SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 [Fee Required]
For the Fiscal year ended March 31, 1996
Commission File No. 0-15596
SPECTRUM
INFORMATION TECHNOLOGIES INC
Delaware 75-1940923
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2700 Westchester Avenue
Purchase, New York 10577
(914) 251-1800
(Address including zip code of principal executive
offices and Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None Not applicable
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
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. [X]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K.
The aggregate market value of voting stock held by
nonaffiliates of the Registrant as of June 14, 1996 was
approximately $26,069,000 based on the average of the high and
low prices of the Common Stock on June 14, 1996 of $0.34 as
reported by the National Quotation Bureau. As of June 14, 1996,
the registrant had outstanding 76,675,448 shares of its Common
Stock, par value $.001 per share.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain information as set forth in Part IV (Item 14) has been incorporated
by reference from the Company's Annual Report on Form 10-K, as amended,
for the fiscal years ended March 31, 1988, 1990, 1991, 1992 , 1993,
1994 and 1995 and the Company's Registration Statements on Form S-1
(Reg. No. 33-36559) and on Form S-3 (Reg. No. 33-48181, 33-51540 and
33-51588), as set forth herein.
Page 1 of__________ pages
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SPECTRUM INFORMATION TECHNOLOGIES, INC.
INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
Item Page
No. No.
- ------ -----
Part I
1 Business.................................................... 2
2 Properties.................................................. 13
3 Legal Proceedings........................................... 14
4 Submission of Matters to a Vote of Security Holders......... 20
Part II
5 Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 20
6 Selected Financial Data..................................... 21
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 22
8 Financial Statements and Supplementary Data................. 25
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 26
Part III
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10 Directors and Executive Officers of the Registrant.......... 26
11 Executive Compensation...................................... 26
12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 28
13 Certain Relationships and Related Transactions.............. 29
Part IV
14 Exhibits, Financial Statements Schedules and Reports
On Form 8-K................................................. 29
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SPECTRUM INFORMATION TECHNOLOGIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
PART I
Item 1. Business.
Overview
Spectrum Information Technologies, Inc., a Delaware
corporation ("Spectrum") and its subsidiaries (collectively, the
"Company"), own a portfolio of pioneering patents (legacy assets)
relating to commercially practicable methods of data transmission
over circuit-switched cellular networks. For several years
preceding the fiscal year covered by this report, Spectrum was
operating as a holding company of several operating subsidiaries
with primary emphasis on being an intellectual property company
focused on generating revenues from royalties associated with the
licensing of its proprietary technology. During the past fiscal
year, however, Spectrum's new management and Board of Directors
concluded that royalty revenue from the Company's existing
licensing program would not achieve prior business expectations
and began implementing a strategy that fundamentally refocuses
the business direction of the Company. Spectrum's business
objective is to further develop its core proprietary technology
and become a leading provider of value added mobile
communications software and related products.
Spectrum's proprietary wireless data transmission technology
enables transmission of data between portable computer devices
over cellular telephone networks. Spectrum licenses its
technology to leading manufacturers of integrated circuits (IC)
and modems and other related data communications product
providers. Spectrum also develops direct connect cellular data
transmission activation kits (software drivers and cables) and
markets them to the Company's licensees. These two components -
technology licensing and development and marketing of activation
kits - are the primary sources of operating revenues which
constitute the core business of the Company.
Spectrum has recently hired two senior technologists, Richard
duFosse, Vice President - Software Engineering, and Mikhail
Drabkin, Chief Technical Officer, (See Directors and Executive
Officers of the Company) to formulate product strategy and to
implement product development plans consistent with Spectrum's
new strategy. The Company is currently adding engineering staff
with the necessary skills to support the business objectives.
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As part of refocusing the Company, beginning in January 1995,
when Spectrum and three of its subsidiaries filed petitions for
relief under Chapter 11 of Federal Bankruptcy Code, and
continuing throughout the fiscal year ended March 31, 1996,
Spectrum's management restructured the Company to focus on its
core business. As part of the restructuring, Spectrum closed one
of its unprofitable subsidiaries, the liquidation of which is
under the supervision of the bankruptcy court, and sold a second
wholly-owned subsidiary, Spectrum Global Services, Inc., a
Delaware corporation ("Spectrum Global"), effective October 17,
1995 (See Note 2 to the Consolidated Financial Statements).
Spectrum Global had not filed for bankruptcy and was not
essential to Spectrum's core business. The Company also
significantly downsized its Spectrum Cellular Corporation
("Cellular") subsidiary in Texas.
In July 1995, the Company also sold its non-profitable
AXCELL(R) cellular interface product line and certain related
patent rights to Telular Corporation ("Telular"). In fiscal 1992,
Spectrum had licensed these patent rights from Telular. In
management's opinion, AXCELL(R) was being replaced in the market
by the Company's direct connect technology. Management therefore
did not believe that AXCELL(R) was a viable product in the long
run and was inconsistent with management's strategy to develop
its core technology into mobile communication software products
(See History).
As part of the restructuring process, Spectrum has included in
its proposed plan of reorganization the consolidation of the
Company's bankruptcy estate with that of its Cellular subsidiary.
Spectrum and Cellular are now conducting the Company's core
business on an operating basis as a single entity (See Item 3
Legal Proceedings - Bankruptcy Proceedings).
The Company's executive offices were relocated in May 1995 to
2700 Westchester Avenue, Purchase, New York 10577.
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Bankruptcy Proceedings
On January 26, 1995, as part of new management's effort to
stem the Company's substantial financial losses and focus on
developing its core technology, the Company, together with its
wholly-owned subsidiaries, Computers Unlimited of Wisconsin,
Inc., a Wisconsin corporation d/b/a Computer Bay ("Computer
Bay"), Dealer Services Business Systems, Inc., a Delaware
corporation d/b/a Data One ("Data One") and Cellular
(collectively, the "Debtors"), filed petitions for relief under
Chapter 11 of the Federal Bankruptcy Code (the "Chapter 11
proceeding"). Upon motion by the Debtors, the United States
Bankruptcy Court for the Eastern District of New York (the
"Bankruptcy Court") converted the action for Computer Bay to a
case under Chapter 7 of the Bankruptcy Code. A trustee is
overseeing the liquidation of Computer Bay's assets and the
Company no longer has control over the Computer Bay estate. The
Company has filed a separate liquidating plan of reorganization
for Data One (the "Liquidation Plan").
In March 1996, the Bankruptcy Court approved the Company's
Third Amended Disclosure Statement (the "Disclosure Statement")
with respect to the Third Amended Consolidated Plan of
Reorganization Proposed by Spectrum and Cellular (the "Plan")
dated as of March 18, 1996 finding the Disclosure Statement
adequate for distribution and vote by interested parties. As
contemplated by the Plan, the bankruptcy estates of Spectrum and
Cellular have been substantively consolidated. The Plan, if
confirmed, provides all administrative creditors with full
payment (unless a lesser amount is agreed upon or ordered by the
Bankruptcy Court) and all general unsecured creditors with 100%
of the value of their claims plus 6% interest thereon. It also
settles the $676 million class action lawsuits filed against the
Company by the payment of a minimal amount of cash and the
delivery of approximately 45% of the equity ownership in Spectrum
to a trustee to be distributed to the members of the class.
Although existing Spectrum shareholders will be substantially
diluted under the terms of the Plan, such shareholders should
obtain the majority of the 45% equity ownership in Spectrum set
aside for existing shareholders and certain creditors.
The Bankruptcy Court set April 22, 1996 as the deadline for
voting on the Plan. Each class entitled to vote on the Plan
accepted the Plan. Over 97% of Spectrum's voting unsecured
creditors, representing over 99% of the total dollar amount
voted, voted to accept the Plan. Under the Bankruptcy Code, a
class accepts a plan if two-thirds in amount and a majority in
number of the holders of claims voting cast ballots in favor of
acceptance. Holders of Spectrum's common stock representing
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approximately 27.6 million shares returned ballots, with over 95%
of those shares voted in favor of confirmation. A class of equity
interests is deemed to have accepted the Plan if the plan is
accepted by holders of at least two-thirds of the allowed
interests that have voted on the plan. The Bankruptcy Court
initially scheduled a confirmation hearing for May 3, 1996, which
has since been rescheduled for July 17, 1996 (See Item 3 - Legal
Proceedings Bankruptcy Proceedings). This rescheduling was
necessary because Plan confirmation is contingent upon the
successful resolution of a coverage dispute with certain of
Spectrum's former directors' and officers' insurance carriers
(See Item 3 - Legal Proceedings - Other Proceedings). This is the
only known remaining significant issue that must be resolved
prior to confirmation of the Plan, however, it is a contingency
for approval of the Class Action Settlement, which is a condition
precedent to Plan confirmation.
Management Strategy
The discussions set forth in this section and this Form 10-K
involve management's strategy and implementation of a business
plan that refocuses the Company's core business from the
generation of royalties associated with the license of its
intellectual property to the development and distribution of
mobile communications software and related products. These
discussions contain forward looking statements regarding
Spectrum's implementation of this strategy that involve
significant risks and uncertainties. The Company's actual results
could differ significantly from the results discussed in the
forward looking statements.
Management is transforming the Company's business from an
intellectual property company to becoming a leading provider of
value added mobile communications software and related products.
Key to this strategy are (1) increasing the number of modems and
related data communications devices in use that incorporate the
Company's patented cellular technology, (2) developing value
added relationships with key licensees and (3) increasing the use
of Spectrum's patented cellular technology, as embodied in
Spectrum-supplied activation kits, through software providing
enhanced functionality and ease of use. Management believes that
this strategy will expand the market for cellular data
communication. Spectrum will expand these products into a
complete suite of mobile communications software products and
solutions to be sold to a growing mobile professional workforce.
The Company's management believes that Spectrum's previous
business strategy (reliance on license royalty payments) failed
largely due to (1) significantly smaller-than-anticipated growth
in the number of cellular data users (which may have been caused
in part by high Spectrum royalty rates) and (2) lack of "user
friendly" software with seamless and reliable capability for
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switching from landline to cellular data communications. Spectrum
expects to alleviate some of these problems by removing costly
royalty barriers, by establishing strategic license relationships
to seed the market with Spectrum's technology and by using this
opportunity to market value added software products that
encourage and simplify the use of cellular data transmission.
Since January 1995, Spectrum's management began the
implementation of several key steps to refocus the Company from
an intellectual property and licensing organization to a provider
of software communications products for mobile professionals.
Such steps include:
a. The operational restructuring of Spectrum to
substantially reduce losses from continuing
operations, including elimination of certain
unprofitable operations.
b. The selling of non-core assets and realigning the
Company's remaining business.
c. The resolution of litigation and other liabilities
issues through the bankruptcy process.
d. Energizing the Company's research and development
organization by hiring known technical leaders in
software and communications, respectively, to form
the core of a creative technical organization.
e. Converting existing and potential licensing
relationships with original equipment
manufacturers ("OEM") into relationships that
provide the opportunity to be distribution
channels for the Company's new products.
f. Developing new channels of distribution for
future products.
Spectrum believes that it has completed steps (a) and (b) and
is making progress on steps (c) and (d). Assuming Spectrum's Plan
is confirmed, Spectrum will have resolved approximately $709
million in claims filed against the Company, many of which are
litigations that have been plaguing the Company for the past
several years. Spectrum is actively recruiting experienced
technical personnel to implement software development plans.
However, Spectrum's background and adverse publicity have made
recruiting more difficult than normally expected. Steps (e) and
(f) have been an ongoing process. Spectrum has concluded
agreements with two key licensees, and is in negotiations with
other licensees and OEMs (See Competition and Item 3 - Legal
Proceedings - Patent Related Proceedings). There can be no
assurances that the Company will successfully convert these
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relationships into distribution channels for its future products
or that the Company will generate sufficient revenues from the
sales of these products to achieve profitability.
Risk Factors
The Company's management believes that developing a product
based strategy is essential to the long term success of the
Company as a going concern. Leveraging the Company's proprietary
wireless driver software assets and capabilities into a mobile
communications software business offers near term opportunity to
achieve turnaround. Management's strategy, as described above
and elsewhere throughout this report, however, contains forward
looking tactics and statements that are subject to significant
risk and uncertainty. Failure to successfully implement this
strategy will raise substantial doubt about the Company's ability
to continue as a going concern.
Spectrum has suffered significant losses from continuing
operations in each fiscal year since inception. Even after the
Company's recent restructuring, management does not believe that
the expected royalty revenues associated with the licensing of
its existing proprietary technology will be sufficient to reverse
losses given the expenses associated with maintaining this
royalty revenue stream. Under the current strategy, management
expects to have a continued negative cash flow until it develops
and markets a new line of mobile communications software
products. Unlike its competitors, the Company's limited financial
resources do not allow the Company significant room to err in its
product development and marketing.
Risks associated with the current strategy include, but are not
limited to, overcoming the negative image Spectrum has developed
in the past and its ability to rebuild credibility in the
marketplace; successfully developing software products that bring
value to mobile communications software markets; developing
relationships with existing licensees, some of which are current
competitors, into channels for distribution of new products;
developing new channels for distribution; hiring key technical
and marketing staff to implement the strategy; competing
successfully within markets where competitors have significantly
more resources and access to capital than the Company;
realization of market forecasts by industry specialists regarding
wireless and mobile communications market growth; limited capital
investment upon exiting Chapter 11; and the ability of the
Company to raise additional capital, if necessary. The following
specific risk factors should be considered in evaluating
Spectrum's ability to achieve a successful turnaround.
Bankruptcy Proceedings. Settlement of the Class Action (see Item
3 - Legal Proceedings - Securities Related Proceeding) is a
condition precedent to confirmation of the Company's Plan.
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Settlement of the Class Action is contingent upon a favorable
decision in the Home Action. (see Item 3 Legal Proceedings Other
Proceedings). If the Class Action settlement is not consummated,
it is highly unlikely that the Plan, as written, will be
confirmed. If the Plan is not confirmed, the alternatives
include: (a) continuation of the pending Chapter 11 cases; (b)
alternative plans of reorganization; or (c) liquidation of the
Debtors under Chapter 7 or Chapter 11 of the Bankruptcy. Each
alternative raises substantial doubts about the Company's ability
to continue as a going concern.
Past Operating History. The Company's future must be considered
in light of the risks associated with the past difficulties and
negative press encountered by Company. To address these risks,
the Company must, among other things, rebuild management and
technical credibility with current and potential customers,
continue to attract, retain and motivate qualified persons, and
continue to upgrade its technologies and commercialize products
and services incorporating such technologies. There can be no
assurance that the Company will be successful in addressing such
risks. The Company has incurred net losses since inception and
expects to continue to operate at a loss for the foreseeable
future until new product development and market acceptance of its
products are achieved (See History).
Developing Market; Acceptance of the Company's Products. The
market for the Company's software and services has only recently
begun to develop, is rapidly evolving and is characterized by an
increasing number of market entrants who have introduced or
developed products and services for mobile communication. As is
typical in the case of a growing industry, demand and market
acceptance for recently introduced products and services are
subject to a high level of uncertainty. While the Company
believes that its software products will offer advantages for
mobile communications, there can be no assurance that the
Company's products for mobile communication will become widely
adopted.
Because the market for the Company's products and services is
evolving, it is difficult to predict the future growth rate, if
any, and size of this market. There can be no assurance that the
market for the Company's products and services will develop, that
the Company's products or services will be adopted, or that
mobile PC users in business will use wireless networks for data
communication. If the market fails to develop, develops more
slowly that expected or becomes saturated with competitors, or if
the Company's products do not achieve market acceptance, the
Company's business, operating results and financial condition
will be materially adversely affected.
Competition. The market for mobile communications software and
services is relatively new, becoming intensely competitive,
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rapidly evolving and subject to rapid technological change. The
Company expects competition to persist, intensify and increase in
the future. Almost all of the Company's current and potential
competitors have longer operating histories producing software
products, greater name recognition, larger installed customer
bases and significantly greater financial, technical and
marketing resources than the Company. Such competition could
materially adversely affect the Company's business, operating
results or financial condition. The Company's key current
competitors include Megahertz, a subsidiary of U.S. Robotics,
Motorola and AT&T, all of which are licensees of the Company (See
Competition).
New Product Development and Technological Change. Substantially
all of the Company's current and near term revenues are expected
to be derived from the licensing of its proprietary technology
and sale of its associated activation kits. Accordingly, broader
acceptance of the Company's activation products by customers is
essential to the Company's future success. The Company's ability
to design, develop, test and support new software products and
enhancements on a timely basis that meet changing customer needs
and respond to technological developments and emerging industry
standards is also critical to the Company's long term success.
There can be no assurance that the Company will be successful in
developing and marketing new software products and enhancements
that meet changing customer needs and respond to such
technological changes or evolving industry standards. The
Company's activation kit products are designed for use with
circuit switched cellular networks. Future sales of the Company's
products will be dependent, in part, on software products that
are independent of networks and are functional to support mobile
user needs, anyplace, anytime. The Company's inability to
successfully expand its product offerings will have a material
adverse effect on the Company's business, operating results or
financial condition.
Evolving Distribution Channels. The Company's strategy is to
develop multiple distribution channels. The Company has
historically sold its activation kit products only through some
of its licensees which are original equipment manufacturers
("OEMs"). The Company expects to increasingly utilize other OEMs
which have competing products and has recently begun marketing
efforts to these potential customers. In the future, the Company
plans to utilize value added resellers ("VARs") as a channel for
more advanced software products. The Company expects that
increased sales through certain OEMs and VARs will adversely
affect the Company's average selling prices and gross margins due
to the lower unit prices that are typically charged when selling
through indirect channels. Moreover, there can be no assurance
that the Company will be able to attract VARs that will be able
to market the Company's products effectively. Consequently, the
Company may be adversely affected should it fail to adequately
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penetrate either channel. The inability to recruit, manage or
retain important VARs, or their inability to penetrate their
respective market segments, could materially adversely affect the
Company's business, future business, operating results or
financial condition.
The Company plans to develop a field sales force and
expand its telemarketing organization. There can be no assurance
that such internal expansion will be successfully completed, that
the cost of such expansion will not exceed the revenues
generated, or that the Company's sales and marketing organization
will be able to successfully compete against the significantly
more extensive and well-funded sales and marketing operations of
many of the Company's current or potential competitors. The
Company's inability to effectively manage its internal expansion
could have a material adverse effect on the Company's business,
operating results or financial condition.
Management of Growth. The timely execution necessary for the
Company to fully exploit the market window for its products and
services requires an effective planning and management process.
Since February 1, 1996, the Company has increased its engineering
staff from two to four employees. Two additional engineers have
accepted positions to begin in July 1996. To manage its growth,
the Company must continue to implement and improve its
operational and financial systems and to expand, train and manage
its employee base. There can be no assurance that the Company
will be able to successfully implement these activities on a
timely basis. Further, the Company will be required to manage
multiple relationships with various customers and other third
parties. Although the Company believes that it has made adequate
allowances for the costs and risks associated with this
expansion, there can be no assurance that the Company's systems,
procedures or controls will be adequate to support the Company's
operations or that the Company's management will be able to
achieve in a timely manner the expansion necessary to fully
exploit the market window for the Company's products and
services. If the Company is unable to manage growth effectively,
the Company's business, operating results and financial condition
will be materially adversely affected.
Dependence on Key Personnel. The Company's performance is
substantially dependent on the performance of its executive
officers and key employees, most of whom have worked together for
only a short period of time. Given the Company's early stage of
transition and restructuring, the Company is dependent on its
ability to retain and motivate high quality personnel, especially
its management and highly skilled development teams. The loss of
the services of any of its executive officers or other key
employees could have a material adverse effect on the business,
operating results or financial condition of the Company.
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The Company's future success also depends on its continuing
ability to identify, hire, train and retain other highly
qualified technical personnel. Competition for such personnel is
intense, and given Spectrum's past history, there can be no
assurance that the Company will be able to attract, assimilate or
retain other highly qualified technical and managerial personnel
in the future. The inability to attract and retain the necessary
technical and managerial personnel could have a material adverse
effect upon the Company's business, operating results or
financial condition.
Limited Capital Resources. If the Company successfully emerges
from Chapter 11 bankruptcy, it will have limited cash assets to
invest in product development and marketing and selling. It is
critical, therefore, to the Company's business, operating,
results and financial condition that timely product introduction
and market acceptance is achieved. Any delays or reduction in
product shipments will have a materially adverse effect on the
Company's business, operating results and financial condition.
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 NASD OTC Bulletin
Board. If the Company successfully emerges from Chapter 11, there
can be no assurance that an active public market for the common
stock will develop or be sustained. Further, the market price of
the Company's common stock is likely to be highly volatile and
could be subject to wide fluctuations in response to existing
Chapter 11 to quarterly variations in operating results,
announcements of technological innovations or new products by the
Company or its competitors, or other events or factors. In
addition, the Company is planning to apply for listing on one of
the major exchanges in the future. There can be no assurances the
Company will be accepted for listing.
Shares Eligible for Future Sale. Sale of a substantial number of
shares of common stock in the public market following the
Company's emergence from Chapter 11 through the distribution of
preferred stock to class action plaintiffs and the conversion of
preferred stock to common stock could adversely affect the future
market price for the common stock (See Item 3 Legal Proceedings
Bankruptcy Related Proceedings).
The Industry
The development of networks linking portable computers,
workstations, minicomputers and mainframes at separate locations
has occurred primarily in connection with the decentralization of
business operations, the evolving enterprise environment of
client/server computing and the need to perform data-intensive
business functions at distant offsite locations. As a result,
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demand is also increasing for more sophisticated, cost-effective
and reliable mobile data communication system solutions,
including portable computers, wireless data communication devices
(modem PC cards), associated peripheral equipment, and mobile
software utilities for mobile applications.
Computer and telecommunications companies have been making
significant investments in the manufacturing and development of
new mobile computing devices and wireless networks. As a result,
the wireless communication industry has experienced the emergence
of a number of competing wireless data network technologies and
services. The Company's proprietary technology is particularly
applicable to data transmission over circuit-switched cellular
networks. While there are new wireless communications networks
entering the market, management believes that circuit switched
cellular will attract a significant share of wireless data
transmission. However, the Company's mobile software product
strategy will support the full range of wireless technologies and
will observe network neutrality, allowing the use of the most
appropriate network for each type of mobile application.
The Company's research indicates that numerous industry
activities and technologies are converging to support the mobile
work force. This indication is substantiated by growth observed
in portable computer, facsimile, cellular telephone, electronic
mail, client/server and database service applications. The
Company believes in order that wireless data communications
capability is essential to businesses seeking to provide real
time support to their field personnel and mobile professionals to
remain competitive.
Based on published market research forecasts, the Company
expects significant growth in PC Card Fax/Modems sold over the
next five years within the United States from approximately 3
million per year to 7.5 million per year in 1999. Management
foresees that the majority of these PC Card Fax/Modems are
expected to include Spectrum intellectual property. Further, the
number of cellular subscribers in the United States is expected
to increase from approximately 30 million subscribers to 60
million by the year 2000. Within this growth market of cellular
subscribers, wireless circuit switched cellular data subscribers
are forecasted to increase in this same period from some 200
thousand to over 2.5 million by 1999. Management believes that
these trends provide a strong indication of future opportunities
for mobile communication products.
When analyzed closely, it appears that no single wireless
network carrier will be able to provide an optimized set of the
features needed to support multiple groups of users with widely
different information needs and work behaviors. Mobile users in
all likelihood would appreciate access to multiple wireless
networks with the ability to determine the optimal network for
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communicating based upon features such as speed of communication,
reliability of transmission and cost of transmission. Management
believes that its proprietary technology can be applied to
satisfying the market needs for such products.
Products Under Development
Spectrum's current product offerings are proprietary direct
connect activation kits (software drivers and cables) providing
interface connection to a variety of cellphones and PC card
modems sold directly to licensed modem manufacturers. These
product offerings have been enhanced by the Company's recent
cross-license agreement with Motorola (See Competition and Item 3
- - Legal Proceedings - Patent Related Proceedings) to allow
Spectrum to offer kits for operation with certain Motorola
proprietary cellphones subject to a prescribed certification
program.
Near term products under development include utilities
software to simplify the set up of cellular communications and to
enhance the use of cellular connectivity. These products will
enable non-technical mobile professionals to easily and
efficiently access and receive data using their cellular phones
and portable computers.
The Company is currently evaluating market needs for next
generation products to extend computer based business processes
to mobile professionals using a broad range of wireless and
wireline technologies, as well continuing to increase the
utilization of cellular data technology. These products most
likely will embody advanced techniques to make mobile
communications simple, efficient, cost effective and network
independent.
Competition
The wireless and mobile data communications industry is
intensely competitive and is characterized by rapid technological
advances. These advances result in the frequent introduction of
new products with increased performance capabilities and
significant price/performance improvements. Competition in this
market is based upon several factors, including product features,
price, quality and reliability, service and support, marketing
and distribution. Many of Spectrum's competitors and potential
competitors have more extensive engineering and marketing
capabilities and greater financial, technological and personnel
resources than does the Company.
Management believes that certain of its competitors may be
infringing upon the Company's patents and/or may infringe upon
patent rights that will be acquired by Spectrum by virtue of its
pending patent applications. In addition, certain of the
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Company's licensees have been granted the right to make or have
made and sell activation kits in competition with the Company.
Spectrum's competitiveness is dependent upon its ability to cost
effectively resolve infringement issues, to develop and introduce
new performance-leading products and technologies and to expand
the market for its technology, including capturing market share
previously given to competitors under its licensing program.
There can be no assurance that Spectrum's products will be as
competitive as other products based upon similar or alternative
technologies are introduced.
In reference to the activation kits and near term development
efforts, the following companies are licensees as well as key
direct competitors:
AT&T: In 1993, Spectrum and AT&T entered a license
agreement, pursuant to which AT&T has full rights to (i) utilize
Spectrum's established and certain pending technology and (ii)
produce competing products, while paying Spectrum only relatively
modest royalties. The pending breakup of AT&T has provided an
opportunity to discuss modifications to an existing license with
AT&T and/or the entities that will be spun off. However, there
can be no assurance that these discussions will lead to a
favorable resolution.
U.S. Robotics/Megahertz: Currently, Megahertz, a subsidiary
of U.S. Robotics Corporation, is a market leader of PC Card modem
sales. U.S. Robotics/Megahertz and Spectrum have entered a
settlement of an arbitration filed by Megahertz and negotiated a
revised license agreement favorable to both parties that was
submitted under seal to the Bankruptcy Court and was approved on
March 7, 1996. Although the revised license agreement provides
the opportunity for a strategic relationship, U.S. Robotics and
Megahertz remain licensed to produce products that may either
directly or indirectly compete with Spectrum (See Item 3 - Legal
Proceedings - Patent Related Proceedings).
Motorola: On December 6, 1994, the Company filed a lawsuit
against Motorola, Inc. ("Motorola") for infringement of claims in
six of its patents, covering basic wireless data concepts.
Motorola denied the allegations and alleged that Spectrum's
patents were invalid and unenforceable. Subsequently, after
lengthy negotiations, Spectrum and Motorola entered into an
agreement settling the patent litigation (See Item 3 - Legal
Proceedings - Patent Related Proceedings). Spectrum and Motorola
have cross-licensed each other for use of specified intellectual
property. Under the agreement, Spectrum is one of the few
entities licensed to distribute communications software that
allows the wireless transmission of data utilizing proprietary
technology related to certain Motorola cellular telephones.
Motorola is licensed to utilize Spectrum's basic technology in
certain modems and modem integrated circuits (ICs) and sell
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activation kits for Motorola modems. The confidential
cross-license agreement was filed under seal and was approved by
the Bankruptcy Court on April 9, 1996.
In addition, a number of other licensees or infringing
companies, many of which have greater resources than the Company,
are currently and may continue to compete directly or indirectly
with Spectrum.
Company History
Spectrum has been actively involved in cellular
telecommunications since its inception in 1984. Between 1984 and
1986, the Company entered into agency representation agreements
with major telephone companies to market cellular telephone
service and equipment. Additionally, Spectrum distributed
cellular telephone equipment for major brand-name manufacturers,
providing both equipment and the necessary technical support to
enable computer retailers to sell cellular telephone products.
Also during this period, the Company anticipated the
implementation of portable computing technology as a means of
enabling companies to increase productivity by providing
automation capabilities to their field personnel. The Company
believed that, through the creation of cellular telephone
networks, employees could interact with their offices to utilize
more effectively the portable computing technology and products
made available to them.
Anticipating the convergence of these two emerging
technologies, the Company in 1984 first investigated the
capabilities of then-existing land-line modem protocols (the set
of rules that specify how information is transferred between
modems), and determined that they did not provide the reliability
needed for dependable transmission of data through cellular
communications. The Company also recognized that none of the
cellular telephone products then available offered the
intelligent interface capabilities required to interface with
modems that are needed for data communications over cellular
networks. In response to this need, the Company developed and
patented (i) other specific modem control technology and (ii)
various cellular telephone-modem interface technologies.
Subsequently, the Company began a second development effort
to create two specialized stand-alone cellular telephone
interface products that would enable the use of modems and other
devices for both land-line and cellular data communications. The
first interface designed, the AXSYS, required special
enhancements to the modem to which it would be connected. The
resulting modem product provided the user with basic land-line
data communications capabilities over a cellular network.
Today, the Company's technology is marketed under the DIRECT
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CONNECT (TM) AXSYS(R) brand name which, in addition to the
enhancements to the chipset, includes (i) the Company's direct
connect software driver product and (ii) associated cables, both
of which are used to connect cellular-capable modems to cellular
telephones, which together form the "activation kit", which makes
a modem cellular ready. A second non-direct connect interface,
the AXCELL(R) brand cellular interface, was designed to allow the
user to utilize other land-line compatible devices (such as a
facsimile, telephone set or answering machine) as well as modems
with a cellular telephone.
In July 1995, pursuant to an agreement approved by the
Bankruptcy Court, the Company sold its non-profitable AXCELL(R)
product line and certain related patent rights to Telular. The
patent rights transferred by the Company relate to wireless
interface technology and were obtained in a license agreement
from Telular dated March 23, 1992, and were not a part of
Spectrum's core patent portfolio. Accordingly, they did not
contribute to the royalties the Company receives from licenses
for its direct connect wireless data transmission technology. The
transaction improved the Company's liquidity and working capital
as it continued its reorganization efforts.
In an effort to establish distribution channels for its
proprietary technology and products, the Company acquired
Computer Bay, Data One, Source One System, Inc. ("Source One")
and Hugh Carver Group, Inc. ("Hugh Carver"). Computer Bay, a
national franchiser of independent resellers of microcomputers
and related products and services, was acquired in 1992. Data One
designed, marketed and serviced portable communications and
computing systems (primarily for use by field personnel in sales
and service companies) and office systems utilizing
microcomputers and peripheral products, and was acquired in 1989.
Source One, also a marketer and servicer of portable
communications and computing systems, was acquired in February
1990 and combined with Data One in September 1990. The primary
business of Hugh Carver, acquired in calendar 1991 through Data
One, was the implementation of field sales force automation
projects. The Company has since discontinued operations of
Computer Bay and Data One due to significant losses from
continuing operations. Computer Bay is being liquidated under
Chapter 7 and Data One is being liquidated under Chapter 11 of
the Federal Bankruptcy Code.
In 1993, the Company commenced a licensing program for its
patented technology and has entered license agreements with many
major modem and integrated circuit manufacturers. Revenues from
royalties under these agreements have failed to meet prior
expectations. It is these licensing agreements upon which the
Company now expects to initially leverage into distribution
channels for its future communications software product offerings
(See Item 1 - Business - Management Strategy).
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In addition, the Company identified the area of
telecommunications infrastructure services as an attractive niche
in the wireless and telecomputing industries. As an initial step
towards developing a business to provide such technical services,
the Company acquired Spectrum Global, formerly known as "Yield
Industries", in October 1993. Spectrum Global primarily provided
low-level skilled technical specialists to Fortune 1000 companies
on a temporary basis to assist clients in wireless infrastructure
services, network management and custom application development.
Effective October 17, 1995, the Company sold Spectrum Global
because it was not essential to Spectrum's core business.
In May 1993, the Company was named as a defendant in a
pending consolidated class action (in which the plaintiffs filed
a proof of claim alleging $676 million in damages in the
Company's pending bankruptcy) and became involved in related
legal proceedings and lawsuits (See Item 3 Legal Proceedings
Securities Related Proceedings). The expense associated with
these proceedings, in addition to continuing operating losses,
contributed to the Company's decision to file its Chapter 11
bankruptcy petition. In April 1995, the Company was delisted from
the Nasdaq Stock Market for failing to meet certain net tangible
asset and bid and ask price criteria. The Company's common stock
is currently traded on the NASD OTC Bulletin Board.
Following the resignation of John Sculley in February 1994,
the Company began a search for a new Chief Executive Officer. In
January 1995, the Company engaged Donald J. Amoruso as President
and Chief Executive Officer. At the time of Mr. Amoruso's
employment, a new Board of Directors was elected to replace the
then existing Board. In late January 1995, the Company, Cellular,
Computer Bay and Data One filed the Chapter 11 bankruptcy
petitions to allow the Company time and conserve limited
resources needed to resolve outstanding litigation and to develop
its core business. Upon motion by the Debtors, 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. Data One is being
liquidated under Chapter 11. (See Item 3-Legal Proceedings
Bankruptcy Proceedings).
Customers
The significant customers of the Company have varied from year
to year. During the fiscal year ended March 31, 1996, sales to
SMART Modular Technologies (including Apex Data, Inc., which was
acquired by SMART during the fiscal year) ("SMART") accounted for
approximately 27% of the Company's merchandise sales. During the
fiscal year ended March 31, 1995, sales to OKI Telecom accounted
for approximately 39% of the Company's merchandise sales. During
the fiscal year ended March 31, 1994, sales to OKI Telecom,
Audiovox Corporation and Fujitsu Network Transmission accounted
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for approximately 19%, 15% and 13%, respectively, of the
Company's merchandise sales.
The Company works closely with existing and potential
customers, often for extended periods of time, in order to sell
products marketed by Spectrum. In many cases, product shipments
are made in a short period of time in response to a customer's
orders. The Company does not have a material backlog of orders.
Manufacturing
The Company utilizes contract manufacturers for the assembly
of its direct connect activation kit products. Each perform to
the Company's quality control standards. Hence, no product
assembly is performed by the Company.
The cross-license that the Company entered with Motorola
requires the Company to purchase cables and connectors for its
direct connect activation mechanisms to be used with Motorola
cellular telephones from authorized vendors of Motorola. (See
Competition and Item 3 - Legal Proceedings Patent Related
Proceedings). Spectrum is presently having these cables
manufactured by one or more of several authorized vendors and the
Company believes it will be able to procure product in sufficient
quantities to meet its customers' demands. A failure to timely
fill product orders would materially and adversely affect the
Company's results of operations.
Seasonality
Spectrum's financial performance has not exhibited
significant seasonality in the past and the Company does not
anticipate future seasonality.
Proprietary Rights
The Company relies on patent, trade secret, copyright and
trademark laws, in addition to technical measures, to protect its
products. The Company currently has six issued U.S. patents,
three issued foreign patents, and several pending U.S. and
foreign applications.
Although the Company believes that its patents and licensed
patent rights have value, there can be no assurance that the
Company's patents, or any additional patents issued in the
future, will provide meaningful protection from competition,
assuming a successful reorganization and emergence from Chapter
11 (See Item 3 - Legal Proceedings - Patent Related Proceedings).
The Company believes its success will depend primarily upon the
experience, creative skills, technical expertise, and marketing
and sales abilities of its personnel. Furthermore, given the
rapid development of technology in the data communications
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industry, there can be no assurance that certain aspects of the
Company's products do not infringe the proprietary rights of
others.
The Company's six U.S. patents are summarized below:
Portable Hybrid Communication System and Methods: On November
20, 1990, the Patent Office issued to the Company this patent
which covers the Company's unique method of combining a cellular
transceiver, modem and variety of telephone devices into a single
functioning, user-controlled device providing wired or wireless
voice and data communications.
System and Method for Interfacing Computers to Diverse
Telephone Networks: On June 30,1992, the Patent Office issued to
the Company this patent which covers (i) the Company's original
AXSYS(R) brand cable interface circuit and (ii) modems that are
adapted to operate with the AXSYS(R) brand cable interface
circuit. This patent further covers other connectivity features
useful in connecting a modem to various cellular telephones.
Cellular Telephone Data Communication System and Method: On
August l8, 1992, the Company obtained this patent which has
claims covering fundamental techniques required for commercially
acceptable and reliable data transmission over any conventional
cellular communication channel. The Company was originally issued
a patent for these concepts on September 29, 1987 and this patent
is a reissue of that original patent.
Programmable Universal Interface System: On September 28,
1993, the Company was issued this patent, which has claims
covering the Company's "direct connect" technology and which
enables specially programmed modems to be connected to a cellular
telephone by a simple passive cable. Software in the modem
generates control signals appropriate to the model of cellular
telephone in use. This technology also allows a single computer
modem to be connected to different types of cellular telephones
without intervening electronic circuits to permit computer
control of the cellular telephone for data transmission purposes.
This product is currently being marketed under the AXSYS(R) brand
name.
System and Method for Interfacing Computers to Diverse
Telephone Networks: On October 4, 1994, the Company was issued
this patent which expands the Company's basic patent rights in
the area of direct connect modem technology originally covered by
the Company's 1993 Programmable Universal Interface patent.
Programmable Universal Interface System: On November 22, 1994,
the Patent Office issued this patent which broadens and expands
the Company's coverage for direct connect modems, adds coverage
for methods used in direct connect technology and provides
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coverage for upgrade kits that provide a software driver and
cable to make the direct connect modem compatible with a specific
cellular telephone.
The Company has non-exclusively licensed various aspects of
this proprietary technology to modem and modem integrated circuit
manufacturers. Licensees of the Company include AT&T, Rockwell
International, U.S. Robotics, Motorola, IBM, Zoom Telephonics,
and SMART.
The Company has developed, and continues to expand, a library
of software drivers related to its direct connect technology.
Each software driver is designed to permit control of a
particular cellular telephone by a direct connect modem, when
installed in the modem. The software drivers are subject to
copyright protection and the Company claims the right, pursuant
to national and international copyright laws, to control copying
and distribution of its software drivers.
The Company has additional patents pending in the U.S. Patent
and Trademark Office and in foreign patent offices, and intends
to apply for additional patents as its development efforts
progress. The Company is also seeking additional patent rights in
the technologies covered by the issued patents.
The Company has regularly used the following trademarks and
service marks to describe certain of its products and services,
and considers each of these marks to be proprietary: SPECTRUM
CELLULAR(R), SPCL(R), AXSYS(R), SPECTRUM CONNECTED(R), the
SPECTRUM CONNECTED logo and DIRECT CONNECT AXSYS. The Company has
obtained U.S. Federal trademark registrations for its SPECTRUM
CELLULAR(R), SPCL(R) and AXSYS(R), SPECTRUM CONNECTED(R) and
SPECTRUM CONNECTED logo marks and has an application pending for
federal trademark registration for DIRECT CONNECT AXSYS. These
trademark registrations and applications provide legal notice to
other parties that the Company claims exclusive rights in these
marks. Since its bankruptcy filing, the Company has selectively
proceeded to seek foreign patent and trademark rights based on
its limited financial resources.
Research and Development Expenditures
During fiscal 1996, 1995, and 1994, the Company spent
approximately $369,000, $306,000 and $336,000, respectively, on
research and development. These expenditures are expected to
significantly increase in fiscal year 1997 in accordance with
management's current strategy to develop and market mobile
communication software products.
Government Regulations
The Company operates solely as an adjunct to the telephone and
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computer industries. Federal and state regulation of telephone
service currently has no direct adverse impact on the Company,
although regulations affecting the cost of cellular telephone
service could have an impact on the Company. The Company believes
that deregulation in the telecommunications industry will
increase competition and make mobile communications more
accessible. The Company expects that this ease in accessibility
will increase in the number of mobile communications users will
create a larger market for the Company's products, although there
can be no assurance that deregulation will have this effect.
Employees
The Company currently employs 21 employees and enjoys a good
relationship with its employees. No employee of the Company is a
member of a labor union or other collective bargaining
association.
Implementation of the Company's strategy contemplates that the
Company will increase the engineering staff during the next
fiscal year (See Management Strategy).
Directors and Executive Officers of the Company
The following table sets forth information with respect to the
directors and executive officers of the Company:
Name Age Position with the Company
Donald J. Amoruso 58 President, Chief Executive
Officer and Chairman of the
Board of Directors
Mikhail Drabkin 49 Chief Technical Officer
Richard duFosse 47 Vice President - Software
Engineering
Christopher M. Graham 31 General Counsel and Secretary
Barry J. Hintze 39 Controller and Principal
Accounting Officer
Sheldon A. Buckler 64 Director
George Bugliarello 68 Director
Robert D. Dalziel 61 Director
Business Experience of Directors and Executive Officers
Donald J. Amoruso became Spectrum's President, Chief
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Executive Officer and Chairman of its Board of Directors in
January 1995. From 1991 to 1994, Mr. Amoruso founded and was the
principal consultant of DMA Associates, a consulting firm
specializing in management, marketing and turnaround strategies
and alliances for small and mid-sized technology firms. Before
1991, Mr. Amoruso held several senior executive positions with
Norden Systems, a subsidiary of United Technologies Corporation.
As Senior Vice President and General Manager, he was responsible
for three high technology business units: the Command, Control
and Communications Systems operation based in Connecticut; the
Marine and Ground Systems operation based in New York; and Norden
Services Company of Maryland. All these units were extensively
involved in computer software activities. Mr. Amoruso holds a
Bachelors and Masters degree in electrical engineering from
Manhattan College and Polytechnic University respectively.
Mikhail Drabkin joined the Company as its Chief
Technical Officer in March, 1996. Since 1988, Mr. Drabkin has
held various positions with Hayes Microcomputer Products, Inc.
("Hayes"). Most recently, as Vice President - Corporate
Engineering, Mr. Drabkin had responsibility for new platform
design and implementation of strategic partnerships with key
technology providers. Mr. Drabkin also held the positions as
Vice President - Product Development from 1992 to 1994, General
Manager - Hayes ISDN Technologies from 1990 to 1992 and Director
of Engineering-San Francisco Hayes Development Center from 1988
to 1990. Before joining Hayes, Mr. Drabkin was employed by
SOFTCOM and Macleod Laboratories as a design engineer and
engineering manager, respectively. Mr. Drabkin is a member of
IEEE and Beta Gamma Sigma and holds a Dipl.-Ing. in electrical
communications from the St. Petersburg Institute for
Telecommunications and an M.B.A. from the University of San
Francisco.
Richard F.duFosse joined the Company as Vice
President of Software Engineering in February 1996. Immediately
prior to joining Spectrum, Mr. duFosse provided consulting
services related to software product development and mobile
computing to Fortune 1000 clients. From 1990 through 1995, Mr.
duFosse held several positions with Lotus Development
Corporation. From 1994 through 1995, as Director of Mobile
Computing, Lotus Business Partners Programs, Mr. duFosse created
a business partner program to implement and deliver products to
wirelessly enable Lotus Notes and cc:Mail. Mr. duFosse
previously held the positions of Development Director, Mobile
Computing Group and Senior Development Manager where he managed
development of Lotus products for mobile computing. Mr. duFosse
is a former Member of the Board of Directors of the Portable
Computer and Communications Association and former Chairman of
the Modem Architecture Subcommittee of the PCCA. Mr. duFosse
received a Bachelor's Degree in Humanities and Technology, a
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Masters degree in Computer Science and an M.B.A. from Worcester
Polytechnic Institute.
Christopher M. Graham has served as General Counsel
and Secretary of Spectrum since May 1995. From July 1994 until
May 1995, Mr. Graham served as Spectrum's Associate General
Counsel. From 1992 until 1994, Mr. Graham was an attorney
associated with the New York law firm of Kelley Drye & Warren.
Mr. Graham served previously as an operations manager with The
Chase Manhattan Bank in its Capital Markets and Foreign Exchange
Sector. Mr. Graham received a Bachelor of Science degree in
finance from Lehigh University and a Juris Doctorate degree from
the University of Connecticut School of Law.
Barry J. Hintze has served as Spectrum's Controller
since May 1995 and also as Principal Accounting Officer since
September 1995. From 1988 to 1995 Mr. Hintze was Controller of
CEL Communications, Inc. Before joining CEL Communications, Mr.
Hintze served as the Assistant Controller of Delson Business
Systems and held various accounting positions with Ticketron.
Mr. Hintze holds a Bachelor of Science degree and an M.B.A. in
finance from C.W. Post Center, Long Island University.
Sheldon A. Buckler is Chairman of Commonwealth Energy
System and was Vice Chairman of Polaroid before his retirement in
1994. At Polaroid he held various positions in a thirty-year
career including Vice President, Research and Executive Vice
President, Technical and Industrial Products. Dr. Buckler has
been awarded thirty-seven patents and has authored numerous
papers. He has a Ph.D. in Chemistry from Columbia University and
a B.A. from New York University. Dr. Buckler is also a member of
the Board of Directors of Aseco Corporation, Cerion, Lord
Corporation, Nashua Corporation, Parlex Corporation and Vice
Chairman of the Massachusetts Eye and Ear Infirmary.
George Bugliarello is the Chancellor of Polytechnic
University, and was President from 1973 to 1994. Before joining
Polytechnic University, Mr. Bugliarello was the Dean of
Engineering, and a Professor of Civil Engineering and
Biotechnology at the University of Illinois. Mr. Bugliarello was
also a Professor of Biotechnology and Civil Engineering, and
Chairman of the Biotechnology Program at Carnegie-Mellon
University. Mr. Bugliarello holds degrees from the Massachusetts
Institute of Technology, University of Minnesota, and the
University of Padua. Mr. Bugliarello is the recipient of many
professional honors, and has been associated with and held
positions in numerous professional societies throughout his
career. Mr. Bugliarello is on the Board of Directors of ANSER,
Comtech Corporation, Educational Commission for Foreign Medical
Graduates, Greenwall Foundation, Jura Corporation, Long Island
Lighting Company, Lord Corporation, Symbol Technologies, Inc.,
and Teagle Foundation.
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Robert D. Dalziel is an international executive with
operations and sales experience. From 1991 to 1995, Mr. Dalziel
was the Chairman of Telecommunications Cooperative Network, Inc.
He has also consulted for Bechtel, the Government of Kazahstan
and the Kvant Company in Ukraine. From 1956 to 1991, Mr. Dalziel
served in numerous capacities for AT&T, including the positions
of Vice President - International Operations, President - AT&T
Europe, and Vice President - Global Networks. Mr. Dalziel has a
degree in electrical engineering from Polytechnic University,
where he is currently a trustee.
Item 2. Properties.
The Company's headquarters occupy approximately 4,200 square
feet of office space in an office building located on Westchester
Avenue in Purchase, New York. The Company holds a lease for such
offices expiring on April 30,1998. The Company also leases
approximately 2,821 square feet of office space in an office
building located on Hutton Drive in Carrollton, Texas. This lease
expires on October 31, 1998. The Company believes that its
properties and facilities are suitable and adequate for its
purposes for the foreseeable future.
The Company is also temporarily leasing individual offices in
executive office parks near Atlanta, Georgia and Boston,
Massachusetts for its research and software product development.
The Norcross, Georgia lease expires on October 31, 1996 and the
Marlborough, Massachusetts lease is month to month. The Company
believes these existing facilities will not be suitable for its
purposes as the Company adds technical staff in each of these
departments and will be relocating to leased property that is
suitable and adequate for its research and development
activities.
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Item 3. Legal Proceedings.
Bankruptcy Proceedings
On January 26, 1995 (the "Petition Date"), the Company and
three of its four operating subsidiaries (Computer Bay, Data One
and Cellular) filed petitions for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the
Eastern District of New York (the "Bankruptcy Court"), Case Nos.
195 10690 260, 195 10691 260, 195 10692 260 and 195 10693 260,
respectively (the "Chapter 11 case"). Spectrum Global did not
file for bankruptcy protection. On February 8, 1995, the United
States Trustee appointed an Official Committee of Unsecured
Creditors to represent the creditors of Spectrum, Data One and
Cellular (the "Committee"), and another committee 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. A trustee has been
appointed to oversee liquidation of the Computer Bay assets.
Spectrum and Cellular have been substantively consolidated in the
bankruptcy proceeding and are continuing to manage their affairs
and operate their business under Chapter 11 as debtors in
possession while awaiting for Bankruptcy Court approval of their
proposed plan of reorganization. A separate plan of liquidation
under Chapter 11 has been filed for Data One.
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 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 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.
Principal Proceedings in the Chapter 11 Case
Stay of Litigation
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Pursuant to section 362 of the Bankruptcy Code, the
commencement of the Debtors' Chapter 11 cases operates as stays,
applicable to all entities, of the following: (i) the
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 Debtors' Chapter 11 cases,
or to recover for a claim that arose before the commencement of
the Debtors' Chapter 11 cases; (ii) the enforcement of any
judgment against the Debtors that arose before the commencement
of the Debtors' Chapter 11 cases; (iii) the taking of any action
to obtain possession of or to exercise control over the Debtors'
property; (iv) the creation, perfection or enforcement of any
lien against the Debtors' property; (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 cases;
or (vi) the setoff of any debt owing to the Debtors that arose
prior to the commencement of the Debtors' Chapter 11 cases
against a claim held by such creditor or party in interest
against the Debtors that arose before the commencement of the
Debtors' Chapter 11 cases. 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
cases.
Executory Contracts
As debtors in possession, the Debtors have 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 Debtors,
including parties to such real property leases, may file motions
with the Bankruptcy Court seeking to require the Debtors to
assume or reject those contracts or leases. In this context,
"assumption" means that the Debtors cure or provide adequate
assurance that they will cure all existing defaults under a
contract or lease and provide 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 Debtors are relieved of their obligations to
perform further under the contract or lease. Rejection of an
executory contract or lease is treated as 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 rejected
certain employment contracts and has terminated employment of
some of the affected individuals. The Bankruptcy Court has
approved the Company's employment agreement with its current CEO.
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On January 23, 1996, the Bankruptcy Court approved (i) the
assumption of modified employment contracts with other employees
with pre-existing employment agreements, eliminating some
contractual perquisites and reducing severance benefits, and (ii)
the terms of agreements with two former employees regarding
rejection of their employment agreements and their claims for
rejection damages. In April 1996, the Bankruptcy Court approved
the assumption of a remaining employment agreement that had been
modified to reduce salary, eliminate some contractual perquisites
and reduce severance benefits. The Company is currently seeking
Bankruptcy Court approval of the employment contracts of its
Chief Technical Officer and Vice President - Software
Engineering. The Company rejected all leases for automobiles
leased on behalf of employees. Additionally, the Company has
rejected the real property lease associated with its former
Manhasset, New York headquarters and leases for certain furniture
and equipment.
Prepetition claims that were contingent, unliquidated, or
disputed as of the commencement of the Chapter 11 case,
including, without limitation, those that arise in connection
with rejection of executory contracts, may be allowed or
disallowed depending on the nature of the claim. Such claims may
be fixed by the Bankruptcy Court or otherwise agreed upon by the
parties.
Computer Bay Trustee's Claim
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 filed a claim with the
Bankruptcy Court seeking to substantively consolidate the
Computer Bay estate and liabilities with the estates and
liabilities of the Company. The Debtors filed an objection to
this claim on November 20, 1995. In furtherance of his proofs of
claim, on January 11, 1996 the Computer Bay trustee filed a
complaint commencing litigation against the Company seeking to
substantively consolidate the Computer Bay estate with the
Debtor's estate and, in the alternative, seeking the return of
alleged preferences and fraudulent conveyances in the amount of
$4,351,396 (the "Computer Bay Litigation"). The Debtors filed an
answer on January 23, 1996. On February 27, 1996, the Computer
Bay trustee informed the Company that it would seek permission
from the Bankruptcy Court to add two of the Company's then
executive officers as defendants in this litigation. The Debtors
asserted counterclaims against the Computer Bay estate in the
amount of $2,430,436.
On March 15, 1996, the Debtors, the Committee and the Computer
Bay trustee agreed to a settlement of the Computer Bay
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Litigation, which was approved by the Bankruptcy Court on March
28, 1996. The settlement calls for the Computer Bay estate to
receive distributions under the Plan of $600,000 in cash and
$300,000 in Spectrum common stock to be distributed approximately
one month after the Plan's effective date. Consummation of the
settlement is contingent upon confirmation of the Plan.
The Debtors' Exclusivity Period
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 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. The Company filed a plan of
reorganization (the Plan) dated as of March 18, 1996. A hearing
regarding confirmation of the Plan is scheduled for July 17,
1996. No other party may file an alternative plan unless the Plan
is not confirmed.
Setting of the Bar Date for Prepetition Claims
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.
The Debtors' Proposed Plan of Reorganization
The Plan, if confirmed by the Bankruptcy Court, will settle
all material litigation now pending and provide all general
unsecured creditors with 100% of the value of their claims plus
6% interest thereon. The Company has segregated approximately
$3.5 million for the payment of general unsecured claims, the
priority non-tax claim and the Company's cash contribution to the
settlement of the class action lawsuits. To date, the Company has
reconciled the majority of the general unsecured creditor claims,
with interest, in the amount of approximately $2.7 million.
Several outstanding claims remain that the Company is attempting
to reconcile before the effective date of the Plan (the
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"Effective Date"). The Company does not believe that the
reconciliation of such claims will have a material effect on the
reserve established for payment to unsecured creditors. The Plan
also provides for the payment of approximately $264,000 on the
Effective Date to the holder of the one priority nontax claim
filed against Spectrum. The Plan will also settle all of the
class action lawsuits filed against the Company by the payment of
$250,000 by the Company and the delivery of approximately 45% of
the equity ownership in reorganized Spectrum to a trustee to be
distributed to the members of the class. (See Securities Related
Proceedings.) Under the terms of the proposed Plan, existing
shareholders will be substantially diluted but should obtain the
majority of the 45% equity ownership in reorganized Spectrum set
aside for such shareholders and certain creditors. This should
hold true even after the issuance of $300,000 of stock to the
Chapter 7 trustee of Computer Bay in connection with the recent
settlement of his claim. Holders of allowed administrative claims
(as agreed upon or ordered by the Bankruptcy Court) will be paid
in full under the Plan. The Company intends to seek a waiver of
accrued professional fees that to date have been held back by the
Bankruptcy Court.
The Bankruptcy Court initially scheduled a confirmation
hearing for May 3, 1996, which has since been rescheduled for
July 17, 1996 (See Securities Related Proceedings.) This
rescheduling was necessary because Plan confirmation is
contingent upon the successful resolution of a coverage dispute
with certain of Spectrum's former directors' and officers'
insurance carriers (See Securities Related Proceedings). This is
the only known remaining significant issue that must be resolved
in bankruptcy prior to confirmation of the Plan.
The Company will amend its certificate of incorporation and
by-laws on the Effective Date. The Amended Certificate contains
certain provisions affecting the rights of shareholders,
corporate governance, and the transferability of Class A
Preferred Stock and Reorganized Spectrum Common Stock (as defined
below). Under the amended certificate of incorporation, the
authorized capital stock of the Company shall be comprised of (i)
10 million shares of reorganized Spectrum common stock
("Reorganized Spectrum Common Stock"), (ii) 1.5 million shares of
Class A preferred stock reserved for issuance in connection with
the settlement of the Class Action that was filed against the
Company in 1993 ("Class A Preferred Stock") and (iii) 2 million
shares of preferred stock ("Preferred Stock"). A description of
the amount of shares that will be issued within each class is set
forth below.
Issued and outstanding shares of the Company's common stock
will be canceled on the Effective Date and replaced with one (1)
share of Reorganized Spectrum Common Stock for each seventy-five
(75) shares of existing common stock. The Company currently has
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authorized 110 million shares of common stock, of which
approximately 76.7 million are issued and outstanding. Therefore,
approximately 1 million shares of Reorganized Spectrum Common
Stock will be issued to existing shareholders on the Effective
Date. An additional $300,000 of Reorganized Spectrum Common Stock
will be issued to the Computer Bay trustee in connection with the
settlement of his claim (See Securities Related Proceedings)
(collectively, the Reorganized Spectrum Common Stock issued to
existing shareholders and the Computer Bay trustee is defined as
"Distributable Common Stock"). Stock options issued under the
Company's existing stock option plans will also be reverse split
at a 75 to 1 ratio and repriced accordingly.
Pursuant to the Class Action Settlement, the Company will
issue a number of shares of Class A Preferred Stock equal to the
number of shares of Distributable Common Stock. The Class A
Preferred Stock is convertible to Reorganized Spectrum Common
Stock at any time within two years of its date of issuance and
automatically converts to Reorganized Spectrum Common Stock at
the expiration of two years.
As part of a bonus or success fee to employees, officers and
all non-executive directors for confirming a plan of
reorganization, the Company will also issue Reorganized Spectrum
Common stock pursuant to the two incentive compensation programs
described in the Plan, the Spectrum 1996 Stock Incentive Plan and
the Spectrum 1996 Incentive Deferral Plan, which collectively
authorize the issuance of an aggregate number of shares of
Reorganized Spectrum Common Stock equal to one-ninth (1/9) of the
aggregate number of shares of Distributable Common Stock and
Class A Preferred Stock (i.e., 10% of the reorganized equity
ownership) to directors, officers and employees of the Company on
the Effective Date. Except for 300 shares of Reorganized Spectrum
Common Stock that will be distributed to directors on the
Effective Date, the distribution of stock to directors, officers
and employees pursuant to such incentive programs shall be
distributed in three equal installments. The first installment
shall be distributed during the three day period commencing three
days after Reorganized Spectrum files its Quarterly Report on
Form 10-Q for its fiscal quarter ending June 30, 1997; the second
installment shall be distributed during the three day period
commencing three days after Reorganized Spectrum files its
Quarterly Report on Form 10-Q for its fiscal quarter ending
December 31, 1997; and the third installment shall be distributed
during the three day period commencing three days after
Reorganized Spectrum files its Quarterly Report on Form 10-Q for
its fiscal quarter ending June 30, 1998. Under the Stock
Incentive Plan, employees, officers and directors will also be
eligible to receive future grants of performance based incentive
awards with respect to an aggregate number of shares equal to an
additional one-ninth (1/9) of the aggregate number of shares of
Distributable Common Stock and Class A Preferred Stock. Also, on
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the Effective Date, the Company will distribute a $300,000
success bonus among all employees.
Implementation of the Plan does not contemplate issuance of
the remainder of the 10 million authorized shares of Reorganized
Spectrum Common Stock, the remainder of the 1.5 million shares of
Class A Preferred Stock, or the 2 million shares of authorized
preferred stock. The details of the Plan, the proposed
recapitalization, and copies of the certificate of incorporation
and by-laws are set forth in detail in the Plan and associated
Disclosure Statement, which the Company filed with the SEC on its
Current Report on Form 8-K dated as of March 26, 1996 and are
incorporated herein by reference (See Note 1(b) to the
Consolidated Financial Statements for Unaudited Pro Forma
Financial Information regarding Confirmation of the Plan).
If the Plan of is not confirmed, the alternatives include: (a)
continuation of the pending Chapter 11 cases; (b) alternative
plans of reorganization; or (c) liquidation of Debtors under
Chapter 7 or Chapter 11 of the Bankruptcy Code.
Securities Related 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 Suits") was
supplemented (i) to extend the end of the class period from May
21, 1993 to February 4, 1994, (ii) to add additional claims
against Spectrum and the individual defendants, and (iii) to add
certain of its then officers as party defendants. In April 1994,
a Second Consolidated Amended Class Action Complaint was filed
adding additional employees as party defendants. The class and
certain subclasses have been certified. A similar putative class
action filed in the United States District Court for the Southern
District of Texas has been transferred and consolidated with the
Class Action Suits.
The plaintiffs in the Class Action Suits 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 (the "SEC"); and (iv) making
misleading statements regarding the employment of John Sculley.
In addition, there are claims against certain of the individual
defendants for improper insider trading. The Company's former
management, based on the advice of its then counsel, believed the
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Company had good and meritorious defenses to the claims against
it.
On July 20, 1994, the Company, certain of its then officers
and directors, and two former officers and directors were served
with a class action complaint. The complaint asserts that
Spectrum knowingly or recklessly made material false statements
or omitted material facts in its financial reporting relating to
Computer Bay prior to announcing the restatement of earnings for
the fiscal year 1992 and the first three quarters of fiscal 1993,
to correct inaccurate accruals of certain items into income. For
pretrial purposes, this litigation has been consolidated with the
Class Action Suits described above.
In November 1995, the Company announced that an agreement in
principle had been reached on a framework for settlement of the
Class Action Suits (the "Class Action Settlement"). The Class
Action Settlement is contingent on numerous factors including,
among other things, the successful resolution of the Home Action
(See Item 3 - Legal Proceedings - Other Proceedings), the
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 the Class
Action Plaintiffs, and the approval of the Class Action
Settlement by the District Court. The Bankruptcy Court approved
the Class Action Settlement on January 19, 1996. The Class Action
Plaintiffs in the Class Action Suits had filed a claim against
the Company in its bankruptcy proceedings in the amount of
approximately $676 million. The Class Action Settlement, if
consummated, will be in satisfaction of that claim as well as any
and all claims of the individual defendants (former directors and
officers) in that suit against the Company.
Under the terms of the Class Action Settlement, the Company
and the representatives of the Class Action Plaintiffs have
agreed to a framework under which the Company will issue to the
Class Action Plaintiffs in its plan of reorganization a number of
shares of its Class A Preferred Stock that would be equal to the
number of shares of Distributable Common Stock available to
Spectrum's stockholders and certain creditors following
confirmation of Spectrum's plan of reorganization. In addition,
under the Class Action Settlement, the Class Action Plaintiffs
are to receive the proceeds, net of certain fees and expenses,
from insurance policies worth $10 million covering the
liabilities of the Company's directors and officers and, as a
result of court supervised negotiations and at the recommendation
of the District Court, $1,350,000 from the various individual
defendants in the action plus $250,000 from the Company.
One of the uncertainties surrounding the Class Action
Settlement is that issuers of insurance policies representing $6
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million out of the $10 million of the insurance necessary to fund
the Class Action Settlement have disclaimed coverage. This
dispute is the subject of a litigation pending before the
District Court and must be successfully resolved to implement the
Class Action Settlement. A trial in the Home Action took place
before the District Court on February 28 and 29, 1996. The
District Court has not yet issued its decision.). Confirmation
hearing dates have been rescheduled twice, awaiting the District
Court's decision. The confirmation hearing is currently scheduled
for July 17, 1996 (See Bankruptcy Related Proceedings).
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 related to accounting and disclosure issues with
respect to certain of the patent license and advertising
agreements it entered into during fiscal 1994 and also related to
other activities of the Company's previous management. The
Company is cooperating fully with the investigation.
The accounting treatment at issue in the investigation, which
had been implemented after consultation with the Company's
previous outside auditors and had been disclosed in the Company's
quarterly filings with the SEC, was revised by Spectrum when it
voluntarily restated its earnings on February 7, 1994.
In April 1996, the SEC staff informed the Company that it
intended to commence an administrative proceeding to determine
whether during 1993 the Company had violated certain sections of
the Securities Exchange Act of 1934 and rules promulgated
thereunder, including violations of Rule 10b-5, related to
accounting and disclosure issues with respect to certain patent
and advertising agreements it entered into during fiscal 1994. In
April 1996, the Company began discussions with the SEC to resolve
the SEC's ongoing investigation. Those discussions contemplate
the entry of an administrative cease and desist order against the
Company, but do not contemplate the imposition of any financial
penalties. The Company's discussions with the SEC are ongoing.
In connection with this investigation, Salvatore T. Marino, a
current employee and former officer of the Company informed the
Company in April 1996 that the SEC staff intended to commence a
proceeding against him for violations of certain sections of the
Securities Exchange Act of 1934 and rules promulgated thereunder,
including violations of Rule 10b-5, related to accounting and
disclosure issues with respect to certain patent and advertising
agreements the Company entered into during fiscal 1994 and the
exercise of options to purchase and subsequent sale of Spectrum
33
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stock in the relevant time frame. Mr. Marino has denied any
wrongdoing and responded to the staff's allegations. Upon
learning of the SEC staff's position and pending resolution of
this issue, the Company removed Mr. Marino as an executive
officer.
Additionally, the Company has learned that the SEC intends to
commence proceedings related to this investigation against two of
its former officers and directors, Peter Caserta, former Chief
Executive Officer and Chairman of the Board of Directors, and
Dana Verrill, former Chief Executive Officer and Chairman of the
Board of Directors. Mr. Caserta left the Company in July 1994 and
Mr. Verrill left the Company in October 1993.
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., 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. In
November 1995, the plaintiffs and all defendants entered into a
settlement agreement, which the Bankruptcy Court has since
approved.
In March 1995, Peter Caserta, the Company's former Chief
Executive Officer and Chairman of the Board, Howard Schor, a
former employee, and eight others, including a former director,
the former President of Spectrum Global (which was sold by the
Company in October 1995), and six other non-company employees
were indicted in the District Court on charges of mail and wire
fraud relating to activities of the Caserta Group, an
unaffiliated financial services company headed by Mr. Caserta. In
January 1996, Mr. Caserta and Mr. Schor pleaded guilty to certain
of the charges against them. The United States Attorney's Office
for the Eastern District of New York has 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 Chief Executive Officer and
Board of Directors. The Company is cooperating fully with the
investigation.
Patent Related Proceedings
In August 1994, Megahertz Corporation ("Megahertz") 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 are
temporarily abated under the terms of a license agreement between
Megahertz and Spectrum. Megahertz, in its arbitration request,
asked for a determination of whether Spectrum had achieved
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certain licensing objectives and/or undertaken defined patent
enforcement actions as set forth in the agreement. Megahertz, its
parent company, U.S. Robotics, and the Company in February 1996
entered into a settlement agreement with respect to all disputes
among them which the Bankruptcy Court approved on March 7, 1996.
The agreement included a $6,000,000 payment to the Company as
settlement of a licensing obligation.
On December 6, 1994, the Company filed a lawsuit against
Motorola for infringement of claims in six of its patents
covering basic wireless data concepts. Motorola 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
(Spectrum Information Technologies, Inc. v. Motorola, Inc., Civil
Action No. 95-U-234-NE). As a result, on March 8, 1996, Spectrum
and Motorola entered into an agreement settling the patent
litigation. The settlement agreement provides that Spectrum and
Motorola will cross-license each other for use of specified
intellectual property. Under the agreement, Spectrum will become
one of the few entities licensed to distribute communications
software that allows the wireless transmission of data utilizing
proprietary technology related to certain Motorola cellular
telephones. Motorola will be licensed to utilize Spectrum's basic
technology in certain modems and modem integrated circuits.
Motorola is one of the world's largest providers of wireless
communication, semiconductors and electronic systems and the
largest producer of mobile and portable cellular telephones. The
confidential agreement, which was filed under seal, was approved
by the Bankruptcy Court on April 9, 1996.
The Company has also instituted an interference proceeding in
the U.S. Patent and Trademark Office to establish that the
Company is the inventor of the claimed subject matter of U.S.
Patent 4,991,197 (the "197 Patent"). This proceeding is based on
the Company's belief that Walker Morris, President of
Intelligence Technology Corporation ("ITC"), a party to a joint
development agreement with the Company, wrongfully obtained the
197 Patent based on the technology invented by the Company. The
Company has been granted a patent to cover this invention, U.S.
Patent 4,972,457. In the course of the interference procedure,
ITC has allowed deadlines to pass without taking steps to
preserve its right to submit evidence showing any date of
invention earlier than the filing date of the Walker Morris
patent application. The Company believes that it has persuasive
evidence proving an earlier date of invention than the Walker
Morris filing date, and has preserved its right to submit such
evidence. The parties, however, have agreed to stay this
proceeding while settlement discussions are pending. The parties
had reached a verbal understanding under which ITC would concede
priority of invention to the Company and would receive a
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restricted field license under U.S. Patent 4,972,457, subject to
the completion of a final agreement acceptable to the parties.
Shortly before execution of a final agreement, Walker Morris
provided the Company information regarding a patent application
that Walker Morris alleged was outside the scope of the
interference. The Patent Office granted the Company's motion,
however, to include the newly disclosed patent in the pending
interference. The Company believes that it will ultimately be
awarded dominant rights to both patents in the interference.
Other Proceedings
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 Data One alleging $1.5 million in damages based on the
allegations described above. Data One intends to object to this
claim on the grounds that, among other things, it was not timely
filed. Data One has filed separate liquidating plan of
reorganization under Chapter 11.
In January 1994, Robert Fallah, a former financial consultant
to Spectrum, 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 oral promises
made by the Company to give Fallah certain stock warrants in
exchange for consulting services. Spectrum filed an objection to
the Fallah claim on January 31, 1996. The Bankruptcy Court has
since disallowed Fallah's claim in its entirety.
In April, 1994, an action was filed against Spectrum, certain
former officers and directors of the Company and the Company's
former transfer agent (Blair v. Spectrum Information Technologies
Inc., et al., 162nd District Court of Dallas County, Texas).
Blair alleged that he was induced to begin employment with
Cellular through a promise that he would be allowed to
participate in Spectrum's stock option plan and alleged against
all defendants breach of contract, fraud, negligence, breach of
fiduciary relationship and bad faith. Blair terminated his
employment with Cellular in August 1994. The parties have
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stipulated to allow Blair an unsecured claim of $95,000. The
Bankruptcy Court approved this settlement on March 7, 1996.
In October 1994, Gene Morgan ("Morgan") and Gene Morgan
Financial ("GMF") 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. Morgan
filed a proof of claim in the bankruptcy proceeding claiming an
unsecured nonpriority claim of $6.3 million alleging breach of
contract under the warrants. Lowenstein, Sandler, Kohl, Fisher &
Boylan, as assignee of GMF's claim, filed a proof of claim
alleging $1.852 million in damages arising from the alleged
breach of the consulting agreement. The Debtors objected to the
claims of both Morgan and GMF. The parties reached a settlements
as to both the Morgan and GMF claims pursuant to which the
Company paid Lowenstein, Sandler, Kohl, Fisher & Boylan $91,000
and the parties exchanged general releases. The Bankruptcy Court
approved the settlement on April 17, 1996.
On July 21, 1995, The Home Insurance Company of Illinois ("The
Home"), the Company's former directors' and officers' primary
insurance carrier, commenced an adversary proceeding (the "Home
Action") in the Company's bankruptcy proceeding. The Honorable
Frederic Block, United States District Judge of the District
Court, subsequently withdrew the reference with respect to the
Home Action such that the litigation is now pending before him.
The Home is seeking to rescind 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 (the "Renewal Policy") and alleges certain material
misrepresentations and/or omissions in the application for the
Renewal Policy. The Home also seeks a declaration that coverage
is not afforded under the Renewal Policy for the claims made
against the policy by the Company and certain of its officers and
directors. The Company believes The Home (as well as the other
carriers discussed below) are obligated to provide the coverage
at issue and is defending this action, and is further seeking a
declaration of coverage under the Renewal Policy for the claims
made against that policy.
In addition to the primary policy, the Company obtained three
excess policies for the insurance year at issue in the Home
Action. Two of the excess carriers, the Agricultural Excess and
Surplus Insurance Company ("AESIC") and The Aetna Casualty and
Surety Company ("Aetna") have intervened in the Home Action.
AESIC has agreed to be bound by any final judicial resolution
regarding The Home (a similar agreement was previously reached
with the third excess carrier) and is no longer actively
participating in the Home Action. The District Court heard the
trial in the Home Action on February 28 and 29, 1996, and has not
yet issued a decision. Settlement of the Class Action is
contingent on the outcome of the Home Action.
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From time to time, the Company has been a party to other legal
actions and proceedings incidental to its business. As of the
date of this report, however, the Company knows of no other
pending or threatened legal actions that could have a material
impact on the financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
On March 14, 1996, the Bankruptcy Court approved the adequacy
and distribution of the Third Amended Disclosure Statement with
respect to the Third Amended Consolidated Plan of Reorganization
Proposed by Spectrum Information Technologies, Inc. and Spectrum
Cellular Corporation, Debtors-in-Possession, Dated as of March
18, 1996. The Company distributed the Disclosure Statement, along
with the associated Plan and voting ballots, to its creditors and
shareholders of record as of March 18, 1996. The Bankruptcy Court
established April 22, 1996 as the voting deadline. Spectrum's
shareholders as of the record date returned ballots representing
27.6 million shares of Spectrum's common stock. Of those voted,
26.3 million shares (95.5%) were voted in favor of confirmation
of the Plan. The Bankruptcy Court has scheduled confirmation
hearing for July 17, 1996. The confirmation hearing is contingent
upon a favorable resolution to the Home Action. (See Item 3 Legal
Proceedings Bankruptcy Related Proceedings and Securities Related
Proceedings).
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.
The Common Stock, par value $.001 per share, of the Company
(the "Company Stock") was traded in the Nasdaq System from
September 8, 1987 through December 18, 1990. Prior to this
period, and from December 19, 1990 through June 11, 1991, the
Common Stock traded in the over-the-counter market. From June 12,
1991 through April 27, 1992, the Common Stock again was traded in
the Nasdaq System. The Common Stock was traded in the Nasdaq
National Market System from April 28, 1992 through April 26,
1995. On April 27, 1995, the Nasdaq delisted the Company from the
National Market System because the Company failed to meet certain
net tangible asset and bid and ask price criteria. The stock is
currently being traded on the NASD OTC Bulletin Board. There are
currently 14 registered market makers for the Common Stock.
Set forth below for the periods indicated are the range of
high and low closing bid prices for the Common Stock for the
fiscal years 1996 and 1995. The ranges reported for the periods
since the Company was delisted were provided by the National
Quotation Bureau and may not reflect actual transactions.
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HIGH AND LOW BID PRICES
1996 1995
--------------------------------------------------------
Low High Low High
--------------------------------------------------------
First Quarter...........$.06 $.41 $1.47 $2.59
Second Quarter............16 .27 1.63 2.38
Third Quarter.............08 .24 .94 1.81
Fourth Quarter............07 .40 .38 1.84
--------------------------------------------------------
On June 14, 1996, the last reported bid and ask prices of the
Company's Common Stock were $.32 and $.36, respectively.
As of June 10, 1996 there were approximately 5,224 holders of
record of the Company's common stock (which amounts do not
include the number of shareholders whose shares are held of
record by brokerage houses but include each brokerage house as
one shareholder).
The Company has paid no dividends for the years ended March
31, 1996 and 1995 and the Company has no current plans to pay
dividends in the foreseeable future. The Company plans to retain
earnings, if any, to finance development and expansion of the
Company's operations. Payment of cash dividends, if any, in the
future will be determined by the Company's Board of Directors in
light of future earnings, capital requirements, financial
condition and other relevant considerations.
Item 6. Selected Financial Data.
The following table presents selected financial information
relating to the financial condition and results of operations of
the Company and should be read in conjunction with the
consolidated financial statements and notes included elsewhere.
Years Ended March 31,
----------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------
(Amounts in thousands, except per share
amounts)
Summary of Operations:
Total revenues $ 8,458 $ 2,623 $ 2,924 $ 1,229 $ 1,819
Loss from continuing (1,160) (10,673) (18,253) (7,149) (2,250)
operations
Loss from continuing
operations (.01) (.14) (.26) (.12) (.04)
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per common share
Weighted average common
shares outstanding 76,675 76,404 71,232 60,018 51,465
Summary of Financial
Position:
Total assets 16,105 14,706 30,575 13,724 16,255
Long-term debt - - 151 187 -
Stockholders' equity 2,089 (901) 12,787 11,340 10,931
(deficit)
- ----------------------------------------------------------------------
Dividends per share None None None None None
- ----------------------------------------------------------------------
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Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Organization And Business Combination
The Company owns a portfolio of patents relating to
commercially practicable methods to transmit data over
circuit-switched cellular networks. For several years preceding
the fiscal year covered by this report, Spectrum was operating
primarily as an intellectual property company generating much of
its revenues from royalties associated with the licensing of its
proprietary technology. During the past fiscal year, however,
Spectrum's new management and Board of Directors began
implementing a strategic plan that fundamentally refocuses the
Company. Spectrum's current business strategy is to become a
leading provider of value added mobile communications software
and related products.
Historically, Spectrum had operated as a holding company of
several operating subsidiaries. Beginning in January 1995, when
Spectrum and three of its subsidiaries filed petitions for relief
under Chapter 11 of Federal Bankruptcy Code, and continuing
throughout the fiscal year ended March 31, 1996, Spectrum's
management began to restructure the Company to focus on its
business strategy. Spectrum closed two of its unprofitable
subsidiaries, the liquidations of which are under the supervision
of the bankruptcy court. The Company sold the capital stock of
its wholly-owned subsidiary, Spectrum Global, effective October
17, 1995 (See Item 1 - Business and Note 2 to the Consolidated
Financial Statements). Spectrum Global had not filed for
bankruptcy and was not essential to Spectrum's success in the
mobile communications arena. Finally, as part of the
reorganization process, upon motion by the Debtors, the
Bankruptcy Court substantively consolidated the Company's
bankruptcy estate with that of its Cellular subsidiary. Spectrum
and Cellular are now conducting the Company's core business as a
single corporate entity and the Company intends to merge Spectrum
and Cellular. (See Item 3 - Legal Proceedings - Bankruptcy
Proceedings.) The discussion of the business of Spectrum in this
report refers to the business that was formerly conducted by
either Spectrum or Cellular. Spectrum Global, Data One and
Computer Bay are reflected in the consolidated financial
statements as discontinued operations.
Chapter 11 Proceedings
On January 26, 1995, as part of new management's effort to
stem the Company's substantial financial losses and focus on
developing its core wireless technology, the Company together
41
<PAGE>
with its wholly-owned subsidiaries Computer Bay, Data One and
Cellular (collectively, the "Debtors") filed petitions for relief
under Chapter 11 of the Federal Bankruptcy Code. Upon motion by
the Debtors, the bankruptcy court converted the action for
Computer Bay to a case under Chapter 7 of the Bankruptcy Code. A
trustee is overseeing the liquidation of Computer Bay's assets
and the Company no longer has control over the Computer Bay
estate. The Company has filed a separate liquidating plan of
reorganization for Data One.
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(R) product line and
related patent rights for $3,000,000 and Spectrum Global for
$4,549,000 in net proceeds. The positive effect has been offset
by the increased administrative and professional fees associated
with the Chapter 11 filing and resolution of claims subject to
compromise.
On March 14, 1996, the Bankruptcy Court approved the adequacy
and distribution of the Third Amended Disclosure Statement with
respect to the Third Amended Consolidated Plan of Reorganization
Proposed by Spectrum Information Technologies, Inc. and Spectrum
Cellular Corporation, Debtors-in-Possession, Dated as of March
18, 1996. The Company distributed the Disclosure Statement, along
with the associated Plan and voting ballots, to its creditors and
shareholders of record as of March 18, 1996.
The Bankruptcy Court set April 22, 1996 as the deadline for
voting on the Plan. Each class entitled to vote on the Plan
accepted the Plan. Over 97% of Spectrum's voting unsecured
creditors, representing over 99% of the total dollar amount
voted, supported the Plan. Under the Bankruptcy Code, a class
accepts a plan if two-thirds in amount and a majority in number
of the holders of claims voting cast ballots in favor of
acceptance. Holders of Spectrum's common stock representing
approximately 27.6 million shares returned ballots, with over 95%
of those shares voted in favor of confirmation. A class of equity
interests is deemed to have accepted the Plan if the Plan is
accepted by holders of such interest that hold at least
two-thirds of the allowed interests that have voted on the plan.
The Bankruptcy Court has scheduled a confirmation hearing for
July 17, 1996 (See Item 3 - Legal Proceedings - Bankruptcy
Proceedings.) The confirmation hearing is contingent upon the
successful resolution of a coverage dispute with certain of
Spectrum's former directors' and officers' insurance carriers,
the Home Action, which is a condition to the Class Action
Settlement.
42
<PAGE>
(See Item 3 - Legal Proceedings - Other Proceedings).
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. Amounts set forth below reflect the
Company's Data One and Computer Bay subsidiaries as discontinued
operations.
43
<PAGE>
Years Ended March 31,
-------------------------------------------------------------------
1996 % 1995 % 1994 %
-------------------------------------------------------------------
(Amounts in thousands)
Revenues $ 8,458 100.0 $ 2,623 100.0 $ 2,924 100.0
Operating costs
and expenses:
Cost of revenues 290 3.4 522 19.9 539 18.4
Selling, general
and administrative 7,591 89.8 11,849 451.7 13,284 454.3
Provision for
litigation - - - - 4,719 161.4
Provision for
restructuring - - 105 4.0 2,410 82.4
Write-down of carrying
value on certain
facilities - - - - 851 29.1
Total operating costs
and expenses 7,881 93.2 12,476 475.6 21,803 745.6
Operating income
(loss) $ 577 6.8 $(9,853)(375.6) $(18,879) (645.6)
Consolidated Revenues
Consolidated revenues increased approximately $5,835,000 or
222% from 1995 to 1996. This increase was due to a $6,606,000 or
496% increase in licensing for the twelve months ended March 31,
1996 as compared to the prior year, offset by a $771,000 or 60%
decrease in product sales from 1995 to 1996. Licensing revenue
increased primarily due to a one time fee of $6,000,000 pursuant
to a licensing settlement agreement with Megahertz (See Item 1
Business - Competition and Item 3 - Legal Proceedings - Patent
Related Proceedings). The remaining increase in licensing revenue
of $606,000 or 46% from 1995 to 1996 is primarily due to the
continuing recognition of deferred revenue pursuant to a
licensing agreement. Consolidated revenues for the fiscal years
1996, 1995 and 1994 have included payments of approximately
$965,000, $485,000 and $100,000, respectively, of an up-front
license fee pursuant to an agreement that the Company entered
during fiscal 1994. The Company anticipates payments pursuant to
this agreement during fiscal 1997 of approximately $736,000, and
44
<PAGE>
no payments pursuant to this agreement during fiscal years
thereafter. Merchandise sales decreased primarily due to
management's decision to sell the AXCELL(R) product line and
related patents in July of 1995. AXCELL(R) sales for the year
ended March 31, 1996 were approximately $132,000 as compared to
$1,063,000 for the year ended March 31, 1995.
Consolidated revenues decreased approximately $301,000 or 10%
from 1994 to 1995. The decrease was primarily due to a $368,000
or 22% decrease in licensing and other revenues offset by a
$67,000 or 5% increase in product sales. The decrease in
licensing revenue was related to the temporary withholding of
royalty payments by a licensee with which the Company was
involved in a dispute.
Operating Costs and Expenses
Operating costs and expenses decreased $4,595,000 or 37% for
the twelve months ended March 31, 1996 as compared to the prior
year due to a $4,258,000 or 36% decrease in selling, general and
administrative expenses as well as a $232,000 or 45% decrease in
cost of sales for the twelve months ended March 31, 1996 as
compared to the prior year.
The decrease in selling, general and administrative expenses
for the twelve months ended March 31, 1996 was primarily due to a
decrease in professional fees (other than professional fees
associated with the Company's bankruptcy proceedings) of
$1,077,000 or 29%. This decrease was primarily due to the stay of
legal actions while the Company is in Chapter 11 bankruptcy
proceedings. Decreases in personnel and related expenses of
$412,000 or 15%, travel and related expenses of $249,000 or 59%
and insurance of $414,000 or 30% are due to the overall
downsizing of the Company. Advertising expenses decreased
$587,000 or 99% during the year ended March 31, 1996 as a result
of the sale of the AXCELL(R) product line. Other operating
expenses decreased $1,519,000 or 50% as a result of the Company's
general downsizing of operations.
Operating costs and expenses decreased $9,327,000 or 43% from
1994 to 1995 due to decreased provisions for restructuring and
litigation of $2,305,000 or 96% and $4,719,000 or 100%,
respectively, and a decrease in selling; general and
administrative expenses of $1,435,000 or 11% as well as a $17,000
or 3% decrease in cost of sales.
The decrease in selling, general and administrative expenses
for the twelve months ended March 31, 1995 as compared to the
prior year was primarily due to decreases in personnel and
related expenses of $1,056,000 or 28%, travel and related
expenses of $591,000 or 58%, printing expenses of $578,000 or 86%
as a result of the Company's efforts to downsize and decrease
45
<PAGE>
costs while under Chapter 11 bankruptcy. These decreases were
offset by increases in insurance and advertising expenses of
$727,000 or 115% and $353,000 or 148%, respectively. Insurance
expense increased as a direct result of the Company opting to
exercise its right to purchase tail coverage insurance and the
increase in 1995 premiums due to the underwriters' position that
the Company presented a high risk profile. Advertising expenses
increased due to the hiring of an advertising firm. In fiscal
years prior to 1995, the Company relied upon public relations for
its advertising. As a result, there was a decrease in public
relations expense of $167,000 or 47% for the fiscal year ended
March 31, 1995 as compared to the fiscal year ended March 31,
1994.
Operating Income (Loss)
The Company's operating income was approximately $577,000 in
1996 as compared to an operating loss of $9,853,000 in 1995. The
increase is a result of the decreased selling, general and
administrative expenses of $4,258,000 or 36% and increased
revenues of $5,835,000 or 222%.
The Company's operating loss decreased $9,026,000 or 48% for
the twelve months ended March 31, 1995 as compared to the prior
year primarily as a result of decreased provisions for
restructuring and litigation of $2,305,000 or 96% and $4,719,000
or 100%, respectively. The litigation provision was established
to reserve the cash portion of any losses resulting from
outstanding litigation (See Item 3 - Legal Proceedings Securities
Related Proceedings). The reorganization reserve in the prior
year was to account for termination agreements of prior officers
and employees. Lastly, during the fourth quarter of the fiscal
year ended March 31, 1994, the Company recorded a pretax charge
of approximately $851,000 to properly reflect the permanent
impairment of its Texas facility's property value.
Other Income and Expense
Other income (expense) increased approximately $2,184,000 or
553% from fiscal year ended March 31, 1995 to fiscal year ended
March 31, 1996 primarily due to the gains of $1,616,000 and
$86,000, respectively, on the sales of the AXCELL(R) product line
and the building in Dallas during 1996 and the loss of
approximately $380,000 on the sale of marketable securities
during 1995. Other income (expense) decreased approximately
$1,021,000 or 163% from 1994 to 1995 primarily due to a loss of
approximately $380,000 on the sale of marketable securities, the
decrease in interest income related to these marketable
securities of approximately $383,000 and a loss on the disposal
of assets of approximately $273,000 for the twelve months ended
March 31, 1995 as compared to the prior year.
46
<PAGE>
Discontinued Operations
On October 17, 1995, the Company sold its Global subsidiary
for approximately $4,549,000 in net proceeds resulting in a
$773,000 gain. As of January 25, 1995, the Company closed its
Computer Bay subsidiary which is reflected as a discontinued
operation in the consolidated financial statements. The Company
did not record a provision related to its anticipated loss on a
disposal because the case was converted into a Chapter 7.
Computer Bay was turned over to a trustee and the Company no
longer maintains control over that subsidiary. As a result, the
Company recorded a gain of $2,539,000 by writing off the net
liabilities of Computer Bay. During the year ended March 31,
1994, the Company adopted a plan to discontinue operations at its
Data One subsidiary. As a result, the Company recorded a
provision in fiscal 1994 for $2,920,000 related to the
anticipated loss on disposal. Data One was completely closed down
as of December 31, 1994 and Spectrum subcontracted out the
remaining service obligations to a third party until it filed
bankruptcy on January 26, 1995 (See Note 2 to the Consolidated
Financial Statements).
Data One has filed a proposed liquidating plan of
reorganization and related disclosure statement. A hearing on the
adequacy of the disclosure statement is scheduled for June 25,
1996. If the Bankruptcy Court approves the distribution, the
liquidating plan will be mailed to Data One creditors shortly
thereafter.
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 an increase in income of approximately
$316,000 (See Note 1(g) 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 file for bankruptcy protection
under Chapter 11 on January 25, 1995. During fiscal 1996, the
Company continued 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(R) product line
and the rights under a related patent license agreement to
Telular . As a result of the sale, the operation of Cellular was
downsized. It is the Company's intentions to eventually merge
47
<PAGE>
Cellular into the Company. On September 21, 1995, Spectrum sold
its Cellular facility in Dallas, Texas for net cash proceeds of
approximately $733,000. As of October 17, 1995, the Company sold
its Spectrum Global subsidiary for net cash proceeds of
approximately $4,549,000 after expenses of $325,000 (See Item 1
Business and Note 2 to the Consolidated Financial Statements).
From 1995 to 1996 cash and cash equivalents and working
capital (current assets less current liabilities) increased by
approximately $9,560,000 and $1,079,000, respectively primarily
due to the sale of Spectrum Global, the AXCELL(R) product line
and the building in Dallas, a $6,000,000 license settlement (See
Item 3 Legal Proceedings - Patent Related Proceedings) and less
cash used by downsized operations. Accounts payable and accrued
liabilities increased by approximately $3,518,000 from 1994 to
1995 as a result of increased legal fees and costs associated
with the Company's filing for bankruptcy protection under Chapter
11.
As a result of the above, net cash provided by continuing
operations for operating activities increased to approximately
$2,544,000 in 1996 from net cash used of approximately
$14,288,000 in 1995.
Net cash provided by continuing operations for investing
activities decreased approximately $1,480,000 in 1996 to
approximately $8,249,000 when compared to the prior fiscal year.
Cash proceeds during fiscal 1996 from the sales of Spectrum
Global, the AXCELL(R) product line and real property in Dallas
were lower than the cash proceeds from the sale of marketable
securities in fiscal 1995.
There were no financing activities for the fiscal year ended
March 31,1996. During the twelve months ended March 31, 1995
certain persons exercised stock options which resulted in a
$784,000 increase in cash.
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. Confirmation of the Company's
proposed Plan will adversely impact the Company's short term
liquidity because of the cash payments pursuant to the Plan to
holders of secured, administrative and unsecured claims (See Note
1(b) to the Consolidated Financial Statements for Unaudited Pro
Forma Financial Information regarding Confirmation of the Plan).
Assuming confirmation of the Plan is in accordance with the
assumptions set forth in the associated disclosure statement,
however, the Company will have adequate capital resources and
liquidity to fund its operations. The Company's long term
liquidity is largely dependent upon the Company's ability to
generate a positive cash flow from its reorganized business (See
Item 1 - Business) and, if necessary, raise additional capital.
48
<PAGE>
Further, if the Company's proposed Plan is not confirmed and no
alternative plan of reorganization is approved, such
uncertainties raise substantial doubt about the Company's ability
to continue as a going concern (See Note 1(c) to the Consolidated
Financial Statements) and the Company may be forced to liquidate
under either Chapter 7 or Chapter 11 of the U.S.
Bankruptcy Code.
Item 8. Consolidated Financial Statements and Supplementary Data.
Information called for by this item is set forth in the
Company's consolidated financial statements and supplementary
data contained in this report, and can be found at the pages
listed in the following index on page F-1.
49
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information concerning the directors and executive
officers of the Company is set forth under Directors and
Executive Officers of the Company heading in Item 1 and is
incorporated herein by reference.
Based solely upon a review of Forms 3 and 4, and amendments
thereto, furnished to the Company regarding fiscal 1996 and Form
5, and amendments thereto, furnished to the Company with respect
to such year, each of Messrs. Hintze, Drabkin and duFosse did not
file a timely Form 3 upon becoming an executive officer of the
Company, none of which reflected any transactions.
Item 11. Executive Compensation.
The following table sets forth information regarding the cash
compensation paid by the Company for services rendered to the
Company in all capacities during fiscal 1996, 1995 and 1994 to
its Chief Executive Officers and its executive officers whose
cash compensation exceeded $100,000.
50
<PAGE>
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------
Annual Compensation
------------------------------------------------------------
Name and Year Salary Bonus Other Annual
Principal Position ($) ($) Compensation
($)
------------------------------------------------------------
Donald J. Amoruso 1996 295,000 100,000 (1) -
President, Chief 1995 73,750 100,000 (1) -
Executive Officer, 1994 - - -
Chairman of the
Board
Salvatore T. 1996 181,220 - -
Marino (3) 1995 169,76 - -
1994 151,253 34,415 25,029(5)
Christopher M. 1996 106,667 - -
Graham 1995 65,481 - -
General Counsel, 1994 - - -
Secretary
-----------------------------------------------------------
Long-Term Compensation
- ------------------------------------------------------------------------
Grants & Awards Payouts
- ------------------------------------------------------------------------
Restricted Options LTIP All Other
Name and Stock Payouts Compensation
Principal Position Award(s) ($)
($)
- ------------------------------------------------------------------------
Donald J. Amoruso
President, Chief - - - 19,965 (2)
Executive Officer, - 1,500,000 - -
Chairman of the - - - -
Board
Salvatore T.
Marino (3) - - - 11,127 (4)
- - - 11,127 (4)
- - - 11,127 (4)
Christopher M.
Graham - - - --
General Counsel, - 100,000 - --
Secretary - - - -
- ------------------------------------------------------------------------
(1) Represents $200,000 signing bonus paid by the Company in
equal installments in fiscal 1995 and fiscal 1996.
(2) Represents premiums paidunder a variable life insurance
policy paid by the Company pursuant to Mr. Amoruso's
employment agreement.
(3) Mr. Marino was the Company's Chief Financial Officer from
51
<PAGE>
September 1992 through September 1995. Since May 20, 1995,
Mr. Marino has been the Vice President - Licensing. However,
on April 24, 1996, Mr. Marino was removed as an officer, but
remains an employee of the Company. (See Item 3 - Legal
Proceedings - Securities Related Litigation). Mr. Hintze was
hired on May 15, 1995 as the Controller and appointed
Principal Accounting Officer on September 20, 1995.
(4) Represents premiums paid under a variable life insurance
policy paid by the Company pursuant to Mr. Marino's
employment agreement, which policy is required to be assigned
to Mr. Marino if his employment is terminated by the Company
without just cause.
(5) Includes $8,818 for medical reimbursements and $10,752 for
automobile lease payments paid by the Company pursuant to Mr.
Marino's prior employment agreement.
OPTIONS GRANTED IN 1996 FISCAL YEAR
Potential
Realizable
Value at
Assumed
Annualized
Rates of
Stock
Price
Appreciation Grant
for Option Date
Individual Grants Term Value
-------------------------------------- ------------ -------
% of Total
Options/SAR's Grant
Options Granted to Exercise Date
SAR's Employees or
Granted in Fiscal Base Expiration 5% 10% Present
Name (#) Year Price Date ($) ($) Value
(%) ($) ($)
- -------------------------------------------------------------------------------
Donald J. Amoruso 0 0 - - 0 0 -
Salvatore T. 0 0 - - 0 0 -
Marino
Christopher M. 0 0 - - 0 0 -
Graham
52
<PAGE>
AGGREGATED OPTIONS EXERCISES IN 1996 FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Shares Value of
Acquired Value Number of Unexercised
Name on Realized Unexercised Options In-the-Money
Exercise at Fiscal Year-End Options at
Fiscal
Year-End
(1)
- ------------------------------------------------------------------------------
Exercisable Unexercisable
----------------------
Donald J. Amoruso 0 0 750,000 750,000 0
Salvatore Marino 0 0 175,000 0 0
Christopher M. 0 0 100,000 0 0
Graham
(1) All of the options included in this chart were out-of-the
money on March 31, 1996.
Compensation of Directors
Each of the Company's outside directors is paid $18,000 per
year plus $1,000 per meeting attended. Each outside director is
also paid $500 per diem for any special assignments. During
fiscal 1996, the Company paid Robert Dalziel $1,000 in connection
with meetings that he attended for the purpose of business
development.
The Board of Directors intends to adopt and implement a plan
following confirmation of the Company's Plan of Reorganization
pursuant to which the Company will pay one-half of the directors
fixed annual compensation in common stock of the Company.
Employment Agreements
The Company currently has employment agreements with each of
the individuals identified above. Mr. Amoruso holds the position
of Chief Executive Officer with an annual salary of $295,000 and
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<PAGE>
a $200,000 signing bonus that was payable in installments over
the first year of the contract. His employment agreement extends
until December 31, 1997 and, as provided by the Bankruptcy Court,
provides that if Mr. Amoruso's employment is terminated earlier
without just cause he is entitled to full compensation for one
year and all options therefore granted to Mr. Amoruso will become
immediately execrable and remain exercisable throughout the term
of the option. This agreement also provides for health and
medical insurance and life insurance benefits and certain other
benefits, and requires indemnification in certain circumstances.
Under the terms of the modified employment agreements approved
by the Bankruptcy Court on January 23, 1996, Messrs. Marino and
Graham were employed by the Company in the respective positions
Vice President Licensing and General Counsel with annual salaries
of $181,220, and $115,000, respectively. In addition to salary,
the above-described employment agreements provide for health and
medical insurance and life insurance benefits, and certain other
benefits. These agreements also provide that if the Company
discharges either individual without cause they are entitled to
full compensation and medical benefits for one year. In addition,
Mr. Marino's employment agreement provides that he is entitled to
an annual bonus to be paid in cash or common stock of Spectrum in
an amount established at the discretion of the Board of Directors
of the Company. No bonus (except Mr. Amoruso's starting bonus and
starting bonuses to Mr. duFosse of $10,000 and Mr. Drabkin of
$45,000, one-half of which is payable on the first anniversary of
his start date) was paid to any officer or employee in fiscal
years 1995 and 1996. Each of these employment agreements require
indemnification in certain circumstances. Mr. Marino remains an
employee pursuant to his contract but has not been an executive
officer of the Company since April 24, 1996 (See Item 3 - Legal
Proceedings - Securities Related Litigation).
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
The following table sets forth information as of June 21, 1996
with respect to beneficial ownership of Common Stock of each of
the Company's directors, the executive officers identified in the
Summary Compensation Table in Item 11 and all directors and
executive officers as a group. The Company's proposed plan of
reorganization provides for adoption of two new stock based
incentive compensation plans for which each of these individuals,
as well as all employees, will be eligible (See Item 3 - Legal
Proceedings - Bankruptcy Proceedings).
54
<PAGE>
Amount and Nature
Name of Percent of
Beneficial Class
Ownership(1) (2)
- -------------------------------------------------------------------
Donald J. Amoruso 875,000 1.13%
Sheldon A. Buckler *
50,000
George Bugliarello *
50,000
Robert D. Dalziel 50,000 *
Christopher M. Graham 100,000 *
Salvatore T. Marino 176,000 *
All Directors and 1,125,000 (3) 1.45%
Executive Officers
of the Company as a
Group
(8 persons)
------------------------
*Less than 1%
(1) Unless otherwise indicated, each named person has voting
and investment power over the listed shares and such
voting and investment power is exercised solely by the
named person or shared with a spouse.
(2) Includes the following number of shares subject to
options exercisable within sixty days from June 21,
1996.
Mr. Amoruso - 875,000
Mr. Buckler - 50,000
Mr. Bugliarello - 50,000
Mr. Dalziel - 50,000
Mr. Graham - 100,000
Mr. Marino - 175,000
(3) Mr. Marino is no longer an executive officer of the
Company, but remains an employee (See Item 3 - Legal
Proceedings - Securities Related Proceedings). Mr.
Marino's beneficial ownership is not included in this
number.
Item 13. Certain Relationships and Related Transactions.
The Company entered into an Underwriting Agreement (the
"Underwriting Agreement") with Gene Morgan Financial ("GMF")
in connection with the Units Offering completed during fiscal
1992. Pursuant to the Underwriting Agreement, GMF received
commissions from the sale of the Units totaling $962,578 and
a non-accountable expense allowance totaling $320,859. GMF
55
<PAGE>
also received warrants to purchase 578,125 shares on common
stock at a purchase price of $2.25 per share (the
"Underwriters"). The Underwriter's Warrants were exercisable
during the period beginning on July 25, 1992, and ending on
April 11, 1996. None of the Underwriter's Warrants had been
exercised prior to March 31, 1996. Subsequent to March 31,
1996, these warrants have been extinguished pursuant to a
Bankruptcy Court approved settlement agreement in a
litigation involving GMF (See Item 3 - Legal Proceedings
Other Proceedings). Pursuant to the settlement agreement, the
Company also paid an assignee of GMF's claim $91,000 and the
parties exchanged general releases.
On October 31, 1993, the Company purchased Spectrum Global
(formerly known as Yield and Wintec) for approximately
$4,120,000. A portion of each of Yield and Wintec were
previously owned by a nephew of the former President of the
Company. The purchase was unanimously approved by the Board
of Directors, with the former President abstaining from such
votes. Effective October 17, 1995, the Company sold its
Spectrum Global subsidiary for $6,101,000, net cash proceeds
of which were $4,549,000, after expenses of $325,000. Members
of the purchasing group included an executive officer of the
Company and two officers of the Spectrum Global subsidiary.
The Company presently holds a note receivable of
approximately $91,000 from a former officer of the Company in
charge of investor relations. The note arose from
transactions in 1993, whereby the Company loaned the former
officer money in relation to the purchase of shares of the
Company's common stock. The note, which now bears interest at
10%, is currently due and is included in liabilities subject
to compromise as an offset to this former officer's severance
agreement. The Company's obligation under the severance
agreement and the former officer's obligations under the note
will be released pursuant to the framework to settle the
Class Action if the settlement is consummated (See Item 3
Legal Proceedings - Other Proceedings).
The Company also settled a claim filed by the trustee for
its Computer Bay subsidiary (See Item 3 - Legal Proceedings
Bankruptcy Proceedings).
56
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this Annual
Report on Form 10-K:
1. Consolidated Financial Statements:
The consolidated financial statements filed as a part of
this report are listed in the "Index to Consolidated
Financial Statements and Financial Statement Schedules at
Item 8.
2. Consolidated Financial Statement Schedules:
The consolidated financial statement schedules filed as
part of this report are listed in the "Index to
Consolidated Financial Statements and Financial Statement
Schedules" at Item 8.
Schedules other than those listed on the accompanying
Index to Consolidated Financial Statements and Financial
Statement Schedules are omitted for the reason that they
are either not required, not applicable, or the required
information is included in the consolidated financial
statements or notes thereto.
57
<PAGE>
3. Exhibits
2.1 Stock Purchase Agreement, dated September 11, 1995, by and
among the Company and the Lori Corporation, COMFORCE
Corporation, et al. ( 7)
3.1 Certificate of Incorporation of Spectrum Information
Technologies, Inc., as amended (5)
3.2 Amended and Restated By-laws of Spectrum Information
Technologies, Inc., as amended effective
December 29, 1994 (6)
3.3 Restated Certificate of Incorporation of the Company. (8)
3.4 Restated Bylaws of the Company. (8)
4.1 Specimen common stock certificate of Spectrum Information
Technologies, Inc. (2)
10.1 Employment Agreement entered into between the Company and
Salvatore T. Marino (64.
10.2 Patent License Agreement between the Company and American
Telephone & Telegraph Company (3)
10.3 Purchase and Sale Agreement dated April 11, 1995 by and
between the Company and Telular Corporation. (6)
10.4 Employment Agreement entered into between the Company and
Donald J. Amoruso (6)
10.5 Stock Option Agreement entered into between the Company and
Donald J. Amoruso (6)
10.6 Employment Agreement entered into between the Company and
Christopher M. Graham (6)
10.7 Stock Option Agreement entered into between the Company and
Christopher M. Graham (6)
10.8 Agreement between Peter T. Caserta and the Company dated July
1, 1994 (6)
10.9 Amended and Restated 1992 Stock Option Plan of
the Company (6)
10.10 Amendment to 1992 Stock Option Plan dated July 6,
1994 (6)
10.11 Amendment to 1992 Stock Option Plan dated April
26, 1995 (6)
10.12 Amendment to Employment Agreement between the
Company and Christopher M. Graham dated as of
December 7, 1995 (1).
10.13 Employment Agreement between the Company and Barry J. Hintze
dated as of April 27, 1995(l).
10.14 Amendment to Employment Agreement between the Company and
Barry J. Hintze dated as of December 4, 1995.(1)
10.15 Amendment to Employment Agreement between the Company and
Salvatore T. Marino dated as of December 7, 1995. (1)
10.16 Employment Agreement between the Company and Mikhail Drabkin
dated as of January 21, 1996 (1)
10.17 Amendment to Employment Agreement between the Company and
Mikhail Drabkin dated as of May 23, 1996 (1)
10.18 Employment Agreement between the Company and Richard
duFosse dated as of January 17, 1996 (1).
10.19 Amendment to Employment Agreement between the
58
<PAGE>
Company and Richard duFosse dated as of May 23,
1996 (1).
10.20 Spectrum 1996 Stock Incentive Plan (8).
10.21 Spectrum 1996 Incentive Deferral Plan (8).
10.22 Mutual Release and Waiver between the Company and Albert P.
Panico dated as of January 10, 1996. (1)
10.23 Mutual Release and Waiver between the Company and Gus
Petruzzelli dated December 13, 1995 (1).
21.1 Subsidiaries of the Company (1)
23.1 Consent of BDO Seidman, LLP (1)
27.1 Financial Data Schedule (1)
99.1 Disclosure Statement with Respect to the Consolidated Plan of
Reorganization Proposed by Spectrum
Information Technologies, Inc. and Spectrum Cellular
Corporation, dated as of February 8, 1996 (8)
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration
Statement on Form 10 dated April 10, 1987, and
incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the fiscal year
ended September 30, 1993, and incorporated
herein by reference.
(4) Previously filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993, and incorporated
herein by reference.
(5) Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the fiscal year
ended March 31, 1990, and incorporated herein by
reference.
(6) Previously filed as an exhibit to the Company's
Annual Report on Form 10-K for the fiscal year
ended March 31, 1995, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's
Current Report on Form 8-K filed October 17,
1995, and incorporated herein by reference.
(8) Previously filed as an exhibit to the Company's
Current Report on Form 8-K filed March 26 1996,
and incorporated herein by reference.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated March
26, 1996, which included: Item 5, "Other Items"
reporting that on March 14, 1996, the United States
Bankruptcy Court of the Eastern District of New York
ruled that the Third Amended Disclosure Statement with
Respect to the Third Amended Consolidated Plan of
Reorganization proposed by Spectrum Information
Technologies, Inc. and Spectrum Cellular (the
"Disclosure Statement") was adequate for distribution. A
copy of the Disclosure
59
<PAGE>
Statement (to which the proposed plan of reorganization
is an exhibit) was attached as an exhibit.
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SPECTRUM INFORMATION
TECHNOLOGIES, INC.
By
Dated: June 24, 1996 /s/ Barry J. Hintze
-------------------------------
Barry J. Hintze
(Controller and Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
By
Dated: June 24, 1996
/s/ Donald J. Amoruso
-------------------------------
Donald J. Amoruso
(President, Chief Executive
Officer and Chairman of the
Board of Directors)
By
Dated: June 24, 1996 /s/ Sheldon A. Buckler
-------------------------------
Sheldon A. Buckler
(Director)
By
Dated: June 24, 1996 /s/ George Bugliarello
-------------------------------
George Bugliarello
(Director)
By
Dated: June 24, 1996 /s/ Robert D. Dalziel
61
<PAGE>
-------------------------------
Robert D. Dalziel
(Director)
62
<PAGE>
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
(Debtors-in-Possession)
Index to Consolidated Financial Statements
And Financial Statement Schedule
Report of Independent Certified Public Accountants for the
Years Ended March 31, 1996, 1995 and 1994 F-2
Consolidated Balance Sheets as of March 31, 1996 and 1995 F-3 - F-4
Consolidated Financial Statements for Each of the Three
Years in the Period Ended March 31, 1996
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity (Deficit) F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-34
Schedule II - Valuation and Qualifying Accounts
for Each of the Three Years in the Period Ended
March 31, 1996 F-35
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Spectrum Information Technologies, Inc. (Debtors-in-Possession)
Purchase, New York
We have audited the accompanying consolidated balance sheets of
Spectrum Information Technologies, Inc. and subsidiaries
(Debtors-in-Possession) as of March 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in
the period ended March 31, 1996. We have also audited the schedule
listed in the accompanying index. These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements and schedule are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
financial statements and schedule. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Spectrum Information Technologies, Inc. and
subsidiaries (Debtors-in-Possession) at March 31, 1996 and 1995,
and the consolidated results of its operations and its cash flows
for each of the three years in the period ended March 31, 1996 in
conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1(c) to the consolidated financial
statements, the Company experienced significant losses from
continuing operations for the three years ended March 31, 1995,
largely due to professional fees incurred in defending itself in
the numerous litigation cases discussed in Note 12 to the
consolidated financial statements. Due to the continuing losses,
litigation and other factors, the Company filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code on
January 26, 1995. On May 25, 1995, the Bankruptcy Court converted
the action of one of its subsidiaries to a case under Chapter 7
of the Bankruptcy Code. A trustee has been appointed to oversee
liquidation of the subsidiary's assets. The accompanying
consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The continuing losses
described above, the uncertainties relating to the confirmation
of a plan of reorganization and the Company's ability to achieve
management's plans raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in
regard to these matters are described in Notes 1(a), 1(b) and
1(c) to the consolidated financial statements. The consolidated
financial statements do not include any adjustments that might
result from the outcome of the uncertainties discussed herein and
do not purport to reflect or provide for the consequences of the
bankruptcy proceedings.
BDO Seidman, LLP
New York, New York
June 18, 1996
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
(Debtors-in-Possession)
Consolidated Balance Sheets
(Amounts in thousands)
March 31, 1996 1995
- --------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $13,002 $ 3,442
Marketable securities 873 785
Accounts receivable (net of allowance
for doubtful accounts of $80 in 1996
and 1995) 1,437 1,264
Prepaid expenses and other current assets 229 1,347
Net assets of discontinued operations - 4,106
------------ ----------
Total current assets 15,541 10,944
------------ ----------
Property and equipment, at cost:
Land - 366
Building - 344
Furniture, fixtures and equipment 426 1,684
------------ ----------
426 2,394
Less - accumulated depreciation (222) (1,124)
------------ ----------
Net property and equipment 204 1,270
------------ ----------
Other assets - 941
Intangible assets, net 360 1,551
------------ ----------
Total assets $16,105 $14,706
============ ==========
See accompanying notes to consolidated financial statements.
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
(Debtors-in-Possession)
Consolidated Balance Sheets
(Amounts in thousands)
March 31, 1996 1995
- ----------------------------------------------------------------------
Liabilities and Stockholders' Equity
(Deficit)
Current Liabilities
Accounts payable $ 3,643 $127
Accrued liabilities 1,386 413
Other current liabilities - 971
---------- -----------
Total current liabilities 5,029 1,511
---------- -----------
Deferred income - 850
---------- -----------
Liabilities subject to compromise:
Accounts payable and accrued liabilities 1,485 1,554
Reserve for litigation 4,719 4,719
Reserve for restructuring 2,067 2,158
Net liabilities of discontinued operations 531 4,630
Other liabilities 185 185
---------- -----------
Total liabilities subject to
compromise 8,987 13,246
---------- -----------
Total liabilities 14,016 15,607
---------- -----------
Commitments and contingencies
Stockholders' Equity (deficit):
Common stock, $.001 par value, 110,000
shares authorized 76,675
issued in 1996 and 1995, respectively 77 77
Paid-in capital 63,961 63,961
Accumulated deficit (61,501) (64,443)
---------- -----------
2,537 (405)
Treasury stock, 100 shares at cost (300) (300)
Unrealized loss on marketable securities (148) (196)
---------- -----------
Total stockholders' equity
(deficit) 2,089 (901)
---------- -----------
Total liabilities and stockholders'
equity (deficit) $16,105 $14,706
========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
(Debtors-in-Possession)
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
Year ended March 31, 1996 1995 1994
- ----------------------------------------------------------------------------
Revenues:
Licensing revenue $ 7,937 $ 1,331 $ 1,699
Merchandise sales, net 521 1,292 1,225
---------- ---------- ----------
Total revenues 8,458 2,623 2,924
---------- ---------- ----------
Operating costs and expenses:
Cost of revenues 290 522 539
Selling, general and administrative 7,591 11,849 13,284
Provision for litigation - - 4,719
Provision for restructuring - 105 2,410
Write-down of carrying value on
certain facilities - - 851
---------- ---------- ----------
Total operating costs and
expenses 7,881 12,476 21,803
---------- ---------- ----------
Operating income (loss) 577 (9,853) (18,879)
---------- ---------- ----------
Chapter 11 administrative expenses (3,526) (425) -
---------- ---------- ----------
Other income (expense):
Gain on Sale of Axcell Product Line 1,616 - -
Other income (expense), net 173 (395) 626
---------- ---------- ----------
Total other income (expense), net 1,789 (395) 626
---------- ---------- ----------
Loss from continuing operations (1,160) (10,673) (18,253)
---------- ---------- ----------
Discontinued operations:
Loss from operations of Data One
and Computer Bay - (4,721) (4,531)
Gain (loss) on disposal of Data
One and Computer Bay 2,539 (118) (2,920)
Income from operations of Spectrum
Global 790 920 234
Gain on sale of Spectrum Global 773 - -
---------- ---------- ----------
Income (loss) from discontinued
operations 4,102 (3,919) (7,217)
---------- ---------- ----------
Cumulative effect of change in
accounting principle - 316 -
---------- ---------- ----------
Net income (loss) $2,942 $(14,276) $(25,470)
========== ========== ==========
Net income (loss) per common share:
Loss from continuing operations $ (.01) $ (.14) $ (.26)
Income (loss) from discontinued
operations .01 (.05) (.06)
Gain(loss) on disposal of
discontinued operations .04 - (.04)
---------- ---------- ----------
Net income (loss) $.04 $ (.19) $ (.36)
========== ========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
(Debtors-in-Possession)
Consolidated Statements of Stockholders' Equity (Deficit)
(Amounts in thousands)
Common Stock
---------------
Paid-in Accumulated
Shares $ Capital Deficit
---------------------------------------------
Balance,
April 1, 1993 62,053 $62 $36,275 $(24,697)
Exercise of
stock options 8,258 8 11,312 -
Exercise of
warrants 5,672 6 15,591 -
Net loss - - - (25,470)
---------------------------------------------
Balance,
March 31, 1994 75,983 76 63,178 (50,167)
Exercise of
stock options 692 1 783 -
Net loss - - - (14,276)
Unrealized loss
on marketable
securities - - - -
---------------------------------------------
Balance,
March 31, 1995 76,675 77 63,961 (64,443)
Net income - - - 2,942
Unrealized
gain on
marketable
securities - - - -
---------------------------------------------
Balance,
March 31, 1996 76,675 $77 $63,961 $(61,501 )
=============================================
Treasury
Stock
---------------
Unrealized
Loss on
Shares $ Marketable Total
Securities
---------------------------------------------
Balance,
April 1, 1993 100 $(300) $ $ 11,340
Exercise of
stock options - - - 11,320
Exercise of
warrants - - - 15,597
Net loss - - - (25,470)
---------------------------------------------
Balance,
March 31, 1994 100 (300) - 12,787
Exercise of
stock options - - - 784
Net loss - - - (14,276)
Unrealized loss
on marketable
securities - - (196) (196)
---------------------------------------------
Balance,
March 31, 1995 100 (300) (196) (901)
Net income - - 2,942
Unrealized
gain on
marketable
securities - - 48
---------------------------------------------
Balance,
March 31, 1996 100 $(300) $(148) $ 2,089
=============================================
See accompanying notes to consolidated financial statements.
<PAGE>
F-7
Spectrum Information Technologies, Inc. and Subsidiaries
(Debtors-in-Possession)
Consolidated Statements of Cash Flows
(Amounts in thousands)
Year ended March 31, 1996 1995 1994
- -----------------------------------------------------------------------------
Cash flow from operating activities:
Net income (loss) $ 2,942 $(14,276) $(25,470)
Adjustments to reconcile net loss to
net cash used by continuing activities:
Provision for litigation - - 4,719
Write-down of carrying value on
certain facilities - - 851
Depreciation and amortization 341 603 521
Other provisions - - 2,790
Gain on Chapter 7 conversion of
Computer Bay (2,539) - -
Gain on sale of Global subsidiary (773) - -
Gain on sale of building (86) - -
Gain on sale of Axcell product line (1,616) - -
Deferred income (850) (825) 2,404
Loss on sale of equipment 221 274 -
(Increase) decrease in:
Accounts receivable (173) 1,197 (6,882)
Prepaid expenses and other assets 1,719 45 (2,406)
Increase (decrease) in:
Accounts payable, accrued
liabilities and other liabilities 3,518 (9,922) 5,906
Liabilities subject to compromise (160) 8,616 -
--------- --------- ---------
Net cash used by continuing
operations 2,544 (14,288) (17,567)
Net cash provided (used) by
discontinued operations (1,800) 17,536 8,684
- -----------------------------------------------------------------------------
Net cash provided (used) by
operating activities 744 3,248 (8,883)
- -----------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of Axcell product
line 3,000 - -
Proceeds from sale of Global
subsidiary 4,549 - -
Proceeds from sale of building 733 - -
Proceeds from sale of marketable
securities - 9,817 -
Purchase of marketable securities - - (7,362)
Purchase of property and equipment (33) (88) (710)
--------- --------- ---------
Net cash provided (used) by
continuing operations 8,249 9,729 (8,072)
Net cash provided (used) by
discontinued operations (275) (100) (3,492)
- -----------------------------------------------------------------------------
Net cash provided (used) by
investing activities 7,974 9,629 (11,564)
- -----------------------------------------------------------------------------
Cash flow from financing activities:
Decrease in debt financing, net - (151) (35)
Proceeds from exercise of stock
options and warrants - 784 26,918
--------- --------- ---------
Net cash provided by continuing
operations - 633 26,883
Net cash provided (used) by
discontinued operations (3) (12,967) (4,730)
- -----------------------------------------------------------------------------
Net cash provided (used) by
financing activities (3) (12,334) 22,153
- -----------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 8,715 543 1,706
Cash and cash equivalents, unrestricted,
beginning of year 4,408 3,865 2,159
--------- --------- ---------
Cash and cash equivalents, unrestricted,
end of year 13,123 4,408 3,865
Cash and cash equivalents, restricted - 288 3,403
- ----------------------------------------------------------------------------
Total cash and cash equivalents, end of
year (including cash amounts in net
assets of discontinued operations) $13,123 $4,696 $7,268
========= ========= =========
Supplemental disclosures of cash
flow information:
Cash paid during the year for interest - $ 25 $ 264
Cash paid during the year for income
taxes $2 $ 44 $ 146
See accompanying notes to consolidated financial statements.
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
(Debtors-in-Possession)
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
(a) Business
Spectrum Information Technologies, Inc., a Delaware
corporation ("Spectrum") and its subsidiaries
(collectively, the "Company"), own a portfolio of
pioneering patents (legacy assets) relating to
commercially practicable methods of data transmission
over circuit-switched cellular networks. For several
years preceding the fiscal year covered by this report,
Spectrum was operating as a holding company of several
operating subsidiaries with primary emphasis on being an
intellectual property company focused on generating
revenues from royalties associated with the licensing of
its proprietary technology. During the past fiscal year,
however, Spectrum's new management and Board of Directors
concluded that royalty revenue from the Company's
existing licensing program would not achieve prior
business expectations and began implementing a strategy
that fundamentally refocuses the business direction of
the Company. Spectrum's business objective is to further
develop its core proprietary technology and become a
leading provider of value-added mobile communications
software and related products.
Spectrum's proprietary wireless data transmission
technology enables transmission of data between portable
computer devices over cellular telephone networks.
Spectrum licenses its technology to leading manufacturers
of integrated circuits (IC), modems and other related
data communications product providers. Spectrum also
develops direct connect cellular data transmission
activation kits (software drivers and cables) and markets
them to the Company's licensees. These two components -
technology licensing and development and marketing of
activation kits are the primary sources of operating
revenues which constitute the core business of the
Company.
Spectrum has recently hired two senior technologists to
formulate product strategy and to implement product
development plans consistent with Spectrum's new
strategy. The Company is currently adding engineering
staff with the necessary skills to support the business
objectives.
As part of refocusing the Company, beginning in January
1995, when Spectrum and three of its subsidiaries filed
petitions for relief under Chapter 11 of Federal
Bankruptcy Code, and continuing throughout the fiscal
year ended March 31, 1996, Spectrum's management
restructured the Company to focus on its core business.
As part of the restructuring, Spectrum closed one of its
unprofitable subsidiaries, the liquidation of which is
under the supervision of the bankruptcy court, and sold a
second wholly-owned subsidiary, Spectrum Global Services,
Inc., a Delaware corporation ("Spectrum Global"),
effective October 17, 1995 Note 2). Spectrum Global had
not filed for bankruptcy and was not essential to
Spectrum's core business. The Company also significantly
downsized its Spectrum Cellular Corporation ("Cellular")
subsidiary in Texas. In July 1995, the Company also sold
its non-profitable AXCELL(R) cellular interface product
line and certain related patent rights to Telular
Corporation ("Telular"). In fiscal 1992, Spectrum had
licensed these patent rights from Telular. In
management's opinion, AXCELL(R) was being replaced in the
market by the Company's direct connect technology.
Management therefore did not believe that AXCELL(R) was a
viable product in the long run and was inconsistent with
management's strategy to develop its core technology into
mobile communication software products.
As part of the restructuring process, Spectrum has
included in its proposed plan of reorganization the
consolidation of the Company's bankruptcy estate with
that of Cellular. Spectrum and Cellular are now
conducting the Company's core business on an operating
basis as a single entity (Notes 1(b) and 12).
(b) Bankruptcy Proceedings
On January 26, 1995, as part of new management's effort
to stem the Company's substantial financial losses and
focus on developing its core technology, the Company,
together with its wholly-owned subsidiaries, Computers
Unlimited of Wisconsin, Inc., a Wisconsin corporation
d/b/a Computer Bay ("Computer Bay"), Dealer Services
Business Systems, Inc., a Delaware corporation d/b/a Data
One ("Data One") and Cellular (collectively, the
"Debtors"), filed petitions for relief under Chapter 11
of the Federal Bankruptcy Code (the "Chapter 11
proceeding"). Upon motion by the Debtors, the United
States Bankruptcy Court for the Eastern District of New
York (the "Bankruptcy Court") converted the action for
Computer Bay to a case under Chapter 7 of the Bankruptcy
Code. A trustee is overseeing the liquidation of Computer
Bay's assets and the Company no longer has control over
the Computer Bay estate. The Company has filed a separate
liquidating plan of reorganization for Data One (the
"Liquidation Plan").
In March 1996, the Bankruptcy Court approved the
Company's Third Amended Disclosure Statement (the
"Disclosure Statement") with respect to the Third Amended
Consolidated Plan of Reorganization Proposed by Spectrum
and Cellular (the "Plan") dated as of March 18, 1996
finding the Disclosure Statement adequate for
distribution and vote by interested parties. As
contemplated by the Plan, the bankruptcy estates of
Spectrum and Cellular have been substantively
consolidated. The Plan, if confirmed, provides all
administrative creditors with full payment (unless a
lesser amount is agreed upon or ordered by the Bankruptcy
Court) and all general unsecured creditors with 100% of
the value of their claims plus 6% interest
<PAGE>
thereon. It also settles the class action lawsuits of
approximately $676,000,000 filed against the Company by
the payment of a minimal amount of cash and the delivery
of approximately 45% of the equity ownership in Spectrum
to a trustee to be distributed to the members of the
class. Although existing Spectrum shareholders will be
substantially diluted under the terms of the Plan, such
shareholders should obtain the majority of the 45% equity
ownership in Spectrum set aside for existing shareholders
and certain creditors. The Plan also calls for
management, employees and non-executive directors of the
Company to receive the remaining 10% ownership.
The Bankruptcy Court set April 22, 1996 as the deadline
for voting on the Plan. Each class entitled to vote on
the Plan accepted the Plan. Over 97% of Spectrum's voting
unsecured creditors, representing over 99% of the total
dollar amount voted, voted to accept the Plan. Under the
Bankruptcy Code, a class accepts a plan if two-thirds in
amount and a majority in number of the holders of claims
voting cast ballots in favor of acceptance. Holders of
Spectrum's common stock representing approximately
27,600,000 shares returned ballots, with over 95% of
those shares voted in favor of confirmation. A class of
equity interests is deemed to have accepted the Plan if
the plan is accepted by holders of at least two-thirds of
the allowed interests that have voted on the plan. The
Bankruptcy Court initially scheduled a confirmation
hearing for May 3, 1996, which has since been rescheduled
for July 17, 1996. This rescheduling was necessary
because Plan confirmation is contingent upon the
successful resolution of a coverage dispute with certain
of Spectrum's former directors' and officers' insurance
carriers. This is the only known remaining significant
issue that must be resolved prior to confirmation of the
Plan. However, it is a contingency for approval of the
Class Action Settlement, which is a condition precedent
to the confirmation of the Plan (Note 12).
<PAGE>
The accompanying unaudited pro forma condensed balance sheet is
presented to give effect to the Plan as if it had been confirmed
on March 31, 1996. The Company's assumptions regarding
confirmation of the Plan involve significant risks and
uncertainties. The Company's actual results may differ materially
at the time of confirmation.
Spectrum Information Technologies, Inc.
Unaudited Pro forma Consolidated Balance Sheet
(Amounts in thousands)
- -----------------------------------------------------------------------------
Pro forma
Adjustments
Assuming
Confirmation
had
Occurred on
March
March 31, 1996 As reported 31,1996 Pro forma
- -----------------------------------------------------------------------------
Current assets (Unaudited) (Unaudited)
Cash $13,002 $(5,888) (a)(c) $7,114
Marketable securities 873 - 873
Accounts receivable 1,437 - 1,437
Prepaids and other 229 - 229
Total current assets 15,541 (5,888) 9,653
Net property and
equipment 204 - 204
Other assets 360 - 360
Total assets $16,105 $ (5,888) $10,217
============ ============= ===========
Current Liabilities
Accounts payable $3,643 $ (1,152) (b) $927
(1,564) (c)
Accrued liabilities 1,386 (237) (b) 364
(785) (c)
------------ ------------- ---------
Total current
liabilities 5,029 (3,738) 1,291
Liabilities subject
to compromise 8,987 (8,456) (d) 531
------------ ------------- ---------
Total liabilities 14,016 (12,194) 1,822
------------ ------------- ---------
Stockholders' Equity
Preferred stock - 1 (e) 1
Common stock 77 (76) (f)(g)(h) 1
Paid-in capital 63,961 6,526 (e)(f)(g)(h) 70,487
Accumulated deficit (61,501) (145) (i) (61,646)
------------ ------------- ---------
2,537 6,306 8,843
Treasury stock (300) - (300)
Unrealized loss on
marketable securities (148) - (148)
------------ ------------- ---------
Total stockholders' 2,089 6,306 8,395
equity
------------ ------------- ---------
Total liabilities and
stockholders' equity $16,105 $(5,888) $10,217
============ ============= =========
The confirmation of the Plan is contingent upon settlement of
the class action lawsuits, which is contingent upon successful
resolution of a coverage dispute with certain of Spectrum's
former directors' and officers' insurance carriers, the Home
Action (Note 12). This pro forma balance sheet therefore
assumes successful resolution of the Home Action and consequent
settlement of the Class Action. The unaudited pro forma balance
sheet is based on the following of management's assumptions
that give effect to the Plan as if it had been confirmed on
March 31, 1996:
(a)Cash is reduced by payments pursuant to the Plan of
approximately (i) $2,724,000 to general unsecured creditors
(including $600,000 for the Computer Bay settlement), (ii)
$265,000 for a priority non-tax claim, (iii) $250,000 as
part of the proposed settlement of the Class Action, (iv)
$300,000 for the payment of a partial success bonus to
officers and employees of the Company for successfully
confirming a plan of reorganization, and (v) $2,349,000 for
professional fees (see item (c) below).
The Company intends to seek a waiver of accrued
professional fees of approximately $1,389,000 that have to
date been held back by order of the Bankruptcy Court until
final determination of allowability. If the Company does
not receive such a waiver, the Company's cash will be
further reduced to the extent holdbacks are not waived
(i.e. $1,389,000 or a portion thereof). If the Bankruptcy
Court does not waive any of the professional fees that have
been held back, the pro forma cash balance would be reduced
to $5,725,000.
(b)Reflects the waiver (and non-payment) of $1,389,000 of
accrued professional fees that have been held back to date
by the Bankruptcy Court and the liability written off. (See
Item (a) above).
(c)Reflects the payment of unpaid professional fees as of the
date of confirmation, less accrued professional fee
holdbacks as set forth in item (b) above.
(d)Liabilities subject to compromise will be discharged on
the effective date of the Plan by either cash payments or
stock distributions. The remaining liabilities subject to
compromise relate to Data One, for which a separate plan of
liquidation has been filed.
(e)Assumes the issuance of 1,062,000 shares of Class A
Preferred Stock to the Class Action Trustee in connection
with the Class Action Settlement. For the purpose of this
analysis, the Class A Preferred Stock has been valued at
approximately $4,917,000, and recorded as approximately
$1,000 in preferred stock and approximately $4,916,000 in
paid-in-capital. Upon completion of the transactions
described in items (a), (d), (f) and (h), the Company would
have had excess liabilities subject to compromise of
$4,917,000 (excluding those attributable to Data One). The
Company has recorded this amount as the value of the Class
A Preferred Stock in the unaudited pro forma balance sheet.
The market value of Spectrum's common stock as of March 31,
1996 has not been used to value the Class A Preferred Stock
in the pro forma balance sheet because the Company cannot
speculate regarding the effects that the significant
dilution resulting from the issuance of the various stock
distributions, or confirmation of the Plan, will have on
the market value of the Company's stock. The actual value
associated with the issuance of Class A Preferred Stock
will be based on the market value of the Company's common
stock on the effective date of the Plan. The difference
between the actual market value of the Class A Preferred
Stock on the effective date of the Plan and the value of
the discharged liabilities subject to compromise will be
recognized as forgiveness of debt and recorded as an
extraordinary item in the Company's statement of
operations. The Class A Preferred Stock is convertible at
the option of the holder for two years, at which time it
automatically converts into common stock.
(f)Reflects the 75 to 1 reverse stock split for all
outstanding shares of the Company's common stock on the
effective date of the Plan with approximately $76,000
recorded as a reduction to common stock and a corresponding
increase in paid-in-capital.
(g)The issuance to officers, non-executive directors and
employees of the Company as the partial payment of a
success bonus of an aggregate number of shares equal to
one-ninth of the number of shares of reorganized common
stock available to existing shareholders and certain
creditors and Class A Preferred Stock. This 10% interest in
the equity ownership of the Company has been valued at
approximately $1,234,000 and recorded as approximately $236
in common stock and $1,233,764 in paid-in-capital. This
valuation is based on 10% of the total market
capitalization of the Company as of March 31, 1996, when
Spectrum's common stock had a closing price of $0.23 per
share, and reduced by 30% due to restrictions on the stock.
This valuation assumes that the market capitalization of
the Company did not change upon confirmation of the Plan.
As with the Class A Preferred Stock, however, the actual
value ascribed to the stock issued to management,
non-executive directors and employees will be based on the
per share price on the effective date. There can be no
assurance that the Company's current trading price is
indicative of the price at which the Company's common stock
will trade following confirmation.
(h)The issuance of 40,166 shares of common stock to the
trustee for Computer Bay valued at $300,000.
Income
(expense)
(i)Reflects the net charge to operations for the following:
(1) Discharge of accrued professional fee holdbacks $1,389,000
(2) Compensation charge for cash bonus paid to employees (300,000)
(3) Compensation charge for the distribution of stock to
employees and non-executive directors (1,234,000)
-----------
$( 145,000)
===========
As described in item (b) above, the Company intends to seek
a waiver of accrued professional fee holdbacks by order of
the Bankruptcy Court. If the Company is not successful
obtaining such a waiver, cash and the income recorded
related to the discharge will be reduced by the amount
paid.
The pro forma unaudited balance sheet presented above
assumes that the Company will continue to report on a
historical basis and not adopt "Fresh-Start Accounting" as
defined in AICPA Statement of Position "SOP" No. 90-7 since
it did not meet both of the following criteria necessary in
order to adopt the "Fresh-Start" accounting rules as
defined in the SOP:
a. The reorganization value of the assets
of the emerging entity immediately before the date
of confirmation is less than the total of all
postpetition liabilities and allowed claims; and
b. The holders of existing voting shares
immediately before confirmation receive less than
50% of the voting shares of the emerging entity.
The estimates and assumptions used are forward looking and
subject to significant change based on when the Plan is
actually confirmed and to any changes to the confirmed
plan. The adjustments recorded as of date of the
confirmation will need to be reevaluated as of that date
and can be materially different.
(c) 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 continuing operations, such realization of
assets and liquidation of liabilities is subject to
significant uncertainty. Further, the Company's ability to
continue as a going concern is dependent upon the
confirmation of the Company's Plan by the Bankruptcy Court
(Note 1(b)), achievement of the business objectives
described in Note 1(a) and profitable operations therefrom
and the ability to generate sufficient cash from
operations and financing sources to meet the restructured
obligations. Except as otherwise disclosed, the
consolidated financial statements do not include any
adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts
and classification of liabilities that may result from the
possible inability of the Company to continue as a going
concern. The Company continues to monitor expenses in
order to conserve cash. During June and July 1995, the
Company received $3,000,000 for the sale of a license to
utilize certain patented technology and the related
business, and as a result of the sale, management has
downsized the operations of Cellular and sold its Dallas
facility. During October 1995, the Company sold its
Spectrum Global subsidiary for the net proceeds of
approximately $4,549,000. In addition, the Plan (Note
1(b)), contemplates the settlement of all significant
litigation. However, there can be no assurance that these
events will occur according to management's plans. The
financial statements for the year ended March 31, 1996,
reflect accounting principles and practices set forth in
AICPA Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code",
which the Company adopted as of January 26, 1995, the date
of the Company's Chapter 11 filing (Note 12). The net
assets of Spectrum, Cellular and Data One, excluding
intercompany payables of approximately $11,491,000, were
approximately $2,089,000 at March 31, 1996.
(d) 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.
(e) Principles of Consolidation
The accompanying consolidated financial statements include
the accounts and results of operations of the Company's
wholly owned subsidiaries: Cellular, Data One, Computer
Bay (through May 25, 1995 when the subsidiary was
converted to a Chapter 7) and Spectrum Global (through
October 17, 1995 when it was sold). All significant
intercompany accounts and transactions have been
eliminated in consolidation.
(f) Cash and Cash Equivalents
Cash and cash equivalents include the Company's cash
balances and short-term investments that mature in 90 days
or less when acquired. Cash and cash equivalents are
carried at cost plus accrued interest, which approximates
market. At March 31, 1996, approximately $3,500,000 was
segregated by the Company for the payment of general
unsecured creditor claims, the priority non-tax claim and
the Company's cash contribution to the settlement of the
class action lawsuits. (Note 1(b)).
(g) Marketable Securities
The Company adopted Statement of Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", resulting in a change in the
way the Company values its investments. Under this new
pronouncement, since the Company does not have the
positive intent to hold its investments to maturity, they
are classified as available-for-sale and carried at fair
value. Unrealized holding gains and losses (determined by
specific identification) on investments classified as
available-for-sale, would be carried as a separate
component of stockholders' equity. The cumulative effect
as of April 1, 1994 of adopting this change resulted in an
increase in income of approximately $316,000.
Additionally, there was no tax effect based upon the
adoption of SFAS No. 115 due to the Company's substantial
net operating loss carryforwards.
(h) Revenue Recognition
Deferred revenue on licensing agreements is recognized
when earned based on each individual agreement. Sales of
product are recognized upon shipment to the customer.
<PAGE>
(i) Property and Equipment
Property and equipment are recorded at cost. Depreciation
is recorded using the straight-line method over the
estimated useful lives of the assets of 5 to 7 years (30
years for the building in fiscal 1995).
(j) Intangible Assets
Included in intangible assets of $1,551,000 at March 31,
1995 is $1,100,000, related to a license agreement
acquired in fiscal year 1992. In July 1995, the Company
sold its AXCELL(R) product line and certain related patent
rights to 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 patent portfolio.
(k) Licensing Agreements
The Company entered one non-exclusive license agreement
and renegotiated and consolidated two prior non-exclusive
agreements during fiscal 1996, and entered 17 such
non-exclusive agreements during fiscal 1995, pursuant to
which it licensed others to utilize Spectrum's patented
technology. The license agreements require up-front
license fees or ongoing royalty obligations, or a
combination thereof. The Company is also required to repay
a license fee that it received pursuant to a license
agreement that it entered during fiscal 1994 with Rockwell
International from a portion of the royalties the Company
may receive from license agreements with Rockwell
customers.
For the fiscal year ended March 31, 1996, the Company has
included revenues of approximately $6,821,000 in licensing
revenues and approximately $1,116,000 in royalties
pursuant to license agreements that it entered during
fiscal 1996 and earlier. Included in license revenues is a
one time fee of $6,000,000 pursuant to a licensing
settlement agreement with Megahertz (Note 12). The Company
has included revenues of approximately $549,000 in
licensing fees for the fiscal year ended March 31, 1995,
which is comprised of non-refundable license fees less the
Company's obligations to make payments under companion
advertising agreements to certain licenses, and
approximately 782,000 in royalties.
At March 31, 1995, approximately $1,002,000, $850,000 and
$850,000 is included in trade and other receivables,
accrued liabilities, other assets and deferred income,
respectively. These entries reflect the balance of the
non-refundable license fees due under the license
agreements that have companion advertising agreements. For
the periods presented, the Company has reclassified
offsetting accounts payable and receivable balances
related to certain patent license agreements.
(l) Research and Development Expenses
Research and development expenditures are recorded as
period costs when incurred. Such expenses were
approximately $369,000, $306,000 and $336,000 in 1996,
1995 and 1994, respectively.
<PAGE>
(m) Income (Loss) Per Common Share
The computation of income (loss) per common share is based
on the weighted average number of common shares and common
stock equivalents (stock options and warrants), if
applicable, assumed to be outstanding during the year. The
weighted average number of shares used in the computation
of income (loss) per share for 1996, 1995 and 1994 are
76,675,448, 76,404,395 and 71,231,751, respectively.
Common stock equivalents were not included in the
computation of weighted average shares outstanding because
such inclusion would be anti-dilutive.
(n) Reclassifications
Certain amounts as previously reported have been
reclassified to conform to the March 31, 1996
presentation.
(o) Recent accounting pronouncements
In March, 1995 the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 121, Accounting For the Impairment of Long
Lived Assets and for Long Lived Assets to the Disposed of."
The Company has adopted SFAS No. 121 as of April 1, 1996.
The adoption of SFAS No. 121 was not material.
In October 1995, FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," SFAS No. 123 establishes a fair
value method for accounting for stock-based compensation
plans either through recognition or disclosure. The
Company intends to adopt the employee stock-based
compensation provisions of SFAS No. 123 as of April 1,
1996 by disclosing the pro forma net income and pro forma
net income per share amounts assuming the fair value
method was adopted April 1, 1995. The adoption of this
standard will not impact the Company's consolidated
results of operations, financial position or cash flows.
2. Business Combinations, Acquisitions, and Dispositions
Computer Bay
Due to Computer Bay's continuing losses and loss of market
share, the Company officially discontinued the operations of
the Computer Bay subsidiary on January 25, 1995. Accordingly,
Computer Bay has been reported as a discontinued operation,
effective January 25, 1995, and the consolidated financial
statements have been reclassified to report separately the
operating results of the subsidiary. The Company's prior
years' operating results have also been reclassified to
reflect the discontinuation of Computer Bay. Upon conversion
of Computer Bay's Chapter 11 case to a case under Chapter 7
on May 25, 1995, which mandates the liquidation of Computer
Bay, control of Computer Bay has been transferred from the
Company to the Computer Bay trustee. As a result, the Company
recorded a gain of $2,539,000 by writing off the net
liabilities of Computer Bay. The Computer Bay trustee filed a
claim with the Bankruptcy Court to substantively consolidate
the Computer Bay liabilities with the liabilities of the
Debtors in Chapter 11. The Company settled this claim for a
$600,000 allowed cash claim and $300,000 allowed stock claim.
(Notes 1(b) and 12).
<PAGE>
Thefollowing table summarizes the net liabilities of Computer
Bay for the periods presented:
May 25, 1995 March 31,
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:
Years ended March 31,
------------------------------------------
1996 1995 1994
----------------------------------------------------------------------
(Amount in thousands)
Revenues $- $ 59,921 $ 85,306
Net loss $- $(4,721) $(1,388)
======================================================================
Data One
Effective December 31, 1993, the Company adopted a plan to
discontinue operations at Data One. The operations of Data
One ceased on December 31, 1994. Accordingly, Data One has
been reported as a discontinued operation effective December
31, 1993 and the consolidated financial statements have been
reclassified to report separately the operating results of
the subsidiary. The Company's prior years operating results
have also been classified to reflect the discontinuation of
Data One. The estimated loss on the disposal of Data One is
$2,920,000, or $.04 per share, consisting of an estimated
loss on disposal of the business of $2,514,000, (which
includes a write-down of intangibles of $1,092,000 and
inventory and property of $516,000), and a provision of
$406,000 for anticipated losses until disposal as of March
31, 1994. No tax effect was taken due to the substantial net
operating loss carryforwards. At March 31, 1996 and 1995, the
balance remaining in the reserve for discontinued operations
was approximately $157,000, respectively.
Data One has filed a proposed plan of liquidation under
Chapter 11 and associated disclosure statement. A hearing
regarding the adequacy of the disclosure statement is
scheduled for June 25, 1996.
<PAGE>
The following table summarizes the net liabilities of Data
One for the periods presented:
March 31, 1996 1995
----------------------------------------------------------------------
(Amounts in thousands)
Cash $121 $ 83
Accounts receivable 10 41
Other assets 2 3
Accounts payable (144) (144)
Deferred income (253) (253)
Reserve for discontinued operations (157) (175)
Other liabilities (110) (86)
-----------------------------
Net liabilities $(531) $(531)
=============================
The summary of Data One's results of discontinued operations
for the periods presented are as follows:
Years ended March 31,
-----------------------------------------------------
1996 1995 1994
----------------------------------------------------------------------
(Amounts in thousands)
Revenues $- $0 $ 14,429
Net loss $- $0 $(3,143)
Spectrum Global
Effective October 17, 1995, the Company sold its Spectrum
Global subsidiary for net proceeds of approximately
$4,549,000, after expenses of $325,000 to certain former
members of management. Spectrum Global was acquired in fiscal
1994 from the nephew of the former President of the Company
for approximately $4,120,000. Spectrum Global has been
reported as a discontinued operation for all periods
presented.
The following table summarizes the net assets of Spectrum Global
for the periods presented:
October 17, March 31,
1995 1995
---------------------------------
(Amounts in thousands)
Cash $1,227 $ 651
Accounts receivable 1,899 1,571
Other assets 2,237 2,285
Accounts payable (243) (316)
Other liabilities (117) (85)
-------------- --------------
Net assets $5,003 $4,106
============== ==============
The following table summarizes the results of discontinued
operations of Spectrum Global for the periods presented:
Years ended March 31,
---------------------------------------------
1996 1995 1994
------------------------------------------------------------------
(Amounts in thousands)
Total revenues $6,877 $9,003 $3,460
Net income $ 790 $ 920 $ 234
3. Investment in Marketable Securities
As of March 31, 1996, the Company's equity reflects a charge
of $148,000, which represents the recognition of unrealized
holding losses for the Company's investments determined to be
available for sale, previously carried at the lower of cost
or market. There were no sales of available-for-sale
securities during the year ended March 31, 1996.
Marketable securities as of March 31, 1996 were comprised of
investments in equity securities and government securities
which consisted primarily of U.S. Treasury Notes. The
aggregate cost, fair value and unrealized holding gains and
losses for equity securities and U.S. Treasury Notes held at
March 31, 1996, are as follows:
Gross
Cost Basis Aggregate Unrealized
Fair Value Holding Losses
---------------------------------------------
(Amounts in thousands)
Equity securities $ 250 $106 $(144)
Government securities,
maturing between 1 and
5 years 702 698 (4)
Other 69 69 -
=============================================
$1,021 $873 $(148)
=============================================
Marketable securities as of March 31, 1995 contain
investments in government securities which consist primarily
of U.S. Treasury Notes and equity securities and are carried
at the lower of cost or market, as determined by quoted
market prices. The aggregate cost of equity securities held
at March 31, 1995 was approximately $250,000 and the related
market value of such securities was approximately $85,000. As
of March 31, 1995, marketable securities contained
investments in U.S. Treasury Notes whose aggregate cost was
$731,000 and the related market value was $700,000.
4. 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 (Notes 1(b) and
12). The Bankruptcy Court established September 7, 1995 as
the bar date by which claims against the Debtors must be
filed if the claimants wish to receive distribution in
Chapter 11 cases.
5. Stock Transactions
In fiscal 1994, 5,671,972 Warrants were exercised to acquire
a like number of shares for total proceeds of $15,596,923.
Additional information regarding the warrants follows:
Shares
Subject to
Warrants
-------------
Outstanding at March 31, 1993, at $2.25 -
$2.75 per share 6,343,275
Exercised at $2.75 per share (5,671,972)
Returned at $2.75 per share (93,178)
=============
Outstanding at March 31, 1994, 1995 and
1996, at $2.25 per share 578,125
=============
The Company entered into an Underwriting Agreement (the
"Underwriting Agreement") with Gene Morgan Financial ("GMF")
in connection with the Units Offering completed during fiscal
1992. Subsequent to March 31, 1996, these warrants have been
extinguished pursuant to a Bankruptcy Court approved
settlement agreement in a litigation involving GMF. Pursuant
to the settlement agreement, the Company also paid an
assignee of GMF's claim $91,000 and the parties exchanged
general releases (Note 12).
6. Stock Option Plans
The Company has two Stock Option Plans (the "Plans") covering
the issuance of incentive and non-qualified stock options to
key employees, consultants and nonemployee directors of the
Company and its subsidiaries. The aggregate number of shares
of common stock granted under the Plans is 22,092,021 shares,
subject to adjustment for stock splits and other capital
adjustments. The exercise price of each option is determined
by the Plan committee, and shall not be less than 100% of the
fair market value of a share of Common Stock at the time such
stock options are granted. Vesting periods for options
granted under the Plans range from 1 to 10 years with certain
plans providing for exercise on the date of grant. Additional
information follows:
Shares
Subject to
Options
-------------
Outstanding at March 31, 1993, at $1.13 -
$4.33 per share 13,766,000
Granted at $1.13 - $9.75 per share 1,997,000
Exercised at $1.13 - $4.13 per share (8,257,500)
-------------
Outstanding at March 31, 1994, at $1.13 -
$9.75 per share 7,505,500
Granted at $1.00 - $4.50 per share 341,416
Exercised at $1.13 - $1.40 per share (692,786)
-------------
Outstanding at March 31, 1995, and 1996 at
$1.13 - $4.33 per share 7,154,130
=============
At March 31, 1996, 6,403,630 options were exercisable at
prices ranging from $1.00 to $4.33. If the Company's proposed
plan of reorganization is confirmed, the number and exercise
price of all options outstanding will be adjusted in
accordance with the reverse stock split of 75 to 1 (Note
1(b)).
7. Concentrations of Credit Risk and Fair Value of Financial Instruments
Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of
temporary cash investments and marketable securities. The
Company currently invests most of its cash investments in
money market funds with financial institutions insured by
the FDIC and government securities. At times, such cash
investments were in excess of the FDIC insurance limit.
The carrying amount of these cash investments approximates
the fair value due to their short maturity. The investments
in government securities are valued at market.
During the fiscal year ended March 31, 1996 sales to SMART
Modular Technologies (including its recently acquired
subsidiary Apex Data) accounted for approximately 27% of the
Company's merchandise sales. During the fiscal year ended
March 31, 1995 sales to OKI Telecom accounted for
approximately 39% of the Company's merchandise sales. During
the fiscal year ended March 31, 1994, sales to OKI Telecom,
Audiovox Corporation and Fujitsu Network Transmission
accounted for approximately 47% of the Company's merchandise
sales.
8. Property
In the fourth quarter of fiscal 1994, the Company determined
that an adjustment was necessary to reduce the carrying value
for certain of its property, plant and equipment to reflect
the significant decline in the market value of its Dallas,
Texas facility. Accordingly, the Company recorded a pretax
charge of approximately $851,000 to properly reflect the
permanent impairment of the property's value. The Company
sold the building in September 1995 for $733,000, resulting
in a gain of $86,000.
9. Provision for Restructuring
Pursuant to the Bankruptcy Code the Company has rejected
termination agreements issued in conjunction with fiscal
1994's restructuring efforts and certain real property leases
(Notes 1(b) and 12). At March 31, 1996 and March 31, 1995,
approximately $2,067,000 and $2,158,000, respectively, is
included in liabilities subject to compromise.
In the fourth quarter of fiscal 1994, plans were developed to
reduce the Company's cost structure and to improve
profitability on a consolidated basis. The restructuring plan
involves consolidation of facilities, along with a reduction
in the number of employees. The consolidated statement of
loss for 1994 includes a charge of $2,700,000, which
substantially relates to anticipated payments to be made to
several employees, which was recorded in the fourth quarter
related to this plan, partially offset by a credit of
$290,000 recognized in the second quarter, which represented
a reversal of reserves set up for the Company's
reorganization efforts in the prior year.
10. Commitments and Contingencies
The Company leases office space and certain equipment under
operating leases. Total rent expense for 1996, 1995, and 1994
was approximately $121,000, $353,000 and $381,000,
respectively.
<PAGE>
Future minimum annual rental commitments for all noncancellable
operating leases are as follows:
Years Ended March 31,
--------------------------------------------
(Amounts
in
thousands)
1997 $ 126
1998 110
1999 19
--------------------------------------------
Total $ 255
==========
The Company has entered into employment agreements (the
"Employment Agreements") with certain officers and employees.
Under the terms of the Employment Agreements, these officers
are to receive annual salaries of approximately $1,231,000 in
the aggregate and certain employee benefits. The Employment
Agreements provide that if the Company discharges any of
these individuals without cause, the discharged individual
will be entitled to full compensation, including
participation in all benefit programs, for periods of up to
one year. The Bankruptcy Court approved the Company's
assumption of these Employment Agreements. Certain Employment
Agreements provide that the employee is entitled to an annual
bonus to be paid in cash or common stock based on the pretax
profits of the Company in an amount established at the
discretion of the Board of Directors of the Company.
Pursuant to the Bankruptcy Code, the Company has filed a
motion seeking bankruptcy court approval of employment
agreements with two technical executive officers who were
hired post-petition. The Company has 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 (Notes 1(b) and 12).
11. Income Taxes
Deferred income taxes are provided for temporary differences
between amounts reported for financial statement and income
tax purposes. Deferred tax assets consist of:
March 31, 1996 1995
-------------------------------------------------------------------
(Amounts in
thousands)
Net operating loss carryforwards $ 25,158 $25,320
Reserve for litigation 1,888 1,888
Reserve for restructuring 827 863
Reserve for discontinued
operations 70 70
Other 67 133
-------------------------------------------------------------------
$ 28,010 28,274
Valuation allowance $ (28,010) (28,274)
---------------------------------============== ============
$ - $ -
============== ============
At March 31, 1996 and 1995, the Company recorded a deferred
tax asset with a valuation allowance of equal value. Since there
are certain limitations that exist regarding the utilization of
the net operating losses (which total approximately $62,897,000
at March 31, 1996) due to changes in ownership and the Company's
current state of reorganization, it is unknown as to whether the
benefit of any of the deferred tax assets will be realized. The
change in the valuation allowance for the three years in the
period ended March 31, 1996 was $264,000 $2,110,000 and
$18,113,000.
These net operating loss carryforwards expire between 2001
and 2010, if not used. The amount of net operating losses that
expire in 2010 is approximately $6,231,000.
12. Litigation
Bankruptcy Proceedings
On January 26, 1995 (the "Petition Date"), the Company and three
of its four operating subsidiaries (Computer Bay, Data One and
Cellular) filed petitions for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the
Eastern District of New York (the "Bankruptcy Court"), Case Nos.
195 10690 260, 195 10691 260, 195 10692 260 and 195 10693 260,
respectively (the "Chapter 11 case"). Spectrum Global did not
file for bankruptcy protection. On February 8, 1995, the United
States Trustee appointed an Official Committee of Unsecured
Creditors to represent the creditors of Spectrum, Data One and
Cellular (the "Committee"), and another committee 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. A trustee has been
appointed to oversee liquidation of the Computer Bay assets.
Spectrum and Cellular have been substantively consolidated in the
bankruptcy proceeding and are continuing to manage their affairs
and operate their business under Chapter 11 as
debtors-in-possession while awaiting for Bankruptcy Court
approval of their proposed plan of reorganization. A separate
plan of liquidation under Chapter 11 has been filed for Data One.
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 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 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.
<PAGE>
Principal Proceedings in the Chapter 11 Case
Stay of Litigation
Pursuant to section 362 of the Bankruptcy Code, the commencement
of the Debtors' Chapter 11 cases operates as stays, applicable to
all entities, of the following: (i) the 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 Debtors' Chapter 11 cases, or to recover
for a claim that arose before the commencement of the Debtors'
Chapter 11 cases; (ii) the enforcement of any judgment against
the Debtors that arose before the commencement of the Debtors'
Chapter 11 cases; (iii) the taking of any action to obtain
possession of or to exercise control over the Debtors' property;
(iv) the creation, perfection or enforcement of any lien against
the Debtors' property; (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 cases; or (vi) the
setoff of any debt owing to the Debtors that arose prior to the
commencement of the Debtors' Chapter 11 cases against a claim
held by such creditor or party in interest against the Debtors
that arose before the commencement of the Debtors' Chapter 11
cases. 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 cases.
Executory Contracts
As debtors-in-possession, the Debtors have 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 Debtors, including
parties to such real property leases, may file motions with the
Bankruptcy Court seeking to require the Debtors to assume or
reject those contracts or leases. In this context, "assumption"
means that the Debtors cure or provide adequate assurance that
they will cure all existing defaults under a contract or lease
and provide 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
Debtors are relieved of their obligations to perform further
under the contract or lease. Rejection of an executory contract
or lease is treated as 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 rejected certain
employment contracts and has terminated employment of some of the
affected individuals. The Bankruptcy Court has approved the
Company's employment agreement with its current CEO. On January
23, 1996, the Bankruptcy Court approved (i) the assumption of
modified employment contracts with other employees with
pre-existing employment agreements, eliminating some contractual
perquisites and reducing severance benefits, and (ii) the terms
of agreements with two former employees regarding rejection of
their employment agreements and their claims for rejection
damages. In April 1996, the Bankruptcy Court approved the
assumption of a remaining employment agreement that had been
modified to reduce salary, eliminate some contractual perquisites
and reduce severance benefits. The Company is currently seeking
Bankruptcy Court approval of the employment contracts of its
Chief Technical Officer and Vice President - Software
Engineering. The Company rejected all leases for automobiles
leased on behalf of employees. Additionally, the Company has
rejected the real property lease associated with its former
Manhasset, New York headquarters and leases for certain furniture
and equipment.
Prepetition claims that were contingent, unliquidated, or
disputed as of the commencement of the Chapter 11 case,
including, without limitation, those that arise in connection
with rejection of executory contracts, may be allowed or
disallowed depending on the nature of the claim. Such claims may
be fixed by the Bankruptcy Court or otherwise agreed upon by the
parties.
Computer Bay Trustee's Claim
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 filed a claim with the
Bankruptcy Court seeking to substantively consolidate the
Computer Bay estate and liabilities with the estates and
liabilities of the Company. The Debtors filed an objection to
this claim on November 20, 1995. In furtherance of his proofs of
claim, on January 11, 1996 the Computer Bay trustee filed a
complaint commencing litigation against the Company seeking to
substantively consolidate the Computer Bay estate with the
Debtor's estate and, in the alternative, seeking the return of
alleged preferences and fraudulent conveyances in the amount of
$4,351,396 (the "Computer Bay Litigation"). The Debtors filed an
answer on January 23, 1996. On February 27, 1996, the Computer
Bay trustee informed the Company that it would seek permission
from the Bankruptcy Court to add two of the Company's then
executive officers as defendants in this litigation. The Debtors
asserted counterclaims against the Computer Bay estate in the
amount of $2,430,436.
On March 15, 1996, the Debtors, the Committee and the Computer
Bay trustee agreed to a settlement of the Computer Bay
Litigation, which was approved by the Bankruptcy Court on March
28, 1996. The settlement calls for the Computer Bay estate to
receive distributions under the Plan of $600,000 in cash and
$300,000 in Spectrum common stock to be distributed approximately
one month after the Plan's effective date. Consummation of the
settlement is contingent upon confirmation of the Plan.
The Debtors' Exclusivity Period
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 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. The Company filed a plan of
reorganization (the Plan) dated as of March 18, 1996. A hearing
regarding confirmation of the Plan is scheduled for July 17,
1996. No other party may file an alternative plan unless the Plan
is not confirmed.
Setting of the Bar Date for Prepetition Claims
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.
The Debtors' Proposed Plan of Reorganization
The Plan, if confirmed by the Bankruptcy Court, will settle all
material litigation now pending and provide all general unsecured
creditors with 100% of the value of their claims plus 6% interest
thereon. The Company has reserved approximately $3,500,000 for
the payment of general unsecured creditor claims, the priority
non-tax claim and the Company's cash contribution to the
settlement of the Class Action lawsuits. To date, the Company has
reconciled the majority of the general unsecured creditor claims,
with interest, in the amount of approximately $2,700,000. Several
outstanding claims remain that the Company is attempting to
reconcile before the effective date of the Plan (the "Effective
Date"). The Company does not believe that the reconciliation of
such claims will have a material effect on the reserve
established for payment to unsecured creditors. The Plan also
provides for the payment of approximately $264,000 on the
Effective Date to the holder of the one priority nontax claim
filed against Spectrum. The Plan will also settle all of the
class action lawsuits filed against the Company by the payment of
$250,000 by the Company and the delivery of approximately 45% of
the equity ownership in reorganized Spectrum to a trustee to be
distributed to the members of the class. Under the terms of the
proposed Plan, existing shareholders will be substantially
diluted but should obtain the majority of the 45% equity
ownership in reorganized Spectrum set aside for such shareholders
and certain creditors. This should hold true even after the
issuance of $300,000 of stock to the Chapter 7 trustee of
Computer Bay in connection with the recent settlement of his
claim. Holders of allowed administrative claims (as agreed upon
or ordered by the Bankruptcy Court) will be paid in full under
the Plan. The Company intends to seek a waiver of accrued
professional fees that to date have been held back by the
Bankruptcy Court.
The Bankruptcy Court initially scheduled a confirmation hearing
for May 3, 1996, which has since been rescheduled for July 17,
1996. This rescheduling was necessary because Plan confirmation
is contingent upon the successful resolution of a coverage
dispute with certain of Spectrum's former directors' and
officers' insurance carriers. This is the only known remaining
significant issue that must be resolved in bankruptcy prior to
confirmation of the Plan.
The Company will amend its certificate of incorporation and
by-laws on the Effective Date. The Amended Certificate contains
certain provisions affecting the rights of shareholders,
corporate governance, and the transferability of Class A
Preferred Stock and Reorganized Spectrum Common Stock (as defined
below). Under the amended certificate of incorporation, the
authorized capital stock of the Company shall be comprised of (i)
10,000,000 shares of reorganized Spectrum common stock
("Reorganized Spectrum Common Stock"), (ii) 1,500,000 shares of
Class A preferred stock reserved for issuance in connection with
the settlement of the Class Action that was filed against the
Company in 1994 ("Class A Preferred Stock") and (iii) 2,000,000
shares of preferred stock ("Preferred Stock"). A description of
the amount of shares that will be issued within each class is set
forth below.
Issued and outstanding shares of the Company's common stock will
be canceled on the Effective Date and replaced with one (1) share
of Reorganized Spectrum Common Stock for each seventy-five (75)
shares of existing common stock. The Company currently has
authorized 110,000,000 shares of common stock, of which
approximately 76,700,000 million are issued and outstanding.
Therefore, approximately 1 million shares of Reorganized Spectrum
Common Stock will be issued to existing shareholders on the
Effective Date. An additional $300,000 of Reorganized Spectrum
Common Stock will be issued to the Computer Bay trustee in
connection with the settlement of his claim (collectively, the
Reorganized Spectrum Common Stock issued to existing shareholders
and the Computer Bay trustee is defined as "Distributable Common
Stock"). Stock options issued under the Company's existing stock
option plans will also be reverse split at a 75 to 1 ratio and
repriced accordingly.
Pursuant to the Class Action Settlement, the Company will issue a
number of shares of Class A Preferred Stock equal to the number
of shares of Distributable Common Stock. The Class A Preferred
Stock is convertible to Reorganized Spectrum Common Stock at any
time within two years of its date of issuance and automatically
converts to Reorganized Spectrum Common Stock at the expiration
of two years.
As part of a bonus or success fee to employees, officers and all
non-executive directors for confirming a plan of reorganization,
the Company will also issue Reorganized Spectrum Common stock
pursuant to the two incentive compensation programs described in
the Plan, the Spectrum 1996 Stock Incentive Plan and the Spectrum
1996 Incentive Deferral Plan, which collectively authorize the
issuance of an aggregate number of shares of Reorganized Spectrum
Common Stock equal to a 10% ownership interest to directors,
officers and employees of the Company on the Effective Date.
Except for 300 shares of Reorganized Spectrum Common Stock that
will be distributed to directors on the Effective Date, the
distribution of stock to directors, officers and employees
pursuant to such incentive programs shall be distributed in three
equal installments. The first installment shall be distributed
during the three day period commencing three days after
Reorganized Spectrum files its Quarterly Report on Form 10-Q for
its fiscal quarter ending June 30, 1997; the second installment
shall be distributed during the three day period commencing three
days after Reorganized Spectrum files its Quarterly Report on
Form 10-Q for its fiscal quarter ending December 31, 1997; and
the third installment shall be distributed during the three day
period commencing three days after Reorganized Spectrum files its
Quarterly Report on Form 10-Q for its fiscal quarter ending June
30, 1998. Under the Stock Incentive Plan, employees, officers and
directors will also be eligible to receive future grants of
performance based incentive awards with respect to an aggregate
number of shares equal to an additional one-ninth (1/9) of the
aggregate number of shares of Distributable Common Stock and
Class A Preferred Stock. Also, on the Effective Date, the Company
will distribute a $300,000 success bonus among all employees.
Implementation of the Plan does not contemplate issuance of the
remainder of the 10 million authorized shares of Reorganized
Spectrum Common Stock, the remainder of the 1.5 million shares of
Class A Preferred Stock, or the 2 million shares of authorized
preferred stock. The details of the Plan, the proposed
recapitalization, and copies of the certificate of incorporation
and by-laws are set forth in detail in the Plan and associated
disclosure statement, which the Company filed with the SEC on its
Current Report on Form 8-K dated as of March 26, 1996. ( (Note
1(b)).
If the Plan is not confirmed, the alternatives include: (a)
continuation of the pending Chapter 11 cases; (b) alternative
plans of reorganization; or (c) liquidation of Debtors under
Chapter 7 or Chapter 11 of the Bankruptcy Code.
Securities Related 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 Suits") was supplemented
(i) to extend the end of the class period from May 21, 1993 to
February 4, 1994, (ii) to add additional claims against Spectrum
and the individual defendants, and (iii) to add certain of its
then officers as party defendants. In April 1994, a Second
Consolidated Amended Class Action Complaint was filed adding
additional employees as party defendants. The class and certain
subclasses have been certified. A similar putative class action
filed in the United States District Court for the Southern
District of Texas has been transferred and consolidated with the
Class Action Suits.
The plaintiffs in the Class Action Suits 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 (the "SEC"); and (iv) making misleading
statements regarding the employment of John Sculley. In addition,
there are claims against certain of the individual defendants for
improper insider trading. The Company's former management, based
on the advice of its then counsel, believed the Company had good
and meritorious defenses to the claims against it.
On July 20, 1994, the Company, certain of its then officers and
directors, and two former officers and directors were served with
a class action complaint. The complaint asserts that Spectrum
knowingly or recklessly made material false statements or omitted
material facts in its financial reporting relating to Computer
Bay prior to announcing the restatement of earnings for the
fiscal year 1992 and the first three quarters of fiscal 1993, to
correct inaccurate accruals of certain items into income. For
pretrial purposes, this litigation has been consolidated with the
Class Action Suits described above.
In November 1995, the Company announced that an agreement in
principle had been reached on a framework for settlement of the
Class Action Suits (the "Class Action Settlement"). The Class
Action Settlement is contingent on numerous factors including,
among other things, the successful resolution of the Home
Action), the 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 the Class
Action Plaintiffs, and the approval of the Class Action
Settlement by the District Court. The Bankruptcy Court approved
the Class Action Settlement on January 19, 1996. The Class Action
Plaintiffs in the Class Action Suits had filed a claim against
the Company in its bankruptcy proceedings in the amount of
approximately $676,000,000. The Class Action Settlement, if
consummated, will be in satisfaction of that claim as well as any
and all claims of the individual defendants (former directors and
officers) in that suit against the Company.
Under the terms of the Class Action Settlement, the Company and
the representatives of the Class Action Plaintiffs have agreed to
a framework under which the Company will issue to the Class
Action Plaintiffs in its plan of reorganization a number of
shares of its Class A Preferred Stock that would be equal to the
number of shares of Distributable Common Stock available to
Spectrum's stockholders and certain creditors following
confirmation of Spectrum's plan of reorganization. In addition,
under the Class Action Settlement, the Class Action Plaintiffs
are to receive the proceeds, net of certain fees and expenses,
from insurance policies worth $10,000,000 covering the
liabilities of the Company's directors and officers and, as a
result of court supervised negotiations and at the recommendation
of the District Court, $1,350,000 from the various individual
defendants in the action plus $250,000 from the Company.
One of the uncertainties surrounding the Class Action Settlement
is that issuers of insurance policies representing $6,000,000 out
of the $10,000,000 of the insurance necessary to fund the Class
Action Settlement have disclaimed coverage. This dispute is the
subject of a litigation pending before the District Court and
must be successfully resolved to implement the Class Action
Settlement. A trial in the Home Action took place before the
District Court on February 28 and 29, 1996. The District Court
has not yet issued its decision.). Confirmation hearing dates
have been rescheduled twice, awaiting the District Court's
decision. The confirmation hearing is currently scheduled for
July 17, 1996.
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 related to accounting and disclosure issues with
respect to certain of the patent license and advertising
agreements it entered into during fiscal 1994 and also related to
other activities of the Company's previous management. The
Company is cooperating fully with the investigation.
The accounting treatment at issue in the investigation, which had
been implemented after consultation with the Company's previous
outside auditors and had been disclosed in the Company's
quarterly filings with the SEC, was revised by Spectrum when it
voluntarily restated its earnings on February 7, 1994.
In April 1996, the SEC staff informed the Company that it
intended to commence an administrative proceeding to determine
whether during 1993 the Company had violated certain sections of
the Securities Exchange Act of 1934 and rules promulgated
thereunder, including violations of Rule 10b-5, related to
accounting and disclosure issues with respect to certain patent
and advertising agreements it entered into during fiscal 1994. In
April 1996, the Company began discussions with the SEC to resolve
the SEC's ongoing investigation. Those discussions contemplate
the entry of an administrative cease and desist order against the
Company, but do not contemplate the imposition of any financial
penalties. The Company's discussions with the SEC are ongoing.
In connection with this investigation, Salvatore T. Marino, a
current employee and former officer of the Company informed the
Company in April 1996 that the SEC staff intended to commence a
proceeding against him for violations of certain sections of the
Securities Exchange Act of 1934 and rules promulgated thereunder,
including violations of Rule 10b-5, related to accounting and
disclosure issues with respect to certain patent and advertising
agreements the Company entered into during fiscal 1994 and the
exercise of options to purchase and subsequent sale of Spectrum
stock in the relevant time frame. Mr. Marino has denied any
wrongdoing and responded to the staff's allegations. Upon
learning of the SEC staff's position and pending resolution of
this issue, the Company removed Mr. Marino as an executive
officer.
Additionally, the Company has learned that the SEC intends to
commence proceedings related to this investigation against two of
its former officers and directors, Peter Caserta, former Chief
Executive Officer and Chairman of the Board of Directors, and
Dana Verrill, former Chief Executive Officer and Chairman of the
Board of Directors. Mr. Caserta left the Company in July 1994 and
Mr. Verrill left the Company in October 1993.
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., 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. In
November 1995, the plaintiffs and all defendants entered into a
settlement agreement, which the Bankruptcy Court has since
approved.
In March 1995, Peter Caserta, the Company's former Chief
Executive Officer and Chairman of the Board, Howard Schor, a
former employee, and eight others including the former director,
the former President of Spectrum Global (which was sold by the
Company in October 1995), and six other non-company employees
were indicted in the District Court on charges of mail and wire
fraud relating to activities of the Caserta Group, an
unaffiliated financial services company headed by Mr. Caserta In
January 1996, Mr. Caserta and Mr. Schor pleaded guilty to certain
of the charges against them.
The United States Attorney's Office for the Eastern District of
New York has 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
Chief Executive Officer and Board of Directors. The Company is
cooperating fully with the investigation.
Patent-Related Proceedings
In August 1994, Megahertz Corporation ("Megahertz") 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 are
temporarily abated under the terms of a license agreement between
Megahertz and Spectrum. Megahertz, in its arbitration request,
asked for a determination of whether Spectrum had achieved
certain licensing objectives and/or undertaken defined patent
enforcement actions as set forth in the agreement. Megahertz, its
parent company, U.S. Robotics, and the Company in February 1996
entered into a settlement agreement with respect to all disputes
among them which the Bankruptcy Court approved on March 7, 1996.
The confidential agreement included a $6,000,000 payment to the
Company as settlement of all licensing obligations.
On December 6, 1994, the Company filed a lawsuit against Motorola
for infringement of claims in six of its patents covering basic
wireless data concepts. Motorola 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 (Spectrum Information
Technologies, Inc. v. Motorola, Inc., Civil Action No.
95-U-234-NE). As a result, on March 8, 1996, Spectrum and
Motorola entered into an agreement settling the patent
litigation. The settlement agreement provides that Spectrum and
Motorola will cross-license each other for use of specified
intellectual property. Under the agreement, Spectrum will become
one of the few entities licensed to distribute communications
software that allows the wireless transmission of data utilizing
proprietary technology related to certain Motorola cellular
telephones. Motorola will be licensed to utilize Spectrum's basic
technology in certain modems and modem integrated circuits.
Motorola is one of the world's largest providers of wireless
communication, semiconductors and electronic systems and the
largest producer of mobile and portable cellular telephones. The
confidential agreement, which was filed under seal, was approved
by the Bankruptcy Court on April 9, 1996.
The Company has also instituted an interference proceeding in the
U.S. Patent and Trademark Office to establish that the Company is
the inventor of the claimed subject matter of U.S. Patent
4,991,197 (the "197 Patent"). This proceeding is based on the
Company's belief that Walker Morris, President of Intelligence
Technology Corporation ("ITC"), a party to a joint development
agreement with the Company, wrongfully obtained the 197 Patent
based on the technology invented by the Company. The Company has
been granted a patent to cover this invention, U.S. Patent
4,972,457. In the course of the interference procedure, ITC has
allowed deadlines to pass without taking steps to preserve its
right to submit evidence showing any date of invention earlier
than the filing date of the Walker Morris patent application. The
Company believes that it has persuasive evidence proving an
earlier date of invention than the Walker Morris filing date, and
has preserved its right to submit such evidence. The parties,
however, have agreed to stay this proceeding while settlement
discussions are pending. The parties had reached a verbal
understanding under which ITC would concede priority of invention
to the Company and would receive a restricted field license under
U.S. Patent 4,972,457, subject to the completion of a final
agreement acceptable to the parties. Shortly before execution of
a final agreement, Walker Morris provided the Company information
regarding a patent application that Walker Morris alleged was
outside the scope of the interference. The Patent Office granted
the Company's motion, however, to include the newly disclosed
patent in the pending interference. The Company believes that it
will ultimately be awarded dominant rights to both patents in the
interference.
Other Proceedings
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 Data One alleging $1,500,000 in damages based on the
allegations described above. Data One intends to object to this
claim on the grounds that, among other things, it was not timely
filed. Data One has filed a separate liquidating plan of
reorganization under Chapter 11.
In January 1994, Robert Fallah, a former financial consultant to
Spectrum, 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 oral promises
made by the Company to give Fallah certain stock warrants in
exchange for consulting services. Fallah filed a proof of claim
in the Company's bankruptcy proceeding alleging $5,790,000 in
damages. Spectrum filed an objection to the Fallah claim on
January 31, 1996. The Bankruptcy Court has since disallowed
Fallah's claim in its entirety.
In April, 1994, an action was filed against Spectrum, certain
former officers and directors of the Company and the Company's
former transfer agent (Blair v. Spectrum Information Technologies
Inc., et al., 162nd District Court of Dallas County, Texas).
Blair alleged that he was induced to begin employment with
Cellular through a promise that he would be allowed to
participate in Spectrum's stock option plan and alleged against
all defendants breach of contract, fraud, negligence, breach of
fiduciary relationship and bad faith. Blair terminated his
employment with Cellular in August 1994. The parties have
stipulated to allow Blair an unsecured claim of $95,000. The
Bankruptcy Court approved this settlement on March 7, 1996.
In October 1994, Gene Morgan ("Morgan") and Gene Morgan Financial
("GMF") demanded in excess of approximately $8,000,000 from the
Company based on an alleged breach of a consulting agreement and
failure to register certain underwriter's warrants. Morgan filed
a proof of claim in the bankruptcy proceeding claiming an
unsecured nonpriority claim of approximately $6,300,000 alleging
breach of contract under the warrants. Lowenstein, Sandler, Kohl,
Fisher & Boylan, as assignee of GMF's claim, filed a proof of
claim alleging approximately $1,852,000 in damages arising from
the alleged breach of the consulting agreement. The Debtors
objected to the claims of both Morgan and GMF. The parties
reached a settlements as to both the Morgan and GMF claims
pursuant to which the Company paid Lowenstein, Sandler, Kohl,
Fisher & Boylan $91,000 and the parties exchanged general
releases. The Bankruptcy Court approved the settlement on April
17, 1996.
On July 21, 1995, The Home Insurance Company of Illinois ("The
Home"), the Company's former directors' and officers' primary
insurance carrier, commenced an adversary proceeding (the "Home
Action") in the Company's bankruptcy proceeding. The Honorable
Frederic Block, United States District Judge of the District
Court, subsequently withdrew the reference with respect to the
Home Action such that the litigation is now pending before him.
The Home is seeking to rescind 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 (the "Renewal Policy") and alleges certain material
misrepresentations and/or omissions in the application for the
Renewal Policy. The Home also seeks a declaration that coverage
is not afforded under the Renewal Policy for the claims made
against the policy by the Company and certain of its officers and
directors. The Company believes The Home (as well as the other
carriers discussed below) are obligated to provide the coverage
at issue and is defending this action, and is further seeking a
declaration of coverage under the Renewal Policy for the claims
made against that policy.
In addition to the primary policy, the Company obtained three
excess policies for the insurance year at issue in the Home
Action. Two of the excess carriers, the Agricultural Excess and
Surplus Insurance Company ("AESIC") and The Aetna Casualty and
Surety Company ("Aetna") have intervened in the Home Action.
AESIC has agreed to be bound by any final judicial resolution
regarding The Home (a similar agreement was previously reached
with the third excess carrier) and is no longer actively
participating in the Home Action. The District Court heard the
trial in the Home Action on February 28 and 29, 1996, and has not
yet issued a decision. Settlement of the Class Action is
contingent on the outcome of the Home Action.
From time to time, the Company has been a party to other legal
actions and proceedings incidental to its business. As of the
date of this report, however, the Company knows of no other
pending or threatened legal actions that could have a material
impact on the financial condition of the Company.
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
(Debtors-in-Possession) (Note 1(b))
Schedule II - Valuation and
Qualifying Accounts For the Years
Ended March 31, 1996, 1995 and 1994
Additions Balance
Balance Charged at
at to Costs End
Description Beginning and of
of Period Expenses Write-offs Other Period
- -------------- --------- -------- ---------- -------- -------
Year Ended March 31, 1994
Allowance for
Doubtful
Accounts
Receivable $ 293 $80,000 $ - $ - $ 80,293
Reserve for
Inventory
Obsolescence $ 35,699 $91,517 $(26,906) $ - $100,310
Year Ended March 31, 1995
Allowance for
Doubtful
Accounts
Receivable $ 80,293 $ - $ - $ - $ 80,293
Reserve for
Inventory
Obsolescence $100,310 $ - $ - $ - $100,310
Year Ended March 31, 1996
Allowance for
Doubtful
Accounts
Receivable $ 80,293 $ - $ - $ - $ 80,293
Reserve for
Inventory
Obsolescence $100,310 $ - $(54,234) $ - $ 46,076
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment, dated as of December 7 , 1995, amends that
certain Employment Agreement (the "Employment Agreement") dated
as of July 11, 1994, by and between Spectrum Information
Technologies, Inc. ("Employer") and
Christopher M. Graham ("Employee").
1. Paragraph 2 is amended and restated in its entirety
as follows:
2. Term of Employment. Employee shall be an at-
will employee and the period during which Employee is
employed by Employer pursuant to this Agreement is called
the "Term of Employment".
2. Paragraph 4(a) is amended and restated in its
entirety as follows:
4(a) Base Salary. During the Term of Employment, as
compensation for the agreements made by the Employee herein and
in consideration of the provision of services by the Employee to
the Employer, Employer shall pay to Employee the base salary of
$115,000.00 per annum (the "Base Salary"). The Base Salary shall
be reviewed by the Employer on each January 1 during the Term of
Employment.
3. Paragraph 4(c) is deleted.
4. Paragraph 7 is amended and restated by deleting the
first paragraph and adding paragraph 7(b) as follows:
7(b) Employer retains the right to discharge Employee
for any reason or without reason. Employer agrees, however, that
if it discharges Employee for any reason other than just cause as
defined above, Employee shall be entitled to a severance benefit
equal to twelve (12) month's Base Salary and participation in
Employer's Executive Medical Plan for a period of twelve (12)
months following such termination. In addition, all stock options
for stock of Employer theretofore granted to Employee will become
immediately exercisable and will remain exercisable throughout
the original term of such options notwithstanding any provision
to the contrary regarding termination of employment in the stock
option agreement issued in respect of such stock option or any
other stock option plan of Employer pursuant to which such stock
option may have been granted; provided, however, Employee agrees
to waive such provision regarding new stock options upon request
by Employer, if Employer reasonably determines that such waiver
would be necessary or appropriate to qualify a stock option plan
pursuant to applicable laws. Employee's benefits pursuant to this
paragraph are and shall be payable immediately upon such
discharge without just cause.
5. The parties hereto acknowledge that the Employer
shall file at the earliest time practicable an application
<PAGE>
in the United States Bankruptcy Court for the Eastern District of
New York, where Employer's bankrupcty case is pending, to approve
the assumption of the within Amendment. The Employer believes
that assumption of the within Amendment is in its best interest,
and in the best interests of its bankruptcy estate and creditors.
Employer and Employee acknowledge that unless and until the
within Amendment is approved by the Bankruptcy Court, the terms
and provisions thereof are not effective.
<PAGE>
All other terms and provisions contained in the
Employment Agreement shall remain in effect.
Spectrum Information Technologies, Inc.
----------------------------------
By: Donald J. Amoruso
Its: Chairman and Chief Executive Officer
----------------------------------
Christopher M. Graham
<PAGE>
April 27, 1995
Mr. Barry Hintze
93 East Beverly Parkway
Valley Stream, NY 11580
Dear Mr. Hintze,
I am pleased to offer you the position of Comptroller with
Spectrum Information Technologies, Inc. In your capacity of
Comptroller, you will be functioning as Spectrum's principal
accounting officer and will have primary responsibility for all
Spectrum's accounting and filing functions.
This position reports directly to me and offers an annual salary
of $ 85,000. Your start date will be May 15, 1995. You are
entitled to receive any and all benefits generally available to
Spectrum employees. In addition you will receive the Executive
Medical Plan. This provides you with 100% coverage for medical
and dental care at no cost to you. A "Summary of Benefits" is
included in the enclosed new hire package. In addition you will
be entitled to the Management Stock Option Plan, the specifics of
which will be decided after the emergence from Chapter 11
bankruptcy.
Please complete the enclosed forms and return them with your
acceptance of this offer. If you have any further questions
please contact Kent Kessler our Human Resources/Payroll
administrator at (914) 251-1800 extension 150.
Very truly yours,
Donald J. Amoruso
President and Chief Executive Officer
Enc.
I accept the position as offered:
- ----------------------------------- -----------------
Signature--Barry Hintze Date
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment, dated as of December 4 , 1995, amends that
certain Employment Agreement (the "Employment Agreement") dated
as of April 27, 1995, by and between Spectrum Information
Technologies, Inc. ("Employer") and Barry Hintze ("Employee").
Employee agrees that during the term of his employment for
Employer, Employee shall devote his full business time and
energy, attention, skills and ability to the performance of the
Employment on an exclusive basis, shall faithfully and diligently
endeavor to promote the business and best interest of the
Employer and shall make available to the Employer all knowledge
possessed by him relating to any aspect of his duties and
responsibilities hereunder.
Employer retains the right to discharge Employee for any
reason or without reason. Employer agrees, however, that if it
discharges Employee for any reason other than just cause,
Employee shall be entitled to a severance benefit equal to six
(6) month's base salary and participation in Employer's Executive
Medical Plan for six (6) months; provided, however, that such
participation in the Employer's Executive Medical Plan shall not
be deemed a waiver of Emplyee's right to continue to receive
benefits under any group health care insurance plan, at
Employee's expense, to the extent required by the Consolidated
Omnibus Budget Reconciliation Act of 1985. For the purposes of
this Amendment, "just cause" shall be defined as dishonesty,
willful misconduct, gross negligence or intentional failure by
Employee to discharge fully and faithfully and to the best of his
ability the duty imposed on him.
The parties hereto acknowledge that the Employer shall file
at the earliest time practicable an application in the United
States Bankruptcy Court for the Eastern District of New York,
where Employer's bankrupcty case is pending, to approve the
assumption of the within Amendment. The Employer believes that
assumption of the within Amendment is in its best interest, and
in the best interests of its bankruptcy estate and creditors.
Employer and Employee acknowledge that unless and until the
within Amendment is approved by the Bankruptcy Court, the terms
and provisions thereof are not effective.
All other terms and provisions contained in the Employment
Agreement shall remain in effect.
Spectrum Information Technologies, Inc.
----------------------------------
By: Donald J. Amoruso
Its: Chairman and Chief Executive Officer
----------------------------------
Barry J. Hintze
AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amendment, dated as of December 7, 1995, amends that
certain Amended and Restated Employment Agreement (the
"Employment Agreement") dated as of August 13, 1993, by and
between Spectrum Information Technologies, Inc. ("Employer") and
Salvatore T. Marino ("Employee").
1. Paragraph 4(a) is amended and restated in its
entirety as follows:
4(a) Base Salary. During the Term of Employment, as
compensation for the agreements made by the Employee herein and
in consideration of the provision of services by the Employee to
the Employer, Employer shall pay to Employee the base salary of
$181,220 per annum (the "Base Salary"). The Base Salary shall be
reviewed by the Employer on each January 1 during the Term of
Employment.
2. Paragraphs 4(c) and 4(e) are deleted.
3. Paragraph 7(b) is amended and restated in its
entirety as follows:
7(b) Employer retains the right to discharge Employee
for any reason or without reason. Employer agrees, however, that
if it discharges Employee for any reason other than just cause as
defined above (whether or not such termination follows a Change
in Control, as defined below), Employee shall be entitled to a
severance benefit equal to twelve (12) month's Base Salary and
participation in Employer's Executive Medical Plan, as defined in
and pursuant to the terms of Paragraph 4(d), for a period of
twelve (12) months following such termination. In addition, all
stock options for stock of Employer theretofore granted to
Employee will become immediately exercisable and will remain
exercisable throughout the original term of such options
notwithstanding any provision to the contrary regarding
termination of employment in the stock option agreement issued in
respect of such stock option or any other stock option plan of
Employer pursuant to which such stock option may have been
granted; provided, however, Employee agrees to waive such
provision regarding new stock options upon request by Employer,
if Employer reasonably determines that such waiver would be
necessary or appropriate to qualify a stock option plan pursuant
to applicable laws. Employee's benefits pursuant to this
paragraph are and shall be payable immediately upon such
discharge without just cause.
4. Paragraph 7(c) is deleted.
5. Any controversy or claim arising out of or relating to
the Employment Agreement and this Amendment, or breach thereof,
shall be settled by arbitration held in the State, City and
County of New York, in accordance with the applicaable rules then
obtaining of the American Arbitration Association, and judgment
upon the award rendered by the arbitrator may be entered in any
court having jurisdiction thereof.
6. The parties hereto acknowledge that the Employer shall
file at the earliest time practicable an application in the
United States Bankruptcy Court for the Eastern District of New
York, where Employer's bankrupcty case is pending, to approve the
assumption of the within Amendment. The Employer believes that
assumption of the within Amendment is in its best interest, and
in the best interests of its bankruptcy estate and creditors.
Employer and Employee acknowledge that unless and until the
within Amendment is approved by the Bankruptcy Court, the terms
and provisions thereof are not effective.
All other terms and provisions contained in the Employment
Agreement shall remain in effect.
Spectrum Information Technologies, Inc.
----------------------------------
By: Donald J. Amoruso
Its: Chairman and Chief Executive
Officer
----------------------------------
Salvatore T. Marino
January 18, 1996
VIA FACSIMILE (770) 410 - 0377
Mr. Mikhail Drabkin
10050 Feather Sound Court
Alpharetta, GA 30202
Re: Employment with Spectrum Information Technologies, Inc.("Spectrum")
Dear Mikhail:
I am writing to confirm our agreement that Spectrum has
offered and you have accepted employment as Chief Technical
Officer commencing on or before March 21, 1996 on the following
terms. You will be paid in accordance with Spectrum's regularly
scheduled payroll a base salary of $195,000.00 per annum. In
addition to the base salary, you will be entitled to a starting
bonus of $45,000.00 payable in equal parts on your Start Date and
the first anniversary thereof provided that you are an employee
of Spectrum on this first anniversary. Spectrum will pay you a
bonus on the first anniversary of your Start Date of at least
$25,000.00, provided, however, that such bonus may be increased
up to $55,000.00 based on your satisfactory completion of
performance objectives to be mutually established and that you
are an employee on such anniversary.
Additionally, following confirmation of Spectrum's plan of
reorganization in Spectrum's pending chapter 11 bankruptcy
proceeding (the "Confirmation"), including the approval of the
allocation of equity to Spectrum's management therein, you will
be granted 0.25% of Spectrum's recapitalized equity provided that
you are an employee of Spectrum on the date of Confirmation.
Following Confirmation, including approval of a stock option
plan, Spectrum shall grant to you an option to purchase one (1)
percent of Spectrum's outstanding and issued common stock at such
time with an exercise price equal to the fair market value of
Spectrum's common stock at such time. Such options are to vest in
equal parts on each of the first three anniversaries of your
Start Date. Such options shall terminate when you cease
employment with Spectrum unless the plan pursuant to which they
are issued provides otherwise. Notwithstanding the foregoing,
such options will immediately vest and remain exercisable
pursuant to the plan under which such options were issued
following a change in control of Spectrum that occurs following
Confirmation. For the purposes of this agreement, a change in
control shall be defined as an acquisition by a single person or
group of persons acting in concert of more than fifty (50)
percent equity ownership of Spectrum. You will be entitled to a
<PAGE>
severance payment of one (1) year's base salary in the event that
your employment is terminated following Confirmation for any
reason other than just cause, which for the purposes of this
agreement shall be defined as dishonesty, willful misconduct,
gross negligence or failure to discharge fully and faithfully and
to the best of your ability the duties imposed on you. Spectrum
and you acknowledge and agree that there can be no such
assurances that Spectrum's plan of reorganization will be
confirmed. In the event that Spectrum's bankruptcy does not
result in a confirmed plan of reorganization, you will have no
claim against the bankruptcy estate except for work actually
performed by you for which you have not been paid.
Spectrum will provide to you term life insurance in an
amount equal to two (2) times your base salary. Spectrum will
provide to you medical and dental insurance pursuant to
<PAGE>
Spectrum's Executive Medical Plan and, if your wife's preexisting
medical condition is not covered under Spectrum's plan, will
direct billing to you the premiums associated with concurrent
coverage for your wife pursuant to the Consolidated Omnibus
Budget Reconciliation Act of 1985 under your previous employer's
plan. Spectrum will reimburse to you the reasonable costs that
you incur relocating you and your family from the Atlanta,
Georgia area to the San Francisco, California area at a mutually
agreed upon time. You will be entitled to four (4) weeks paid
vacation per annum, with no more that two (2) consecutive weeks
taken in any one year.
All copyrights, patents, trade secrets, or other
intellectual property rights associated with any ideas, concepts,
techniques, inventions, processes or works of authorship
developed or created by you during the course of performing work
for Spectrum or its clients ("Work Product") shall belong
exclusively to Spectrum and shall, to the extent possible, be
considered a work made by you for hire for Spectrum. You agree to
assign, and automatically assign at the time of creation of the
Work Product, without any requirement of further consideration,
any right, title, or interest you may have in such Work Product
to Spectrum. Upon the request of Spectrum and, in any event, upon
termination of your employment, you will leave with Spectrum all
memoranda, notes, records drawings, manuals, disks, or other
documents and media pertaining to Spectrum's business or your
Work Product.
You represent to Spectrum that your execution and
performance of this agreement does not and will not conflict or
violate any agreement by which you are bound. Without limiting
the foregoing, you agree to abide by the terms of any
nondisclosure or confidentiality agreement by which you are bound
and that any such agreement shall not prevent you from
discharging your duties as Spectrum's Chief Technical Officer.
Nothing contained herein shall be construed to make your
employment other than terminable at will at any time by you or
Spectrum.
If the foregoing accurately reflects our agreement, please
so indicate in the space designated below.
Sincerely,
<PAGE>
Donald J. Amoruso
Chief Executive
Officer
Accepted and Agreed:
- --------------------- -------
Mikhail Drabkin Date
May 23, 1996
VIA FACSIMILE
Mr. Mikhail Drabkin
820 Mabry Road
Atlanta, GA 30328
Re: Employment with Spectrum Information Technologies, Inc.
("Spectrum" or "Employer")
Dear Mikhail:
As you are aware, Spectrum has postponed the hearing regarding
confirmation of its plan of reorganization in its pending
bankruptcy proceeding because a condition precedent to confirmation
(a favorable decision in the litigation with certain of Spectrum's
former directors' and officers' insurance carriers) has not yet
occurred. In light of the uncertainty surrounding the timing of
confirmation and the importance of your continued employment with
the Company, Spectrum believes that it is in the best interest of
Spectrum to enter an amendment (the "Amendment") to your employment
agreement executed January 21, 1996 (the "Agreement"), subject to
bankruptcy court approval, as set forth below.
Spectrum retains the right to discharge you for any reason or
without reason. Spectrum agrees, however, that if it discharges
you for any reason other than just cause (as defined in the
Agreement), you shall be entitled to a severance benefit equal to
twelve (12) month's base salary and participation in Spectrum's
Executive Medical Plan for twelve (12) months; provided, however,
that such participation in Spectrum's Executive Medical Plan shall
not be deemed a waiver of your right to continue to receive
benefits under any group health care insurance plan, at your
expense, to the extent required by the Consolidated Omnibus Budget
Reconciliation Act of 1985. In addition, all stock options for
stock of Employer theretofore granted to you will become
immediately exercisable and will remain exercisable throughout the
original term of such options notwithstanding any provision to the
contrary regarding termination of employment in the stock option
agreement issued in respect of such stock option or any other stock
option plan of Employer pursuant to which such stock option may
have been granted; provided, however, Employee agrees to waive such
provision regarding new stock options upon request by Employer, if
Employer reasonably determines that such waiver would be necessary
or appropriate to qualify a stock option plan pursuant to
applicable laws. Your benefits pursuant to this paragraph are and
shall be payable immediately upon such discharge without just
cause.
Except to the extent that they are inconsistent with this
Amendment, the terms and conditions of the Agreement shall remain
in full force and effect, regardless of whether bankruptcy court
approval of this Amendment is obtained.
If the foregoing accurately reflects our agreement, please so
indicate in the space designated below and I will instruct
Spectrum's counsel to promptly seek bankruptcy court approval,
without which this Amendment will not be effective.
Sincerely,
Donald J. Amoruso
Chief Executive Officer
Accepted and Agreed:
________________________________
Mikhail Drabkin Date
January 17, 1996
VIA FACSIMILE (508) 393-6598
Mr. Richard duFosse
15 John Edward Drive
Northboro, MA 01532
Re: Employment with Spectrum Information Technologies, Inc.
("Spectrum")
Dear Richard:
I am writing to confirm our agreement that Spectrum has
offered and you have accepted employment as Vice President -
Software Engineering commencing on February 6, 1996 (the
"Start Date") on the following terms. You will be paid in
accordance with Spectrum's regularly scheduled payroll a
base salary of $140,000.00 per annum. In addition to the
base salary, you will be entitled to a starting bonus of
$10,000.00 payable on your Start Date. Spectrum will pay
you a bonus on the first anniversary of your Start Date of
at least $15,000.00, provided, however, that such bonus may
be increased up to $50,000.00 based on your satisfactory
completion of performance objectives to be mutually
established and that you are an employee on such
anniversary.
Additionally, following confirmation of Spectrum's plan
of reorganization in Spectrum's pending chapter 11
bankruptcy proceeding (the "Confirmation"), including the
approval of the allocation of equity to Spectrum's
management therein, you will be granted 0.25% of Spectrum's
recapitalized equity provided that you are an employee of
Spectrum on the date of Confirmation. Following
Confirmation, including approval of a stock option plan,
Spectrum shall grant to you an option to purchase 0.75%
percent of Spectrum's outstanding and issued common stock at
such time with an exercise price equal to the fair market
value of Spectrum's common stock at such time. Such options
are to vest in equal parts on each of the first three
anniversaries of your Start Date. Such options shall
terminate when you cease employment with Spectrum unless the
plan pursuant to which they are issued provides otherwise.
Notwithstanding the foregoing, such options will immediately
vest and remain exercisable pursuant to the plan under which
such options were issued following a change in control of
Spectrum that occurs following Confirmation. For the
purposes of this agreement, a change in control shall be
defined as an acquisition by a single person or group of
persons acting in concert of more than fifty (50) percent
equity ownership of Spectrum. You will be entitled to a
severance payment of one (1) year's base salary in the event
that your employment is terminated following Confirmation
for any reason other than just cause, which for the purposes
of this agreement shall be defined as dishonesty, willful
misconduct, gross negligence or failure to discharge fully
and faithfully and to the best of your ability the duties
imposed on you. Spectrum and you acknowledge and agree that
there can be no such assurances that Spectrum's plan of
reorganization will be confirmed. In the event that
Spectrum's bankruptcy does not result in a confirmed plan of
reorganization, you will have no claim against the
bankruptcy estate except for work actually performed by you
for which you have not been paid.
Spectrum will provide to you term life insurance in an
amount equal to two (2) times your base salary. Spectrum
will provide to you medical and dental insurance pursuant to
Spectrum's Executive Medical Plan. You will be entitled to
three (3) weeks paid vacation per annum, with no more that
two (2) consecutive weeks taken in any one year.
All copyrights, patents, trade secrets, or other
intellectual property rights associated with any ideas,
concepts, techniques, inventions, processes or works of
authorship developed or created by you during the course of
performing work for Spectrum or its clients ("Work Product")
shall belong exclusively to Spectrum and shall, to the
extent possible, be considered a work made by you for hire
for Spectrum. You agree to assign, and automatically assign
at the time of creation of the Work Product, without any
requirement of further consideration, any right, title, or
interest you may have in such Work Product to Spectrum.
Upon the request of Spectrum and, in any event, upon
termination of your employment, you will leave with Spectrum
all memoranda, notes, records drawings, manuals, disks, or
other documents and media pertaining to Spectrum's business
or your Work Product.
This offer and your employment with Spectrum shall be
contingent upon the completion of a review of your
employment history and references satisfactory to Spectrum.
Spectrum will provide to you notification regarding the
outcome of such review on or before the Start Date.
You represent to Spectrum that your execution and
performance of this agreement does not and will not conflict
or violate any agreement by which you are bound.
Nothing contained herein shall be construed to make
your employment other than terminable at will at any time by
you or Spectrum.
If the foregoing accurately reflects our agreement,
please so indicate in the space designated below.
Sincerely,
Donald J. Amoruso
Chief Executive
Officer
Accepted and Agreed:
_______________________________
Richard duFosse Date
May 23, 1996
VIA FACSIMILE
Mr. Richard duFosse
15 John Edward Drive
Northboro, MA 01532
Re: Employment with Spectrum Information Technologies, Inc.
("Spectrum" or "Employer")
Dear Richard:
As you are aware, Spectrum has postponed the hearing
regarding confirmation of its plan of reorganization in its
pending bankruptcy proceeding because a condition precedent to
confirmation (a favorable decision in the litigation with
certain of Spectrum's former directors' and officers'
insurance carriers) has not yet occurred. In light of the
uncertainty surrounding the timing of confirmation and the
importance of your continued employment with the Company,
Spectrum believes that it is in the best interest of Spectrum
to enter an amendment (the "Amendment") to your employment
agreement dated January 17, 1996 (the "Agreement"), subject to
bankruptcy court approval, as set forth below.
Spectrum retains the right to discharge you for any
reason or without reason. Spectrum agrees, however, that if
it discharges you for any reason other than just cause (as
defined in the Agreement), you shall be entitled to a
severance benefit equal to twelve (12) month's base salary and
participation in Spectrum's Executive Medical Plan for twelve
(12) months; provided, however, that such participation in
Spectrum's Executive Medical Plan shall not be deemed a waiver
of your right to continue to receive benefits under any group
health care insurance plan, at your expense, to the extent
required by the Consolidated Omnibus Budget Reconciliation Act
of 1985. In addition, all stock options for stock of Employer
theretofore granted to you will become immediately exercisable
and will remain exercisable throughout the original term of
such options notwithstanding any provision to the contrary
regarding termination of employment in the stock option
agreement issued in respect of such stock option or any other
stock option plan of Employer pursuant to which such stock
option may have been granted; provided, however, Employee
agrees to waive such provision regarding new stock options
upon request by Employer, if Employer reasonably determines
that such waiver would be necessary or appropriate to qualify
a stock option plan pursuant to applicable laws. Your
benefits pursuant to this paragraph are and shall be payable
immediately upon such discharge without just cause.
Except to the extent that they are inconsistent with this
Amendment, the terms and conditions of the Agreement shall
remain in full force and effect, regardless of whether
bankruptcy court approval of this Amendment is obtained.
If the foregoing accurately reflects our agreement,
please so indicate in the space designated below and I will
instruct Spectrum's counsel to promptly seek bankruptcy court
approval, without which this Amendment will not be effective.
Sincerely,
Donald J. Amoruso
Chief Executive Officer
Accepted and Agreed:
______________________________
Richard duFosse Date
MUTUAL RELEASE AND WAIVER BETWEEN
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND ALBERT D. PANICO
This Mutual Release and Waiver is made as of the ___ day of
January, 1996 between Albert D. Panico ("Panico") and Spectrum Information
Technologies, Inc. (the "Company").
WHEREAS, Panico and Company have entered into an Employment Agreement,
dated August 13, 1993 (the"Employment Agreement"), pursuant to which Company
may have incurred, and may in the future incur, certain obligations to Panico;
WHEREAS, the Employment Agreement provides for the employment of
Panico by Company, and Panico has been an employee of Company, since
the date of the Employment Agreement;
WHEREAS, Panico may have incurred certain obligations to Company
in connection with his service as an employee of Company;
WHEREAS, Panico and the Company, in consideration of the mutual
agreements and covenants set forth herein, desire to release each other from
the Employment Agreement on the terms and conditions of this Mutual Release
and Waiver;
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto hereby agree as follows:
I. MUTUAL RELEASE AND WAIVER
PANICO AGREES TO RELEASE, REMISE, ACQUIT AND DISCHARGE COMPANY
AND ITS OFFICERS, AGENTS, EMPLOYEES, GUARANTORS, CONSULTANTS, INDEPENDENT
CONTRACTORS, ATTORNEYS, ADVISERS, SUCCESSORS AND ASSIGNS (THE "SPECTRUM
GROUP"), JOINTLY AND SEVERALLY, FROM ANY AND ALL CLAIMS, KNOWN OR
UNKNOWN, WHICH PANICO, HIS HEIRS, SUCCESSORS, OR ASSIGNS HAVE, OR MAY NOW
OR IN THE FUTURE HAVE, AGAINST ANY MEMBER OF THE SPECTRUM GROUP AND ANY
AND ALL LIABILITY WHICH ANY MEMBER OF THE SPECTRUM GROUP HAS, OR MAY NOW
OR IN THE FUTURE HAVE TO PANICO, WHETHER DENOMINATED CLAIMS, DEMANDS,
CAUSES OF ACTION, OBLIGATIONS, DAMAGES OR LIABILITIES, ARISING FROM ANY AND
ALL BASES, INCLUDING BUT NOT LIMITED TO ANY CLAIMS UNDER ANY POLICY,
AGREEMENT, ARRANGEMENT OR PRACTICE OF OR WITH ANY MEMBER OF THE
SPECTRUM GROUP (INCLUDING ANY INDEMNIFICATION AGREEMENT OR OBLIGATION) OR
ANY FEDERAL, STATE, OR LOCAL LAW OR REGULATION, RELATING TO ANY MATTER,
CAUSE OR THING WHATSOEVER FROM THE BEGINNING OT THE WORLD TO THE DATE OF
THIS MUTUAL RELEASE AND WAIVER, INCLUDING, WITHOUT LIMITATION, ANY SUCH
CLAIMS THAT ARISE OUT OF OR RELATE TO (i) PANICO'S RELATIONSHIP WITH THE
SPECTRUM GROUP, (ii) THE TERMINATION OF SUCH RELATIONSHIP OR (iii) THE
EMPLOYMENT AGREEMENT, BUT EXCLUDING (i) ANY CLAIMS, IF ANY, MADE FOR
INDEMNIFICATION PURSUANT TO PARAGRAPH 8 OF THE EMPLOYMENT AGREEMENT AND
(ii) PANICO'S RIGHTS TO PURCHASE COMMON STOCK PURSUANT TO PRESENTLY VESTED
OPTIONS ISSUED TO PANICO TO PURCHASE THE COMPANY'S COMMON STOCK IN
ACCORDANCE WITH THE TERMS OF THE PLAN UNDER WHICH SUCH OPTIONS HAVE BEEN
GRANTED AND THE TREATMENT OF SUCH OUTSTANDING OPTIONS IN THE COMPANY'S
PLAN OF REORGANIZATION. THIS RELEASE IS FOR ANY RELIEF, NO MATTER HOW
DENOMINATED, INCLUDING, BUT NOT LIMITED TO, WAGES, BACK PAY, FRONT PAY,
COMPENSATORY DAMAGES OR PUNITIVE DAMAGES. PANICO FURTHER AGREES (i) THAT
HE WILL NOT FILE OR PERMIT TO BE FILED ON HIS BEHALF ANY SUCH CLAIM AND (ii)
THAT HE AND THE COMPANY WILL EACH EXECUTE A GENERAL RELEASE SUBSTANTIALLY
IN THE FORM EXECUTED BY OTHER FORMER OFFICERS AND DIRECTORS WITH RESPECT
TO INDEMNIFICATION IN CONNECTION WITH SETTLEMENT OF THE CLASS ACTION
DESCRIBED IN PARAGRAPH II BELOW.
THE SPECTRUM GROUP AGREES TO RELEASE, REMISE, ACQUIT AND DISCHARGE
PANICO AND HIS HEIRS, SUCCESSORS AND ASSIGNS (THE "PANICO GROUP"), JOINTLY
AND SEVERALLY, FROM ANY AND ALL CLAIMS, KNOWN OR UNKNOWN, WHICH THE
SPECTRUM GROUP HAS, OR MAY NOW OR IN THE FUTURE HAVE, AGAINST ANY MEMBER
OF THE PANICO GROUP AND ANY AND ALL LIABILITY WHICH ANY MEMBER OF THE
PANICO GROUP HAS, OR MAY NOW OR IN THE FUTURE HAVE TO THE GLOBAL GROUP,
WHETHER DENOMINATED CLAIMS, DEMANDS, CAUSES OF ACTION, OBLIGATIONS,
DAMAGES OR LIABILITIES, ARISING FROM ANY AND ALL BASES, INCLUDING BUT NOT
LIMITED TO ANY CLAIMS UNDER ANY POLICY, AGREEMENT, OR ARRANGEMENT OR ANY
FEDERAL, STATE, OR LOCAL LAW OR REGULATION, RELATING TO ANY MATTER, CAUSE
OR THING WHATSOEVER FROM THE BEGINNING OF THE WORLD TO THE DATE OF THIS
MUTUAL RELEASE AND WAIVER, BUT EXCLUDING ANY RIGHT TO SETOFF OR
COUNTERCLAIM AS TO A CLAIM FOR INDEMNIFICATION BY PANICO. THIS RELEASE IS
FOR ANY RELIEF, NO MATTER HOW DENOMINATED. THE SPECTRUM GROUP FURTHER
AGREES THAT IT WILL NOT FILE OR PERMIT TO BE FILED ON ITS BEHALF ANY SUCH
CLAIM.
II. Representations and Warranties of Panico
In order to induce the Company to execute and perform this agreement,
Panico does hereby represent and warrant the he is not aware of any pending
claims, whether asserted, unasserted or otherwise, that would give rise to a
claim for indemnification under Paragraph 8 of the Employment Agreement
other than the class action litigation entitled In re Spectrum Information
Technologies, Inc. Securities Litigation, (U.S.D.C. Eastern District
of New York, Civil Action No. 93-2295).
III. Identified Consideration
In consideration for the mutual release evidenced hereby, the Company
shall within seven (7) days following bankruptcy court approval of this
agreement as set forth in paragraph V(c) pay Panico the sum of one hundred
and thirty thousand dollars ($130,000.00) subject to applicable withholding
and taxes and the Company shall pay the premiums associated with Panico's
medical and dental benefits plans as generally offered to its employees for
a period of twelve (12) months from the effective date of this agreement.
Panico acknowledges and agrees that the foregoing amounts are in addition
to any amount to which he would otherwise be entitled from the Company.
IV. No Admission
(a) The Company admits no liability of any sort to Panico,
and nothing herein is intended to, or shall be deemed to, constitute an
admission of liability of any kind by the
Spectrum Group.
(b) Panico admits no liability of any sort to the Company,
and nothing herein is intended to, or shall be deemed to, constitute an
admission of liability of any kind by Panico.
V. Third-Party Beneficiary Rights
Panico agrees that the terms of this Mutual Release and Waiver shall
inure to the benefit of and shall be enforceable by each member of the
Spectrum Group, each of whom is intended to be a third-party beneficiary
hereof, and its respective successors and assigns.
VI. General Provisions
(a) This Mutual Release and Waiver constitutes the entire
understanding of Company and Panico with respect to the subject matter
hereof, and supersedes all prior understandings, written or oral, except
as expressly provided herein. The terms of this Mutual Release and Waiver
may be changed, modified or discharged only by an instrument in writing
signed by the parties hereto. A failure of a party to insist on strict
compliance with any provision of this Mutual Release and Waiver shall not
be deemed a waiver of such provision or any other provision hereof.
In the event that any provision of this Mutual Release and Waiver is
determined to be so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
(b) This Mutual Release and Waiver shall be construed, enforced
and interpreted in accordance with and governed by the laws of the State of
New York without reference to the principles and conflicts of law.
The courts of New York shall have jurisdiction to entertain
any action arising hereunder.
(c) Panico acknowledges that he has been given more than
21 days to consider this agreement and eight days to revoke his agreement
hereto.
(d) The Company and Pancio acknowledge that the Company shall
file an application with the United States Bankruptcy Court for the Eastern
District of New York to enter an Order approving the within agreement in the
Company's pending bankruptcy case, In re Spectrum Information Technologies,
Inc. et al., Debtors (Proc. Consol. Case No. 95-
10690).
(e) The Company believes that approval of the within agreement
is in its best interest, and in the best interest of its bankruptcy estate
and creditors. The Company and Panico acknowledge that unless and until the
within Release and Waiver is approved by the Bankruptcy Court on or before
January 31, 1996 the terms hereof are not effective. In the event that the
Release and Waiver is not approved by the bankruptcy court by January 31,
1996, Panico expressly reserves the right to file a proof of claim,
the filing of which, the Company agrees, will not unduly prejudice it or the
estate, and will not unduly delay the administration of the bankruptcy case,
and the Company expressly reserves its right to object to or seek to
disallow such claim for any other reason.
VII. Knowing and Voluntary Waiver
Panico and the Company each agree and acknowledge that they
have read this Mutual Release and Waiver, have consulted with an attorney of
his or its choosing with respect hereto and completely understands the terms
and consequences hereof and that the execution of this Mutual Release and
Waiver is his or its knowing, free and voluntary act.
______________________________________
Albert D. Panico
SPECTRUM INFORMATION TECHNOLOGIES, INC.
______________________________________
By: Donald J. Amoruso,
Chief Executive Officer
RELEASE AND WAIVER OF GUS PETRUZZELLI
This Release and Waiver is made as of the 13th day of
December, 1995, between Gus Petruzzelli ("Petruzzelli") and
Spectrum Information Technologies, Inc. (the "Company").
WHEREAS, Petruzzelli and Company have entered into an
Employment Agreement, dated March 1, 1994 (the "Employment
Agreement"), pursuant to which Company may have incurred, and
may in the future incur, certain obligations to Petruzzelli;
WHEREAS, the Employment Agreement provides for the
employment of Petruzzelli by Company, and Petruzzelli has been
an employee of Company, since the date of the Employment
Agreement;
WHEREAS, Petruzzelli, in consideration of the mutual
agreements and covenants set forth herein, desires to release
Company from the Employment Agreement on the terms and
conditions of this Release and Waiver;
NOW, THEREFORE, for good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto
hereby agree as follows:
I. RELEASE AND WAIVER
PETRUZZELLI AGREES TO RELEASE, REMISE, ACQUIT AND
DISCHARGE COMPANY AND ITS OFFICERS, AGENTS, EMPLOYEES,
GUARANTORS, CONSULTANTS, INDEPENDENT CONTRACTORS, ATTORNEYS,
ADVISERS, SUCCESSORS AND ASSIGNS (THE "SPECTRUM GROUP"),
JOINTLY AND SEVERALLY, FROM ANY AND ALL CLAIMS, KNOWN OR
UNKNOWN, WHICH PETRUZZELLI, HIS HEIRS, SUCCESSORS, OR ASSIGNS
HAVE, OR MAY NOW OR IN THE FUTURE HAVE, AGAINST ANY MEMBER OF
THE SPECTRUM GROUP AND ANY AND ALL LIABILITY WHICH ANY MEMBER
OF THE SPECTRUM GROUP HAS, OR MAY NOW OR IN THE FUTURE HAVE TO
PETRUZZELLI, WHETHER DENOMINATED CLAIMS, DEMANDS, CAUSES OF
ACTION, OBLIGATIONS, DAMAGES OR LIABILITIES, ARISING FROM ANY
AND ALL BASES, INCLUDING BUT NOT LIMITED TO ANY CLAIMS UNDER
ANY POLICY, AGREEMENT, ARRANGEMENT OR PRACTICE OF OR WITH ANY
MEMBER OF THE SPECTRUM GROUP (INCLUDING ANY INDEMNIFICATION
AGREEMENT OR OBLIGATION) OR ANY FEDERAL, STATE, OR LOCAL LAW
OR REGULATION, RELATING TO ANY MATTER, CAUSE OR THING
WHATSOEVER FROM THE BEGINNING OT THE WORLD TO THE DATE OF THIS
MUTUAL RELEASE AND WAIVER, INCLUDING, WITHOUT LIMITATION, ANY
SUCH CLAIMS THAT ARISE OUT OF OR RELATE TO (i) PETRUZZELLI'S
RELATIONSHIP WITH THE SPECTRUM GROUP, (ii) THE TERMINATION OF
SUCH RELATIONSHIP OR (iii) THE EMPLOYMENT AGREEMENT, BUT
EXCLUDING EMPLOYEE'S RIGHTS REGARDING PRESENTLY VESTED OPTIONS
ISSUED TO EMPLOYEE TO PURCHASE EMPLOYER'S COMMON STOCK IN
ACCORDANCE WITH THE TERMS OF THE PLAN UNDER WHICH SUCH
OPTIONS HAVE BEEN GRANTED AND THE TREATMENT OF SUCH
OUTSTANDING OPTIONS IN EMPLOYER'S PLAN OF REORGANIZATION.
THIS RELEASE IS FOR ANY RELIEF, NO MATTER HOW DENOMINATED,
INCLUDING, BUT NOT LIMITED TO, WAGES, BACK PAY, FRONT PAY,
COMPENSATORY DAMAGES OR PUNITIVE DAMAGES. PETRUZZELLI FURTHER
AGREES THAT HE WILL NOT FILE OR PERMIT TO BE FILED ON HIS
BEHALF ANY SUCH CLAIM.
II. Identified Consideration
In consideration for the release and waiver evidenced
hereby, the Company shall within seven (7) days following
bankruptcy court approval of this agreement as set forth in
paragraph VI(c) pay Petruzzelli the sum of one hundred
thousand dollars ($100,000.00), subject to applicable
withholding and taxes. Petruzzelli acknowledges and agrees
that the foregoing amount is in addition to any amount to
which he would otherwise be entitled from the Company.
III. Return of Benefits
Petruzzelli acknowledges and agrees that for a period of
six (6) months following the effective date of this agreement
he will immediately notify the Company if he accepts
employment or performs services as a consultant, independent
contractor or otherwise for the Company, any of its
subsidiaries or any entities that have been subsidiaries of
the Company within the one year prior to the effective date of
this agreement and will return all payments received by
Petruzzelli pursuant to this Release and Waiver.
IV. No Admission
The Company admits no liability of any sort to
Petruzzelli, and nothing herein is intended to, or shall be
deemed to, constitute an admission of liability of any kind by
the Spectrum Group.
V. Third-Party Beneficiary Rights
Petruzzelli agrees that the terms of this Release and
Waiver shall inure to the benefit of and shall be enforceable
by each member of the Spectrum Group, each of whom is intended
to be a third-party beneficiary hereof, and its respective
successors and assigns.
VI. General Provisions
(a) This Release and Waiver constitutes the entire
understanding of Company and Petruzzelli with respect to the
subject matter hereof, and supersedes all prior
understandings, written or oral, except as expressly provided
herein. The terms of this Release and Waiver may be changed,
modified or discharged only by an instrument in writing signed
by the parties hereto. A failure of a party to insist on
strict compliance with any provision of this Release and
Waiver shall not be deemed a waiver of such provision or any
other provision hereof. In the event that any provision of
this Release and Waiver is determined to be so broad as to be
unenforceable, such provision shall be interpreted to be only
so broad as is enforceable.
(b) This Release and Waiver shall be construed,
enforced and interpreted in accordance with and governed by
the laws of the State of New York without reference to the
principles and conflicts of law. The courts of New York shall
have jurisdiction to entertain any action arising hereunder.
(c) Petruzzelli acknowledges that he has been given
more than 21 days to consider this agreement and eight days to
revoke his agreement hereto. This agreement shall be
submitted to and only become effective upon the approval by
the United States Bankruptcy Court for the Eastern District of
New York.
VII. Knowing and Voluntary Waiver
Petruzzelli agrees and acknowledges that he has read
this Release and Waiver, has consulted with an attorney of his
choosing with respect hereto and completely understands the
terms and consequences hereof and that the execution of this
Release and Waiver is his or its knowing, free and voluntary
act.
______________________________________
Gus Petruzzelli
SPECTRUM INFORMATION TECHNOLOGIES, INC.
______________________________________
By: Donald J. Amoruso,
Chief Executive Officer
Spectrum Information Technologies, Inc. and Subsidiaries
Subsidiaries of the Registrant
March 31, 1996
Organized under
Name of Subsidiary the Laws of Business Name
- ------------------ --------------- -------------
Spectrum Cellular Corp. Delaware Spectrum Cellular
Computers Unlimited
of Wisconsin, Inc. Wisconsin Computer Bay
Dealer Service
Business Systems, Inc. Delaware Data One
CONSENT OF BDO SEIDMAN, LLP
Spectrum Information Technologies, Inc.
Purchase, New York
We hereby consent to the incorporation by reference and inclusion
in the Prospectus constituting a part of this Registration
Statement of our report dated June 18, 1996, relating to the
consolidated financial statements and schedule of Spectrum
Information Technologies, Inc. and subsidiaries appearing in the
Company's Annual Report on Form 10-K for the year ended March 31,
1996.
BDO Seidman, LLP
June 24, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM SPECTRUM INFORMATION TECHNOLIGIES, INC.
AND SUBSIDIARIES (DEBTORS IN POSSESSION) CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 13,002
<SECURITIES> 873
<RECEIVABLES> 1,517
<ALLOWANCES> 80
<INVENTORY> 0
<CURRENT-ASSETS> 15,541
<PP&E> 426
<DEPRECIATION> 222
<TOTAL-ASSETS> 16,105
<CURRENT-LIABILITIES> 5,029
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0
0
<COMMON> 77
<OTHER-SE> 2,012
<TOTAL-LIABILITY-AND-EQUITY> 16,105
<SALES> 8,458
<TOTAL-REVENUES> 8,458
<CGS> 290
<TOTAL-COSTS> 7,881
<OTHER-EXPENSES> (1,789)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,942
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,160)
<DISCONTINUED> 4,102
<EXTRAORDINARY> 0
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<NET-INCOME> 2,942
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<EPS-DILUTED> .04
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