 591 $ -
Stock options for prior board of directors &
consultants $ 33 $ -
3. Earnings Per Share
Earnings per share for the three and nine months ended December 31, 1998
and 1997 were calculated as follows:
Three Months Ended December 31,
1998 1997
Basic Diluted Basic Diluted
(Amounts in thousands)
Net Income (loss) $(1,060) $(1,060) $(1,122) $(1,122)
------------------- ------------------
Weighted average number of
common shares outstanding
during the year (i) 2,104 2,104 1,413 1,413
Common stock equivalents -
preferred stock - - - -
Common stock equivalents -
stock options - - - -
------------------- ------------------
Weighted average number of
common shares and common
stock equivalents used in
calculation of earnings per
common share (i) 2,104 2,104 1,413 1,413
------------------- ------------------
Earnings per common share (i) $ (0.50) $ (0.50) $ (0.79) $ (0.79)
------------------- ------------------
Nine Months Ended December 31,
1998 1997
Basic Diluted Basic Diluted
(Amounts in thousands)
Net Income (loss) $(1,259) $(1,259) $(2,043) $(2,043)
7
Weighted average number of
common shares outstanding
during the year (i) 1,926 1,926 1,258 1,258
Common stock equivalents -
preferred stock - - - -
Common stock equivalents -
stock options - - - -
------------------- ------------------
Weighted average number of
common shares and common
stock equivalents used in
calculation of earnings per
common share (i) 1,926 1,926 1,258 1,258
------------------- ------------------
Earnings per common share (i) $ (0.65) $ (0.65) $ (1.62) $ (1.62)
------------------- ------------------
Common stock equivalents were not included in the computation of weighted
average shares outstanding for the three and nine months ended December 31, 1998
and 1997 because such inclusion would be anti-dilutive.
(i) Because of the substantial sales of common stock and options in December
1998, the weighted average number of 2,104,000 shares of common stock is not
fully reflective of the 7,048,698 shares outstanding as of December 31, 1998.
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:
Nine months ended
December 31,
1998 1997
(Amounts in thousands)
-------------------------
Net Loss $ (1,259) $(2,043)
Other Comprehensive income (loss),
net of tax 0 (3)
-------------------------
Comprehensive income (loss) $ (1,259) $(2,046)
Spectrum Information Technologies, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This entire report, including discussions in the Notes to the Consolidated
Financial Statements, contains forward-looking statements that are based on
current expectations about the Company's business, its business strategy and
management's beliefs and assumptions. Words such as "expects," "anticipates,"
"intends," "potential," "hopes," "plans," "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. In addition, particular attention should
be paid to the cautionary statements in this report involving the Company's
ability to find and effectively develop the web-site and partnership
opportunities contemplated herein and the Company's ability to raise capital in
the near and long term. 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, but is deemed modified by
events in 1998 as described in this report. Except as required by law, the
Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. Readers,
8
however, should carefully review the factors set forth in other reports or
documents that the Company files from time to time with the Securities and
Exchange Commission (the "SEC").
Business
Spectrum Information Technologies, Inc., a Delaware corporation
("Spectrum"), and its subsidiaries (collectively, the "Company"), plans to
establish Internet web-sites for the marketing of products and services. The
services could involve Internet projects and direct marketing projects as well.
The Company plans to develop the sites independently and through strategic
alliances. Management believes the World Wide Web is becoming the marketplace of
choice for consumers all across the globe. While there are innumerable web-sites
now in operation, management believes that there are still many worthwhile
opportunities to pursue. The industry is still in its infancy, but many of the
early entrants are already being consolidated into larger units, and some are
going out of business.
Many web-sites attempt to make themselves appealing to the broadest
audience possible. The Company hopes that it can develop multiple sites targeted
to the interests of specific demographic groups by entering into joint ventures
with specialists in such groups. In this way, the Company believes it can foster
multiple communities of loyal participants, which, in turn will lead to long
term marketing possibilities. Members of the Company's new senior management and
Board of Directors, in addition to having general management experience as
Chairman/CEO (Powers) or Presidents (Schonfeld and Ingenito) of publicly held
and private businesses, have backgrounds in media/cable TV, direct marketing,
computer manufacturing and management consulting (Gerber), and
finance/acquisitions. Initially, they have invested an aggregate of more than
$900,000 of their personal funds to create a balance sheet platform from which
to build the Company.
Currently, the Company's cash assets are being conserved and new management
is in preliminary discussions with respect to two new web-sites which it
currently hopes to finance and develop with technical/marketing partners. No
assurance can be given that these discussions will lead to the joint ventures
planned, or that they will not require additional financing as they go through
testing and initial marketing phases. Because of the emerging nature of its
business, management has closed the offices previously rented by the Company and
postponed the expense of obtaining corporate office space until the new business
affiliations have been completed, which may result in shared space with
co-venturers. Management continues to operate from its personal offices. The
Company has placed into storage certain computer equipment which it hopes to use
for its planned web-sites. No employees have yet been put on salary, and present
management has been working without receiving any compensation (although present
management may receive compensation for future time commitments if and when the
Company is able to pay it). The primary expenses at this date are accounting and
legal costs.
The Company's ability to find and effectively develop the web-site and
partnership opportunities contemplated herein and its ability to raise
additional capital in the near and long term could prevent the Company from
implementing its business strategy.
The Company is now doing business as Siti-Sites.com. The Company is
planning to change its corporate name to Siti-Sites.com, Inc. but will retain
its stock symbol "SITI". The name change is subject to shareholder approval and
will be presented at the next meeting of the Company's shareholders scheduled
within the next several months. Shareholders owning approximately two-thirds of
the issued and outstanding shares of Common Stock have expressed approval of the
name change as being in the best interest of the Company and its shareholders.
On December 11, 1998, the Company entered into a Stock Purchase Agreement
with Powers & Co., the principal of which is Lawrence M. Powers, pursuant to
which Powers & Co. purchased 3,000,000 shares of the Company's common stock par
value $.001 (which totaled approximately 54.9% of the outstanding aggregate
shares of voting stock of the Company at the time) and an option to acquire an
additional 1,800,000 shares of the Company's common stock at an exercise price
of $0.15 per share, for an aggregate purchase price of $600,000. As a result of
this transaction and subsequent equity investments and option exercises, an
aggregate of $1,007,000 of new equity was invested in the Company. Additionally,
as a result of this transaction all of the Company's senior management and Board
of Directors were replaced. The new senior management and Board of Directors has
changed the focus of the Company to its current strategy described above.
Historically, the Company was operating as a holding company of several
operating subsidiaries generating revenues from royalties for licensing its
patents relating to wireless data transmission over cellular networks. From
January 1995 through December 11, 1998, the Company's former management had to
resolve the many financial and legal problems inherited from prior years and to
9
refocus the business direction of the Company. One strategy was to seek
protection and reorganization under Chapter 11 of the Bankruptcy Code. The
Company consummated a plan of reorganization and emerged from bankruptcy on
March 31, 1997. See "History of the Plan of Reorganization - 1995 through 1998."
Thereafter, the Company spent substantial monies to develop and patent new
software and related products for use in Internet data transmission. In
particular, the Company developed FastLane , a software product which performs
compression improving the speed of World Wide Web access for most dial-up
subscribers. However, financing could not be found to continue with such product
and its marketing. In June 1998, the Company began seeking to raise capital or
attract an acquisition, and by December 1998 the Company had wound down its
overhead and operations and was on the verge of filing, a second time, for
bankruptcy protection.
The Company does not expect the former businesses to provide any material
future revenues. The Company is trying to sell the patents and technologies, but
does not anticipate their sale, if it occurs, will be a significant source of
revenue. In substance, the new investors acquired control of a corporate shell
with all of its known existing obligations paid or provided for prior to
closing, enabling them to make a fresh start.
Immediately preceding the change of control in December, 1998, the Company
had approximately 1,668,698 shares of Common Stock issued and outstanding and
800,283 shares of convertible Class A Convertible Preferred Stock issued and
outstanding. The Class A Stock automatically converts to Common Stock on March
31, 1999. Upon completion of the transaction, Powers & Co. acquired
approximately 64.3% of the issued and outstanding Common Stock, and 54.9% of the
aggregate shares of outstanding stock, including Common Stock and Class A Stock.
In connection with the change in control on December 11, 1998, the
Company's directors as of such date appointed Lawrence M. Powers a director of
the Company, and immediately thereafter the Company's other directors resigned.
The Company's previous officers as of December 11, 1998 also resigned in
connection with the transaction. Lawrence M. Powers, as the sole remaining
member of the Board, filled two vacancies by appointing Maurice Schonfeld and
Jon Gerber as directors of the Company. The new Board elected Lawrence M. Powers
as Chairman and Chief Executive Officer and Mr. Gerber as Vice-President,
Secretary and Treasurer. The new Board also appointed Robert Ingenito to the
Board. The prior Board was informed before December 11, 1998 of the intended
transactions with Mr. Schonfeld and Mr. Ingenito described below.
On December 12, 1998, (a) Powers & Co. transferred 500,000 shares of its
Common Stock and a portion of its option (representing the right to acquire
300,000 shares of Common Stock) to Mr. Schonfeld for $100,000, (b) Powers & Co.
transferred by gift 200,000 shares of its common stock of the Company and a
portion of its option (representing the right to acquire 80,000 shares of the
Company's common stock) to Mr. Gerber, a second cousin of Mr. Powers, (c) Powers
& Co. transferred by gift an aggregate of 1,305,000 shares of its common stock
of the Company and a portion of its option (representing the right to acquire an
aggregate of 730,000 shares of the Company's common stock) to his son and other
individuals, and (d) the Company entered into a Stock Purchase Agreement with
Mr. Ingenito pursuant to which Mr. Ingenito purchased 500,000 shares of the
Company's common stock and an option to acquire an additional 300,000 shares of
the Company's common stock at an exercise price of $0.15 per share for a total
purchase price of $100,000.
Thereafter, Steven Gross, a partner in the law firm which now represents
the Company, and his son purchased an aggregate of 500,000 shares of the
Company's common stock and options to acquire an aggregate of 300,000 additional
shares of the Company's common stock at an exercise price of $0.15 per share for
an aggregate purchase price of $100,000. In addition, Powers & Co. and one of
its transferees by gift have exercised their options and purchased an aggregate
of 1,380,000 additional shares of the Company's common stock for an aggregate
price of $207,000.
As a result of the change in control, as well as the Company's change in
strategic direction to Internet marketing, the Company determined that it cannot
and will not be utilizing any pre-existing net operating loss carryforwards.
Consequently, as announced in December, 1998, the Company's new Board determined
that the provision in the Company's Certificate of Incorporation and By-Laws
requiring Board approval of transfers of the Company's common stock to persons
or groups which own or would acquire 5% of the common stock would no longer be
enforced.
10
History of the Plan of Reorganization - 1995 through 1998
On January 26, 1995, as part of prior management's effort to stem the
Company's substantial financial losses, 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 business. 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 has no 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 the Company 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 the Company and Cellular have been substantively
consolidated and thereafter prior to December 11, 1998, the Company and Cellular
had been conducting the Company's business on an operating basis as a single
entity. 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. As stated above, the Company's
strategy from 1997 through 1998 did not result in a viable business. A change of
control occurred on December 11, 1998 in connection with which payment or
provision was made for all known liabilities and a new direction was taken by
the new investor group.
Results of Operations
The following discussion relates in part to a discontinued business in
certain wireless data patents that preceded the Company's bankruptcy
reorganization and the Company's unsuccessful FastLane software development
which are discussed above in the "Business" section. As discussed above, the
Company's FastLane project was not viable and the Company was on the verge of a
bankruptcy filing when new management took over on December 11, 1998.
Consequently, although the Company has a prior operating history, the Company's
prospects must be considered primarily in light of the risk that the Company
will not be able to find and effectively develop the web-site and partnership
opportunities contemplated herein and/or to raise additional capital in the near
and long term. Even if the Company is able to do so, the Company's prospects
must also be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as web- sites
for the marketing of products and services. Such risks for the Company include,
but are not limited to, an evolving and unpredictable business, competition and
the management of growth.
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 December 31, 1998 % 1997 %
- -------------------------------------------------------------------------------
Revenues $ 209 100 $ 68 100
------- ----- ------- -----
Operating costs and expenses:
Cost of revenues - - 8 12
Selling, general and administrative 1,668 798 1,217 1,790
------- ----- ------- -----
Total operating costs and expenses 1,668 798 1,225 1,802
------- ----- ------- -----
Operating income (loss) $(1,459) (698) $(1,157) (1,702)
------- ----- ------- -----
11
(Amounts in thousands)
Nine months Ended December 31, 1998 % 1997 %
- -------------------------------------------------------------------------------
Revenues $ 2,324 100 $ 1,481 100
------- ------ -------- -------
Operating costs and expenses:
Cost of revenues - - 8 12
Selling, general and administrative 4,054 174 3,610 243
------- ------ -------- -------
Total operating costs and expenses 4,054 174 3,662 247
------- ------ -------- -------
Operating income (loss) $(1,730) (74) $(2,181) (147)
------- ------ -------- -------
Revenues
The following discussion relates in part to a discontinued business in
certain wireless data patents that preceded the Company's bankruptcy
reorganization and the Company's unsuccessful FastLane software development
which are discussed above in the "Business" section of this Management's
Discussion and Analysis of Financial Condition and Results of Operations. As a
result of the Company's change in business strategy discussed above, the Company
is unable to accurately forecast its future revenues.
Revenues increased approximately $141,000 or 207% and $843,000 or 57%,
respectively, for the quarter and nine months ended December 31, 1998 as
compared to the quarter and nine months ended December 31, 1997 primarily due to
increased one-time licensing revenues of $171,000 or 450% and $966,000 or 72%,
respectively. This increase was partially offset by a decline in merchandise
sales for the quarter and nine months ended December 31, 1998 of approximately
$30,000 or 100% and $123,000 or 94%, respectively. The increase in licensing
revenues for the nine months ended December 31, 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 up-front 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
non-recurring increase was partially offset by the decrease associated with the
renegotiation of a 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 discontinued wireless data
products and associated patents, is no longer carrying them at any value, and
does not expect these patents to provide material future revenues. Merchandise
sales decreased for the quarter ended December 31, 1998 as compared to the
quarter ended December 31, 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 had committed to undertake specified marketing efforts intended to
stimulate the market for activated cellular capable modems and to pay the
Company a royalty for each activation kit it sells. None were sold for the
quarter ended December 31, 1998. See "Note 1(e) to the Consolidated Financial
Statements" for a discussion of the renegotiation of the Company's license
agreements.
Operating Costs and Expenses
The following discussion relates in part to a discontinued business in
certain wireless data patents that preceded the Company's bankruptcy
reorganization and the Company's unsuccessful FastLane software development
which are discussed above in the "Business" section of Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Operating costs and expenses for the three months and nine months ended
December 31, 1998 increased approximately $443,000 or 36% and $392,000 or 11%,
respectively, when compared to the three months and nine months ended December
31, 1997 primarily due to increased selling, general and administrative expenses
of approximately $451,000 or 37% and $444,000 or 12%, respectively. This
increase was partially offset by decreased cost of sales of approximately $8,000
or 100% and $52,000 or 100%, respectively, for the quarter and nine months ended
December 31, 1998. Cost of sales decreased as a direct result of decreased
merchandise sales for the quarter and nine months ended December 31, 1998 as
compared to the same periods in the prior year.
12
The increase in selling, general and administrative expenses for the
quarter and nine months ended December 31, 1998 as compared to the same periods
in the prior year was primarily the result of increased personnel and related
expenses of approximately $535,000 or 93% and $594,000 or 34%, respectively. All
such employees were terminated between September 1998 and year-end. These
increases are the direct result of severance payments to former employees in
connection with the "change of control" stock purchases in the Company by Powers
& Co. See "Business." Also, during the quarter ended December 31, 1998, the
Company recorded a provision for idle equipment of approximately $139,000. See
"Note 1(f) to the Consolidated Financial Statements." There was no such
allowance during the period ended December 31, 1997. These increases were offset
by a decrease in outside services of approximately $208,000 or 63% and $441,000
or 52%, respectively, for the three and nine months ended December 31, 1998 as
compared to the same periods in the prior fiscal year.
Operating Income (Loss)
The following discussion relates in part to a discontinued business in
certain wireless data patents that preceded the Company's bankruptcy
reorganization and the Company's unsuccessful FastLane software development
which are discussed above in the "Business" section of this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
For the quarter ended December 31, 1998, the Company's operating loss
increased approximately $302,000 or 26% as compared to the quarter ended
December 31, 1997 primarily due to increased operating costs and expenses.
For the nine months ended December 31, 1998, the Company's operating loss
decreased approximately $451,000 or 21% as compared to the nine months ended
December 31, 1997 primarily due to increased licensing revenues.
Other Income and Expense
The following discussion relates in part to a discontinued business in
certain wireless data patents that preceded the Company's bankruptcy
reorganization and the Company's unsuccessful FastLane software development
which are discussed above in the "Business" section of this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
For the three months and nine months ended December 31, 1998, other income
increased approximately $364,000 or 1040% and $333,000 or 241%, respectively, as
compared to the same periods in the prior year as a result of a settlement
agreement entered into in December, 1998 between the Company and a former
employee whereby the Company paid approximately $229,000 in full settlement of
any potential future indemnification. See "Legal Proceedings." As a result of
these payments, the Company recognized approximately $400,000 in other income.
This increase was offset by a decrease in interest income of approximately
$25,000 or 71% and $105,000 or 78%, respectively, for the quarter and nine
months ended December 31, 1998 as compared to the quarter and nine months ended
December 31, 1997. Interest income decreased because the Company had lower cash
balances for the three and nine months ended December 31, 1998 than during the
three and nine months ended December 31, 1997.
Liquidity and Capital Resources
The following discussion relates in part to a discontinued business in
certain wireless data patents that preceded the Company's bankruptcy
reorganization and the Company's unsuccessful FastLane software development
which are discussed above in the "Business" section of this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
During September 1998, 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 used these funds for operating expenses and
winding down the FastLane business.
During the nine months ended December 31, 1998, working capital (current
assets less current liabilities) decreased by approximately $38,000 to $973,000
due to a decrease in the Company's current assets and current liabilities of
approximately $1,422,000 and $1,384,000, respectively. Cash and cash equivalents
13
decreased approximately $989,000 for the nine months ended December 31, 1998 due
to the payment of operating expenses and severance to former employees. During
the nine months ended December 31, 1998, net receivables and employee loans
decreased approximately $170,000 and $79,000, respectively. Receivables
decreased as a result of payments received pursuant to certain licensing
agreements. See "Note 1(e) to the Consolidated Financial Statements." The
Company called its employee loans during the period ended December 31, 1998.
These loans were collateralized by the Company's Common Stock. The former
employees elected to default on their respective loans resulting in a decrease
in employee loans and an increase in treasury stock. These decreases were
partially offset by the elimination of the litigation reserve of $645,000 as
well as the reduction in accounts payable and accrued expenses of approximately
$163,000 and $398,000, respectively.
Net cash used by operating activities decreased $101,000, from $1,946,000
to $1,845,000 during the nine months ended December 31, 1997. During the nine
months ended December 31, 1997, the Company paid approximately $441,000 in
Chapter 11 claims in connection with the Plan and made no such payments during
the period reported. See "History of the Plan of Reorganization - 1995 through
1998." However, during the nine months ended December 31, 1998, the Company paid
approximately $229,000 pursuant to a settlement agreement with a former
employee. See "Legal Proceedings." Also, during the quarter ended December 31,
1998, the Company elected to record a provision for its idle equipment of
approximately $139,000. See "Note 1(f) to the Consolidated Financial
Statements." During the same period in the prior fiscal year, there was no such
provision.
Net cash provided by investing activities decreased $1,236,000 from
$1,614,000 for the nine months ended December 31, 1997 to $378,000 for the nine
months ended December 31, 1998. The decrease was primarily related to the amount
of marketable securities sold. During the periods presented, the Company sold
its marketable securities in order to fund current operations.
Net cash provided by financing activities increased approximately $930,000
during the nine months ended December 31, 1998 as compared to the same period in
the prior year. This increase was directly related to the issuance of common
stock pursuant to the December 11, 1998 agreement between the Company and Powers
& Co. as well as the subsequent agreements for an aggregate investment of
$1,007,000. See "Business." Also, during the period presented, the Company
purchased approximately $80,000 of treasury stock as opposed to the $3,000
purchase during the nine months ended December 31, 1997.
Year 2000
The year 2000 issue arises from the widespread use of computer programs
that rely on two-digit date codes to perform computations or decision-making
functions. As discussed in the "Business" section above, in December of 1998, a
new investor acquired a controlling interest in the Company and thereafter
additional investors also purchased newly issued stock and options. In
connection with this change in control, the Company's senior management and
Board of Directors were replaced. The new senior management and Board have
indicated their intention to establish Internet web-sites for the marketing of
products and services but have not finalized any specific projects yet. Until
the Company commences such a new project, the Company is conserving its cash
resources. In addition, as discussed above, the Company does not expect the
former businesses of the Company related to wireless data transmission
technology and FastLane compression software to provide any material future
revenues. Thus, the Company believes that the consequences of year 2000 issues
would not have a material effect on its business, results of operations or
financial condition at this time.
If and when the Company consummates a project to establish and Internet
web-site for the marketing of products or services, management will review plans
to prepare the Company's computer systems and applications for the year 2000, as
well as identify critical third parties which the Company will rely upon to
operate its business to assess their readiness for the year 2000.
Risk Factors
Overview. As discussed in the "Business" section above, the Company has
changed its strategic direction. While the Company had suffered significant
losses from previous operations, all those operations have essentially been
discontinued. The Company is now seeking to establish several web-sites for
marketing products and services over the Internet.
14
The following specific risk factors should be considered in evaluating the
Company's ability to achieve its business objectives.
Commencement of Projects. The Company's strategy depends on its ability to
find and effectively develop the web-site and partnership opportunities
contemplated herein. There can be no assurance that the Company will be able to
do so or that the Company's overall strategy will be successful.
Limited Capital Resources. Giving effect to the recent investment in the
Company, the Company's December 31, 1998 working capital has still decreased to
approximately $973,000. The Company therefore has limited capital resources to
invest in development, marketing and selling. Management has taken the proactive
steps of closing the Company's leased facilities in Marlboro, Massachusetts and
Purchase, New York and expects to open a smaller facility in the future. These
steps have been taken to preserve the Company's capital for future use. There
can be no assurance that the Company will be able to raise sufficient additional
capital in the near and long term.
Competition. The market for Internet web-sites providing products and
services is intensely competitive. The Company expects competition to persist,
intensify and increase in the future, and for capital costs to also increase.
There can be no assurance that the Company will be able to compete successfully
against its competitors. In order to successfully compete in this market, the
Company must be able to build brand recognition and develop a dedicated
following.
Dependence on Key Personnel. The Company is dependent on its ability to
retain and motivate highly qualified personnel, especially its management. The
loss of the services of any of its key executive officers could have a material
adverse effect on the Company's business or the Company's ability to raise
capital. No employees have yet been put on salary, and present management has
been working without receiving any compensation. Other employees necessary to
build the business will require competitive compensation and present management
may receive compensation for future time commitments if and when and the Company
is able pay it. In addition, the Company currently does not have a long-term
employment agreement with any of its executive officers.
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 Company's 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 all such shares automatically
convert 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 Company's
common stock.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Securities Related Proceedings
As previously reported by the Company, during May 1997, the SEC and the
Company reached a settlement agreement under which the Company 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. The Company
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 the Company's then current Chief Executive Officer and Board of
Directors had cooperated in the SEC's investigation. Such "current" group was
part of the management which resigned in December 1998.
In December 1997, the SEC filed a civil lawsuit in the United States
District Court for the Eastern District of New York against a then current
employee (who resigned in December 1998) 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
15
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 the Company's 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 sought to have the Company advance the legal fees that he
incurs in defense of this action pursuant to his bankruptcy court approved
employment agreement. In December 1998, the Company and the former officer
reached a settlement that limited the Company's exposure to a one-time payment
of $229,000 as described in "Item 2, Liquidity and Capital Resources.".
From time to time, the Company has been a party to other legal actions and
proceedings incidental to prior 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
Unregistered Issuances of Stock. As discussed in the "Business" section
above, (a) on December 11, 1998, the Company sold an aggregate of 3,000,000
shares of the Company's common stock and options to purchase an addition
1,800,000 additional shares of the Company's common stock for an exercise price
of $0.15 per share (exercisable from December 11, 1998 through December 11, 2003
(the "December 11 Options")) for an aggregate price of $600,000, (b) on December
12, 1998, the Company sold an aggregate of 500,000 shares of the Company's
common stock and options to purchase an addition 300,000 additional shares of
the Company's common stock for an exercise price of $0.15 per share (exercisable
from December 12, 1998 through December 12, 2003) for an aggregate price of
$100,000, and (c) on December 21, 1998, the Company sold an aggregate of 500,000
shares of the Company's common stock and options to purchase an addition 300,000
additional shares of the Company's common stock for an exercise price of $0.15
per share (exercisable from December 21, 1999 through December 21, 2003) for an
aggregate price of $100,000. On December 24, 1998, Options to purchase an
aggregate of 1,380,000 additional shares were exercised by the holders thereof
for an aggregate exercise price of $207,000. No underwriters were used in
connection with any of the foregoing sales. All sales were made in reliance upon
an exemption from the registration requirements of the Securities Act of 1933,
as amended (the "Securities Act") provided, in each case, by Section 4(1)
thereof. The acquirors of such securities made certain representations to the
Company as to, among other things, investment intent, that they possessed a
sufficient level of financial sophistication and that they received information
about the Company. The securities issued in the transactions were subject to
restrictions on transfer absent registration under the Securities Act, and no
offers to sell the securities were made by any form of general solicitation or
general advertisement
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.
10.1 The Stock Purchase Agreement between Powers & Co. and Spectrum
Information Technologies, Inc. dated December 11, 1998 was
previously filed as an exhibit to the Company's Current Report on
Form 8-K filed December 11, 1998, and incorporated herein by
reference.
27 Financial Data Schedule
99.1 Press Release dated December 14, 1998
99.2 Press Release dated December 17, 1998
16
99.3 Press Release dated December 21, 1998
99.4 Press Release dated December 29, 1998
B. Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated December 11,
1998, which included: Item 1, "Changes in Control of Registrant"
reporting that the Company, on December 11, 1998, sold a majority
interest in the Company to an investor.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Dated: February 12, 1999
SPECTRUM INFORMATION TECHNOLOGIES, INC.
By: /s/ Lawrence Powers
Lawrence Powers
Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ Jon Gerber
Jon Gerber
Vice President, Secretary and Treasurer
18
Exhibit 27
Financial Data Schedule