UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 January 26, 1998, the registrant had outstanding
approximately 1,491,000 shares of its Common Stock, par value
$.001 per share.
<PAGE>
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 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 15
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands)
Assets December 31, March 31,
1997 1997
- ---------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 2,797 $ 3,132
Marketable securities 448 2,176
Accounts receivable (net of
allowance for doubtful
accounts of $86) 76 288
Prepaid expenses and other
current assets 200 239
------- -------
Total current assets 3,521 5,835
------- -------
Property and equipment, at cost:
Furniture, fixtures and equipment 588 542
Less - accumulated depreciation (370) (334)
------- -------
Net property and equipment 218 208
------- -------
Total assets $ 3,739 $ 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 December 31, March 31,
1997 1997
- ---------------------------------------------------------------------
(Unaudited)
Current Liabilities
Accounts payable $ 169 $ 49
Accrued liabilities 1,242 1,243
Reserve for unpaid Chapter 11 claims 25 465
------- -------
Total current liabilities 1,436 1,757
Reserve for Chapter 11 and
other stock claims 981 2,125
------- -------
Total liabilities 2,417 3,882
------- -------
Commitments and contingencies
Stockholders' Equity:
Class A Convertible Preferred
Stock, $.001 par value, 1,500
shares authorized and 815 and
1,022 issued and outstanding,
respectively 1 1
Common stock, $.001 par value,
10,000 shares authorized and
1,491 and 1,022 issued and
outstanding, respectively 1 1
Paid-in capital 71,351 70,170
Accumulated deficit (69,724) (67,681)
------- -------
1,629 2,491
Treasury stock, 1 shares at
cost, respectively (303) (300)
Unrealized loss on marketable
securities (4) (30)
------- -------
Total stockholders' equity 1,322 2,161
------- -------
Total liabilities and
stockholders' equity $ 3,739 $ 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 Nine months
ended ended
(Unaudited) December 31, December 31,
1997 1996 1997 1996
- -------------------------------- ---- ---- ---- ----
Revenues:
Licensing revenue $ 38 $95 $1,350 $1,432
Merchandise sales, net 30 110 131 232
Total revenues 68 205 1,481 1,664
Operating costs
and expenses:
Cost of revenues 8 47 52 88
Selling, general
and administrative 1,217 1,136 3,610 3,683
Total operating costs
and expenses 1,225 1,183 3,662 3,771
Operating income (loss) (1,157) (978) (2,181) (2,107)
Chapter 11
administrative expenses - (214) - (602)
Other income (expense), net 35 129 138 196
Income(loss)from
continuing operations (1,122) (1,063) (2,043) (2,513)
Discontinued operations:
Gain on liquidation
of Data One - 531 - 531
Income from discontinued
operations - 531 - 531
Net income (loss) $(1,122) $(532) $(2,043) $(1,982)
Basic and diluted loss
per common share:
Loss from continuing
operations $(.79) $(1.04) $(1.62) $(2.46)
Income from
discontinued operations - $.52 - $.52
Net loss per common share $(.79) $(.52) $(1.62) $(1.94)
Weighted Average Number
of Common Shares used
in basic and diluted
calculation 1,413 1,022 1,258 1,022
See accompanying notes to consolidated financial statements.
3
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
Nine months ended December 31, 1997 1996
- ---------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash flow from operating activities:
Net loss $(2,043) $(1,982)
Adjustments to reconcile net loss
to net cash used by
continuing activities:
Depreciation and amortization 95 101
Inventory reserve (13) -
Gain on liquidation of Data One - (531)
Gain on sale of marketable
securities (6) -
Loss on sale of equipment 6 -
Issuance of common stock 37 -
(Increase) decrease in:
Accounts receivable 246 1,093
Prepaid expenses and
other assets 53 (195)
Increase (decrease) in:
Accounts payable, accrued
liabilities and other
liabilities (321) (2,349)
Liabilities subject to
compromise - (163)
Net cash used by continuing
operations (1,946) (4,026)
------- -------
Net cash used by
discontinued operations - (121)
- ---------------------------------------------------------------------
Net cash used by operating
activities (1,946) (4,147)
- ---------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of marketable
securities 1,759 -
Purchase of marketable securities - (3,826)
Loans to employees (34) -
Proceeds from sale of property
and equipment 3 -
Capital expenditures (114) (99)
- ---------------------------------------------------------------------
Net cash (used) provided
by investing activities 1,614 (3,925)
- ---------------------------------------------------------------------
Cash flow from financing activities:
Purchase of treasury stock (3) -
- ---------------------------------------------------------------------
Net cash provided (used)
by financing activities (3) -
- ---------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (335) (8,072)
Cash and cash equivalents,
beginning of year 3,132 13,123
- ---------------------------------------------------------------------
Total cash and cash equivalents,
end of period (including cash
amounts in net assets of
discontinued operations) $ 2,797 $ 5,051
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year
for interest $ - $ -
Cash paid during the year
for income taxes $ 9 $ 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"), are developing software
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. Since January 1995,
Spectrum's current management has implemented
strategies to resolve the many financial, legal and
litigation problems inherited from prior years and has
refocused 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. This software is expected to enable
more efficient Internet/Intranet information access and
is designed primarily for use over dial up land lines,
but will also be applicable for use over wireless
links. Information about the Company and FASTLANE(TM),
Spectrum's Internet software, are available on the
Internet at www.spectruminfo.com. The intended software
will not be covered by Spectrum's existing patent
portfolio. (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 and modems
and to other related data communications product
providers. Spectrum also developed direct connect
cellular data transmission activation kits (cellphone
software drivers and cables) and licenses a distributor
to market them to some of the Company's licensees and
end users. These two components - marketing of
activation kits and technology licensing - are the
current sources of operating revenues.
The Company expects to continue to experience operating
losses while it attempts to successfully develop and
market its new line of remote access communications
software and related products to increase revenues and
achieve profitability.
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 carefully
monitors all expenses in order to conserve cash and
continues to assess alternatives to minimize negative
cash flow. 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
nine months ended December 31, 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 mandated the
liquidation of Computer Bay, control of Computer Bay
was 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 December 31, 1997,
and the results of its operations and its cash flows
for the interim periods presented. Interim period
results are not necessarily indicative of full year
results of operations.
(e) Revenue
On September 30, 1997, the Company entered an agreement
with a leading modem chipset manufacturer that
converted its existing master license agreement to a
broader license under the Company's legacy technology.
The new agreement provided for a non-recurring
significant up front payment and guaranteed increased
royalty payments over two years. Under the terms of the
revised agreement, however, the Company expects reduced
royalties from certain of the chipset manufacturer's
customers because the chipset manufacturer is allowed
to sell certain chipsets with full pass through rights
to the Company's technology without need for an
additional sublicense from the Company. Under the
agreement, the Company will continue to be the
preferred source of cables used to activate cellular
capable modems. The agreement also provides for a
strategic relationship where the parties will meet to
discuss product development and possible future
business arrangements.
(f) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard
("SFAS") No. 130, "Reporting Comprehensive Income"
which establishes standards for reporting and display
of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include
all changes in equity except those resulting from
investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all
items that are required to be recognized under current
accounting standards as components of comprehensive
income be reported in a financial statement that is
displayed with the same prominence as other financial
statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997 and requires
comparative information for earlier years to be
restated. The adoption of this standard is not expected
to have a material impact on the Company's financial
statements.
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 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 (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
dial up communications software and related products.
Spectrum's mission is to develop software that makes
Internet/Intranet access a more productive experience. As
described in the Company's Annual Report on Form 10-K, 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 service
provider and corporate markets. FASTLANE(TM), the first product
of the suite, is being designed as a software server
implementation to significantly improve the speed of World Wide
Web (WWW) access for most dial-up subscribers currently
connecting at speeds up to 128 kbps. Developed primarily for
Internet Service Providers (ISPs) and On-line Service Providers
(OSPs), FASTLANE(TM) is intended to give ISPs and OSPs the
ability to offer subscribers faster and smarter Internet access
and a more productive experience. FASTLANE(TM) is designed for
home users, telecommuters and enterprises accessing the Internet
on dial up connections.
FASTLANE(TM) combines proprietary architecture and
algorithms with optimized processing techniques and is intended
to enable more efficient information transfer over wide area
networks using Internet and Intranet technologies. It is designed
to minimize the inefficiencies inherent in Internet interactions
between standard Web browsers and Web servers. The software
attacks the problem of limited bandwidth on the final connection
between the remote user and the Internet. Developed primarily for
dial up access, FASTLANE(TM) uses Content Management Agents
(CMAs) that process the data on one side of an Internet
connection and transmit it to the user. This technology can be
adopted to provide a wide variety of value added capabilities
between network connected clients and servers with the addition
of client software for future releases of the INTELLIGENT
PIPE(TM) suite of software. Spectrum's initial set of CMAs are
used in FASTLANE(TM) and designed to accelerate Web browsing
speed.
As with any software, implementation is complex and time
consuming. The Company is completing a beta release version of
its FASTLANE(TM) server that it has been demonstrating to
potential customers, analysts and trade magazines for evaluation.
The beta release significantly improves the speed at which most
popular graphic images are transmitted during Web browsing
without material loss of image quality. The Company is continuing
the development of user interface characteristics and the
installation/administration functions of the software to make it
suitable for commercial release. One ISP, with approximately
1,000 dial-up subscribers, has agreed to install FASTLANE(TM) and
conduct market trials. The Company is continuing to seek other
ISPs to conduct market trials of the beta release. The Company's
future development plans include features aimed at improving the
performance of FASTLANE(TM) and adding functionality beyond
acceleration. There can be no assurances that Spectrum will
successfully complete the development of this software and
introduce it according to the Company's development schedule or
that FASTLANE(TM) will be competitive within its product class.
Even if the Company's software performs up to the Company's
expectations, there can be no assurance 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).
7
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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 Company expects to continue to experience
operating losses while it attempts to successfully develop and
market its new line of remote access communications software and
related products to increase revenues. (See Liquidity and Capital
Resources.)
Spectrum has reduced the operating expenses associated
with its legacy business and is leveraging its legacy assets to
increase working capital necessary to help fund the Company's
remote access Internet software development efforts. In
connection with this effort, Spectrum entered an agreement on
September 30, 1997 with a leading modem chipset manufacturer that
converted its existing master license agreement to a broader
license under Spectrum's legacy technology. The new agreement
provided for a significant up front payment and guaranteed
increased royalty payments over two years. Under the terms of the
revised agreement, however, the Company expects reduced royalties
from certain of the chipset manufacturer's customers because the
chipset manufacturer is allowed to sell certain chipsets to its
customers with full pass through rights to Spectrum's technology
without need for an additional sublicense from Spectrum. Under
the agreement, Spectrum will continue to be the preferred source
of cables used to activate cellular capable modems. The agreement
also provides for a strategic relationship where the parties will
meet to discuss product development and possible future business
arrangements. Spectrum also entered a license agreement in
October 1997 with a distributor to assume some or all of the
Company's activation kit (cables and/or associated software used
to activate cellular capable modems) business. Under the
agreement, the distributor has committed to undertake specified
marketing efforts to stimulate the market for activated cellular
capable modems and will pay Spectrum a royalty for each
activation kit it sells.
Spectrum continues to investigate other alternatives to
maximize the value of its legacy assets and improve the financial
performance of its legacy business. However, management does not
believe that the successful implementation of any or all of these
alternatives with respect to the legacy business will be
sufficient to completely offset operating losses without
successful implementation of the strategy related to the new
remote access Internet software business.
Consummation of the Company's 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 then
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
8
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management, employees and non-executive directors of the Company
participating in developing the Plan to receive the remaining 10%
ownership pursuant to Bankruptcy Court approved incentive plans.
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)
Three Months Ended
December 31, 1997 % 1996 %
- ----------------------------------------------------------------------
Revenues $ 68 100 $205 100
------- ------- ------- -------
Operating costs
and expenses:
Cost of revenues 8 11 47 23
Selling, general
and administrative 1,217 1,790 1,136 554
------- ------- ------- -------
Total operating costs
and expenses 1,225 1,801 1,183 577
------- ------- ------- -------
Operating income (loss) $(1,157) (1,701) $(978) (477)
======= ======= ======= =======
(Amounts in thousands)
Nine Months Ended
December 31, 1997 % 1996 %
- -----------------------------------------------------------------------
Revenues $ 1,481 100 $ 1,664 100
------- ------- ------- -------
Operating costs
and expenses:
Cost of revenues 52 4 88 5
Selling, general
and administrative 3,610 244 3,683 222
------- ------- ------- -------
Total operating costs
and expenses 3,662 248 3,771 227
------- ------- ------- -------
Operating loss $(2,181) (148) $(2,107) (127)
======= ======= ======= =======
Revenues
Revenues decreased approximately $137,000 or 67% and
$183,000 or 11%, respectively, for the quarter and nine months
ended December 31, 1997 as compared to the quarter and nine
months ended December 31, 1996 primarily due to decreased
merchandise sales of approximately $80,000 or 73% and $101,000 or
44%, respectively, and decreased licensing revenues of
approximately $57,000 or 60% and $82,000 or 6%, respectively.
Merchandise sales decreased because of lower demand and the
effects of a licensing agreement the Company entered into with a
distributor to assume the Company's activation kit business.
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. The decrease in
licensing revenues is primarily related to a decrease in
royalties that the Company has recognized as a result of the AT&T
divestiture while it discusses the effect of the AT&T breakup on
the intellectual property license between AT&T and Spectrum and
the spun off entities. Also, during the prior fiscal year, the
Company received royalties from a certain licensee for past due
royalties pursuant to an agreement. During the current fiscal
period, there were no such agreements. These decreases were
offset by an increase in revenues associated with a leading modem
chipset manufacturer. The Company entered a new licensing
agreement with this licensee which resulted in the recognition of
approximately $1,152,000 in licensing income for September 1997.
(See Business).
Operating Costs and Expenses
Operating costs and expenses for the three months ended
December 31, 1997 increased approximately $42,000 or 4% when
compared to the three months ended December 31, 1996 due to
increased selling, general and administrative expenses of
approximately $81,000 or 7% offset by decreased cost of sales of
approximately $39,000 or 83%.
9
<PAGE>
Operating costs and expenses for the nine months ended
December 31, 1997 decreased approximately $109,000 or 3% when
compared to the nine months ended December 31, 1996 due to
decreased selling, general and administrative expenses of
approximately $73,000 or 2% and decreased cost of sales of
approximately $36,000 or 41%.
The increase in selling, general and administrative
expenses for the quarter ended December 31, 1997 as compared to
the same period in the prior year was primarily the result of
increased outside services of approximately $256,000 or 356% due
to the retention of independent contractors to assist in the
Company's development and marketing activities, which was offset
by a decrease in personnel and related expenses of $53,000. This
increase was also offset by a decrease in legal fees of
approximately $78,000 or 59% due to the reduction of legal
expenses post bankruptcy. Insurance expense decreased
approximately $31,000 or 39% for the three months ended December
31, 1997 as compared to the three months ended December 31, 1996,
primarily as a result of decreased directors' and officers'
insurance premiums.
The decrease in selling, general and administrative
expenses for the nine months ended December 31, 1997 was
primarily the result of a decrease in legal fees of $470,000 or
72% due to the reduction of legal expenses post bankruptcy.
Insurance expense decreased approximately $99,000 or 36% for the
nine months ended December 31, 1997 as compared to the nine
months ended December 31, 1996, primarily as a result of
decreased directors' and officers' insurance premiums. License
expense decreased $65,000 as a result of a renegotiated license
agreement. These decreases were offset by an increase in outside
services of approximately $634,000 or 298% for the nine months
ended December 31, 1997 as compared to the same periods in the
prior year due to the retention of independent contractors to
assist in the Company's development and marketing activities.
Operating Income/Loss
For the quarter and nine months ended December 31, 1997,
the operating loss increased approximately $179,000 or 18% and
$74,000 or 4%, respectively, as compared to the same periods in
the prior year primarily due to decreased revenues.
Other Income and Expense
For the quarter and nine months ended December 31, 1997,
other income decreased $94,000 and $58,000, respectively, to
$35,000 and $138,000, respectively, as compared to the quarter
and nine months ended December 31, 1996. Interest income
decreased approximately $89,000 or 72% and $193,000 or 59%,
respectively, for the three and nine months ended December 31,
1997 as compared to the three and nine months ended December 31,
1996 because the Company had lower cash balances for the quarter
and nine months ended December 31, 1997 than during the periods
ended December 31, 1996 as a result of creditor payments of
approximately $3,250,000 pursuant to the consummation of the Plan
of Reorganization. During the nine months ended December 31,
1996, the Company sold an investment which resulted in a loss of
approximately $142,000.
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. Post bankruptcy, the
Company expects operating losses to continue until such time as
it successfully develops and markets its new line of Internet
software. The Company continues to review expenses in order to
conserve cash and is investigating alternatives to address the
continued negative cash flow. The Company also continues to
assess the Company's opportunity to successfully build revenues
from its new software development and marketing efforts.
During the nine months ended December 31, 1997, working
capital (current assets less current liabilities) decreased by
approximately $1,993,000 due to a decrease in cash and marketable
securities of $2,063,000. The decrease is due to the payment of
approximately $1,491,000 in operating expenses and $455,000 in
bonus expenses for all employees, primarily in accordance with
Bankruptcy Court approved success bonus and new hire employment
contracts.
Net cash used by operating activities decreased from
$4,147,000 for the nine months ended December 31, 1996 to
$1,946,000 for the period ended December 31, 1997. The decrease
of $2,201,000 was primarily due to the reduction of bankruptcy
related expenditures of approximately $2,957,000 in 1996, offset
by the decreased cash received from licensing accounts receivable
of approximately $434,000 as compared to 1996 and bonus expenses
of $455,000 paid in 1997.
The Company reported net cash used by investing activities
of $3,925,000 for the nine months ended December 31, 1996 as
compared to net cash provided by investing activities of $1,614,000
for the nine months December 31, 1997. The marketable securities
component of investing activities changed due to a $3,826,000
reduction in the purchase of marketable securities in 1997 as
10
<PAGE>
compared to 1996 and the $1,759,000 proceeds from the sale of
marketable securities in 1997. The Company also extended loans,
collateralized by common stock, totaling $34,000, to certain of
its employees to pay the withholding taxes associated with the
distribution of common stock pursuant to the Company's stock
incentive plans. Further, capital expenditures increased
approximately $15,000 for the nine months ended December 31, 1997
as compared to the nine months ended December 31, 1996. 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 $250,000.
Net cash used by financing activities increased to $3,000
for the nine months ended December 31, 1997 due to the purchase
of treasury stock. There were no financing activities for the
nine months ended December 31, 1996.
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 suite and related products to generate a
positive cash flow from its reorganized business and, if
necessary, to raise 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 June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard ("SFAS") No.
130, "Reporting Comprehensive Income" which establishes standards
for reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required
to be recognized under current accounting standards as components
of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial
statements. SFAS 130 is effective for fiscal years beginning
after December 15, 1997 and requires comparative information for
earlier years to be restated. The adoption of this standard is
not expected to have a material impact on the Company's financial
statements.
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 legacy 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 its new line of
Internet software 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
continuing to fund the marketing and development of its Internet
software with its existing capital resources without increasing
revenues and/or raising capital. (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 users of data communications in corporate and Internet
Service Provider markets; developing new channels for
distribution; hiring and retaining key technical and marketing
staff to implement the strategy; competing successfully within
markets where competitors have significantly more resources and
access to capital than the Company; realization of market
forecasts regarding market growth in the 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 Internet communications
software market, Spectrum must establish management and technical
credibility as well as financial viability with potential
customers, 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.
11
<PAGE>
Changing and Segmented Market; Acceptance of the Company's
Products. The market for the Company's dial-up remote access
Internet software and related products is substantially and
rapidly changing (primarily due to the Internet phenomena,
convergence of computers, communications and entertainment, and
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 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. Companies that have announced Web
performance software or software/hardware solutions similar or
related to Spectrum's technology include Compaq, Intel and Shiva.
Intel released its Web performance software solution in January
1998 and three national ISPs have announced that they plan to
offer Intel's faster access software as a premium service. It was
also reported that Intel is in discussions with the 30 largest
ISPs, the most likely potential market for Spectrum's software.
These and other 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. In
order to successfully compete in this market, Spectrum must be
able to differentiate its products based on its 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.
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 enables 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 actively 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.
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 its new product developments.
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 are critical to the Company's
long term success. Time to market, of the initial FASTLANE(TM)
product release, is essential to its success. There can be no
assurance that the Company will successfully complete the
development and marketing of this new software and related
products in a timely manner that successfully competes with
Intel's and other announced similar products or that future
release of the software meet changing customer needs and respond
to such technological changes or evolving industry standards.
Sales of the Company's new Internet remote access software
products will be highly dependent on whether the products add
substantial value to service providers and 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 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
12
<PAGE>
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 will not be the primary
channels for distribution of its new line of remote access
software that is under development. Spectrum must develop new
channels that primarily include Internet service providers.
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 efforts. 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 acquire key
personnel and 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 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 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 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.
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 including revenue generation
is achieved. Any delays in product availability will give
competition an advantage and can 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 software products. Spectrum's management believes that it
will need to raise capital and has begun to 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 Internet
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 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.
13
<PAGE>
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
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 six 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 parties have jointly
requested and received extensions of time to file preliminary
statements and motions while the parties engage in settlement
discussions. 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.
In December 1997, the SEC filed a civil lawsuit in the
United States District Court for the Eastern District of New York
against Salvatore T. Marino, 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 Mr. Marino 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 Mr. Marino as an executive officer. Mr. Marino
has denied any wrong doing and is represented by independent
counsel in this matter. Mr. Marino 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.
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
against Mr. Marino. 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. As
part of the order, the SEC found that in 1992 Spectrum violated
the registration provisions of the Securities Act of 1933 when
Spectrum controlled the issuance and exercise of stock options
and the sale of underlying shares without having a valid
registration statement in effect for these shares. The SEC also
found that Spectrum, through the actions of certain former
officers, violated the anti-fraud, reporting and record-keeping
provisions of the federal securities laws in connection with the
false and misleading accounting treatment for license fees
pursuant to certain intellectual property license agreements that
it entered in 1993.
15
<PAGE>
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
16
<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: February 3, 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
Controller and
Principal Accounting Officer
17
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SPECTRUM
INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
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