UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period
from ________________ to _______________
Commission File Number 0-15596
SPECTRUM INFORMATION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1940923
(State of (I.R.S. Employer
incorporation) Identification No.)
2700 Westchester Avenue, Purchase, New York 10577
(Address of principal executive offices) (Zip Code)
(914) 251-1800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
YES X NO
--- ---
As of July 30, 1997, the registrant had outstanding approximately
1,127,000 shares of its Common Stock, par value $.001 per share.
<PAGE>
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1997
INDEX
PART I. FINANCIAL INFORMATION Page No.
Consolidated Balance Sheets 1
Consolidated Statements of Loss 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION 14
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands)
Assets June 30, 1997 March 31, 1997
(Unaudited)
- -----------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 1,846 $ 3,132
Marketable securities 2,195 2,176
Accounts receivable
(net of allowance for
doubtful accounts of $86) 172 288
Prepaid expenses and other
current assets 344 239
--------- ---------
Total current assets 4,557 5,835
--------- ---------
Property and equipment, at cost:
Furniture, fixtures and equipment 556 542
Less - accumulated depreciation (365) (334)
--------- ---------
Net property and equipment 191 208
--------- ---------
Total assets $ 4,748 $ 6,043
========= =========
See accompanying notes to consolidated financial statements.
1
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands)
Liabilities and Stockholders'
Equity June 30, 1997 March 31, 1997
(Unaudited)
- -----------------------------------------------------------------
Current Liabilities
Accounts payable $ 239 $ 49
Accrued liabilities 1,192 1,243
Reserve for unpaid
Chapter 11 claims - 465
--------- ---------
Total current liabilities 1,431 1,757
Reserve for Chapter 11
and other stock claims 1,370 2,125
--------- ---------
Total liabilities 2,801 3,882
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Class A Convertible Preferred
Stock, $.001 par value,
1,500 shares authorized and
1,089 and 1,022 issued and
outstanding, respectively 1 1
Common stock, $.001 par value,
10,000 shares authorized
and 1,127 and 1,022 issued
and outstanding, respectively 1 1
Paid-in capital 70,932 70,170
Accumulated deficit (68,677) (67,681)
--------- ---------
2,257 2,491
Treasury stock, 1 shares
at cost, respectively (300) (300)
Unrealized loss on marketable
securities (10) (30)
--------- ---------
Total stockholders' equity 1,947 2,161
--------- ---------
Total liabilities and
stockholders' equity $ 4,748 $ 6,043
========= =========
See accompanying notes to consolidated financial statements.
2
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Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Statements of Loss
(Amounts in thousands, except per share amounts)
Three months ended June 30, 1997 1996
(Unaudited) (Unaudited)
- -----------------------------------------------------------------
Revenues:
Licensing revenue $ 112 $ 758
Merchandise sales, net 53 50
--------- ---------
Total revenues 165 808
--------- ---------
Operating costs and expenses:
Cost of revenues 23 24
Selling, general and
administrative 1,199 1,334
--------- ---------
Total operating costs
and expenses 1,222 1,358
--------- ---------
Operating loss $ (1,057) (550)
--------- ---------
Chapter 11 administrative expenses - (329)
--------- ---------
Other income, net 61 96
--------- ---------
Net loss $ (996) $ (783)
========= =========
Net loss per common share: $ (.92) $ (.75)
========= =========
See accompanying notes to consolidated financial statements.
3
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Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
Three months ended June 30, 1997 1996
(Unaudited) (Unaudited)
- -----------------------------------------------------------------
Cash flow from operating
activities:
Net loss $ (996) $ (783)
Adjustments to reconcile
net loss to net cash used by
continuing activities:
Depreciation and amortization 31 30
(Increase) decrease in:
Accounts receivable 116 712
Prepaid expenses and
other assets (104) (157)
Increase (decrease) in:
Accounts payable, accrued
liabilities and other
liabilities (319) (1,107)
Liabilities subject to
compromise - (124)
- -----------------------------------------------------------------
Net cash used by
operating activities (1,272) (1,429)
- -----------------------------------------------------------------
Cash flows from investing
activities:
Capital expenditures (14) (24)
- -----------------------------------------------------------------
Net cash used by
investing activities (14) (24)
- -----------------------------------------------------------------
Net decrease in cash and
cash equivalents (1,286) (1,453)
Cash and cash equivalents,
beginning of year 3,132 13,123
- -----------------------------------------------------------------
Total cash and cash equivalents,
end of year $ 1,846 $ 11,670
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year
for interest $ - $ -
Cash paid during the year
for income taxes $ 1 $ 2
See accompanying notes to consolidated financial statements.
4
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
(a) Business
Spectrum Information Technologies, Inc., a Delaware
corporation ("Spectrum"), and its subsidiaries
(collectively, the "Company"), own a portfolio of
patents (legacy assets) relating to commercially
practicable methods of data transmission over
circuit-switched cellular networks. For several years
preceding current management, Spectrum was operating as
a holding company of several operating subsidiaries
with primary emphasis on being an intellectual property
company focused on generating revenues from royalties
associated with the licensing of its proprietary
technology. Since January 1995, Spectrum's new
management has been implementing strategies to resolve
the many financial, legal and litigation problems
inherited from prior years and to refocus the business
direction of the Company.
While continuing to rely on license fees, royalties and
the sale of products related to its patents for revenues
(the "legacy business"), Spectrum's business objective
is to become a key provider of value-added Internet
remote access communications software and related
products. (See Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of
Operations.)
Spectrum's proprietary wireless data transmission technology
enables transmission of data between portable computer
devices over existing analog cellular telephone
networks. Spectrum licenses its technology to leading
manufacturers of integrated circuits, modems and other
related data communications product providers. Spectrum
also develops direct connect cellular data transmission
activation kits (cellphone software drivers and cables)
and markets them to some of the Company's licensees.
These two components - marketing of activation kits and
technology licensing - are the current sources of
operating revenues.
Spectrum hired two senior technologists at the end of fiscal
1996 to formulate product strategy and to implement
product development plans consistent with Spectrum's
new strategy. The Company is currently adding
engineering staff through new hires or by outsourcing
technical consultants with the necessary skills to
support the business objectives.
The Company expects to continue to experience operating
losses while it attempts to successfully develop and
market a new line of remote access communications
software and related products to increase revenues.
The Company consummated its plan of reorganization under
Chapter 11 of the United States Bankruptcy Code on
March 31, 1997. As part of the plan of reorganization,
the Company consolidated Spectrum's bankruptcy estate
with that of Spectrum Cellular Corporation
("Cellular"). Spectrum and Cellular are now conducting
the Company's core business on an operating basis as a
single entity.
(b) Basis of Presentation
The accompanying consolidated financial statements of the
Company have been prepared on the basis that it is a
going concern, which contemplates the realization of
assets and the satisfaction of liabilities, except as
otherwise disclosed, in the normal course of business.
However, because of the Company's recurring losses from
continuing operations, such realization of assets and
liquidation of liabilities is subject to significant
uncertainty. Further, the Company's ability to continue
as a going concern is dependent upon the achievement of
the business objectives described in Note 1(a) and
profitable operations therefrom and the ability to
generate sufficient cash from operations and financing
sources to meet obligations. The Company continues to
monitor expenses in order to conserve cash and is
assessing alternatives to address the continued
negative cash flow associated with its legacy business.
However, there can be no assurance that these
objectives will be met or that acceptable alternatives
will be found. Except as otherwise disclosed, the
consolidated financial statements do not include any
adjustments to reflect the possible future effects on
the recoverability and classification of assets or the
amounts and classification of liabilities that may
result from the possible inability of the Company to
continue as a going concern.
(c) Use of Estimates
In preparing financial statements in conformity with
generally accepted accounting principles, management is
required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and
expenses during the reporting period. Actual results
could differ from those estimates.
5
<PAGE>
(d) Principles of Consolidation
These consolidated financial statements include the accounts
and results of operations of the Company and its wholly
owned subsidiary Cellular as of and for the three
months ended June 30, 1997 and 1996. The Company
discontinued the operations of its Data One subsidiary
during fiscal year 1994 and its Computer Bay subsidiary
during fiscal year 1995. Data One was liquidated in
Chapter 11 on October 4, 1996. Upon conversion of
Computer Bay's Chapter 11 case to a case under Chapter
7 on May 25, 1995, which mandates the liquidation of
Computer Bay, control of Computer Bay has been
transferred from the Company to the Computer Bay
trustee. As a result, the net liabilities of Computer
Bay have been eliminated from the consolidated
financial statements of the Company. All intercompany
transactions have been eliminated.
The unaudited interim consolidated financial statements
have been prepared on a basis substantially consistent
with the audited statements for the fiscal year ended
March 31, 1997. Certain information and footnote
disclosures normally included in financial statements
were prepared in accordance with generally accepted
accounting principles and have been condensed or
omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The Company
believes that the disclosures contained herein are
adequate to make the information presented not
misleading. The unaudited financial statements should
be read in conjunction with the audited financial
statements and accompanying notes in the Company's
annual report on Form 10-K for the fiscal year ended
March 31, 1997.
In the opinion of management, the accompanying unaudited
consolidated financial statements reflect all
adjustments that are necessary to present fairly the
Company's financial position as of June 30, 1997, and
the results of its operations and its cash flows for
the interim periods presented.
(e) Income (Loss) Per Common Share
The computation of income per common share is based on the
weighted average number of common shares and common
stock equivalents (convertible preferred shares, stock
options and warrants), if applicable, assumed to be
outstanding during the year. Common stock equivalents
were not included in the computation of weighted
average shares outstanding when determining loss per
common share because such inclusion would be
anti-dilutive. The weighted average number of shares
used in the computation of loss per common share for
the quarters ended June 30, 1997 and 1996 are
approximately 1,081,000, and 1,022,000, respectively.
All references in the consolidated financial statements
with regard to average number of shares have been
calculated giving retroactive effect to the 75:1
reverse stock split effective as of March 31, 1997, as
part of the Company's plan of reorganization.
In March 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting
Standard ("SFAS") No. 128, "Earnings per Share" which
is effective for fiscal years ending after December 15,
1997. The Company will adopt SFAS No. 128 for the year
ending March 31, 1998. The adoption of this standard is
not expected to have a material impact on the Company's
income (loss) per common share computation.
2. Subsequent Event
On July 10, 1997, the United States Patent and Trademark
Office notified the Company that, at the request of
Compaq Computer Corporation ("Compaq"), it had declared
an interference proceeding to establish whether the
Company or Compaq is the inventor of certain claimed
subject matter within the Company's issued U.S. Patent
No. 5,249,218, one of the Company's portfolio of issued
patents relating to wireless data transmission. The
interference is in its earliest stages and neither
Compaq nor Spectrum have submitted arguments supporting
their respective claim of ownership to the Patent
Office. The Company does not expect the interference
proceeding to materially impact Spectrum's legacy
business because the Company believes that most
commercially practicable methods to transmit data via
circuit switched cellular networks are covered by other
claims in the '218 Patent or the Company's other issued
patents. The proceeding does not relate to the
Company's Internet software development.
6
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
THIS REPORT CONTAINS FORWARD LOOKING STATEMENTS THAT ARE
BASED ON CURRENT EXPECTATIONS ABOUT SPECTRUM'S BUSINESS,
ITS BUSINESS STRATEGY AND MANAGEMENT'S BELIEFS AND
ASSUMPTIONS. WORDS SUCH AS "EXPECTS," "ANTICIPATES,"
"INTENDS," "POTENTIAL," "BELIEVES" AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. THESE
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO SIGNIFICANT RISK AND UNCERTAINTY AND ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM WHAT IS EXPRESSED. A
DISCUSSION OF THE RISK FACTORS REGARDING THE IMPLEMENTATION
OF THE COMPANY'S BUSINESS STRATEGY IS SET FORTH HEREIN.
ADDITIONAL INFORMATION REGARDING THE COMPANY'S STRATEGY AND
ASSOCIATED RISKS IS INCLUDED IN THE COMPANY'S ANNUAL REPORT
ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
Business
The Company owns a portfolio of patents (legacy assets)
relating to commercially practicable methods of data transmission
over circuit-switched cellular networks. For several years
preceding current management, Spectrum was operating as a holding
company of several operating subsidiaries with primary emphasis
on being an intellectual property company focused on generating
revenues from royalties associated with the licensing of its
proprietary technology. Since January 1995, Spectrum's new
management has been implementing strategies to resolve the many
financial and legal problems inherited from prior years and to
refocus the business direction of the Company. One of the
Company's strategies was to seek protection and reorganize under
Chapter 11 of the United States Bankruptcy Code. On March 31,
1997, the Company consummated its plan of reorganization and
emerged from bankruptcy (See Consummation of the Plan of
Reorganization). While continuing to rely on license fees,
royalties and the sale of products related to its patents for
revenues (the legacy business), Spectrum's business objective is
to become a provider of value-added Internet remote access
communications software and related products.
Spectrum's proprietary wireless data transmission
technology enables transmission of data between portable computer
devices over existing analog cellular telephone networks.
Spectrum licenses its technology to leading manufacturers of
integrated circuits and modems and other related data
communications product providers. Spectrum also markets direct
connect cellular data transmission activation kits (cellphone
software drivers and cables) to some of the Company's licensees.
These two components marketing of activation kits and technology
licensing - comprised the Company's operating revenues during
this fiscal year. The Company expects to continue to experience
operating losses while it attempts to successfully develop and
market a new line of remote access communications software and
related products to increase revenues. (See Liquidity and Capital
Resources.)
In connection with the continued operating losses
associated with its legacy business, Spectrum has considered
several options that include, but are not limited to,
restructuring certain elements of its licensing program,
converting certain existing licenses to paid up agreements, and
engaging one or more distributors to take over the activation kit
sales business. Although management does not believe that the
successful implementation of any or all of these alternatives
will be sufficient to completely offset operating losses,
management expects that implementation will reduce operational
expenses and increase working capital necessary to help fund the
Company's remote access software development efforts.
Spectrum is investigating one such alternative with a
leading manufacturer of modem chipsets. The parties are
discussing a framework which would convert the manufacturer's
existing master license to a broader license under Spectrum's
technology, which would also allow the purchasers of such
chipsets (i.e. modem manufacturers) access to Spectrum's
technology without the need for an additional sublicense. In
exchange, Spectrum would receive an up front payment and other
consideration. These discussions are subject to resolution of
several outstanding issues and the completion of a definitive
agreement. There can be no assurance that a new agreement will be
consummated.
As described in the Company's Annual Report on Form 10-K,
Spectrum's remote access software, branded as the INTELLIGENT
PIPE(TM), is currently in the development stage. The INTELLIGENT
PIPE(TM) combines proprietary architecture with optimized
processing techniques and is intended to enable more efficient
information transfer over wide area networks using Internet and
Intranet technologies. The INTELLIGENT PIPE(TM) is designed to
minimize the inefficiencies inherent in Internet interactions
between standard Web browsers and Web servers. The pipe attacks
the problem of limited bandwidth on the final connection between
the remote user and the Internet or corporate Intranet. Developed
primarily for dial up access, this pipe provides persistent
connections, end to end control of the data stream and uses
Content Management Agents (CMAs) that restructure the data on one
side of an Internet connection and reconstitute it at the other
side. This technology can be adopted to provide a wide variety of
value added capabilities between network connected clients and
servers. Spectrum's initial set of CMAs are designed to accelerate
Web browsing speed for most end users by at least a factor of two
for modem connections with advertised speeds up to 56K. The
7
<PAGE>
INTELLIGENT PIPE(TM) is intended to address communications
solutions for remote access in the corporate environment and the
service provider markets.
As with any client/server software, implementation is
complex and time consuming. Spectrum's current goals include
having a beta version product available later this calendar year
and a product for commercial shipment by the end of the 1998
fiscal year. The Company has a demonstration version of its
product that it expects to selectively demonstrate to potential
customers at the ISP CON trade show in August 1997. The
demonstration version improves the Web browsing speed by nearly
the Company's stated objective. The software is in the
development stage and requires refinement of its performance and
user interface characteristics and improved robustness before it
will be suitable for beta testing or commercial introduction.
There can be no assurances that Spectrum will successfully
complete the development of this software and introduce it
according to Spectrum's development schedule. Even if the
software is completed and performs up to the Company's
expectations, there can be no assurances that a market will
develop for the Company's product or that competing technologies
or products will not capture the opportunity before Spectrum.
(See Risk Factors).
Consummation of the Plan of Reorganization
On January 26, 1995 (the "Petition Date"), as part of
management's effort to stem the Company's substantial financial
losses and focus on its core technology, the Company, together
with its wholly-owned subsidiaries, Computers Unlimited of
Wisconsin, Inc., a Wisconsin corporation d/b/a Computer Bay
("Computer Bay"), Dealer Services Business Systems, Inc., a
Delaware corporation d/b/a Data One ("Data One") and Spectrum
Cellular Corporation ("Cellular") (collectively, the "Debtors"),
filed petitions for relief under Chapter 11 of the Federal
Bankruptcy Code (the "Chapter 11 proceeding"). A fourth wholly
owned subsidiary Spectrum Global Services, Inc. ("Spectrum
Global"), a Delaware Corporation, did not file for bankruptcy and
was sold by the Company effective October 17, 1995. Spectrum
Global was not essential to the Company's legacy business or its
current direction. Upon motion by the Debtors, the United States
Bankruptcy Court for the Eastern District of New York (the
"Bankruptcy Court") converted the action for Computer Bay to a
case under Chapter 7 of the Bankruptcy Code. A trustee is
overseeing the liquidation of Computer Bay's assets and the
Company no longer has control over the Computer Bay estate. Data
One consummated a separate liquidating plan of reorganization on
October 4, 1996, which had been unanimously supported by Data
One's voting creditors.
In March 1996, the Bankruptcy Court approved the Company's
Third Amended Disclosure Statement (the "Disclosure Statement")
with respect to the Third Amended Consolidated Plan of
Reorganization Proposed by Spectrum and Cellular (the "Plan")
dated as of March 18, 1996 finding the Disclosure Statement
adequate for distribution and vote by interested parties. As
contemplated by the Plan, the bankruptcy estates of Spectrum and
Cellular have been substantively consolidated. On August 14,
1996, the United States Bankruptcy Court of the Eastern District
of New York entered an order confirming the Plan, as amended. On
March 31, 1997, the Company consummated the Plan (the "Effective
Date"). The Plan provided all administrative creditors with full
payment (unless a lesser amount was agreed upon or ordered by the
Bankruptcy Court) and all general unsecured creditors with 100%
of the value of their claims plus 6% interest per annum from the
filing date thereon. It also settled the class action lawsuits of
approximately $676,000,000 filed against the Company by the
payment by the Company of $250,000 and the delivery of
approximately 45% of the equity ownership in Spectrum to a
trustee to be distributed to the members of the class. In
addition, under the settlement, the plaintiffs are to receive the
proceeds, net of certain fees and expenses, from insurance
policies covering the liabilities of the Company's directors and
officers and, as a result of court supervised negotiations and at
the recommendation of the District Court, approximately
$1,350,000 (in cash or publicly traded securities) from the
various individual defendants in the action. Although existing
Spectrum shareholders were substantially diluted under the terms
of the Plan, such shareholders obtained the majority of the 45%
equity ownership in Spectrum set aside for existing shareholders
and certain creditors. The Plan also called for management,
employees and non-executive directors of the Company
participating in developing the Plan to receive the remaining 10%
ownership.
8
<PAGE>
As part of the plan of reorganization, Spectrum
consolidated the Company's bankruptcy estate with that of
Cellular. Spectrum and Cellular are now conducting the Company's
core business on an operating basis as a single entity.
Results of Operations
The following table sets forth, for the periods indicated,
the percentage relationship that certain items bear to revenue.
This summary provides trend data relating to the Company's normal
recurring operations. Amounts set forth below reflect the
Company's Data One subsidiary as a discontinued operation.
(Amounts in thousands)
Quarters Ended June 30, 1997 % 1996 %
- -----------------------------------------------------------------
Revenues $ 165 100 $ 808 100
------- ------ ------- ------
Operating costs and
expenses:
Cost of revenues 23 14 24 3
Selling, general and
administrative 1,199 727 1,334 165
------- ------ ------- ------
Total operating costs
and expenses 1,222 741 1,358 168
------- ------ ------- ------
Operating loss $(1,057) (641) $ (550) (68)
======= ====== ======= ======
Revenues
Revenues decreased approximately $643,000 or 80% for the
quarter ended June 30, 1997 as compared to the quarter ended June
30, 1996 primarily due to a decrease in licensing revenue of
approximately $646,000 or 86%. Licensing revenue decreased
primarily because the Company received a $400,000 installment
payment of an up front license fee during the quarter ended June
30, 1996. The Company received the final installment of this up
front fee during the quarter ended September 30, 1996 and
therefore did not receive any payment in the quarter reported.
The licensing revenue for the quarter ended June 30, 1996 also
included the payment of approximately $203,000 for past due
royalties from one of the Company's licensees.
Operating Costs and Expenses
Operating costs and expenses for the three months ended
June 30, 1997 decreased $136,000 or 10% when compared to the
three months ended June 30, 1996 primarily due to decreased
selling, general and administrative expenses of approximately
$135,000 or 10%.
The decrease in selling, general and administrative
expenses for the quarter ended June 30, 1997 was primarily the
result of a decrease in legal fees of $251,000 or 78% offset by
an increase in outside services of approximately $142,000 or 241%
for the quarter ended June 30, 1997 as compared to the quarter
ended June 30, 1996. The decrease in legal fees was primarily due
to the reduction of non-bankruptcy related litigation. Outside
services increased due to the Company hiring independent
contractors to assist in the development of its Internet remote
access communications software.
Operating Loss
For the quarter ended June 30, 1997, the Company's
operating loss increased approximately $507,000 to $1,057,000, as
compared to $550,000 for the quarter ended June 30, 1996. This
92% increase is due to decreased licensing revenues which were
partially offset by decreased selling, general and administrative
expenses.
Other Income and Expense
For the three months ended June 30, 1997, other income
decreased approximately $35,000 or 36% as compared to the three
months ended June 30, 1996 primarily due to a decrease in
interest income of approximately $34,000 or 37%. Interest income
decreased because the Company had lower cash balances for the
quarter ended June 30, 1997 than during the quarter ended June
30, 1996 as a result of creditor payments of approximately
$3,250,000 pursuant to the consummation of the Plan of
Reorganization.
9
<PAGE>
Liquidity and Capital Resources
Since inception, the Company has experienced significant
operating losses from continuing operations and operating cash
flow deficits which ultimately caused the Company to reorganize
under Chapter 11 bankruptcy protection. The Company expects
operating losses to continue until such time as it successfully
develops and markets a new line of communications software. The
Company continues to review expenses in order to conserve cash
and is investigating alternatives to address the continued
negative cash flow associated with its legacy business as well as
continuing to monitor the Company's opportunity to successfully
build revenues from its new software development and marketing
efforts.
During the quarter ended June 30, 1997, working capital
(current assets less current liabilities) decreased by
approximately $952,000 due to a decrease in cash and cash
equivalents of $1,286,000 offset by a decrease in accounts
payable, accrued liabilities and other liabilities of $319,000.
The decrease in cash is due to the payment of approximately
$455,000 in bonus expenses for all employees, primarily in
accordance with Bankruptcy Court approved success bonus and
employment contracts, and approximately $931,000 in operating
expenses.
Net cash used by operating activities decreased from
$1,429,000 for the three months ended June 30, 1996 to $1,272,000
for the quarter ended June 30, 1997 The decrease of $157,000 was
primarily due to a decrease in accounts payable, accrued
liabilities and other liabilities of $788,000 offset by a
decrease of $596,000 in accounts receivable. The decrease in
accounts payable, accrued liabilities and other liabilities is
primarily due to payments of professional services rendered in
connection with the Company's bankruptcy proceedings. The
decrease in accounts receivable relates to installment payments
pursuant to a license agreement entered into during fiscal 1994.
The last of these installments was received in the quarter ended
September 30, 1996.
Net cash used by investing activities decreased $10,000
from $24,000 for the quarter ended June 30, 1996 to $14,000 for
the quarter ended June 30, 1997 due to reduced capital
expenditures. These expenditures primarily relate to equipping
the technical development office in the Boston, Massachusetts
area. Capital expenditures for the year ended March 31, 1998 are
expected to be approximately $125,000.
The Company projects it will have adequate near term (i.e.,
over the next 12 months) capital resources to fund its
operations. Management believes the Company's long-term (i.e.,
beyond 12 months) liquidity depends upon the Company's ability to
develop and sell the INTELLIGENT PIPE(TM) remote access
communications software and related products to generate a
positive cash flow from its reorganized business. The Company's
long term liquidity also depends on its ability to improve the
performance of its legacy business (See Business) and raise
additional capital. The accompanying financial statements have
been prepared assuming the Company will continue as a going
concern, however, there can be no assurance that the Company will
be able to successfully achieve management's plans. The financial
statements do not include any adjustments that might result from
the outcome of these uncertainties.
Recent Accounting Pronouncement
In March 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard
("SFAS") 128, "Earnings per Share" which is effective for fiscal
years ending after December 15, 1997. The Company will adopt SFAS
128 for the year ending March 31, 1998. The adoption of this
standard is not expected to have a material impact on the
Company's income (loss) per common share computation.
Risk Factors
Overview. Spectrum has suffered significant losses from
continuing operations in each fiscal year since inception. Even
after the Company's recent restructuring, management does not
believe that the sales of its existing products and expected
royalty revenues associated with the licensing of its existing
proprietary technology will be sufficient to reverse losses given
the Company's operating performance and expenses. Management
expects to have a continued negative cash flow while the Company
attempts to develop and market a new line of Internet/Intranet
communications software and related products to increase revenue.
This anticipated negative cash flow combined with the Company's
limited capital resources creates a significant risk that the
Company will have difficulty funding the marketing and
development of its communications software with its existing
capital resources. (See Limited Capital Resources).
Risks associated with Spectrum's strategy include, but are
not limited to: improving the financial performance in the legacy
business; overcoming the negative image Spectrum has developed in the
past, and its ability to rebuild credibility in the marketplace;
successfully developing software products that bring value to remote
users of data communications in corporate and Internet service provider
markets; developing new channels for distribution; hiring and retain-
ing 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
10
<PAGE>
Company; realization of market forecasts regarding remote
access (landline and wireless) market growth in the corporate and
service provider market segments; and the ability of the Company
to raise additional capital, if necessary. The following specific
risk factors should be considered in evaluating Spectrum's
ability to achieve a successful turnaround.
Past Operating History. The Company's future must be
considered in light of the risks associated with the past
difficulties and negative press encountered by the Company. To
address these risks, the Company must, among other things,
address the financial performance of its legacy business.
Concurrently, to effectively enter the communications software
market, Spectrum must establish management and technical
credibility with potential customers, continue to attract, retain
and motivate qualified persons, and develop new technologies and
commercialize products and services incorporating such
technologies. There can be no assurance that the Company will be
successful in addressing such risks.
Changing and Segmented Market; Acceptance of the Company's
Products. The market for the Company's remote access Internet
software and related products is substantially and rapidly
changing (primarily due to the Internet phenomena, convergence of
computers, communications and entertainment, deregulation of the
telecommunications industry) and is characterized by both large
established providers and an increasing number of market entrants
who, exploiting market and technology discontinuities and
segmentation, have introduced or developed remote access software
products. As is typical in the case of a growing and changing
industry, demand and market acceptance for recently introduced
products and services are subject to a high level of uncertainty.
While the Company believes that its software and related products
will offer substantial advantages, there can be no assurance that
the Company's products will be successfully developed or become
widely adopted.
Because the market for the Company's existing products and
prospective software products is rapidly changing, it is
difficult to predict the future segmentation and size of this
market. There can be no assurance that the market segments for
the Company's products will develop or that the Company's
products will be adopted. If the market segments fail to develop,
develop more slowly than expected or become saturated with
competitors, or if the Company's products do not achieve market
acceptance, the Company's business, operating results and
financial condition will be materially adversely affected.
Competition. The Company's key current competitors in its
legacy business include Megahertz, a subsidiary of U.S. Robotics,
Motorola, Compaq and AT&T prior to its breakup. Effective
September 30, 1996, AT&T completed the divestiture of Lucent
Technologies, Inc. ("Lucent"), which had previously sold its AT&T
Paradyne unit. Spectrum is engaged in discussions with AT&T,
Lucent and Paradyne regarding the effect of the breakup on an
intellectual property license between AT&T and Spectrum. This
breakup has provided an opportunity to discuss modification to
the existing license agreement between Spectrum and AT&T and new
relationships with the entities that were spun off, however,
there can be no assurance that these discussions will result in
favorable business arrangements. The Company currently considers
Sierra Wireless, Inc. and PCSI (a subsidiary of Cirrus Logic,
Inc.) as other potential competitors primarily due to their
alternative methods of wireless data signal delivery, such as
CDPD. If the Company converts the master license agreement
discussed above (see Business), other companies may also be able
to compete in the legacy business.
The market for remote access Internet software is intensely
competitive and subject to rapid technological change. The
Company expects competition to persist, intensify and increase in
the future. Most of the Company's current and potential
competitors have longer operating histories producing software
products, greater name recognition, significant installed
customer bases and significantly greater financial, technical and
marketing resources than the Company. Such competition could
materially adversely affect the Company's business, operating
results or financial condition. There can be no assurances that
other companies are not developing similar or competing software
and/or hardware products satisfying the same market needs or that
Spectrum's products will become widely accepted in the face of
this competition.
Synergies may exist between the Company and its
competitors. Spectrum is engaged in assessing and evaluating such
synergies and potential partnerships. However, there can be no
assurance that these activities will result in favorable business
arrangements.
New Product Development and Technological Change.
Substantially all of the Company's current and near term revenues
are expected to be derived from the licensing of its proprietary
technology and sale of its associated activation kit products.
Given the limited revenue being generated and expected to be
generated from this existing business, it is essential for
Spectrum to generate revenues from other sources.
The Company's ability to design, develop, test, market and
support its remote access Internet communications software and
related products and enhancements on a timely basis that meet
changing customer needs and respond to technological developments
and emerging industry standards is also critical to the Company's
long term success. Time to market is essential to the success of the
11
<PAGE>
INTELLIGENT PIPE(TM) software products. There can be no
assurance that the Company will successfully complete the
development and marketing of this new software and related
products that meet changing customer needs and respond to such
technological changes or evolving industry standards. Future
sales of the Company's new Internet remote access software
products will be highly dependent on software products that add
substantial value to end users and data communications
infrastructure providers. Also, certain elements of the Company's
new technology may be covered by patents owned by others which
may require licenses. The Company's inability to introduce and
sell the products that it is currently developing in a timely
manner or to successfully expand its product offerings on a
timely basis will have a material adverse effect on the Company's
business, operating results or financial condition.
Evolving Distribution Channels. Spectrum has historically
sold its legacy business activation kit products to its
licensees, most of which are original equipment manufacturers
("OEMs") in the modem industry. Given the limited distribution of
its products through these channels, the Company is considering
alternative marketing plans regarding the legacy business. Even
if the Company decides to adopt a different method of
distribution for its legacy products, there are no assurances
that its sales performance will improve.
Spectrum does not expect that its existing OEM channels
will be the primary channels for distribution of its new line of
remote access software that is under development, and will need
to develop new channels that may include other data
communications OEM's, infrastructure service providers and
software companies. Spectrum has not previously sold products
into these channels. Failure to develop new channels will inhibit
the Company's ability to generate revenues from the Company's new
software products and will likely result in continued operating
losses and negative cash flow.
The Company plans to develop a limited sales force and
expand its marketing at the appropriate time. There can be no
assurance that such internal expansion will be successfully
completed, or that the Company's sales and marketing efforts will
enable it to successfully compete against the significantly more
extensive and well-funded sales and marketing operations of
current or potential competitors. The Company's inability to
effectively manage its internal expansion could have a material
adverse effect on the Company's business, operating results or
financial condition.
Management of Growth. The timely execution necessary for
the Company to fully exploit the market window for its products
and services requires an effective planning and management
process. The Company continues to seek to hire highly skilled
technical staff but due to the competitive high demand for
software skills, the Company is also dependent upon outside
services for aspects of its software development. To manage its
growth, the Company must continue to implement and improve its
operational and financial systems and to expand, train and manage
its employee base. There can be no assurance that the Company
will be able to successfully implement these activities on a
timely basis. Further, the Company will be required to manage
multiple relationships with various customers and other third
parties. Although the Company believes that it has made adequate
allowances for the costs and risks associated with this
expansion, there can be no assurance that the Company's systems,
procedures or controls will be adequate to support the Company's
operations or that the Company's management will be able to
achieve in a timely manner the expansion necessary to fully
exploit the market window for the Company's products and
services. If the Company is unable to manage growth effectively,
the Company's business, operating results and financial condition
will be materially adversely affected.
Dependence on Key Personnel. The Company is dependent on
its ability to retain and motivate high quality personnel,
especially its management and highly skilled engineering and
software development teams. The loss of the services of any of
its executive officers or other key employees could have a
material adverse effect on the business, operating results or
financial condition of the Company.
The Company's future success also depends on its continuing
ability to identify, attract, hire, train and retain other highly
qualified technical personnel. Competition for such personnel is
intense, and given Spectrum's past history and performance, there
can be no assurance that the Company will be able to attract,
assimilate or retain other highly qualified technical and
managerial personnel in the future. The inability to attract and
retain the necessary technical and managerial personnel could
have a material adverse effect upon the Company's business,
operating results or financial condition.
Limited Capital Resources. The Company has limited capital
resources to invest in product development and marketing and
selling. It is critical, therefore, to the Company's business,
operating results and financial condition that timely new product
introduction and market acceptance is achieved. Any delays in
product shipments will have a material adverse effect on the
Company's business, operating results and financial condition. As
the Company's existing capital resources are depleted by
continuing operations including investment in new product
development and losses associated with its legacy business, it
becomes increasingly likely that the Company will need to raise
capital to fund the development and marketing of its new communica-
tions aoftware product. Spectrum's management believes that it will
need to raise capital during the 1998 fiscal year and has begun to
12
<PAGE>
investigate alternatives for so doing. As part of Spectrum's
bankruptcy reorganization efforts, between October of 1995 and
January of 1996, the Company through its financial advisor
contacted 48 potential investors regarding interest in investing
or developing a strategic relationship with Spectrum, none of
whom expressed an interest at that time when product strategies
were in their early stages. There can be no assurances that
Spectrum's new communications software development efforts will
interest potential investors.
Market Listing; Volatility of Stock Price. Spectrum was
delisted from the NASDAQ National Market in April 1995. Since
then, the Company's common stock has been traded on the OTC
Bulletin Board. Since the Company's emergence from Chapter 11,
the market for the Company's common stock has been relatively
illiquid and subject to wide fluctuations. There can be no
assurance that an active public market for the common stock will
develop or be sustained. Further, the market price of the
Company's common stock may continue to be highly volatile based
on quarterly variations in operating results, announcements of
technological innovations or new products by the Company or its
competitors, or other events or factors.
Shares Eligible for Future Sale. The preferred stock that
was issued to the plaintiffs to settle class action litigation
pursuant to the Plan is convertible to common stock upon request
of the holder and automatically converts to common stock on March
31, 1999. Conversion to common stock of a significant number of
shares of preferred stock and a subsequent sale in the public
market could adversely affect the future market price for the
common stock.
13
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 10,1997, the United States Patent and Trademark
Office notified the Company that, at the request of Compaq
Computer Corporation ("Compaq"), it had declared an interference
proceeding to establish whether the Company or Compaq is the
inventor of certain claimed subject matter within the Company's
issued U.S. Patent No. 5,249,218, one of the Company's portfolio
of issued patents relating to wireless data transmission. The
interference is in its earliest stages and neither Compaq nor
Spectrum have submitted arguments supporting their respective
claim of ownership to the Patent Office. The Company does not
expect the interference proceeding to materially impact
Spectrum's legacy business because the Company believes that most
commercially practicable methods to transmit data via circuit
switched cellular networks are covered by other claims in the
'218 Patent or the Company's other issued patents. The proceeding
does not relate to the Company's Internet software development.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
No.
27 Financial Data Schedule
B. Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
Dated: August 12, 1997
SPECTRUM INFORMATION TECHNOLOGIES, INC.
By /s/ Donald J. Amoruso
-----------------------------------
Donald J. Amoruso
President, Chief Executive Officer and
Chairman of the Board of Directors
By /s/ Barry J. Hintze
-----------------------------------
Barry J. Hintze
Controller and
Principal Accounting Officer
15
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INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED
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