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, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-15596
SPECTRUM INFORMATION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1940923
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2700 Westchester Avenue, Purchase, New York 10577
(Address of principal executive offices) (Zip Code)
(914) 251-1800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the latest
practicable date.
Common stock, $.001 par value, 76,675,448 outstanding at November
10, 1995.
<PAGE>
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
FORM 10-Q
SEPTEMBER 30, 1995
INDEX
PART I. FINANCIAL INFORMATION Page No.
Consolidated Balance Sheets 1
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
PART II. OTHER INFORMATION 25
<PAGE>
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND MARCH 31, 1995
(Unaudited)
September 30, March 31,
Assets 1995 1995
- ----------------------------------------------------------------------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 3,550 $ 3,442
Marketable securities 905 785
Accounts receivable, net 6,870 5,793
Inventories 59 377
Prepaid expenses and other current assets 449 970
Net assets of discontinued operations 4,929 4,106
----- ------
Total current assets 16,762 15,473
Net property and equipment 405 1,270
Notes receivable-related parties 91 91
Other assets - 850
Intangible assets, net 373 1,551
- ----------------------------------------------------------------------------
Total assets $17,631 $19,235
====== ======
See accompanying notes to the consolidated financial statements.
<PAGE>
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND MARCH 31, 1995
(Unaudited)
September 30, March 31,
Liabilities and Stockholders' Equity 1995 1995
- -----------------------------------------------------------------------------
(Amounts in thousands)
Current liabilities:
Accounts payable $ 608 $ 127
Accrued liabilities 1,659 413
Other current liabilities 5,930 5,500
------ -------
Total current liabilities 8,197 6,040
------ -------
Deferred income - 850
------ -------
Liabilities Subject to Compromise:
Accounts payable and accrued liabilities 1,481 1,554
Reserve for litigation 4,719 4,719
Reserve for restructuring 2,158 2,158
Net liabilities of discontinued operations 531 4,630
Other liabilities 185 185
------ ------
Total liabilities subject to compromise 9,074 13,246
------ ------
Total liabilities 17,271 20,136
------ ------
Stockholders'equity:
Common Stock, $.001 par value, 110,000
shares authorized; 76,675 issued 77 77
Paid-in capital 63,961 63,961
Accumulated deficit (63,283) (64,443)
------- ------
755 (405)
Treasury stock, 100 shares at cost (300) (300)
Unrealized loss on marketable securities (95) (196)
------ -----
Total stockholders' equity 360 (901)
- -----------------------------------------------------------------------------
$ 17,631 $ 19,235
====== ======
See accompanying notes to the consolidated financial statements.
<PAGE>
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
Three Months Six Months
Ended Sept. 30, Ended Sept. 30,
--------------------- --------------------
1995 1994 1995 1994
- ----------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Revenues:
Licensing and
other revenue $ 550 $ 139 $ 1,379 $ 432
Merchandise sales, net 119 142 320 814
-------- -------- ------- -------
Total revenues 669 281 1,699 1,246
-------- ------- ------- -------
Operating costs and
expenses:
Cost of revenues 68 23 191 317
Selling, general
and admin 1,420 3,106 3,547 6,169
------- ------- ------- -------
Total operating costs
and expenses 1,488 3,129 3,738 6,486
------- ------- ------- -------
Operating loss (819) (2,848) (2,039) (5,240)
Professional fees in
connection with
Chapter 11 filing (888) - (1,778) -
Other income, net 1,781 85 1,722 88
----- ------ ------ ------
Income(loss) from
continuing operations 74 (2,763) (2,095) (5,152)
------- ------ ------ ------
Discontinued operations:
Income from operations
of Spectrum
Global 445 210 716 411
Income from operations
of Computer Bay - (818) (1,076)
Gain on disposal of
Computer Bay - - 2,539 -
------- ------- ------ ------
Income from discontinued
operations 445 (608) 3,255 (665)
------- ------- ------ ------
Cumulative effect of
change in accounting
principle - - - 316
------- ------- ------ ------
Net income (loss) $ 519 $ (3,371) $ 1,160 $ (5,501)
=== ======= ====== =======
Net income (loss) per
common share:
Loss from continuing
operations $ - $ (.03) $ (.02) $ (.06)
Income (loss) from
discontinued operations .01 (.01) .04 (.01)
Cumulative effect of
change in accounting
principle - - - -
--------- --------- --------- --------
Net income (loss) $ .01 $ (.04) $ .02 $ (.07)
===== ===== ===== =====
Weighted average
shares outstanding 76,675 76,261 76,675 76,171
====== ====== ====== ======
See accompanying notes to the consolidated financial statements.
<PAGE>
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
1995 1994
- ----------------------------------------------------------------------------
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,160 (5,501)
Adjustments to reconcile net income (loss)
to net cash (used by)provided by operating
activities:
Depreciation and amortization 223 276
Unrealized gain (loss) on marketable
securities 101 -
Cumulative effect of change in accounting
principle - (315)
Deferred income (850) (525)
Writedown of furniture and equipment 129 -
Gain on disposal of Computer Bay (2,539) -
Gain on sale of building (86) -
Gain on sale of Axcell (1,616) -
(Increase) decrease in:
Accounts receivable (1,077) 383
Inventories 18 (68)
Other assets 1,371 (434)
Increase (decrease) in:
Accounts/notes payable,
Accrued liabilities and
other liabilities 2,157 (22)
Liabilities subject to compromise (73) -
----- -----
Net cash used by continuing
operations (1,082) (6,206)
Net cash (used)provided by
discontinued operations (1,798) 1,578
- ----------------------------------------------------------------------------
Net cash used by operating
activities (2,880) (4,628)
- ----------------------------------------------------------------------------
CASH FLOWS RELATING TO INVESTING ACTIVITIES:
(Purchase) sale of marketable securities,net (120) 3,349
Purchase of property and equipment (40) (62)
Proceeds from sale of Axcell 3,000 -
Proceeds from sale of building 734 -
----- -----
Net cash provided by continuing operations 3,574 3,287
Net cash used by discontinued operations (57) (69)
- ----------------------------------------------------------------------------
Net cash provided by investing activities 3,517 3,218
- ----------------------------------------------------------------------------
CASH FLOWS RELATING TO FINANCING ACTIVITIES:
Proceeds from exercise of stock options
and warrants - 581
----- ------
Net cash provided by continuing operations - 581
Net cash used by discontinued operations (3) (1,345)
- ----------------------------------------------------------------------------
Net cash used by financing activities (3) (764)
- ----------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 634 (2,174)
Cash and cash equivalents, unrestricted,
beginning of period 4,409 3,865
----- ------
Cash and cash equivalents, unrestricted,end
of period 5,043 1,691
Cash and cash equivalents, restricted, end
of period 291 269
- ----------------------------------------------------------------------------
Total cash and cash equivalents $ 5,334 $ 1,960
===== =====
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ - $ -
Cash paid during the year for income taxes $ 2 $ -
See accompanying notes to the consolidated financial statements.
<PAGE>
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. Summary of Significant Accounting Policies
Business
Spectrum Information Technologies, Inc. (the "Company" or
"Spectrum") is a holding company with one continuing subsidiary;
Spectrum Cellular Corporation, a Delaware corporation ("Spectrum
Cellular"). The Company discontinued the operations of its
Dealer Service Business Systems, Inc. subsidiary, a Delaware
corporation d/b/a Data One ("Data One"), in fiscal 1994 and its
Computers Unlimited of Wisconsin, Inc. subsidiary, a Wisconsin
corporation d/b/a Computer Bay ("Computer Bay") in fiscal 1995.
The Company sold its Spectrum Global Services, Inc. ("Spectrum
Global")subsidiary during October 1995 (Note 7).
Spectrum, through its Spectrum Cellular subsidiary, develops
and licenses wireless data transmission technology and designs,
markets and supervises the manufacturing of direct connect data
communication products incorporating that technology. The
Company's wireless data transmission technology utilizes an
error-correction protocol permitting the reliable transmission of
electronic data between two computers over cellular telephone
networks and other wireless communication systems. The Company
also provided, through its Spectrum Global subsidiary,
telecommunication contract personnel to Fortune 1000 companies.
Bankruptcy Proceedings
On January 26, 1995 ("Petition Date"), the Company and three
of its four subsidiaries (Computer Bay, Data One and Spectrum
Cellular) filed petitions for protection under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy
Court of the Eastern District of New York ("Chapter 11"). The
Company, Data One and Spectrum Cellular, are herein called the
"Debtors-in-Possession" and together with Computer Bay the
"Debtors". Spectrum Global did not file for bankruptcy. On
February 8, 1995, the United States Trustee appointed an
Unsecured Creditors Committee for Spectrum, Spectrum Cellular and
Data One and another for Computer Bay. On May 25, 1995, the
Bankruptcy Court, upon motion by the Debtors, converted the
Computer Bay Chapter 11 to a case under Chapter 7 of the
Bankruptcy Code ("Chapter 7") (Note 2), and an independent
trustee is overseeing the liquidation of Computer Bay's assets.
Spectrum and Spectrum Cellular are continuing to manage their
affairs and operate their business under Chapter 11 as debtors-
in-possession while formulating a plan of reorganization. The
operations of Data One were discontinued as of December 31, 1994.
Pursuant to section 362 of the Bankruptcy Code, the
commencement of the Debtors' Chapter 11 case operates as an
automatic stay, applicable to all entities, of the following: (i)
commencement or continuation of a judicial, administrative, or
other proceeding against the Debtors that was or could have been
commenced prior to commencement of the Debtor's Chapter 11 case,
or to recover for a claim that arose before the commencement of
the Debtors' Chapter 11 case; (ii) enforcement of any judgments
against the Debtors that arose before the commencement of the
Debtors' Chapter 11 case; (iii) the taking of any action to
obtain possession of property of the Debtors or to exercise
control over property of the Debtors; (iv) the creation,
perfection or enforcement of any lien against the property of the
Debtors; (v) the taking of any action to collect, assess or
recover a claim against the Debtors that arose before the
commencement of the Debtors' Chapter 11 case; or (vi) the setoff
of any debt owing to the Debtors that arose prior to the
commencement of the Debtors' Chapter 11 case against a claim held
by such creditor or party-in-interest against the Debtors that
arose before the commencement of the Debtors' Chapter 11 case.
Any entity may apply to the Bankruptcy Court for relief from the
automatic stay so that it may enforce any of the aforesaid
remedies that are automatically stayed by operation of law at the
commencement of the Debtors' Chapter 11 case.
Although the Debtors are authorized to operate their
business as debtors-in-possession, they may not engage in
transactions outside the ordinary course of business without
first complying with the notice and hearing provisions of the
Bankruptcy Code and obtaining Bankruptcy Court approval. The
Unsecured Creditors' Committees may review and object to
transactions involving the Company that are outside of the
ordinary course of the Company's business, may consult with the
Company concerning the administration of the Company's Chapter 11
case, and may participate in the formulation of a plan of
reorganization. The Company is required to pay certain expenses
of the Unsecured Creditors' Committees, including counsel and
other professional fees, to the extent allowed by the Bankruptcy
Court. Other parties in interest in the Chapter 11 case are also
entitled to be heard on motions made in the Chapter 11 case,
including motions for approval of transactions outside the
ordinary course of business.
For 120 days after the petition date, the Debtors have the
exclusive right to propose and file a plan of reorganization with
the Bankruptcy Court. If the plan is filed, no other party may
file a plan of reorganization until 180 days after the petition
date, during which period the Debtors have the exclusive right to
solicit acceptance of the plan. On September 21, 1995, the
Bankruptcy Court granted the Debtors' request to extend the
filing of the plan of reorganization to January 26, 1996. The
Company is currently working on formulating a plan of
reorganization.
Basis of Presentation
The accompanying consolidated financial statements of the
Company have been prepared on the basis that it is a going
concern, which contemplates the realization of assets and the
satisfaction of liabilities, except as otherwise disclosed, in
the normal course of business. However, as a result of Chapter
11 proceedings and circumstances relating to this event,
including the Company's recurring losses from operations, such
realization of assets and liquidation of liabilities is subject
to significant uncertainty. Further, the Company's ability to
continue as a going concern is dependent upon the confirmation of
a plan of reorganization by the Bankruptcy Court, achievement of
profitable operations, the sale of non-core assets and the
ability to generate sufficient cash from operations and financing
sources to meet the restructured obligations. Except as
otherwise disclosed, the consolidated financial statements do not
include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.
While the Company is currently in the process of formulating a
plan of reorganization, it continues to monitor expenses in order
to conserve cash. During June and July 1995, the Company
received $3,000,000 for the sale of a license to utilize certain
patented technology and the related business (Note 6) and as a
result of the sale, management has downsized the operations of
Spectrum Cellular and sold its Dallas facility. During October
1995, the Company sold its Spectrum Global subsidiary for
approximately $6,000,000, of which the net proceeds were approximately
$4,572,000. In addition, as part of its plan of reorganization,
the Company is looking to settle all significant litigation and
seek equity capital. However, there can be no assurance that
these events will occur according to management's plans. The
financial statements for the six months ended September 30, 1995
and the year ended March 31, 1995, reflect accounting principles
and practices set forth in AICPA Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code", which the Company adopted as of January 26,
1995, the date of the Company's Chapter 11 filing (see Bankruptcy
Proceedings). The net liabilities of Spectrum, Spectrum Cellular
and Data One, excluding intercompany payables of approximately
$14,459,000, were approximately $4,570,000 at September 30, 1995.
Principles of Consolidation
These consolidated financial statements include the accounts
and results of operations of the Company and its wholly owned
subsidiaries, Data One, Spectrum Cellular, and Spectrum Global as
of and for the three and six months ended September 30, 1995 and
1994. Upon conversion of Computer Bay's Chapter 11 case to a case
under Chapter 7, on May 25, 1995, which mandates the liquidation
of Computer Bay, control of Computer Bay has been transferred
from the Company to the Computer Bay trustee. As a result, the
net liabilities of Computer Bay have been eliminated from the
consolidated financial statements of the Company. The Company
discontinued the operations of its Data One subsidiary during
fiscal year 1994 and its Computer Bay subsidiary during fiscal
year 1995, and sold its Spectrum Global subsidiary during October
1995. All intercompany transactions have been eliminated.
The unaudited interim consolidated financial statements have
been prepared on a basis substantially consistent with the
audited statements for the fiscal year ended March 31, 1995.
Certain information and footnote disclosures normally included in
financial statements were prepared in accordance with generally
accepted accounting principles and have been condensed or omitted
pursuant to the rules and regulations of the Securities and
Exchange Commission. The Company believes that the disclosures
contained herein are adequate to make the information presented
not misleading. The unaudited financial statements should be
read in conjunction with the audited financial statements and
accompanying notes in the Company's annual report on Forms 10-K
and 10-K/A for the fiscal year ended March 31, 1995.
In the opinion of management, the accompanying unaudited
consolidated financial statements reflect all adjustments that
are necessary to present fairly the Company's financial position
as of September 30, 1995, and the results of its operations and
its cash flows for the interim periods presented.
Cash, cash equivalents
Cash and cash equivalents include the Company's cash
balances and certificates of deposit that mature in 90 days or
less when acquired. Cash and cash equivalents are carried at
cost plus accrued interest, which approximates market.
Inventories
Inventories consist primarily of merchandise held for resale
and are stated at the lower of cost or market. Cost is
determined by using the first-in, first-out ("FIFO") method.
Inventory is net of a valuation allowance of approximately
$100,000 at September 30, 1995 and March 31, 1995.
Property and Equipment
Property and equipment are depreciated using the straight-
line method over the estimated useful lives of the assets or, in
the case of leasehold improvements, over the lesser of their
estimated useful lives or the remaining term of the lease. The
following is a summary of estimated useful lives:
Building 30 years
Furniture, fixtures
and equipment 5 to 7 years
Improvements are capitalized and depreciated over the
remaining useful life of the asset. Maintenance and repairs are
charged to expense as incurred.
Income Taxes
No provision for taxes has been made due to continuing
losses from operations and net operating loss carryforwards.
Income (Loss) Per Common Share
The computation of income (loss) per common share is based
on the weighted average number of common shares outstanding
during the period. Common stock equivalents were not included in
the computation of weighted average shares outstanding because
such inclusion would be anti-dilutive to income from continuing
operations.
Reclassification
Certain amounts as previously reported have been
reclassified to conform to the September 30, 1995 presentation.
2. Business Combinations, Acquisitions, and Dispositions
Computer Bay
Due to Computer Bay's continuing losses and loss of market
share, the Company officially closed down its Computer Bay
subsidiary on January 25, 1995. Accordingly, Computer Bay has
been reported as a discontinued operation, effective January 25,
1995 and the consolidated financial statements have been
reclassified to report separately the operating results of the
subsidiary. The Company's prior years' operating results have
also been reclassified to reflect the discontinuation of Computer
Bay.
Upon conversion of Computer Bay's Chapter 11 case to a case
under Chapter 7 on May 25, 1995, which mandates the liquidation
of Computer Bay, control of Computer Bay has been transferred
from the Company to the Computer Bay trustee. As a result, the
net liabilities of Computer Bay have been eliminated from the
consolidated financial statements of the Company. As a further
result of the conversion of Computer Bay to a case under Chapter
7, the Company has recorded a gain of $2,539,000 by writing off
the net liabilities of Computer Bay. The Computer Bay trustee has
filed a claim with the Bankruptcy Court to substantively
consolidate the Computer Bay liabilities with the liabilities of
the Debtors in Chapter 11. Although there can be no assurance
that the Debtors will be successful defending this claim, the
Company does not believe there are grounds for such
consolidation.
The following table summarizes the net liabilities of
Computer Bay for the periods presented:
May 25, March 31,
1995 1995
------------------------------------------------------------
(Amounts in thousands)
Cash $ 218 $ 232
Restricted cash 291 288
Accounts receivable 1,078 1,080
Income taxes receivable 409 409
Property and equipment 100 100
Other assets 129 129
Accounts payable (3,368) (4,864)
Other liabilities (1,396) (1,473)
------- -------
Net liabilities $ (2,539) $ (4,099)
====== =======
The summary of Computer Bay's results of discontinued
operations for the periods presented are as follows:
Three Months ended Six Months ended
September 30, September 30,
------------------ ------------------
1995 1994 1995 1994
------------------ ------------------
(Amount in (Amount in
thousands) thousands)
Revenues $ - $20,218 $ - $45,494
Net Loss - (818) - (1,076)
Data One
Effective December 31, 1993, the Company adopted a plan to
discontinue operations at Data One. The operations of Data One
ceased on December 31, 1994. Accordingly, Data One has been
reported as a discontinued operation effective December 31, 1993
and the consolidated financial statements have been reclassified
to report separately the operating results of the subsidiary. The
Company's prior years operating results have also been
reclassified to reflect the discontinuation of Data One.
The following table summarizes the net liabilities of Data
One for the periods presented:
September 30, March 31,
1995 1995
------------------------------------------------------------------
(Amounts in thousands)
Cash $ 88 $ 83
Accounts Receivable 41 41
Other assets 2 3
Accounts payable (144) (144)
Deferred income (253) (253)
Reserve for discontinued operations (158) (175)
Other liabilities (107) ( 86)
------- ------
Net liabilities $ (531) $ (531)
====== ======
Spectrum Global
Effective October 17, 1995, the Company sold its Spectrum
Global subsidiary for approximately $6 million in cash. Spectrum
Global has been reported as a discontinued operation for all
periods presented.
The following table summarizes the net assets of Spectrum
Global for the periods presented:
September 30, March 31,
1995 1995
------------------------------------------------------------------
(Amounts in thousands)
Cash $ 1,187 $ 651
Accounts Receivable 1,885 1,571
Other Assets 2,257 2,285
Accounts Payable (282) (316)
Other Liabilities (118) (85)
-------- -------
Net assets $ 4,929 $ 4,106
===== =====
The following table summarizes the results of discontinued
operations of Spectrum Global for the periods presented:
Three Months ended Six Months ended
September 30, September 30,
------------------ ------------------
1995 1994 1995 1994
------------------ ------------------
(Amount in (Amount in
thousands) thousands)
Revenues $3,354 $2,007 $6,317 $4,037
Net Income 445 210 716 411
3. Liabilities Subject to Compromise
Liabilities subject to compromise are liabilities recorded
by the Company as of the Petition Date that are expected to be
compromised under a plan of reorganization (Note 1). The
Bankruptcy Court established the bar date by which claims against
the Debtors must be filed if the claimants wish to receive
distribution in Chapter 11 cases as September 7, 1995.
Excluding the material litigation discussed herein (Note 5)
and improperly filed claims by shareholders, approximately 308
claims were filed against the Company alleging approximately $5.4
million in creditors' claims. These claims primarily consisted
of approximately: $1.7 million in claims by vendors; $855
thousand in claims by former employees based upon severance and
employment agreements; $1.2 million in indemnification claims for
legal fees and settlement of litigation by former employees; $784
thousand in claims arising from rejected leases; $554 thousand
claimed by a Computer Bay financing company; and $314 thousand
related to a prepaid Data One maintenance contract. Additionally,
the Trustee appointed to administer the Computer Bay estate filed
a claim alleging $4.4 million in damages. The Company,
along with its outside counsel, is evaluating each of these
claims and reconciling them to its books and records.
4. Licensing Agreements
During the quarter ended September 30, 1995 the Company
signed one new non-exclusive licensing agreement pursuant to
which it licensed the use of its patented technology. The license
agreement entitles the Company to receive a non-refundable
license fee as well as future royalties. During the quarter
ended September 30, 1994, the Company signed one non-exclusive
licensing agreement, pursuant to which it licensed the use of its
patented technology. The license agreement entitles the Company
to receive a non-refundable license fee as well as future
royalties.
At September 30, 1995, approximately $5,974,000 is included
in trade and other receivables, to reflect the balance of the
non-refundable license fees due under the licensing agreements.
Additionally, $5,500,000 is included in current liabilities to
reflect the payments which the Company will make in connection
with mutual advertising agreements.
5. Litigation
Bankruptcy Proceedings
On January 26, 1995, the Debtors (Note 1) filed petitions
for relief under Chapter 11 in the United States Bankruptcy Court
for the Eastern District of New York, Case Nos. 195_10690_260,
195_10691_260, 195_10692_260 and 195_10693_260. Spectrum Global
did not file for bankruptcy. On February 8, 1995, the United
States Trustee appointed an Official Committee of Unsecured
Creditors for the Debtors other than Computer Bay and another for
Computer Bay to represent the interests of all unsecured
creditors whose claims arose before the Petition Date. No other
committees have been appointed. On May 25, 1995, the Bankruptcy
Court, upon motion by the Debtors, converted the Computer Bay
proceeding to a case under Chapter 7 of the Bankruptcy Code. An
independent trustee has been appointed to oversee liquidation of
Computer Bay's Chapter 7 estate. The Computer Bay trustee has
filed a claim with the Bankruptcy Court to substantively
consolidate the Computer Bay liabilities with the liabilities of
the Debtors in Chapter 11. Although there can be no assurance
that the Debtors will be successful defending this claim, the
Company does not believe there are grounds for such
consolidation.
Spectrum and Spectrum Cellular are continuing to manage
their affairs and operate their businesses under Chapter 11 as
debtors in possession while formulating a plan of reorganization.
The operations of Data One were discontinued as of December 31,
1994. By order of the Bankruptcy Court, the bar date for filing
proofs of claim in the Chapter 11 proceedings was established as
September 7, 1995.
Other Legal Proceedings
The Company is involved in various litigations, the most
significant of which are discussed herein.
The Company, certain of its former officers and directors,
one current officer and two employees are defendants in certain
of these matters. All of the proceedings discussed below in which
the Company is named as a defendant or respondent (other than
those pending in the Bankruptcy Court) are stayed pursuant to the
automatic stay provisions of the Bankruptcy Code, as discussed
above. The Company hopes to use the bankruptcy process to resolve
pending litigation. These actions are not stayed, however,
against defendants other than the Company. The Company has
informed former officers and directors and employees of the
Company to whom it has been paying legal expenses related to
these proceedings prior to the Bankruptcy filing that it would no
longer be paying these expenses. The Company has directed these
individuals to seek reimbursement directly from the Company's
insurance providers. The Company intends to seek Bankruptcy Court
approval for payment of limited legal fees incurred by certain
present employees.
Securities Related Legal Proceedings
On February 9, 1994, the class action filed against the
Company, and two of its former officers in May 1993 (In re
Spectrum Information Technologies, Inc. Securities Litigation;
United States District Court For the Eastern District of New
York; Civil Action No. 93-2295) (the "Class Action") was
supplemented to extend the end of the class period from May 21,
1993 to February 4, 1994, to add additional claims against the
Company and the individual defendants, and to add certain of its
then officers as party defendants. In April 1994, a Second
Consolidated Amended Class Action Complaint was filed adding
additional employees as party defendants. The class and certain
sub-classes have been certified. A similar putative class action
filed in the United States District Court of the Southern
District of Texas has been transferred and consolidated with the
Class Action.
The plaintiffs in the Class Action claim to have purchased
the Company's securities at prices which the Company and the
individual defendants allegedly artificially inflated by, among
other things: (i) misrepresenting the potential value of the
patent license agreement the Company entered into with AT&T; (ii)
improperly accounting for revenues and expenses in connection
with certain license and advertising agreements; (iii) failing to
disclose the existence of an inquiry initiated by the Securities
and Exchange Commission ("SEC"); and (iv) making statements
regarding the employment of John Sculley. In addition, there are
claims against certain of the individual defendants for improper
insider trading. The class plaintiffs have filed a proof of
claim alleging $676 million in damages. The Company's former
management, based on the advice of its then counsel, believed it had
good and meritorious defenses to the claims against it. The
Company's new management, along with its new counsel, are involved
in the ongoing process of evaluating the pending litigation. While
the effect of the bankruptcy filing and likely outcome of these
claims are uncertain at this time, the Company hopes to use the
bankruptcy process to assist it in reaching a resolution to this
and other litigation.
On July 20, 1994, the Company, certain of its then officers
and directors, and two former officers and directors were served
a class action complaint. The complaint asserts that Spectrum
knowingly or recklessly made material false statements or omitted
material facts in its financial reporting relating to Computer
Bay prior to announcing the restatement of earnings for the
fiscal year 1992 and the first three quarters of fiscal 1993, to
correct inaccurate accruals of certain items into income. For
pre-trial purposes, this litigation has been consolidated with
the Class Action described above.
In May 1993, the SEC initiated a confidential and
informal fact gathering inquiry apparently directed toward
statements the Company purportedly made regarding the potential
value of the patent license agreement it had entered into in
fiscal 1994 with AT&T. On December 6, 1993, following the
Company's dismissal of its outside auditors, the SEC issued a
formal order of investigation. The Company believes that a focus
of the investigation relates to accounting and disclosure issues
with respect to certain of the patent license and advertising
agreements it entered into during fiscal 1994. The Company is
cooperating fully with the investigation.
The accounting treatment at issue in the investigation,
which had been implemented after consultation with the Company's
previous outside auditors and had been disclosed in the Company's
quarterly filings with the SEC, was revised by the Company when
it voluntarily restated its earnings on February 7, 1994.
In October 1994, two individuals commenced an action
against two of the Company's former officers and directors
Silverberg, et. al. v. Sculley, et. al., in the Superior Court of
the State of California for the County of Los Angeles, Case No.
BC 111206. The claims against the former officers and directors
include breach of fiduciary duty, breach of covenant of good
faith and fair dealing, deceit and misrepresentation, negligent
misrepresentation, mismanagement and gross negligence. The
complaint was subsequently amended and the Company is determining
whether it was properly served prior to the petition date.
In March 1995, Peter Caserta, Spectrum's former chief
executive officer and chairman of the Board, Howard Schor, a
former employee, John Bohrman, a former director, James Paterek,
former president of Spectrum Global (which was sold by Spectrum
in October), and six other non-Company employees were indicted on
charges of mail and wire fraud relating to activities of the
Caserta Group. The United States Attorney's Office for the
Eastern District of New York also informed the Company that it is
the subject of an investigation regarding violations of
securities laws that may have occurred prior to the appointment
of the Company's current CEO and Board of Directors. The Company
is cooperating fully with the investigation.
Patent Related Proceedings
During August 1994, Megahertz Corporation filed a Demand for
Arbitration with the American Arbitration Association in Salt
Lake City, Utah, Case No. 81 184 0008194 seeking a determination
as to whether royalty payments by Megahertz were temporarily
abated under the terms of a license agreement between Megahertz
and Spectrum. Megahertz, in its arbitration request, asked for a
determination of whether the Company has achieved certain
licensing objectives and/or undertaken defined patent enforcement
actions as set forth in the agreement. The parties jointly agreed
to delay this proceeding in December 1994. The arbitration was
subsequently automatically stayed by the Company's bankruptcy
filing. Megahertz and Spectrum have since been engaged in
settlement discussion.
On December 5, 1994, the Company filed a lawsuit against
Motorola, Inc. for infringement of claims in six of its patents
covering basic wireless data concepts. Motorola has denied the
allegations in its answer. The case was originally filed in the
United States District Court for the Eastern District of
Virginia, but was transferred to the United States District Court
for the Northern District of Alabama, Northeastern Division and
is captioned Spectrum Information Technologies, Inc. v. Motorola,
Inc., Civil Action No. 95-U-234-NE. On October 16, 1995, the
parties stipulated to extend the dates in the case's original
scheduling order by three months to permit the parties to pursue
settlement discussions.
Other Proceedings
In January 1994, Robert Fallah, a former financial
consultant instituted a suit, Fallah v. Spectrum Information
Technologies,Inc., Index No. 94-1044 against the Company seeking
$5,790,000 in damages related to purported promises made by the
Company to give the plaintiff certain stock warrants in exchange
for the consultant's services.The plaintiff filed a proof of
claim in the Company's bankruptcy proceeding alleging $5,790,000
in damages. It is the Company's opinion that it has sound
defenses and will vigorously defend this claim.
In September 1994, the plaintiff in an action filed against
the Company in April 1994, Blair v. Spectrum Information
Technologies, 162nd District Court of Dallas County, amended his
complaint to add Peter Caserta, a former officer and director of
the Company, as a defendant. The amended complaint charges Mr.
Caserta with breach of fiduciary duty, fraud, negligence and
gross negligence in the alleged failure to allow Mr. Blair to
participate in the Company's stock option plan. The plaintiff
alleges that he was induced to begin employment with Spectrum
Cellular through a promise that he would be allowed to
participate in the Company's stock option plan and alleges breach
of contract, fraud, negligence, breach of fiduciary relationship
and bad faith against all defendants. The plaintiff terminated
his employment with Spectrum Cellular Corporation in August 1994.
Mr. Blair filed a proof of claim in the bankruptcy proceeding
alleging $1 million in damages.
In October 1994, Gene Morgan and Gene Morgan Financial
(collectively, "Gene Morgan") demanded in excess of $8 million
dollars from the Company based on an alleged breach of a
consulting agreement and failure to register certain
underwriter's warrants. Gene Morgan filed a proof of claim in
the bankruptcy proceeding claiming an unsecured nonpriority claim
of $6.3 million alleging breach of contract under warrant. Gene
Morgan, by its assignee, Lowenstein, Sandler, Kohl & Fisher,
filed a proof of claim alleging approximately $1.9 million in
damages arising from the alleged breach of the consulting
agreement.
On July 21, 1995, The Home Insurance Company of Illinois
("The Home"), the Company's former directors' and officers'
insurance carrier, filed an adversary proceeding complaint in the
Company's bankruptcy proceeding. In its complaint, The Home
seeks rescission of a renewal of a directors' and officers'
liability and company reimbursement policy issued in June 1993 to
the Company for the benefit of its directors and officers based
upon material misrepresentations and/or omissions in the
application for that policy. In the alternative, The Home seeks a
declaration that coverage is not afforded under such policy for
claims asserted against certain directors and officers of the
Company. The Home alleges that the Company made certain
misrepresentations and/or omissions regarding the existence of an
SEC informal investigation and suits filed against the Company
arising from alleged misstatements made by the Company regarding
the license agreement it entered in fiscal 1994 with AT&T. The
Company believes the Home is obligated to provide the coverage at
issue and intends to defend this action.
In an action against the Company and certain former
employees in the Superior Court of New Jersey, Middlesex County,
entitled Douglas H. Anderson v. Dealer Service Business Systems,
Inc. d/b/a Data One et al., Docket No. L-11315-92, the plaintiff
alleged breach by the Company of an employment contract and age
discrimination by the plaintiff's employer, Data One. The
plaintiff further alleged that the Company and certain former
employees interfered with his employment contract and inflicted
emotional distress. The action is currently stayed against the
Company and Data One by the automatic stay provisions of the
Bankruptcy Code. Subsequently, the individual defendants in the
litigation other than Peter Caserta, the Company's former CEO,
were dropped from the action. The plaintiff and Mr. Caserta
entered a settlement, the terms of which are under seal by court
order. In October 1995, Mr. Andersen filed a proof of claim
against the Company alleging $1.5 million in damages based on the
allegations described above. The Company intends to object to
this claim on the grounds that, among other things, it was not
timely filed. Additionally, Mr. Caserta filed a proof of claim
against the Company alleging that he is entitled to
indemnification from the Company based on the amount he paid to
the plaintiff to settle this matter.
The Company is also involved in other litigations. The
Company had previously reserved approximately $4.7 million which
had been prior management's estimate of the Company's portion of
any ultimate settlement. The Class Action and other litigations
were factors in the Company's decision to file for protection
under Chapter 11. The effect of the filing and the likely
outcomes of these claims are uncertain at this time.
6. Asset Dispositions
On September 21, 1995, Spectrum sold its Spectrum Cellular
facility in Dallas, Texas. The building was sold for
approximately $780,000 resulting in a gain on the sale of
$85,976. Net proceeds from the sale were $734,000, although the
Company owes an as yet undetermined amount of taxes on the
property.
In July, 1995, the Company sold its Axcell business and its
license to certain related patent rights to Telular Corporation
("Telular") for $3,000,000 pursuant to an agreement approved by
the Bankruptcy Court, which resulted in a gain of approximately
$1,616,000. The patent rights relate to wireless interface
technology and were obtained in a license agreement from Telular
and are not part of Spectrum's core direct connect patent
portfolio. The sales of Axcell products were approximately
$149,000 and $711,000 for the six months ended September 30, 1995
and 1994, respectively, and $19,000 and $75,000 for the three
months ended September 30, 1995 and 1994, respectively.
7. Subsequent Events
On September 11, 1995, the Company entered an agreement (the
"Plan") to sell all of the capital stock of its wholly owned
subsidiary Spectrum Global Services, Inc. ("Global") to The Lori
Corporation and COMFORCE Corporation (collectively, "Purchaser")
for $6 million, plus a closing adjustment related primarily to
the allocation of salaries and benefits of certain Spectrum and
Global employees. Other members of the purchasing group included
ARTRA Group Incorporated, a corporation organized under the laws
of the State of Pennsylvania, Peter R. Harvey, Marc L. Werner,
James L. Paterek, Michael Ferrentino and Christopher P. Franco.
The sale of Global was subject to bankruptcy court approval and
receipt of higher and better offers. A hearing regarding the
transaction (and any higher and better offers) was held on
October 17, 1995 before the United States Bankruptcy Court for
the Eastern District of New York, following which the court
approved the sale. The Purchaser paid cash for Global's stock at
the October 17th closing.
In July 1995, Mr. Paterek, president of Global, Mr.
Ferrentino, a vice president of Global, and Mr. Franco,
Spectrum's vice president and former general counsel, notified
Spectrum that they wished to pursue an opportunity independent of
Spectrum and intended to accept positions with the Purchaser if
its bid for Global was successful. Following the sale, Mr.
Ferrentino and Mr. Franco assumed senior management positions
with the Purchaser, and the Purchaser announced that Mr. Paterek
would become a consultant to COMFORCE Corporation.
On November 8, 1995, the Company reached an agreement in
principle on a framework for settlement of the Class Action
lawsuit that has been pending against the Company and certain of
its present and former employees since May 1993. The class
plaintiffs in that lawsuit filed a claim against the Company in
its bankruptcy proceedings in the amount of $676 million. (See
note 5 to consolidated financial statements.) The settlement, if
consummated, would be in satisfaction of that claim as well as
all claims between the Company and the other defendants in the
suit.
The settlement is contingent on numerous factors, including
among other things successfully resolving a litigation regarding
insurance coverage (see note 5 to consolidated financial
statements), negotiation and execution of a definitive settlement
agreement, the Company's ability to develop and confirm a plan of
reorganization in the Company's pending bankruptcy proceeding
satisfactory to all interested parties including plaintiffs in
the class action, and approval of the settlement by the
Bankruptcy Court and by the United States District Court in which
the class action suit is pending.
Under the terms of the agreement in principle, the Company
and the class plaintiffs have agreed to a framework under which
it is contemplated that the Company will issue to the class
plaintiffs in its plan of reorganization a number of shares of
its common stock that would be equal to the number of shares of
its stock to be issued to existing shareholders in the
reorganization. This undertaking is subject to contingencies
which could alter the framework of the settlement, including
without limitation the percentage of the Company's stock to be
issued to the class. In a related agreement, the class
plaintiffs are also to receive the proceeds, net of certain fees
and expenses, from $10 million of insurance policies covering the
Company's directors and officers and, as a result of court
supervised negotiations and at the recommendation of the Court,
$1,350,000 from the various individual defendants in the action
and $250,000 from the Company. The individual defendants are to
place their contributions to the settlement in escrow by November
15, 1995. Neither the Company nor the individual defendants
acknowledged any wrongdoing in connection with the agreement in
principle.
Among the uncertainties is that insurers that issued
policies for $6 million of the insurance necessary to fund the
settlement have disclaimed coverage. This dispute is the subject
of a litigation pending in the U.S. District Court for the
Eastern District of Long Island, which must be successfully
resolved in order for the settlement to be implemented. The
Company's plan of reorganization must also address other material
litigation, claims by the Company's creditors and the Company's
need for additional capital. There can be no assurance that the
Company will be successful in its efforts to resolve those
matters or that the other conditions to the settlement will be
achieved. The Company's exclusive right to file a plan of
reorganization expires on January 26, 1996.
<PAGE>
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
ORGANIZATION AND BUSINESS COMBINATION
Spectrum Information Technologies, Inc. is a holding company
with one continuing subsidiary; Spectrum Cellular Corporation
("Spectrum Cellular"). The Company discontinued the operations
of its Dealer Service Business Systems, Inc. subsidiary d/b/a
Data One ("Data One"), in fiscal 1994 and its Computer Unlimited
of Wisconsin, Inc. subsidiary d/b/a Computer Bay ("Computer Bay")
in fiscal 1995. The Company sold its Spectrum Global Services,
Inc. subsidiary ("Spectrum Global") on October 17, 1995.
Spectrum Global, Data One and Computer Bay are reflected in the
financial statements as discontinued operations.
Effective January 26, 1995, the Company and Data One,
Spectrum Cellular and Computer Bay filed for reorganization under
Chapter 11 of the Federal Bankruptcy Code. On May 25, 1995, the
Bankruptcy Court granted the Company's motion to convert the
Chapter 11 filing for Computer Bay to a case under Chapter 7 and
as a result, control of Computer Bay has been transferred to the
Computer Bay trustee and no longer rests with the Company.
Chapter 11 Proceedings
As discussed in Note 1 to the financial statements, the
Company and three of its subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the United States
Bankruptcy Code, as amended, in the United States Bankruptcy
Court for the Eastern District of New York ("Bankruptcy Court").
The Class Action and other litigations were among the factors
that contributed to the Company's decision to seek bankruptcy
protection in order to position the Company to focus on its core
business.
Due to the Chapter 11 filing, the Company's liquidity
position has been positively affected because the cash
requirements for the payment of accounts payable and other
liabilities, which arose prior to the Chapter 11 filings, are in
most cases deferred until a plan of reorganization is confirmed
by the Bankruptcy Court. The Company's liquidity position has
also been improved by the sale of the AXCELL business and related
patents and Spectrum Global. However, the positive effect will
be at least partially offset by the increased administrative and
professional fees associated with the Chapter 11 filing and
resolution of claims subject to compromise. The Company is also
reviewing all future obligations and all executory contracts to
determine whether they should be assumed or rejected, subject to
Bankruptcy Court approval.
Management of the Company is currently working on a plan of
reorganization. The major components of this plan have yet to be
finalized. The adequacy of the Company's capital resources and
long-term liquidity will be determined when a plan of
reorganization is confirmed by the Bankruptcy Court (see
Liquidity and Capital Resources).
SUMMARY OF OPERATIONS
The following table sets forth, for the periods indicated,
the percentage relationship that certain items bear to revenue.
This summary provides trend data relating to the Company's normal
recurring operations. Other items of significance are discussed
separately under the captions "Operating Loss", "Other Income and
Expense", and "Discontinued Operations" below. Amounts set forth
below reflect the Company's Data One, Computer Bay and Spectrum
Global subsidiaries as discontinued operations.
Three Months Ended
September 30,
-----------------------------------------
1995 % 1994 %
-------- ----- -------- -----
(Amounts in Thousands)
Revenues $ 669 100 281 100
------- --- ------- ---
Operating costs and expenses:
Cost of revenues 68 10 23 8
Selling, general and
administrative expenses 1,420 212 3,106 1,105
------- --- ------- -----
Total operating costs
and expenses 1,488 222 3,129 1,114
------- --- ------- -----
Operating loss $ (819) (122) (2,848) (1,014)
======= === ======= =====
Six Months Ended
September 30,
-----------------------------------------
1995 % 1994 %
-------- ----- -------- -----
(Amounts in Thousands)
Revenues $ 1,669 100 1,246 100
------- --- ------- ---
Operating costs and expenses:
Cost of revenues 191 11 317 25
Selling, general and
administrative expenses 3,547 209 6,169 495
------- --- ------- -----
Total operating costs
and expenses 3,738 220 6,486 520
------- --- ------- -----
Operating loss $ (2,039) (120) (5,240) (420)
======= === ======= =====
Consolidated revenues for the quarter and six months ended
September 30, 1995 increased by $388,000 or 138% and $453,000 or
36%, respectively,as compared to September 1994. This increase is
due to a $411,000 or 296% and $947,000 or 219% increase,
respectively, in royalty/licensing income for the three and six
months ended September 30, 1995 offset by a decrease in sales of
$23,000 or 16% and $494,000 or 61%, respectively, for the second
quarter and six months ended September 30, 1995 due to the sale
of the Axcell product line. Axcell sales decreased $56,000 and
$562,000, respectively, for the quarter and six months ended
September 30, 1995 as compared to the prior year. Royalties and
licensing income increased primarily as a result of six months of
royalty income for the Megahertz and Rockwell licence agreements
as compared to three months of income for each company in the
prior year (see note 5 to the consolidated financial statements).
In addition, U.S. Robotics paid the balance due on their licence
fee during the three months ended September 30, 1995.
Operating costs and expenses decreased approximately
$1,641,000 or 52% and $2,748,000 or 43% during the three and six
months ended September 30, 1995 as compared to September 30,
1994. These decreases are primarily due to the decrease in
selling, general and administrative expenses of approximately
$1,686,000 or 54% and $2,622,000 or 43% for the three and six
months, respectively.
The decrease in selling, general and administrative expenses
for the three and six months ended September 30, 1995 is
primarily due to the decrease in professional fees (other than
professional fees associated with the Company's bankruptcy
proceeding)of $636,000 and $1,147,000, respectively, primarily
due to the stay of legal actions while under bankruptcy
proceedings. Decreases in personnel and related expenses of
$237,000 for both periods, and a decrease in travel and
entertainment expenses of $90,000 and $142,000, respectively, are
due to the overall downsizing of the Company. Other
administrative expenses decreased $613,000 and $917,000,
respectively, primarily due to the Company's move from Manhasset,
New York to a smaller location in Purchase, New York.
Advertising expense decreased $75,000 and $123,000 during the
three and six months ended September 30, 1995 primarily due to
the Axcell product line sale.
Operating Loss
The Company's operating loss decreased $2,029,000 or 71% and
$3,201,000 or 61% for the three and six months ended September
30, 1995 as compared to the same periods in the prior
year,respectively. The decreases are primarily due to the
decreased selling, general and administrative expenses of 54% and
43%, respectively, as well as an increase in revenues of 138% and
36%, respectively, (see summary of operations above). The
decrease in cost of goods sold of $126,000 or 40% for the six
months ended September 30, 1995 as compared to the prior year is
due to the sale of the Axcell product line.
Other Expense and Income
Other income increased $1,696,000 and $1,634,000
respectively for the three and six months ended September 30,
1995 as compared with prior year primarily due to the gain of
$1,616,000 on the sale of the Axcell product line.
Discontinued Operations
As of January 25, 1995, the Company closed its Computer Bay
subsidiary which is reflected as a discontinued operation in the
consolidated financial statements. The Company did not record a
provision related to its anticipated loss on a disposal as the
case was converted into a Chapter 7. As a result of the
conversion of Computer Bay to a case under Chapter 7, the Company
has recorded a gain of $2,539,000 by writing off the net
liabilities of Computer Bay. The Computer Bay trustee has filed a
claim in the Bankruptcy Court to substantively consolidate the
Computer Bay liabilities with the liabilities of the Debtors.
However, the Company does not believe there are grounds for such
consolidation. (See note 2 to consolidated financial statements).
As of October 17, 1995, the Company sold its Spectrum Global
subsidiary which is reflected as a discontinued operation in the
consolidated financial statements(See note 7 to consolidated
financial statements).
Cumulative Effect of Change in Accounting Principle
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," effective for fiscal years beginning after December
15, 1993. The cumulative effect of adopting SFAS No. 115 as of
April 1, 1994 resulted in a increase in income of approximately
$316,000 (see note 1 to the consolidated financial statements).
Liquidity and Capital Resources
Since inception, the Company has experienced significant
operating losses and operating cash flow deficits which
ultimately caused the Company to restructure its largest
subsidiary, Computer Bay, as a discontinued operation and to file
for bankruptcy protection under Chapter 11 on January 26, 1995
(see Chapter 11 proceedings).
During the six months ended September 30, 1995, working
capital (current assets less current liabilities) decreased by
approximately $868,000 to $8,565,000. This decrease is primarily
due to an increase in accrued liabilities of $1,246,000 primarily
due to professional fees associated with bankruptcy related
issues.
Net cash used by continuing operations decreased
approximately $5,100,000 when compared to the prior year
primarily as a result of the Company's ability to decrease its
operating expenses as compared to the prior year and an increase
in accrued expenses primarily related to bankruptcy professional
fees.
Net cash provided by investing activities increased $299,000
for six months ended September 30, 1995 when compared to the
prior fiscal year due to the sales of the Axcell product line and
building in Dallas, as compared to the sale of marketable
securities in fiscal 1995. Capital expenditures amounted to
approximately $40,000 for the six months ended September 30,
1995. These expenditures are primarily related to office
relocation and rejected capital leases. Capital expenditures for
the six months ended September 30, 1994 were approximately
$62,000. The Company has no material commitments outstanding as
of quarter end and anticipates that capital expenditures may
increase as a result of anticipated efforts to further develop
core technology.
There were no financing activities during the six months
ended September 30, 1995. During the six months ended September
30, 1994, certain persons exercised stock options and warrants
which resulted in a $581,000 increase in cash.
For the six months ended September 30, 1995 net cash
required by discontinued operations was $1,858,000 as compared to
net cash provided by discontinued operations of $164,000 for the
six months ended September 30,1994.
As part of its plan of reorganization the Company is
attempting to settle all significant litigation and is seeking
equity capital. The adequacy of the Company's capital resources
and long-term liquidity will be determined when a plan of
reorganization is confirmed by the Bankruptcy Court. However,
the uncertainties relating to the confirmation of a plan of
reorganization and the continuing losses (see Operating Loss)
raise substantial doubt about the Company's ability to continue
as a going concern (see note 1 to consolidated financial
statements). While the Company is currently in the process of
formulating a plan of reorganization, it continues to evaluate
the performance of the continuing subsidiaries in order to
conserve cash. In July 1995, the Company received $3,000,000
for the sale of its AXCELL products and its license to certain
patent rights to Telular Corporation ("Telular") (see note 6 to
the consolidated financial statements). As a result of the sale,
the operations of Spectrum Cellular have been downsized.
As of October 17, 1995, the Company sold its Spectrum Global
subsidiary for approximately $6 million (see note 2 to the
consolidated financial statements).
<PAGE>
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
(Debtors in Possession)
FORM 10-Q
September 30, 1995
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Chapter 11 Reorganization Under The Bankruptcy Code
On January 26, 1995, the Debtors (Note 1) filed petitions
for relief under Chapter 11 in the United States Bankruptcy Court
for the Eastern District of New York Case Nos. 195_10690_260,
195_10691_260, 195_10692_260 and 195_10693_260. Spectrum Global
did not file for bankruptcy. On February 8, 1995, the United
States Trustee appointed an Official Committee of Unsecured
Creditors for the Debtors, other than Computer Bay, and another
for Computer Bay to represent the interests of all unsecured
creditors whose claims arose before the Petition Date. No other
committees have been appointed. On May 25, 1995, the Bankruptcy
Court, upon motion by the Debtors, converted the Computer Bay
Chapter 11 case to a case under Chapter 7 of the Bankruptcy Code.
An independent trustee has been appointed to oversee liquidation
of Computer Bay's Chapter 7 estate, and the Company no longer has
control over the Computer Bay estate. Spectrum and Spectrum
Cellular are continuing to manage their affairs and operate their
businesses under Chapter 11 as debtors in possession while
formulating a plan of reorganization. The operations of Data One
were discontinued as of December 31, 1994. By order of the
Bankruptcy Court, the bar date for filing proofs of claim in the
Chapter 11 proceeding was established as September 7, 1995.
Excluding the material litigation discussed herein (Note 5)
and improperly filed claims by shareholders, approximately 308
claims were filed against the Company alleging approximately $5.4
million in creditors' claims. These claims primarily consisted
of approximately: $1.7 million in claims by vendors; $855
thousand in claims by former employees based upon severance and
employment agreements; $1.2 million in indemnification claims for
legal fees and settlement of litigation by former employees; $784
thousand in claims arising from rejected leases; $554 thousand
claimed by a Computer Bay financing company; and $314 thousand
related to a prepaid Data One maintenance contract. Additionally,
the Trustee appointed to administer the Computer Bay estate filed
a claim alleging $4.4 million in damages. The Company,
along with its outside counsel, is evaluating each of these
claims and reconciling them to its books and records.
Pursuant to section 362 of the Bankruptcy Code, the
commencement of the Company's Chapter 11 case operates as a stay,
applicable to all entities, of the following: (i) commencement or
continuation of a judicial, administrative, or other proceeding
against the Company that was or could have been commenced prior
to commencement of the Company's Chapter 11 case, or to recover
for a claim that arose before the commencement of the Company's
Chapter 11 case; (ii) enforcement of any judgments against the
Company that arose before the commencement of the Company's
Chapter 11 case; (iii) the taking of any action to obtain
possession of property of the Company or to exercise control over
property of the Company; (iv) the creation, perfection or
enforcement of any lien against the property of the Company; (v)
the taking of any action to collect, assess or recover a claim
against the Company that arose before the commencement of the
Company's Chapter 11 case; or (vi) the setoff of any debt owing
to the Company that arose prior to the commencement of the
Company's Chapter 11 case against a claim held by such creditor
or party-in-interest against the Company that arose before the
commencement of the Company's Chapter 11 case. Any entity may
apply to the Bankruptcy Court for relief from the automatic stay
so that it may enforce any of the aforesaid remedies that are
automatically stayed by operation of law at the commencement of
the Company's Chapter 11 case.
Although the Company is authorized to operate its business
as debtor in possession, it may not engage in transactions
outside of the ordinary course of business without first
complying with the notice and hearing provisions of the
Bankruptcy Code and obtaining Bankruptcy Court approval. The
Unsecured Creditors' Committee may review and object to
transactions involving the Company that are outside of the
ordinary course of the Company's business, may consult with the
Company concerning the administration of the Company's Chapter 11
case, and may participate in the formulation of a plan of
reorganization. The Company is required to pay certain expenses
of the Unsecured Creditors' Committee, including counsel and
other professional fees, to the extent allowed by the Bankruptcy
Court. Other parties in interest in the Chapter 11 case are also
entitled to be heard on motions made in the Chapter 11 case,
including motions for approval of transactions outside the
ordinary course of business.
The Bankruptcy Court has approved the Company's retention
of: (i) Cleary, Gottlieb, Steen & Hamilton as its outside general
counsel; (ii) BDO Seidman, LLP ("BDO Seidman") as its independent
auditors; (iii) Sixbey, Friedman, Leedom and Ferguson as its
outside patent counsel; (iv) Executive Manning Corporation as
a human resources and management consultant; and (v) the Gordian
Group, L.P. as a financial advisor to assist in its reorganization.
As debtor in possession, the Company has the right, under
the relevant provisions of the Bankruptcy Code, to assume or
reject executory contracts, including real property leases.
Certain parties to such executory contracts with the Company,
including parties to such real property leases, may file motions
with the Bankruptcy Court seeking to require the Company to
assume or reject those contracts or leases. In this context,
"assumption" means that the Company cures or provides adequate
assurance that it will cure all existing defaults under contract
or lease and provides adequate assurance of future performance
under the contract or lease. "Rejection" which is a remedy
available under the relevant provisions of the Bankruptcy Code,
means that the Company is relieved of its obligations to perform
further under the contract or lease. Rejection of an executory
contract or lease constitutes a breach of that contract
immediately before the date of filing of the petition and gives
the nondebtor party the right to assert a claim against the
bankruptcy estate for damages arising out of the breach which
shall be allowed or disallowed as if such claims had arisen
before the date of the filing of the petition.
Pursuant to the Bankruptcy Code, the Company has applied to
reject certain employment contracts and has terminated employment
of some of the affected individuals. The Company is in the
process of modifying and assuming employment contracts with
other employees with preexisting employment agreements,
eliminating some contractual perquisites and creating at-will
employment relationships. The Company rejected all leases for
automobiles leased on behalf of employees. Additionally, the
Company has rejected the real property lease associated with its
former Manhasset, New York headquarters and leases for certain
furniture and equipment. The Company is also planning to reject
certain executory service obligations related to its Data One
subsidiary.
Prepetition claims that were contingent, unliquidated, or
disputed as of the commencement of the Chapter 11 case,
including, without limitation, those that arise in connection
with rejection of executory contracts, may be allowed or
disallowed depending on the nature of the claim. Such claims may
be fixed by the Bankruptcy Court or otherwise agreed upon by the
parties.
Under the Bankruptcy Code, an allowed claim of a creditor
that is secured by a lien on property of the Company's estate, or
that is subject to a valid right of setoff, is a secured claim to
the extent of the value of such creditor's interest in such
property, or to the extent of the amount subject to setoff, as
the case may be, and is an unsecured claim to the extent that the
value of such creditor's interest or the amount so subject to
setoff is less than the amount of such allowed claim. Generally,
claims for unmatured interest are not allowable. To the extent
that an allowed claim is secured by property whose value, after
recovery of the reasonable, necessary costs and expense of
preserving or disposing of such property, is greater than the
amount of such claim the creditor generally is allowed interest
on such claim and any reasonable fees, costs, or charges provided
for under the agreement which such claim rose.
Plan of Reorganization - Procedures.
For 120 days after the Petition Date, the Company has the
exclusive right to propose and file a plan of reorganization with
the Bankruptcy Court. If the Company files a plan of
reorganization during the 120 day exclusivity period, no other
party may file a plan of reorganization until 180 days after the
Petition Date, during which period, the Company has the exclusive
right to solicit acceptance of the plan. If the Company fails to
file a plan during the 120-day exclusivity period or such
additional time period ordered by the Bankruptcy Court (the
"Exclusivity Period") or, after such plan has been filed, fails
to obtain acceptance of such plan from impaired classes of
creditors and equity security holders during the exclusive
solicitation period or such additional time period ordered by the
Bankruptcy Court, any party-in-interest, including a creditor, an
equity security holder, a committee of creditors, or an indenture
trustee, may file a plan of reorganization in the Chapter 11
proceedings. Additionally, if the Bankruptcy Court were to
appoint a Chapter 11 trustee, any party-in-interest may file a
plan, regardless of whether any additional time remains in the
Company's Exclusivity Period. On September 21, 1995 the
Bankruptcy Court granted the Company's request to extend the
Exclusivity Period to January 26, 1996.
The Company filed with its Chapter 11 petition a list
containing the names and addresses of its twenty largest known
creditors for the Company and for each of the three filing
subsidiaries. The Company, Spectrum Cellular and Data One have,
within the time periods set by the Bankruptcy Court, filed with
the Bankruptcy Court schedules of assets and liabilities and
other schedules and statements of affairs as required by
Bankruptcy Rules and by the Local Rules of the Bankruptcy Court.
Section 501 of the Bankruptcy Code allows any creditor or
indenture trustee to file a proof of claim with the Bankruptcy
Court and any equity security holder to file a proof of interest
with the Bankruptcy Court. A claim or interest, proof of which is
filed under Bankrutcy Code Section 501, is deemed allowed, unless
a party-in-interest (including the Company) objects thereto. If
an objection is made to the allowance of a claim, the Bankruptcy
Court, after notice and hearing will determine the amount,
validity, and priority of such claim. The last date (bar date)
for filing proofs of claim or interest was established by order
of the Bankruptcy Court as September 7, 1995.
These claims are liabilities subject to compromise under a
plan of reorganization (See Note 3 to the consolidated financial
statements).
After a plan has been filed with the Bankruptcy Court, it
will be sent with a disclosure statement approved by the
Bankruptcy Court after notice and hearing, to members of all
classes of impaired creditors and equity security holders
entitled to vote with ballots for acceptance or rejection.
Following acceptance or rejection of any plan by impaired classes
of creditors and equity security holders, the Bankruptcy Court at
a hearing on notice would consider whether to confirm the plan.
Among other things, to confirm a plan, the Bankruptcy Court is
required to find that (i) each holder of a claim or interest of
an impaired class of creditors and equity security holders either
has accepted the plan or will receive or retain under the plan on
account of such claim or interest property of a value, as of the
effective date of the plan, that is not less than the amount that
such holder would so receive or retain if the Company were
liquidated under Chapter 7 of the Bankruptcy Code on such date,
(ii) if any class of claims is impaired under the plan, at least
one class of claims that is impaired under the plan has accepted
the plan, and (iii) confirmation of the plan is not likely to be
followed by the liquidation or need for further financial
reorganization of the Company or any successor, unless such
liquidation or reorganization is proposed in the plan.
If at least one class of claims that is impaired under the
plan has accepted the plan, and certain other requirements of the
Bankruptcy Code relating to plan confirmation are satisfied, the
proponent of the plan may invoke the so-called "cramdown"
provisions of section 1129(b) of the Bankruptcy Code. Under
these provisions, the Bankruptcy Court, on request of the
proponent of the plan shall confirm the plan if the plan does not
discriminate unfairly, and is fair and equitable, with respect to
each class of claims or interests that is impaired under, and has
not accepted, the plan. As used in the Bankruptcy Code, the
phrases "discriminate unfairly" and "fair and equitable" have
narrow and specific meanings. A "cramdown" might result in
holders of the Company's Common Stock receiving no property or
other value for their equity security interests. Because of this
and other possibilities, the value of the Company's Common Stock
is highly speculative.
Other Proceedings
On November 8, 1995, the Company reached an agreement in
principle on a framework for settlement of the Class Action
lawsuit that has been pending against the Company and certain of
its present and former employees since May 1993. The class
plaintiffs in that lawsuit filed a claim against the Company in
its bankruptcy proceedings in the amount of $676 million. (See
note 5 to consolidated financial statements.) The settlement, if
consummated, would be in satisfaction of that claim as well as
all claims between the Company and the other defendants in the
suit.
The settlement is contingent on numerous factors, including
among other things successfully resolving a litigation regarding
insurance coverage (see note 5 to consolidated financial
statements), negotiation and execution of a definitive settlement
agreement, the Company's ability to develop and confirm a plan of
reorganization in the Company's pending bankruptcy proceeding
satisfactory to all interested parties including plaintiffs in
the class action, and approval of the settlement by the
Bankruptcy Court and by the United States District Court in which
the class action suit is pending.
Under the terms of the agreement in principle, the Company
and the class plaintiffs have agreed to a framework under which
it is contemplated that the Company will issue to the class
plaintiffs in its plan of reorganization a number of shares of
its common stock that would be equal to the number of shares of
its stock to be issued to existing shareholders in the
reorganization. This undertaking is subject to contingencies
which could alter the framework of the settlement, including
without limitation the percentage of the Company's stock to be
issued to the class. In a related agreement, the class
plaintiffs are also to receive the proceeds, net of certain fees
and expenses, from $10 million of insurance policies covering the
Company's directors and officers and, as a result of court
supervised negotiations and at the recommendation of the Court,
$1,350,000 from the various individual defendants in the action
and $250,000 from the Company. The individual defendants are to
place their contributions to the settlement in escrow by November
15, 1995. Neither the Company nor the individual defendants
acknowledged any wrongdoing in connection with the agreement in
principle.
Among the uncertainties is that insurers that issued
policies for $6 million of the insurance necessary to fund the
settlement have disclaimed coverage. This dispute is the subject
of a litigation pending in the U.S. District Court for the
Eastern District of Long Island, which must be successfully
resolved in order for the settlement to be implemented. The
Company's plan of reorganization must also address other material
litigation, claims by the Company's creditors and the Company's
need for additional capital. There can be no assurance that the
Company will be successful in its efforts to resolve those
matters or that the other conditions to the settlement will be
achieved. The Company's exclusive right to file a plan of
reorganization expires on January 26, 1996.
Certain other material litigation in which the Company is
involved is described in Note 5 to the consolidated financial
statements.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
No.
2 Stock Purchase Agreement, dated September 11,
1995, by and among the Company and The Lori
Corporation, Comforce Corporation, et al has
been previously filed as an exhibit to the
Company's Current Report on Form 8-K filed
November 1, 1995 and is incorporated herein by
reference.
27 Financial Data Schedule
B. Reports on Form 8-K
The Company filed a Current Report on Form 8-K
dated October 17, 1995, which included: Item 2,
"Acquisition or Disposition of Assets" reporting the
sale of the Company's subsidiary, Spectrum Global
Services, Inc.
<PAGE>
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 10, 1995
SPECTRUM INFORMATION TECHNOLOGIES, INC.
By /s/ Donald J. Amoruso
----------------------------------
Donald J. Amoruso
Chief Executive Officer and
Chairman of the Board of Directors
By /s/ Barry J. Hintze
----------------------------------
Barry J. Hintze
Controller and
Principal Accounting Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SPECTRUM
INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES (DEBTORS IN POSSESSION)
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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