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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 0-15596
SPECTRUM INFORMATION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1940923
(State of incorporation) (I.R.S. Employer
Identification No.)
2700 Westchester Avenue,
Purchase, New York 10577
(Address of principal executive offices) (Zip Code)
(914) 251-1800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
YES X NO
----- -----
As of July 17, 1998, the registrant had outstanding approximately
1,581,000 shares of its Common Stock, par value $.001 per share.
<PAGE>
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1998
INDEX
PART I. FINANCIAL INFORMATION Page No.
Consolidated Balance Sheets 1
Consolidated Statements of Income (Loss) 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION 15
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands)
Assets June 30, 1998 March 31, 1998
- ----------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 475 $ 1,600
Marketable securities 450 449
Accounts receivable (net of
allowance for doubtful
accounts of $6) 1,425 194
Employee Loans 79 79
Prepaid expenses and other
current assets 134 192
------------- -------------
Total current assets 2,563 2,514
------------- -------------
Property and equipment, at cost:
Furniture, fixtures and equipment 673 598
Less - accumulated depreciation (378) (340)
------------- -------------
Net property and equipment 295 258
------------- -------------
Total assets $ 2,858 $ 2,772
============= =============
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, 1998 March 31, 1998
- -------------------------------------------------------------------------
(Unaudited)
Current Liabilities
Accounts payable $ 243 $ 227
Accrued liabilities 321 453
Reserve for litigation 645 645
Deferred royalty income - 153
Reserve for unpaid
Chapter 11 claims 25 25
----------- ------------
Total current liabilities 1,234 1,503
Reserve for Chapter 11 and
other stock claims 525 591
----------- ------------
Total liabilities 1,759 2,094
----------- ------------
Commitments and contingencies
Stockholders' Equity:
Class A Convertible Preferred Stock,
$.001 par value, 1,500 shares
authorized and 800 and 813 issued
and outstanding, respectively 2 1
Common stock, $.001 par value,
10,000 shares authorized and
1,581 and 1,557 issued and
outstanding, respectively 2 2
Paid-in capital 71,822 71,740
Accumulated deficit (70,419) (70,758)
----------- ------------
1,406 985
Treasury stock, 4 shares at cost,
respectively (304) (304)
Accumulated comprehensive loss (3) (3)
----------- ------------
Total stockholders' equity 1,099 678
----------- ------------
Total liabilities and
stockholders' equity $ 2,858 $ 2,772
=========== ============
See accompanying notes to consolidated financial statements.
2
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Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Statements of Income (Loss)
(Amounts in thousands, except per share amounts)
Three months ended June 30, 1998 1997
- --------------------------------------------------------------------------
(Unaudited) (Unaudited)
Revenues:
Licensing revenue $ 1,583 $ 112
Merchandise sales, net 3 53
----------- ------------
Total revenues 1,586 165
----------- ------------
Operating costs and expenses:
Cost of revenues - 23
Selling, general and administrative 1,313 1,199
----------- ------------
Total operating costs and expenses 1,313 1,222
----------- ------------
Operating income (loss) $ 273 $(1,057)
----------- ------------
Other income , net 67 61
----------- ------------
Net income (loss) $ 340 $ (996)
=========== ============
Net income (loss) per common share
Basic $ .22 $ (.92)
=========== ============
Diluted $ .14 $ (.92)
=========== ============
Weighted Average Number of
Common Shares used in income (loss)
per common share calculation
Basic 1,567 1,081
=========== ============
Diluted 2,367 1,081
=========== ============
Interim results are not indicative of the results expected for
a full year. 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, 1998 1997
- -------------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash flow from operating activities:
Net Income (loss) $ 340 $ (996)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Stock options for board of directors 16 -
Depreciation and amortization 38 31
(Increase) decrease in:
Accounts receivable (1,231) 116
Prepaid expenses and other assets 57 (104)
Increase (decrease) in:
Accounts payable 16 190
Accrued expenses (133) (190)
Deferred royalty income (153) -
Reserve for unpaid Chapter 11
claims - (319)
- ----------------------------------------------------------------------
Net cash used by operating
activities (1,050) (1,272)
- ----------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (75) (14)
- ----------------------------------------------------------------------
Net cash used by investing
activities (75) (14)
- ----------------------------------------------------------------------
Net decrease in cash and cash
equivalents (1,125) (1,286)
Cash and cash equivalents,
beginning of year 1,600 3,132
- ----------------------------------------------------------------------
Total cash and cash equivalents,
end of year $ 475 $ 1,846
=========== ===========
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"), are developing software
and related products and services designed to make
Internet/Intranet access a faster, more productive and
enjoyable experience. The Company also owns a portfolio
of patents ("legacy assets") relating to commercially
practicable methods of data transmission over
circuit-switched cellular networks. 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 (the "legacy business"). Since January 1995,
Spectrum's current management has been implementing
strategies to resolve the many financial and legal
problems inherited from prior years and to refocus the
business direction of the Company. One of the Company's
strategies was to seek protection and reorganize under
Chapter 11 of the United States Bankruptcy Code. On March
31, 1997, the Company consummated its plan of
reorganization and emerged from bankruptcy.
As stated above, Spectrum's business objective is to
develop software and offer related products and services
that make Internet/Intranet access a faster, more
productive and enjoyable experience. Spectrum plans to
develop a communications software product suite, the
Spectrum INTELLIGENT PIPE(TM), that is intended to
address communications solutions for remote access in the
Internet service and corporate markets. FastLane(TM), the
first product of the intended suite, is a software server
that performs compression that significantly improves the
speed of World Wide Web ("Web") access for most dial-up
subscribers currently connecting at speeds up to 56 Kbps.
FastLane(TM) is designed for home users, telecommuters
and enterprises accessing the Internet on dial-up modem
connections. On May 4, 1998, Spectrum announced that it
was offering free trials for a limited time of
FastLane(TM), the world's first Web acceleration service
employing this technology. The service is available to
dial-up users accessing the Web through local, regional,
national, and international Internet Service Providers
(ISPs), and does not require any complex set-up by users.
FastLane(TM) is also available to ISPs looking to provide
faster image downloading speeds to all or part of their
subscribers.
Spectrum is actively seeking to raise capital to
implement this business strategy. Unless Spectrum
successfully raises this capital, the Company projects
that it will have adequate capital to sustain its
operations until the second or possibly third quarter of
the Company's fiscal year. In June, the Company began
contacting potential sources of capital and, in July, the
Company retained Josephberg Grosz & Co., Inc., a New York
based investment bank, to assist the Company in its
efforts to raise capital. There can be no assurance that
the Company will successfully raise the necessary capital
to continue as a going concern.
With respect to Spectrum's legacy business, Spectrum's
proprietary wireless data transmission technology enables
transmission of data between portable computer devices
over existing analog cellular telephone networks.
Spectrum licenses this technology to leading
manufacturers of integrated circuits and modems and other
related data communications product providers. Spectrum
also markets, through a distributor, direct connect
cellular data transmission activation kits (cellphone
software drivers and cables) to some of the Company's
licensees. - Technology licensing comprises the majority
of the Company's operating revenues. Because of the
minimal revenues in this business area, the Company
expects to continue to experience operating losses while
it attempts to successfully develop, market and deploy
its Internet related products and services.
(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
5
<PAGE>
classification of assets or the amounts and
classification of liabilities that may result from the
possible inability of the Company to continue as a going
concern
(c) Use of Estimates
In preparing financial statements in conformity with
generally accepted accounting principles, management is
required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and
expenses during the reporting period. Actual results
could differ from those estimates.
(d) Principles of Consolidation
The accompanying consolidated financial statements
include the accounts and results of operations of the
Company's wholly owned subsidiary, Spectrum Cellular
Corporation. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The unaudited interim consolidated financial statements
have been prepared on a basis substantially consistent
with the audited statements for the fiscal year ended
March 31, 1998. Certain information and footnote
disclosures normally included in financial statements
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, 1998.
In the opinion of management, the accompanying unaudited
consolidated financial statements reflect all adjustments
that are necessary to present fairly the Company's
financial position as of June 30, 1998, and the results
of its operations and its cash flows for the interim
periods presented.
(e) Income (Loss) Per Common Share
The computation of basic income (loss) per common share
is based on the weighted average number of common shares.
The computation of diluted income per common share is
based on the weighted average number of common shares and
common stock equivalents (convertible preferred shares,
stock options and warrants), if applicable, assumed to be
outstanding during the year.
(f) Licensing Agreements
Licensing income is recognized according to the specific
terms of each individual contract.On June 30, 1998, the
Company entered into an agreement to license the
Company's patented technology to an entity for two
non-recurring upfront payments, $425,000 in July 1998 and
$925,000 in October 1998. The Company is not currently
aware of any significant unlicensed manufacturers that
are infringing the Company's wireless data patents and
therefore does not expect these patents to provide
material future revenues.
(g) Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging activities." SFAS 133 requires companies to
recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at
fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss
recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the
hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated
as a hedging instrument, the gain or loss is recognized
in income in the period of change. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after
June 15, 1999.
Historically, the Company has not entered into
derivatives contracts either to hedge existing risks or
for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1,
2000 to affect its financial statements.
6
<PAGE>
2. Statements of Cash Flows
Three months ended June 30,
---------------------------
1998 1997
---------------------------
(Amounts in thousands)
Supplemental disclosures
of cash flow information:
Cash paid during the year
for interest $ - $ -
Cash paid during the year
for income taxes $ 1 $ 1
Non-cash transactions:
Class A Preferred Stock
issuance $ - $300
Payments of unsecured claims
via common stock issuance $ - $162
Stock options for board
of directors $ 16 $ -
3. Earnings Per Share
Earnings per share for the quarters ended June 30, 1998
and 1997 were calculated as follows:
Three Months Ended June 30,
1998 1997
-----------------------------------
Basic Diluted Basic Diluted
(Amounts in thousands)
-----------------------------------
Net Income (loss) $ 340 $ 340 ($996) ($996)
================ ===============
Weighted average number
of common shares out-
standing during the year 1,567 1,567 1,081 1,081
Common share equivalents
- preferred stock - 800 - -
Common share equivalents
- stock options - - - -
---------------- ---------------
Weighted average number
of common shares and
common share equivalents
used in calculation of
earnings per common share 1,567 2,367 1,081 1,081
================ ===============
Earnings per common share $ 0.22 $ 0.14 ($0.92) ($0.92)
================ ===============
Common stock equivalents were not included in the
computation of weighted average shares outstanding for the
quarter ended June 30, 1997 because such inclusion would be
anti-dilutive. Stock options were not included in the
computation of weighted average shares outstanding for the
quarter ended June 30, 1998 because such inclusion would be
anti-dilutive.
7
<PAGE>
4. Comprehensive Income
The Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income"
which requires that all components of comprehensive income
and total comprehensive income be reported on one of the
following: a statement of income and comprehensive income, a
statement of comprehensive income or a statement of
stockholders' equity. Comprehensive income is comprised of
net income and all changes to stockholders' equity, except
those resulting from investments by owners (changes in paid
in capital) and distributions to owners (dividends). For all
periods presented, comprehensive income is comprised of
unrealized holding losses on marketable securities.
Comprehensive income and its components consist of the
following:
Three Months Ended June 30,
1998 1997
(Amounts in thousands)
-----------------------
Net Income $340 $(996)
Other Comprehensive
income (loss), net of tax 0 6
-----------------------
Comprehensive income $340 $(990)
=======================
8
<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. The Company's failure to successfully implement its
business strategy or its failure to raise capital in the near
term will prevent the Company from continuing as a going concern.
Additional information regarding the Company's strategy and
associated risks is included in the Company's Annual Report on
Form 10-K as filed with the Securities and Exchange Commission.
Business
The Company is developing software and related services
designed to make Internet/Intranet access a faster, more
productive and enjoyable experience for users. The Company also
owns a portfolio of patents ("legacy assets") relating to
commercially practicable methods of data transmission over
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 (the "legacy business"). Since January 1995,
Spectrum's current management has been implementing strategies to
resolve the many financial and legal problems inherited from
prior years and to refocus the business direction of the Company.
One of the Company's strategies was to seek protection and
reorganize under Chapter 11 of the United States Bankruptcy Code.
On March 31, 1997, the Company consummated its plan of
reorganization and emerged from bankruptcy.
As stated above, Spectrum's business objective is to
develop software and offer related products and services that
make Internet/Intranet access a faster, more productive and
enjoyable experience. Spectrum is developing a communications
software product suite, the Spectrum INTELLIGENT PIPE(TM), that
is intended to address communications solutions for remote access
in the Internet service and corporate markets. FastLane(TM), the
first product of the suite, is a software server that performs
compression that significantly improves the speed of World Wide
Web (WWW) access for most dial-up subscribers currently
connecting at speeds up to 56 Kbps. FastLane (TM) is designed for
home users, telecommuters and enterprises accessing the Internet
on dial up modem connections. On May 4, 1998, Spectrum announced
that it was offering free trials for a limited time of
FastLane(TM), the world's first Web acceleration service
employing this technology. The service is available directly to
dial-up users accessing the Web through local, regional,
national, and international Internet Service Providers (ISPs),
and does not require any complex set-up by users. FastLane(TM) is
also available to ISPs looking to provide faster image
downloading speeds to all or part of their subscribers. Users can
sign up for the FastLane(TM) Service on Spectrum's Web sites at
www.spectruminfo.com. and www.fastlanehome.com
On July 13, 1998, the Company announced that it had
attracted over 2,700 users for the FastLane Web Acceleration
Service free trial since its May introduction. The Company
conducted limited marketing in June focused on the Northeast, but
attracted subscribers nationwide and from more that 30
international countries. Limited free trials are expected to
continue through the second fiscal quarter, followed by full
scale operation. The Company is limiting its marketing the
expenditures to conserve its working capital, while it seeks to
raise additional capital to support the growth and marketing of
FastLane Service. Further subscriber growth is therefore expected
to be gradual until such time as the Company begins the marketing
campaign.
Spectrum is actively seeking to raise capital to implement
this business strategy. Unless Spectrum successfully raises this
capital, the Company projects that it will have adequate capital
to sustain its operations until the second or possibly third
quarter of the Company's fiscal year. In June, the Company began
contacting potential sources of capital and, in July, the Company
retained Josephberg Grosz & Co., Inc., a New York based
investment bank, to assist the Company in its efforts to raise
capital. There can be no assurance that the Company will
successfully raise the necessary capital to continue as a going
concern.
With respect to Spectrum's legacy business, Spectrum's
proprietary wireless data transmission technology enables
transmission of data between portable computer devices over
existing analog cellular telephone networks. Spectrum licenses
this technology to leading manufacturers of integrated circuits
and modems and other related data communications product
providers. Spectrum also markets, through a distributor, direct
connect cellular data transmission activation kits (cellphone
software drivers and cables) to some of the Company's licensees.
These two components - marketing of activation kits and
technology licensing comprise the Company's operating revenues
during this fiscal year. Because of the minimal revenues in this
business area, the
9
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Company expects to continue to experience operating losses while
it attempts to successfully develop and market its Internet
related products and services. (See Liquidity and Capital
Resources.) The Company is not currently aware of any significant
unlicensed manufacturers that are infringing the Company's
wireless data patents and therefore does not expect these patents
to provide material future revenues.
Consummation of the Plan of Reorganization
On January 26, 1995 (the "Petition Date"), as part of
management's effort to stem the Company's substantial financial
losses and focus on its core technology, the Company, together
with its wholly-owned subsidiaries, Computers Unlimited of
Wisconsin, Inc., a Wisconsin corporation d/b/a Computer Bay
("Computer Bay"), Dealer Services Business Systems, Inc., a
Delaware corporation d/b/a Data One ("Data One") and Spectrum
Cellular Corporation ("Cellular") (collectively, the "Debtors"),
filed petitions for relief under Chapter 11 of the Federal
Bankruptcy Code (the "Chapter 11 proceeding"). A fourth wholly
owned subsidiary, Spectrum Global Services, Inc. ("Spectrum
Global"), a Delaware Corporation, did not file for bankruptcy and
was sold by the Company effective October 17, 1995. Spectrum
Global was not essential to the Company's legacy business or its
current direction. Upon motion by the Debtors, the United States
Bankruptcy Court for the Eastern District of New York (the
"Bankruptcy Court") converted the action for Computer Bay to a
case under Chapter 7 of the Bankruptcy Code. A trustee is
overseeing the liquidation of Computer Bay's assets and the
Company no longer has control over the Computer Bay estate. Data
One consummated a separate liquidating plan of reorganization on
October 4, 1996, which had been unanimously supported by Data
One's voting creditors.
In March 1996, the Bankruptcy Court approved the Company's
Third Amended Disclosure Statement (the "Disclosure Statement")
with respect to the Third Amended Consolidated Plan of
Reorganization Proposed by Spectrum and Cellular (the "Plan")
dated as of March 18, 1996 finding the Disclosure Statement
adequate for distribution and vote by interested parties. As
contemplated by the Plan, the bankruptcy estates of Spectrum and
Cellular have been substantively consolidated. On August 14,
1996, the United States Bankruptcy Court of the Eastern District
of New York entered an order confirming the Plan, as amended. On
March 31, 1997, the Company consummated the Plan (the "Effective
Date"). The Plan provided all administrative creditors with full
payment (unless a lesser amount was agreed upon or ordered by the
Bankruptcy Court) and all general unsecured creditors with 100%
of the value of their claims plus 6% interest per annum from the
filing date thereon. It also settled the class action lawsuits of
approximately $676,000,000 filed against the Company by the
payment by the Company of $250,000 and the delivery of
approximately 45% of the equity ownership in Spectrum to a
trustee to be distributed to the members of the class. In
addition, under the settlement, the plaintiffs are to receive the
proceeds, net of certain fees and expenses, from insurance
policies covering the liabilities of the Company's directors and
officers and, as a result of court supervised negotiations and at
the recommendation of the District Court, approximately
$1,350,000 (in cash or publicly traded securities) from the
various individual defendants in the action. Although existing
Spectrum shareholders were substantially diluted under the terms
of the Plan, such shareholders obtained the majority of the 45%
equity ownership in Spectrum set aside for existing shareholders
and certain creditors. The Plan also called for management,
employees and non-executive directors of the Company
participating in developing the Plan to receive the remaining 10%
ownership.
As part of the plan of reorganization, Spectrum
consolidated the Company's bankruptcy estate with that of
Cellular. Spectrum and Cellular are now conducting the Company's
core business on an operating basis as a single entity.
Results of Operations
The following table sets forth, for the periods indicated,
the percentage relationship that certain items bear to revenue.
This summary provides trend data relating to the Company's normal
recurring operations.
(Amounts in thousands)
Quarters Ended June 30, 1998 % 1997 %
- -------------------------------------------------------------------------
Revenues $1,586 100 $ 165 100
-------- --------- --------- ---------
Operating costs
and expenses:
Cost of revenues - - 23 14
Selling, general and
administrative 1,313 83 1,199 727
-------- --------- --------- ---------
Total operating costs
and expenses 1,313 83 1,222 741
-------- --------- --------- ---------
Operating income (loss) $ 273 17 $(1,057) (641)
======== ========= ========= =========
10
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Revenues
Revenues increased approximately $1,421,000 or 861% for the
quarter ended June 30, 1998 as compared to the quarter ended June
30, 1997 primarily due to an increase in licensing revenue of
approximately $1,471,000 or 1,313%, which was offset by decreased
merchandise sales of $50,000 or 94%. Licensing revenue increased
primarily because the Company recognized approximately $1,350,000
in revenues and $153,000 of deferred royalty income in connection
with an upfront fee pursuant to a license agreement that the
Company entered into during the quarter. The Company is not
currently aware of any significant unlicensed manufacturers that
are infringing the Company's wireless data patents and therefore
does not expect these patents to provide material future
revenues. Merchandise sales decreased for the quarter ended June
30, 1998 as compared to the quarter ended June 30, 1997 because
of the effects of a licensing agreement the Company entered into
with a distributor to assume the Company's activation kit
business during the third quarter of fiscal 1998. Under the
agreement, the distributor has committed to undertake specified
marketing efforts intended to stimulate the market for activated
cellular capable modems and will pay the Company a royalty for
each activation kit it sells
Operating Costs and Expenses
Operating costs and expenses for the three months ended
June 30, 1998 increased approximately $91,000 or 7% when compared
to the three months ended June 30, 1997 primarily due to
increased selling, general and administrative expenses of
approximately $114,000 or 10%. This increase was offset by
decreased cost of sales of approximately $23,000. Cost of sales
decreased as a direct result of decreased merchandise sales for
the quarter ended June 30, 1998 as compared to the same period in
the prior year.
The increase in selling, general and administrative
expenses for the quarter ended June 30, 1998 was primarily the
result of increased marketing expenses of approximately $125,000
in an attempt to attractsubscribers at the introduction of the
Company's FastLane(TM) Web Acceleration Service. This increase
was offset by decreased insurance expense of approximately
$31,000 or 39% for the quarter ended June 30, 1998 as compared to
the same period in the prior year. This decrease is primarily due
to lower directors' and officers' insurance policy premiums.
Operating Income (Loss)
For the quarter ended June 30, 1998, the Company recognized
an operating gain of approximately $273,000 as opposed to an
operating loss of approximately $1,057,000 for the quarter ended
June 30, 1997. This difference of approximately $1,330,000 is due
to increased licensing revenues.
Other Income and Expense
For the three months ended June 30, 1998, other income
increased approximately $6,000 or 10% as compared to the three
months ended June 30, 1997 primarily due to the settlement of a
use tax liability, which was partially offset by a decrease in
interest income of approximately $45,000 or 78%. Interest income
decreased because the Company had lower cash balances for the
quarter ended June 30, 1998 than during the quarter ended June
30, 1997.
Liquidity and Capital Resources
The Company's expenditures have increased recently as the
Company marketed its FastLane(TM) Web Acceleration Service in an
attempt to grow subscribers. The Company expects to suffer
significant losses from operations during fiscal year 1999. In
light of the continued negative cash flow and limited capital
resources, the Company will not be able to fund the marketing,
development and deployment of its Internet services with its
existing capital resources and must raise capital during the
second or, possibly, the third quarter of its fiscal year ended
March 31, 1999, to fund its operations in the near term.
During the quarter ended June 30, 1998, working capital
(current assets less current liabilities) increased by
approximately $318,000 due to an increase in accounts receivable
of approximately $1,231,000 and the recognition of deferred
royalty income of approximately $153,000 offset by a decrease in
cash of approximately $1,125,000. The change in accounts
receivable and the recognition of deferred royalty income were
associated with the completion of a license agreement during the
quarter. The decrease in cash was primarily related to the
development and marketing of FastLane.
Net cash used by operating activities decreased $222,000,
from $1,272,000 during the quarter ended June 30, 1997 to
$1,050,000 for the quarter reported. This decrease was primarily
because the Company paid approximately $319,000 in Chapter 11
11
<PAGE>
claims during the quarter ended June 30, 1997 and made no such
payments during the quarter ended June 30, 1998. This payment was
offset by approximately $125,000 in marketing expensed incurred
during the quarter reported that were not incurred a year
earlier.
Net cash used by investing activities increased $61,000
from $14,000 for the quarter ended June 30, 1997 to $75,000 for
the quarter ended June 30, 1998 due to increased 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, 1999 are
expected to be approximately $280,000.
There were no financing activities during the periods
presented.
As discussed elsewhere within this report, the Company
projects it will not have adequate near term (i.e., over the next
12 months) capital resources to fund its operations. Near and
long term liquidity therefore depend upon the Company's ability
to raise capital during the second or third quarter of the fiscal
year ended March 31, 1999, and its ability to generate a positive
cash flow from its Internet products and services, or raise
additional capital, thereafter. The accompanying consolidated
financial statements have been prepared assuming the Company will
continue as a going concern, however, there can be no assurance
that the Company will be able to successfully raise capital in
the time frame noted above or achieve management plans. The
consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging
activities." SFAS 133 requires companies to recognize all
derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated
as a hedge, the objective of which is to match the timing of gain
or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged
asset or liability that are attributable to the hedged risk or
(ii) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS 133
is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999.
Historically, the Company has not entered into derivatives
contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption of
the new standard on January 1, 2000 to affect its financial
statements.
Risk Factors
Overview. Spectrum has suffered and continues to suffer
significant losses from continuing operations. The Company's
expenditures have increased recently as the Company deploys and
markets its FastLane(TM) Web Acceleration Service in an attempt
to grow subscribers. In light of the continued negative cash flow
and limited capital resources, the Company will not be able to
fund the marketing and development of its Internet software and
services with its existing capital resources and must raise
capital during the second or third quarter of its fiscal year
ending March 31, 1999 to fund its continuing operations and
continue as a going concern (See Limited Capital Resources).
Other significant risks associated with Spectrum's 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
and services that bring value to Internet subscribers and
Internet Service Provider markets; developing new channels for
distribution; hiring and retaining key technical and marketing
staff to implement the strategy; and competing successfully
within markets where competitors have significantly more
resources and access to capital than the Company. The following
specific risk factors should be considered in evaluating
Spectrum's ability to achieve its business objectives.
Limited Capital Resources. At the close of the fiscal
quarter reported, the Company had working capital of
approximately $1.3 million, which includes a reserve for
litigation of $645,000. During the quarter ended June 30, 1998,
the Company's continuing operations used approximately $1,050,000
cash. The Company therefore has limited capital resources to
invest in product development, service deployment, marketing and
selling. It is critical, therefore, that the Company raise money
within the next several months to fund its operations and
business strategy. There can be no assurances that Spectrum's new
Internet technology and service business will interest potential
investors. Further, the Company believes that an indemnification
claim that it has received from a current employee related to
activities that took place in 1993 may present an impediment to
attracting investors. The Company cannot quantify the burden that
this claim may place upon its capital resources at this time.
(See Item 1 - Legal Proceedings;
12
<PAGE>
Securities Related Proceedings.) If the Company successfully
raises capital, it is likely that existing stockholders'
ownership will be materially diluted.
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.
Concurrently, to effectively enter the Internet and services
market, Spectrum must establish management and technical
credibility as well as financial viability with potential
customers and investors, continue to attract, retain and motivate
qualified persons, and develop market opportunities and
acceptance of its new products. There can be no assurance that
the Company will be successful in addressing such risks.
Changing and Segmented Market; Acceptance of the Company's
Services and Products. The market for the Company's Web
Acceleration Service is large, but difficult and expensive to
penetrate. While the Company believes that its service offers
substantial advantages, there can be no assurance that the
Company's service will be successfully developed or become widely
adopted. Additionally, the margins in service businesses are
traditionally much lower than software businesses. The Company
intends to market its service initially for approximately $4.95
per month. In order to fund the costs associated with its
existing infrastructure and attract a material paying subscriber
base the Company must raise capital.
Competition. The market for Internet software and services
is intensely competitive and subject to rapid technological
change. The Company expects competition to persist, intensify and
increase in the future. Companies that have announced Web
performance software or software/hardware solutions similar or
related to Spectrum's technology include Compaq, Intel and
others. Intel released its Web performance software solution in
January 1998 and three national ISPs announced that they planned
to offer Intel's faster access software as a premium service. It
was also reported that Intel was in discussions with the 30
largest ISPs, the most likely potential reseller market for
Spectrum's software or service. In June 1998, Intel announced
that it was discontinuing its Web performance offering for
business reasons, stating that the product did not ramp as
quickly as Intel would have liked. There can be no assurance that
Spectrum's strategy of marketing directly to end users will be
successful.
Other technologies that offer faster Internet connections
are currently being developed and deployed, such as cable modems
and DSL. Market forecasts by leading analysts indicate, however,
that dial-up Internet access will continue to be the prevalent
method of access for several years. If the faster access methods
become widely adopted earlier than anticipated, Spectrum's
available market will be reduced accordingly.
Nearly all of these potential competitors have longer
operating histories producing hardware and software products or
offering services, greater name recognition, significant
installed customer bases and significantly greater financial,
technical and marketing resources than the Company. In order to
successfully compete in this market, Spectrum must be able to
differentiate its services based on their value proposition,
including price, performance and scalability for additional
features. Such competition could prevent Spectrum from
successfully entering the market and materially adversely affect
the Company's business, operating results or financial condition.
For its legacy business, the Company has appointed a
distributor to sell activation kits to licensees of its
technology and their customers. The license arrangements that the
Company has entered with most manufacturers enable them to sell
activation kits for use with their respective products without
additional royalty obligation. These licensees compete with
Spectrum's primary distributor. The Company is no longer
manufacturing or selling activation kits itself, but earns a
royalty for each kit sold by the primary distributor it has
appointed and certain licensees.
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. All of
the Company's current revenues have been derived from the
licensing of its proprietary technology and royalties from the
sale of its associated activation kit products. Given the limited
revenue being generated and expected to be generated from this
existing business, it is essential for Spectrum to generate
revenues from its new product developments offered through its
Web Acceleration Service for dial up users of the Internet.
Sales of the Company's new Internet service is dependent on
the Company's ability to add substantial value to service
providers or directly to their subscribers. 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 and services 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.
13
<PAGE>
Evolving Distribution Channels. Spectrum has historically
sold its legacy business activation kit products to its
licensees, most of which are original equipment manufacturers
("OEMs") in the modem industry. Given the limited distribution of
its products through these channels, the Company has appointed a
distributor to attempt to stimulate sales of activation kits.
Although the Company receives a royalty for each kit sold by the
licensee/distributor, the Company does not expect these revenues
to be material given the size of the market.
Spectrum's existing OEM channels are not the primary
channels for distribution of its Web Acceleration Service.
Spectrum must market effectively directly to dial-up Internet
users, and must develop new channels that include ISPs and other
Companies with Internet presence. Spectrum has not previously
sold products into these channels. Failure to develop new
channels will inhibit the Company's ability to generate revenues
from the Company's new service and software products and will
likely result in continued operating losses and negative cash
flow.
The Company has limited sales and marketing staff and
resources. There can be no assurance that these resources will
enable it to successfully compete against the significantly more
extensive and well-funded sales and marketing operations of
current or potential competitors.
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
marketing, 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 initial 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 technical and
operational 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 and marketing 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
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.
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 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.
14
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Securities Related Proceedings
As previously reported by the Company, during May 1997, the SEC
and Spectrum reached a settlement agreement under which Spectrum
agreed to the entry of an administrative order requiring it to
cease and desist from committing any and future violations of the
registration, antifraud, reporting and record-keeping provisions
of the federal securities laws. Spectrum neither admitted nor
denied the SEC's findings relative to events in 1992 and 1993,
and which relate to the allegations in the SEC's action described
above against the former officer. The SEC did not seek monetary
penalties and recognized that Spectrum's current Chief Executive
Officer and Board of Directors had cooperated in the SEC's
investigation.
In December 1997, the SEC filed a civil lawsuit in the United
States District Court for the Eastern District of New York
against a current employee and former officer of the Company, and
two of the Company's former directors and officers alleging
violations of certain sections of the Securities Exchange Act of
1934 and rules promulgated thereunder, including violations of
Rule 10b-5, related to accounting and disclosure issues with
respect to certain patent and advertising agreements the Company
entered into during 1993 (fiscal 1994) and the exercise of
options to purchase and subsequent sale of Spectrum stock in the
relevant time frame. As previously reported by the Company, the
SEC notified the former officer in April 1996 that it intended to
bring this action. Upon learning of the SEC staff's position and
pending resolution of this issue, the Company at that time
removed the former officer as an executive officer. The former
officer has denied any wrong doing and is represented by
independent counsel in this matter. The former officer is seeking
to have the Company advance the legal fees that he incurs in
defense of this action pursuant to his Bankruptcy Court approved
employment agreement. The Company is currently examining its
obligation to continue to advance these fees and the extent of
its indemnification of the former officer. It is not possible to
estimate the potential liability associated with this claim at
this time.
From time to time, the Company has been a party to other legal
actions and proceedings incidental to its business. As of the
date of this report, however, the Company knows of no other
pending or threatened legal actions that could have a material
impact on the financial condition of the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
No.
---
27 Financial Data Schedule
B. Reports on Form 8-K
The Company filed a Current Report on Form 8-K
dated May 4, 1998, which included: Item 5, "Other
Items" reporting that the Company, on May 4,
1998, launched FastLane(TM), its Web acceleration
service.
15
<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: July 30, 1998
SPECTRUM INFORMATION TECHNOLOGIES, INC.
By /s/ Donald J. Amoruso
---------------------------------
Donald J. Amoruso
President, Chief Executive Officer and
Chairman of the Board of Directors
By /s/ Barry J. Hintze
---------------------------------
Barry J. Hintze
Chief Financial Officer
16
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SPECTRUM
INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED FINANCIAL
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