-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L6RYg/hkBa0ynhorM0cyOh/PTAHw7+sfBBBTCU4/hV8PsFXjlr+UkfLrWkQm9FQg FeiwAWWkoEqRGnVfBjlsqw== 0000903423-96-000008.txt : 19960216 0000903423-96-000008.hdr.sgml : 19960216 ACCESSION NUMBER: 0000903423-96-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960214 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECTRUM INFORMATION TECHNOLOGIES INC CENTRAL INDEX KEY: 0000812551 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 751940923 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15596 FILM NUMBER: 96518879 BUSINESS ADDRESS: STREET 1: 2700 WESTCHESTER AVE CITY: PURCHASE STATE: NY ZIP: 10577 BUSINESS PHONE: 9142511800 MAIL ADDRESS: STREET 1: 2700 WESTCHESTER AVE. CITY: PURCHASE STATE: NY ZIP: 10577 FORMER COMPANY: FORMER CONFORMED NAME: SPECTRUM CELLULAR CORP DATE OF NAME CHANGE: 19890925 FORMER COMPANY: FORMER CONFORMED NAME: SPECTRUM CELLULAR COMMUNICATIONS CORP DATE OF NAME CHANGE: 19870715 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 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, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to _______________ Commission File Number 0-15596 SPECTRUM INFORMATION TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) Delaware 75-1940923 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 2700 Westchester Avenue, Purchase, New York 10577 (Address of principal executive offices) (Zip Code) (914) 251-1800 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the latest practicable date. Common stock, $.001 par value, 76,675,448 outstanding at February 9, 1996. SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES (Debtors in Possession) FORM 10-Q DECEMBER 31, 1995 INDEX PART I. FINANCIAL INFORMATION Page No. Consolidated Balance Sheets 1 Consolidated Statements of Operations 3 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 23 PART II. OTHER INFORMATION 28 SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES (Debtors in Possession) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND MARCH 31, 1995 (Unaudited) December 31, March 31, Assets 1995 1995 - --------------------------------------------------------------------------- (Amounts in thousands) Current assets: Cash and cash equivalents $ 7,968 $ 3,442 Marketable securities 907 785 Accounts receivable, net 6,965 5,793 Inventories 24 377 Prepaid expenses and other current assets 360 970 Net assets of discontinued operations 4,106 ------ ------ Total current assets $16,224 $15,473 Net property and equipment 213 1,270 Intangible assets, net 367 1,551 Notes receivable-related parties 91 91 Other assets - 850 - --------------------------------------------------------------------------- Total assets $16,895 $19,235 ====== ====== See accompanying notes to the consolidated financial statements. SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES (Debtors in Possession) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND MARCH 31, 1995 (Unaudited) December 31, March 31, Liabilities and Stockholders' Equity 1995 1995 - --------------------------------------------------------------------------- (Amounts in thousands) Current liabilities: Accounts payable $ 903 $ 127 Accrued liabilities 1,874 413 Other current liabilities 5,930 5,500 ------ ------- Total current liabilities 8,707 6,040 ------ ------- Deferred income 33 850 ------ ------- Liabilities Subject to Compromise: Accounts payable and accrued liabilities 1,485 1,554 Reserve for litigation 4,719 4,719 Reserve for restructuring 2,158 2,158 Net liabilities of discontinued operations 531 4,630 Other liabilities 185 185 ------ ------ Total liabilities subject to compromise 9,078 13,246 ------ ------ Total liabilities 17,818 20,136 ------ ------ Stockholders' equity: Paid-in capital 63,961 63,961 Accumulated deficit (64,566) (64,443) ------- ------ (528) (405) Treasury stock, 100 shares at cost (300) (300) Unrealized loss on marketable securities (95) (196) Common Stock, $.001 par value, 110,000 shares authorized; 76,675 issued 77 77 ------ ------ Total stockholders' equity (923) (901) - --------------------------------------------------------------------------- $16,895 $19,235 ====== ====== See accompanying notes to the consolidated financial statements. SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES (Debtors in Possession) CONSOLIDATED STATEMENTS OF OPERATIONS DECEMBER 31, 1995 AND 1994 (UNAUDITED) Three Months Nine Months Ended Dec. 31, Ended Dec. 31, --------------------------------------------- 1995 1994 1995 1994 - --------------------------------------------------------------------------- (Amounts in thousands, except per share amounts) Revenues: Licensing and other revenue $ 379 $ 686 $ 1,758 $1,118 Merchandise sales, net 125 267 445 1,081 ------- ------ ------ ------ Total revenues 504 953 2,203 2,199 ------- ------ ------ ------ Operating costs and expenses: Cost of revenues 67 128 258 445 Selling, general and admin. 1,821 4,094 5,368 10,263 ------- ------- ------- ------- Total operating cost and expenses 1,888 4,222 5,626 10,708 ------- ------- ------- ------- Operating loss (1,384) (3,269) (3,423) (8,509) Professional fees in connection with Chapter 11 filing (686) - (2,464) - Other income(expense), net (60) (246) 1,662 (158) ----- ------ ------ ------ Loss from continuing operations (2,130) (3,515) (4,225) (8,667) ------- ------ ------ ------ Discontinued operations: Income (loss) from operations of: Spectrum Global 74 255 790 666 Computer Bay - (3,312) - (4,388) Gain on Sale of Spectrum Global 773 - 773 - Gain on disposal of Computer Bay - - 2,539 - ------- ------ ------ ------ Income(loss) from discontinued operations 847 (3,057) 4,102 (3,722) ------- ------- ------ ------ Cumulative effect of change in accounting principle - - - 316 ------ ------ ------ ------ Net(loss) $ (1,283) $ (6,572) $ (123) $(12,073) ====== ====== ===== ====== Net income (loss) per common share: Loss from continuing operations $ (.03) $ (.05) $ (.05) $ (.11) Income (loss)from discontinued operations .01 (.04) .05 (.05) Cumulative effect of change in accounting principle - - - - ------ ------ ------ ------ Net loss $ (.02) $ (.09) $ - $ (.16) === === === === Weighted average shares outstanding 76,675 76,597 76,675 76,316 ====== ====== ====== ====== See accompanying notes to the consolidated financial statements. SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES (Debtors in Possession) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994 (UNAUDITED) 1995 1994 - --------------------------------------------------------------------------- (Amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (123) (12,073) Adjustments to reconcile net income (loss) to net cash (used by)provided by operating activities: Depreciation and amortization 288 431 Unrealized gain (loss) on marketable securities 101 - Cumulative effect of change in accounting principle - (209) Deferred income (817) (525) Writedown of furniture and equipment 279 - Gain on disposal of Computer Bay (2,539) - Gain on sale of building (86) - Gain on sale of AXCELL (1,616) - Gain on Sale of Spectrum Global (773) - (Increase)decrease in: Accounts receivable (1,172) 951 Inventories 53 (109) Other assets 1,460 (172) Increase (decrease) in: Accounts/notes payable, Accrued liabilities and other liabilities 2,667 322 Liabilities subject to compromise (69) - ----- ----- Net cash used by continuing operations (2,347) (11,384) Net cash (used) provided by discontinued operations (1,801) 9,923 - --------------------------------------------------------------------------- Net cash used by operating activities (4,148) (1,461) - --------------------------------------------------------------------------- CASH FLOWS RELATING TO INVESTING ACTIVITIES: (Purchase) sale of marketable securities, net (122) 8,744 Purchase of property and equipment (58) (130) Proceeds from sale of AXCELL 3,000 - Proceeds from sale of building 734 - Proceeds from sale of Spectrum Global 4,549 - ----- ----- Net cash provided by continuing operations 8,103 8,614 Net cash used by discontinued operations (57) (100) - --------------------------------------------------------------------------- Net cash provided by investing activities 8,046 8,513 - --------------------------------------------------------------------------- CASH FLOWS RELATING TO FINANCING ACTIVITIES: Proceeds from exercise of stock options and warrants - 770 ------ ------ Net cash provided by continuing operations - 770 Net cash used by discontinued operations (3) (8,609) - --------------------------------------------------------------------------- Net cash used by financing activities (3) (7,839) - --------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 3,895 (786) Cash and cash equivalents, unrestricted, beginning of period 4,409 3,865 ----- ------ Cash and cash equivalents, unrestricted, end of period 8,304 3,079 Cash and cash equivalents, restricted, end of 291 303 period - --------------------------------------------------------------------------- Total cash and cash equivalents $ 8,595 $ 3,382 ===== ===== Supplemental disclosures of cash flow information: Cash paid during the period for interest $ - $ - Cash paid during the year for income taxes $ 2 $ - See accompanying notes to the consolidated financial statements. SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES (Debtors in Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 1. Summary of Significant Accounting Policies Business Spectrum Information Technologies, Inc. (the "Company" or "Spectrum") is a holding company with one continuing subsidiary; Spectrum Cellular Corporation, a Delaware corporation ("Spectrum Cellular"). The Company discontinued the operations of its Dealer Service Business Systems, Inc. subsidiary, a Delaware corporation d/b/a Data One ("Data One"), in fiscal 1994 and its Computers Unlimited of Wisconsin, Inc. subsidiary, a Wisconsin corporation d/b/a Computer Bay ("Computer Bay") in fiscal 1995. The Company sold its Spectrum Global Services, Inc. ("Spectrum Global") subsidiary during October 1995 (Note 6). Spectrum, through its Spectrum Cellular subsidiary, develops and licenses wireless data transmission technology and designs, markets and supervises the manufacturing of direct connect data communication products incorporating that technology. The Company's wireless data transmission technology utilizes an error-correction protocol permitting the reliable transmission of electronic data between two computers over cellular telephone networks and other wireless communication systems. The Company also had provided, through its Spectrum Global subsidiary, telecommunication contract personnel to Fortune 1000 companies. Bankruptcy Proceedings On January 26, 1995 ("Petition Date"), the Company and three of its four subsidiaries (Computer Bay, Data One and Spectrum Cellular) filed petitions for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court of the Eastern District of New York ("Chapter 11"). The Company, Data One and Spectrum Cellular, are herein called the "Debtors in Possession" and together with Computer Bay the "Debtors." Spectrum Global did not file for bankruptcy. On February 8, 1995, the United States Trustee appointed an Unsecured Creditors Committee for Spectrum, Spectrum Cellular and Data One and another for Computer Bay. On May 25, 1995, the Bankruptcy Court, upon motion by the Debtors, converted the Computer Bay Chapter 11 to a case under Chapter 7 of the Bankruptcy Code ("Chapter 7") (Note 2), and an independent trustee is overseeing the liquidation of Computer Bay's assets. Spectrum and Spectrum Cellular are continuing to manage their affairs and operate their business under Chapter 11 as debtors in possession while formulating a plan of reorganization. The operations of Data One were discontinued as of December 31, 1994. Pursuant to section 362 of the Bankruptcy Code, the commencement of the Debtors' Chapter 11 case operates as an automatic stay, applicable to all entities, of the following: (i) commencement or continuation of a judicial, administrative, or other proceeding against the Debtors that was or could have been commenced prior to commencement of the Debtor's Chapter 11 case, or to recover for a claim that arose before the commencement of the Debtors' Chapter 11 case; (ii) enforcement of any judgments against the Debtors that arose before the commencement of the Debtors' Chapter 11 case; (iii) the taking of any action to obtain possession of property of the Debtors or to exercise control over property of the Debtors; (iv) the creation, perfection or enforcement of any lien against the property of the Debtors; (v) the taking of any action to collect, assess or recover a claim against the Debtors that arose before the commencement of the Debtors' Chapter 11 case; or (vi) the setoff of any debt owing to the Debtors that arose prior to the commencement of the Debtors' Chapter 11 case against a claim held by such creditor or party in interest against the Debtors that arose before the commencement of the Debtors' Chapter 11 case. Any entity may apply to the Bankruptcy Court for relief from the automatic stay so that it may enforce any of the aforesaid remedies that are automatically stayed by operation of law at the commencement of the Debtors' Chapter 11 case. Although the Debtors are authorized to operate their business as debtors in possession, they may not engage in transactions outside the ordinary course of business without first complying with the notice and hearing provisions of the Bankruptcy Code and obtaining Bankruptcy Court approval. The Unsecured Creditors' Committees may review and object to transactions involving the Company that are outside of the ordinary course of the Company's business, may consult with the Company concerning the administration of the Company's Chapter 11 case, and may participate in the formulation of a plan of reorganization. The Company is required to pay certain expenses of the Unsecured Creditors' Committees, including counsel and other professional fees, to the extent allowed by the Bankruptcy Court. Other parties in interest in the Chapter 11 case are also entitled to be heard on motions made in the Chapter 11 case, including motions for approval of transactions outside the ordinary course of business. For 120 days after the petition date, the Debtors have the exclusive right to propose and file a plan of reorganization with the Bankruptcy Court. If the plan is filed, no other party may file a plan of reorganization until 180 days after the petition date, during which period the Debtors have the exclusive right to solicit acceptance of the plan. On January 23, 1996, the Bankruptcy Court granted the Debtors' request to extend the filing of the plan of reorganization to March 8, 1996. The Company filed a plan of reorganization on February 9, 1996 (Note 7). Basis of Presentation The accompanying consolidated financial statements of the Company have been prepared on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities, except as otherwise disclosed, in the normal course of business. However, as a result of Chapter 11 proceedings and circumstances relating to this event, including the Company's recurring losses from operations, such realization of assets and liquidation of liabilities is subject to significant uncertainty. Further, the Company's ability to continue as a going concern is dependent upon the confirmation of a plan of reorganization by the Bankruptcy Court, achievement of profitable operations, the sale of non-core assets and the ability to generate sufficient cash from operations and financing sources to meet the restructured obligations. Except as otherwise disclosed, the consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. The Company continues to monitor expenses in order to conserve cash. During June and July 1995, the Company received $3,000,000 for the sale of a license to utilize certain patented technology and the related business (Note 6) and as a result of the sale, management has downsized the operations of Spectrum Cellular and sold its Dallas facility. During October 1995, the Company sold its Spectrum Global subsidiary for approximately $6,101,000, the net proceeds were approximately $4,549,000. In addition, as part of its plan of reorganization, the Company is looking to settle all significant litigation. However, there can be no assurance that these events will occur according to management's plans. The financial statements for the nine months ended December 31, 1995 and the year ended March 31, 1995, reflect accounting principles and practices set forth in AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code", which the Company adopted as of January 26, 1995, the date of the Company's Chapter 11 filing (Note 5). The net liabilities of Spectrum, Spectrum Cellular and Data One, excluding intercompany payables of approximately $14,384,000, were approximately $923,000 at December 31, 1995. Principles of Consolidation These consolidated financial statements include the accounts and results of operations of the Company and its wholly owned subsidiaries, Data One, Spectrum Cellular, and Spectrum Global as of and for the three and nine months ended December 31, 1995 and 1994. Upon conversion of Computer Bay's Chapter 11 case to a case under Chapter 7 on May 25, 1995, which mandates the liquidation of Computer Bay, control of Computer Bay has been transferred from the Company to the Computer Bay trustee. As a result, the net liabilities of Computer Bay have been eliminated from the consolidated financial statements of the Company. The Company discontinued the operations of its Data One subsidiary during fiscal year 1994 and its Computer Bay subsidiary during fiscal year 1995, and sold its Spectrum Global subsidiary during October 1995. All intercompany transactions have been eliminated. The unaudited interim consolidated financial statements have been prepared on a basis substantially consistent with the audited statements for the fiscal year ended March 31, 1995. Certain information and footnote disclosures normally included in financial statements were prepared in accordance with generally accepted accounting principles and have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. The unaudited financial statements should be read in conjunction with the audited financial statements and accompanying notes in the Company's annual report on Forms 10-K and 10-K/A for the fiscal year ended March 31, 1995. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments that are necessary to present fairly the Company's financial position as of December 31, 1995, and the results of its operations and its cash flows for the interim periods presented. Cash, cash equivalents Cash and cash equivalents include the Company's cash balances and certificates of deposit that mature in 90 days or less when acquired. Cash and cash equivalents are carried at cost plus accrued interest, which approximates market. Inventories Inventories consist primarily of merchandise held for resale and are stated at the lower of cost or market. Cost is determined by using the first-in, first-out ("FIFO") method. Inventory is net of a valuation allowance of approximately $100,000 at December 31, 1995 and March 31, 1995. Property and Equipment Property and equipment are depreciated using the straight- line method over the estimated useful lives of the assets or, in the case of leasehold improvements, over the lesser of their estimated useful lives or the remaining term of the lease. The following is a summary of estimated useful lives: Building 30 years Furniture, fixtures and equipment 5 to 7 years Improvements are capitalized and depreciated over the remaining useful life of the asset. Maintenance and repairs are charged to expense as incurred. Income Taxes No provision for taxes has been made due to continuing losses from operations and net operating loss carryforwards. Income (Loss) Per Common Share The computation of income (loss) per common share is based on the weighted average number of common shares outstanding during the period. Common stock equivalents were not included in the computation of weighted average shares outstanding because such inclusion would be anti-dilutive to income (loss) from continuing operations. Reclassification Certain amounts as previously reported have been reclassified to conform to the December 31, 1995 presentation. 2. Business Combinations, Acquisitions, and Dispositions Computer Bay Due to Computer Bay's continuing losses and loss of market share, the Company officially closed out its Computer Bay subsidiary on January 25, 1995. Accordingly, Computer Bay has been reported as a discontinued operation, effective January 25, 1995, and the consolidated financial statements have been reclassified to report separately the operating results of the subsidiary. The Company's prior years' operating results have also been reclassified to reflect the discontinuation of Computer Bay. Upon conversion of Computer Bay's Chapter 11 case to a case under Chapter 7 on May 25, 1995, which mandates the liquidation of Computer Bay, control of Computer Bay has been transferred from the Company to the Computer Bay trustee. As a result, the Company recorded a gain of $2,539,000 by writing off the net liabilities of Computer Bay. The Computer Bay trustee has filed a claim with the Bankruptcy Court to substantively consolidate the Computer Bay liabilities with the liabilities of the Debtors in Chapter 11. Although there can be no assurance that the Debtors will be successful defending this claim, the Company does not believe there are grounds for such consolidation. A trial for this matter has been scheduled for April 9-11, 1996 in the Bankruptcy Court. The following table summarizes the net liabilities of Computer Bay for the periods presented: May 25, March 31, 1995 1995 ------------------------------------------------------------- (Amounts in thousands) Cash $ 218 $ 232 Restricted cash 291 288 Accounts receivable 1,078 1,080 Income taxes receivable 409 409 Property and equipment 100 100 Other assets 129 129 Accounts payable (3,368) (4,864) Other liabilities (1,396) (1,473) ------ ------ Net liabilities $(2,539) $ (4,099) ===== ===== The summary of Computer Bay's results of discontinued operations for the periods presented are as follows: Three Months ended Nine Months ended December 31, December 31, 1995 1994 1995 1994 ------------------- -------------------- (Amounts in thousands) (Amounts in thousands) Revenues $ - $12,544 $ - $58,038 Net loss - (3,312) - (4,388) Data One Effective December 31, 1993, the Company adopted a plan to discontinue operations at Data One. The operations of Data One ceased on December 31, 1994. Accordingly, Data One has been reported as a discontinued operation effective December 31, 1993 and the consolidated financial statements have been reclassified to report separately the operating results of the subsidiary. The Company's prior years operating results have also been reclassified to reflect the discontinuation of Data One. The following table summarizes the net liabilities of Data One for the periods presented: December 31, March 31, 1995 1995 -------------------------------------------------------------- (Amounts in thousands) Cash $ 118 $ 83 Accounts Receivable 11 41 Other assets 2 3 Accounts payable (144) (144) Deferred income (253) (253) Reserve for discontinued operations (158) (175) Other liabilities (107) ( 86) --- --- Net liabilities $ (531) $ (531) === === Spectrum Global Effective October 17, 1995, the Company sold its Spectrum Global subsidiary for cash proceeds of approximately $4,549,000, after expenses of $325,000. Spectrum Global has been reported as a discontinued operation for all periods presented. The following table summarizes the net assets of Spectrum Global for the periods presented: October 17, 1995 March 31, 1995 ----------------------------------- (Amounts in thousands) Cash $ 1,227 $ 651 Accounts Receivable 1,899 1,571 Other Assets 2,237 2,285 Accounts Payable (243) (316) Other Liabilities (117) (85) ------ ------ Net assets $ 5,003 $ 4,106 ====== ====== The following table summarizes the results of discontinued operations of Spectrum Global for the periods presented: Three Months ended Nine Months ended December 31, December 31, 1995 1994 1995 1994 -------------------- --------------------- (Amounts in thousands) (Amounts in thousands) Revenues $ 560 $ 2,276 $ 6,877 $ 6,313 Net Income 74 255 790 666 3. Liabilities Subject to Compromise Liabilities subject to compromise are liabilities recorded by the Company as of the Petition Date that are expected to be compromised under a plan of reorganization (Note 1). The Bankruptcy Court established the bar date by which claims against the Debtors must be filed if the claimants wish to receive distribution in Chapter 11 cases as September 7, 1995. Excluding the material litigation discussed herein (Note 5) and improperly filed claims by shareholders, approximately 308 claims were filed against the Debtors alleging approximately $5.4 million in creditors' claims. These claims primarily consisted of approximately: $1.7 million in claims by vendors; $855 thousand in claims by former employees based upon severance and employment agreements; $1.2 million in indemnification claims for legal fees and settlement of litigation by former employees; $784 thousand in claims arising from rejected leases; $554 thousand claimed by a Computer Bay financing company; and $314 thousand related to a prepaid Data One maintenance contract. Additionally, the Trustee appointed to administer the Computer Bay estate filed a claim alleging $4.4 million in damages. The Company, along with its outside counsel, is evaluating each of these claims and reconciling them to its books and records. 4. Licensing Agreements During the nine months ended December 31, 1995 the Company signed one new non-exclusive licensing agreement pursuant to which it licensed the use of its patented technology. During the nine and three months ended December 31, 1994, the Company signed 13 and 6 non-exclusive license agreements, respectively, pursuant to which it licensed others to use its patented technology. At December 31, 1995, approximately $5,974,000 is included in trade and other receivables, to reflect the balance of the non-refundable license fees due under the licensing agreements. Additionally, $4,450,000 is included in current liabilities to reflect the payments which the Company will make in connection with mutual advertising agreements. 5. Litigation Bankruptcy Proceedings On January 26, 1995, the Debtors (Note 1) filed petitions for relief under Chapter 11 in the United States Bankruptcy Court for the Eastern District of New York, Case Nos. 195 10690 260, 195 10691 260, 195 10692 260 and 195 10693 260. Spectrum Global did not file for bankruptcy. On February 8, 1995, the United States Trustee appointed an Official Committee of Unsecured Creditors for the Debtors other than Computer Bay and another for Computer Bay to represent the interests of all unsecured creditors whose claims arose before the Petition Date. No other committees have been appointed. On May 25, 1995, the Bankruptcy Court, upon motion by the Debtors, converted the Computer Bay proceeding to a case under Chapter 7 of the Bankruptcy Code. An independent trustee has been appointed to oversee liquidation of Computer Bay's Chapter 7 estate. The Computer Bay trustee has filed a claim with the Bankruptcy Court to substantively consolidate the Computer Bay liabilities with the liabilities of the Debtors in Chapter 11. Although there can be no assurance that the Debtors will be successful defending this claim, the Company does not believe there are grounds for such consolidation. A trial for this matter has been scheduled for April 9-11, 1996, in the Bankruptcy Court. Spectrum and Spectrum Cellular are continuing to manage their affairs and operate their businesses under Chapter 11 as debtors in possession while formulating a plan of reorganization. The operations of Data One were discontinued as of December 31, 1994. By order of the Bankruptcy Court, the bar date for filing proofs of claim in the Chapter 11 proceedings was established as September 7, 1995. Other Legal Proceedings The Company is involved in various litigations, the most significant of which are discussed herein. The Company, certain of its former officers and directors, one current officer and two employees are defendants in certain of these matters. All of the proceedings discussed below in which the Company is named as a defendant or respondent (other than those pending in the Bankruptcy Court) are stayed pursuant to the automatic stay provisions of the Bankruptcy Code, as discussed above. The Company hopes to use the bankruptcy process to resolve pending litigation. These actions are not stayed, however, against defendants other than the Company. The Company has informed former officers and directors and employees of the Company to whom it had been paying legal expenses related to these proceedings prior to the Bankruptcy filing that it would no longer be paying these expenses. The Company has directed these individuals to seek reimbursement directly from the Company's insurance providers. The Company has received Bankruptcy Court approval for payment of limited legal fees incurred by certain present employees. Securities Related Legal Proceedings On February 9, 1994, the class action filed against the Company, and two of its former officers in May 1993 (In re Spectrum Information Technologies, Inc. Securities Litigation; United States District Court for the Eastern District of New York; Civil Action No. 93-2295) (the "Class Action") was supplemented to extend the end of the class period from May 21, 1993 to February 4, 1994, to add additional claims against the Company and the individual defendants, and to add certain of its then officers as party defendants. In April 1994, a Second Consolidated Amended Class Action Complaint was filed adding additional employees as party defendants. The class and certain subclasses have been certified. A similar putative class action filed in the United States District Court of the Southern District of Texas has been transferred and consolidated with the Class Action. The plaintiffs in the Class Action claim to have purchased the Company's securities at prices which the Company and the individual defendants allegedly artificially inflated by, among other things: (i) misrepresenting the potential value of the patent license agreement the Company entered into with AT&T; (ii) improperly accounting for revenues and expenses in connection with certain license and advertising agreements; (iii) failing to disclose the existence of an inquiry initiated by the Securities and Exchange Commission ("SEC"); and (iv) making statements regarding the employment of John Sculley. In addition, there are claims against certain of the individual defendants for improper insider trading. The Company's former management, based on the advice of its then counsel, believed it had good and meritorious defenses to the claims against it. The Company's new management, along with its new counsel, are involved in the ongoing process of evaluating the pending litigation. While the effect of the bankruptcy filing and likely outcome of these claims are uncertain at this time, the Company hopes to use the bankruptcy process to assist it in reaching a resolution to this and other litigation. On November 8, 1995, the Company reached an agreement in principle on a framework for settlement of the Class Action lawsuit that has been pending against the Company and certain of its present and former employees since May 1993. On January 19, 1996, the Bankruptcy Court approved Spectrum's participation in the framework. The class plaintiffs in that lawsuit filed a claim against the Company in its bankruptcy proceedings in the amount of $676 million. The settlement, if consummated, would be in satisfaction of that claim as well as all claims between the Company and the other defendants in the suit. The settlement is contingent on numerous factors, including among other things successfully resolving a litigation regarding insurance coverage (see below), negotiation and execution of a definitive settlement agreement, the Company's ability to develop and confirm a plan of reorganization in the Company's pending bankruptcy proceeding satisfactory to all interested parties including plaintiffs in the class action, and approval of the settlement by the United States District Court in which the class action suit is pending. Under the terms of the agreement in principle, the Company and the class plaintiffs have agreed to a framework under which it is contemplated that the Company will issue to the class plaintiffs in its plan of reorganization a number of shares of its preferred stock, which will automatically convert into common stock at the end of two years, equal in number to the shares of its common stock to be issued to existing shareholders in the reorganization. This understanding is subject to contingencies which could alter the framework of the settlement, including without limitation the percentage of the Company's stock to be issued to the class. In a related agreement, the class plaintiffs are also to receive the proceeds, net of certain fees and expenses of approximately $1 million, from $10 million of insurance policies covering the Company's directors and officers and, in addition, as a result of court supervised negotiations and on the recommendation of the Court, $1,350,000 from the various individual defendants in the action and $250,000 from the Company. Neither the Company nor the individual defendants acknowledged any wrongdoing in connection with the agreement in principle. Among the uncertainties is that insurers that issued policies for $6 million of the insurance necessary to fund the settlement have disclaimed coverage. This dispute is the subject of a litigation pending in the U.S. District Court for the Eastern District of Long Island, which must be successfully resolved in order for the settlement to be implemented. The Company's plan of reorganization must also address other material litigation, claims by the Company's creditors and the Company's need for additional capital. There can be no assurance that the Company will be successful in its efforts to resolve those matters or that the other conditions to the settlement will be achieved. The Company's exclusive right to file a plan of reorganization expires on March 8, 1996. On July 20, 1994, the Company, certain of its then officers and directors, and two former officers and directors were served with a class action complaint. The complaint asserts that Spectrum knowingly or recklessly made material false statements or omitted material facts in its financial reporting relating to Computer Bay prior to announcing the restatement of earnings for the fiscal year 1992 and the first three quarters of fiscal 1993, to correct inaccurate accruals of certain items into income. For pre-trial purposes, this litigation has been consolidated with the Class Action described above. In May 1993, the SEC initiated a confidential and informal fact gathering inquiry apparently directed toward statements the Company purportedly made regarding the potential value of the patent license agreement it had entered into in fiscal 1994 with AT&T. On December 6, 1993, following the Company's dismissal of its outside auditors, the SEC issued a formal order of investigation. The Company believes that a focus of the investigation relates to accounting and disclosure issues with respect to certain of the patent license and advertising agreements it entered into during fiscal 1994 and, based on recent requests for information from the SEC, may also relate to other activities of the Company's previous management. The Company is cooperating fully with the investigation. The accounting treatment at issue in the investigation, which had been implemented after consultation with the Company's previous outside auditors and had been disclosed in the Company's quarterly filings with the SEC, was revised by the Company when it voluntarily restated its earnings on February 7, 1994. In October 1994, two individuals commenced an action against two of the Company's former officers and directors, Silverberg, et. al. v. Sculley, et. al., in the Superior Court of the State of California for the County of Los Angeles, Case No. BC 111206. The claims against the former officers and directors include breach of fiduciary duty, breach of covenant of good faith and fair dealing, deceit and misrepresentation, negligent misrepresentation, mismanagement and gross negligence. The complaint was subsequently amended to add the Company as a defendant. In November, 1995, the parties reached a settlement of this matter, the terms of which are confidential. In March 1995, Peter Caserta, Spectrum's former chief executive officer and chairman of the Board, Howard Schor, a former employee, John Bohrman, a former director, James Paterek, former president of Spectrum Global (which was sold by Spectrum in October), and nine other non-Company employees were indicted on charges of mail and wire fraud relating to activities of the Caserta Group, a financial services company Mr. Caserta headed. In January 1996, Mr. Caserta and Mr. Schor pleaded guilty to certain charges against them. The United States Attorney's Office for the Eastern District of New York also informed the Company that it is the subject of an investigation regarding violations of securities laws that may have occurred prior to the appointment of the Company's current CEO and Board of Directors. The Company is cooperating fully with the investigation. Patent Related Proceedings During August 1994, Megahertz Corporation filed a Demand for Arbitration with the American Arbitration Association in Salt Lake City, Utah, Case No. 81 184 0008194, seeking a determination as to whether royalty payments by Megahertz were temporarily abated under the terms of a license agreement between Megahertz and Spectrum. Megahertz, in its arbitration request, asked for a determination of whether the Company has achieved certain licensing objectives and/or undertaken defined patent enforcement actions as set forth in the agreement. The parties jointly agreed to delay this proceeding in December 1994. The arbitration was subsequently automatically stayed by the Company's bankruptcy filing. On February 6, 1996, Megahertz, its parent company, U.S. Robotics, and Spectrum entered into a settlement agreement with respect to all disputes among them, subject to the approval of the Bankruptcy Court, which approval is being sought (Note 7). On December 5, 1994, the Company filed a lawsuit against Motorola, Inc. for infringement of claims in six of its patents covering basic wireless data concepts. Motorola has denied the allegations in its answer. The case was originally filed in the United States District Court for the Eastern District of Virginia, but was transferred to the United States District Court for the Northern District of Alabama, Northeastern Division, and is captioned Spectrum Information Technologies, Inc. v. Motorola, Inc., Civil Action No. 95-U-234-NE. The parties stipulated to extend the dates in the case's original scheduling order by three months to permit the parties to pursue settlement discussions. In January 1996, the parties entered another such stipulation. Other Proceedings In January 1994, Robert Fallah, a former financial consultant instituted a suit, Fallah v. Spectrum Information Technologies,Inc., Index No. 94-1044, against the Company seeking $5,790,000 in damages related to purported promises made by the Company to give the plaintiff certain stock warrants in exchange for the consultant's services. The plaintiff filed a proof of claim in the Company's bankruptcy proceeding alleging $5,790,000 in damages. The Company has filed an objection to this claim in the Bankruptcy Court. In September 1994, the plaintiff in an action filed against the Company in April 1994, Blair v. Spectrum Information Technologies, 162nd District Court of Dallas County, amended his complaint to add Peter Caserta, a former officer and director of the Company, as a defendant. The amended complaint charges Mr. Caserta with breach of fiduciary duty, fraud, negligence and gross negligence in the alleged failure to allow Mr. Blair to participate in the Company's stock option plan. The plaintiff alleges that he was induced to begin employment with Spectrum Cellular through a promise that he would be allowed to participate in the Company's stock option plan and alleges breach of contract, fraud, negligence, breach of fiduciary relationship and bad faith against all defendants. The plaintiff terminated his employment with Spectrum Cellular Corporation in August 1994. Mr. Blair filed a proof of claim in the bankruptcy proceeding alleging $1 million in damages. The Texas lawsuit is stayed as to the Company by operation of the automatic stay. Settlement discussions have taken place between the Company and Mr. Blair's counsel. In October 1994, Gene Morgan and Gene Morgan Financial (collectively, "Gene Morgan") demanded in excess of $8 million dollars from the Company based on an alleged breach of a consulting agreement and failure to register certain underwriter's warrants. Gene Morgan filed a proof of claim in the bankruptcy proceeding claiming an unsecured nonpriority claim of $6.3 million alleging breach of contract under warrant. Gene Morgan, by its assignee, Lowenstein, Sandler, Kohl & Fisher, filed a proof of claim alleging approximately $1.9 million in damages arising from the alleged breach of the consulting agreement. The bankruptcy court has ruled that any claim Morgan may have under the warrant is subordinated under Section 510(b) of the bankruptcy code. A trial on this matter is being conducted before the United States Bankruptcy Court for the Eastern District of New York. On July 21, 1995, The Home Insurance Company of Illinois, the Company's former primary directors' and officers' insurance carrier, and certain excess carriers (collectively, the "Home"), filed an adversary proceeding complaint in the Company's bankruptcy proceeding. In its complaint, the Home seeks rescission of a renewal of a directors' and officers' liability and company reimbursement policy issued in June 1993 to the Company for the benefit of its directors and officers based upon material misrepresentations and/or omissions in the application for that policy. The Home also seeks a declaration that coverage is not afforded under such policy for claims asserted against certain directors and officers of the Company. The Home alleges that the Company made certain misrepresentations and/or omissions regarding the existence of an SEC informal investigation and suits filed against the Company arising from alleged misstatements made by the Company regarding the license agreement it entered in fiscal 1994 with AT&T. The action has been removed to the United States District Court for the Eastern District of New York where a trial has been scheduled to begin on February 20, 1996. The Company believes the Home is obligated to provide the coverage at issue and intends to defend this action. In an action against the Company and certain former employees in the Superior Court of New Jersey, Middlesex County, entitled Douglas H. Anderson v. Dealer Service Business Systems, Inc. d/b/a Data One et al., Docket No. L-11315-92, the plaintiff alleged breach by the Company of an employment contract and age discrimination by the plaintiff's employer, Data One. The plaintiff further alleged that the Company and certain former employees interfered with his employment contract and inflicted emotional distress. The action is currently stayed against the Company and Data One by the automatic stay provisions of the Bankruptcy Code. Subsequently, the individual defendants in the litigation other than Peter Caserta, the Company's former CEO, were dropped from the action. The plaintiff and Mr. Caserta entered a settlement, the terms of which are under seal by court order. In October 1995, Mr. Andersen filed a proof of claim against the Company alleging $1.5 million in damages based on the allegations described above. The Company intends to object to this claim on the grounds that, among other things, it was not timely filed. Additionally, Mr. Caserta filed a proof of claim against the Company alleging that he is entitled to indemnification from the Company based on the amount he paid to the plaintiff to settle this matter. Should the Class Action settlement described above be approved, it is the Company's position that Mr. Caserta's claim for indemnity will be released. The Company is also involved in other litigations. The Company had previously reserved approximately $4.7 million which had been prior management's estimate of the Company's portion of any ultimate settlement of the Class Action. The Class Action and other litigations were factors in the Company's decision to file for protection under Chapter 11. The effect of the bankruptcy filing on and the likely outcomes of these claims are uncertain at this time. 6. Asset Dispositions On September 21, 1995, Spectrum sold its Spectrum Cellular facility in Dallas, Texas. The building was sold for approximately $780,000 resulting in a gain on the sale of $85,976. Net proceeds from the sale were $734,000, of which the Company has segregated $72,000 to cover claims related to property taxes filed by the City and County of Dallas. In July, 1995, the Company sold its AXCELL business and its license to certain related patent rights to Telular Corporation ("Telular") for $3,000,000 pursuant to an agreement approved by the Bankruptcy Court, which resulted in a gain of approximately $1,616,000. Net proceeds of the sale were $3,000,000. The patent rights relate to wireless interface technology and were obtained in a license agreement from Telular, and are not part of Spectrum's core direct connect patent portfolio. The sales of AXCELL products were approximately $132,000 and $894,000 for the nine months ended December 31, 1995 and 1994, respectively, and $152,000 for the three months ended December 31, 1994. On September 11, 1995, the Company entered an agreement to sell all of the capital stock of its wholly owned subsidiary Spectrum Global Services, Inc. ("Global") to The Lori Corporation and COMFORCE Corporation (collectively, "Purchaser") for $6 million, plus a closing adjustment related primarily to the allocation of salaries and benefits of certain Spectrum and Global employees. Other members of the purchasing group included ARTRA Group Incorporated, a corporation organized under the laws of the State of Pennsylvania, Peter R. Harvey, Marc L. Werner, James L. Paterek, Michael Ferrentino and Christopher P. Franco. The sale of Global was subject to bankruptcy court approval and receipt of higher and better offers. A hearing regarding the transaction (and any higher and better offers) was held on October 17, 1995 before the United States Bankruptcy Court for the Eastern District of New York, following which the court approved the sale. The Purchaser paid cash for Global's stock at the October 17th closing. Net proceeds from the sale were $4,549,000. Following the sale, Mr. Ferrentino, a vice president of Global, and Mr. Franco, Spectrum's vice president and former general counsel, assumed senior management positions with the Purchaser, and the Purchaser announced that Mr. Paterek, president of Global, would become a consultant to COMFORCE Corporation. 7. Subsequent Events On November 8, 1995, the Company reached an agreement in principle on a framework for settlement of the Class Action lawsuit that has been pending against the Company and certain of its present and former employees since May 1993. On January 19, 1996, the Bankruptcy Court approved the framework for settlement of the Class Action. The class plaintiffs in that lawsuit filed a claim against the Company in its bankruptcy proceedings in the amount of $676 million (Note 5). The settlement, if consummated, would be in satisfaction of that claim as well as all claims between the Company and the other defendants in the suit. On January 23, 1996 the Bankruptcy Court approved the Company's motions for approval of severance agreements with two former employees and assumption of modified employment agreements with certain key employees. During January, the Company entered employment agreements with two executive officers: Mikhail Drabkin, as Chief Technical Officer and Richard duFosse as Vice President - Software Engineering. Mr. duFosse joined Spectrum on February 6, 1996 and Mr. Drabkin is scheduled to begin on March 20, 1996. Among other things, the agreements provide that following confirmation of Spectrum's plan of reorganization, each will be entitled to a severance benefit of one year's salary if the Company terminates their employment without just cause. Among the litigation pending against Spectrum when it filed for bankruptcy on January 26, 1995 was an arbitration (the "Arbitration") instituted by Megahertz Corporation ("Megahertz") (Note 5). Since the institution of the Arbitration, Megahertz has been acquired by U.S. Robotics Corporation (collectively, Megahertz and U.S.Robotics are referred to as "U.S. Robotics"), which is the successor in interest to the business assets of Megahertz, including the intellectual property license and advertising agreements between Megahertz and Spectrum. On February 6, 1996, Spectrum and U.S. Robotics executed a settlement in principle, in which, subject to Bankruptcy Court approval, they will enter a stipulation dismissing the Arbitration with prejudice, settle all disputes between Spectrum and U.S. Robotics, consolidate the license and advertising agreements between Spectrum and U.S. Robotics, alter the manner and method by which royalties are paid and create a strategic relationship between Spectrum and U.S. Robotics. The settlement provides in part that U.S. Robotics will pay Spectrum a substantial license fee and that Spectrum and U.S. Robotics will enter a strategic relationship beneficial to Spectrum's business development. Spectrum expects to file a motion seeking bankruptcy court approval of the settlement agreement shortly, which contains confidential information of Spectrum and U.S. Robotics and will be filed under seal with the court. In January 1996, the Company and Motorola entered into a second stipulation to extend for an additional three months the dates in the original scheduling order in the case pending before the U.S. District Court for the Northern District of Alabama in order to permit the parties to pursue settlement discussions (see note 5 to the consolidated financial statements). On February 9, 1996, Spectrum filed a Consolidated Plan of Reorganization Proposed by Spectrum Information Technologies, Inc. and its Affiliated Debtors (the "Plan") and associated Disclosure Statement. The Disclosure Statement describes, among other things, the Plan, Spectrum's proposed business plan, and the proposed capitalization of Spectrum immediately following the effective date of the Plan. A hearing with respect to the Disclosure Statement is scheduled before the Bankruptcy Court for March 7, 1996. Copies of the Plan and Disclosure Statement will not be generally distributed until approval of the Disclosure Statement has been received from the Bankruptcy Court although they will be available for review in the office of the Clerk of the Bankruptcy Court. Following such approval, the Company will file the Disclosure Statement with the Securities and Exchange Commission and distribute copies to its creditors and shareholders. Consistent with the agreement in principle on a framework to settle the Class Action securities litigation that has been pending against the Company since 1993, the Plan provides that the Company's current equity holders will be substantially diluted. The equity distribution, confirmation and effectiveness of the Plan and implementation of the proposed business plan are subject to numerous uncertainties set forth in detail in the Plan and Disclosure Statement. Accordingly, the value of the Company's common stock remains highly speculative. The proposed Plan and Disclosure Statement are subject to amendment, which amendments may be material. Data One intends to formulate a liquidating plan of reorganization to be proposed by Data One (the "Liquidating Plan") and to prepare the related disclosure statement which will be distributed to creditors of Data One. The disclosure statement will describe, among other things, the Liquidating Plan and the proposed distribution to creditors of Data One. SPECTRUM INFORMATION TECHNOLOGIES, INC AND SUBSIDIARIES (DEBTORS IN POSSESSION) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ORGANIZATION AND BUSINESS COMBINATION Spectrum Information Technologies, Inc. (the "Company" or "Spectrum") is a holding company with one continuing subsidiary, Spectrum Cellular Corporation ("Spectrum Cellular"). The Company discontinued the operations of its Dealer Service Business Systems, Inc. subsidiary d/b/a Data One ("Data One") in fiscal 1994 and its Computer Unlimited of Wisconsin, Inc. subsidiary d/b/a Computer Bay ("Computer Bay") in fiscal 1995. The Company sold its Spectrum Global Services, Inc. subsidiary ("Spectrum Global") on October 17, 1995. Spectrum Global, Data One and Computer Bay are reflected in the financial statements as discontinued operations. Effective January 26, 1995, the Company, Data One, Spectrum Cellular and Computer Bay filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. On May 25, 1995, the Bankruptcy Court granted the Company's motion to convert the Chapter 11 filing for Computer Bay to a case under Chapter 7 and, as a result, control of Computer Bay has been transferred to the Computer Bay trustee and no longer rests with the Company. Chapter 11 Proceedings As discussed in Note 1 to the consolidated financial statements, the Company and three of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code, as amended, in the United States Bankruptcy Court for the Eastern District of New York ("Bankruptcy Court"). The Class Action and other litigations were among the factors that contributed to the Company's decision to seek bankruptcy protection in order to position the Company to focus on its core business. Due to the Chapter 11 filing, the Company's liquidity position has been positively affected because the cash requirements for the payment of accounts payable and other liabilities, which arose prior to the Chapter 11 filings, are in most cases deferred until a plan of reorganization is confirmed by the Bankruptcy Court. The Company's liquidity position has also been improved by the sale of the AXCELL (registered trademark) business and related patent rights and Spectrum Global. The positive effect has been offset by the increased administrative and professional fees associated with the Chapter 11 filing and resolution of claims subject to compromise. Management of the Company filed with the Bankruptcy Court a plan of reorganization on February 9, 1996. The adequacy of the Company's capital resources and long-term liquidity will be determined when a plan of reorganization is confirmed by the Bankruptcy Court (see Liquidity and Capital Resources below). SUMMARY OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship that certain items bear to revenue. This summary provides trend data relating to the Company's normal recurring operations. Other items of significance are discussed separately under the captions "Operating Loss", "Other Income and Expense", and "Discontinued Operations" below. Amounts set forth below reflect the Company's Data One, Computer Bay and Spectrum Global subsidiaries as discontinued operations. Three Months Ended Nine Months Ended December 31, December 31, ------------------------ ------------------------ 1995 % 1994 % 1995 % 1994 % ----- -- ---- -- ---- -- ---- -- (Amounts in thousands) Licensing and other Revenue $ 379 75 686 72 $ 1,758 80 1,118 51 Merchandise Sales 125 25 267 28 445 20 1,081 49 Total Revenues $ 504 100 953 100 $ 2,203 100 2,199 100 ---- --- --- --- ----- --- ----- --- Operating costs and expenses: Cost of revenue 67 13 128 13 258 12 445 20 Selling, general and admini- strative expenses 1,821 362 4,094 430 5,368 243 10,263 467 ----- --- ----- ----- ----- --- ----- --- Total operating costs and expenses $ 1,888 375 4,222 443 5,626 255 10,708 487 ----- --- ----- --- ----- --- ------ --- Operating loss $(1,384)(275)(3,269) (343)$(3,423) (155)(8,509) (387) ===== === ===== === ===== === ===== === Consolidated revenues for the three months ended December 31, 1995 decreased by $449,000 or 47% and increased $4,000 for the nine months ended December 31, 1995, respectively, as compared to December 1994. The decrease for the three months ended December 31, 1995 is due to a decrease of $307,000, or 45%, and $142,000, or 53%, in royalty/licensing income and product sales, respectively. Royalties and licensing income decreased primarily as a result of a disputed royalty agreement with a certain licensee. The decrease in product sales is due to the sale of the AXCELL product line. AXCELL sales decreased $152,000 for the three months ended December 31, 1995 as compared to the prior year. The increase in consolidated revenues for the nine months ended December 31, 1995 is due to an increase in royalty/licensing income of $640,000 or 57% offset by a decrease in product sales of $636,000 or 59%. Royalties and licensing income increased primarily as a result of payments received pursuant to the Megahertz and Rockwell license agreements (see note 5 to the consolidated financial statements) offset by decreased royalties due to a disputed royalty agreement with a certain licensee. The decrease in product sales is due to the sale of the AXCELL product line. AXCELL sales decreased $762,000 for the nine months ended December 31, 1995 as compared to the prior year. Operating costs and expenses decreased approximately $2,334,000 or 55% and $5,082,000 or 47% during the three and nine months ended December 31, 1995 as compared to the same periods ending December 31, 1994. These decreases are primarily due to the decrease in selling, general and administrative expenses of approximately $2,273,000 or 56% and $4,895,000 or 48% for the three and nine months, respectively. The decrease in selling, general and administrative expenses for the three and nine months ended December 31, 1995 is primarily due to the decrease in professional fees (other than professional fees associated with the Company's bankruptcy proceeding)of $151,000 and $1,144,000, respectively. These decreases are primarily due to the stay of legal actions while the Company is in Chapter 11 bankruptcy proceedings. Decreases in personnel and related expenses of $464,000 and $702,000, respectively, and a decrease in travel and entertainment expenses of $65,000 and $207,000, respectively, are due to the overall downsizing of the Company. Other administrative expenses decreased $1,246,000 and $2,372,000, respectively, primarily due to the Company's move from Manhasset, New York to a smaller location in Purchase, New York. Advertising expense decreased $347,000 and $470,000 during the three and nine months ended December 31, 1995 primarily due to the sale of the AXCELL product line. Operating Loss The Company's operating loss decreased $1,885,000 or 58% and $5,086,000 or 60% for the three and nine months ended December 31, 1995 as compared to the same periods in the prior year. The decreases are primarily due to the decreased selling, general and administrative expenses of 56% and 48%, respectively for the three and nine month periods reported, as well as a decrease in cost of goods sold of $61,000 or 48% and $187,000 or 42%, respectively, for the three and nine months ended December 31, 1995 as compared to the prior year due to the sale of the AXCELL product line. Other Expense and Income Other income increased $186,000 and $1,820,000, respectively, for the three and nine months ended December 31, 1995 compared to the prior year. The large increase for the nine months ended December 31, 1995 is primarily due to the gain of $1,616,000 on the sale of the AXCELL product line. Discontinued Operations As of January 25, 1995, the Company closed its Computer Bay subsidiary which is reflected as a discontinued operation in the consolidated financial statements. The Company did not record a provision related to its anticipated loss on a disposal because the case was converted into a Chapter 7. As a result of the conversion, the Company has recorded a gain of $2,539,000 by writing off the net liabilities of Computer Bay. The Computer Bay trustee has filed a claim in the Bankruptcy Court to substantively consolidate the Computer Bay liabilities with the liabilities of the Debtors. However, the Company does not believe there are grounds for such consolidation. (See note 2 to consolidated financial statements). As of October 17, 1995, the Company sold its Spectrum Global subsidiary which is reflected as a discontinued operation in the consolidated financial statements(See note 7 to consolidated financial statements). Data One intends to formulate a liquidating plan of reorganization to be proposed by Data One (the "Liquidating Plan") and to prepare the related disclosure statement which will be distributed to creditors of Data One. The disclosure statement will describe, among other things, the Liquidating Plan and the proposed distribution to creditors of Data One. Cumulative Effect of Change in Accounting Principle In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective for fiscal years beginning after December 15, 1993. The cumulative effect of adopting SFAS No. 115 as of April 1, 1994 resulted in a increase in income of approximately $316,000 (see note 1 to the consolidated financial statements). Liquidity and Capital Resources Since inception, the Company has experienced significant operating losses and operating cash flow deficits which ultimately caused the Company to restructure its largest subsidiary, Computer Bay, as a discontinued operation and to file for bankruptcy protection under Chapter 11 on January 26, 1995 (see Chapter 11 proceedings above). During the nine months ended December 31, 1995, working capital (current assets less current liabilities) decreased by approximately $1,916,000 to $7,517,000. This decrease is primarily due to an increase in accrued liabilities of $1,461,000 primarily due to professional fees associated with bankruptcy related issues. Net cash used by continuing operations decreased approximately $9,037,000 when compared to the prior year primarily as a result of the Company's net loss from operating activities decreasing from $12,073,000 for the nine months ended December 31, 1994 to $123,000 for the nine months ended December 31, 1995. In addition, through downsizing and bankruptcy protection relating to litigations and indemnifications, the Company was able to decrease its operating expenses as compared to the prior year. An increase in accrued expenses primarily related to bankruptcy professional fees was also responsible for the decrease in cash used. Net cash provided by investing activities decreased $467,000 for nine months ended December 31, 1995 when compared to the prior fiscal year due to the cash proceeds from the sales of the Global subsidiary, AXCELL product line and real property in Dallas, as compared to the cash proceeds from the sale of marketable securities in fiscal 1995. Capital expenditures amounted to approximately $58,000 for the nine months ended December 31, 1995. These expenditures are primarily related to office relocation and rejected capital leases. Capital expenditures for the nine months ended December 31, 1994 were approximately $130,000. The Company has no material commitments outstanding as of quarter end; however, the Company anticipates that capital expenditures may increase as a result of anticipated efforts to further develop core technology. There were no financing activities during the nine months ended December 31, 1995. During the nine months ended December 31, 1994, certain persons exercised stock options and warrants which resulted in a $770,000 increase in cash. For the nine months ended December 31, 1995 net cash required by discontinued operations was $1,861,000 as compared to net cash provided by discontinued operations of $1,214,000 for the nine months ended December 31, 1994. As part of its plan of reorganization the Company is attempting to settle all significant litigation. The adequacy of the Company's capital resources and long-term liquidity will be determined when a plan of reorganization is confirmed by the Bankruptcy Court. However, the uncertainties relating to the confirmation of a plan of reorganization and the continuing losses (see Operating Loss above) raise substantial doubt about the Company's ability to continue as a going concern (see note 1 to consolidated financial statements). The Company continues to evaluate the performance of the continuing subsidiaries in order to conserve cash. In July 1995, the Company received $3,000,000 for the sale of its AXCELL business and the related license to certain patent rights to Telular Corporation ("Telular") (see note 6 to the consolidated financial statements). As a result of the sale, the operations of Spectrum Cellular have been downsized. As of October 17, 1995, the Company sold its Spectrum Global subsidiary for net cash proceeds of approximately $4,549,000 after expenses of $325,000 (see note 6 to the consolidated financial statements). SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES (Debtors in Possession) FORM 10-Q December 31, 1995 PART II. OTHER INFORMATION Item 1. Legal Proceedings Chapter 11 Reorganization Under The Bankruptcy Code On January 26, 1995, the Debtors (see note 1 to the consolidated financial statements) filed petitions for relief under Chapter 11 in the United States Bankruptcy Court for the Eastern District of New York, Case Nos. 195 10690 260, 195 10691 260, 195 10692 260 and 195 10693 260. Spectrum Global did not file for bankruptcy. On February 8, 1995, the United States Trustee appointed an Official Committee of Unsecured Creditors for the Debtors, other than Computer Bay, and another for Computer Bay to represent the interests of all unsecured creditors whose claims arose before the Petition Date. No other committees have been appointed. On May 25, 1995, the Bankruptcy Court, upon motion by the Debtors, converted the Computer Bay Chapter 11 case to a case under Chapter 7 of the Bankruptcy Code. An independent trustee has been appointed to oversee liquidation of Computer Bay's Chapter 7 estate, and the Company no longer has control over the Computer Bay estate. Spectrum and Spectrum Cellular are continuing to manage their affairs and operate their businesses under Chapter 11 as debtors in possession while formulating a plan of reorganization. The operations of Data One were discontinued as of December 31, 1994. By order of the Bankruptcy Court, the bar date for filing proofs of claim in the Chapter 11 proceeding was established as September 7, 1995. Excluding the material litigation discussed herein (see note 5 to the consolidated financial statements) and improperly filed claims by shareholders, approximately 308 claims were filed against the Debtors alleging approximately $5.4 million in creditors' claims. These claims primarily consisted of approximately: $1.7 million in claims by vendors; $855 thousand in claims by former employees based upon severance and employment agreements; $1.2 million in indemnification claims for legal fees and settlement of litigation by former employees; $784 thousand in claims arising from rejected leases; $554 thousand claimed by a Computer Bay financing company; and $314 thousand related to a prepaid Data One maintenance contract. Additionally, the Trustee appointed to administer the Computer Bay estate filed a claim alleging $4.4 million in damages. The Company, along with its outside counsel, is evaluating each of these claims and reconciling them to its books and records. Pursuant to section 362 of the Bankruptcy Code, the commencement of the Company's Chapter 11 case operates as a stay, applicable to all entities, of the following: (i) commencement or continuation of a judicial, administrative, or other proceeding against the Company that was or could have been commenced prior to commencement of the Company's Chapter 11 case, or to recover for a claim that arose before the commencement of the Company's Chapter 11 case; (ii) enforcement of any judgments against the Company that arose before the commencement of the Company's Chapter 11 case; (iii) the taking of any action to obtain possession of property of the Company or to exercise control over property of the Company; (iv) the creation, perfection or enforcement of any lien against the property of the Company; (v) the taking of any action to collect, assess or recover a claim against the Company that arose before the commencement of the Company's Chapter 11 case; or (vi) the setoff of any debt owing to the Company that arose prior to the commencement of the Company's Chapter 11 case against a claim held by such creditor or party-in-interest against the Company that arose before the commencement of the Company's Chapter 11 case. Any entity may apply to the Bankruptcy Court for relief from the automatic stay so that it may enforce any of the aforesaid remedies that are automatically stayed by operation of law at the commencement of the Company's Chapter 11 case. Although the Company is authorized to operate its business as debtor in possession, it may not engage in transactions outside of the ordinary course of business without first complying with the notice and hearing provisions of the Bankruptcy Code and obtaining Bankruptcy Court approval. The Unsecured Creditors' Committee may review and object to transactions involving the Company that are outside of the ordinary course of the Company's business, may consult with the Company concerning the administration of the Company's Chapter 11 case, and may participate in the formulation of a plan of reorganization. The Company is required to pay certain expenses of the Unsecured Creditors' Committee, including counsel and other professional fees, to the extent allowed by the Bankruptcy Court. Other parties in interest in the Chapter 11 case are also entitled to be heard on motions made in the Chapter 11 case, including motions for approval of transactions outside the ordinary course of business. The Bankruptcy Court has approved the Company's retention of: (i) Cleary, Gottlieb, Steen & Hamilton as its outside general counsel; (ii) BDO Seidman, LLP ("BDO Seidman") as its independent auditors; (iii) Sixbey, Friedman, Leedom and Ferguson as its outside patent counsel; (iv) Executive Manning Corporation as a human resources and management consultant; and (v) the Gordian Group, L.P. as a financial advisor to assist in its reorganization. As debtor in possession, the Company has the right, under the relevant provisions of the Bankruptcy Code, to assume or reject executory contracts, including real property leases. Certain parties to such executory contracts with the Company, including parties to such real property leases, may file motions with the Bankruptcy Court seeking to require the Company to assume or reject those contracts or leases. In this context, "assumption" means that the Company cures or provides adequate assurance that it will cure all existing defaults under contract or lease and provides adequate assurance of future performance under the contract or lease. "Rejection," which is a remedy available under the relevant provisions of the Bankruptcy Code, means that the Company is relieved of its obligations to perform further under the contract or lease. Rejection of an executory contract or lease constitutes a breach of that contract immediately before the date of filing of the petition and gives the nondebtor party the right to assert a claim against the bankruptcy estate for damages arising out of the breach which shall be allowed or disallowed as if such claims had arisen before the date of the filing of the petition. The Company has received Bankruptcy Court approval to assume certain modified employment contracts with other employees with preexisting employment agreements, eliminating some contractual perquisites and creating at-will employment relationships with certain of these employees. The Company rejected all leases for automobiles leased on behalf of employees. Additionally, the Company has rejected the real property lease associated with its former Manhasset, New York headquarters and leases for certain furniture and equipment. Prepetition claims that were contingent, unliquidated, or disputed as of the commencement of the Chapter 11 case, including, without limitation, those that arise in connection with rejection of executory contracts, may be allowed or disallowed depending on the nature of the claim. Such claims may be fixed by the Bankruptcy Court or otherwise agreed upon by the parties. Under the Bankruptcy Code, an allowed claim of a creditor that is secured by a lien on property of the Company's estate, or that is subject to a valid right of setoff, is a secured claim to the extent of the value of such creditor's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim. Generally, claims for unmatured interest are not allowable. To the extent that an allowed claim is secured by property whose value, after recovery of the reasonable, necessary costs and expense of preserving or disposing of such property, is greater than the amount of such claim the creditor generally is allowed interest on such claim and any reasonable fees, costs, or charges provided for under the agreement which such claim rose. Plan of Reorganization - Procedures. For 120 days after the Petition Date, the Company has the exclusive right to propose and file a plan of reorganization with the Bankruptcy Court. If the Company files a plan of reorganization during the 120 day exclusivity period, no other party may file a plan of reorganization until 180 days after the Petition Date, during which period, the Company has the exclusive right to solicit acceptance of the plan. If the Company fails to file a plan during the 120-day exclusivity period or such additional time period ordered by the Bankruptcy Court (the "Exclusivity Period") or, after such plan has been filed, fails to obtain acceptance of such plan from impaired classes of creditors and equity security holders during the exclusive solicitation period or such additional time period ordered by the Bankruptcy Court, any party-in-interest, including a creditor, an equity security holder, a committee of creditors, or an indenture trustee, may file a plan of reorganization in the Chapter 11 proceedings. Additionally, if the Bankruptcy Court were to appoint a Chapter 11 trustee, any party-in-interest may file a plan, regardless of whether any additional time remains in the Company's Exclusivity Period. On January 23, 1996 the Bankruptcy Court granted the Company's request to extend the Exclusivity Period to March 8, 1996. The Company filed a plan of reorganization on February 9, 1996 (see Other Proceedings below). The Company filed with its Chapter 11 petition a list containing the names and addresses of its twenty largest known creditors for the Company and for each of the three filing subsidiaries. The Company, Spectrum Cellular and Data One have, within the time periods set by the Bankruptcy Court, filed with the Bankruptcy Court schedules of assets and liabilities and other schedules and statements of affairs as required by Bankruptcy Rules and by the Local Rules of the Bankruptcy Court. Section 501 of the Bankruptcy Code allows any creditor or indenture trustee to file a proof of claim with the Bankruptcy Court and any equity security holder to file a proof of interest with the Bankruptcy Court. A claim or interest, proof of which is filed under Bankruptcy Code Section 501, is deemed allowed, unless a party-in-interest (including the Company) objects thereto. If an objection is made to the allowance of a claim, the Bankruptcy Court, after notice and hearing will determine the amount, validity, and priority of such claim. The last date (bar date) for filing proofs of claim or interest was established by order of the Bankruptcy Court as September 7, 1995. These claims are liabilities subject to compromise under a plan of reorganization (See note 3 to the consolidated financial statements). Now that a plan has been filed with the Bankruptcy Court on February 9, 1996, it will be sent with a disclosure statement approved by the Bankruptcy Court after notice and hearing, to members of all classes of impaired creditors and equity security holders entitled to vote with ballots for acceptance or rejection. Such hearing has been scheduled for March 7, 1996. The proposed Plan and Disclosure Statement are subject to amendment, which amendments may be material. Following acceptance or rejection of any plan by impaired classes of creditors and equity security holders, the Bankruptcy Court at a hearing on notice would consider whether to confirm the plan. Among other things, to confirm a plan, the Bankruptcy Court is required to find that (i) each holder of a claim or interest of an impaired class of creditors and equity security holders either has accepted the plan or will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the Company were liquidated under Chapter 7 of the Bankruptcy Code on such date, (ii) if any class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, and (iii) confirmation of the plan is not likely to be followed by the liquidation or need for further financial reorganization of the Company or any successor, unless such liquidation or reorganization is proposed in the plan. If at least one class of claims that is impaired under the plan has accepted the plan, and certain other requirements of the Bankruptcy Code relating to plan confirmation are satisfied, the proponent of the plan may invoke the so-called "cramdown" provisions of section 1129(b) of the Bankruptcy Code. Under these provisions, the Bankruptcy Court, on request of the proponent of the plan, shall confirm the plan if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan. As used in the Bankruptcy Code, the phrases "discriminate unfairly" and "fair and equitable" have narrow and specific meanings. A "cramdown" might result in holders of the Company's Common Stock receiving no property or other value for their equity security interests. Because of this and other possibilities, the value of the Company's Common Stock is highly speculative. The Company intends to formulate a liquidating plan of reorganization to be proposed by Dealer Service Business Systems d/b/a Data One (the "Liquidating Plan") and to prepare the associated disclosure statement which will be distributed to creditors of Data One. The disclosure statement will describe, among other things, the Liquidating Plan and the proposed distribution to creditors of Data One. Other Proceedings On November 8, 1995, the Company reached an agreement in principle on a framework for settlement of the Class Action lawsuit that has been pending against the Company and certain of its present and former employees since May 1993. On January 19, 1996, the Bankruptcy Court approved the framework for settlement of the Class Action. The class plaintiffs in that lawsuit filed a claim against the Company in its bankruptcy proceedings in the amount of $676 million (see note 5 to consolidated financial statements). The settlement, if consummated, would be in satisfaction of that claim as well as all claims between the Company and the other defendants in the suit. The settlement is contingent on numerous factors, including among other things successfully resolving a litigation regarding insurance coverage (see note 5 to consolidated financial statements), negotiation and execution of a definitive settlement agreement, the Company's ability to develop and confirm a plan of reorganization in the Company's pending bankruptcy proceeding satisfactory to all interested parties including plaintiffs in the class action, and approval of the settlement by the United States District Court in which the class action suit is pending. Under the terms of the agreement in principle, the Company and the class plaintiffs have agreed to a framework under which it is contemplated that the Company will issue to the class plaintiffs under its Plan a number of shares of its preferred stock, which will automatically convert into common stock at the end of two years, equal in number to the common stock to be issued to existing shareholders under the Plan. This understanding is subject to contingencies which could alter the framework of the settlement, including without limitation the percentage of the Company's stock to be issued to the class. In a related agreement, the class plaintiffs are also to receive the proceeds, net of certain fees and expenses amounting to approximately $1 million, from $10 million of insurance policies covering the Company's directors and officers and, in addition, as a result of court supervised negotiations and on the recommendation of the Court, $1,350,000 from the various individual defendants in the action and $250,000 from the Company. Neither the Company nor the individual defendants acknowledged any wrongdoing in connection with the agreement in principle. Among the uncertainties is that insurers that issued policies for $6 million of the insurance necessary to fund the settlement have disclaimed coverage. This dispute is the subject of a litigation pending in the U.S. District Court for the Eastern District of Long Island, which must be successfully resolved in order for the settlement to be implemented (see note 5 to consolidated financial statements). The Company's plan of reorganization must also address other material litigation, claims by the Company's creditors and the Company's need for additional capital. There can be no assurance that the Company will be successful in its efforts to resolve those matters or that the other conditions to the settlement will be achieved. The Company's exclusive right to file a plan of reorganization expires on March 8, 1996. On February 9, 1996, Spectrum filed a Consolidated Plan of Reorganization Proposed by Spectrum Information Technologies, Inc. and its Affiliated Debtors (the "Plan") and associated Disclosure Statement. The Disclosure Statement describes, among other things, the Plan, Spectrum's proposed business plan, and the proposed capitalization of Spectrum immediately following the effective date of the Plan. A hearing with respect to the Disclosure Statement is scheduled before the Bankruptcy Court for March 7, 1996. Copies of the Plan and Disclosure Statement will not be distributed until approval of the Disclosure Statement has been received from the Bankruptcy Court although they will be available for review in the office of the Clerk of the Bankruptcy Court. Following such approval, the Company will file the Disclosure Statement with the Securities and Exchange Commission and distribute copies to its creditors and shareholders. Consistent with the agreement in principle on a framework to settle the Class Action litigation that has been pending against the Company since 1993, the Plan provides that the Company's current equity holders will be substantially diluted. The equity distribution, confirmation and effectiveness of the Plan and implementation of the proposed business plan are subject to numerous uncertainties set forth in detail in the Plan and Disclosure Statement. Accordingly, the value of the Company's common stock remains highly speculative. The proposed Plan and Disclosure Statement are subject to amendment, which amendments may be material. Data One intends to formulate a liquidating plan of reorganization to be proposed by Data One (the "Liquidating Plan") and to prepare the related disclosure statement which will be distributed to creditors of Data One. The disclosure statement will describe, among other things, the Liquidating Plan and the proposed distribution to creditors of Data One. On January 23, 1996 the Bankruptcy Court approved the Company's motions for approval of severance agreements with two former employees and assumption of modified employment agreements with certain key employees. During January, the Company entered employment agreements with two executive officers: Mikhail Drabkin, as Chief Technical Officer and Richard duFosse as Vice President - Software Engineering. Mr. duFosse joined Spectrum on February 6, 1996 and Mr. Drabkin is scheduled to begin on March 20, 1996. Among other things, the agreements provide that following confirmation of Spectrum's plan of reorganization, each will be entitled to a severance benefit of one year's salary if the Company terminates their employment without just cause. Among the litigation pending against Spectrum when it filed for bankruptcy on January 26, 1995 was an arbitration (the "Arbitration") instituted by Megahertz Corporation ("Megahertz") (see note 5 to the consolidated financial statements). Since the institution of the Arbitration, Megahertz has been acquired by U.S. Robotics Corporation (collectively, Megahertz and U.S. Robotics are referred to as "U.S. Robotics"), a subsidiary of which is the successor in interest to the business assets of Megahertz, including the intellectual property license and advertising agreements between Megahertz and Spectrum. On February 6, 1996, Spectrum and U.S. Robotics executed a settlement in principle, in which, subject to Bankruptcy Court approval, they will enter a stipulation dismissing the Arbitration with prejudice, settle all disputes between Spectrum and U.S. Robotics, consolidate the license and advertising agreements between Spectrum and U.S. Robotics, alter the manner and method by which royalties are paid and create a strategic relationship between Spectrum and U.S. Robotics. The settlement provides in part that U.S. Robotics will pay Spectrum a substantial license fee and that Spectrum and U.S. Robotics will enter a strategic relationship beneficial to Spectrum's business development. Spectrum has applied to the bankruptcy court for approval of the settlement, which contains confidential information of Spectrum and U.S. Robotics and has been filed under seal with the court. In January 1996, the Company and Motorola entered into a second stipulation to extend for an additional three months the dates in the original scheduling order in the case pending before the U.S. District Court for the Northern District of Alabama in order to permit the parties to pursue settlement discussions (see note 5 to the consolidated financial statements). Certain other material litigation in which the Company is involved is described in Note 5 to the consolidated financial statements. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K A. Exhibits No. 2. Stock Purchase Agreement, dated September 11, 1995, by and among the Company and The Lori Corporation, COMFORCE Corporation, et al. has been previously filed as an exhibit to the Company's Current Report on Form 8-K dated October 17, 1995 and incorporated herein by reference. 27. Financial Data Schedule 99. Disclosure Statement with Respect to the Consolidated Plan of Reorganization Proposed by Spectrum Information Technologies, Inc. and Spectrum Cellular Corporation Dated as of: February 8, 1996. B. Reports on Form 8-K The Company filed a Current Report on Form 8-K dated October 17, 1995, which included: Item 2, "Acquisition or Disposition of Assets" reporting the sale of the Company's subsidiary, Spectrum Global Services, Inc. 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 13, 1996 SPECTRUM INFORMATION TECHNOLOGIES, INC. By /s/ Donald J. Amoruso ----------------------------------- Donald J. Amoruso Chief Executive Officer and Chairman of the Board of Directors By /s/ Barry J. Hintze ----------------------------------- Barry J. Hintze Controller and Principal Accounting Officer EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES (DEBTORS IN POSSESSION) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS MAR-31-1996 DEC-31-1995 7,968 907 6,965 0 24 16,224 1,363 1,150 16,895 8,707 0 77 0 0 (1000) 16,895 445 2,203 258 5,626 (1,662) 0 0 (123) 0 (4,225) 4,102 0 0 (123) .00 .00
EX-99 3 THE PROPOSED PLAN OF REORGANIZATION AND DISCLOSURE STATEMENT HAVE NOT YET BEEN APPROVED BY THE BANKRUPTCY COURT. A HEARING WITH RESPECT TO THE ADEQUACY OF THE DISCLOSURE STATEMENT IS SCHEDULED BEFORE THE BANKRUPTCY COURT FOR MARCH 7, 1996. THE PROPOSED PLAN OF REORGANIZATION AND DISCLOSURE STATEMENT ARE SUBJECT TO AMENDMENT, WHICH AMENDMENTS MAY BE MATERIAL. February 8, 1996 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK - -----------------------------------------x In re : Chapter 11 Case Nos. SPECTRUM INFORMATION TECHNOLOGIES, INC. : 195 10690 260 and SPECTRUM CELLULAR CORPORATION, : 195 10693 260 : Debtors. : : : - -----------------------------------------x ------------------------------------------ DISCLOSURE STATEMENT WITH RESPECT TO THE CONSOLIDATED PLAN OF REORGANIZATION PROPOSED BY SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SPECTRUM CELLULAR CORPORATION DATED AS OF: FEBRUARY 8, 1996 ------------------------------------------ SPECTRUM INFORMATION TECHNOLOGIES, INC. and SPECTRUM CELLULAR CORPORATION Debtors and Debtors in Possession Donald J. Amoruso Chief Executive Officer and Chairman of the Board of Directors 2700 Westchester Avenue Purchase, New York 10577 (914) 251-1800 CLEARY, GOTTLIEB, STEEN & HAMILTON George Weisz Barry M. Fox Arthur H. Kohn Shari Siegel Mary M. McDonald Mary P. Watson One Liberty Plaza New York, New York 10006 (212) 225-2000 Attorneys for Spectrum Information Technologies, Inc. and Spectrum Cellular Corporation, Debtors and Debtors in Possession THE CONFIRMATION AND EFFECTIVENESS OF THE PROPOSED PLAN (AS DEFINED HEREIN) ARE SUBJECT TO MATERIAL CONDITIONS PRECEDENT, SOME OF WHICH MAY NOT BE SATISFIED. SATISFACTION OF THESE CONDITIONS PRECEDENT REMAINS TO BE NEGOTIATED OR LITIGATED. THESE CONDITIONS PRECEDENT INCLUDE, AMONG OTHERS, SUCCESSFUL RESOLUTION OF THE LITIGATION DESCRIBED IN "CONDITIONS PRECEDENT TO EFFECTIVENESS OF THE PLAN," SECTION XII. THESE AND OTHER ISSUES MUST BE RESOLVED TO THE SATISFACTION OF THE PROPONENTS AND IN A MANNER CONSISTENT WITH AVAILABLE RESOURCES BEFORE CONFIRMATION OF THE PLAN. THERE CAN BE NO ASSURANCE THAT THESE ISSUES WILL BE RESOLVED TO THE SATISFACTION OF THE PROPONENTS; IN THE EVENT THEY ARE NOT SATISFACTORILY RESOLVED, THE PLAN MAY NOT BE ABLE TO BE CONFIRMED AND/OR BECOME EFFECTIVE. EVEN IF ALL SUCH ISSUES ARE SATISFACTORILY RESOLVED, THERE CAN BE NO ASSURANCE THAT THE PLAN CAN BE CONFIRMED AND IMPLEMENTED. THE DEBTORS CONTINUE TO FACE SUBSTANTIAL UNCERTAINTIES AND TO SUFFER SIGNIFICANT OPERATING LOSSES AND EXPENSES INCURRED IN CONNECTION WITH THE COMPANY'S PENDING BANKRUPTCY. AS A CONSEQUENCE, THERE CAN BE NO ASSURANCE THAT DEBTORS WILL HAVE SUFFICIENT FUNDS AVAILABLE TO CONTINUE OPERATIONS UNTIL THE PLAN CAN BE CONFIRMED AND IMPLEMENTED. MOREOVER, THE PLAN CONTEMPLATES THAT ALL ADMINISTRATIVE CLAIMS, PRIORITY TAX CLAIMS, PRIORITY NONTAX CLAIMS AND UNSECURED CLAIMS (EACH AS DEFINED IN THE PLAN), TOGETHER WITH CERTAIN OTHER COSTS, WILL BE PAID IN CASH. IN THE EVENT THAT THE AGGREGATE AMOUNT OF ADMINISTRATIVE, PRIORITY TAX, PRIORITY NONTAX AND UNSECURED CLAIMS, TOGETHER WITH CERTAIN COSTS, EXCEEDS THE AMOUNT OF CASH AVAILABLE TO THE DEBTORS, THE PLAN CANNOT BE CONFIRMED WITHOUT THE CONSENT OF THE HOLDERS OF THE ADMINISTRATIVE, PRIORITY TAX AND PRIORITY NONTAX CLAIMS IN ADDITION TO OTHER HOLDERS ENTITLED TO VOTE UNDER THE PLAN. SEE "SUMMARY OF THE PLAN - GENERAL DESCRIPTION OF THE TREATMENT OF CLAIMS," SECTION VIII(D). IN ANY EVENT, NO ASSURANCE CAN BE GIVEN THAT THE DEBTORS WILL HAVE SUFFICIENT FUNDS AVAILABLE TO MAKE ALL PAYMENTS NECESSARY FOR CONFIRMATION AND IMPLEMENTATION OF THE PLAN. TABLE OF CONTENTS I. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . .1 A. General Information. . . . . . . . . . . . . . . . .1 B. Who May Vote and Instructions for Voting . . . . . .2 C. Confirmation of the Plan . . . . . . . . . . . . . .4 D. Contents of the Disclosure Statement . . . . . . . .4 II. OVERVIEW OF THE PLAN. . . . . . . . . . . . . . . . . . .5 A. Summary of Distributions Under the Plan. . . . . . .6 B. Corporate Structure. . . . . . . . . . . . . . . . .8 1. Merger. . . . . . . . . . . . . . . . . . . . .8 2. Capital Structure of Reorganized Spectrum . . .8 3. Board of Directors and Officers . . . . . . . .9 4. Amended Spectrum Certificate and Bylaws . . . 10 5. Business Purpose; Assets. . . . . . . . . . . 10 6. Listing; Exchange Act Reporting . . . . . . . 11 7. Restrictions on Transferability of Shares of Reorganized Spectrum Stock. . . . . . . . . . . . . . . 11 8. Rights Plan . . . . . . . . . . . . . . . . . 12 III. GENERAL INFORMATION ABOUT THE DEBTORS' BUSINESS; RESTRUCTURING EFFORTS AND FILING OF THE CHAPTER 11 CASES . . . . . . . . . . . . . . . . . . . . . . . . . 12 A. Description of the Debtors . . . . . . . . . . . . 12 1. The Operations. . . . . . . . . . . . . . . . 12 2. Directors and Officers. . . . . . . . . . . . 13 B. Summary of the Debtors' Prebankruptcy Restructuring Efforts. . . . . . . . . . . . . . . 16 C. Commencement of Cases. . . . . . . . . . . . . . . 16 D. Summary of the Debtors' Postbankruptcy Restructuring Efforts. . . . . . . . . . . . . . . 16 1. Discontinued Operations and Disposition of Subsidiary. . . . . . . . . . . . . . . . . . 16 2. Dispositions of Other Assets. . . . . . . . . 17 3. Fund Raising Process. . . . . . . . . . . . . 17 IV. CHAPTER 11 PROCEEDINGS AND OTHER RECENT DEVELOPMENTS. . 18 A. Principal Proceedings in the Cases . . . . . . . . 18 1. Stay of Litigation. . . . . . . . . . . . . . 18 2. Executory Contracts . . . . . . . . . . . . . 18 3. Computer Bay Trustee's Claim. . . . . . . . . 19 4. The Debtors' Exclusivity Period . . . . . . . 19 5. Setting of the Bar Date for Prepetition Claims. . . . . . . . . . . . . . 20 B. Other Recent Developments. . . . . . . . . . . . . 20 1. Securities Related Litigation . . . . . . . . 20 2. Patent Related Proceedings. . . . . . . . . . 22 3. Other Proceedings . . . . . . . . . . . . . . 23 V. PROPERTIES OF THE DEBTORS . . . . . . . . . . . . . . . 24 VI. SELECTED OPERATING AND FINANCIAL DATA . . . . . . . . . 26 A. Operating Results for Fiscal Years Ended 1995, 1994 and 1993. . . . . . . . . . . . . . . . . . . 26 B. Unaudited Operating Results for First Three Quarters of Fiscal 1996. . . . . . . . . . . . . . 29 C. Net Worth. . . . . . . . . . . . . . . . . . . . . 31 D. Liquidity and Capital Resources. . . . . . . . . . 31 VII. SUBSTANTIVE CONSOLIDATION OF SPECTRUM AND CELLULAR. . . 34 VIII. SUMMARY OF THE PLAN. . . . . . . . . . . . . . . . . . 35 A. Means of Execution of the Plan . . . . . . . . . . 35 B. General Description of Reorganized Spectrum Stock . . . . . . . . . . . . . . . . . . 36 1. Authorized and Issued Reorganized Spectrum Stock. . . . . . . . . . . . . . . . 36 a. Reorganized Spectrum Common Stock. . . . 36 b. Class A Preferred Stock. . . . . . . . . 37 c. Preferred Stock. . . . . . . . . . . . . 37 2. Voting Rights of Reorganized Spectrum Stock . 38 a. Reorganized Spectrum Common Stock and Class A Preferred Stock Held by the Disbursing Agent or Class Action Trustee. . . . . . . . . . . . . . . . . 38 b. Manner of Voting; Election and Removal of Directors . . . . . . . . . . . . . . 39 c. Class Voting . . . . . . . . . . . . . . 39 d. Quorum . . . . . . . . . . . . . . . . . 39 3. Restrictions on Transferability of Shares of Reorganized Spectrum Stock. . . . . . . . . . 39 4. Legend on Certificates. . . . . . . . . . . . 40 a. Legend on Class A Preferred Stock. . . . 40 b. Legend on Reorganized Spectrum Common Stock . . . . . . . . . . . . . . 40 5. Transactions with Related Parties . . . . . . 41 6. Estimated Equity Value. . . . . . . . . . . . 42 7. Reverse Stock Split . . . . . . . . . . . . . 42 8. Fractional Shares . . . . . . . . . . . . . . 42 9. Rights Plan . . . . . . . . . . . . . . . . . 43 C. Certain Features of Amended Spectrum Certificate and Amended Spectrum Bylaws. . . . . . . . . . . . 45 1. Summary . . . . . . . . . . . . . . . . . . . 45 2. The Evaluation Provision. . . . . . . . . . . 46 3. The Consent Provision . . . . . . . . . . . . 46 4. The Shareholder Meeting Provision . . . . . . 47 5. The Classified Board Provision. . . . . . . . 47 6. The Director Removal Provision. . . . . . . . 48 7. The Business Combination Provision. . . . . . 48 8. The Liability Provision . . . . . . . . . . . 49 9. The Bylaw Amendment Provision . . . . . . . . 49 10. The Restriction on Transfer of Reorganized Spectrum Stock Provision . . . . . . . . . . 50 11. The Amendment Provision . . . . . . . . . . . 51 12. Other Provisions. . . . . . . . . . . . . . . 52 a. Quorum . . . . . . . . . . . . . . . . . 52 b. Ordinary Action by the Board . . . . . . 52 c. Issuance of Rights and Options to Purchase Shares . . . . . . . . . . . . . . . . . 52 d. Supermajority Requirement. . . . . . . . 52 D. General Description of the Treatment of Claims . . 54 1. Unclassified Claims and Distributions . . . . 54 a. Administrative Claims. . . . . . . . . . 54 b. Priority Tax Claims. . . . . . . . . . . 55 2. Classification of Claims and Distributions. . 55 a. General Description. . . . . . . . . . . 55 b. Priority Nontax Claims (Class 1) . . . . 55 c. Unsecured Claims (Class 2) . . . . . . . 55 d. Class Action Claims (Class 3). . . . . . 56 e. Other Securities Claims (Class 4). . . . 56 f. Equity Interests (Class 5) . . . . . . . 56 g. Equitably Subordinated Claims (Class 6). 57 3. Objections to Claims. . . . . . . . . . . . . 57 4. Estimation of and Reserve for Disputed Claims and Interests. . . . . . . . . . . . . 57 E. Distributions under the Plan . . . . . . . . . . . 58 1. Funding of the Plan . . . . . . . . . . . . . 58 2. Fractional Shares . . . . . . . . . . . . . . 58 3. Unclaimed Distributions . . . . . . . . . . . 58 F. Treatment of Executory Contracts and Unexpired Leases . . . . . . . . . . . . . . . . . . . . . . 59 1. Assumption of Executory Contracts and Unexpired Leases. . . . . . . . . . . . . . . . . . . . 59 2. Bar to Rejection Damages. . . . . . . . . . . 59 3. Indemnification Obligations to Be Assumed . . 59 4. Reorganized Spectrum's Liabilities. . . . . . 60 a. Effect of Implementation of the Plan on Existing Employment Agreements . . . . 60 b. Contracts Entered Into on or After the Petition Date. . . . . . . . . . . . . . 60 G. Adoption of Certain Compensation Plans . . . . . . 60 1. Stock Incentive Plan. . . . . . . . . . . . . 60 2. Incentive Deferral Plan . . . . . . . . . . . 66 IX. CERTAIN FACTORS TO BE CONSIDERED. . . . . . . . . . . . 68 A. Reorganized Spectrum's Business Plan . . . . . . . 69 1. Management's Vision . . . . . . . . . . . . . 69 2. Management's Strategic Plan . . . . . . . . . 69 3. The Wireless Data Industry. . . . . . . . . . 70 4. Industry Growth . . . . . . . . . . . . . . . 72 5. Summary of Reorganized Spectrum's Technology. 72 6. Marketing and Product Plan. . . . . . . . . . 74 7. Competition . . . . . . . . . . . . . . . . . 75 B. Certain Risk Factors Affecting Business Plan . . . 76 1. Financial Difficulties. . . . . . . . . . . . 76 2. Competiton. . . . . . . . . . . . . . . . . . 76 3. Legal Expenses and Risks Associated with Proprietary Technology. . . . . . . . . . . . 76 4. Unit Sales Forecast . . . . . . . . . . . . . 76 5. Marketing Channels. . . . . . . . . . . . . . 77 6. Pricing . . . . . . . . . . . . . . . . . . . 77 7. Renegotiation of Existing Licenses. . . . . . 77 8. Certain Litigation. . . . . . . . . . . . . . 77 9. Staffing. . . . . . . . . . . . . . . . . . . 77 C. Major Assumptions. . . . . . . . . . . . . . . . . 78 1. Product and Licensing Business. . . . . . . . 78 2. Costs of Goods Sold . . . . . . . . . . . . . 78 3. Selling, General and Administrative Expenses (All Other Operating Expenses). . . . . . . 78 4. Other Income. . . . . . . . . . . . . . . . . 79 5. Taxes . . . . . . . . . . . . . . . . . . . . 79 6. Balance Sheet Assumptions . . . . . . . . . . 79 D. Management's Summary Projections . . . . . . . . . 80 E. Postconfirmation Liquidity . . . . . . . . . . . . 83 F. Other Risk Factors to Be Considered. . . . . . . . 83 1. Inability to Pay Administrative and Priority Claims. . . . . . . . . . . . . . . . . . . . 83 2. Lack of Established Market for the Common Stock . . . . . . . . . . . . . . . . . . . . 84 3. Potential Unavailability of Substantial Net Operating Loss Carryovers . . . . . . . . . . 84 4. Rights of Holders of Class A Stock. . . . . . 84 X. APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS. . . 85 A. Initial Issuance of Reorganized Spectrum Stock under the Plan . . . . . . . . . . . . . . . . . . . . . 85 B. Resale of Reorganized Spectrum Stock . . . . . . . 85 1. Effect of Applicable Law. . . . . . . . . . . 85 a. Controlling Persons. . . . . . . . . . . 85 b. Accumulators and Distributors. . . . . . 86 c. Syndicators. . . . . . . . . . . . . . . 87 d. Dealers. . . . . . . . . . . . . . . . . 87 2. Effect of Amended Spectrum Certificate. . . . 87 XI. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN . . 88 A. Tax Consequences to the Debtors. . . . . . . . . . 88 1. Debtors' Existing Tax Attributes. . . . . . . 88 Matters Affecting Utilization of the Debtors' Tax Attributes. . . . . . . . . . . . . . . . . . 89 a. "Ownership Change" Under Tax Code Section 382. . . . . . . . . . . . . . . . . . . 89 b. Effect of Tax Code Section 382 . . . . . 89 c. The Bankruptcy Exception under Tax Code Section 382(l)(5). . . . . . . . . . . 90 d. Subsequent Ownership Changes . . . . . . 91 e. Tax Code Section 269 . . . . . . . . . . 91 f. Discharge of Indebtedness. . . . . . . . 91 B. Tax Consequences to the Creditors. . . . . . . . . 91 1. Creditors Receiving Only Cash . . . . . . . . 92 2. Creditors Receiving Common Stock. . . . . . . 92 3. Treatment of Interest . . . . . . . . . . . . 93 XII. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THE PLAN . . . 93 XIII. CONFIRMATION OF THE PLAN . . . . . . . . . . . . . . . 94 A. Confirmation Hearing . . . . . . . . . . . . . . . 94 B. Requirements for Confirmation of the Plan. . . . . 94 C. Definition of Impairment . . . . . . . . . . . . . 97 D. Vote Required for Class Acceptance . . . . . . . . 98 E. Cramdown . . . . . . . . . . . . . . . . . . . . . 98 F. Certain Effects of Confirmation of the Plan by the Bankruptcy Court . . . . . . . . . . . . . . . . . 99 1. Continuing Jurisdiction of the Bankruptcy Court. . . . . . . . . . . . . . . 99 2. Discharge of Claims Against the Debtors and the Officers and Directors. . . . . . . . 99 3. Disallowance of Contribution Claims . . . . .100 4. Rights of Subordination . . . . . . . . . . .100 5. Exclusions of Liability . . . . . . . . . . .100 6. Payment of Fees and Expenses. . . . . . . . .101 a. Professional Fees and Expenses . . . . .101 b. United States Trustee's Fees . . . . . .101 7. Amendments and Modifications. . . . . . . . .101 XIV. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF PLAN. . . . . . . . . . . . . . . . . . . . . . . . . .101 A. Continuation of the Cases. . . . . . . . . . . . .102 B. Alternative Plans of Reorganization. . . . . . . .102 C. Liquidation under Chapter 7 or Chapter 11. . . . .102 XV. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . .104 LIST OF EXHIBITS A. Consolidated Plan of Reorganization Proposed by Spectrum Information Technologies, Inc. and Spectrum Cellular Corporation Dated as of: [ ], 1996 B. Spectrum Information Technologies, Inc.'s Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended March 31, 1995, as amended by Form 8-K dated April 27, 1995 (on file with the Bankruptcy Court and the Securities and Exchange Commission and incorporated by reference herein) C. Spectrum Information Technologies, Inc.'s Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended June 30, 1995, as amended and restated by Form 10-Q/A dated October 3, 1995 and by Form 8-K dated October 17, 1995 (each on file with the Bankruptcy Court and the Securities and Exchange Commission and incorporated by reference herein) D. Spectrum Information Technologies, Inc.'s Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended September 30, 1995 (on file with the Bankruptcy Court and the Securities and Exchange Commission and incorporated by reference herein) E. Spectrum Information Technologies, Inc.'s Quarterly Report to the Securities and Exchange Commission on Form 10-Q for the quarter ended December 31, 1995 (on File with the Bankruptcy Court and the Securities and Exchange Commission and incorporated by reference herein) F. Liquidation Analysis G. Parties in Interest H. Amended Spectrum Bylaws I. Amended Spectrum Certificate J. Stock Incentive Plan K. Incentive Deferral Plan DISCLOSURE STATEMENT WITH RESPECT TO THE CONSOLIDATED PLAN OF REORGANIZATION PROPOSED BY SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SPECTRUM CELLULAR CORPORATION DATED AS OF: [ ], 1996 SECTION I INTRODUCTION A. General Information Spectrum Information Technologies, Inc., a corporation organized under the laws of the State of Delaware ("Spectrum" or the "Company") and Spectrum Cellular Corporation, a corporation organized under the laws of the State of Delaware ("Cellular"), the debtors and debtors in possession (the "Debtors") in the above-referenced jointly administered Chapter 11 cases (the "Chapter 11 Cases) (each a "Proponent" and together, the "Proponents") submit this Disclosure Statement with Respect to the Consolidated Plan of Reorganization Proposed by Spectrum Information Technologies, Inc. and Spectrum Cellular Corporation dated as of: [ ], 1996 (the "Plan") in connection with the solicitation of acceptances for the Plan (the "Disclosure Statement"). A copy of the Plan is attached hereto as Exhibit A. Capitalized terms contained herein have the meanings ascribed to them in the Plan, unless otherwise defined herein. This Disclosure Statement is being transmitted by the Proponents to all known holders of Claims or Interests with respect to the Debtors who have a right to vote (as set forth in "Who May Vote and Instructions for Voting," Section I(B)), to provide adequate information to enable them to make an informed decision in exercising their right to vote for acceptance or rejection of the Plan. On [ ], after notice and a hearing, the United States Bankruptcy Court for the Eastern District of New York (the "Bankruptcy Court"), approved this Disclosure Statement as containing information, of a kind and in sufficient detail, adequate to enable the holders of Claims or Interests with respect to the Debtors to make an informed judgment regarding acceptance or rejection of the Plan. THE BANKRUPTCY COURT'S APPROVAL OF THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE EITHER A GUARANTY OF THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED HEREIN OR AN ENDORSEMENT OF THE PLAN BY THE BANKRUPTCY COURT. THE BOARDS OF DIRECTORS OF THE DEBTORS HAVE APPROVED THE PLAN AND RECOMMEND THAT THE HOLDERS OF CLAIMS OR INTERESTS UNDER THE PLAN WHO ARE ENTITLED TO VOTE THEREON VOTE IN FAVOR THEREOF. IF THE PLAN IS NOT CONFIRMED, THERE CAN BE NO ASSURANCE THAT THE DEBTORS OR ANY OTHER PARTIES IN INTEREST WOULD BE ABLE TO FORMULATE AND CONFIRM ANY OTHER PLAN. IN PARTICULAR, THERE CAN BE NO ASSURANCE THAT THE DEBTORS WILL HAVE SUFFICIENT CASH TO SUPPORT OPERATIONS UNTIL ANOTHER PLAN IS PREPARED, CONFIRMED, AND IMPLEMENTED, AND THERE CAN BE NO ASSURANCE THAT THE DEBTORS WOULD BE ABLE TO OBTAIN ADDITIONAL FUNDING NECESSARY TO CONTINUE OPERATIONS UNTIL SUCH TIME. AS A RESULT, THE DEBTORS' CHAPTER 11 CASES MAY BE CONVERTED TO CHAPTER 7 CASES, OR THE DEBTORS COULD BE FORCED TO LIQUIDATE IN CHAPTER 11, WHICH IN EITHER EVENT WOULD LIKELY RESULT IN THE ELIMINATION OF ANY RECOVERY WHATSOEVER FROM THE DEBTORS BY THE HOLDERS OF CLASS ACTION CLAIMS, SECURITIES CLAIMS AND HOLDERS OF INTERESTS AND SUBSTANTIALLY REDUCED RECOVERIES BY HOLDERS OF ADMINISTRATIVE CLAIMS, PRIORITY TAX CLAIMS , PRIORITY NONTAX CLAIMS (SUCH PRIORITY TAX AND NONTAX CLAIMS REFERRED TO COLLECTIVELY AS "PRIORITY CLAIMS") AND UNSECURED CLAIMS. SEE "LIQUIDATION ANALYSIS," EXHIBIT E. THERE CAN BE NO ASSURANCE THAT ANY PLAN OF REORGANIZATION OF THE DEBTORS CAN BE CONFIRMED OR WILL BECOME EFFECTIVE. IN ANY EVENT, EVEN IF THE PLAN IS CONFIRMED, HOLDERS OF CLASS ACTION SECURITIES CLAIMS, SUBORDINATED CLAIMS AND/OR INTERESTS WILL NOT RECEIVE ANY CASH DISTRIBUTION FROM THE ESTATE; HOLDERS OF SUCH CLASS ACTION CLAIMS, SECURITIES CLAIMS, SUBORDINATED CLAIMS AND/OR INTERESTS WILL, HOWEVER, RECEIVE SECURITIES UNDER THE PLAN IF IT IS CONFIRMED. B. Who May Vote and Instructions for Voting A holder of an impaired Claim that is not disputed or unliquidated is entitled to vote its Claim, respectively, to accept or reject the Plan and such vote is important. A Claim that will not be paid in full or otherwise falls within the definition of "impaired" is considered "impaired." See "Confirmation of the Plan - Definition of Impairment," Section XIII(C). Under the Plan, holders of Claims in Classes 2, 4, and 6 and Interests in Class 5 are impaired (the "Impaired Classes" and, individually, an "Impaired Class") and may vote to the extent such Claim is not unliquidated or disputed or, in the case of Interests, to the extent such Interests are reflected on the records of the Stock Transfer Agreement on the Record Date. HOLDERS OF CLAIMS IN CLASSES 1 AND 3 ARE NOT IMPAIRED, ARE DEEMED TO HAVE ACCEPTED THE PLAN AND NEED NOT VOTE. See "Summary of the Plan - General Description of the Treatment of Claims," Section VIII(D). The holder of an impaired Claim entitled to vote, after carefully reviewing this Disclosure Statement, including the Plan and other exhibits attached hereto, should indicate acceptance or rejection of the Plan by voting in favor of or against the Plan on the enclosed ballot, and returning the ballot to [ ], the Proponents' information agent, at the address set forth on the ballot, in the enclosed return envelope so that it is received by the Proponents' information agent no later than 5:00 p.m., Eastern Standard Time, on [ ] (the "Voting Deadline"). Only the beneficial owners of Interests are entitled to vote to accept or reject the Plan. The record holders of Interests will receive Disclosure Statements and ballots for voting on the Plan, together with instructions for (i) voting on the Plan if the record holder is also the beneficial owner of the Interest or (ii) disseminating the Disclosure Statement and ballots to the beneficial owner or owners represented by such record holder and compiling a master ballot on such beneficial owners' behalf. The record holders of Interests entitled to vote should indicate acceptance or rejection of the Plan in accordance with the instructions provided with their ballots and return such ballots to the Proponents' information agent by the Voting Deadline. Any questions with respect to the procedures for voting Allowed Interests or requests for additional ballots or Disclosure Statements for beneficial owners of such Interests should be directed to the Proponents' information agent. ANY BALLOT RECEIVED BY THE PROPONENTS' INFORMATION AGENT THAT DOES NOT INDICATE ACCEPTANCE OR REJECTION OF THE PLAN WILL BE DEEMED TO CONSTITUTE ACCEPTANCE OF THE PLAN. ANY BALLOTS RECEIVED BY THE PROPONENTS' INFORMATION AGENT AFTER 5:00 P.M., EASTERN STANDARD TIME, ON [ ], WILL NOT BE COUNTED. IF YOU ARE THE HOLDER OF AN UNDISPUTED LIQUIDATED CLAIM IN AN IMPAIRED CLASS, THE ENCLOSED BALLOT SETS FORTH A CLAIM AMOUNT BASED EITHER ON YOUR PROOF OF CLAIM OR ON THE DEBTORS' SCHEDULES OF LIABILITIES. BY INCLUDING SUCH CLAIM AMOUNT ON THE BALLOT, DEBTORS ARE NOT ADMITTING THAT YOU HAVE A CLAIM IN THE STATED OR ANY OTHER AMOUNT AND ARE NOT WAIVING ANY RIGHTS THEY MAY HAVE TO OBJECT TO YOUR VOTING OF THE CLAIM IN SUCH AMOUNT OR ANY OTHER AMOUNT OR YOUR RECOVERY UNDER THE PLAN BASED ON SUCH AMOUNT OR ANY OTHER AMOUNT. Ballots have been sent to the holders in all Impaired Classes that are entitled to vote on the Plan, including holders of Claims as to which the Debtors have not yet objected but retain the right to do so after confirmation of the Plan, but excluding holders of Claims that are unliquidated or indicate a $0.00 amount as reflected in the Proofs of Claim that have been filed with respect thereto. The Bankruptcy Code provides that only the holders of Allowed Claims or Interests (or Claims or Interests that are deemed Allowed) are entitled to vote on the Plan. A Claim as to which an objection has been filed and is still pending is a Disputed Claim and is not entitled to vote unless the Bankruptcy Court temporarily allows the Claim in an amount which it deems proper solely for the purpose of voting on the Plan. Although some holders of Disputed Claims may receive ballots, their votes will not be counted if any objection has been filed on or before [ ] and the Bankruptcy Court does not rule thereon in the Claimant's favor or, with respect to unliquidated claims, temporarily allow such Claims for purposes of voting on the Plan. Creditors who believe they are entitled to vote all or a portion of their Disputed Claims must file an application with the Bankruptcy Court for such a determination prior to the Confirmation Date. The fact that you receive a ballot or ballots does not signify that your Claim has been allowed for any purposes including final allowance or for the purpose of voting. C. Confirmation of the Plan For the Plan to be confirmed, it must be accepted by each Class of Allowed Claims and Interests whose rights are impaired by the Plan, except as otherwise set forth below. Under the Bankruptcy Code, a Class of Claims is deemed to have accepted the Plan if the Plan is accepted by creditors of such Class that hold at least two-thirds in amount and more than one-half in number of the Allowed Claims of such Class that have voted on the Plan. Under the Bankruptcy Code, a Class of Interests is deemed to have accepted the Plan if the Plan is accepted by holders of such Interests that hold at least two-thirds in amount of the Allowed Interests in such Class that have voted on the Plan. Regardless of whether the requisite acceptances with respect to the Plan are obtained for all of the Classes that are being requested to vote, the Proponents, in accordance with section 1129(b) of the Bankruptcy Code, intend to request the Bankruptcy Court to confirm the Plan, provided that at least one impaired class has accepted the Plan, because the Plan does not discriminate unfairly and is fair and equitable with respect to each class of Claims and Interests that is impaired. See "Confirmation of the Plan - Cramdown," Section XIII(E). The Bankruptcy Court has entered an order fixing [ ], 1996 at [ ] Eastern Standard Time, Courtroom 313, United States Courthouse, 75 Clinton Street, Brooklyn, New York, as the date, time and place for a hearing on confirmation of the Plan (the "Confirmation Hearing"), and filing by 5:00 p.m. Eastern Standard Time, on [ ], 1996, as the time by which all objections to confirmation of the Plan must be filed with the Court and received by the Proponents. Any objections to confirmation of the Plan must be in writing and must be filed and served in accordance with the procedure described below. See "Confirmation of the Plan - Confirmation Hearing," Section XIII(A). D. Contents of the Disclosure Statement NO PARTY IS AUTHORIZED TO GIVE INFORMATION WITH RESPECT TO THE PLAN OTHER THAN THAT CONTAINED IN THIS DISCLOSURE STATEMENT. NO REPRESENTATIONS CONCERNING THE DEBTORS, THEIR BUSINESS OPERATIONS OR THE VALUE OF THEIR PROPERTY HAVE BEEN AUTHORIZED, OTHER THAN AS SET FORTH IN THIS DISCLOSURE STATEMENT. ANY INFORMATION, REPRESENTATIONS OR INDUCEMENTS MADE TO OBTAIN YOUR ACCEPTANCE THAT ARE OTHER THAN OR INCONSISTENT WITH THE INFORMATION CONTAINED HEREIN AND IN THE PLAN SHOULD NOT BE RELIED UPON BY ANY HOLDER OF A CLAIM IN VOTING ON THE PLAN. UNAUTHORIZED INFORMATION, REPRESENTATIONS OR INDUCEMENTS SHOULD BE REPORTED TO THE PROPONENTS OR THEIR RESPECTIVE COUNSEL WHO SHALL DELIVER SUCH INFORMATION TO THE BANKRUPTCY COURT FOR SUCH ACTION AS IT MAY DEEM APPROPRIATE. THIS DISCLOSURE STATEMENT CONTAINS A SUMMARY OF CERTAIN PROVISIONS OF THE PLAN, CERTAIN OTHER DOCUMENTS AND CERTAIN FINANCIAL INFORMATION. WHILE THE PROPONENTS BELIEVE THAT THESE SUMMARIES ARE FAIR AND ACCURATE IN ALL MATERIAL RESPECTS AND PROVIDE ADEQUATE INFORMATION WITH RESPECT TO DOCUMENTS SUMMARIZED, SUCH SUMMARIES ARE QUALIFIED TO THE EXTENT THAT THEY DO NOT SET FORTH THE ENTIRE TEXT OF SUCH DOCUMENTS. FURTHER, CERTAIN OF THE FINANCIAL INFORMATION CONTAINED HEREIN MAY BE DATED AND HAS NOT BEEN SUBJECT TO AN AUDIT. THE PROPONENTS HAVE MADE EVERY EFFORT TO BE ACCURATE IN ALL MATERIAL RESPECTS; HOWEVER, THE PROPONENTS ARE UNABLE TO WARRANT OR REPRESENT THAT THE INFORMATION CONTAINED HEREIN IS WITHOUT ANY MATERIAL INACCURACIES. THE PROPONENTS CAUTION THAT, ALTHOUGH THE PROJECTED FINANCIAL STATEMENTS HAVE AS THEIR BASIS SPECTRUM'S ASSESSMENT OF ITS BUSINESS, NO REPRESENTATIONS CAN BE MADE WITH RESPECT TO THE ACCURACY OF THE PROJECTIONS OR THE ABILITY TO ACHIEVE THE PROJECTED RESULTS. MANY OF THE ASSUMPTIONS UPON WHICH THESE PROJECTIONS ARE BASED ARE SUBJECT TO MAJOR UNCERTAINTIES. SOME ASSUMPTIONS INEVITABLY WILL NOT MATERIALIZE, UNANTICIPATED EVENTS AND CIRCUMSTANCES MAY OCCUR AND, ACCORDINGLY, THE ACTUAL RESULTS ACHIEVED THROUGHOUT THE PROJECTION PERIOD WILL VARY FROM THE PROJECTED RESULTS AND THE VARIATIONS MAY BE MATERIAL. THIS DISCLOSURE STATEMENT WAS APPROVED BY THE BANKRUPTCY COURT, AFTER NOTICE AND A HEARING, AS CONTAINING ADEQUATE INFORMATION AS DEFINED IN THE BANKRUPTCY CODE. EACH HOLDER OF AN IMPAIRED CLAIM OR INTEREST ENTITLED TO VOTE SHOULD REVIEW THE ENTIRE PLAN AND THIS DISCLOSURE STATEMENT (AND THE EXHIBITS THERETO AND HERETO) BEFORE CASTING ITS BALLOT. SECTION II OVERVIEW OF THE PLAN THIS DISCLOSURE STATEMENT AND THE PLAN ASSUME THAT THE PLAN IS CONFIRMED BY THE BANKRUPTCY COURT ON [ ], 1996 AND THAT THE EFFECTIVE DATE WILL OCCUR ON OR BEFORE [ ]. THE DEBTORS CONTINUE TO FACE SUBSTANTIAL UNCERTAINTIES CONCERNING PENDING LITIGATION WHICH COULD AFFECT THEIR ABILITY TO CONFIRM AND IMPLEMENT THE PLAN. OTHER SUBSTANTIAL UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, CONTINUING SIGNIFICANT OPERATING LOSSES THAT CONTINUE TO AFFECT ADVERSELY LIQUIDITY AND EXPENSES ASSOCIATED WITH BANKRUPTCY. SEE "SELECTED OPERATING AND FINANCIAL DATA - LIQUIDITY AND CAPITAL RESOURCES," SECTION VI(D). THE CONFIRMATION AND EFFECTIVENESS OF THE PROPOSED PLAN ARE SUBJECT TO MATERIAL CONDITIONS PRECEDENT, SOME OF WHICH MAY NOT BE SATISFIED. SATISFACTION OF THESE CONDITIONS PRECEDENT REMAINS TO BE NEGOTIATED OR LITIGATED. THESE CONDITIONS PRECEDENT INCLUDE, AMONG OTHERS, SUCCESSFUL RESOLUTION OF THE LITIGATION DESCRIBED IN "CONDITIONS PRECEDENT TO EFFECTIVENESS OF THE PLAN," SECTION XII. THESE AND OTHER ISSUES MUST BE RESOLVED TO THE SATISFACTION OF THE PROPONENTS AND IN A MANNER CONSISTENT WITH AVAILABLE RESOURCES BEFORE CONFIRMATION OF THE PLAN. THERE CAN BE NO ASSURANCE THAT THESE ISSUES WILL BE RESOLVED TO THE SATISFACTION OF THE PROPONENTS; IN THE EVENT THEY ARE NOT SATISFACTORILY RESOLVED, THE PLAN MAY NOT BE ABLE TO BE CONFIRMED AND/OR BECOME EFFECTIVE. EVEN IF ALL SUCH ISSUES ARE SATISFACTORILY RESOLVED, THERE CAN BE NO ASSURANCE THAT THE PLAN CAN BE CONFIRMED AND IMPLEMENTED. THE DEBTORS CONTINUE TO FACE SUBSTANTIAL UNCERTAINTIES AND TO SUFFER SIGNIFICANT OPERATING LOSSES AND BANKRUPTCY RELATED EXPENSES. AS A CONSEQUENCE THERE CAN BE NO ASSURANCE THAT DEBTORS WILL HAVE SUFFICIENT FUNDS AVAILABLE TO CONTINUE OPERATIONS UNTIL THE PLAN CAN BE CONFIRMED AND IMPLEMENTED. MOREOVER, THE PLAN CONTEMPLATES THAT ALL ADMINISTRATIVE CLAIMS, PRIORITY CLAIMS AND UNSECURED CLAIMS, TOGETHER WITH CERTAIN OTHER COSTS, WILL BE PAID IN CASH. IN THE EVENT THAT THE AGGREGATE AMOUNT OF ADMINISTRATIVE AND PRIORITY CLAIMS TOGETHER WITH THE AMOUNT OF UNSECURED CLAIMS AND CERTAIN COSTS, EXCEEDS THE AMOUNT OF CASH AVAILABLE TO THE DEBTORS, THE PLAN CANNOT BE CONFIRMED WITHOUT THE CONSENT OF THE HOLDERS OF SUCH ADMINISTRATIVE AND PRIORITY CLAIMS IN ADDITION TO OTHER HOLDERS ENTITLED TO VOTE UNDER THE PLAN. SEE "SUMMARY OF THE PLAN - GENERAL DESCRIPTION OF THE TREATMENT OF CLAIMS," SECTION VIII(D). IN ANY EVENT, NO ASSURANCE CAN BE GIVEN THAT THE DEBTORS WILL HAVE SUFFICIENT FUNDS AVAILABLE TO MAKE ALL PAYMENTS NECESSARY FOR CONFIRMATION AND IMPLEMENTATION OF THE PLAN. A. Summary of Distributions Under the Plan The distributions under the Plan to each class are summarized in the following table, which is qualified by reference to the more detailed and complete descriptions set forth elsewhere in this Disclosure Statement and in the Plan. Preliminary and Estimated Table 1 Brief Descriptions of Classes and Their Distributions Refer to text of Plan and Disclosure Statement for more complete information Description of Estimated Amount Distribution Under of Claims Class Description the Plan in Class - ----------------- ------------------ ---------------- Class 1 -- See Section $ 6,838,269 Priority Nontax VIII(D)(2)(b) Claims Cash equal to 100% of Allowed Claim Amount Class 2 -- See Section $ 7,438,269(1) Unsecured Claims VIII(D)(2)(c) Cash and Reorganized Spectrum Common Stock equal to 100% of the Allowed Claim Amount Class 3 -- See Section $675,669,900 Class Action Claims VIII(D)(2)(d) Cash and Class A Prefered Stock in accordance with the Class Action Settlement Class 4 -- See Section $ 6,953,937(2) Other Securities VIII(D)(2)(e) Claims Reorganized Spectrum Common Stock Class 5 -- See Section $ 9,201,054 Equity Interests VIII(D)(2)(f) Reorganized Spectrum Common Stock Class 6 -- See Section $ 0 Equitably VIII(D)(2)(g) Subordinated Claims Reorganized Spectrum Common Stock __________________ (1) Includes disputed and undisputed Claims. See "Certain Factors to be Considered -- Major Assumptions," Section IX(C) and "Alternatives to Confirmation and Consummation of the Plan -- Liquidation under Chapter 7 or Chapter 11," Section XIV(C). (2) All such Claims are disputed. Administrative Claims and Priority Tax Claims have not been classified under the Plan and are excluded from the classes in accordance with section 1123(a)(1) of the Bankruptcy Code. B. Corporate Structure 1. Merger The Plan contemplates substantive consolidation of the estates of Spectrum and Cellular into a single bankruptcy estate and the merger of Spectrum and Cellular into a single surviving corporation, Reorganized Spectrum, continuing in existence under the Delaware General Corporation Law. The Amended Spectrum Certificate and Amended Spectrum Bylaws will each become effective on the Effective Date. 2. Capital Structure of Reorganized Spectrum The Plan contemplates authorization of 10 million shares of Reorganized Spectrum Common Stock, $.001 par value, of which a number equal to the number of shares of Distributable Common Stock will be issued and deposited with the Disbursing Agent on or before the Effective Date for the initial distribution to holders of Allowed Claims and Interests in Classes 2, 4, 5 and 6 in accordance with the Plan. Holders of Existing Spectrum Common Stock will receive one share of Reorganized Spectrum Common Stock in exchange for each 100 shares of Existing Spectrum Common Stock pursuant to the Reverse Stock Split. Reorganized Spectrum shall reserve sufficient shares of such stock as may be required for distribution to holders of Disputed Claims and Disputed Interests in Classes 2, 4, 5 and 6, pending the allowance or disallowance of such Disputed Claims or Interests. See "Summary of the Plan - General Description of the Treatment of Claims -- Estimation Of And Reserve For Disputed Claims And Interests," Section VIII(D)(5). Reorganized Spectrum shall also authorize and reserve for issuance, pursuant to the Stock Incentive Plan and Incentive Deferral Plan, an aggregate number of shares of Reorganized Spectrum Common Stock equal to 2/9 of the aggregate number of shares of Distributable Common Stock and Class A Preferred Stock. See "Summary of the Plan - Means of Execution of the Plan," Section VIII(A). The Plan also contemplates authorization of 1 million shares of Class A Preferred Stock, $.001 par value, a portion of which equal to the number of shares of Distributable Common Stock will be issued to the Class Action Trustee for the benefit of the Class Action Plaintiffs in accordance with the Class Action Settlement and Plan. For two years after the Effective Date, holders of Class A Preferred Stock will have a liquidation preference over Reorganized Spectrum Common Stock, to the extent that, in the event that within two years after the Effective Date, Reorganized Spectrum again becomes a debtor in a bankruptcy case under the Bankruptcy Code (unless the case is an involuntary case and is dismissed before an order for relief is entered therein against Reorganized Spectrum), interests of holders of Class A Preferred Stock will have priority in such proceedings over interests of holders of Reorganized Spectrum Common Stock. At the expiration of the two-year preference period, Class A Preferred Stock will automatically convert to and become Reorganized Spectrum Common Stock. Holders of Class A Preferred Stock will be entitled to vote in the same manner as holders of Reorganized Spectrum Common Stock, although, for the period of time that the Class A Preferred Stock is in the hands of the Class Action Trustee and has not been distributed to members of the class, such stock will be required to be voted in the same proportions as the holders of the Reorganized Spectrum Common Stock have voted. Secondary market trading by the public in the Class A Preferred Stock will be permitted, subject to generally applicable securities laws, but the Class A Preferred Stock will not (by reason of NASD restrictions) be listed by Reorganized Spectrum on the Nasdaq SmallCap Market or on any other exchange or market. In addition, during the two-year preference period, no person may be elected as a director unless he receives a plurality of the votes cast by the holder of Reorganized Spectrum Common Stock as well as a plurality of the votes cast by the holders of Class A Preferred Stock, and no person may be removed as a director by the holders of Class A Preferred Stock, unless the holders of a majority of the outstanding Reorganized Spectrum Common Stock vote in favor of such removal. See "Summary of the Plan - General Description of Reorganized Spectrum Stock," Section VIII(B). Additionally, the Plan contemplates authorization of 2 million shares of Preferred Stock, issuable in series as the Board may by resolution authorize, with such designations, relative rights, preferences and limitations as the Board may specify in such resolution. The resolution authorizing such issuance shall not require the approval of the shareholders of Reorganized Spectrum. See "Summary of the Plan - General Description of Reorganized Spectrum Stock - Authorized and Issued Reorganized Spectrum Stock - Preferred Stock," Section VIII(B)(1)(c). 3. Board of Directors and Officers The individuals currently serving as directors and officers of Spectrum will serve as the directors and officers of Reorganized Spectrum commencing on the Effective Date. See "General Information about the Debtors' Business; Restructuring Efforts and Filing of the Chapter 11 Cases - Description of the Debtors - Directors and Officers," Section III(A)(2), for the list of such individuals. This list may be amended at any time prior to the Effective Date upon such notice as may be required by the Bankruptcy Court. Subject to any requirement of Bankruptcy Court approval under section 1129(a)(5) of the Bankruptcy Code, such individuals shall continue to serve in such capacities until removed by the Board of Directors or stockholders of Reorganized Spectrum in accordance with applicable state law and Reorganized Spectrum's then-existing certificate of incorporation and bylaws. 4. Amended Spectrum Certificate and Bylaws The Amended Spectrum Certificate contains certain provisions affecting the rights of shareholders, corporate governance, and the transferability of the Class A Preferred Stock and Reorganized Spectrum Common Stock. These provisions include, but are not limited to: (i) a requirement that shareholders act only at a duly called annual or special meeting; (ii) a restriction on the ability of shareholders to call special meetings; (iii) a requirement of a classified board of directors; (iv) a restriction allowing directors to be removed from the board of directors only for cause; (v) supermajority voting requirements for the approval by shareholders of certain business combinations; (vi) supermajority voting requirements for amending the Reorganized Spectrum Bylaws and certain provisions of the Amended Spectrum Certificate; and (vii) supermajority voting and quorum requirements in connection with certain actions by the board of directors. The Amended Spectrum Bylaws contains certain provisions relating to the nomination of directors and notice of business to be conducted at shareholder meetings. See "Summary of the Plan - Certain Features of the Amended Spectrum Certificate and Amended Spectrum Bylaws," Section VIII(c) and Exhibit H attached hereto. 5. Business Purpose; Assets Reorganized Spectrum's Strategic Plan contemplates transforming the Company's business from an intellectual property company generating low annual revenues from royalty to becoming a supplier of wireless data communications technology and software. Key to this strategy is expanding (i) the number of data communications devices in use that incorporate the Company's patented cellular technology and (ii) the use of Reorganized Spectrum's patented cellular technology, as embodied in Reorganized Spectrum-supplied activation kits, to activate such devices. Over time, Reorganized Spectrum intends to expand its product offering into a complete suite of data communications software products that can be sold to a growing user population of wireless data services in the mobile professional and field sales workforce. The Company's headquarters occupy approximately 4,200 square feet of office space in an office building located in Purchase, New York. The Company holds a lease for such offices which expires on April 30, 1998. Cellular leases approximately 2,800 square feet in an office building located in Carrollton, Texas, a suburb of Dallas. The lease expires on October 31, 1998. The Company also owns certain intellectual property rights including patents and trademarks. The Company currently has (i) six issued U.S. patents, (ii) three issued foreign patents, and (iii) several pending U.S. and foreign patent applications. The Company holds patents for techniques that compensate for the high error rate conditions common during cellular data communication. In addition, the Company has license agreements for the use of its patents with such licensees as AT&T, Rockwell International and U.S. Robotics. Finally, the Company has regularly used the following trademarks and service marks to describe certain of its products and services and has obtained U.S. Federal Trademark registrations for: SPECTRUM CELLULAR (registered trademark), SPCL (registered trademark), AXSYS (registered trademark), SPECTRUM CONNECTED (registered trademark) and the SPECTRUM CONNECTED logo. 6. Listing, Exchange Act Reporting The Plan contemplates that Spectrum will have applied for a listing of the Reorganized Spectrum Common Stock on The Nasdaq SmallCap Market, effective as of the Effective Date, which (if effected) would facilitate public trading of the Reorganized Spectrum Common Stock, subject to the restrictions set forth in paragraph 7 below. No assurance can be given that any such listing will be obtained. Although secondary market trading by the public in the Class A Preferred Stock will be permitted, subject to generally applicable securities laws, the Plan contemplates that no listing application will be made with respect to the Class A Preferred Stock. Trading of the Class A Preferred Stock will be subject to the restrictions set forth in paragraph 7 below. Spectrum expects to continue to comply with the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), after the Effective Date. 7. Restrictions on Transferability of Shares of Reorganized Spectrum Stock The Amended Spectrum Certificate limits for a period of three years after the Effective Date the transfer of shares of Reorganized Spectrum Stock, and any other interests that would be treated as stock of Reorganized Spectrum under the Internal Revenue Code of 1986, as amended (the "Tax Code") or applicable Internal Revenue Service ("IRS") regulations, that would cause either a person or an entity to become an owner, directly or indirectly, of five percent or more of Reorganized Spectrum Stock or that would increase the percentage ownership interest of such person in Reorganized Spectrum. This limitation is intended to prevent transfers of Reorganized Spectrum Stock from triggering an "ownership change," as defined in section 382 of the Tax Code, which would result in the limitation of certain potential tax benefits available to Reorganized Spectrum. This restriction may be waived by the Board of Directors of Reorganized Spectrum if, in its judgment, the proposed transfer does not increase the risk that the use of such tax benefits will be limited. It is anticipated that limited waivers to this restriction will be granted with respect to Reorganized Spectrum Common Stock covered by the Incentive Deferral Plan and the Stock Incentive Plan. Any transfer of Reorganized Spectrum Stock effected in violation of the restrictions set forth in the Amended Spectrum Certificate shall be deemed null and void and shall have no force and effect, and the transferee thereof shall have no rights as a shareholder of Reorganized Spectrum. See "Certain Federal Income Tax Consequences of the Plan," Section XI; "Summary of the Plan - General Description of Reorganized Spectrum Stock - Restrictions on Transferability of Shares of Reorganized Spectrum Stock," and "- Certain Features of the Amended Spectrum Certificate - The Restriction on Transfer of Reorganized Spectrum Stock Provision," Sections VIII(B)(3) and (C)(10); and Exhibit I attached hereto. Certificates representing shares of Reorganized Spectrum Stock and other securities of Reorganized Spectrum treated as stock will bear an appropriate legend with respect to such restrictions. See "Summary of the Plan - General Description of Reorganized Spectrum Stock-Legend on Certificates," Section VIII(B)(4). 8. Rights Plan. Reorganized Spectrum anticipates that it will adopt a shareholders rights plan (a "Rights Plan") after the Effective Date. For a discussion of such anticipated Rights Plan, see "Summary of the Plan-General Description of Reorganized Spectrum Common Stock-Rights Plan," Section VIII(B)(9). SECTION III GENERAL INFORMATION ABOUT THE DEBTORS' BUSINESS; RESTRUCTURING EFFORTS AND FILING OF THE CHAPTER 11 CASES A. Description of the Debtors 1. The Operations Spectrum is a holding company with one continuing subsidiary, Cellular. Spectrum discontinued the operations of Dealer Services Business Systems, Inc., d/b/a Data One, a corporation organized under the laws of the State of Delaware ("Data One") in fiscal 1994 and Computers Unlimited of Wisconsin, Inc., d/b/a Computer Bay, a corporation organized under the laws of the State of Wisconsin ("Computer Bay") in fiscal 1995. Spectrum sold its subsidiary Spectrum Global Services, Inc., a corporation organized under the laws of the State of Delaware ("Global") on October 17, 1995. A separate, liquidating plan of reorganization is being filed for Data One, and that plan and its accompanying Disclosure Statement will be mailed to Data One's creditors and its shareholders. Spectrum, through Cellular, develops and licenses wireless data transmission technology and designs, markets and supervises the manufacturing of direct connect data communication products incorporating that technology. Spectrum's wireless data transmission technology utilizes an error-correction protocol permitting the reliable transmission of electronic data between two computers over cellular telephone networks and other wireless communication systems. 2. Directors and Officers The following table sets forth information with respect to the directors and executive officers of Spectrum: Position with Name Age Spectrum Director Since - ---- --- ------------- -------------- Donald J. Amoruso 58 President and Chief January 1, 1995 Executive Officer, Chairman of the Board of Directors Mikhail Drabkin 48 Chief Technical Office (effective March 20, 1996) Richard F. duFosse 46 Vice President -- Software Engineering Salvatore T. Marino 43 Vice President -- Licensing Christopher M. Graham 31 General Counsel and Secretary Barry J. Hintze 39 Controller and Principal Accounting Officer Sheldon A. Buckler 63 Director January 1, 1995 George Bugliarello 67 Director January 1, 1995 Robert D. Dalziel 60 Director January 1, 1995 Business Experience of Directors and Executive Officers Donald J. Amoruso became Spectrum's President, Chief Executive Officer and Chairman of its Board of Directors in January 1995. From 1991 to 1994, Mr. Amoruso founded and was the principal consultant of DMA Associates, a consulting firm specializing in management, marketing and turnaround strategies and alliances for small and mid-sized technology firms. Before 1991, Mr. Amoruso held several senior executive positions with Norden Systems, a subsidiary of United Technologies Corporation. As Senior Vice President and General Manager, he was responsible for three high technology business units: the Command, Control and Communications Systems operation based in Connecticut; the Marine and Ground Systems operation based in New York; and Norden Services Company of Maryland. Mr. Amoruso holds a Bachelors and Masters degree in electrical engineering from Manhattan College and Polytechnic University respectively. Mikhail Drabkin has entered an agreement with the Company to become its Chief Technical Officer on March 20, 1996. Since 1988, Mr. Drabkin has held various positions with Hayes Microcomputer Products, Inc. ("Hayes"). Most recently, as Vice President - Corporate Engineering, Mr. Drabkin has responsibility for new platform design and implementation of strategic partnerships with key technology providers. Mr. Drabkin also held the positions as Vice President - Product Development from 1992 to 1994, General Manager - Hayes ISDN Technologies from 1990 to 1992 and Director of Engineering-San Francisco Hayes Development Center from 1988-1990. Before joining Hayes, Mr. Drabkin was employed by SOFTCOM and Macleod Laboratories as a design engineer and engineering manager, respectively. Mr. Drabkin is a member of IEEE and Beta Gamma Sigma and holds a Bachelors and Masters Degree from the St. Petersburg Institute for Telecommunications and an M.B.A. from the University of San Francisco. Richard F. duFosse joined the Company as Vice President of Software Engineering in February 1996. Immediately prior to joining Spectrum, Mr. duFosse was providing consulting services related to software product development and mobile computing to Fortune 1000 clients. From 1990 through 1995, Mr. duFosse held several positions with Lotus Development Corporation. From 1994 thorough 1995, as Director of Mobile Computing, Lotus Business Partners Programs, Mr. duFosse created a business partner program to implement and deliver products to wirelessly enable Lotus Notes and cc:Mail. Mr. duFosse previously held the positions of Development Director, Mobile Computing Group and Senior Development Managers where he managed development of Lotus products for mobile computing. Mr. duFosse is a former Member of the Board of Directors of the Portable Computer and Communications Association and former chairman of the Modern Architecture Subcommittee of the PCCA. Mr. duFosse received a Bachelor's Degree in Humanities and Technology, a Masters degree in Computer Science and an M.B.A. from Worcester Polytechnic University. Salvatore T. Marino has served as Vice President- Licensing since September 1995 and was Spectrum's Chief Financial Officer since 1992 through September 1995. From 1992 until May 1995, Mr. Marino also served as Spectrum's Vice President - Finance and Treasurer. From 1992 until January 1995, Mr. Marino served as a Director of Spectrum. From 1990 to 1992, Mr. Marino was the Controller of Angelo Francis Corva & Associates, an architectural firm. From 1988 to 1990, Mr. Marino was Senior Vice President of Owens Maintenance Corporation, a division of Helmsley Enterprises. From 1977 to 1988, Mr. Marino was Vice President of General Services for Goldman, Sachs & Co. Prior to that, Mr. Marino served as Senior Accountant at Deloitte, Haskins & Sells. Mr. Marino became a Certified Public Accountant in January 1977. Mr. Marino received a Bachelor of Science degree in accounting and a Masters degree in business administration from St. John's University. Christopher M. Graham has served as General Counsel and Secretary of Spectrum since May 1995. From June 1994 until May 1995, Mr. Graham served as Spectrum's Associate General Counsel. From 1992 until 1994, Mr. Graham was an attorney associated with the New York law firm of Kelley Drye & Warren. Mr. Graham served previously as an operations manager with The Chase Manhattan Bank in its Capital Markets and Foreign Exchange Sector. Mr. Graham received a Bachelor of Science degree in finance from Lehigh University and a Juris Doctorate degree from the University of Connecticut School of Law. Barry J. Hintze has served as Spectrum's Controller since May 1995 and also as Principal Accounting Officer since September 1995. From 1988 to 1995 Mr. Hintze was Controller of CEL Communications, Inc. Before joining CEL Communications, Mr. Hintze served as the Assistant Controller of Delson Business Systems and held various accounting positions with Ticketron. Mr. Hintze holds a Bachelor of Science degree and an M.B.A. in finance from C.W. Post Center, Long Island University. Sheldon A. Buckler was Vice Chairman of the Board of Directors of Polaroid before he retired in 1994. Mr. Buckler held various positions at Polaroid from 1964 to 1994, including Vice President - Research, and Executive Vice President - Diversified Products. Mr. Buckler is the holder of 37 patents and has authored numerous technical papers. Mr. Buckler has a Ph.D. and M.A. in chemistry from Columbia University, and a B.A. in chemistry from New York University. Mr. Buckler was recently elected Chairman of the Board of Directors of Commonwealth Energy Systems and is also a member of the Board of Directors of Lord Corporation, Aseco Corporation, Speech Systems, Massachusetts Eye and Ear Infirmary, and the American Repertory Theater. George Bugliarello is the Chancellor of Polytechnic University, and was President from 1973 to 1994. Before joining Polytechnic University, Mr. Bugliarello was the Dean of Engineering, and a Professor of Civil Engineering and Biotechnology at the University of Illinois. Mr. Bugliarello was also a Professor of Biotechnology and Civil Engineering, and Chairman of the Biotechnology Program at Carnegie-Mellon University. Mr. Bugliarello holds degrees from the Massachusetts Institute of Technology, University of Minnesota, and the University of Padua. Mr. Bugliarello is the recipient of many professional honors, and has been associated with and held positions in numerous professional societies throughout his career. Mr. Bugliarello is on the Board of Directors of ANSER, Comtech Corporation, Educational Commission for Foreign Medical Graduates, Greenwall Foundation, Jura Corporation, Long Island Lighting Company, Lord Corporation, Symbol Technologies, Inc., and Teagle Foundation. Robert D. Dalziel is an international executive with operations and sales experience. From 1991 to 1995, Mr. Dalziel was the Chairman of Telecommunications Cooperative Network, Inc. He has also served as a consultant to Bechtel National, Inc. and the Government of Kazahkstan. From 1956 to 1991, Mr. Dalziel served in numerous capacities for AT&T, including the positions of Vice President - International Operations, President - AT&T Europe, and Vice President - Global Networks. Mr. Dalziel has a degree in electrical engineering from Polytechnic University, where he is currently a trustee. B. Summary of the Debtors' Prebankruptcy Restructuring Efforts As of December 31, 1993, Spectrum adopted a plan to discontinue operations at Data One. Accordingly, effective December 31, 1993, Data One has been reported as a discontinued operation and the consolidated financial statements have been reclassified to report separately the operating results of the subsidiary. Additionally, Spectrum recorded a provision for the year ended March 31, 1994 of $2,920,000 related to the anticipated loss on disposal of Data One although no tax effect was taken due to the substantial net operating loss carryforwards. Data One was completely closed down as of December 31, 1994, and Spectrum subcontracted out the remaining service obligations to a third party until it filed for bankruptcy on January 26, 1995. As of January 25, 1995, Spectrum closed Computer Bay, which is reflected as a discontinued operation in the consolidated financial statements. Spectrum did not record a provision related to its anticipated loss on disposal since the case was converted to a case under Chapter 7 of the Bankruptcy Code ("Chapter 7"). As a result of the conversion of Computer Bay to a case under Chapter 7, Spectrum has recorded a gain of $2,539,000 by writing off the net liabilities of Computer Bay. The Computer Bay trustee has filed a claim in the Bankruptcy Court to substantively consolidate the Computer Bay liabilities with the liabilities of the Debtors. Spectrum does not believe that there are grounds for such consolidation and has objected thereto. C. Commencement of Cases On January 26, 1995, Spectrum, Computer Bay, Data One and Cellular filed petitions for relief under Chapter 11 in the Bankruptcy Court, Case Nos. 195-10690-260, 195-10691-260, 195-10692-260 and 195-10693-260, respectively. Global did not file for bankruptcy. On February 8, 1995, the United States Trustee appointed the Creditors Committee for the Debtors and an Official Committee of Unsecured Creditors for Computer Bay to represent the interests of all unsecured creditors whose claims arose before the Petition Date. No other committees have been appointed. D. Summary of the Debtors' Postbankruptcy Restructuring Efforts 1. Discontinued Operations and Disposition of Subsidiary On February 8, 1995, the United States Trustee appointed the Creditors Committee for Spectrum, Cellular and Data One and another for Computer Bay. On May 25, 1995, the Bankruptcy Court, upon motion by the Debtors, converted the Computer Bay Chapter 11 case to a case under Chapter 7, and a court appointed trustee is overseeing the liquidation of Computer Bay's assets. Spectrum and Cellular are continuing to manage their affairs and operate their business under Chapter 11 as debtors in possession while formulating a plan of reorganization. On September 11, 1995, Spectrum, entered into an agreement to sell all of the capital stock of its wholly owned subsidiary, Global, to COMFORCE Corporation, a corporation organized under the laws of the State of Delaware, for $6 million plus a closing adjustment related primarily to the allocation of salaries and benefits of certain Spectrum and Global employees. Other members of the purchasing group included The Lori Corporation, a corporation organized under the laws of the State of Delaware, ARTRA Group Incorporated, a corporation organized under the laws of the State of Pennsylvania, Peter R. Harvey, Marc L. Werner, James L. Paterek, Michael Ferrentino and Christopher P. Franco. The sale of Global was subject to Bankruptcy Court approval and receipt of higher and better offers. A hearing regarding the transaction (and any higher and better offers) was held on October 17, 1995 before the Bankruptcy Court. On October 17, 1995, the Bankruptcy Court approved the sale. The Purchaser paid cash for Global's stock at the October 17th closing. 2. Dispositions of Other Assets In July 1995, Spectrum sold its AXCELL business and its license to certain related patent rights to Telular Corporation ("Telular") for $3,000,000 pursuant to an agreement approved by the Bankruptcy Court, which resulted in a gain of approximately $1,616,000. The patent rights relate to wireless interface technology and were obtained in a license agreement from Telular and are not part of Spectrum's core direct connect patent portfolio. On September 21, 1995, Spectrum sold its Cellular facility in Dallas, Texas. The building was sold for approximately $780,000 resulting in a gain on the sale of $85,976. Net proceeds after taxes from the sale were $734,000 of which the Company has segregated $72,000 to cover claims related to property taxes filed by the City and County of Dallas. 3. Fund Raising Process Effective April 1, 1995, the Bankruptcy Court approved the Company's retention of Gordian Group, L.P. ("Gordian") as its financial advisor, to, among other things, assist the Company's efforts to develop its plan of reorganization and to raise capital. Gordian and the Company identified approximately 48 potential investors, comprising many of the nation's leading venture capital firms and certain corporations that could have an interest in developing a strategic relationship with the Company. Gordian contacted such parties from October 1995 to January 1996, and potential investors desiring further information were provided with a Confidential Information Memorandum embodying the Company's business plan, under appropriate confidentiality arrangements. To date, none of these parties has expressed an interest in investing in the Company. Gordian also assisted Spectrum in the sale of Global. SECTION IV CHAPTER 11 PROCEEDINGS AND OTHER RECENT DEVELOPMENTS A. Principal Proceedings in the Cases 1. Stay of Litigation Pursuant to section 362 of the Bankruptcy Code, the commencement of the Debtors' Chapter 11 cases operates as stays, applicable to all entities, of the following: (i) commencement or continuation of a judicial, administrative, or other proceeding against the Debtors that was or could have been commenced prior to commencement of the Debtors' Chapter 11 cases, or to recover for a claim that arose before the commencement of the Debtors' Chapter 11 cases; (ii) enforcement of any judgments against the Debtors that arose before the commencement of the Debtors' Chapter 11 cases; (iii) the taking of any action to obtain possession of property of the Debtors or to exercise control over property of the Debtors; (iv) the creation, perfection or enforcement of any lien against the property of the Debtors; (v) the taking of any action to collect, assess or recover a claim against the Debtors that arose before the commencement of the Debtors' Chapter 11 cases; or (vi) the setoff of any debt owing to the Debtors that arose prior to the commencement of the Debtors' Chapter 11 cases against a claim held by such creditor or party-in-interest against the Debtors that arose before the commencement of the Debtors' Chapter 11 cases. Any entity may apply to the Bankruptcy Court for relief from the automatic stay so that it may enforce any of the aforesaid remedies that are automatically stayed by operation of law at the commencement of the Debtors' Chapter 11 cases. 2. Executory Contracts As debtors in possession, the Debtors have the right, under the relevant provisions of the Bankruptcy Code, to assume or reject executory contracts, including real property leases. Certain parties to such executory contracts with the Debtors, including parties to such real property leases, may file motions with the Bankruptcy Court seeking to require the Debtors to assume or reject those contracts or leases. In this context, "assumption" means that the Debtors cure or proved adequate assurance that they will cure all existing defaults under contract or lease and provide adequate assurance of future performance under the contract or lease. "Rejection," which is a remedy available under the relevant provisions of the Bankruptcy Code, means that the Debtors are relieved of their obligations to perform further under the contract or lease. Rejection of an executory contract or lease is traded as a breach of that contract immediately before the date of filing of the petition and gives the nondebtor party the right to assert a claim against the bankruptcy estate for damages arising out of the breach which shall be allowed or disallowed as if such claims had arisen before the date of the filing of the petition. Pursuant to the Bankruptcy Code, the Company has rejected certain employment contracts and has terminated employment of some of the affected individuals. The Bankruptcy Court has approved the Company's employment agreement with its current CEO. On January 23, 1996, the Bankruptcy Court approved the assumption of modified employment contracts with other employees with preexisting employment agreements, eliminating some contractual perquisites and reducing severance benefits, and approved severance agreements with two former employees. The Company rejected all leases for automobiles leased on behalf of employees. Additionally, the Company has rejected the real property lease associated with its former Manhasset, New York headquarters and leases for certain furniture and equipment. Prepetition claims that were contingent, unliquidated, or disputed as of the commencement of the Chapter 11 case, including, without limitation, those that arise in connection with rejection of executory contracts, may be allowed or disallowed depending on the nature of the claim. Such claims may be fixed by the Bankruptcy Court or otherwise agreed upon by the parties. 3. Computer Bay Trustee's Claim On May 25, 1995, the Bankruptcy Court, upon motion by the Debtors, converted the Computer Bay proceeding to a case under Chapter 7 of the Bankruptcy Code. An independent trustee has been appointed to oversee liquidation of Computer Bay's Chapter 7 estate. The Computer Bay trustee has filed a claim with the Bankruptcy Court seeking to substantively consolidate the Computer Bay estate and liabilities with the estates and liabilities of the Company. The Debtors filed an objection to this claim on November 20, 1995. In furtherance of his proofs of claim, on January 11, 1996 the Computer Bay trustee filed a complaint commencing litigation against the Company seeking to substantively consolidate the Computer Bay estate with the Company's estate and, in the alternative, seeking the return of alleged preferences and fraudulent conveyances in the amount of $4,351,396 (the "Computer Bay Litigation"). The Debtors filed an answer on January 23, 1996. Although there can be no assurance that the Debtors will be successful defending this claim, the Company does not believe there are grounds for such consolidation. Likewise, the Debtors believe they have valid defenses to all claims made in the Computer Bay Litigation and have asserted counterclaims against the Computer Bay estate in the amount of $2,430,436. 4. The Debtors' Exclusivity Period For 120 days after the Petition Date, the Company has the exclusive right to propose and file a plan of reorganization with the Bankruptcy Court. If the Company files a plan of reorganization during the 120-day exclusivity period, no other party may file a plan of reorganization until 180 days after the Petition Date, during which period the Company has the exclusive right to solicit acceptance of the plan. If the Company fails to file a plan during the 120-day exclusivity period or such additional time period ordered by the Bankruptcy Court (the "Exclusivity Period") or, after such plan has been filed, fails to obtain acceptance of such plan from Impaired Classes during the exclusive solicitation period or such additional time period ordered by the Bankruptcy Court, any party-in-interest, including a creditor, an equity security holder, a committee of creditors, or an indenture trustee, may file a plan of reorganization in the Chapter 11 proceedings. Additionally, if the Bankruptcy Court were to appoint a Chapter 11 trustee, any party-in-interest may file a plan, regardless of whether any additional time remains in the Company's Exclusivity Period. On January 23, 1996 the Bankruptcy Court granted the Company's request to extend the Exclusivity Period to March 8, 1996 or, if a plan is filed by March 8, 1996, to May 9, 1996. 5. Setting of the Bar Date for Prepetition Claims By order of the Bankruptcy Court, the bar date for filing proofs of claim in the Chapter 11 proceedings was established as September 7, 1995. B. Other Recent Developments 1. Securities Related Litigation On February 9, 1994, the class action filed against the Company and two of its former officers in May 1993 (In re Spectrum Information Technologies, Inc. Securities Litigation, United States District Court for the Eastern District of New York, Civil Action No. 93-2295) (the "Class Action Suits") was supplemented (x) to extend the end of the class period from May 21, 1993 to February 4, 1994, (y) to add additional claims against Spectrum and the individual defendants, and (z) to add certain of its then officers as party defendants. In April 1994, a Second Consolidated Amended Class Action Complaint was filed adding additional employees as party defendants. The class and certain subclasses have been certified. A similar putative class action filed in the United States District Court of the Southern District of Texas has been transferred and consolidated with the Class Action Suits. The plaintiffs in the Class Action Suits have made the following claims against Spectrum: (i) misrepresenting the potential value of the patent license agreement the Company entered into with AT&T; (ii) improperly accounting for revenues and expenses in connection with certain license and advertising agreements; (iii) failing to disclose the existence of an inquiry initiated by the Securities and Exchange Commission (the "SEC"); and (iv) making statements regarding the employment of John Sculley. In addition, there are claims against certain of the individual defendants for improper insider trading. The Company's former management, based on the advice of its then counsel, believed it had good and meritorious defenses to the claims against it. On July 20, 1994, the Company, certain of its then officers and directors, and two former officers and directors were served with a class action complaint. The complaint asserts that Spectrum knowingly or recklessly made material false statements or omitted material facts in its financial reporting relating to Computer Bay prior to announcing the restatement of earnings for the fiscal year 1992 and the first three quarters of fiscal 1993, to correct inaccurate accruals of certain items into income. For pretrial purposes, this litigation has been consolidated with the Class Action Suits described above. In November 1995, the Company announced that an agreement in principle had been reached on a framework for settlement of the Class Action Suits (the "Class Action Settlement"). The Class Action Settlement is contingent on numerous factors including, among other things, the successful resolution of the Home Action (see "Chapter 11 Proceedings and Other Recent Developments - Other Recent Developments - Other Proceedings," Section IV(B)(3)), the negotiation and execution of a definitive settlement agreement, the Company's ability to develop and confirm a plan of reorganization in the Company's pending bankruptcy proceeding satisfactory to all interested parties, including the Class Action Plaintiffs, and the approval of the Class Action Settlement by the District Court. The Bankruptcy Court approved the Class Action Settlement on January 19, 1996. The Class Action Plaintiffs in the Class Action Suits had filed a claim against the Company in its bankruptcy proceedings in the amount of $676 million. The Class Action Settlement, if consummated, will be in satisfaction of that claim as well as any and all claims of the individual defendants (former directors and officers) in that suit against the Company. Under the terms of the Class Action Settlement, the Company and the representatives of the Class Action Plaintiffs have agreed to a framework under which the Company will issue to the Class Action Plaintiffs in its plan of reorganization a number of shares of its Class A Preferred Stock that would be equal to the number of shares of Distributable Common Stock. In addition, under the Class Action Settlement, the Class Action Plaintiffs are to receive the proceeds, net of certain fees and expenses, from insurance policies worth $10 million covering the liabilities of the Company's directors and officers and, as a result of court supervised negotiations and at the recommendation of the District Court, $1,350,000 from the various individual defendants in the action plus $250,000 from the Company. One of the uncertainties surrounding the Class Action Settlement is that issuers of insurance policies representing $6 million out of the $10 million of the insurance necessary to fund the Class Action Settlement have disclaimed coverage. This dispute is the subject of a litigation pending before the District Court and must be successfully resolved to implement the Class Action Settlement. A trial in the Home Action is scheduled to take place February 20 to 22, 1996. See "Chapter 11 Proceedings and Other Recent Developments - Other Recent Developments - Other Proceedings," Section IV(B)(3). In May 1993, the SEC initiated a confidential and informal fact gathering inquiry apparently directed toward statements the Company purportedly made regarding the potential value of the patent license agreement it had entered into in fiscal 1994 with AT&T. On December 6, 1993, following the Company's dismissal of its outside auditors, the SEC issued a formal order of investigation. The Company believes that a focus of the investigation relates to accounting and disclosure issues with respect to certain of the patent license and advertising agreements it entered into during fiscal 1994 and, based on recent requests for information by the SEC, may also relate to other activities of the Company's previous management. The Company is cooperating fully with the investigation. The accounting treatment at issue in the investigation, which had been implemented after consultation with the Company's previous outside auditors and had been disclosed in the Company's quarterly filings with the SEC, was revised by Spectrum when it voluntarily restated its earnings on February 7, 1994. In October 1994, two individuals commenced an action against two of the Company's former officers and directors (Silverberg, et al. v. Sculley, et al., Superior Court of the State of California for the County of Los Angeles, Case No. BC 111206). The claims against the former officers and directors include breach of fiduciary duty, breach of covenant of good faith and fair dealing, deceit and misrepresentation, negligent misrepresentation, mismanagement and gross negligence. In November 1995, the plaintiffs and all defendants entered into a settlement, the terms of which are confidential. In March 1995, Peter Caserta, the Company's former Chief Executive Officer and Chairman of the Board, Howard Schor, a former employee, John Bohrman, a former director, James Paterek, former President of Global (which was sold by the Company in October 1995), and six other non-Company employees were indicted in the District Court on charges of mail and wire fraud relating to activities of the Caserta Group, an unaffiliated financial services company Mr. Caserta headed. In January 1996, Mr. Caserta and Mr. Schor pleaded guilty to certain of the charges against them. The United States Attorney's Office for the Eastern District of New York has informed the Company that it is the subject of an investigation regarding violations of securities laws that may have occurred prior to the appointment of the Company's current Chief Executive Officer and Board of Directors. The Company is cooperating fully with the investigation. 2. Patent Related Proceedings During August 1994, Megahertz Corporation ("Megahertz") filed a Demand for Arbitration with the American Arbitration Association in Salt Lake City, Utah (Case No. 81 184 0008194) seeking a determination as to whether royalty payments by Megahertz were temporarily abated under the terms of a license agreement between Megahertz and Spectrum. Megahertz, in its arbitration request, asked for a determination of whether Spectrum has achieved certain licensing objectives and/or undertaken defined patent enforcement actions as set forth in the agreement. The parties jointly agreed to delay this proceeding in December 1994. The arbitration was subsequently automatically stayed by the Company's bankruptcy filing. Megahertz, its parent company, U.S. Robotics, and the Company in February 1996 entered into a settlement agreement with respect to all disputes among them, subject to the approval of the Bankruptcy Court, which approval is being sought. See "Certain Factors to be Considered," section IX. On December 5, 1994, the Company filed a lawsuit against Motorola, Inc. for infringement of claims in six of its patents covering basic wireless data concepts. Motorola has denied the allegations in its answer. The case was originally filed in the United States District Court for the Eastern District of Virginia, but was transferred to the United States District Court for the Northern District of Alabama, Northeastern Division (Spectrum Information Technologies, Inc. v. Motorola, Inc., Civil Action No. 95-U-234-NE). On October 16, 1995, the parties stipulated to extend the dates in the case's original scheduling order to permit the parties to pursue settlement discussions, which discussions are ongoing. On January 25, 1996 the parties entered another such stipulation. 3. Other Proceedings In January 1994, Robert Fallah, a former financial consultant to Spectrum, instituted a suit (Fallah v. Spectrum Information Technologies, Inc., Index No. 94-1044) against the Company seeking $5,790,000 in damages related to purported promises made by the Company to give the plaintiff certain stock warrants in exchange for the consultant's services. Fallah filed a proof of claim in the Company's bankruptcy proceeding alleging $5,790,000 in damages. Spectrum filed an objection to the Fallah claim on January 31, 1996. The Company believes that it has sound legal and factual defenses and will vigorously defend this claim. In 1994, an action was filed against Spectrum, certain former officers and directors of the Company and the Company's former transfer agent (Blair v. Spectrum Information Technologies Inc., 162nd District Court of Dallas County). Mr. Blair alleges that he was induced to begin employment with Cellular through a promise that he would be allowed to participate in Spectrum's stock option plan and alleges against all defendants breach of contract, fraud, negligence, breach of fiduciary relationship and bad faith. Mr. Blair terminated his employment with Cellular in August 1994. Mr. Blair filed a proof of claim in the bankruptcy proceeding alleging $1 million in damages. The Texas lawsuit is stayed as to Spectrum by operation of the automatic stay. Settlement discussions have taken place between Spectrum and Mr. Blair's counsel. In October 1994, Gene Morgan ("Morgan") and Gene Morgan Financial ("GMF") demanded in excess of $8 million dollars from the Company based on an alleged breach of a consulting agreement and failure to register certain underwriter's warrants. Morgan filed a proof of claim in the bankruptcy proceeding claiming an unsecured nonpriority claim of $6.3 million alleging breach of contract under the warrants. Lowenstein, Sandler, Kohl Fisher & Boylan, as assignee of GMF's claim, filed a proof of claim alleging approximately $1.9 million in damages arising from the alleged breach of the consulting agreement. The Debtors have objected to the claims of both Morgan and GMF. In addition, the Debtors are seeking equitable subordination of the GMF claim. The Bankruptcy Court has already ruled that any claim Morgan may have under the warrant is subordinated under section 510(b) of the Bankruptcy Code. A trial on the liability for the amount, allowability and priority of the Morgan and GMF claims is now being conducted before the Bankruptcy Court. On July 21, 1995, The Home Insurance Company of Illinois ("The Home"), the Company's former directors' and officers' primary insurance carrier, commenced an adversary proceeding (the "Home Action") in the Company's bankruptcy proceeding. The Honorable Frederic Block, United States District Judge of the District Court, subsequently withdrew the reference with respect to the Home Action such that the litigation is now pending before him. The Home is seeking to rescind a renewal of a directors' and officers' liability and company reimbursement policy issued in June 1993 to the Company for the benefit of its directors and officers (the "Renewal Policy") and alleges certain material misrepresentations and/or omissions in the application for the Renewal Policy. The Home also seeks a declaration that coverage is not afforded under the Renewal Policy for the claims made against the policy by the Company and certain of its officers and directors. The Company believes The Home (as well as the other carriers discussed below) are obligated to provide the coverage at issue and is defending this action, and is further seeking a declaration of coverage under the Renewal Policy for the claims made against that policy. In addition to the primary policy, the Company obtained three excess policies for the insurance year at issue in the Home Action. Two of the excess carriers, the Agricultural Excess and Surplus Insurance Company ("AESIC") and The Aetna Casualty and Surety Company ("Aetna") have intervened in the Home Action. AESIC has agreed to be bound by any final judicial resolution regarding The Home (a similar agreement was previously reached with the third excess carrier) and is no longer actively participating in the Home Action. Both The Home and Aetna have recently filed motions for summary judgment in the Home Action and the Company filed a response on January 26, 1996. The District Court has scheduled a three-day trial of the Home Action beginning on February 20, 1996. The Company is also involved in other minor litigations, all of which have been stayed by the automatic stay. The likely outcomes of these claims are uncertain at this time. SECTION V PROPERTIES OF THE DEBTORS The Company's headquarters occupy approximately 4,200 square feet of office space in an office building located in Purchase, New York. The Company holds a lease for such offices which expires on April 30, 1998. Cellular leases approximately 2,800 square feet in an office building located in Carrollton, Texas, a suburb of Dallas. The lease expires on October 31, 1998. The Company also owns certain intellectual property rights including patents and trademarks. The Company currently has (i) six issued U.S. patents, (ii) three issued foreign patents, and (iii) several pending U.S. and foreign patent applications. The Company holds patents for techniques that compensate for the high error rate conditions common during cellular data communication. The Company's six U.S. patents are summarized below: - Portable Hybrid Communication System and Methods: On November 20, 1990, the Patent Office issued to the Company this patent which covers the Company's unique method of combining a cellular transceiver, modem and variety of telephone devices into a single functioning, user-controlled device providing wired or wireless voice and data communications. - System and Method for Interfacing Computers to Diverse Telephone Networks: On June 30,1992, the Patent Office issued to the Company this patent which covers (i) the Company's original AXSYS brand cable interface circuit and (ii) modems that are adapted to operate with the AXSYS brand cable interface circuit. This patent further covers other connectivity features useful in connecting a modem to various cellular telephones. - Cellular Telephone Data Communication System and Method: On August l8, 1992, the Company obtained this patent which has claims covering fundamental techniques required for commercially acceptable and reliable data transmission over any conventional cellular communication channel. The Company was originally issued a patent for these concepts on September 29, 1987 and this patent is a reissue of that original patent. - Programmable Universal Interface System: On September 28, 1993, the Company received this patent, which has claims covering the Company's "direct-connect" technology and which enables specially programmed modems to be connected to a cellular telephone by a simple passive cable. Software in the modem generates control signals appropriate to the model of cellular telephone in use. This technology also allows a single computer modem to be connected to different types of cellular telephones without intervening electronic circuits to permit computer control of the cellular telephone for data transmission purposes. This product is currently being marketed under the AXSYS brand name. - System and Method for Interfacing Computers to Diverse Telephone Networks: On October 4, 1994, the Company received this patent which expands the Company's basic patent rights in the area of direct-connect modem technology originally covered by the Company's 1993 Programmable Universal Interface patent. - Programmable Universal Interface System: On November 22, 1994, the Patent Office issued this patent which broadens and expands the Company's coverage for direct- connect modems, adds coverage for methods used in direct-connect technology and provides coverage for upgrade kits that provide a software driver and cable to make the direct-connect modem compatible with a specific cellular telephone. The Company has nonexclusively licensed various aspects of this proprietary technology to other companies, including portable computer, modem and modem chipset manufacturers. Some of these agreements require the modem manufacturer to pay a royalty on modems they sell which include aspects of the Company's proprietary technology. Others require payment of a royalty following the activation of the cellular data capability. In addition, most of these license agreements require the licensee to indicate on its product packaging that the product contains technology licensed from Spectrum and to use Spectrum's logotype. Licensees of the Company include AT&T, Rockwell International, U.S. Robotics, IBM and Zoom Telephonics, Inc. The Company has also developed, and continues to expand, a library of software drivers related to the direct- connect technology. Each software driver is designed to permit control of a particular cellular telephone by a direct-connect modem. The software drivers are subject to copyright protection, and the Company claims the right, pursuant to national and international copyright laws, to control copying and distribution of its software drivers. The Company has regularly used the following trademarks and service marks to describe certain of its products and services and has obtained U.S. Federal Trademark registrations for: SPECTRUM CELLULAR (registered trademark), SPCL (registered trademark), AXSYS (registered trademark), SPECTRUM CONNECTED (registered trademark) and the SPECTRUM CONNECTED (registered trademark) logo. SECTION VI SELECTED OPERATING AND FINANCIAL DATA THE FOLLOWING SECTION DISCUSSES CERTAIN HISTORICAL OPERATING AND FINANCIAL INFORMATION ABOUT THE DEBTORS. AS A RESULT OF MANY FACTORS, INCLUDING THE BANKRUPTCY PROCEEDINGS, HISTORICAL RESULTS OF OPERATIONS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. REFERENCE IS MADE TO REPORTS OF THE DEBTORS FILED WITH THE SEC PURSUANT TO THE EXCHANGE ACT AND WITH THE BANKRUPTCY COURT THAT ARE INCORPORATED BY REFERENCE HEREIN FOR A MORE COMPLETE DESCRIPTION OF THE MATTERS SET FORTH HEREIN. A. Operating Results for Fiscal Years Ended 1995, 1994 and 1993 The following table sets forth, for the periods indicated, certain financial information and the percentage relationship that certain items bear to revenue as reported in the Company's Annual Report on Form 10-K for the Year Ended March 31, 1995, filed with the SEC (the "Form 10-K"). See Exhibit B attached hereto. This summary provides trend data relating to the Company's normal recurring operations. Amounts set forth below reflect the Company's Data One and Computer Bay subsidiaries as discontinued operations. See "General Information about the Debtors' Business; Restructuring Efforts and Filing of the Chapter 11 Cases - Summary of the Debtors' Prebankruptcy Restructuring Efforts," Section III(B). Years Ended March 31, ------------------------------------------- 1995 % 1994 % 1993 % ------------------------------------------- (Amounts in thousands) Revenues $11,627 100.0 $6,384 100.0 $1,229 100.0 Operating costs and expenses: Cost of revenues 7,227 62.2 3,195 50.0 655 53.2 Selling, general and admin- istrative 13,237 113.8 13,856 217.1 6,657 541.7 Provision for litigation - - 4,719 73.9 - - Provision for restructuring 105 .9 2,410 37.8 1,349 109.8 Write-down of carrying value on certain facilities - - 851 13.3 - - Total operating costs and expenses 20,569 176.9 25,031 392.1 8,661 704.7 Operating loss $(8,942) (76.9)$(18,647) (292.1) $(7,432) (604.7) Consolidated revenues increased by approximately $5,243,000 or 82.1% from fiscal 1994 to 1995. The increase was primarily due to the inclusion of a full year of operations of Global in fiscal 1995, as compared to only five months of operations in the prior year. Consolidated revenues increased by approximately $5,155,000 or 419.5% from fiscal 1993 to 1994 due to the acquisition of Global in October 1993, the revenues of which were $3,460,000 in fiscal 1994, and the recording of licensing and sign-up fees in fiscal 1994 of approximately $1,700,000 relating to use of the Company's proprietary technology. Operating costs and expenses decreased $4,462,000 or 17.8% from fiscal 1994 to 1995. The decrease is primarily the result of the recording of a special charge for litigation of $4,719,000 during 1994, which had been management's estimate of a portion of any ultimate Class Action Settlement, and the recording of a write-down of approximately $851,000 for the reduction in carrying value on certain of Cellular's property, plant and equipment in Dallas, Texas in 1994. In addition, the Company provided for restructuring charges in 1994 of $2,410,000. In 1995, the Company took an additional charge of $105,000, which related to anticipated payments to a terminated employee, to complete its restructuring (see Spectrum's Annual Report on Form 10-K for the year ended March 31, 1995, Note 10 to the Consolidated Financial Statements, attached hereto as Exhibit B). These decreases were partially offset by an increase in the cost of revenues of $4,032,000 or 126.2%, which is a direct result of increased sales at the Company's Global subsidiary. Operating costs and expenses increased $16,370,000 or 190.0% from fiscal 1993 to 1994. The increase related to an increase in the cost of revenues of $2,540,000 or 387.8% due to the acquisition of Global in October 1993, an increase in selling, general and administrative expenses of $7,199,000 or 108.9%, the recording of a special charge for litigation of $4,719,000 during 1994 (described in the preceding paragraph), the recording of a write-down of approximately $851,000 for the reduction in carrying value on certain facilities in 1994 (described in the preceding paragraph), and an increased charge of $1,061,000 which represents anticipated costs associated with the Company's restructuring efforts (see note 10 to consolidated financial statements in the Form 10-K attached hereto as Exhibit B). The increase in selling, general and administrative expenses is primarily due to increased legal fees of approximately of $2,161,000 associated with the defense of the Company's patents and licensing efforts and other legal matters and increased employee-related costs of approximately $2,551,000. As a result of the factors discussed above and because the Company's gross profit increased by $1,211,000 or 38%, the Company's operating loss decreased approximately $9,705,000 from 1994 to 1995. The Company's operating loss increased to $18,647,000 in 1994 from $7,432,000 in 1993. The increase was a result of the increase in total operating costs and expenses (discussed in the second preceding paragraph) which was partially offset by the increase in gross profit of $918,000 realized primarily due to the acquisition of Global in October 1993. B. Unaudited Operating Results for the First Three Quarters of Fiscal 1996 Nine Months Ended Dec. 31, 1995 1994 (Amounts in thousands) Revenues: Licensing and other revenue $1,758 $1,118 Merchandise sales, net 445 1,081 ------ ------ Total revenues 2,203 2,199 Operating costs and expenses: Cost of revenues 258 445 Selling, general and administrative 5,368 10,263 ------ ------ Total operating costs and expenses 5,626 10,708 ------ ------ Operating loss (3,423) (8,509) Professional fees in connection with Chapter 11 filing (2,464) -- Other income (expense), net 1,662 (158) ------ ------ Income (loss) from continuing operations (4,225) (8,667) ------ ------ Discontinued operations: Income from operations of Global 790 666 Income from operations of Computer Bay -- (4,388) Gain on Sale of Global 773 -- Gain on disposal of Computer Bay 2,539 -- ------ ------ Income from discontinued operations 4,102 (3,722) ------ ------ Cumulative effect of change in accounting principle -- 316 Net (loss) $(123) $(12,073) ====== ======= Consolidated revenues for the nine months ended December 31, 1995 increased $4,000 as compared to December 1994. The increase in consolidated revenues for the nine months ended December 31, 1995 is due to an increase in royalty/licensing income of $640,000 or 57% offset by a decrease in product sales of $636,000 or 59%. Royalties and licensing income increased primarily as a result of payments received pursuant to the Megahertz and Rockwell license agreements offset by decreased royalties due to a disputed royalty agreement with a certain licensee. The decrease in product sales is due to the sale of the AXCELL product line. AXCELL sales decreased $762,000 for the nine months ended December 31, 1995 as compared to the prior year. Operating costs and expenses decreased approximately $5,082,000 or 47% during the nine months ended December 31, 1995 as compared to the same period ending December 31, 1994. This decrease is primarily due to the decrease in selling, general and administrative expenses of approximately $4,895,000 or 48% for the nine months. The decrease in selling, general and administrative expenses for the nine months ended December 31, 1995 is primarily due to the decrease in professional fees (other than professional fees associated with the Chapter 11 Cases) of $1,144,000. This decrease is primarily due to the stay of legal actions during the Chapter 11 Cases. The decreases in personnel and related expenses of $702,000, and a decrease in travel and entertainment expenses of $207,000, are due to the overall downsizing of the Company. Other administrative expenses decreased $2,372,000, primarily due to the Company's move from Manhasset, New York to a smaller location in Purchase, New York. Advertising expense decreased $470,000 during the nine months ended December 31, 1995 primarily due to the sale of the AXCELL product line. The Company's operating loss decreased $5,086,000 or 60% for the nine months ended December 31, 1995 as compared to the same period in the prior year. The decrease is primarily due to the decreased selling, general and administrative expenses of 48% for the nine month period reported, as well as a decrease in cost of goods sold of $187,000 or 42% for the nine months ended December 31, 1995 as compared to the prior year due to the sale of the AXCELL product line. Other income increased $1,820,000 for the nine months ended December 31, 1995 compared to the prior year, primarily due to the gain of $1,616,000 on the sale of the AXCELL product line. As of January 25, 1995, the Company closed its Computer Bay subsidiary which is reflected as a discontinued operation in the consolidated financial statements. The Company did not record a provision related to its anticipated loss on disposal because the case was converted into a Chapter 7 bankruptcy proceeding. As a result of the conversion, the Company has recorded a gain of $2,539,000 by writing off the net liabilities of Computer Bay. The Computer Bay trustee has filed a claim in the Bankruptcy Court to substantively consolidate the Computer Bay liabilities with the liabilities of the Debtors. However, the Company does not believe there are grounds for such consolidation. See "General Information about the Debtors' Business; Restructuring Efforts and the filing of the Chapter 11 Cases - Summary of the Debtors' Postbankruptcy Restructuring Efforts," Section III (D), and Spectrum's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, attached hereto as Exhibit E. As of October 17, 1995, the Company sold its Global subsidiary which is reflected as a discontinued operation in the consolidated financial statements. See "General Information about the Debtors' Business; Restructuring Efforts and the Filing of the Chapter 11 Cases-Summary of the Debtors' Postbankruptcy Restructuring Efforts," Section III (D). In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective for fiscal years beginning after December 15, 1993. The cumulative effect of adopting SFAS No. 115 as of April 1, 1994 resulted in an increase in income of approximately $316,000. C. Net Worth At March 31, 1995, the consolidated negative net worth of the Debtors was $901,000. At December 31, 1995, the consolidated net worth of the Debtors was $923,000. Losses from continuing operations of $4,225,000 have been partially offset primarily as a result of the sale of the AXCELL product line, the sale of Global and the discontinuation of the operations of Computer Bay. See "General Information about the Debtors' Business; Restructuring Efforts and Filing of the Chapter 11 Cases - Summary of the Debtors' Postbankruptcy Restructuring Efforts," Section III(D); and Spectrum's Annual Report on Form 10-K for the year ended March 31, 1995, attached hereto as Exhibit B; and Spectrum's Quarterly Reports on Form 10-Q for the quarters ended June 30, 1995, September 30, 1995 and December 31, 1995, attached hereto as Exhibits C, D and E, respectively. D. Liquidity and Capital Resources Since inception, the Company has experienced significant operating losses and operating cash flow deficits which ultimately caused the Company to restructure its largest subsidiary, Computer Bay, as a discontinued operation and to file for bankruptcy protection under Chapter 11 on January 26, 1995. See "General Information about the Debtors' Business; Restructuring Efforts and the Filing of the Chapter 11 Cases - Commencement of Cases, and - Summary of Debtors' Postbankruptcy Restructuring Efforts," Sections III(C) and (D); and Spectrum's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, attached hereto as Exhibit E. During the nine months ended December 31, 1995, working capital (current assets less current liabilities) decreased by approximately $1,916,000 to $7,517,000. This decrease is primarily due to an increase in accrued liabilities of $1,461,000 primarily due to professional fees associated with the Chapter 11 Cases. Net cash used by continuing operations decreased approximately $9,037,000 when compared to the prior year primarily as a result of the Company's net loss from operating activities decreasing $12,073,000 for the nine months ended December 31, 1994 to $123,000 for the comparative period ended December 31, 1995. In addition, through downsizing and bankruptcy protection relating to various litigation and indemnifications, the Company was able to decrease its operating expenses as compared to the prior year (see "Selected Operating and Financial Data - Unaudited Operating Results for the First Three Quarters of Fiscal 1996," Section VI(B).) An increase in accrued expenses, primarily relating to bankruptcy professional fees, was also responsible for the decrease in cash utilized. Net cash provided by investing activities decreased $467,000 for nine months ended December 31, 1995 when compared to the prior fiscal year due to the cash proceeds from the sales of Global, the AXCELL product line and certain real property in Dallas, as compared to the cash proceeds from the sale of marketable securities in fiscal 1995. Capital expenditures amounted to approximately $58,000 for the nine months ended December 31, 1995. These expenditures are primarily related to office relocation and rejected capital leases. Capital expenditures for the nine months ended December 31, 1994 were approximately $130,000. The Company has no material commitments outstanding as of quarter-end and anticipates that capital expenditures may increase as a result of anticipated efforts to develop further core technology. There were no financing activities during the nine months ended December 31, 1995. During the nine months ended December 31, 1994, certain persons exercised stock options and warrants which resulted in a $770,000 increase in cash. For the nine months ended December 31, 1995, net cash required by discontinued operations was $1,861,000 as compared to net cash provided by discontinued operations of $1,214,000 for the nine months ended December 31, 1994. The Debtors reported significant operating losses as of December 31, 1995, and expect that significant operating losses will continue to be incurred prior to the Effective Date. Such operating losses combined with other cash requirements are expected to present a substantial cash funding requirement. As part of the Plan, the Debtors are attempting to settle all significant litigation. The adequacy of the Debtors' capital resources and long-term liquidity will be determined when the Plan is confirmed by the Bankruptcy Court. However, the uncertainties relating to the confirmation of the Plan and the continuing losses (see "Selected Operating and Financial Data - Unaudited Operating Results for the First Three Quarters of Fiscal 1996," Section VI(B)) raise substantial doubt about the Company's ability to continue as a going concern. See Spectrum's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, Note 1 to Consolidated Financial Statements, attached hereto as Exhibit E. Spectrum continues to closely monitor its expenditures in order to conserve cash. In July 1995, the Company received $3,000,000 for the sale of its AXCELL business and the related license to certain patent rights to Telular. See "General Information about the Debtors' Business; Restructuring Efforts and Filing of the Chapter 11 Cases - Summary of the Debtors' Postbankruptcy Restructuring Efforts - Dispositions of Other Assets," Section III(D)(2), and Spectrum's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, Note 6 to Consolidated Financial Statements, attached hereto as Exhibit E. As a result of the sale of the AXCELL business, the operations of Cellular have been downsized. In addition, on October 17, 1995, the Company sold its Global subsidiary for $6,101,081. The net proceeds of the sale were $4,549,000. See "General Information about the Debtors' Business; Restructuring Efforts and Filing of the Chapter 11 Cases - Summary of the Debtors' Postbankruptcy Restructuring Efforts - Discontinued Operations and Disposition of Subsidiary," Section III(D)(1), and Spectrum's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995, Note 6 to Consolidated Financial Statements, attached hereto as Exhibit E. NOTWITHSTANDING THE FOREGOING CASH CONSERVING EFFORTS, THE DEBTORS CONTINUE TO FACE SUBSTANTIAL UNCERTAINTIES AND TO SUFFER SIGNIFICANT OPERATING LOSSES AND BANKRUPTCY RELATED EXPENSES, RAISING SUBSTANTIAL DOUBT ABOUT THE DEBTORS' ABILITY TO CONTINUE AS GOING CONCERNS. AS A CONSEQUENCE, THERE CAN BE NO ASSURANCE THAT DEBTORS WILL HAVE SUFFICIENT FUNDS AVAILABLE TO CONTINUE OPERATIONS UNTIL THE PLAN CAN BE CONFIRMED AND IMPLEMENTED. MOREOVER, THE PLAN CONTEMPLATES THAT ALL ADMINISTRATIVE AND PRIORITY CLAIMS, TOGETHER WITH UNSECURED CLAIMS AND CERTAIN OTHER COSTS, WILL BE PAID IN CASH. IN THE EVENT THAT THE AGGREGATE AMOUNT OF ADMINISTRATIVE, PRIORITY AND UNSECURED CLAIMS, TOGETHER WITH CERTAIN COSTS, EXCEEDS THE AMOUNT OF CASH AVAILABLE TO THE DEBTORS, THE PLAN CANNOT BE CONFIRMED WITHOUT THE CONSENT OF THE HOLDERS OF SUCH ADMINISTRATIVE AND PRIORITY CLAIMS IN ADDITION TO OTHER HOLDERS ENTITLED TO VOTE UNDER THE PLAN. SEE "SUMMARY OF THE PLAN - GENERAL DESCRIPTION OF THE TREATMENT OF CLAIMS," SECTION VIII(D). IN ANY EVENT, NO ASSURANCE CAN BE GIVEN THAT THE DEBTORS WILL HAVE SUFFICIENT FUNDS AVAILABLE TO MAKE ALL PAYMENTS NECESSARY FOR CONFIRMATION AND IMPLEMENTATION OF THE PLAN. SECTION VII SUBSTANTIVE CONSOLIDATION OF SPECTRUM AND CELLULAR The Plan contemplates the substantive consolidation of the estates of Spectrum and Cellular into a single estate. The Proponents will file a motion for the substantive consolidation of the Spectrum and Cellular estates prior to the Confirmation Hearing (the "Spectrum/Cellular Substantive Consolidation Motion"). APPROVAL OF THE SPECTRUM/CELLULAR SUBSTANTIVE CONSOLIDATION MOTION BY A FINAL ORDER OF THE BANKRUPTCY COURT IS A CONDITION PRECEDENT TO EFFECTIVENESS OF THE PLAN. See "Conditions Precedent to Effectiveness of the Plan," Section XII. Giving effect to substantive consolidation will create a single estate consisting of all assets of Spectrum's and Cellular's separate estates. Consequently, the legal rights and priorities of each Claim and Interest holder shall be treated as having a single recourse against the assets of the consolidated estate. All Claim holders who asserted a Claim against either or both of the Debtors arising from or relating to the same underlying obligation or cause of action, whether the basis for the asserted liability of either Debtor arises by contract or by operation of law, will be treated as having a single Claim against the assets of the consolidated estate. Also, as a result of giving effect to substantive consolidation of Spectrum's and Cellular's estates, neither Spectrum nor Cellular will receive any distribution pursuant to the Plan with respect to Claims and, in the case of Spectrum only, Interests against or in each other. Substantive consolidation is based on an equitable doctrine and not on any provision of the Bankruptcy Code or other applicable statute. As an equitable doctrine, substantive consolidation is meant to ensure fair treatment of all creditors. While courts consider a variety of factors when determining whether substantive consolidation is appropriate, these considerations generally involve two critical criteria: (i) whether creditors dealt with the entities as a single company and did not rely on their corporate separateness in extending credit and (ii) whether the debtors' business and affairs are so entangled that consolidation would benefit all of their creditors. Since Spectrum and Cellular do not have a separate body of creditors and since Cellular's assets have been commingled with Spectrum's assets, the Debtors believe that application of the above criteria to the facts of this case mandates substantive consolidation of the estates of Spectrum and Cellular. SECTION VIII SUMMARY OF THE PLAN A. Means of Execution of the Plan The respective Chairman of the Board of Directors, the Chairman of any special committees designated by the Board of Directors, the President, Principal Chief Accounting Officer, or Corporate Secretary of Spectrum and Reorganized Spectrum shall be authorized to take all such actions as may be necessary or appropriate to effectuate and further evidence the terms and conditions of the Plan, agreements approved thereby, or orders of the Bankruptcy Court relating thereto. The respective Secretary or any Assistant Secretary of Spectrum or Reorganized Spectrum shall be authorized to certify or attest to any of the foregoing actions. The adoption of the Amended Spectrum Certificate and Amended Spectrum Bylaws, or similar constituent documents for Reorganized Spectrum; the initial selection of directors and officers for Reorganized Spectrum; the distribution of Cash and issuance and distribution of Distributable Common Stock and Class A Preferred Stock, the adoption, execution, delivery, conveyance, assignment, and implementation of all contracts, leases, agreements, documents, instruments, amendments, schedules, releases, indentures and other agreements related to any of the foregoing or the Plan; the adoption, execution and implementation of employment, retirement and indemnification agreements, incentive compensation programs, retirement income plans, welfare benefit plans and other employee plans and related agreements, including the Stock Incentive Plan and the Incentive Deferral Plan; and the other matters provided for under the Plan involving the corporate structure of Spectrum or Reorganized Spectrum or corporate action to be taken or required by Spectrum or Reorganized Spectrum shall be authorized and approved in all respects without any requirement of further action by the stockholders or directors of Spectrum or Reorganized Spectrum. Reorganized Spectrum shall adopt the Amended Spectrum Certificate and the Amended Spectrum Bylaws in conformance with section 303 of the Delaware General Corporation Law and pursuant to section 1123(a)(5)(I) of the Bankruptcy Code. The Amended Spectrum Certificate and Amended Spectrum Bylaws shall contain provisions which, among other provisions, authorize the issuance of the Reorganized Spectrum. The Amended Spectrum Certificate and Amended Spectrum Bylaws will become effective upon (x) Confirmation of the Plan, (y) the occurrence of the Effective Date, and (z) the filing with the Delaware Secretary of State of a certificate of amendment reflecting the Amended Spectrum Certificate. On the Effective Date or as soon thereafter as is practicable, pursuant to applicable state law, Reorganized Spectrum shall file with the applicable state governmental agencies or offices any required constituent documents for Reorganized Spectrum. As of and after the Effective Date, Reorganized Spectrum shall continue to engage in business in accordance with the Plan and related documents. Following the Effective Date, Reorganized Spectrum shall retain the right to merge, consolidate, dissolve, or take any other corporate action in accordance with applicable nonbankruptcy law, including amending the Amended Spectrum Certificate and the Amended Spectrum Bylaws pursuant to applicable nonbankruptcy law to provide for the issuance of nonvoting equity securities. Effective as of the time of confirmation of the Plan, Reorganized Spectrum shall adopt the Spectrum Technologies, Inc. 1996 Stock Incentive Plan (the "Stock Incentive Plan"). A summary of the Stock Incentive Plan is included under "Summary of the Plan - Adoption of Certain Compensation Plans - Stock Incentive Plan," Section VIII(G)(1). A copy of the Stock Incentive Plan is attached as Exhibit J hereto. Approval of the Plan shall be deemed to constitute approval of the Stock Incentive Plan for purposes of Rule 16b-3 promulgated under the Exchange Act and for purposes of section 422 of the Tax Code. Effective as of the time of confirmation of the Plan, Reorganized Spectrum shall also adopt the Spectrum Technologies, Inc. 1996 Incentive Deferral Plan (the "Incentive Deferral Plan"). A summary of the Incentive Deferral Plan is included under "Summary of the Plan - Adoption of Certain Compensation Plans - Incentive Deferral Plan," Section VIII(G)(2). A copy of the Incentive Deferral Plan is attached as Exhibit K hereto. Approval of the Plan shall be deemed to constitute approval of the Incentive Deferral Plan for purposes of Rule 16b-3 promulgated under the Exchange Act. Reorganized Spectrum shall transmit or cause to be transmitted to the Disbursing Agent on or before the Effective Date sufficient Cash and Distributable Common Stock to: (i) make the Distributions to the holders of Allowed Claims and Interests required by the Plan to be made on or as soon as practicable after the Effective Date; and (ii) establish the reserves required by the Plan. The Disbursing Agent shall make the Distributions pursuant to the Plan to the holders of Allowed Claims and Allowed Interests, as applicable on the Effective Date, and Reorganized Spectrum will effect the Reverse Stock Split on the Effective Date. B. General Description of Reorganized Spectrum Stock 1. Authorized and Issued Reorganized Spectrum Stock The authorized capital stock of Reorganized Spectrum shall consist of 13 million shares, comprised of (i) 10 million shares of Reorganized Spectrum Common Stock, (ii) 1 million shares of Class A Preferred Stock, and (iii) 2 million shares of Preferred Stock. The Amended Spectrum Certificate shall prohibit the issuance of certain nonvoting securities as required by the Bankruptcy Code. a. Reorganized Spectrum Common Stock. The Amended Spectrum Certificate will authorize the issuance of 10 million shares of Reorganized Spectrum Common Stock, $.001 par value, and Reorganized Spectrum will issue and deposit with the Disbursing Agent on or before the Effective Date sufficient shares of such stock as are required for the initial distribution to holders of Allowed Claims in Classes 4 and 6 and Allowed Interests in Class 5 in accordance with the Plan. In addition, Reorganized Spectrum shall reserve for issuance sufficient shares of such stock as are required for distribution to (i) holders of Class 2 Claims in the event that there is insufficient cash in the Class 2 Distribution Pool to pay 100 percent of the aggregate Allowed Amount of all Class 2 Claims (after all Class 2 Claims are Allowed or Disallowed) in cash and (ii) holders of Disputed Claims and Disputed Interests in Classes 4, 5 and 6, pending the allowance or disallowance of such Disputed Claims or Disputed Interests. See "Summary of the Plan - General Description of the Treatment of Claims - Estimation of and Reserve for Disputed Claims and Interests," Section VIII(D)(5). The Amended Spectrum Certificate authorizes Reorganized Spectrum to issue shares of Reorganized Spectrum Common Stock in the future for such business purposes as may then be determined by the Board. The Reorganized Spectrum Stock Incentive Plan and Incentive Deferral Plan (as such terms are defined below) shall authorize, and Reorganized Spectrum will issue, an aggregate number of shares of Reorganized Spectrum Common Stock equal to 2/9 of the aggregate number of shares of Distributable Common Stock and Class A Preferred Stock. See "Summary of the Plan - Means of Execution of the Plan," Section VIII(A). b. Class A Preferred Stock. The Amended Spectrum Certificate will authorize the issuance of 1 million shares of Class A Preferred Stock, $.001 par value, of which shares in an amount equal to the Distributable Common Stock will be issued by Reorganized Spectrum to the Class Action Trustee for the benefit of the Class Action Plaintiffs in accordance with the Class Action Settlement and Plan. For two years after the Effective Date, holders of Class A Preferred Stock will have a liquidation preference over Reorganized Spectrum Common Stock to the extent that, in the event that within two years of the Effective Date, Reorganized Spectrum again becomes a debtor in a bankruptcy case under the Bankruptcy Code (unless the case is an involuntary case and is dismissed before an order for relief is entered therein against Reorganized Spectrum), interests of holders of Class A Preferred Stock will have priority in such proceedings over interests of holders of Reorganized Spectrum Common Stock. At the expiration of the two-year preference period, Class A Preferred Stock will automatically convert to and become Reorganized Spectrum Common Stock. Secondary market trading by the public in the Class A Preferred Stock will be permitted, subject to generally applicable securities laws, but the Class A Preferred Stock will not (by reason of NASD restrictions) be listed by Reorganized Spectrum on the Nasdaq SmallCap Market or on any other exchange or market. See "Summary of the Plan - General Description of Reorganized Spectrum Stock - Restrictions on Transferability of Shares of Reorganized Spectrum Stock," and - - Certain Features of Amended Spectrum Certificate and Amended Spectrum Bylaws - The Restriction on Transfer of Reorganized Spectrum Stock Provision," Sections VIII(B)(3) and (C)(10). c. Preferred Stock. Reorganized Spectrum is authorized to issue 2 million shares of preferred stock (the "Preferred Stock"), of Reorganized Spectrum, issuable in series as the Board may by resolution authorize, with such designations, relative rights, preferences and limitations as the Board may specify in such resolution, which resolution shall not require the approval of shareholders. The Preferred Stock is available to Reorganized Spectrum for issuance for any proper corporate purpose, including issuance for cash, acquisitions of property or stock of other companies, stock dividends or for increased flexibility in defending against an unsolicited attempt to acquire Reorganized Spectrum. Moreover, it is contemplated that shares of Preferred Stock will be reserved for issuance in connection with the adoption of a shareholder purchase rights plan by the Board after the Effective Date. See "Summary of the Plan - General Description of Reorganized Spectrum Stock Rights Plan," Section VIII(B)(9). Unless otherwise required by applicable law or regulation, the shares of Preferred Stock will be issuable without further authorization by vote or consent of the holders of Reorganized Spectrum Common Stock and on such terms and for such consideration as may be determined by the Board. The Board will have broad discretion with respect to designating and establishing the terms of each series of Preferred Stock prior to its issuance. In this connection, the Board may fix for each series (1) the number of shares constituting that series, (2) the rate of dividends, if any, and the preferences, if any, over any other series with respect to dividends, (3) voting rights, if any, (4) the terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion, (5) the price at and the terms and conditions on which shares may be redeemed, (6) sinking fund provisions, if any, for the redemption or purchase of shares, (7) the amount payable upon shares in the event of voluntary or involuntary liquidation, (8) the conditions or restrictions upon the creation of indebtedness of Reorganized Spectrum or upon the issuance of capital stock of Reorganized Spectrum and (9) the conditions or restrictions with respect to the payment of dividends upon, or the making of other distributions to, or the acquisition or redemption of, shares ranking junior to the Preferred Stock. Unless specifically provided for in the Board resolution authorizing the issuance of the Preferred Stock, holders of Preferred Stock will not have any preemptive rights. 2. Voting Rights of Reorganized Spectrum Stock. a. Authorized and issued shares of Reorganized Spectrum Common Stock held by a Disbursing Agent for distribution to the holder of an Allowed Claim or Allowed Interest shall not be entitled to vote in any election of directors of Reorganized Spectrum, or any other matter requiring the vote of shareholders, until such time as the Reorganized Spectrum Common Stock has actually been distributed to the holder of the Allowed Claim or Allowed Interest. In addition, a holder of a Disputed Claim or Disputed Interest shall not be entitled to vote in any election of directors of Reorganized Spectrum, or any other matter requiring the vote of shareholders until such time as the Disputed Claim or Disputed Interest has become an Allowed Claim or Allowed Interest, and the holder of such Allowed Claim or Allowed Interest has received its distribution and become a shareholder of record of Reorganized Spectrum. The Class Action Trustee shall be entitled to vote Class A Preferred Stock that has not yet been distributed to a Class Action Plaintiff and is held by the Class Action Trustee; however, the Class Action Trustee shall be required to vote the Class A Preferred Stock in the same proportions and the same manner as the holders of shares of Reorganized Spectrum Common Stock have voted. b. Manner of Voting; Election and Removal of Directors. Subject to Subsection (a) above, each shareholder of record of Reorganized Spectrum Common Stock and Class A Preferred Stock shall have one vote for each share outstanding in his or her name on the books of Reorganized Spectrum and entitled to vote. Cumulative voting will not be permitted. Holders of Class A Preferred Stock will be entitled to vote in the same manner as holders of Reorganized Spectrum Common Stock, although, for the period of time that the Class A Preferred Stock is in the hands of the Class Action Trustee and has not been distributed to members of the class, such stock will be required to be voted in the same proportions as the holders of the Reorganized Spectrum Common Stock have voted. In addition, during the two-year preference period, no person may be elected as a director unless he receives a plurality of the votes cast by the holder of Reorganized Spectrum Common Stock as well as a plurality of the votes cast by the holders of Class A Preferred Stock, and no person may be removed as a director by the holders of Class A Preferred Stock unless the holders of a majority of the outstanding Reorganized Spectrum Common Stock vote in favor of such removal. c. Class Voting. So long as there are any shares of Class A Preferred Stock outstanding, any of the actions described in Sections VIII(C)(12)(d)(2), (4) and (9) will require the affirmative vote of the plurality of the shares of each of the Class A Preferred Stock and the Reorganized Spectrum Common Stock, each voting separately as a class. Except as may be otherwise required by law, or with regard to (i) the election of directors, (ii) the amendment of the Amended Spectrum Certificate or Amended Spectrum Bylaws, (iii) mergers and consolidations, (iv) dispositions, and (v) appointing or replacing Reorganized Spectrum's independent public auditors, the holders of Class A Preferred Stock and Reorganized Spectrum Common Stock shall vote together as a single class. d. Quorum. So long as any shares of Class A Preferred Stock are outstanding, the holders of (i) a majority of the issued and outstanding shares of Class A Preferred Stock and (ii) a majority of the issued and outstanding shares of Reorganized Spectrum Common Stock, present in person or represented by proxy, will constitute a quorum for the transaction of any business at any duly called meeting of shareholders. Thereafter, the holders of a majority of all issued and outstanding shares of Reorganized Spectrum Common Stock, present in person or represented by proxy, will constitute a quorum for the transaction of any business at any duly called meeting of shareholders. 3. Restrictions on Transferability of Shares of Reorganized Spectrum Stock The Amended Spectrum Certificate prohibits for a period of three years after the Effective Date any transfer of shares of Reorganized Spectrum Stock that would cause any Person or group of Persons to become a Five Percent Shareholder (as defined below) (See "Summary of the Plan - Certain Features of the Amended Spectrum Certificate - The Restriction on Transfer of Reorganized Spectrum Stock Provision," Section VIII(C)(10)) or increase a Five Percent Shareholder's percentage ownership interest in Reorganized Spectrum. This limitation is intended to prevent transfers of Reorganized Spectrum Stock from triggering an "ownership change," as defined in section 382 of the Tax Code, which would result in the limitation of certain potential tax benefits available to Reorganized Spectrum. This restriction may be waived by the Board of Directors of Reorganized Spectrum if, in its judgment, the proposed transfer does not increase the risk that the use of such tax benefits will be limited. It is anticipated that limited waivers to this restriction will be granted with respect to Reorganized Spectrum Common Stock covered by the Incentive Deferral Plan and the Stock Incentive Plan. Any transfer or Reorganized Spectrum Stock effected in violation of the restrictions set forth in the Amended Spectrum Certificate shall be deemed null and void and shall have no force and effect, and the transferee thereof shall have no rights as a shareholder of Reorganized Spectrum. See "Certain Federal Income Tax Consequences of the Plan," Section XI; "Summary of the Plan - Certain Features of the Amended Spectrum Certificate - The Restriction on Transfer of Reorganized Spectrum Stock Provision," Section VIII(C)(10); and Exhibit I attached hereto. Certificates representing shares of Reorganized Spectrum Stock and such other securities of Reorganized Spectrum will bear an appropriate legend, as set forth in Section 4 below, with respect to such restrictions. 4. Legend on Certificates a. Legend on Class A Preferred Stock. All certificates for shares of Class A Preferred Stock issued by Reorganized Spectrum and shares of Reorganized Spectrum Common Stock to be issued on conversion of Class A Preferred Stock will conspicuously bear a legend in substantially the following form: "IN ORDER TO PRESERVE CERTAIN TAX BENEFITS UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN PROVISIONS OF THE CORPORATION'S CERTIFICATE OF INCORPORATION AND BYLAWS WHICH LIMIT THE TRANSFERABILITY OF SUCH SECURITIES. A COPY OF THE CERTIFICATE OF INCORPORATION HAS BEEN DEPOSITED WITH THE CORPORATION AT ITS PRINCIPAL OFFICE, AND THE CORPORATION WILL FURNISH A COPY THEREOF TO THE RECORD HOLDER OF THESE SECURITIES WITHOUT CHARGE UPON WRITTEN REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS. b. Legend on Reorganized Spectrum Common Stock. Certificates for shares of Reorganized Spectrum Common Stock issued by Reorganized Spectrum (other than upon conversion of Class A Preferred Stock), including shares of Reorganized Spectrum Common Stock distributed by the Disbursing Agent, will conspicuously bear a legend in substantially the following form: "IN ORDER TO PRESERVE CERTAIN TAX BENEFITS UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN PROVISIONS OF THE CORPORATION'S CERTIFICATE OF INCORPORATION AND BYLAWS WHICH LIMIT THE TRANSFERABILITY OF SUCH SECURITIES. A COPY OF SUCH PLAN AND CERTIFICATE OF INCORPORATION HAVE BEEN DEPOSITED WITH THE CORPORATION AT ITS PRINCIPAL OFFICE, AND THE CORPORATION WILL FURNISH A COPY THEREOF TO THE RECORD HOLDER OF THESE SECURITIES WITHOUT CHARGE UPON WRITTEN REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS. 5. Transactions with Related Parties. The Amended Spectrum Certificate requires that certain business combinations proposed by shareholders owning more than 10% of the outstanding stock entitled to vote (as defined in Section VIII(C)(7), an "Interested Stockholder") be approved by the affirmative vote of at least 66-2/3% of the votes entitled to be cast on such transaction by the holders of all then- outstanding shares of Reorganized Spectrum Common Stock and Class A Preferred Stock, voting together as a single class, excluding shares held by the Interested Stockholder, unless prior approval by the Board of Directors has been obtained. Such restricted business combinations include, but are not limited to, (i) mergers of Reorganized Spectrum into the Interested Stockholder, (ii) the sale or other disposition by Reorganized Spectrum of any assets or securities to an Interested Stockholder, (iii) a plan of liquidation or dissolution of Reorganized Spectrum, (iv) any amendment to the Amended Spectrum Bylaws and (v) any reclassification of securities, recapitalization, merger with a subsidiary or other transaction which would increase an Interested Stockholder's proportionate share of the outstanding capital stock of Reorganized Spectrum. See "Summary of the Plan -- Certain Features of Amended Spectrum Certificate and Amended Spectrum Bylaws -- The Business Combination Provision," Section VIII(C)(7). The restrictions on certain business combinations may encourage companies interested in acquiring Reorganized Spectrum to negotiate in advance with the Reorganized Spectrum Board since the 66-2/3% vote requirement would not be invoked if a majority of the Reorganized Spectrum Board approves such a business combination prior to its effective date. In the event of a proposed acquisition of Reorganized Spectrum, the Reorganized Spectrum Board believes that the interests of Reorganized Spectrum shareholders will best be served by a transaction that results from negotiations based upon careful consideration of the proposed terms, such as the price to be paid minority shareholders, the form of consideration paid and tax effects of the transaction. However, if the restriction on business combinations has the effect of giving management more bargaining power in negotiations with a potential acquiror, it could result in management using the bargaining power not only to try to negotiate a favorable price for an acquisition but also to negotiate more favorable terms for management. 6. Estimated Equity Value Following confirmation of the Plan, Reorganized Spectrum shall be authorized to issue sufficient shares of such stock to be distributed to holders of Claims in Classes 2,4,5 and 6 (the "Distributable Common Stock"). Following confirmation, the holders of Distributable Common stock will hold approximately forty-five percent (45%) of the total equity interest in Reorganized Spectrum. Based on the outstanding shares of Existing Common Stock and the average closing bid and ask price as reported by the National Quotation Bureau as of February 2, 1996 of $.115 per share, the Existing Common Stock had a market value of approximately $9.2 million. The market value of the Distributable Common Stock will be approximately forty-five (45%) of the market value of the total equity value of Reorganized Spectrum. THE AMOUNT OF DISTRIBUTABLE COMMON STOCK TO EACH CLASS IS NOT KNOWN AT THIS TIME AND WILL NOT BE KNOWN UNTIL ALL DISPUTED CLAIMS ARE LIQUIDATED. FURTHER, THE COMPANY CANNOT PREDICT THE EFFECT OF THE CONFIRMATION OF THIS PLAN ON THE FUTURE TRADING PRICE OF SPECTRUM SECURITIES. If no plan of reorganization can be confirmed, the Debtors may be liquidated under Chapter 7 or Chapter 11. In the case of a liquidation, the proceeds of the liquidation would be distributed to the respective holders of Claims against the Debtors in accordance with the priorities established by the Bankruptcy Code. See "Alternatives to Confirmation and Consummation of Plan" Section XIV. Under the current liquidation analysis, Class 5; Equity Interests will receive distribution from the liquidation proceeds after payment of Administrative Expense Claims, Priority Tax Claims, Secured Claims, Priorty Nontax Claims, and Unsecured Claims. The Company also believes that holders of claims in Classes 3,4,5 and 6 will be treated pari passu. This distribution will likely result in the elimination of any recovery to holders of claims in those Classes. 7. Reverse Stock Split The Reverse Stock Split shall be effected by the exchange and cancellation of all issued and outstanding Existing Spectrum Common Stock for Reorganized Spectrum Common Stock at the rate of one share of Reorganized Spectrum Common Stock for every 100 shares of Existing Spectrum Common Stock. No fractional shares of Reorganized Spectrum Common Stock will be issued as a result of the Reverse Stock Split. Where the Reverse Stock Split would create such fractional shares, shares will be rounded up or down to the nearest whole number. 8. Fractional Shares Fractional shares of Reorganized Spectrum Common Stock created by the Reverse Stock Split shall be rounded up or down to the nearest whole number. 9. Rights Plan. Reorganized Spectrum anticipates that it will adopt a Rights Plan after the Effective Date. The Amended Spectrum Certificate will explicitly authorize the Board of Directors to adopt a Rights Plan and to specify its actual terms, without the need for shareholder approval. See "Summary of the Plan - Certain Features of Amended Spectrum Certificate and Amended Spectrum Bylaws - Other Provisions - Issuance of Rights and Options to Purchase Shares," Section VIII(C)(12)(c). The time at which a Rights Plan shall be adopted and the specific terms of the Rights Plan shall be determined by the Board of Directors upon adoption and set forth in the contracts or instruments establishing the Rights Plan and evidencing the rights to be issued thereunder. The authority of the Board of Directors with respect to the Rights Plan and such rights shall include, but not be limited to, determination of (i) the purchase price of the capital stock to be purchased upon exercise of such rights; (ii) provisions relating to the times at which and the circumstances under which such rights may be exercised or sold or otherwise transferred, either together with or separately from, any other stock or other securities of Reorganized Spectrum; (iii) provisions which set forth the type and amount of capital stock for which the rights are initially exercisable and provisions which adjust the number or exercise price of such rights or the amount or nature of the stock or other securities receivable upon exercise of such rights in the event of a combination, split or recapitalization of any Reorganized Spectrum Stock, a change in ownership of Reorganized Spectrum Stock or other securities or a reorganization, merger, consolidation, sale of assets or other occurrence relating to Reorganized Spectrum or any Reorganized Spectrum Stock, and provisions restricting the ability of Reorganized Spectrum to enter into any such transaction absent an assumption by the other party or parties thereto of the obligations of Reorganized Spectrum under such rights; (iv) provisions which deny the holder of a specified percentage of the outstanding securities of Reorganized Spectrum the right to exercise such rights and/or cause such rights held by such holder to become void; (v) provisions which permit Reorganized Spectrum to redeem or exchange such rights; and (vi) the appointment of the rights agent with respect to such rights. This provision is intended to confirm (and not limit) the authority of the Board of Directors to issue share purchase rights or other rights to purchase stock or securities or assets of Reorganized Spectrum or any other corporation. It is anticipated that following the Effective Date, Reorganized Spectrum would issue share purchase rights (each, a "Right") to all holders of voting Stock. The Rights would be subject to a Rights Agreement which would provide the circumstances under which the Rights are to be distributed and exercised. The circumstances in which the Rights would be distributed could include, among other circumstances, (i) the public announcement that a Person or group of affiliated or associated Persons (an "Acquiring Person") shall have acquired beneficial ownership of at least a specified percentage of the outstanding shares of Reorganized Spectrum voting stock and (ii) the commencement of, or an announcement of an intention to make, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a Person or group of at least a specified percentage of the outstanding shares of Reorganized Spectrum voting stock (the earlier of such dates being called the "Rights Distribution Date"). The Rights would not be exercisable prior to the Rights Distribution Date and would not be transferable prior to such time separate from the shares of Reorganized Spectrum voting stock to which a Right attaches. Upon distribution, each Right would entitle the registered holder to purchase newly-issued capital stock of Reorganized Spectrum (which could be Reorganized Spectrum Common Stock or a class or series of Preferred Stock having such terms as would be established by the Board of Directors, and could be a fractional share), all as specified in the Rights Agreement, at an exercise price also specified therein. It is anticipated that the Rights Agreement would provide that, in the event that any Person or group of affiliated Persons becomes an Acquiring Person (other than in a transaction approved in advance by the Board of Directors and/or by directors meeting specified criteria, by such vote of the Board and/or such directors as would be specified in the Rights Agreement), proper provision would be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which Rights would thereafter be void), would thereafter have the right to receive upon exercise that number of shares of Reorganized Spectrum voting stock (or other specified security) having a market value (as defined in the Rights Agreement) of two times (or other specified multiple) of the exercise price of the Right. In the event that, at any time on or after the date that any Person has become an Acquiring Person, Reorganized Spectrum is acquired in a merger or other business combination transaction, or 50% or more (or other specified percentage) of its consolidated assets or earning power are sold, it is anticipated that the Rights Agreement would require that proper provision be made so that each holder of a Right would thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of Reorganized Spectrum voting stock of the acquiring company which at the time of such transaction would have a market value of two times (or other specified multiple) of the exercise price of the Right. It is anticipated that the Rights Agreement would provide that, after any Person or group becomes an Acquiring Person, the Board of Directors would have the right to exchange the Rights (other than Rights held by such Acquiring Person which would have become void), in whole or in part, at an exchange ratio of one share of Reorganized Spectrum voting stock (or other specified amount of Reorganized Spectrum voting stock or other securities) per Right, subject to adjustment. It is anticipated that the Rights Agreement would provide that, prior to the acquisition by a Person or group of affiliated or associated Persons of beneficial ownership of more than a specified percentage of the outstanding shares of Reorganized Spectrum voting stock, the Board of Directors would have the right to redeem the Rights in whole, but not in part, at a price per Right (and payable in cash or such other form of consolidation) specified in the Rights Agreement. Redemption of the Rights could be made at such time and on such basis as the Board of Directors in its sole discretion might establish. Immediately upon redemption of any Rights, the right to exercise the Rights would terminate, other than the right of holders of Rights to receive the redemption price. The Rights Agreement would be anticipated to provide that the terms of the Rights could be amended by the Board of Directors (and/or by directors meeting specified criteria, and by such vote of the Board or such directors as would be specified therein) without consent of the holders of Rights. Prior to exercise, a Right would not create any rights in the holder thereof as a stockholder of Reorganized Spectrum, including, without limitation, the right to vote or receive dividends. The Rights would have certain antitakeover effects. The Rights would cause substantial dilution to a person or group that attempts to acquire Reorganized Spectrum on terms not approved by the Board of Directors. The Rights should not interfere with any merger or other business combination approved by the Board of Directors before the existence of an Acquiring Person since the Rights would be able to be redeemed by Reorganized Spectrum prior to the time that a Person or group of Persons has become an Acquiring Person. In the event of a bona fide offer to acquire Reorganized Spectrum conditioned on the elimination or non-applicability of the Rights Plan, the Board of Directors would decide, on a basis consistent with the directors fiduciary duties, whether or not to redeem the Rights or otherwise cause the Rights Plan to be inapplicable. C. Certain Features of the Amended Spectrum Certificate and Amended Spectrum Bylaws The individuals currently serving as directors and officers will serve initially as the directors and the executive officers of Reorganized Spectrum commencing on the Effective Date. See "General Information about the Debtors' Business; Restructuring Efforts and Filing of the Chapter 11 Cases - Description of the Debtors - Directors and Officers," Section III(A)(2) for the list of such individuals. This list may be amended at any time prior to the Effective Date upon such notice as may be required by the Bankruptcy Court. Subject to the requirement of Bankruptcy Court approval under section 1129(a)(5) of the Bankruptcy Code, those persons so designated shall be authorized to assume their offices as of the Effective Date and shall be authorized to continue to serve in such capacities thereafter pending further action of the Board of Directors or stockholders of Reorganized Spectrum in accordance with applicable state law and Reorganized Spectrum's then-existing certificate of incorporation and bylaws. The Amended Spectrum Bylaws will contain certain provisions relating to the nomination of directors and notice of business to be conducted at shareholder meetings. See "Summary of the Plan - Certain Features of the Amended Spectrum Certificate and Amended Spectrum Bylaws," Section VIII(C), and Exhibit H attached hereto. Certain significant features of the Amended Spectrum Certificate, attached hereto as Exhibit I, are summarized below. Certain additional features relating to the rights and limitations of the Preferred Stock, the Class A Preferred Stock and the Reorganized Spectrum Common Stock are described in "Summary of the Plan - General Description of Reorganized Spectrum Stock," Section VIII(B). 1. Summary. The Amended Spectrum Certificate provides (i) that the Board may consider the interests of constituents of Reorganized Spectrum other than Reorganized Spectrum's shareholders in evaluating certain takeover proposals (the "Evaluation Provision"); (ii) that shareholders of Reorganized Spectrum may not act without a duly called annual or special meeting, except upon the written consent signed by all of the shareholders of Reorganized Spectrum entitled to vote thereon (the "Consent Provision"); (iii) that shareholders of Reorganized Spectrum may not call a special meeting of shareholders (the "Shareholder Meeting Provision"); (iv) that directors on the Board are classified into three classes, as nearly equal in number as possible, each class to serve for three years, with one class elected each year (the "Classified Board Provision"); (v) that a director on the Board may be removed only for cause and only by the affirmative vote of not less than 80% of the outstanding stock of Reorganized Spectrum entitled to vote for the election of such director (the "Director Removal Provision"); (vi) that a Business Combination (as defined below) with or proposed by or on behalf of an Interested Stockholder (as defined below) would require an affirmative vote of 66-2/3% of the votes entitled to be cast by holders of the Voting Stock (as defined below) of Reorganized Spectrum (excluding Voting Stock held by the Interested Stockholder and certain related parties) unless the transaction is approved by a majority of the Board prior to the Determination Date (as defined below) (the "Business Combination Provision"); (vii) that directors of Reorganized Spectrum shall not be liable for damages for breach of their fiduciary duty of care, subject to certain exceptions (the "Liability Provision"); (viii) that the Board is expressly authorized to make, adopt, alter, amend, change or repeal the Amended Spectrum Bylaws, and that the shareholders of Reorganized Spectrum do not have the right to make, adopt, alter, amend, change or repeal the Amended Spectrum Bylaws except upon the affirmative vote of not less than 80% of the outstanding stock of Reorganized Spectrum entitled to vote thereon (the "Bylaws Amendment Provision"); (ix) that limitations apply to the transfer of shares of Reorganized Spectrum Stock that would cause a person or entity to become a Five Percent Shareholder or increase a Five Percent Shareholder's percentage ownership interest in Reorganized Spectrum (the "Restriction on Transfer of Stock Provision"); and (x) that notwithstanding anything to the contrary in the Amended Spectrum Certificate, the affirmative vote of at least 80% of all of the Voting Stock voting together as a single class, other than Voting Stock beneficially owned by an Interested Stockholder, is required to alter, amend or repeal the Evaluation Provision, the Consent Provision, the Shareholder Meeting Provision, the Classified Board Provision, the Director Removal Provision, the Business Combination Provision, the Bylaw Amendment Provision, the Restriction on Transfer of Stock Provision and the Amendment Provision (as defined below) unless such alteration, amendment, or repeal is recommended by a majority of the members of the Board (the "Amendment Provision"). 2. The Evaluation Provision. The Evaluation Provision will permit the Board to take into account all factors it deems relevant in evaluating, among other things, tender offers, proposals for business sales or combinations and proposals for corporate liquidation or reorganizations involving Reorganized Spectrum, including the potential impact of any such transaction on employees, customers, suppliers, partners, joint ventures, and other constituents of Reorganized Spectrum and the communities in which it operates. 3. The Consent Provision. The Consent Provision provides that shareholders of Reorganized Spectrum may not act without a duly called annual or special meeting except upon the signing of a written consent setting forth the action to be taken signed by all of the shareholders entitled to vote thereon. The Consent Provision limits the ability of any shareholder (other than a holder of all of the Reorganized Spectrum Common Stock) to take action immediately and without prior notice to the Board. The Consent Provision allows shareholders to act only at an annual or special meeting thereby ensuring that all shareholders will have the opportunity to consider any matter that could affect their rights. 4. The Shareholder Meeting Provision. The Shareholder Meeting Provision provides that shareholders of Reorganized Spectrum may not call a special meeting of shareholders, thus increasing the difficulty of shareholders from taking any action not approved by the Board of Directors except at an annual meeting of shareholders. 5. The Classified Board Provision. Under the Classified Board Provision, the directors are divided into three classes, designated Class I, Class II and Class III. Each class consists, as nearly as possible, of one-third of the total number of directors constituting the entire Board of Directors. Initially, Class I directors shall be elected for a one-year term, Class II directors for a two-year term, and Class III directors for a three-year term. At each succeeding annual meeting of stockholders beginning after the first meeting following the Effective Date, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. The Classified Board Provision provides that the Board shall be comprised of no more than seven directors. The exact number of directors and the number of directors constituting each class of directors (with each of the three classes being as nearly equal as possible) may be fixed or changed, from time to time, by the Board within such authorized limits. In addition, the Classified Board Provision provides that if the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. In addition, a director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected subject, however, to prior death, resignation, retirement or removal from office. Any vacancy on the Board that results from an increase in the number of directors may be filled by a vote of the majority of the directors then in office, provided that a quorum is present; any other vacancy occurring in the Board may be filled by a vote of the majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor or if such director has no predecessor, as that of the class of directors to which such director has been elected. 6. The Director Removal Provision. Under the Director Removal Provision, each director on the Board may be removed only for cause and by the affirmative vote of the holders of not less than a majority of the shares of each class of outstanding voting stock of Reorganized Spectrum then entitled to vote for the election of such director. Cause for removal exists only if the director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction or has been adjudged by a court of competent jurisdiction to be liable for gross negligence or misconduct in the performance of such director's duty to Reorganized Spectrum and such adjudication is no longer subject to direct appeal. 7. The Business Combination Provision. Under the Business Combination Provision, a Business Combination (as defined below) transaction would require approval by the affirmative vote of at least 66-2/3% of the votes entitled to be cast on such transaction by the holders of all then-outstanding shares of Reorganized Spectrum Common Stock ("Voting Stock"), voting together as a single class, excluding shares held by an Interested Stockholder (as defined below) and certain related parties if the Business Combination transaction is with or proposed by or on behalf of any of them, unless the Business Combination is approved by a majority of the Board prior to the date on which such Interested Shareholder became the beneficial owner of 10% or more of the Reorganized Spectrum Common Stock (the "Acquisition Date"). Under certain circumstances a Business Combination shall be presumed to be proposed by or on behalf of an Interested Stockholder, unless a majority of the Board determines otherwise. If such prior Board approval is obtained, the Business Combination shall be subject to the applicable voting requirement under the Delaware General Corporation Law ("DGCL") which presently, for most types of Business Combination transactions on which a shareholder vote is required, is the affirmative vote of the holders of a majority of the outstanding shares entitled to vote on the matter. An "Interested Stockholder" is defined in the Business Combination Provision to include any person who is the beneficial owner (as defined below) of more than 10% of the Voting Stock other than Reorganized Spectrum, certain of its subsidiaries or certain employee benefit plans, including employee stock ownership plans, and the trustees of such plans. A person is the "beneficial owner" of Voting Stock when such person and certain related parties, directly or indirectly, own or have the right to acquire or vote such stock. A "Business Combination" includes the following transactions with, or proposed by or on behalf of, any Interested Stockholder or certain related parties: (a) a merger or consolidation of Reorganized Spectrum or any subsidiary with an Interested Stockholder or certain related parties; (b) the sale or other disposition by Reorganized Spectrum or a subsidiary of any assets or securities to an Interested Stockholder or certain related parties, or any other arrangement with or for the benefit of an Interested Stockholder or any such related party (including investments, loans, advances, guarantees, extensions of credit, creating security interests and participating in joint ventures) which (except in certain circumstances), together with all other such arrangements (including all contemplated future events), involves assets or securities having a value (or involving aggregate commitments) of $5 million or more or constitutes more than 5% of the book value of the total assets (in the case of transactions involving assets or commitments other than capital stock) or of the shareholders' equity (in the case of transactions in capital stock) of the entity in question (the "Substantial Part"), as reflected in the most recent fiscal year- end consolidated balance sheet of such entity existing at the time the shareholders of Reorganized Spectrum would be required to approve or authorize such transaction; (c) the adoption of any plan or proposal for the liquidation or dissolution of Reorganized Spectrum or for any amendment to Amended Spectrum Bylaws; (d) any reclassification of securities, recapitalization, merger with a subsidiary or other transaction which has the effect, directly or indirectly, of increasing an Interested Stockholder's proportionate share of the outstanding capital stock of Reorganized Spectrum or a subsidiary; or (e) any agreement or arrangement providing for any one or more of the actions specified in the foregoing clauses (a) through (d). If an Interested Stockholder consents to the adoption of the proposed Business Combination and in certain other circumstances, the Business Combination will be presumed to be on behalf of the Interested Stockholder, unless a majority of the Board in good faith determines otherwise. 8. The Liability Provision. Under the Liability Provision, Reorganized Spectrum's directors will not have personal liability to Reorganized Spectrum or its shareholders for monetary damages for any breach of their fiduciary duties as directors, except (i) for any breach of the duty of loyalty to Reorganized Spectrum or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for liability under section 174 of the DGCL involving certain unlawful dividends or stock repurchases or redemptions or (iv) for any transaction from which the director derived an improper personal benefit. The Liability Provision also provides that Reorganized Spectrum shall indemnify to the full extent provided by law any person made or threatened to be made a party or witness to any action, suit or proceeding by reason of the fact that such person is or was a director or officer of Reorganized Spectrum or by reason of the fact that such person is or was serving any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity at the request of Reorganized Spectrum. In addition, the Liability Provision provides that Reorganized Spectrum may maintain insurance, at its expense, to protect itself and any director, officer, employee, or agent of Reorganized Spectrum or another corporation, partnership, joint venture, trust or other enterprise against such expense, liability or loss, whether or not Reorganized Spectrum would have the power to indemnify such person against such expense, liability or loss under the DGCL. 9. The Bylaw Amendment Provision. Under the Bylaw Amendment Provision, the Board is expressly authorized to make, adopt, alter, amend, change or repeal the Amended Spectrum Bylaws. The Bylaw Amendment Provision further provides that the shareholders of Reorganized Spectrum may not make, adopt, alter, amend, change or repeal the Amended Spectrum Bylaws except upon the affirmative vote of not less than 80% of the outstanding stock of Reorganized Spectrum entitled to vote thereon. 10. The Restriction on Transfer of Reorganized Spectrum Stock Provision. Spectrum currently has reflected on its balance sheet certain net deferred tax benefits of approximately $3.2 million with a valuation allowance of equal value. The tax deductions associated with these deferred tax benefits may be reviewed by the IRS, and it is possible that, upon such review, the IRS may disallow a portion of such deferred tax benefits. In addition, such tax deductions would be subject to significant limitation under section 382 of the Tax Code if Reorganized Spectrum undergoes an "ownership change." See "Certain Federal Income Tax Consequences of the Plan - Matters Affecting Utilization of Debtors' Tax Attributes," Section XI (2)(a). Reorganized Spectrum will undergo an "ownership change" if any Five Percent Shareholders (as defined below) of Reorganized Spectrum increase their aggregate ownership of Reorganized Spectrum Stock by more than 50 percentage points over the lowest percentage of such stock owned by such shareholders at any time during the testing period (generally three years). A "Five Percent Shareholder" is a Person or group of Persons identified as a "Five Percent Shareholder" of Reorganized Spectrum for purposes of section 382 of the Tax Code and the Treasury Regulations promulgated thereunder. The Amended Spectrum Certificate limits transfers of shares of Reorganized Spectrum Stock. This limitation is intended to prevent transfers of Reorganized Spectrum Stock from triggering an "ownership change." See "Certain Federal Income Tax Consequences of the Plan - Matters Affecting Utilization of Debtors' Tax Attributes," Section XI (2)(a). Under the Amended Spectrum Certificate, any sale, transfer, assignment, conveyance, pledge or other disposition or the issuance of any option to sell, transfer, assign, convey, pledge or otherwise dispose of (a "Transfer") legal or beneficial ownership of Reorganized Spectrum Stock prior to the date which is one day after the third anniversary of the Effective Date (the "Release Date"), or any attempted Transfer of such Stock under any agreement entered into prior to the Release Date, shall be prohibited and deemed null and void to the extent that, as a result of such Transfer (or any series of Transfers of which such Transfer is a part), (i) any Person or group of Persons would become a Five Percent Shareholder for purposes of section 382 of the Tax Code, or (ii) the percentage of stock ownership of any Five Percent Shareholder would be increased (a "Prohibited Transfer"); provided, that nothing contained in the Amended Spectrum Certificate shall preclude the settlement of any transaction entered into through the facilities of the Nasdaq SmallCap Market in the Reorganized Spectrum Common Stock. This prohibition on Transfers will not apply to any Transfer (i) that has been approved in advance by the Board of Directors of Reorganized Spectrum, which approval may be withheld only if, in the judgment of the Board of Directors, such Transfer may increase the risk that the use of Reorganized Spectrum's net operating loss carryforwards, tax losses recognized in the future or other tax attributes will be limited or (ii) made in compliance with exceptions provided by the Board of Directors of Reorganized Spectrum in resolutions duly adopted from time to time. It is anticipated that limited waivers to this prohibition will be granted with respect to Reorganized Spectrum Common Stock covered by the Incentive Deferral Plan and the Stock Incentive Plan. The Amended Spectrum Certificate shall prohibit any employee or agent of Reorganized Spectrum from recording any Transfer which is prohibited, and the transferee in any such Transfer shall not be recognized as a holder of Reorganized Spectrum Stock in respect of the Reorganized Spectrum Stock that is the subject of such Prohibited Transfer. If a purported Transfer would constitute a Prohibited Transfer, then the transferee is required, upon demand of Reorganized Spectrum, to transfer or cause to be transferred any certificate or other evidence of ownership of the Reorganized Spectrum Stock that is the subject of the Prohibited Transfer, together with all dividends or distributions, if any, that may have been received by the purported transferee from Reorganized Spectrum in respect of such stock, to a designated transfer agent (the "Agent"). The Agent shall sell such Reorganized Spectrum Stock in an arm's length transaction. If the purported transferee has resold the Reorganized Spectrum Stock before receiving a transfer demand from Reorganized Spectrum, the purported transferee will be deemed to have sold the Reorganized Spectrum Stock on behalf of the Agent and will be required to transfer to the Agent any distributions received in respect of the stock and the proceeds of such sale, except to the extent the Agent grants written permission to the purported transferee to retain such portion of the proceeds not exceeding the amount the purported transferee would have received from the Agent had the Agent rather than the purported transferee resold the Reorganized Spectrum Stock. The Agent shall apply any proceeds of sale of Reorganized Spectrum Stock that has been the subject of a Prohibited Transfer as follows: first, to cover its own expenses in selling the stock; second, to the purported transferee, up to the amount paid by the purported transferee for the Reorganized Spectrum Stock (or the market price for such Reorganized Spectrum Stock on the trading day immediately preceding the Transfer), which amount shall be determined by the Board of Directors of Reorganized Spectrum in its sole discretion; and third, to a charitable organization selected by Reorganized Spectrum. If the purported transferee fails to surrender the Reorganized Spectrum Stock that is the subject of a prohibited Transfer or the proceeds of sale thereof to the Agent within thirty days of demand therefor by Reorganized Spectrum, Reorganized Spectrum may institute legal proceedings to compel the surrender. Under the Amended Spectrum Certificate, each certificate representing a share of Reorganized Spectrum Stock issued prior to the Release Date shall bear a legend to the effect that such Reorganized Spectrum Stock and any common stock or other Reorganized Spectrum Stock acquired prior to the Release Date upon exercise or conversion of such Reorganized Spectrum Stock is subject to the transfer restrictions set forth in the Reorganized Spectrum Certificate. 11. The Amendment Provision. Under the Amendment Provision, the affirmative vote of 80% of all the Voting Stock voting together as a single class, other than Voting Stock beneficially owned by an Interested Stockholder, is required to alter, amend, or repeal the Evaluation Provision, the Consent Provision, the Stockholder Meeting Provision, the Classified Board Provision, the Director Removal Provision, the Business Combination Provision, the Bylaw Amendment Provision, the Restriction on Transfer of Stock Provision and the Amendment Provision. For purposes of the Amendment Provision, the definitions of "Interested Stockholder" and "Voting Stock" are the same as used in the Business Combination Provision. 12. Other Provisions. a. Quorum. Not less than a majority of directors shall constitute a quorum for the transaction of business at any duly called meeting of the Board; provided that not less than a majority of directors shall constitute a quorum at such a meeting for the transaction of any business relating to the approval of any action described in Subsection (d) below. b. Ordinary Action by the Board. A majority vote of directors present at a meeting of directors at which a quorum is present shall be required to effect any action by the Board with respect to any matter other than those described in Subsection (d) below. c. Issuance of Rights and Options to Purchase Shares. The Board of Directors shall have the authority to issue, by a majority vote of directors present at a meeting of directors at which a quorum is present, rights or options entitling the holders of such rights or options to purchase from Reorganized Spectrum, upon such consideration, terms and conditions as may be fixed by the Board, (x) shares of any class or series, whether authorized but unissued shares, treasury shares or shares to be purchased or acquired or (y) assets of the corporation, including, without limitation, to issue without consideration to the stockholders of Reorganized Spectrum any such rights or options (a "Rights Plan"). See "Summary of the Plan - General Description of Reorganized Spectrum Stock - Rights Plan," Section VIII (B)(9). No shareholder vote is required for the adoption of a Rights Plan or other issuance of rights or options and, in the event the Board adopts such a Rights Plan, the Board shall have the authority to waive any and all rights granted therein to Shareholders as it in its judgment deems necessary. d. Supermajority Requirement. The affirmative vote of not less than two-thirds of the directors present at any meeting at which a quorum is present ("Supermajority Vote") shall be required to effect any action by the Board with respect to the matters set forth below, other than actions determined by the Board to constitute Business Combinations within the meaning of the Business Combination Provision. (1) Amendments. Any modification, revision, alteration, amendment, repeal or rescission, in whole or in part, of any provision of the Amended Spectrum Certificate or Amended Spectrum Bylaws. (2) Mergers and Consolidations. Entering into any agreement to merge or consolidate Reorganized Spectrum with or into any other Person. (3) Acquisitions. Entering into any agreement for Reorganized Spectrum or any of its subsidiaries to acquire all or substantially all of the properties, assets or equity of another person, if the value of the aggregate consideration for such acquisition, including any liabilities to be assumed by Reorganized Spectrum or its subsidiaries, in the reasonable judgment of the Board, exceeds $5 million or more or constitutes more than 5 percent of the book value of the total assets (in the case of transactions involving assets or commitments other than capital stock) or of the shareholders' equity (in the case of transactions in capital stock) of the entity in question, as reflected in the most recent fiscal year-end consolidated balance sheet of such entity existing at the time the directors of Reorganized Spectrum would be required to approve or authorize such transaction. (4) Dispositions. Selling, leasing, exchanging or otherwise disposing of all or substantially all of the business, assets or properties of Reorganized Spectrum and its subsidiaries, taken as a whole. (5) Securities Issuances, etc. Issuing, selling, or modifying the terms of any capital stock of Reorganized Spectrum or its subsidiaries, or any warrant, option, note, debenture, call or other securities or rights convertible into or exchangeable therefor, or engaging in any recapitalization or reclassification involving any such capital stock or other securities. (6) Redemption and Repurchase. Directly or indirectly redeeming, purchasing or otherwise acquiring any of Reorganized Spectrum's securities. (7) Insolvency and Bankruptcy. Committing any voluntary act of insolvency or bankruptcy on behalf of Reorganized Spectrum, including but not limited to (a) the filing of a voluntary petition in any bankruptcy, reorganization, winding-up or liquidation proceeding or other proceeding analogous in purpose and effect, (b) applying for or consenting to the appointment of a receiver or trustee for a substantial portion of its assets, (c) making an assignment for the benefit of creditors, (d) admitting in writing its inability to pay its debts, or (e) consenting to the entry to any court order or judgment confirming its bankruptcy or insolvency or approving any reorganization, winding-up or liquidation. (8) Appointment and Removal of CEO. Appointing or removing the Chief Executive Officer of Reorganized Spectrum. (9) Auditors. Appointing or replacing Reorganized Spectrum's independent public auditors. (10) Shareholders Meetings. Calling a special meeting of the shareholders or fixing the date of an annual meeting of the Shareholders. D. General Description of the Treatment of Claims 1. Unclassified Claims and Distributions Administrative Claims and Priority Tax Claims have not been classified under the Plan and are excluded from the classes described below in accordance with section 1123(a)(1) of the Bankruptcy Code. a. Administrative Claims. Each Allowed Administrative Claim with the exception of Management Administrative Claims described in the following paragraph, shall be paid either (i) in full, in cash, on the later of the Effective Date or the date on which such Administrative Claim is allowed by Final Order or (ii) on such terms as the Debtors or the Disbursing Agent and the holder of an Allowed Administrative Claim agree; provided, however, that Allowed Administrative Claims representing liabilities incurred in the ordinary course of business by the Debtors in Possession shall be paid in full, in cash, as they fall due, or paid by the Disbursing Agent in the ordinary course of business in accordance with the terms and conditions of the particular transactions and any agreements relating thereto. In lieu of a cash bonus or success fee for effecting a Confirmed Plan of Reorganization for the Debtors, the employees, officers and non-executive directors of the Debtors in office as of the Confirmation Date will (i) receive, pursuant to the Stock Incentive Plan and the Incentive Deferral Plan, Deferral Awards and Director's Stock Awards (as such terms are defined in Section IV(G) below) in an aggregate amount equal to 1/9th of the aggregate number of shares of Distributable Common Stock and Class A Preferred Stock and (ii) be eligible to receive future grants of Incentive Awards and Directors' Awards under the Stock Incentive Plan with respect to an aggregate number of shares equal to 1/9th of the aggregate number of shares of Distributable Common Stock and Class A Preferred Stock. The employees, officers and non-executive directors to whom Deferral Awards and Director's Stock Awards will be distributed and the amounts of each distribution are set forth in Exhibits J and K attached hereto. The amount necessary to pay (i) Disputed Administrative Claims and (ii) Administrative Claims for which applications for compensation or reimbursement of expenses of professionals or other persons retained or to be compensated pursuant to sections 327, 328, 330, 331 or 503(b) of the Bankruptcy Code are pending or yet to be submitted will be deposited in the Distribution Reserve. Such claims shall be paid upon allowance by a Final Order and shall include Earned Interest on the amounts actually allowed by Final Order, calculated from the Effective Date to the date of distribution. b. Priority Tax Claims. The holder of an Allowed Priority Tax Claim shall be paid either (i) in cash, in full, on the later of the Effective Date or the date on which such Priority Tax Claim is allowed by Final Order or (ii) on such terms as the Debtors or the Disbursing Agent and the holder of the Allowed Priority Tax Claim agree. The holder of an Allowed Priority Tax Claim shall not be entitled to receive any payment on account of post-Petition Date interest, or on account of any penalty arising with respect to or in connection with the Allowed Priority Tax Claim. Any such Claim or demand for any such penalty shall be discharged by Confirmation of the Plan and section 1141(d)(1) of the Bankruptcy Code, and the holder of an Allowed Priority Tax Claim shall not assess or attempt to collect such penalty from Reorganized Spectrum or its property. 2. Classification of Claims and Distributions a. General Description. The following is the designation of the classes of Claims and Interests under the Plan. A Claim or Interest is classified in a particular class only to the extent that the Claim or Interest qualifies within the description of that class and is classified in a different class to the extent that any remainder of the Claim or Interest qualifies within the description of such different class. A Claim or Interest is in a particular class only to the extent that the Claim or Interest is an Allowed Claim or Allowed Interest in that class and has not been paid, released or otherwise satisfied before the Effective Date. There will be a reserve for issuance of sufficient shares of Reorganized Spectrum Common Stock as required for distribution to holders of Disputed Claims and Disputed Interests in Classes 2, 4, 5 and 6 pending the allowances or disallowances of such Disputed Claims or Disputed Interests. b. Priority Nontax Claims (Class 1). Class 1 is unimpaired under the Plan and not entitled to vote. Each Claim in Class 1 shall be paid in Cash in full on the Effective Date. c. Unsecured Claims (Class 2). Class 2 is impaired under the Plan. While it is expected that all claims in Class 2 will be paid at the rate of 100 cents on the dollar in Cash, such expectation cannot be confirmed until the allowability of all Claims in Class 2 is finally determined. Class 2 Claims will in any event, receive 100 percent of the Allowed Amount of their Class 2 Claims in value under the Plan. Class 2 Claims are to be paid out of a $3.5 million pool of funds and shares of Reorganized Spectrum Common Stock set aside for payment of Class 2 Claims in such amount as may be necessary to provide holders of Class 2 Claims with 100 percent of the Allowed amount of their Claims. Distributions will be made to holders of an Allowed Claim pro rata based on an aggregate amount of Claims Filed other than Claims that have been disallowed (or allowed in the reduced amount) by Final Order. Once allowance of all Disputed Claims has been resolved, holders of Allowed Class 2 Claims will get additional distributions up to 100 percent of the amount of the Allowed Claim. Any remaining funds will go to Reorganized Spectrum for operations. In the event that the amount of the Allowed Claims exceeds $3.5 million, and, thus, there are insufficient funds to pay Allowed Claims in Class 2, the unpaid balance of Allowed Claims in Class 2 will be converted into an equivalence of Reorganized Spectrum Common Stock. The calculation for determining the equivalent shares will be the same as the calculation used for the determination of equivalent shares used for Class 4 Claims. No interest will be paid on Class 2 Claims. d. Class Action Claims (Class 3). Class 3 is unimpaired under the Plan and not entitled to vote. Class 3 Claims will be treated pursuant to the terms set forth in the Class Action Settlement. It is expected that the Class Action Settlement will provide that: (1) the Debtors will pay $250,000 to the Class Action Trust; (2) assuming that SIT is successful in the Home Action, the issuers of the directors and officers insurance policies that are the subject of the Home Action will pay the proceeds of such policies to the Class Action Trust; (3) on the Effective Date, Reorganized Spectrum will issue to the Class Action Trustee a certificate representing a number of shares of Class A Preferred Stock equal to the number of shares of Distributable Common Stock; (4) the Class Action Trustee will make distributions of cash to the individual Class Action Plaintiffs in accordance with the terms of the Class Action Trust Agreement; and (5) when the Class Action Trustee has determined the proper allocation of the shares of the Class A Preferred Stock issued to the Class Action Trust among the individual Class Action Plaintiffs, the Class Action Trustee will return the stock certificate to Reorganized Spectrum with instructions to reissue certificates in the appropriate pro rata share amounts to the individual Class Action Plaintiffs. Confirmation of the Plan is contingent on (1) the entry of a Final Order of the District Court approving the Class Action Settlement Motion, and (2) successful resolution of the Home Action. e. Other Securities Claims (Class 4). Class 4 is impaired under the Plan. Class 4 Claims shall be converted into an equivalence in shares of Reorganized Spectrum Common Stock. The calculation for determining the equivalent shares for Class 3 Claims shall be one (1) share of Reorganized Spectrum Common Stock for each $11.50 of an allowed Class 4 Claim. f. Equity Interests (Class 5). Class 5 is impaired under the Plan. Holders of Existing Spectrum Common Stock will receive one share of Reorganized Spectrum Common Stock in exchange for each 100 shares of Existing Spectrum Common Stock pursuant to the Reverse Stock Split. Holders of Options for Existing Spectrum Common Stock will receive New Options to purchase Reorganized Spectrum Common Stock. Such New Options will entitle the holder to purchase one percent of the number of shares that could be purchased under the Existing Spectrum Options at an exercise price adjusted in accordance with the Reverse Stock Split. No Fractional Shares of Reorganized Spectrum Common Stock will be issued. Where the Reverse Stock Split would create such fractional shares, Holders of Allowed Class 5 Claims will receive shares of Reorganized Spectrum Common Stock that have been rounded up or down to the nearest whole number. g. Equitably Subordinated Claims (Class 6). Class 6 is impaired under the Plan. Class 6 Claims shall receive the same treatment as Class 4 Claims. 3. Objections to Claims The Debtors will file a list of all Disputed Claims (the "Disputed Claims List"), other than Administrative Claims, with the Bankruptcy Court on or before the hearing on approval of the Disclosure Statement. The comments of the Creditors Committee will be solicited prior to the filing of the Disputed Claims List. Any Claims, other than Administrative Claims, that have been Filed prior to the Filing of the Disputed Claims List and that are not included on the Disputed Claims List shall be deemed Allowed Claims. Unless another date is established by the Bankruptcy Court, all objections to Claims shall be Filed and served on the holders of such Claims within 45 days after the Effective Date, except as extended by an agreement between the claimant and Reorganized Spectrum or by order of the Bankruptcy Court upon an application filed by Reorganized Spectrum. After the Effective Date, only Reorganized Spectrum and the Post-Effective Date Committee shall have the authority to File and prosecute objections to Claims and only Reorganized Spectrum, upon notice to the Post-Effective Date Committee shall have the authority to settle or compromise objections to Claims. Notwithstanding any prior order of the Bankruptcy Court or the provisions of Bankruptcy Rule 9019, as of the Effective Date, Reorganized Spectrum may settle or compromise any Disputed Claim without approval of the Bankruptcy Court. 4. Estimation of and Reserve for Disputed Claims and Interests. Reorganized Spectrum shall reserve sufficient shares of Reorganized Spectrum Common Stock based upon the "face amount" of the existing Disputed Claims and Disputed Interests in Classes 2, 4, 5 and 6 for issuance and distribution to the holders thereof if, as, and when such Disputed Claims and Disputed Interests become Allowed Claims and Allowed Interests. The "face amount" of a Disputed Claim or Disputed Interest means the amount set forth on the proof of claim or proof of interest unless the Disputed Claim or Disputed Interest has been estimated for distribution purposes. Where no amount has been specified on the face of a proof of claim or proof of interest, or where the Disputed Claim or Disputed Interest has been estimated for purposes of allowance and distribution by the Bankruptcy Court, the "face amount" shall be the amount fixed by the Bankruptcy Court in connection with a motion of the type described in the following paragraph, unless otherwise agreed between the claimant or interest holder and the Debtors or Reorganized Spectrum. As to any Disputed Claim (including Claims based upon rejection of executory contracts or leases) or Disputed Interest, the Bankruptcy Court, upon motion by the Debtors or Reorganized Spectrum shall determine the amount sufficient to reserve, and may estimate for purposes of allowance and distribution, the likely maximum allowed amount of the Disputed Claim or Disputed Interest. Any Person whose Disputed Claim or Disputed Interest is so estimated shall have recourse only to the reserve established for such Person's Disputed Claim or Disputed Interest (and not to Reorganized Spectrum, holders of Reorganized Spectrum Common Stock or Class A Preferred Stock, holders of Existing Spectrum Common Stock, any Person receiving a distribution under the Plan, or to any assets distributed on account of any Allowed Claims or Allowed Interests) if such Person's Claim or Interest, as finally allowed, exceeds the maximum estimated amount thereof. THUS, THE BANKRUPTCY COURT'S ESTIMATION FOR PURPOSES OF ALLOWANCE AND DISTRIBUTION OF A DISPUTED CLAIM OR DISPUTED INTEREST WILL LIMIT THE DISTRIBUTION TO BE MADE THEREON, REGARDLESS OF THE AMOUNT FINALLY ALLOWED ON ACCOUNT OF SUCH DISPUTED CLAIM OR DISPUTED INTEREST. Thirty-four (34) Disputed Unsecured Claims alleging $17,907,129 in damages are currently pending against the Company. The Company is litigating some of the claims, has objected to or intends to object to others and is attempting to reconcile others with claimants. The Company intends to object to the claims that it believes were filed after the bar date. Additionally, Gene Morgan Financial has filed a disputed claim against the Company alleging $6.3 million in damages. The Bankruptcy Court has ruled that this claim is statutorily subordinated pursuant to Bankruptcy Court Section 310(b). This claim is currently being litigated before the Bankruptcy Court. Due to the uncertainties associated with pending litigation and settlement discussions, the estimated amount of unsecured disputed claims reflects the full amount of the claim. If favorable results are obtained in the litigations and/or settlement discussions, the estimated value will decrease accordingly. E. Distributions under the Plan 1. Funding of the Plan Cash payments required by the Plan shall be provided from the funds of the Estate and from funds generated by operation of Spectrum's and Reorganized Spectrum's business. 2. Fractional Shares Fractional shares of Reorganized Spectrum Common Stock created by the Reverse Stock Split shall be rounded to the nearest whole number. 3. Unclaimed Distributions If any holder of an Allowed Claim or Allowed Interest (a) does not comply with a precondition of distribution as provided in the Plan within two years of the date upon which notice is sent regarding the holder's failure to meet a precondition or (b) cannot be located within two years after the date upon which a distribution is made available to the holder of such Claim or Interest, the holder's right to any distribution shall be forever discharged and the holder shall be forever barred from asserting any Claim or Interest against Reorganized Spectrum or its property. Nothing contained in the Plan shall require Reorganized Spectrum or the Disbursing Agent to attempt to locate any holder of an Allowed Claim or Allowed Interest, other than to mail distributions to the claimant's or interest holder's last known address. All unclaimed or undistributed distributions under this Section shall, pursuant to section 347(b) of the Bankruptcy Code, be the property of Reorganized Spectrum and shall not be subject to the unclaimed property or escheat laws of any Governmental Unit. F. Treatment of Executory Contracts and Unexpired Leases 1. Assumption of Executory Contracts and Unexpired Leases On the Effective Date, and to the extent permitted by applicable law, all executory contracts (including unexpired leases) of the Debtors will be assumed in accordance with the provisions of section 365 and section 1123 of the Bankruptcy Code except for (a) any and all executory contracts which are the subject of separate motions filed pursuant to section 365 of the Bankruptcy Code by the Debtor prior to the commencement of the Confirmation Hearing, (b) such contracts as are listed on any "Schedule of Rejected Executory Contracts and Unexpired Leases" filed by the Debtor on or before entry of the Confirmation Order, all of which contracts shall be rejected pursuant to the provisions of section 365 and section 1123 of the Bankruptcy Code, and (c) any and all such contracts rejected prior to entry of the Confirmation Order. 2. Bar to Rejection Damages If the rejection of an executory contract or unexpired lease pursuant to the Plan gives rise to a Claim by the other party or parties to such contract or lease, such Claim, to the extent that it is timely Filed and is an Allowed Claim, shall be classified in Class 2, as applicable; provided, however, that the Unsecured Claim arising from the rejection shall be forever barred and shall not be enforceable against the Debtors, Reorganized Spectrum, its successors or properties, unless a proof of claim is Filed and served on Reorganized Spectrum within 30 days after the date of notice of the entry of an order of the Bankruptcy Court rejecting the executory contract or unexpired lease, including, if applicable, the Confirmation Order. 3. Indemnification Obligations to Be Assumed Any obligation of the Debtors to indemnify any individual serving as one of its present officers or directors or any individual who served in such capacity on or after January 31, 1996 by reason of such individual's past or future service in such capacity, or as a director, officer or partner of another corporation, partnership or other legal entity at the behest of the Debtors, to the extent provided in the applicable certificate of incorporation, bylaws or similar constituent documents or by statutory law or written agreement with the Debtors, shall (except as expressly provided in the following subparagraph (b)) be deemed and treated as an executory obligation assumed by Reorganized Spectrum as of the Effective Date pursuant to the Plan and section 365 of the Bankruptcy Code. Accordingly, such indemnification obligations shall survive and be unaffected by entry of the Confirmation Order irrespective of whether such indemnification obligations are owed for acts or events occurring before or after the Petition Date. The obligation of the Debtors to indemnify any Person not within the scope of the preceding paragraph shall be rejected and shall terminate and be discharged to the extent provided by section 502(e) of the Bankruptcy Code or otherwise, as of the Confirmation Date. Pursuant to the Amended Spectrum Certificate, individuals in respect of whom indemnity obligations are assumed by Reorganized Spectrum pursuant to the Plan and section 365 of the Bankruptcy Code or arise in the future by reason of such individual's service as a director or officer of Reorganized Spectrum, shall be deemed to have served at the request of the predecessors of Reorganized Spectrum to the extent that they served as directors or officers of the Debtors prior to the Effective Date. 4. Reorganized Spectrum's Liabilities a. Effect of Implementation of the Plan on Existing Employment Agreements. Confirmation of the Plan and the occurrence of the Effective Date is not intended to and shall not constitute a change of ownership or change in control, as defined in any employment agreement in effect on the Effective Date to which either of the Debtors is a party. b. Contracts Entered Into on or After the Petition Date. All contracts, leases and other agreements entered into by the Debtor in Possession on or after the Petition Date which have not been breached by the other party or terminated in accordance with their terms by the Debtor in Possession on or prior to the Confirmation Date, shall remain in full force and effect as against Reorganized Spectrum. G. Adoption of Certain Compensation Plans Following are summaries of the principal terms of the Stock Incentive Plan and the Incentive Deferral Plan. Such summaries are qualified in their entirety by reference to the text of such plans, which are attached as Exhibits J and K hereto. 1. Stock Incentive Plan In General The Stock Incentive Plan provides for the grant to employees of the Company of non-qualified and incentive stock options, limited, tandem and stand-alone stock appreciation rights and stock bonuses (collectively referred to herein as "Incentive Awards") and for the grant to non-executive directors of the Company of non-qualified stock options and stock awards ("Directors Awards"). The maximum number of shares of Reorganized Spectrum Common Stock that may be issued under the Stock Incentive Plan is indicated in Section 3 thereof. Shares of Reorganized Spectrum Common Stock issued under the Stock Incentive Plan may be either newly issued shares or treasury shares. The average of the bid and asked prices for Existing Spectrum Common Stock in over-the- counter trading in such stock on February 2, 1996, was $0.115 per share, as reported by the National Quotation Bureau. Approximately 25 key employees and 3 non-executive directors are currently eligible to participate in the Stock Incentive Plan. Administration The Stock Incentive Plan will be administered by the Compensation Committee of the Company's Board of Directors, or such other committee as the Board of Directors shall appoint from time to time (the "Committee"). The Committee shall from time to time designate the key employees of the Company who shall be granted Incentive Awards (together with non-executive directors who are granted Directors Awards, the "Participants") and the amount and type of such Incentive Awards. No Incentive Award may be granted under the Stock Incentive Plan after the tenth anniversary of the confirmation of the Plan, and no Incentive Award shall be exercisable after the expiration of ten years from the date such Incentive Award was granted. Except as provided below, the Committee will have full authority to administer the Stock Incentive Plan, including authority to interpret and construe any provision of the Stock Incentive Plan and the terms of any Incentive Award issued under it, to accelerate the date on which any Incentive Award becomes exercisable and to adopt such rules and regulations for administering the Stock Incentive Plan as it may deem necessary. Decisions of the Committee shall be final and binding on all Participants. The Committee shall have no discretionary authority with respect to Directors Awards. Significant Features of Incentive Awards Non-Qualified and Incentive Stock Options. Each non- qualified stock option ("NQO") and incentive stock option ("ISO") shall entitle the holder thereof to purchase a specified number of shares of Reorganized Spectrum Common Stock determined by the Committee. The exercise price of each NQO and ISO granted under the Stock Incentive Plan shall be the fair market value of a share of Reorganized Spectrum Common Stock on the date on which such NQO or ISO is granted. The exercise price shall be paid in cash or, subject to the approval of the Committee, in shares of Reorganized Spectrum Common Stock valued at their fair market value on the date of exercise. An NQO or ISO may be exercisable for a term not to exceed ten years, established by the Committee on the date on which the NQO or ISO is granted. In the event that the employment of a Participant shall terminate (i) for any reason other than Disability, Cause (as such terms are defined in the Stock Incentive Plan) or death, NQOs or ISO granted to such Participant, to the extent that they were exercisable at the time of such termination, shall remain exercisable for ninety days after such termination, and those not exercisable at such time shall expire at such time; (ii) on account of the Disability or death of the Participant, such Participant or his designated beneficiary, respectively, shall be entitled to exercise, until the first anniversary of such termination, NQOs and ISOs which were exercisable at the time of such termination or would have become exercisable had his employment continued until the first anniversary of such termination, and all other NQOs and ISOs shall expire at such time; and (iii) for Cause, all outstanding NQOs and ISOs granted to such Participant shall expire at the commencement of business on the date of such termination. However, no NQO or ISO may be exercised after the expiration of its term. Upon the occurrence of a Change in Control of the Company (as defined in the Stock Incentive Plan), each NQO and ISO granted under the Stock Incentive Plan and outstanding at such time shall become fully and immediately exercisable. Limited Stock Appreciation Rights. The Committee may grant in connection with any NQO or ISO granted under the Stock Incentive Plan a limited stock appreciation right ("LSAR") with respect to a number of shares not exceeding the number of shares subject to the NQO or ISO . In general, the exercise of an LSAR by a Participant entitles the Participant to an amount in cash, with respect to each share subject thereto, equal to the excess of the value of a share of Reorganized Spectrum Common Stock (determined pursuant to the Stock Incentive Plan) on the exercise date over the exercise price of the related NQO or ISO . The exercise of an LSAR with respect to a number of shares causes the cancellation of the NQO or ISO to which it relates with respect to an equal number of shares. The exercise, cancellation or expiration of an NQO or ISO with respect to a number of shares causes the cancellation of the LSAR related to it with respect to an equal number of shares. An LSAR shall be exercisable only during the period commencing on the first day following the occurrence of a Change in Control and terminating on the expiration of ninety days after such date. Tandem Stock Appreciation Rights. The Committee may grant, in connection with any NQO or ISO, a tandem stock appreciation right ("Tandem SAR") with respect to a number of shares of Reorganized Spectrum Common Stock not exceeding the number of shares subject to the related NQO or ISO. In general, the exercise of a Tandem SAR by a Participant entitles the Participant to an amount in cash, shares of Reorganized Spectrum Common Stock or a combination of cash and shares of Reorganized Spectrum Common Stock, as determined by the Committee, with respect to each share subject thereto, equal to the excess of the fair market value of a share of Reorganized Spectrum Common Stock on the exercise date over the exercise price of the related NQO or ISO. The exercise of a Tandem SAR with respect to a number of shares causes the cancellation of its related NQO or ISO with respect to an equal number of shares. The exercise, cancellation or expiration of an NQO or ISO with respect to a number of shares causes the cancellation of its related Tandem SAR to the extent that the number of shares subject to the NQO or ISO after its exercise is less than the number of shares subject to the Tandem SAR. A Tandem SAR is exercisable at the same time and to the same extent as its related NQO or ISO. The payment upon exercise of a Tandem SAR after the occurrence of a Change in Control shall be made in cash. Stand-Alone Stock Appreciation Rights. The Committee may grant stand-alone stock appreciation rights ("Stand-Alone SARs") with respect to a number of shares of Reorganized Spectrum Common Stock and with an exercise price determined by the Committee on the date on which such Stand-Alone SAR is granted. A Stand-Alone SAR shall be exercisable for a term, not to exceed ten years, established by the Committee on the date on which such Stand-Alone SAR is granted. The payment upon the exercise of a Stand-Alone SAR after the occurrence of a Change in Control shall be made in cash. Except in the event of the death or Disability of a Participant or the termination of the employment of a Participant for Cause, Stand-Alone SARs are exercisable only while a Participant is employed by the Company. In the event of death, Disability or termination of employment for Cause, Stand- Alone SARs shall be treated in the manner described above with respect to NQOs and ISOs. Stock Bonuses. The Committee may grant bonuses payable in Reorganized Spectrum Common Stock in such amounts as it shall determine from time to time (a "Stock Bonus"). A Stock Bonus shall be paid at such time and subject to such conditions as the Committee shall determine at the time of grant. Significant Features of Directors Awards Non-Qualified Stock Options. At the time of the confirmation of the Plan, each non-executive director of the Company shall be automatically granted a non-qualified option to purchase such number of shares of Reorganized Spectrum Common Stock as is indicated in Section 10 of the Stock Incentive Plan (a "Director's Option"). Each person who subsequently is appointed or elected as a non-executive director of the Company shall also be granted a Director's Option upon such appointment or election. Each Director's Option shall have an exercise price equal to the fair market value of a share of Reorganized Spectrum Common Stock on the date on which such Director's Option is granted and shall have a term of ten years, provided that each Director's Option shall expire no later than the first anniversary of the date on which the holder thereof ceases to be a director of the Company for any reason. Director's Stock Awards. At the time of the confirmation of the Plan, each non-executive director of the Company shall be automatically allocated a number of shares of Reorganized Spectrum Common Stock as indicated in Section 10 of the Stock Incentive Plan ("Director's Stock Awards"). The shares so allocated shall be distributed to such persons in two portions. The first portion shall consist of 100 shares of Reorganized Spectrum Common Stock for each such person, which shall be distributed to such person immediately following the confirmation of the Plan. The second portion shall be distributed in three equal installments on a deferred basis, as follows. The first installment shall be distributed during the three day period commencing three days after Reorganized Spectrum files its Quarterly Report on Form 10-Q for its fiscal quarter ending December 31, 1997; the second installment shall be distributed during the three day period commencing three days after Reorganized Spectrum files its Quarterly Report on Form 10- Q for its fiscal quarter ending June 30, 1998; and the third installment shall be distributed during the three day period commencing three days after Reorganized Spectrum files is Quarterly Report on Form 10-Q for its fiscal quarter ending December 31, 1998; provided that all shares allocated to a non- executive director will be immediately distributed to such director in the event of such director's membership on the Board of Directors terminates for any reason. Each person who subsequently is appointed or elected as a non-executive director of the Company shall also be granted a Director's Stock Award of an equal number of shares, to be distributed as described above, upon such appointment or election. General Plan Provisions Share Counting. In the event that any outstanding NQO, ISO, Stand-Alone SAR, Stock Bonus or Director's Option expires, terminates or is canceled for any reason (other than by reason of the exercise of a related LSAR or Tandem SAR), the shares of Reorganized Spectrum Common Stock subject to the unexercised portion of such NQO, ISO, Stand-Alone SAR or Director's Option, and any canceled or forfeited Stock Bonus, shall again be available for grants under the Stock Incentive Plan. Adjustments Upon Changes in Capitalization. The Stock Incentive Plan provides for an adjustment in the number of shares of Reorganized Spectrum Common Stock available to be issued under the Stock Incentive Plan, the number of shares subject to Incentive Awards and Director's Options and the exercise prices of certain Incentive Awards and Director's Options upon a change in the capitalization of the Company, a stock dividend or split, a merger or combination of shares and certain other similar events. Income Tax Withholding. The Stock Incentive Plan provides that Participants may elect to satisfy certain federal income tax withholding requirements by remitting to the Company cash or, subject to certain conditions, shares of Reorganized Spectrum Common Stock or by instructing the Company to withhold shares payable to the Participant. No Assignment or Transfer. During the lifetime of a Participant, each Incentive Award and Directors Award granted to him is exercisable only by him. No Incentive Award or Directors Award is transferable or assignable other than by will or the laws of descent and distribution. Amendment. The Board of Directors of the Company may at any time amend the provisions of the Stock Incentive Plan to alter the allocation of benefits as between non-executive directors and key employees, provided that not more that one such amendment shall be made in any six month period, other than to comport with changes to the Tax Code, the Employee Retirement Income Security Act of 1974, or the regulations thereunder. Federal Income Tax Consequences Following is a summary of the U.S. federal income tax consequences of the issuance and exercise of Incentive Awards and Directors Awards to Participants and to Reorganized Spectrum. NQOs. A Participant will not be deemed to receive any income at the time an NQO or Director's Option is granted, nor will the Company be entitled to a deduction at that time. However, when any part of an NQO or Director's Option is exercised the Participant will be deemed to have received ordinary income in an amount equal to the difference between the exercise price of the NQO or Director's Option and the fair market value of the shares received on the exercise of the NQO or Director's Option. The Company will be entitled to a tax deduction in an amount equal to the amount of ordinary income realized by the Participant. Upon any subsequent sale of the shares acquired upon the exercise of an NQO or Director's Option, any gain (the excess of the amount received over the fair market value of the shares on the date ordinary income was recognized) or loss (the excess of the fair market value of the shares on the date ordinary income was recognized over the amount received) will be a long- term capital gain or loss the sale occurs more than one year after such date or recognition and otherwise will be a short-term capital gain or loss. If all or any part of the exercise price of an NQO or Director's Option is paid by the Participant with shares of common stock, no gain or loss will be recognized on the shares surrendered in payment. The number of shares received on such exercise of the NQO or Director's Option equal to the number of shares surrendered will have the same basis and holding period, for purposes of determining whether subsequent dispositions result in long-term or short-term capital gain or loss, as the basis and holding period of the shares surrendered. The balance of the shares received on such exercise will be treated for federal income tax purposes as described in the preceding paragraphs as though issued upon the exercise of the NQO or Director's Option for an exercise price equal to the consideration, if any, paid by the Participant in cash. The Participant's compensation, which is taxable as ordinary income upon such exercise, and the Company's deduction, will not be affected by whether the exercise price is paid in cash or in shares of Reorganized Spectrum Common Stock. ISOs. A Participant will not be deemed to receive any income at the time an ISO is granted or exercised. (However, special rules apply to Participants who are subject to the alternative minimum tax.) If a Participant does not dispose of the shares acquired on exercise of an ISO within two years after the grant of the ISO and one year after the exercise of the ISO, the gain (if any) on a subsequent sale (the excess of the amount received over the exercise price) or loss (if any) on a subsequent sale (the excess of the exercise price over the amount received) will be a long-term capital gain or loss. In order to receive the favorable ISO income tax treatment described in the preceding sentence, a Participant must exercise his ISO not later than three months after his termination of employment. Otherwise, the ISO will be treated as an NQO. If the Participant sells the shares acquired on exercise of an ISO within two years after the date of grant of the ISO or within one year after the exercise of the ISO, the disposition is a "disqualifying disposition", and the Participant will recognize income in the year of the "disqualifying disposition" equal to the excess of the amount received for the shares over the exercise price. Of that income, the portion equal to the excess of the fair market value of the shares at the time the ISO was exercised over the exercise price will be treated as compensation taxable as ordinary income and the balance, if any, will be long-term or short-term capital gain depending on whether the shares were sold more than one year after the ISO was exercised. If a Participant uses shares acquired upon the exercise of an ISO to exercise an ISO at a time when the sale of such shares would constitute a "disqualifying disposition", proposed IRS regulations appear to require the Participant to recognize ordinary income in the amount described in the preceding sentence. LSARs, Tandem SARs and Stand-Alone SARs. A Participant will not be deemed to receive any income at the time an LSAR, Tandem SAR or Stand-Alone SAR is granted, nor will the Company be entitled to a deduction at that time. However, when any part of the LSAR, Tandem SAR or Stand-Alone SAR is exercised, the Participant will be deemed to have received compensation taxable as ordinary income in an amount equal to the amount of cash received. Stock Bonus and Director's Stock Award. Generally, upon the receipt of a Stock Bonus or a Director's Stock Award, a Participant will be deemed to have received ordinary income in an amount equal to the fair market value of the Reorganized Spectrum Common Stock at the time it is received. Tabular Description The following describes in tabular form the benefits that will be received by non-executive directors under the Stock Incentive Plan, which information is required under applicable SEC rulings. Amounts that will be received by individual executive officers of Spectrum, all executive officers of Spectrum as a group and non-executive employees of Spectrum as a group are not determinable. New Plan Benefits Stock Incentive Plan - ----------------------------------------------------------------- Name and Position Dollar Value ($) Number of Units ----------------- ---------------- --------------- Non-Executive -- A number of shares of Director Group Reorganized Spectrum Common Stock as indicated in Section 10 of the Stock Incentive Plan 2. Incentive Deferral Plan In General The Incentive Deferral Plan provides for the deferred distribution to employees and officers of the Debtors at the time of the confirmation of the Plan ("Participants") of an aggregate number of shares of Reorganized Spectrum Common Stock as indicated in Section 3 thereof. Shares allocated to each Participant shall be distributed in three equal installments. The first installment shall be distributed during the three day period commencing three days after Reorganized Spectrum files its Quarterly Report on Form 10-Q for its fiscal quarter ending December 31, 1997; the second installment shall be distributed during the three day period commencing three days after Reorganized Spectrum files its Quarterly Report on Form 10-Q for its fiscal quarter ending June 30, 1998; and the third installment shall be distributed during the three day period commencing three days after Reorganized Spectrum files is Quarterly Report on Form 10-Q for its fiscal quarter ending December 31, 1998; provided that all shares allocated to a Participant will be immediately distributed to such Participant in the event of such Participant's death or disability or in the event that such Participant's employment with Reorganized Spectrum is terminated by Reorganized Spectrum without cause. Administration The Incentive Deferral Plan will be administered by the Compensation Committee of the Company's Board of Directors, or such other committee as the Board of Directors shall appoint from time to time (the "Committee"). The Committee will have full authority to administer the Incentive Deferral Plan, including authority to interpret and construe any provision of the Incentive Deferral Plan, to accelerate the date on which any shares are distributed pursuant to the Incentive Deferral Plan and to adopt such rules and regulations for administering the Incentive Deferral Plan as it may deem necessary. Decisions of the Committee shall be final and binding on all Participants. General Plan Provisions Adjustments Upon Changes in Capitalization. The Incentive Deferral Plan provides for an adjustment in the number of shares of Reorganized Spectrum Common Stock to be distributed to Participants upon a change in the capitalization of the Company, a stock dividend or split, a merger or combination of shares and certain other similar events. Income Tax Withholding. The Incentive Deferral Plan provides that Participants may elect to satisfy certain federal income tax withholding requirements by remitting to the Company cash or, subject to certain conditions, shares of Reorganized Spectrum Common Stock by instructing the Company to withhold shares payable to the Participant. No Assignment or Transfer. During the lifetime of a Participant, his rights to shares pursuant to the Incentive Deferral Plan are not transferable or assignable other than by will or the laws of descent and distribution. Tabular Description The following describes in tabular form the benefits that will be received by certain persons and groups under the Incentive Deferral Plan, which information is required be applicable SEC rulings. New Plan Benefits Incentive Deferral Plan Name and Position Dollar Value ($) Number of Units - ----------------- ---------------- --------------- Donald J. Amoruso, -- * President, Chairman of the Board and Chief Executive Officer Edward W. Maskaly, -- -- Former Chairman of the Board and Chief Executive Officer Albert D. Panico, -- -- Former Vice President - - Operations Salvatore T. Marino, -- * Vice President - - Licensing Christopher P. Franco, -- -- Former Vice President Executive Group -- * Non-Executive Director -- -- Group Non-Executive Officer -- * Employee Group * A number of shares of Reorganized Spectrum Common Stock as indicated in Exhibit A to the Incentive Deferral Plan. SECTION IX CERTAIN FACTORS TO BE CONSIDERED A fundamental factor underlying Reorganized Spectrum's ability to reorganize successfully is the implementation of Reorganized Spectrum's strategy and business plan. The financial information included in Reorganized Spectrum's business plan is based on future events and circumstances and reflects Management's judgment with respect to same. The projections should be read in conjunction with the assumptions, qualifications, explanations, and other information set forth herein. MANAGEMENT CAUTIONS THAT THE PROJECTED FINANCIAL STATEMENTS HAVE AS THEIR BASIS REORGANIZED SPECTRUM'S ASSESSMENT OF ITS BUSINESS, AND HENCE NO REPRESENTATIONS CAN BE MADE WITH RESPECT TO THE ACCURACY OF THE PROJECTIONS OR THE ABILITY TO ACHIEVE THE PROJECTED RESULTS. MANY OF THE ASSUMPTIONS UPON WHICH THESE PROJECTIONS ARE BASED ARE SUBJECT TO MAJOR UNCERTAINTIES. SOME ASSUMPTIONS INEVITABLY WILL NOT MATERIALIZE, UNANTICIPATED EVENTS AND CIRCUMSTANCES MAY OCCUR AND, ACCORDINGLY, THE ACTUAL RESULTS ACHIEVED THROUGHOUT THE PROJECTION PERIOD WILL VARY FROM THE PROJECTED RESULTS AND THE VARIATIONS MAY BE MATERIAL. A. Reorganized Spectrum's Business Plan 1. Management's Vision Reorganized Spectrum's Strategic Plan contemplates transforming the Company's business from an intellectual property company generating low annual revenues from royalty to becoming a supplier of wireless data communications technology and software. Key to this strategy is initially expanding (i) the number of data communications devices in use that incorporate the Company's patented cellular technology and (ii) the use of Reorganized Spectrum's patented cellular technology, as embodied in Reorganized Spectrum-supplied activation kits, to activate such devices. Over time, Reorganized Spectrum intends to expand its product offering into a complete suite of data communications software products that can be sold to a growing user population of wireless data services in the mobile professional and field sales workforce. 2. Management's Strategic Plan Since joining Reorganized Spectrum in January 1995, new Management began to implement several key steps with the goal of positioning Reorganized Spectrum as a provider of wireless software communication products and solutions. Such key steps include: 1. The operational restructuring of Reorganized Spectrum to substantially reduce losses from continuing operations, including elimination of unprofitable operations. 2. The selling of non-core assets and realigning the Company's remaining business. 3. Resolution of litigation issues and liabilities through the bankruptcy process. 4. The redirection of the Company from an intellectual property and licensing organization with low royalty income to a provider of software- based wireless communications solutions. This is to be achieved by converting existing OEM license relationships into strategic relationships that will serve as channels for distribution of the Company's software products. Management believes that this strategy will expand the market for wireless data communication, as well as position Reorganized Spectrum to profit from such expansion. 5. Hiring technical leaders in software and communications, respectively, to form the core of a creative technical organization. 6. Leveraging Reorganized Spectrum's patents by developing a series of new software product offerings enhancing the ability of cellular subscribers to transmit data easily over wireless cellular networks Steps 1 and 2 above are complete, and the Company intends to implement Step 3 through confirmation of the Plan. Reorganized Spectrum is seeking to implement the remaining steps, although there is no assurance it will be successful in such regard. 3. The Wireless Data Industry The development of networks linking portable computers, workstations, minicomputers and mainframes at separate locations has occurred primarily in connection with the decentralization of business operations, the evolving enterprise environment of client servers, and the need to perform data-intensive business functions at distant offsite locations. As a result, demand is also increasing for more sophisticated, cost-effective and reliable mobile data communication system solutions, including portable computers, wireless data communication devices, associated peripheral equipment, and specially adapted mobile software systems and applications. Current mobile computing devices include laptop computers, notebook computers, handheld computers (i.e, personal digital assistants), and pen-based computers. Management believes that such devices are the first generation of products in a trend towards mobile computing - a truly "personal" computer - - that allows virtually instant access to information anytime and anywhere. Computer and telecommunications companies have been making significant investments in the manufacturing and development of new mobile computing devices and wireless networks. As a result, the wireless communication industry has experienced the emergence of a substantial number of competing wireless data technologies and services. The following is a description of the basic technologies in place or being developed that offer consumers wireless communication service. Circuit-Switched Networks ("CSNs"): CSNs are similar to land-line networks in that an unbroken communication path must be established between the sender and the receiver before communication and data transmission can occur. Once the link is established, there is no delay and communication takes place in real time. In the United States, the following commercial wireless networks are capable of sending circuit-switched data: Analog Cellular: Analog cellular today is the most widely available system, with coverage everywhere but the most remote areas. Cellular telephones themselves are inexpensive, but service is relatively expensive today and expected to decrease with competition. Also, transmission quality can be erratic. Digital Cellular: Digital cellular is the planned replacement for analog cellular and it is expected to improve greatly both the capacity and quality of transmission. At present, digital telephones cost more than analog models, but Management expects the price to decrease as digital service becomes more readily available. Personal Communication System ("PCS"): The personal communication system is a new variety of cellular service that operates on newly assigned frequencies with differing PCS technologies, promising high capacity and good quality with a potentially low investment. Government auctions of frequencies were held within the past year, and construction of networks has only recently begun. Specialized Mobile Radio ("SMR"): SMR is another form of digital communications that can combine paging with voice service. The main difference between cellular telephone technology and SMR is cellular telephones assign frequencies to individual cellular subscribers, while SMR shares a pool of frequencies among a group of subscribers. Satellite Radio: Mobile satellite networks are being designed for applications in which long-distance wireless communications are required, especially in remote locations. Message Switched Networks ("MSNs"): Unlike CSNs, MSNs do not establish a direct-connection between the sender and receiver of data. When data is sent, the data is addressed, and moves through the network (wireless and wire-line) to the final destination. The network continuously monitors the transmission of data and determines the optimal path for sending the information. Packet Switched Networks ("PSNs"): With PSNs, data is created in continuous blocks, but the network breaks the data down to numerous small blocks called "packets". PSNs transmit packets onto the network and travel independently of each other until they reach their final destination, where they are combined into one continuous message. The Company's technology and current patents are particularly applicable to data transmission over circuit- switched cellular telephones. While there are new wireless communication networks coming to market, Management believes (based upon market requirements) new wireless communication technology will be "backwards" compatible with cellular technology (i.e., able to work with current cellular telephone networks). Management believes that this requirement will establish continued demand for the Company's existing technology even when alternate wireless data transmission technology is developed. Management also believes that, when analyzed closely, no single wireless network vendor can provide all of the features needed to support multiple groups of users with widely different information needs and work behaviors. Mobile users would appreciate access to multiple wireless networks. An ideal communication product would be able to communicate/transmit data on any one of the multiple networks available. Such product would determine the optimal network for communicating based upon features such as speed of communication, reliability of transmission and price of transmission. Management believes that its omni-modal technology will enable this to occur and believes that the market will openly accept such products, particularly the Company's software products enabling this technology. The Company currently has patent applications on file with the Patent Office for its omni-modal technology. Some, but not all, of the protection sought in these applications has been indicated as allowable by the U.S. Patent Office. The Company believes that additional protection for the technology disclosed in these applications is available and has filed responses setting forth its position. 4. Industry Growth Company's research indicates that numerous industry activities and technologies are converging to support the mobile work force. This indication is substantiated by growth observed in portable computer, facsimile, cellular telephone, electronic mail, client/server and database service applications. The Company believes that wireless data communications capability is essential to businesses seeking to provide automated support to their field personnel to remain competitive in a mobile society. In its market research, BIS Strategic Decisions ("BIS"), a leading analyst of the wireless data market, projects significant growth in PC Card Fax/Modems sold over the next five years within the United States from 2.6 million per year in 1995 to 7.5 million per year in the year 1999. The majority of these PC FAX/Modems will include Reorganized Spectrum intellectual property. BIS also projects that cellular subscribers in the United States will increase from 24 million subscribers in 1994 to 60 million by the year 2000. The Gartner Group further forecasts that, within this growth market of cellular subscribers, wireless circuit switch cellular data subscribers will increase in this same period from some 200 thousand to over 2.5 million by 1999. Management believes that these trends provide a strong indication of future opportunities for growth in its wireless data transmission market. 5. Summary of Reorganized Spectrum's Technology The Company currently has six United States patents, three foreign patents and several pending U.S. and foreign patent applications covering various technologies related to wireless data communication. See "Properties of the Debtors," Section V. Direct-Connect Technology Reorganized Spectrum's direct-connect technology - consisting of proprietary cellular modem and cellular-activation technologies - allows the user to directly connect ("direct connect") a portable computer containing a PC Card modem to a cellular telephone through a simple cable without additional interface circuitry. Reorganized Spectrum's cellular technology is incorporated into chipsets or PC Card modems, thereby making the modem cellular capable. Activation products, which include an appropriate connection cable and the cellular telephone software driver for a selected cellular telephone, incorporate the Company's proprietary cellular-activation technology and are either sold by the Company's current licensees or Reorganized Spectrum, depending upon the license arrangement. To transmit data utilizing the Company's direct-connect technology, a user must have a cellular data compatible cellular telephone connected to the PC Card modem (which includes necessary software and hardware incorporating Reorganized Spectrum's proprietary technology) within the computer, and a direct-connect cable and appropriate cellular telephone software drivers (Activation Kit). The Company's direct-connect technology generally cannot be used unless an activation kit, which incorporates the Company's proprietary cellular activation technology, is purchased and installed by the consumer or PC Card modem manufacturer. Depending upon the license agreement, certain licensees of Reorganized Spectrum sell the activation products directly and pay a royalty to Reorganized Spectrum, while under other license agreements, Reorganized Spectrum retains the right to sell the activation kit product to licensees and sub- licensees. The activation product provides the "key" to activation and use of the cellular direct-connect capability for data transmission using the selected cellular telephone. Software drivers are software routines that understand, and control, the functional operations of a particular cellular telephone. A cellular telephone software driver serves as the connection between a PC Card modem and the cellular telephone, enabling the modem to control the circuitry of the particular telephone. Each cellular telephone's electronic circuitry operates differently depending upon its architecture. In addition, the software drivers activate a direct-connect PC Card modem, allowing the modem to become cellular ready and communicate with a cellular telephone for cellular data transmission. After connecting the cellular telephone and a cellular modem with a direct-connect cable, a consumer can initiate a cellular telephone call through the computer's communication software. The cellular telephone software drivers control the dialing and operation of the cellular telephone and allow the computer to transmit data via the cellular telephone. Omni-Modal Technology Management anticipates that various wireless communication networks will be available to consumers in the future. Management believes that any portable communications device capable of interacting with more than one telecommunications service provider or radio infrastructure would have significant advantages over a portable unit capable of accessing only a single service provider. To enhance the portable product's functionality, Reorganized Spectrum believes that it must develop advanced omni- modal applications software for the mobile user and the client server that enable mobile users to receive and transmit data utilizing existing communication software applications over various wireless networks. Such advanced software would also allow automatic selections based upon the user's current communication needs. Examples of some of these controlling factors are desired cost of transmission, quality of connection link, priority on the network, security of data and guaranteed delivery of data/message. Management believes that for remote wireless computing to become a routine business operation, the physical transmission medium (i.e., the wireless infrastructure utilized) must be totally transparent to the user. 6. Marketing and Product Plan Management believes that the prior Reorganized Spectrum business strategy (reliance on license royalty payments) failed largely due to (i) significantly smaller-than-anticipated growth in the number of cellular data transmission users (which may have been suppressed in part by high Reorganized Spectrum royalty rates) and (ii) unavailable "user friendly" software and support for seamless and reliable transition to wireless data communications. Reorganized Spectrum's Strategic Plan is designed to address and overcome these problems by renegotiating existing license agreements to remove royalty barriers and instituting strategic relationships which seed the market with Reorganized Spectrum technology. This will create the opportunity for Reorganized Spectrum to market software products that encourage the use of wireless data transmission encompassing Reorganized Spectrum technology. Reorganized Spectrum anticipates growth in wireless data applications over the next several years based upon current market forecasts. Reorganized Spectrum also believes that a substantial portion of such growth will occur within the corporate marketplace for applications such as automation of field sales forces and the mobile office for professionals. Because Management believes that a significant number of these applications will require notebook computers or similar devices, the Company believes that the number of PC Card modems sold and the projected number of wireless data subscribers are a good indicator of the potential wireless data market size. As a result of the existing license grants, the Company estimates that it has at present retained approximately 25 percent market share for its activation products, the balance of the market share going to licensees. It is management's objective to increase this share by renegotiation of existing key license agreements to include strategic relationships that create the opportunity for Reorganized Spectrum to increase its market share for activation kits as well as establish larger channels of distribution for the company's more advanced software products. Initial products would include client utility software for enhancing cellular communications that would work with existing "client" applications as well as add capabilities where no applications yet exist. Next generation products would enhance the utility possibly through development of a "server" version. This would permit more reliable cellular fax transmission. Building on these products would be development of an "all-in- one" or omni-modal mobile communications package. The first priority of Reorganized Spectrum's new technical leadership will be to define the specifics of these products. 7. Competition The wireless data communications industry is intensely competitive and is characterized by rapid technological advances. These advances result in the frequent introduction of new products with increased performance capabilities and significant price/performance improvements. Competition in this market is based upon several factors, including product features, price, quality and reliability, service and support, marketing and distribution. Many of Reorganized Spectrum's competitors and potential competitors have more extensive engineering and marketing capabilities and greater financial, technological and personnel resources than does the Company. The Company's manufacturing of cables for activation kits is outsourced and hence no hardware assembly is performed by the Company. Management believes that certain of its competitors may be infringing upon the Company's patents and/or may infringe upon patent rights that will be acquired by Reorganized Spectrum by virtue of its pending applications. In addition, certain of the Company's licensees have been granted the right to make or have made and sell activation kits. Reorganized Spectrum's competitiveness is dependent upon its ability to develop and introduce new performance-leading products and technologies and to expand the market for its technology. There can be no assurance that Reorganized Spectrum will be able to maintain its performance leadership as competitive products based upon similar or alternative technologies are introduced. The Company has identified the following companies as significant direct competitors or potential direct competitors of Reorganized Spectrum: AT&T: Currently, AT&T's Paradyne unit competes directly with the Company as a result of the existing license arrangement between the two companies. AT&T has full rights to (i) Reorganized Spectrum's established and pending technology and (ii) produce competing products, while paying Reorganized Spectrum only relatively modest royalties. The pending breakup of AT&T and its decision to sell Paradyne may create an opportunity for the company with the new Buyer. However, there can be no assurance that this will be accomplished. U.S. Robotics/Megahertz: Currently, Megahertz enjoys approximately 50% of PC Card modem sales. The existing license arrangement with Megahertz permits Megahertz to develop its own "activation kits" for its products. U.S. Robotics/ Megahertz and Reorganized Spectrum have entered a settlement of the arbitration filed by Megahertz (see "Chapter 11 Proceedings and Other Recent Developments - Other Recent Developments - Securities Related Litigation," Section IV(B)(2)) and negotiated a revised license agreement favorable to both parties that has been submitted under seal to the Bankruptcy Court for approval. Motorola: The Company believes that Motorola has modem products that infringe upon the Company's intellectual property rights and that Motorola is distributing activation kits. As a consequence, on December 6, 1994, the Company filed a lawsuit against Motorola for infringement of claims in six of its patents, covering basic wireless data concepts. Motorola has denied the allegations and has alleged that Reorganized Spectrum's patents are invalid and unenforceable. The parties have stipulated to temporarily stay this patent litigation while they pursue settlement discussions. However, there can be no assurances a favorable settlement can be achieved. In addition, Reorganized Spectrum believes that a number of other companies, many of which have significantly greater resources than the Company, may compete directly or indirectly with Reorganized Spectrum. Reorganized Spectrum will also face competition from alternate technologies. B. Certain Risk Factors Affecting Business Plan 1. Financial Difficulties: The Company's operations have suffered significant operating losses in past years, and the Company filed for bankruptcy protection in January 1995. While Management has implemented a significant cost-reduction program, and is optimistic that the Company's operations will be profitable in the future pursuant to its strategy, there can be no assurance in such regard. Moreover, the Company's revenues from direct connect product and royalties, on an annualized basis, are only about $1 million at this juncture. 2. Competition: The wireless data communications industry is intensely competitive and is characterized by rapid technological advances. These advances result in the frequent introduction of new products with increased performance capabilities and significant price/performance improvements. Competition in this market is based upon several factors, including product features, price, quality and reliability, service and support, marketing and distribution. Many of Reorganized Spectrum's competitors and potential competitors have more extensive engineering and marketing capabilities and greater financial, technological and personnel resources than does the Company. See "Certain Factors to be Considered - Reorganized Spectrum's Business Plan - Summary of Reorganized Spectrum's Technology", Section IX(A)(5). 3. Legal Expenses and Risks Associated with Proprietary Technology: The Company has historically spent significant amounts in order to protect and develop its patent rights. For example, in Fiscal 1995 Reorganized Spectrum incurred legal costs of approximately $1.1 million relating to enforcement and development of its proprietary rights. Although Management does not anticipate spending at this rate in the future, there can be no assurance that legal expenses will diminish as the Company continues to protect its proprietary patent rights. Additionally, the ability of Management to successfully implement its Strategic Plan would be severely constrained if certain of its basic patents were deemed invalid or unenforceable. 4. Unit Sales Forecast: Reorganized Spectrum anticipates that the number of software activation packages it will provide will grow to 800,000 by Fiscal 2000. Such forecast is predicated upon a number of assumptions that may not occur. The number of PC Card modems and modem chipsets shipped, as well as the activation rate and wireless data user subscriber rate is subject to market demand and the actions of Reorganized Spectrum's OEM customers. Accordingly, these factors are largely out of Reorganized Spectrum's direct control. Additionally, to the extent competitors become licensed to compete with Reorganized Spectrum or develop greater market presence, Reorganized Spectrum's market share will decline. 5. Marketing Channels: For the foreseeable future, Reorganized Spectrum intends to deliver its activation kits and software products to market through its original equipment manufacturer ("OEM") licensees, whereby the OEM incorporates Reorganized Spectrum's technology onto a component device and sells Spectrum's activation kits typically under private label. There can be no assurance that the Company will successfully redirect its business and capitalize on these marketing channels. 6. Pricing: Reorganized Spectrum's software pricing strategy is to maintain relatively competitive prices for the immediate future. While Reorganized Spectrum believes that its pricing assumptions are realistic, changes in its competitors' pricing structure could force Reorganized Spectrum to respond with competitive price reductions. 7. Renegotiation of Existing Licenses: The Company is in the process of renegotiating its existing license agreements. With certain licensees, the Company is focusing on up front license payments and an opportunity for a strategic relationship. There can be no assurances this will be achieved. Megahertz, a licensee of the Company, U.S. Robotics, the parent of Megahertz and the Company in February 1996 entered into a settlement agreement with respect to all disputes among them. This settlement provides for the payment of a substantial license fee to Spectrum and establishes a framework for a strategic relationship and is contingent upon Bankruptcy Court approval. A hearing before the Bankruptcy Court on this matter is scheduled to be held on March 7, 1996. If the settlement is not approved or payment is not made, Spectrum's liquidity will be severely adversely affected and its ability to implement Management's Strategic Plan will be severely hindered. 8. Certain Litigation: The Company has both an SEC and a federal grand jury investigation of prior management activities pending. Additionally, the Company has several other outstanding lawsuits, including class action litigation. See "Chapter 11 Proceedings and other Recent Developments - Other Recent Developments," Section IV(B). Although the Company believes that it will be able to use the bankruptcy process to resolve these other matters, there can be no assurance in this regard. 9. Staffing: In order to achieve its Strategic Plan, the Company will need to fill a number of key positions through recruiting. An important part of the recruiting program will be the hiring of key software and communication specialists. While Management believes it will be successful in this effort, there can be no assurance in this regard. C. Major Assumptions 1. Product and Licensing Business Reorganized Spectrum anticipates that the number of PC Card modems sold annually in the U.S. will increase from 3.6 million in calendar year 1996 to 7.5 million in calendar year 1999. Management believes that it will be able to supply activations to the Company's 25% market share. Further, the Company estimates that through development of strategic relationships it will be able to increase this percentage market share an additional 5% with advanced software products beginning in fiscal year 1998, increasing to 20% by fiscal year 2000. Projected revenues related to activation products and software products are based upon expected market conditions for distribution through the Company's current licensed OEM channels. After product introduction, as is normal with software products, average prices are assumed to decline. Projected revenues from licensing are based upon the following assumptions: a. Rockwell license fee payments will continue as contracted through the second quarter of fiscal year 1997; b. a new Megahertz license agreement will be approved by the Bankruptcy Court by 1996 fiscal year-end; c. AT&T royalties will remain relatively constant through the projection period; and d. all other royalties will not exceed twice the current royalty stream in fiscal year 2000. 2. Cost of Goods Sold During the restructuring of the Company, management downsized manufacturing capacity and outsourced this effort. The projections assume that this outsourcing will continue for the projection period. 3. Selling, General and Administrative Expenses (All Other Operating Expenses) Major assumptions relating to administration, licensing, research and development, selling, professional fees (including bankruptcy related professional fees for fiscal years 1996 and 1997) and all other operating expenses include: a. Additions to the current restructured staff a research and development organization will be made beginning in fiscal year 1997, including the addition of two engineering facilities; b. Distribution channels for the Company's products are the current licensed OEMs. Selling is assumed to be transitional to the current licensing staff with an increase in staff starting fiscal year 1999. A marketing leader will be hired in the third quarter of fiscal year 1997; c. Bankruptcy related professional fees will substantially end upon the Effective Date following confirmation of the Plan, which is expected to be no later than May 31, 1996; and d. There will be no provision for Post-Effective Date Committee expenses, based on the assumption that all litigation and disputes will be resolved by the time of confirmation of the Plan. 4. Other Income Other Income for fiscal year 1997 reflects a gain relating to the forgiveness of indebtedness associated with an expected waiver of the holdback portion of professional fees incurred during bankruptcy. Also, the projections assume that payments to holders of Unsecured Claims will not exceed $3.5 million. 5. Taxes Management's projections assume tax losses incurred during the projected period are carried forward and applied to future tax liabilities. For purposes of the projections, Management has assumed that a substantial portion of its estimated Net Operating Loss Carryforward ("NOLs") of $70.7 million can be applied to future earnings. See "Certain Federal Income Tax Consequences of the Plan," Section XI. 6. Balance Sheet Assumptions Cash: Management's projections assume that at the Effective Date the Company's cash balance will be $7.3 million for continuing operations. Accounts Receivable: Management has assumed a 60-day collection period and bad debt expense equal to 1.5% of sales, based upon historical experience. WHILE MANAGEMENT BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE PROJECTED FINANCIAL STATEMENTS, WHEN CONSIDERED ON AN OVERALL BASIS, ARE REASONABLE IN LIGHT OF CURRENT CIRCUMSTANCES, NO ASSURANCE CAN BE, OR IS BEING, GIVEN THAT THE PROJECTIONS WILL BE REALIZED. REORGANIZED SPECTRUM URGES THAT ALL ASSUMPTIONS DESCRIBED ABOVE BE CAREFULLY CONSIDERED BY HOLDERS OF CLAIMS IN REACHING THEIR DETERMINATION OF WHETHER TO ACCEPT OR REJECT THE PLAN. D. Management's Summary Projections Management has provided these financial projections for informational purposes only. The projections involve the use of assumptions and estimates. Accordingly, actual operating results may differ materially from the amounts and estimates included in the accompanying projections. Projected Income Statement (Dollars in Thousands) Fiscal Year Ending March 31, ------------------------------------------- 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Sales $591 $1,00 $4,375 $9,915 $17,100 Cost of Goods Sold 331 500 1,696 3,320 5,062 ------ ------ ------ ------ ------ Gross Profit 260 500 2,679 6,595 12,038 Gross Margin 44.0% 50.0% 61.2% 66.5% 70.4% License & Royalty 7,924 1,227 511 606 699 SG&A Personnel 2,424 2,657 3,220 3,634 4,784 Insurance 892 523 588 603 677 Rent 117 190 228 250 300 Outside Services 176 245 140 140 140 Professional Fees and Bankruptcy Exp 5,878 1,487 410 410 410 Other 711 931 1,508 1,733 2,295 ------ ------ ------ ------ ------ Total SG&A 10,198 6,033 6,094 6,770 8,606 EBITDA (2,014) (4,306) (2,904) 431 4,131 Depreciation and Amortization 324 171 95 107 140 ------ ------ ------ ------ ------ EBIT (2,338) (4,477) (2,999) 324 3,991 Other Expenses (Income) (5,882) (7,141) (43) (28) (108) ------ ------ ------ ------ ------ Pre-Tax Income 3,544 2,664 (2,956) 352 4,099 Income Taxes 0 0 0 0 0 ------ ------ ------ ------ ------ Net Income (Loss) $3,544 $2,664 ($2,956) $352 $4,099 ====== ====== ====== ====== ====== Projected Balance Sheet (Dollars in Thousands) March 31, ------------------------------------------- 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Current Assets Cash & ST Investments $12,428 $4,966 $1,428 $923 $3,591 Accounts Receivable, net 1,403 202 699 1,473 2,414 Inventory 29 45 339 830 1,688 Other Current Assets 284 286 286 286 286 ------ ------ ------ ------ ------ Total Current Assets 14,144 5,499 2,752 3,512 7,979 Fixed Assets, net 183 212 266 245 291 Other Assets 360 334 308 282 256 ------ ------ ------ ------ ------ Total Assets $14,687 $6,045 $3,326 $4,039 $8,526 ====== ====== ====== ====== ====== Accounts Payable $865 $161 $398 $759 $1,147 Accrued Expenses 2,091 477 477 477 477 Working Capital Revolver 0 0 0 0 0 ------ ------ ------ ------ ------ Total Current Liabilities 2,956 638 875 1,236 1,624 Liabilities Subject to Compromise 8,987 0 0 0 0 ------ ------ ------ ------ ------ Total Liabilities 11,943 638 875 1,236 1,624 Shareholders' Equity 2,744 5,407 2,451 2,803 6,902 ------ ------ ------ ------ ------ Total Liabilities & Equity $14,687 $6,045 $3,326 $4,039 $8,526 ====== ====== ====== ====== ====== Consolidated Statement of Cash Flows (Dollars in Thousands) Fiscal Year Ending March 31, Cash Flow ------------------------------------------- From Operations 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Net Income $3,544 $2,664 ($2,956) $352 $4,099 Depreciation & Amortization 324 171 95 107 140 Deferred Income (849) 0 0 0 0 Unrealized Gain on Marketable Securities 101 0 0 0 0 Gain from Disposition of Assets (2,475) 0 0 0 0 Gain on Debt Forgiveness (2,539) (6,925) 0 0 0 Net Loss from Write-off of Assets & Liabilities 279 0 0 0 0 Cash Generated from Working Capital Management: Accounts Receivable 4,391 1,201 (497) (774) (941) Inventory 48 (16) (294) (491) (857) Prepaid Expenses 75 (2) 0 0 0 Other Current Assets 1,460 0 0 0 0 Accounts Payable (2,542) (704) 238 361 387 Accrued Expenses (542) (164) 0 0 0 Cash used by Discontinued Operations (2,140) 0 0 0 0 ------ ------ ------ ------ ------ Cash Flow from Operations (865) (3,777) (3,414) (445) 2828 Cash Flow from Investing Capital Expenditures (58) (173) (124) (60) (160) Asset Disposition 8,283 0 0 0 0 Investments 0 0 0 0 0 Cash used by Discontinued Operations (57) 0 0 0 0 ------ ------ ------ ------ ------ Cash Flow from Investing 8,168 (173) (124) (60) (160) Cash Flow from Financing Liabilities Subject to Compromise (69) (3,512) 0 0 0 ------ ------ ------ ------ ------ Cash Flow from Financing (69) (3,512) 0 0 0 ------ ------ ------ ------ ------ Total Cash Generated (Used) $7,234 ($7,462) ($3,538) ($505) $2,668 ====== ====== ====== ====== ====== E. Postconfirmation Liquidity Spectrum anticipates that the initial consolidated cash balance of $7.3 million generated from the sale of non-core assets and cash flow from operations will be adequate to meet its postconfirmation liquidity needs. Spectrum's primary use of its cash resources will be to fund ongoing operations and develop enhanced software products. Capital expenditures are anticipated to aggregate $0.1 million in fiscal 1996, $0.2 million in fiscal 1997, $0.1 million in fiscal 1998, $0.1 million in fiscal 1999 and $0.2 million in fiscal 2000. Capital expenditures are related primarily to computer and testing equipment needed in Research and Development. Spectrum will have no long term debt when it emerges from bankruptcy therefore should not be burdened by debt service or interest expense. F. Other Risk Factors to be Considered 1. Inability to Pay Administrative and Priority Claims. Under Section 1129(a)(9) of the Bankruptcy Code, for the Bankruptcy Court to confirm the Plan, holders of Administrative Claims and Priority Tax Claims must be paid in cash on the later of the Effective Date or the date on which such Claim is allowed by Final Order the Allowed Amount of their Claims, except to the extent that the holder of a particular Claim has agreed to a different treatment of such Claim. Holders of Priority Nontax Claims must be paid in cash in full on the Effective Date. Holders of Unsecured Claims are expected to receive an amount equal to 100 cents on the dollar on the Effective Date, such expectation cannot be confirmed until the allowability of all Unsecured Claims is finally determined. Unsecured Claims are to be paid out of a pool set aside for the payment of Unsecured Claims consisting of $3.5 million in Cash and as many shares of Reorganized Spectrum Common Stock as may be necessary (the "Class 2 Distribution Pool"). See "Summary of the Plan - General Description of the Treatment of Claims," Section VIII(D). To confirm the Plan, the Debtors must have sufficient cash to pay all Administrative Claims, Priority Claims and Unsecured Claims in full on the Effective Date, except to the extent otherwise indicated above. However, because Administrative Claims continue to accrue, the amount of accrued Administrative Claims is unliquidated and undeterminable at present. Furthermore, the Debtors continue to sustain significant operating losses and there can be no assurance that the Debtors will have sufficient cash to make the cash payments with respect to Administrative Claims, Priority Claims and Unsecured Claims required under Section 1129 of the Bankruptcy Code as a condition to confirmation. If the Debtors do not have sufficient cash to make the required payments to satisfy Administrative Claims, Priority Claims and Unsecured Claims on the Effective Date, the Debtors may still be able to have the Plan confirmed if the affected holders of such Claims consent to a different treatment of these Claims, such as a reduction thereof, or payment of said Claim through the issuance of Reorganized Spectrum Common Stock. There can be no assurance that any, or a sufficient number of, such holders of Claims will consent to such treatment. The Administrative and Priority Claims to be paid as of the Effective Date are estimated to be approximately $2.7 million unless a lesser amount is ordered by the Bankruptcy Court or agreed to with holders of such claims. The $2.7 million will consist of: (i) estimated wind-down costs of the Debtors' Estates (including professional fees), and (ii) priority claims for taxes. These claims are expected to be settled as of the Effective Date. 2. Lack of Established Market for the Common Stock. Existing Spectrum Common Stock is listed over the counter and has a number of market makers. It is currently contemplated that the Company will apply for listing of the Reorganized Spectrum Common Stock on the Nasdaq SmallCap Market shortly following confirmation of the Plan. There can be no assurance that such application will be granted. As a result, no assurance can be given as to the continuation of a liquid market for the Reorganized Spectrum Common Stock or as to the market prices of the Reorganized Spectrum Common Stock that will prevail following confirmation of the Plan. 3. Potential Unavailability of Substantial Net Operating Loss Carryovers. The Debtors believe that the Company may have substantial NOLs (as defined below) available that may not be subject to the limitations imposed by section 382 of the Tax Code and therefore may be used to offset a portion of the Company's postreorganization taxable income. The Debtors also believe that the satisfaction of certain Claims should not give rise to discharge of indebtedness income. As discussed in "Certain Federal Income Tax Consequences of the Plan", Section XI, however, the availability of substantial NOLs and the absence of significant discharge of indebtedness income are dependent on a number of factual and legal assumptions as to which there is uncertainty. Accordingly, notwithstanding the foregoing, the Company's NOLs and other tax attributes may be reduced significantly, eliminated or subject to substantial limitations on their utilization pursuant to section 382 of the Tax Code and other provisions. In that case, the Company may incur greater tax liabilities than projected under the Business Plan. A reduction or limitation in the amount of the Company's utilizable NOLs could also adversely affect the value of the Reorganized Spectrum Common Stock. 4. Rights of Holders of Class A Stock. Under the Amended Spectrum Certificate, the holders of Class A Preferred Stock shall have a liquidation preference over the holders of Reorganized Spectrum Common Stock for two years after the Effective Date pursuant to the following terms. In the event that Reorganized Spectrum becomes insolvent and commences liquidation proceedings within two years of the Effective Date, interests of holders of Class A Preferred Stock will have priority over interests of holders of Reorganized Spectrum Common Stock. At the expiration of the preference period, which will be two years to the date after the Effective Date, Class A Preferred Stock will automatically convert to Reorganized Spectrum Common Stock. Class A Preferred Stock will be voting stock although, for the period that it is in the hands of the Class Action Trustee, it will be voted with the restrictions described in Section VIII(B)(1)(b), namely, only in the same proportions and manner as the Reorganized Spectrum Common Stock which has been distributed at the time of voting. Secondary market trading by the public in the Class A Preferred Stock will be permitted, subject to generally applicable securities laws, but the Class A Preferred Stock will not (by reason of NASD restrictions) be listed by Reorganized Spectrum on the Nasdaq SmallCap Market or on any other exchange or market. SECTION X APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS THE ISSUANCE OF REORGANIZED SPECTRUM STOCK UNDER THE PLAN RAISES CERTAIN SECURITIES LAW ISSUES UNDER THE BANKRUPTCY CODE AND FEDERAL AND STATE SECURITIES LAWS, WHICH ARE DISCUSSED IN THIS SECTION. THIS SECTION SHOULD NOT BE CONSIDERED APPLICABLE TO ALL SITUATIONS OR ALL CREDITORS RECEIVING REORGANIZED SPECTRUM STOCK UNDER THE PLAN. A. Initial Issuance of Reorganized Spectrum Stock under the Plan Section 1145 of the Bankruptcy Code provides that the securities registration and/or qualification requirements of federal and state securities laws do not apply to the offer or sale of stock, warrants or other securities by a debtor or its successor if the offer or sale occurs under a plan of reorganization and the securities are transferred in exchange (or principally in exchange) for a claim against or interest in a debtor. Accordingly, the initial issuance of the Class A Preferred Stock and the Reorganized Spectrum Common Stock shall be exempt from the registration and/or qualification requirements of federal and state law under section 1145 of the Bankruptcy Code. B. Resale of Reorganized Spectrum Stock 1. Effect of Applicable Law Any person who is not an "underwriter" under section 1145 of the Bankruptcy Code and is not an "affiliate" under SEC Rule 144 and who resells Reorganized Spectrum Common Stock or Class A Preferred Stock need not comply with the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"). The term "underwriter" as used in section 1145 of the Bankruptcy Code includes four categories of persons, which are referred to herein as "controlling persons," "accumulators," "distributors" and "syndicators." The treatment of the four types of underwriters and the treatment of "dealers" are discussed below. a. Controlling Persons. "Controlling Persons" are persons who, after the Effective Date, have the power, whether direct or indirect, formal or informal, to control the management and policies of Reorganized Spectrum. Whether a person has such power is a question of fact which depends on certain factors, including the person's equity ownership in Reorganized Spectrum relative to other equity holders, and whether the person, acting alone or in concert with others, has a contractual or other relationship giving that person power over management policies and decisions. Based on certain legislative history and applicable no-action letters issued by the SEC staff with respect to section 1145 of the Bankruptcy Code, it appears that any shareholder who beneficially owns less than 1% of Reorganized Spectrum Stock, as calculated in accordance with SEC Rule 13d-3 promulgated under the Exchange Act, generally should not be deemed to be in a control relationship with Reorganized Spectrum solely by reason of such ownership. Based on such legislative history and no-action letters, it would also appear that if any shareholder beneficially owns between 1% and 10% of the Reorganized Spectrum Stock, that stockholder may be deemed to be in a control relationship with Reorganized Spectrum, depending upon the facts and circumstances of its particular situation. A shareholder who beneficially owns more than 10% of Reorganized Spectrum Stock is more likely to be deemed a controlling person, but acquiring such status would still depend upon the facts and circumstances of such shareholder's particular case. Controlling persons are permitted to resell or otherwise dispose of Reorganized Spectrum Stock only by complying with the registration requirements of the Securities Act or an exemption therefrom. Reorganized Spectrum is currently not aware of any Person who is expected to beneficially own greater than 10% of the Reorganized Spectrum Stock immediately following the consummation of the Plan. ANY SUCH SHAREHOLDER SHOULD SEEK THE ADVICE OF ITS OWN COUNSEL BEFORE RESELLING ANY REORGANIZED SPECTRUM STOCK. In order to resell the Reorganized Spectrum Stock without registration, controlling persons would be required to comply with the restrictions set forth in SEC Rule 144 or another exemption from registration under the Securities Act. It is anticipated that after the Effective Date, Reorganized Spectrum will continue to comply with the reporting requirements under the Exchange Act and thus will be in a position to fulfill the "Current Public Information" requirements of SEC Rule 144(c). b. Accumulators and Distributors. "Accumulators" are persons who purchase Claims against the Debtors with a view to distribution of any Reorganized Spectrum Stock to be received under the Plan in exchange for such Claim. "Distributors" are persons who offer to sell Reorganized Spectrum Stock for the holders of such Reorganized Spectrum Stock. In prior bankruptcy cases, the SEC staff has taken the position that resales by accumulators and distributors of securities distributed under a plan are exempt from the registration requirements of the Securities Act if made in "ordinary trading transactions." c. Syndicators. "Syndicators" are persons who offer to buy Reorganized Spectrum Stock from the holders with a view to distribution, under an agreement made in connection with the Plan, with the consummation of the Plan or with the offer or sale of Reorganized Spectrum Stock under the Plan. The Debtors are not aware of any arrangements for the resale of Reorganized Spectrum Stock which would make any person a Syndicator. d. Dealers. "Dealers" are persons who engage either for all or part of their time, directly or indirectly, as agents, brokers, or principals, in the business of offering, buying, selling or otherwise dealing or trading in securities. Once the Reorganized Spectrum Stock becomes publicly-traded after the Effective Date, section 4(3) of the Securities Act will exempt transactions in the Reorganized Spectrum Stock by Dealers taking place more than 40 days after the date the Reorganized Spectrum Stock was bona fide offered to the public by the issuer or by or through an underwriter (which date presumably would be no earlier than the first Distribution Date). Within the 40-day period after such date, transactions by Dealers who are stockbrokers are exempt from the 1933 Act pursuant to section 1145(a)(4) of the Bankruptcy Code, as long as the stockbrokers deliver a copy of this Disclosure Statement (and supplements hereto, if any, as ordered by the Bankruptcy Court) at or before the time of the transactions. THE FOREGOING DISCUSSION IS A SUMMARY OF CERTAIN PROVISIONS OF SECTION 1145 OF THE BANKRUPTCY CODE AND THE FEDERAL SECURITIES LAWS, AS THEY MAY APPLY TO RECIPIENTS OF REORGANIZED SPECTRUM STOCK PURSUANT TO THE PLAN. THIS DISCUSSION DOES NOT ADDRESS ANY ASPECT OF STATE SECURITIES OR "BLUE SKY" LAWS OR FOREIGN SECURITIES LAWS. EACH RECIPIENT OF REORGANIZED SPECTRUM STOCK IS STRONGLY URGED TO SATISFY ITSELF THROUGH CONSULTATION WITH ITS OWN LEGAL ADVISORS AS TO WHETHER ANY RESALES OR OTHER TRANSACTIONS IN REORGANIZED SPECTRUM STOCK ARE LAWFUL UNDER THE FEDERAL AND STATE OR OTHER SECURITIES LAWS. THE DEBTORS HAVE NOT SOUGHT A "NO-ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION WITH RESPECT TO ANY MATTER DISCUSSED HEREIN. THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN. 2. Effect of Amended Spectrum Certificate Any purported transfer of Reorganized Spectrum Stock will be subject to the restrictions on transferability found in the Amended Spectrum Certificate. The Amended Spectrum Certificate limits for a period of three years after the Effective Date the transfer of shares of Reorganized Spectrum Stock and other interests that would be treated as stock of Reorganized Spectrum under the Tax Code or applicable IRS regulations that would cause either a person or an entity to become a Five Percent Shareholder (see "Summary of the Plan - Certain Features of the Amended Reorganized Spectrum Certificate - - The Restriction on Transfer of Reorganized Spectrum Stock Provision," Section VIII(C)(10)) or increase a Five Percent Shareholder's percentage ownership interest in Reorganized Spectrum. This restriction is intended to prevent transfers of stock of Reorganized Spectrum from triggering an "ownership change," as defined in section 382 of the Tax Code, which would result in the limitation of certain potential tax benefits available to Reorganized Spectrum. This restriction may be waived by the Board of Directors of Reorganized Spectrum if, in its judgment, the proposed transfer does not increase the risk that the use of such tax benefits will be limited. It is anticipated that limited waivers to this restriction will be granted with respect to Reorganized Spectrum Common Stock covered by the Incentive Deferral Plan and the Stock Incentive Plan. Certificates representing shares of Reorganized Spectrum Stock and such other securities of Reorganized Spectrum will bear an appropriate legend with respect to such restrictions. See "Certain Federal Income Tax Consequences of the Plan - Limitation on Use of Tax Losses," Section XI ( ); "Summary of the Plan - Certain Features of the Amended Spectrum Certificate - The Restriction on Transfer of Reorganized Spectrum Stock Provision," Section VIII(C)(10); and Exhibit I attached hereto. SECTION XI CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN THE FOLLOWING DISCUSSION IS A SUMMARY OF THE MORE SIGNIFICANT FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN TO THE DEBTORS AND HOLDERS OF CLAIMS AND INTERESTS. HOWEVER, NO RULING HAS BEEN SOUGHT FROM THE IRS WITH RESPECT TO THE PLAN, AND NO ASSURANCE CAN BE GIVEN AS TO THE TAX CONSEQUENCES OF THE PLAN TO THE DEBTORS. MOREOVER, THE TAX CONSEQUENCES TO INDIVIDUAL HOLDERS OF CLAIMS MAY VARY DEPENDING ON INDIVIDUAL CIRCUMSTANCES. A. Tax Consequences to the Debtors 1. Debtor's Existing Tax Attribute. As discussed above, the Debtors have substantial NOLs which may be available to offset income of Reorganized Spectrum after the Plan. However, whether and to what extent such NOLs may be utilized by Reorganized Spectrum depends upon the application of section 382 of the Internal Revenue Code, as discussed further below. As of the end of the fiscal year ended March 31, 1995, the Debtors had approximately $70,668,000 NOLs. Of these NOLs, approximately $56,411,000 were already subject to limitation under section 382. Thus, even after reduction for cancellation of indebtedness income realized in the reorganization, it is anticipated that substantial NOLs will be available to Reorganized Spectrum in the future without limitation under section 382 unless Reorganized Spectrum becomes subject to section 382 in the future, either as a result of the reorganization or otherwise. These NOLs expire between 2001 and 2010 if not used. 2. Matters Affecting Utilization of Debtors' Tax Attributes. a. "Ownership Change" Under Tax Code Section 382. Section 382 (in conjunction with section 383) of the Tax Code provides in general that, following an "ownership change" with respect to the stock of a corporation, the corporation's ability to utilize its existing NOLs, general business credit carryovers and other tax attributes will be subject to stringent limitations unless section 382(1)(5) (the "Bankruptcy Exception") (discussed below) is available. Very generally, an ownership change within the meaning of section 382 occurs when the percentage of stock (determined on the basis of value) owned by one or more Five Percent Shareholders has increased by more than 50 percentage points (in relation to the corporation's total stock considered to be outstanding for this purpose) from the lowest percentage of stock that was owned by such Five Percent Shareholders at any time during the applicable "testing period". The testing period is ordinarily the shorter of (i) the three-year period preceding the date of testing or (ii) the period of time since the most recent ownership change of the corporation. In general, for purposes of determining stock ownership and the aggregate amount of stock outstanding, special rules apply for options and rights that are similar to options, and broad constructive ownership and attribution rules apply. Also, all persons holding less than 5% of the value of the corporation's stock generally are treated as a single Five Percent Shareholder. An ownership change can occur as a result of, among other things, the purchase or sale of stock by or to a Five Percent Shareholder, an issuance of stock by the corporation (whether or not any particular shareholder holds 5% of the value of the corporation's stock), or the redemption of stock by the corporation. Although the matter is not free from doubt, it is anticipated that the implementation of the Plan will cause an ownership change. b. Effect of Tax Code Section 382. Unless the Bankruptcy Exception applies, a corporation may use pre-ownership change NOLs in any taxable year following an ownership change only up to an amount equal to its "section 382 limitation" (described below) for that taxable year. The section 382 limitation for a taxable year equals, in general and subject to adjustments, the product of (i) the long-term tax-exempt bond rate as determined at the time of the ownership change and (ii) the value of the corporation immediately before the ownership change. In general, in the case of a corporation undergoing an ownership change in a bankruptcy proceeding, the value of the corporation is increased to reflect the increase (if any) in its value resulting from any surrender or cancellation of creditors' claims in the transaction unless the Bankruptcy Exception applies. If the section 382 limitation applies with respect to an ownership change, and the corporation does not continue its historic business (as defined in the regulations under the Tax Code) during the two year period following the date of such ownership change, the NOLs are eliminated in their entirety. If the corporation's taxable income in a given year exceeds the section 382 limitation, the excess is subject to federal income tax (except to the extent such taxable income is attributable to certain "built-in gains" of the corporation). NOLs not utilized in a given year because of the section 382 limitation remain available for use in future years until their normal expiration dates. To the extent that a corporation's section 382 limitation in a given year exceeds its taxable income for such year, that excess will increase the section 382 limitation in future taxable years. The section 382 limitation also applies in the case of a corporation that has net unrealized built-in losses (i.e., if the aggregate adjusted basis of the corporation's assets at the time of the ownership change exceeds the fair market value of such assets) in excess of a de minimis threshold amount, so as to limit the corporation's utilization of such built-in losses that are realized during the five-year period after the ownership change. This rule also applies to deductions that have accrued economically prior to the ownership change but are recognized for tax purposes after the ownership change. Rules similar to those under section 382 apply under section 383 to restrict a corporation's utilization of business credit carryovers and other tax attributes after an ownership change. In general, if the Bankruptcy Exception does not apply, the operation of section 382 may severely restrict the amount of NOLs that may be utilized by Reorganized Spectrum after the Effective Date in any given taxable year. c. The Bankruptcy Exception under Tax Code Section 382(l)(5). The Bankruptcy Exception provides that the section 382 limitation does not apply if a corporation that is otherwise subject to section 382 is under the jurisdiction of a court in a case under the Bankruptcy Code and the shareholders and "qualified creditors" of the corporation together own 50% or more of the value and voting power of the reorganized corporation after the ownership change as a result of being shareholders or creditors immediately before the ownership change. "Qualified creditors" include (i) persons who were creditors at least 18 months before the date of Chapter 11 petition was filed and (ii) holders of claims which arose in the ordinary course of business who have at all times held the beneficial interest in such trade claims. Regulations with respect to the Bankruptcy Exception provide that creditors with respect to liabilities relating to the breach of a statutory duty constitute qualified creditors. If this exception applies, the use of the corporation's NOLs is not subject to the section 382 limitation, but the NOLs are reduced by the amount of interest relating to any indebtedness which is converted into stock and for which the corporation claimed a deduction during the three-year period preceding the taxable year of the ownership change plus the portion of the year of the ownership change prior to the effective date of the plan of reorganization. However, under the Bankruptcy Exception, if there were a second ownership change during the two-year period following the ownership change that results from the plan of reorganization, the NOLs and other tax attributes of a corporation would be subject to a section 382 limitation of zero for all taxable years ending after the date of the second ownership change (thereby, in effect, eliminating entirely the corporation's ability thereafter to utilize such tax attributes). The Bankruptcy Exception automatically applies if its requirements are satisfied. A debtor, however, has the option of filing an election not to have the Bankruptcy Exception apply with the filing of its tax return for the year of the ownership change. If the election is made, the section 382 limitation will apply. It is currently anticipated that the Bankruptcy Exception will apply in this case, and that the election not to have the Bankruptcy Exceptions apply will not be made. However, the applicability of the Bankruptcy Exception under these circumstances is not absolutely free from doubt, and as noted above no ruling has been sought from the IRS with respect to the Plan of Reorganization. d. Subsequent Ownership Changes. As described above, if the Bankruptcy Exception applies to Reorganized Spectrum and a second ownership change were to occur during the two-year period following the ownership change that results pursuant to the Plan, the section 382 limitation would be zero for all taxable years ending after the date of the second ownership changes, thereby eliminating in effect the ability of Reorganized Spectrum thereafter to utilize the NOLs. In order to minimize the likelihood that a second ownership change would occur and would adversely affect the shareholders of Reorganized Spectrum, the Plan incorporates certain restrictions on the transferability of stock as described above. There can be no assurance, however, that these restrictions will in fact prevent an ownership change that could adversely affect the shareholders of Reorganized Spectrum. e. Tax Code Section 269. Notwithstanding a corporation's compliance with the rules described above, the IRS is authorized under Tax Code section 269 to disallow any deduction, credit or other allowance (including the use of NOLs and business credit carryovers) if control of a corporation is acquired principally for tax avoidance purposes. Under section 269, "control" is regarded as the ownership of stock possessing at least 50% of the total combined voting power or value of all classes of stock. The existence of a principal tax avoidance motive by persons acquiring control of Reorganized Spectrum would be primarily a question of fact. f. Discharge of Indebtedness. Under the Tax Code, a taxpayer generally must include in gross income the amount of any discharged indebtedness realized during the taxable year, except to the extent payment of such indebtedness would have given rise to a deduction. However, such amounts are not included in income where the discharge of indebtedness is pursuant to a plan approved by the court in a case under the Bankruptcy Code. Instead, the amount of discharged indebtedness which would otherwise have been required to be included in income will be applied to reduce certain tax attributes of the taxpayer in the following order: NOLs, general business credit carryovers, capital loss carryovers, the taxpayer's basis in property and foreign tax credit carryovers. The satisfaction of Claims in Chapter 11 generally will give rise to discharge of indebtedness and a reduction in Reorganized Spectrum's tax attributes indebtedness unless the discharged Claims are not satisfied for less than the amount of such claims, the Claims do not constitute indebtedness for U.S. federal income tax purposes or the discharged Claims would have given rise to a deduction had they been paid in full and a deduction for such amount has not already been claimed. Although same cancellation of indebtedness income may be realized in the reorganization, it is anticipated that substantial NOLs will remain after such recognition of income. B. Tax Consequences to Creditors. 1. Creditors Receiving Only Cash. A Creditor that receives only cash pursuant to the Plan will generally be required to recognize gain or loss equal to the difference between the Creditor's basis in the Claim and the amount of consideration allocable thereto (other than consideration allocable to accrued interest, as discussed in paragraph 3 below). The character of any recognized gain or loss will depend upon the status of the Creditor, the nature of the Claim in its hands and its holding period. 2. Creditors Receiving Common Stock. The federal tax consequences of the implementation of the Plan to a creditor that receives Common Stock will depend primarily on whether the creditor's Claim constitutes a "security" for federal income tax purposes (hereinafter referred to as a "tax security"). Whether a Claim constitutes a tax security is based on the facts and circumstances surrounding the origin and nature of the Claim and its maturity date. Generally, claims arising out of the extension of trade credit or litigation will not constitute tax securities. Instruments with a five-year term or less also rarely qualify as tax securities. On the other hand, bonds or debentures with an original term of at least ten years have generally been considered to be tax securities. A holder of a Claim that constitutes a tax security that exchanges its tax securities solely for Common Stock pursuant to the Plan will not recognize gain or loss on the exchange except (as discussed below) to the extent, if any, such Common Stock is attributable to interest accrued after the beginning of its holding period. Notwithstanding the foregoing, if a holder of a Claim which constitutes a tax security receives, in addition to Common Stock, cash or other property, such holder may recognize gain (but not loss) but only to the extent of the cash or other property received. Such gain would be capital gain if the Claim was a capital asset in the hands of the holder. A holder's aggregate tax basis in any Common Stock received under the Plan in respect of a Claim constituting a tax security (except for any amounts allocable to interest) will generally equal the holder's basis in the Claim, decreased by the value of any cash and other property received in the exchange (other than in respect of interest) will generally include the holder's holding period of the Claim surrendered. A holder of a Claim not constituting a tax security that receives cash and/or property in satisfaction of such Claim will generally recognize gain or loss measured by the difference between the amount realized and such holder's tax basis in the Claim. The amount realized will equal the aggregate fair market value of the property distributed to such creditor (to the extent not allocable to interest). The character of any recognized gain or loss will depend on the status of the holder, the nature of the Claim in its hands and its holding period. Subject to paragraph 3 below, such holder's tax basis in New Common Stock or other property received in satisfaction of a Claim that does not constitute a tax security will generally equal the fair market value of such stock or other property at the time gain or loss is recognized. The precise treatment of the Class Action Trust and Class Plaintiffs is not free from doubt. In particular, it is not clear whether such Class Plaintiffs should recognize any income with respect to the receipt of Class A Preferred Stock and the timing of the recognition of such income if any. Because individual circumstances may differ significantly, such persons should consult their own tax advisors. 3. Treatment of Interest. A creditor that, under the applicable accounting method, was not required to include in income accrued but unpaid interest attributable to its Claim will be treated as receiving ordinary interest income to the extent consideration received is allocable to such interest. This treatment applies regardless of whether that creditor realizes an overall gain or loss as a result of the exchange of its Claim. A creditor that had previously included in income accrued but unpaid interest attributable to its Claim will recognize a loss (generally deductible in full against ordinary income) to the extent such accrued but unpaid interest is not satisfied in full. For purposes of the above discussion, "accrued" interest means interest that was accrued while the underlying Claim was held by the creditor. It is unclear how a Creditor who receives consideration with respect to a Claim which is less than the amount of the Allowed Claim should allocate such consideration between principal and interest. It appears likely that the IRS would require that the consideration be allocated proportionately between the portion of the Allowed Claim representing principal and the portion of the Allowed Claim representing interest. SECTION XII CONDITIONS PRECEDENT TO EFFECTIVENESS OF THE PLAN The following are conditions precedent to Confirmation: 1. A Final Order of the Bankruptcy Court is entered granting the Motion for Substantive Consolidation of Spectrum and Cellular. 2. A Final Order of the District Court is entered granting approval of the Class Action Settlement Motion. 3. The Debtors are successful in the Home Action. Reorganized Spectrum may waive any of the foregoing conditions at any time, without notice, without leave or order of the Bankruptcy Court and without any formal action other than proceeding to confirm the Plan. SECTION XIII CONFIRMATION OF THE PLAN A. Confirmation Hearing Section 1128(a) of the Bankruptcy Code requires the Bankruptcy Court, after notice, to hold a hearing on confirmation of a plan. By order of the Bankruptcy Court, the Confirmation Hearing has been scheduled for [April ], 1996, at [ ] a.m. Eastern Standard Time, in Courtroom 313, United States Courthouse, 75 Clinton Street, Brooklyn, New York. The confirmation hearing may be adjourned from time to time by the Bankruptcy Court without further notice except for an announcement made at the confirmation hearing or any adjournment hereof. Section 1128(b) of the Bankruptcy Code provides that any party in interest may object to confirmation of a plan. Any objection to confirmation of the Plan must be made in writing and filed with the Bankruptcy Court and served by hand or by Federal Express on, so received by, each of the Proponents, together with proof of service, on or before 5:00 p.m., Eastern Standard Time, on [April , 1996]. Counsel upon whom objections must be served is: George Weisz, Esq. Cleary, Gottlieb, Steen & Hamilton Attorneys for Reorganized Spectrum Information Technologies, Inc. et al., the Debtors and Debtors in Possession One Liberty Plaza New York, New York 10006 and on Michael P. Richman, Esq. Mayor, Brown & Platt Counsel to the Creditors Committee 1675 Broadway New York, New York Objections to confirmation of the Plan are governed by Bankruptcy Rule 9014. UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY SERVED AND FILED IT WILL NOT BE CONSIDERED BY THE BANKRUPTCY COURT. B. Requirements for Confirmation of the Plan At the confirmation hearing, the Bankruptcy Court shall determine whether the Bankruptcy Code's requirements for confirmation of the Plan have been satisfied, in which event the Bankruptcy Court shall enter an order confirming the Plan. As set forth in section 1129(a) of the Bankruptcy Code, these requirements are as follows: 1. The Plan complies with the applicable provisions of the Bankruptcy Code. 2. The Proponents of the Plan have complied with the applicable provisions of the Bankruptcy Code. 3. The Plan has been proposed in good faith and not by any means forbidden by law. 4. Any payment made or to be made by the Debtors or by a person issuing securities or acquiring property under the Plan, for services or for costs and expenses in or in connection with the case, or in connection with the Plan and incident to the case, has been approved by, or is subject to the approval of, the court as reasonable. 5. (a) (i) The Proponents of the Plan have disclosed the identity and affiliations of any individual proposed to serve, after confirmation of the Plan, as a director, officer, or voting trustee of the Debtors, an affiliate of the debtor participating in a joint plan with the debtor, or a successor to the Debtors under the Plan; and (ii) the appointment to, or continuance in, such office of such individual, is consistent with the interests of creditors and equity security holders and with public policy; and (b) the Proponents of the Plan have disclosed the identity of any insider that will be employed or retained by the reorganized Debtors, and the nature of any compensation for such insider. 6. Any governmental regulatory commission with jurisdiction, after confirmation of the Plan, over the rates of the Debtors has approved any rate change provided for in the Plan, or such rate change is expressly conditioned on such approval. 7. With respect to each impaired class of Claims or Interests -- (a) each holder of a Claim or Interest of such class: (i) has accepted the Plan; or (ii) will receive under the Plan on account of such Claim or Interest property of a value, as of the effective date of the Plan, that is not less than the amount that such holder would so receive or retain if the Debtors were liquidated under Chapter 7 of the Bankruptcy Code on such date; or (b) if section 1111(b)(2) of the Bankruptcy Code applies to the Claims of such class, each holder of a Claim of such class will receive or retain under the Plan on account of such Claim property of a value, as of the effective date of the Plan, that is not less than the value of such holder's interest in the estate's interest in the property that secures such Claims. 8. With respect to each Class of Claims or Interests -- (a) such Class has accepted the Plan; or (b) such Class is not impaired under the Plan; or (c) the test of section 1129(b) has been met (see "Confirmation of the Plan-Cramdown," Section XIII(E) 9. Except to the extent that the holder of a particular Claim has agreed to a different treatment of such Claim, the Plan provides that -- (a) with respect to a Claim of a kind specified in section 507(a)(1) or 507(a)(2) of the Bankruptcy Code, on the Effective Date of the Plan, the holder of such Claim will receive on account of such Claim cash equal to the allowed amount of such Claim; (b) with respect to a Class of Claims of a kind specified in section 507(a)(3), 507(a)(4), 507(a)(5), 507(a)(6) or 507(a)(7) of the Bankruptcy Code, each holder of a Claim of such class will receive -- (i) if such Class has accepted the Plan, deferred cash payments of a value, as of the Effective Date of the Plan, equal to the allowed amount of such Claim; or (ii) if such Class has not accepted the Plan, cash on the Effective Date of the Plan equal to the allowed amount of such Claim; and (c) with respect to a Claim of a kind specified in section 507(a)(8) of the Bankruptcy Code, the holder of a Claim will receive on account of such Claim deferred cash payments, over a period not exceeding six years after the date of assessment of such Claim of a value, as of the Effective Date of the Plan, equal to the allowed amount of such Claim. 10. If a class of Claims is impaired under the Plan, at least one class of Claims that is impaired has accepted the Plan, determined without including any acceptance of the Plan by any insider. 11. Confirmation of the Plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the Debtors or any successor to the Debtors under the Plan, unless such liquidation or reorganization is proposed in the Plan. 12. All fees payable under 28 U.S.C. section 1930, as determined by the court at the hearing on confirmation of the Plan, have been paid or the Plan provides for the payment of all such fees on the Effective Date of the Plan. 13. The Plan provides for the continuation after its Effective Date of payment of all retiree benefits, as that term is defined in section 1114 of the Bankruptcy Code, at the level established pursuant to subsection (e)(1)(B) or (g) of section 1114 of the Bankruptcy Code, at any time prior to confirmation of the Plan, for the duration of the period the Debtors have obligated themselves to provide such benefits. Proponents believe that the Plan satisfies all of the statutory requirements of Chapter 11, that they have complied or will have complied with all of the requirements of Chapter 11, and that the proposal of the Plan is made in good faith. Proponents believe that the holders of all Claims and Interests impaired under the Plan will receive payments or distributions under the Plan having a present value as of the Effective Date in amounts not less than the amounts likely to be received by such holders if Debtors were liquidated in a case under Chapter 7. In particular, as set forth in Exhibit F, in a liquidation, Interest holders would receive no distribution on account of their Interests. At the Confirmation Hearing, the Bankruptcy Court will determine whether holders of Claims and Interests would receive distributions under the Plan not less than the amount they would receive in a liquidation under Chapter 7. Proponents also believe that confirmation of the Plan is not likely to be followed by the liquidation or the need for further financial reorganization of Debtors or any successor to Debtors under the Plan. According to Debtors' business projections, they will have sufficient postconfirmation financing, earnings and cash flow from continuing operations with which to meet the ongoing financial needs of their businesses. C. Definition of Impairment A Class of Claims or interests is Impaired under a plan of reorganization unless, as set forth in section 1124 of the Bankruptcy Code, with respect to each Claim or Interest of such Class, the Plan: 1. leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest; or 2. notwithstanding any contractual provision or applicable law that entitles the holder of such claim or interest to demand or receive accelerated payment of such claim or interest after the occurrence of a default -- (a) cures any such default that occurred before or after the commencement of the case under the Bankruptcy Code other than a default of a kind specified in section 365(b)(2) of the Bankruptcy Code; (b) reinstates the maturity of such claim or interest as such maturity existed before such default; (c) compensates the holder of such claim or interest for any damages incurred as a result of any reasonable reliance by such holder on such contractual provision or such applicable law; and (d) does not otherwise alter the legal, equitable, or contractual rights to which such claim or interest entitles the holder of such claim or interest. D. Vote Required for Class Acceptance Section 1126 of the Bankruptcy Code defines acceptance of a plan by a class of claims as acceptance by holders of at least two-thirds in amount, and more than one-half in number, of the claims of that Class that actually cast ballots for acceptance or rejection of the plan. Thus, class acceptance takes place only if two-thirds in amount and a majority in number of the holders of Claims voting cast their ballots in favor of acceptance. Under the Bankruptcy Code, a class of Interests is deemed to have accepted the Plan if the Plan is accepted by holders of such Interests that hold at least two-thirds in amount of the Allowed Interests in such class that have voted on the Plan. E. Cramdown The Bankruptcy Court may confirm the Plan at the request of the Proponents if, as to each impaired Class which has not accepted the Plan, the Plan "does not discriminate unfairly" and is "fair and equitable." A plan of reorganization does not discriminate unfairly within the meaning of the Bankruptcy Code if no class receives more than it is legally entitled to receive for its claims or equity interests. "Fair and equitable" has different meanings with respect to the treatment of secured and unsecured claims. As set forth in section 1129(b)(2) of the Bankruptcy Code, those meanings are as follows: 1. With respect to a class of secured claims, the plan provides -- (i)(I) that the holder of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and (II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property; (ii) for the sale, subject to section 363(k) of the Bankruptcy Code, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or (iii) for the realization by such holders of the indubitable equivalent of such claims. 2. With respect to a class of unsecured claims -- (i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or (ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property. 3. With respect to a class of interests -- (i) the plan provides that each holder of an interest of such class receive or retain on account of such interest property of a value, as of the effective date of the plan, equal to the greatest of the allowed amount of any fixed liquidation preference to which such holder is entitled, any fixed redemption price to which such holder is entitled, or the value of such interest; or (ii) the holder of any interest that is junior to the interests of such class will not receive or retain under the plan on account of such junior interest any property. The Bankruptcy Court will determine at the Confirmation Hearing whether the Plan is fair and equitable with respect to, and does not discriminate unfairly against, any rejecting impaired class of Claims or Interests. F. Certain Effects of Confirmation of the Plan by the Bankruptcy Court 1. Continuing Jurisdiction of the Bankruptcy Court. If the Plan is confirmed, the Bankruptcy Court will retain all legally permissible jurisdiction over all matters necessary to ensure that the purposes and intent of the Plan are carried out until such time as the Plan has been fully consummated through the entry of a final decree completely closing the Chapter 11 Cases. Unless otherwise provided by order of the Bankruptcy Court, all injunctions or stays provided for in the Chapter 11 Cases and in effect on the date of entry of the Confirmation Order will remain in full force and effect until the Effective Date of the Plan. 2. Discharge of Claims Against the Debtors and the Officers and Directors. The rights afforded in the Plan and the treatment of all holders of Claims or Interests in the Plan will be in exchange for and in complete satisfaction of all Claims or Interests of any nature whatsoever, known or unknown, including any interest accrued or expenses incurred thereon from and after the Petition Date, against the Debtors. Except as otherwise provided in the Plan, on the Effective Date, all Claims against and Interests in the Debtors will be satisfied in full exchange for the consideration, if any, provided for in the Plan. All persons and entities will be precluded from asserting against the Debtors, their successors (including Reorganized Spectrum and the Plan Administrator) or their respective assets or properties, any other Claims based upon any act or omission, transaction or other activity of any kind or nature that occurred prior to the Effective Date. The Confirmation Order will provide, among other things, that except as otherwise expressly provided in the Plan, all persons and entities who have held, hold or may hold Claims against or Interests in any of the Debtors are permanently enjoined, on and after the Effective Date, from (a) commencing or continuing in any manner any action or other proceeding of any kind with respect to any such Claim or Interest against Reorganized Spectrum, (b) the enforcement, attachment, collection or recovery by any manner or means of any judgment, award, decree or order against Reorganized Spectrum, (c) creating, perfecting, or enforcing any encumbrance of any kind against Reorganized Spectrum or against the property or interests in property of Reorganized Spectrum, with respect to any such Claims, and (d) asserting any right of setoff, subrogation, or recoupment of any kind against any obligation due from Reorganized Spectrum or against the property or interests in property of Reorganized Spectrum, with respect to any such Claim. Upon confirmation of the Plan, its provisions will bind the Debtors and all their respective creditors and Interest holders, whether or not they have filed proofs of Claims or Interests or have accepted the Plan. 3. Disallowance of Contribution Claims. Except as otherwise provided in the Plan, the Confirmation Order will provide that any Claim for reimbursement, indemnification, contribution or subrogation of an entity that is liable with the Debtors on, or that has secured, the Claim of a Creditor not disallowed by a prior order of the Bankruptcy Court, will be disallowed to the extent (a) such Creditor's Claim against the Debtors is disallowed, (b) such Claim for reimbursement, indemnification, contribution or subrogation is contingent as of the Confirmation Date or (c) such entity asserts a right of subrogation to the rights of such Creditor under section 509 of the Bankruptcy Code. 4. Rights of Subordination. The right of any Claimant or the Debtors to enforce any subordination rights which it has or may have against another Claimant, whether arising by contract or by law will not be impaired, except to the extent as may be otherwise provided for by an order of the Bankruptcy Court as a result of a Class Action Settlement or compromise, or otherwise. All rights of subordination arising under section 510 of the Bankruptcy Code are to be preserved without impairment. 5. Exclusions of Liability. Except for their own gross negligence or willful misconduct, but subject to the discharge of Claims pursuant to the Confirmation Order, neither the Debtors, nor the directors, officers, employees or agents or professionals of the foregoing, will be responsible for any recitals, representations or warranties contained in, or for the execution, validity, genuineness, effectiveness or enforceability of, the Plan, this Disclosure Statement or any exhibit thereto or hereto, or be liable to any person or entity for any action taken or omitted by them in the Chapter 11 Cases or otherwise in connection with their duties and each Claim or Interest holder is enjoined from asserting any claim or cause of action relating to the foregoing. 6. Payment of Fees and Expenses. a. Professional Fees and Expenses. The reasonable and necessary professional fees and expenses incurred by the Debtors, Reorganized Spectrum, the Disbursing Agent, the Creditors' Committee from and after the Effective Date in connection with the consummation and implementation of the Plan shall be paid by the Disbursing Agent in the ordinary course of business without further order of the Bankruptcy Court; provided, however, that any unresolved dispute as to such professional compensation and reimbursement of expenses shall be submitted to (and resolved by) the Bankruptcy Court. b. United States Trustee's Fees. All fees due and owing to the United States Trustee under 28 U.S.C. Section 1930 will be paid on the Effective Date, or as soon thereafter as may be practicable. 7. Amendments and Modifications. The Plan may be amended or modified before the Effective Date only by Reorganized Spectrum or, following the Effective Date, only by Reorganized Spectrum to the extent provided in section 1127 of the Bankruptcy Code. In addition, Reorganized Spectrum reserves the right to revoke or withdraw the Plan prior to the Confirmation Date. If Reorganized Spectrum revokes or withdraws the Plan, or if Confirmation of the Plan does not occur, then the Plan shall be null and void and nothing contained herein shall: (1) constitute a waiver or release of any Claims by or against, or any Interests in, Reorganized Spectrum, or (2) prejudice in any manner the rights of Reorganized Spectrum or holders of Claims or Interests in any further proceedings involving Reorganized Spectrum. SECTION XIV ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF PLAN The Proponents believe that the Plan affords holders of Claims the potential for the greatest realization on Debtors' assets and, therefore, is in the best interests of such holders. If the Plan is not confirmed the alternatives include: (a) continuation of the pending Chapter 11 Cases; (b) alternative plans of reorganization; or (c) liquidation of Debtors under Chapter 7 or Chapter 11 of the Bankruptcy Code. A. Continuation of the Cases If the Debtors remain in Chapter 11, they would remain subject to the restrictions imposed by the Bankruptcy Code and would continue to face constraints as a result of continued operating losses and professional fees while in bankruptcy. It is unlikely that the Debtors would be able to generate positive cash from operations, or that the Debtors would have or be able to obtain sufficient resources if the Plan were not confirmed. For a discussion of the Debtors' liquidity and capital resources, see "Selected Operating and Financial Data -- Liquidity and Capital Resources" Section VI(D). B. Alternative Plans of Reorganization If the Plan is not confirmed, the Debtors, or, subject to further determinations by the Bankruptcy Court as to extensions of exclusivity under the Bankruptcy Code, any party in interest in the Chapter 11 Cases, could attempt to formulate and propose a different plan or plans. Such plans might involve either a reorganization and continuation of the Debtors' businesses, or an orderly liquidation of their assets, or a combination thereof. Based on the Debtors' current cash position and due to continuing significant operating losses, there can be no assurance that the Debtors will have sufficient cash to support operations until such plan or plans are confirmed and implemented, and there can be no assurance that the Debtors would be able to obtain additional funding necessary to continue operations until such time. C. Liquidation under Chapter 7 or Chapter 11 If no plan can be confirmed, the Chapter 11 Cases may be converted to cases under Chapter 7 of the Bankruptcy Code. In Chapter 7 cases, a trustee or trustees would be elected or appointed to liquidate the assets of each Debtor. The proceeds of the liquidation would be distributed to the respective holders of Claims against Debtors in accordance with the priorities established by the Bankruptcy Code. Under Chapter 7, a secured creditor whose claim is fully secured would be entitled to full payment, including interest, from the proceeds of the sale of its collateral. Unless its claim is nonrecourse, a secured creditor whose collateral is insufficient to pay its claim in full would be entitled to assert an unsecured claim for its deficiency. Claims entitled to priority under the Bankruptcy Code would be paid in full before any distribution to general unsecured creditors. Funds, if any, remaining after payment of secured claims and priority claims would be distributed pro rata to general unsecured creditors. Proponents believe that liquidation under Chapter 7 would result in substantial diminution of the value of the Debtors' estates because of additional administrative expenses involved in the appointment of trustees and attorneys, accountants and other professionals to assist such trustees; additional expenses and claims, some of which would be entitled to priority, that would arise by reason of the liquidation and from the rejection of executory contracts in connection with a cessation of Debtors' operations; and failure to realize the greater going concern value of Debtors' assets. The Debtors may also be liquidated pursuant to the provisions of a Chapter 11 plan. In a liquidation under Chapter 11, the Debtors' assets would be sold in an orderly fashion over a more extended period of time than in liquidations under Chapter 7. Thus, Chapter 11 liquidation might result in larger recoveries than in a Chapter 7 liquidation, but the delay in distributions could result in greater losses being incurred prior to completing any sale. Further if a trustee were not appointed, because a trustee is not required in a Chapter 11 case, expenses for professional fees would likely be lower than in a Chapter 7 case, but any distribution to the holders of claims under a Chapter 11 liquidation plan probably would be delayed substantially. Proponents have considered liquidation in the context of a Chapter 11 case and their liquidation analysis is attached hereto as Exhibit F. In the analysis, Proponents have taken into account the nature, status and underlying value of the assets, the ultimate realizablevalue of their assets and the extent to which such assets are subject to liens and security interests. Based on this analysis, it is apparent that a liquidation of each of Debtors' assets would produce substantially less value for distribution to the Impaired Classes than that recoverable in each instance under the Plan with the possible exception of Class 2 and Class 2 claimants would receive no greater distribution on liquidation than they will receive under the Plan. Moreover, for the reasons discussed above, under a Chapter 7 liquidation there would be no greater recovery to unsecured creditors than under the Chapter 11 liquidation analyses. SECTION XV CONCLUSION All holders of Claims against Debtors are urged to vote to accept the Plan and to evidence such acceptance by returning their ballots so that they will be received by [ ]. SPECTRUM INFORMATION TECHNOLOGIES, INC., DEBTOR AND DEBTOR IN POSSESSION DATED: [ ] By: ------------------------------- Donald J. Amoruso Chief Executive Officer and Chairman of the Board SPECTRUM CELLULAR CORPORATION, DEBTOR AND DEBTOR IN POSSESSION DATED: [ ] By: ------------------------------- Donald J. Amoruso Chief Executive Officer and Chairman of the Board Submitted by: CLEARY, GOTTLIEB, STEEN & HAMILTON ___________________________ George Weisz, Esq. A Member of the Firm One Liberty Plaza New York, New York 10006 (212) 225-2000 Attorneys for Reorganized Spectrum Information Technologies, Inc. and Reorganized Spectrum Cellular Corporation Debtors and Debtors in Possession EXHIBIT A UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK - -----------------------------------------x In re : Chapter 11 Case Nos. SPECTRUM INFORMATION TECHNOLOGIES, INC., : 195 10690 260 and SPECTRUM CELLULAR CORPORATION, : 195 10693 260 : Debtors. : : : : - -----------------------------------------x -------------------------------------------- CONSOLIDATED PLAN OF REORGANIZATION PROPOSED BY SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SPECTRUM CELLULAR CORPORATION, DEBTORS IN POSSESSION DATED AS OF: FEBRUARY 8, 1996 -------------------------------------------- SPECTRUM INFORMATION TECHNOLOGIES, INC. and SPECTRUM CELLULAR CORPORATION, Debtors and Debtors in Possession Donald J. Amoruso Chief Executive Officer and Chairman of the Board of Directors 2700 Westchester Avenue Purchase, New York 10577 (914) 251-1800 CLEARY, GOTTLIEB, STEEN & HAMILTON George Weisz Barry M. Fox Shari Siegel Mary M. McDonald Mary P. Watson One Liberty Plaza New York, New York 10006 (212) 225-2000 Attorneys for Spectrum Information Technologies, Inc. and Spectrum Cellular Corporation Debtors and Debtors in Possession TABLE OF CONTENTS INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . .1 I. DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION. . .1 A. Definitions.. . . . . . . . . . . . . . . . . . . . .1 B. Interpretation, Rules of Construction, Computation of Time, and Choice of Law . . . . . . . . . . . . .8 II. DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS. . . . . .9 A. Class 1: Priority Nontax Claims . . . . . . . . . . .9 B. Class 2: Unsecured Claims . . . . . . . . . . . . . 10 C. Class 3: Class Action Claims. . . . . . . . . . . . 10 D. Class 4: Other Securities Claims. . . . . . . . . . 10 E. Class 5: Equity Interests . . . . . . . . . . . . . 10 F. Class 6: Equitably Subordinated Claims. . . . . . . 10 III. TREATMENT OF CLASSES OF CLAIMS AND INTERESTS. . . . . . 10 A. Unclassified Claims . . . . . . . . . . . . . . . . 10 B. Class 1 - Priority Nontax Claims. . . . . . . . . . 11 C. Class 2 - Unsecured Claims. . . . . . . . . . . . . 11 D. Class 3 - Class Action Claims . . . . . . . . . . . 12 E. Class 4 - Other Securities Claims . . . . . . . . . 12 F. Class 5 - Equity Interests. . . . . . . . . . . . . 12 G. Class 6 - Equitably Subordinated Claims . . . . . . 12 IV. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES . 13 A. Assumption of Executory Contracts and Unexpired Leases.. . . . . . . . . . . . . . . . . 13 B. Bar Date for Rejection Damages. . . . . . . . . . . 13 C. Special Executory Contract Issues.. . . . . . . . . 13 V. SUBSTANTIVE CONSOLIDATION. . . . . . . . . . . . . . . . 14 VI. MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN. . . 15 A. On the Effective Date.. . . . . . . . . . . . . . . 15 B. Funding of Plan.. . . . . . . . . . . . . . . . . . 18 C. Revesting of Assets.. . . . . . . . . . . . . . . . 18 D. Management of Reorganized Spectrum. . . . . . . . . 19 E. Release of Liens. . . . . . . . . . . . . . . . . . 20 F. Exemption From Certain Transfer Taxes . . . . . . . 20 G. Cancellation and Surrender of Instruments, Securities, and Other Documentation. . . . . . . . 20 H. Applicability of Sections 1125 And 1145 of the Bankruptcy Code to Reorganized Spectrum Common Stock, Class A Preferred Stock, and Preferred Stock Issued Under The Plan. . . . . . . 21 I. Voting of Reorganized Spectrum Common Stock and Class A Preferred Stock Held . . . . . . . . . . . 21 J. Setoffs.. . . . . . . . . . . . . . . . . . . . . . 21 K. Objection to Claims.. . . . . . . . . . . . . . . . 22 L. Discharge of the Debtors and Injunction.. . . . . . 22 M. Preservation of Rights of Action. . . . . . . . . . 24 N. Compromise of Controversies.. . . . . . . . . . . . 24 O. Limitation of Liability . . . . . . . . . . . . . . 25 P. Professional Fees and Expenses. . . . . . . . . . . 25 VII. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . 25 A. Conditions. . . . . . . . . . . . . . . . . . . . . 25 B. Waiver of Conditions. . . . . . . . . . . . . . . . 25 VIII. DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . 26 A. General . . . . . . . . . . . . . . . . . . . . . . 26 B. Distribution of Reorganized Spectrum Common Stock and Class A Preferred Stock. . . . . . . . . . . . 27 IX. EFFECTIVE DATE. . . . . . . . . . . . . . . . . . . . . 30 X. CONFIRMATION REQUEST . . . . . . . . . . . . . . . . . . 31 XI. RETENTION OF JURISDICTION . . . . . . . . . . . . . . . 31 XII. MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . 32 A. Amendment and Modification of the Plan. . . . . . . 32 B. Withdrawal or Revocation of the Plan. . . . . . . . 32 C. Payment of Fees in Connection with Balloting. . . . 32 D. Committees. . . . . . . . . . . . . . . . . . . . . 32 E. Successors and Assigns. . . . . . . . . . . . . . . 33 F. Severability of Provisions of the Plan. . . . . . . 33 INTRODUCTION This Consolidated Plan of Reorganization (the "Plan") is proposed by Spectrum Information Technologies, Inc. and Spectrum Cellular Corporation, the debtors and debtors in possession (the "Debtors") in the above-captioned cases pending under chapter 11 of the Bankruptcy Code for the resolution of the Debtors' outstanding creditor claims and equity security interests. Data One, another subsidiary of Spectrum Information Technologies, Inc., that filed a petition for relief under chapter 11 of the Bankruptcy Code at the same time as the Debtors herein, will be filing a separate liquidating plan of reorganization pursuant to Chapter 11. Data One's plan and its associated Disclosure Statement will be distributed to Data One's creditors and Data One's sole stockholder. Reference is made to the "Disclosure Statement to Accompany Plan of Reorganization" (the "Disclosure Statement") for a discussion of the Debtors' history, business, results of operations, historical financial information, projections, and properties, and for a summary and analysis of the Plan. All creditors and equity security holders should review the Disclosure Statement before voting to accept or reject the Plan. In addition, there are other agreements and documents on file with the Bankruptcy Court and the Securities and Exchange Commission which are referenced in the Plan and/or the Disclosure Statement and which are available for review. No solicitation materials, other than the Disclosure Statement and related materials transmitted therewith and approved by the Bankruptcy Court, have been authorized by the Court for use in soliciting acceptances or rejections of the Plan. I. DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION A. Definitions. In addition to such other terms as are defined in other sections of the Plan, the following terms (which appear in the Plan as capitalized terms) have the following meanings as used in the Plan: 1. "Administrative Claim" means a Claim for costs and expenses of administration allowed under sections 503(b), 507(a) or 1114(e)(2) of the Bankruptcy Code, including all compensation or reimbursement of expenses under sections 330, 331 or 503(b) of the Bankruptcy Code to the extent incurred prior to the Effective Date, and any fees or charges assessed against the estates of the Debtors under section 1930, chapter 123 of title 28, United States Code. 2. "Allowed Claim" or "Allowed Interest" means a Claim against or Interest in either of the Debtors to the extent that (a) a proof of such Claim or Interest was (1) timely Filed; or (2) deemed timely Filed under applicable law or by reason of an order of the Bankruptcy Court; and (b) (1) Debtors, Reorganized Spectrum, or any other party in interest entitled to do so, does not File an objection within the time period(s) set forth in Section VI.K. of the Plan, and the Claim or Interest is not otherwise a Disputed Claim or Disputed Interest; (2) the Claim or Interest is allowed (and only to the extent allowed) by a Final Order; or (3) the Claim or Interest is allowed under the Plan. Allowed Interests include, without the necessity of filing a proof of Interest, the Interests consisting of the issued and outstanding Existing Spectrum Common Stock as of the Distribution Record Date. Except as otherwise expressly provided herein, Allowed Claims and Allowed Interests shall not, for purposes of computing distributions under the Plan, include interest on such Claim from and after the Petition Date, except as provided in section 506(b) of the Bankruptcy Code. Terms such as "Allowed Priority Tax Claim" mean, by way of example, an Allowed Claim which is also a Priority Tax Claim. 3. "Amended Spectrum Bylaws" means the amended and restated bylaws of Reorganized Spectrum that will be effective on the Effective Date, in the form annexed to the Disclosure Statement as Exhibit G. 4. "Amended Spectrum Certificate" means the amended and restated certificate of incorporation of Reorganized Spectrum that will be effective on the Effective Date, in the form annexed to the Disclosure Statement as Exhibit H. 5. "Bankruptcy Code" means title 11 of the United States Code, as it was in effect on the Petition Date, as amended by any amendments applicable to the Reorganization Cases. 6. "Bankruptcy Court" means the United States Bankruptcy Court for the Eastern District of New York or, in the event such court ceases to exercise jurisdiction over the Reorganization Cases, such other court or adjunct thereof that exercises jurisdiction over the Reorganization Cases. 7. "Bankruptcy Rules" means the Federal Rules of Bankruptcy Procedure, as the same may from time to time be in effect and applicable to proceedings in the Reorganization Cases. 8. "Business Day" means any day, other than a Saturday, Sunday or "legal holiday" (as defined in Bankruptcy Rule 9006(a)). 9. "Cellular" means Spectrum Cellular Corporation. 10. "Cash" means cash and cash equivalents, including, but not limited to, bank deposits, wire transfers, checks, and other similar items. 11. "Claim" means a claim as such term is defined in section 101(5) of the Bankruptcy Code. 12. "Class" means one of the classes of Claims or Interests established under Article III of the Plan pursuant to section 1122 of the Bankruptcy Code. 13. "Class A Preferred Stock" means the stock of Reorganized Spectrum which will be issued to the Class Action Trustee on behalf of the Class Action Plaintiffs pursuant to the Class Action Settlement. For two years after the Effective Date Class A Preferred Stock will have a liquidation preference over Reorganized Spectrum Common Stock to the extent that, in the event that within two years of the Effective Date, Reorganized Spectrum again becomes a debtor in a bankruptcy case under the United States Bankruptcy Code (unless the case is an involuntary case and is dismissed before an order for relief is entered therein against Reorganized Spectrum), interests of holders of Class A Preferred Stock will have priority in such proceedings over interests of holders of Reorganized Spectrum Common Stock. At the expiration of the two-year preference period, Class A Preferred Stock will automatically convert to and become Reorganized Spectrum Common Stock. Holders of Class A Preferred Stock will be entitled to vote in the same manner as holders of Reorganized Spectrum Common Stock, although, for the period of time that the Class A Preferred Stock is in the hands of the Class Action Trustee and has not been distributed to members of the class, such stock will be required to be voted in the same proportions as the holders of the Reorganized Spectrum Common Stock have voted. Class A Preferred Stock will be fully tradeable, but it will not (by reason of NASD restrictions) be listed on the NASD Small Capital market until it has been converted to Reorganized Spectrum Common Stock. In addition, during the two-year preference period, no person may be elected as a director unless he receives a plurality of the votes cast by the holders of Reorganized Common Stock as well as a plurality of the votes cast by the holders of Class A Preferred Stock, and no person may be removed as a director by the holders of Class A Preferred Stock unless the holders of a majority of the outstanding Reorganized Spectrum Common Stock vote in favor of such removal. 14. "Class Action Claims" means all claims arising from the Class Action Suits. 15. "Class Action Settlement" means the settlement of the Class Action Suits pursuant to the terms authorized by the Final Order of the District Court granting the Class Action Settlement Motion, when and if that order is granted. 16. "Class Action Settlement Motion" means the Motion For Approval of the Settlement of the Class Action Suits which will be filed with the District Court once the terms of the proposed Class Action Settlement are finalized. 17. "Class Action Suits" means the securities class action litigation against SIT and certain of its present and former officers and directors currently pending before Judge Frederic Block in the Eastern District of New York under the consolidated caption In Re Spectrum Information Technologies Litigation, No. 93 Civ. 2295 (FB). 18. "Class Action Trust" means that trust established for the benefit of the Class Action Plaintiffs pursuant to the terms of the Class Action Settlement. 19. "Class Action Trust Agreement" means the agreement governing the trust to be established as part of the Class Action Settlement attached to the Disclosure Statement as Exhibit I. 20. "Class Action Trustee" means the Trustee or Trustees appointed pursuant to the Class Action Trust Agreement. 21. "Class Action Plaintiffs" means all plaintiffs in the Class Action Suits. 22. "Class 2 Distribution Pool" has the meaning set forth in section III.B. 23. "Computer Bay" means Computers Unlimited of Wisconsin, Inc. d/b/a/ Computer Bay. 24. "Computer Bay Litigation" means the litigation commenced by the trustee of the Computer Bay estate in the Bankruptcy Court seeking substantive consolidation of its estates with that of SIT or, alternatively, relief under sections 547 and 548 of the Bankruptcy Code. 25. "Confirmation" means the entry of an order of the Bankruptcy Court confirming the Plan. 26. "Confirmation Date" means the date of Confirmation. 27. "Confirmation Hearing" is the hearing regarding confirmation of the Plan which will be held by the Bankruptcy Court prior to Confirmation as required by Section 1128(a) of the Bankruptcy Code. 28. "Confirmation Order" means the order of the Bankruptcy Court confirming the Plan. 29. "Consolidated Estates" means the combined assets and liabilities of SIT and Cellular after giving effect to the Court's granting of the SIT/Cellular Substantive Consolidation Motion (if such relief is granted). 30. "Creditor" means a creditor as such term is defined in section 101(10) of the Bankruptcy Code. 31. "Creditors' Committee" means the Official Committee of Unsecured Creditors of SIT. 32. "Data One" means Dealer Services Business Systems, Inc. d/b/a Data One. 33. "Debtors" means SIT and Cellular. 34. "Debtors in Possession" means the Debtors when acting in their capacity as representatives of the Estates in the Reorganization Cases. 35. "Disbursing Agent" means Reorganized Spectrum and/or any other Person or Persons that are designated under the Plan or by Reorganized Spectrum to disburse property pursuant to the Plan. 36. "Disclosure Statement" means the Filed "Disclosure Statement With Respect To The Consolidated Plan Of Reorganization Proposed By The Debtors For Spectrum Information Technologies, Inc. And Spectrum Cellular Corporation Dated As Of February 8, 1996" (and all exhibits and schedules annexed thereto or referenced therein) that relates to the Plan and is approved pursuant to section 1125 of the Bankruptcy Code in an order of the Bankruptcy Court, as such Disclosure Statement may be amended, modified or supplemented. 37. "Disputed Claim" or "Disputed Interest" means any Claim or Interest, including any Administrative Expense Claim, to the extent such Claim or Interest has not been allowed pursuant to the Plan or Final Order, and (a) which is listed on any of the Debtors' Schedules as disputed, unliquidated or contingent and as to which a proof of claim designating such Claim as liquidated in amount and not contingent was not timely and properly filed or (b) to the extent any party in interest has interposed a timely objection or request for estimation in accordance with the Plan, Bankruptcy Code and the Bankruptcy Rules, which objection or request for estimation has not been withdrawn or determined by Final Order, or (c) to the extent such Claim is disputed on any timely and properly filed Disputed Claim List. 38. "Disputed Claims List" shall have the meaning assigned to it in Section VI.K. 39. "Distributable Common Stock" means the number of shares of Reorganized Spectrum Common Stock to be distributed to holders of Claims in Classes 2, 4, 5 and 6. 40. "Distribution Record Date" means the date fixed by the Bankruptcy Court as (a) the deadline for any Disbursing Agent to recognize assignments of Allowed Claims pursuant to Bankruptcy Rule 3001(e), and (b) the record date for determining the holders of record of Existing Spectrum Common Stock or Existing Spectrum Stock Options who are entitled to receive distributions under the Plan. 41. "Distribution Reserve" means the funds reserved to ensure Reorganized Spectrum's ability to pay Disputed Administrative Claims and Administrative Claims that have not yet matured or been allowed when and if such Administrative Claims become Allowed Administrative Claims. 42. "District Court" means the United States District Court for the Eastern District of New York, the Honorable Frederic Block presiding, or in the event such court ceases to exercise jurisdiction over appeals from and proceedings relating to the Reorganization Cases, including without limitation the Class Action Suits and the Home Action, such other court or adjunct thereof that exercises jurisdiction over direct appeals from and proceedings related to the Reorganization Cases, including without limitation the Home Action and the Class Action Suits. 43. "Effective Date" means the date specified as the Effective Date of the Plan in Article IX. 44. "Estate" means either or both of the respective estates created in the Reorganization Cases for SIT and Cellular by section 541 of the Bankruptcy Code. 45. "Existing Spectrum Stock Options" means any option granted by SIT to purchase authorized but unissued common shares of stock, which, if issued, would have been Existing Spectrum Common Stock, as such plans may have been amended from time to time. 46. "Existing Spectrum Common Stock" means the common stock of SIT issued and outstanding prior to the Effective Date. 47. "Filed" means filed with the Clerk of the Bankruptcy Court in the Reorganization Cases. 48. "Final Order" means a court order as to which the time to appeal or petition for certiorari has been timely filed, or as to which any appeal or petition for certiorari that has been timely filed has been resolved by the highest court to which the order was timely appealed or from which certiorari was timely sought. 49. "Governmental Unit" means a governmental unit as such term is defined in section 101(27) of the Bankruptcy Code. 50. "Home Action" means the adversary proceeding commenced by The Home Insurance Company of Illinois which is now pending before the Honorable Frederic Block, United States District Judge for the Eastern District of New York under the caption The Home Insurance Company of Illinois v. Spectrum Information Technologies, Inc., et al., 95 Civ. 3744 (FB). 51. "Incentive Deferral Plan" shall have the meaning assigned to it in Section VI.A.8.b. 52. "Interest" means an equity security as defined in section 101(16) of the Bankruptcy Code. 53. "IRS" means the Internal Revenue Service of the United States of America. 54. "Management Administrative Claims" means certain administration expense claims of officers and directors as more fully set forth in Section III.A.1.b. 55. "Person" means any individual, corporation, general partnership, limited partnership, association, joint stock company, joint venture, estate, trust, Governmental Unit, Creditors' Committee, Equity Committee, unofficial committee of Creditors, Interest holders or retirees, or other entity. 56. "Petition Date" means January 26, 1995. 57. "Post-Effective Date Committee" shall have the meaning assigned to it in Section XII.D. 58. "Preferred Stock" - means that preferred stock (other than Class A Preferred Stock) authorized by the Amended Spectrum Certificate which the Board of Directors of Reorganized Spectrum may decide to issue, for value, from time to time. No Preferred Stock will have been issued at the time the Plan becomes effective. 59. "Priority Tax Claim" means a Claim entitled to priority pursuant to section 507(a)(8) of the Bankruptcy Code. 60. "Professional Person" means a person, including any Disbursing Agent and a trustee (if one is appointed), retained or to be compensated pursuant to section 326, 327, 328, 330, 503(b)(2) and (4), 1103 and/or 1107(b) of the Bankruptcy Code. 61. "Record Date" means the date on which the identity of the record holders of Allowed Interests entitled to vote on the Plan, in accordance with the instructions provided with the ballots respecting the votes of the beneficial owners of such Allowed Interests, is established. The Record Date shall be the date on which the Bankruptcy Court Order approving the Disclosure Statement is entered. 62. "Reorganization Cases" means the cases pending in the Bankruptcy Court under chapter 11 of the Bankruptcy Code for SIT and Cellular. 63. "Reorganized Spectrum" means the merged corporations of SIT and Cellular on and after the Effective Date. 64. "Reorganized Spectrum Common Stock" means the common stock of Reorganized Spectrum to be authorized pursuant to the Plan and the Amended Spectrum Certificate. 65. "Reorganized Spectrum Management Stock Option Plan" means the Stock Incentive Plan and the Incentive Deferral Plan. 66. "Reorganized Spectrum Stock" means both Reorganized Spectrum Common Stock and Class A Preferred Stock and Preferred Stock (if any). 67. "Reverse Stock Split" means the exchange and cancellation of all issued and outstanding Existing Spectrum Common Stock for Reorganized Spectrum Common Stock at the rate of one share of Reorganized Spectrum Common Stock for every 100 shares of Existing Spectrum Common Stock. No fractional shares of Reorganized Spectrum Common Stock will be issued as a result of the Reverse Stock Split. Where the Reverse Stock Split would create such fractional shares, shares will be rounded up or down to the nearest whole number. 68. "Scheduled" means set forth in the Schedules of Assets and Liabilities. 69. "Schedules of Assets and Liabilities" means the "Schedule of All Liabilities of Debtor and Statement of All Property of Debtor" Filed by the Debtors, as the same have been or may be amended from time to time prior to the Effective Date. 70. "Secured Claim" means a Claim, including interest, fees and charges as determined pursuant to section 506(b) of the Bankruptcy Code that is secured by a lien on property in which the Estate has an interest, or that is subject to setoff under section 553 of the Bankruptcy Code, to the extent of the value of the claim holder's interest in the Estate's interest in such property, or to the extent of the amount subject to setoff, as applicable, as determined pursuant to sections 506(a) and, if applicable, 1129(b) of the Bankruptcy Code. 71. "Securities Claims" means those claims against SIT that are entitled to subordination under Section 510(b) of the Bankruptcy Code. 72. "SIT" means Spectrum Information Technologies, Inc. 73. "SIT/Cellular Substantive Consolidation Motion" means the motion, which will be filed by the Debtors' prior to the Confirmation Hearing seeking substantive consolidation of the estates of SIT and Cellular. 74. "Stock Incentive Plan" shall have the meaning assigned to it in Section VI.A.8.a. 75. "Unsecured Claim" means a Claim against the Debtors which is not an Administrative Claim, Priority Tax Claim, or Secured Claim. B. Interpretation, Rules of Construction, Computation of Time, and Choice of Law. 1. The provisions of the Plan shall control over any descriptions thereof contained in the Disclosure Statement. 2. Any term used in the Plan that is not defined in the Plan, either in this Article I (Definitions) or elsewhere, but that is used in the Bankruptcy Code or the Bankruptcy Rules has the meaning assigned to that term in and will be construed in accordance with the rules of construction under the Bankruptcy Code or the Bankruptcy Rules. Without limiting the foregoing, the definitions and rules of construction set forth in section 102 of the Bankruptcy Code shall apply. The definitions and rules of construction contained herein do not apply to the Disclosure Statement or to the Exhibits to the Plan except to the extent expressly so stated in the Disclosure Statement or in each Exhibit to the Plan. 3. The words "herein," "hereof," "hereto," "hereunder" and others of similar import refer to the Plan as a whole and not to any particular Article, Section, subsection or clause contained in the Plan. 4. Unless specified otherwise in a particular reference, all references in the Plan to Articles, Sections and Exhibits are references to Articles, Sections and Exhibits of or to the Plan. 5. Any reference in the Plan to a contract, document, instrument, release, bylaw, certificate, or other agreement or document being in a particular form or on particular terms and conditions means that such document shall be substantially in such form or substantially on such terms and conditions. 6. Any reference in the Plan to an existing document or Exhibit means such document or Exhibit as it may have been amended, restated, modified or supplemented as of the Effective Date. 7. Captions and heading of Articles and Sections in the Plan are inserted for convenience of reference only and shall neither constitute a part of the Plan nor in any way affect the interpretation of any provisions hereof. 8. Whenever from the context it is appropriate, each term stated in either the singular or the plural shall include both the singular and the plural. 9. In computing any period of time prescribed or allowed by the Plan, the provisions of Bankruptcy Rule 9006(a) shall apply. 10. All Exhibits to the Plan are incorporated into the Plan, and shall be deemed to be included in the Plan, regardless of when Filed. 11. Subject to the provisions of any contract, certificate, bylaws, instrument, release, or other agreement or document entered into in connection with the Plan, the rights and obligations arising under the Plan shall be governed by, and construed and enforced in accordance with, federal law, including the Bankruptcy Code and Bankruptcy Rules. II. DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS The following is the designation of the Classes of Claims and Interests under the Plan. Administrative Claims and Priority Tax Claims have not been classified and are excluded from the following Classes in accordance with section 1123(a)(1) of the Bankruptcy Code. A Claim or Interest is classified in a particular Class only to the extent that the Claim or Interest qualifies within the description of that Class and is classified in a different Class to the extent that any remainder of the Claim or Interest qualifies within the description of such different Class. A Claim or Interest is in a particular Class only to the extent that the Claim or Interest is an Allowed Claim or Allowed Interest in that Class and has not been paid, released or otherwise satisfied before the Effective Date. A. Class 1: Priority Nontax Claims: Class 1 consists of all Priority Nontax Claims. B. Class 2: Unsecured Claims: Class 2 consists of all Unsecured Claims against Spectrum and Cellular. C. Class 3: Class Action Claims: Class 3 consists of all Class Action Claims. D. Class 4: Other Securities Claims: Class 4 consists of all Claims other than the Class Action Claims that arise from the purchase or sale of SIT Securities within the meaning of Section 510(b) of the Bankruptcy Code. E. Class 5: Equity Interests: Class 5 consists of all Equity Interests. F. Class 6: Equitably Subordinated Claims: Class 6 consists of all Equitably Subordinated Claims. III. TREATMENT OF CLASSES OF CLAIMS AND INTERESTS A. Unclassified Claims. 1. Administrative Claims. a. In General Each Allowed Administrative Claim with the exception of Management Administrative Claims which will be treated as described below in Section III. A.1.b. shall be paid either (i) in full, in cash, on the later of the Effective Date or the date on which such Administrative Claim is allowed by Final Order or (ii) on such terms as the Debtors or the Disbursing Agent and the holder of an Allowed Administrative Claim agree; provided, however, that Allowed Administrative Claims representing liabilities incurred in the ordinary course of business by the Debtors in Possession shall be paid in full, in cash, as they fall due, or paid by the Disbursing Agent in the ordinary course of business in accordance with the terms and conditions of the particular transactions and any agreements relating thereto. The amount necessary to pay (i) Disputed Administrative Claims and (ii) Administrative Claims for which applications for compensation or reimbursement of expenses of professionals or other persons retained or to be compensated pursuant to sections 327, 328, 330, 331 or 503(b) of the Bankruptcy Code are pending or yet to be submitted will be deposited in the Distribution Reserve. Such claims shall be paid upon allowance by a Final Order and shall include Earned Interest on the amounts actually allowed by Final Order, calculated from the Effective Date to the date of distribution. b. Management Administrative Claims. In lieu of a cash bonus or success fee for effecting a Confirmed Plan of Reorganization for the Debtors, the employees, officers and nonexecutive directors of the Debtors in office as of the Confirmation Date will (i) receive, pursuant to the Stock Incentive Plan and the Incentive Deferral Plan, a distribution of shares of Reorganized Spectrum Common Stock in an aggregate amount equal to one ninth (1/9) of the aggregate number of shares of Distributable Common Stock and Class A Preferred Stock and (ii) be eligible to receive future grants of incentive awards under the Stock Incentive Plan with respect to an aggregate number of shares equal to 1/9th of the aggregate number of shares of Distributable Common Stock and Class A Preferred Stock. The employees, officers and nonexecutive directors to whom distributions will be made and incentive awards may be granted and the amount of distributions and potential future grants are set forth in Exhibits J and K to the Disclosure Statement. 2. Priority Tax Claims. Each Allowed Priority Tax Claim shall be paid either (i) in full, in cash, on the later of the Effective Date or the date on which such Priority Tax Claim is allowed by Final Order or (ii) on such terms as the Debtors or the Disbursing Agent and the holder of an Allowed Priority Tax Claim agree. Allowed Priority Tax Claims shall not be entitled to receive any payment on account of post- Petition Date interest, or on account of any penalty arising with respect to or in connection with the Allowed Priority Tax Claim. Any such Claim or demand for any such penalty shall be discharged by Confirmation of the Plan and section 1141(d)(1) of the Bankruptcy Code, and the holder of an Allowed Priority Tax Claim shall not assess or attempt to collect such penalty from Reorganized Spectrum or its property. B. Class 1 - Priority Nontax Claims: Class 1 is unimpaired under the Plan and not entitled to vote. Each Claim in Class 1 shall be paid in Cash in full on the Effective Date. C. Class 2 - Unsecured Claims: Class 2 is impaired under the Plan. While it is expected that all Claims in Class 2 will be paid at the rate of 100 cents on the dollar in Cash, such expectation cannot be confirmed until the allowability of all Claims in Class 2 is finally determined. Class 2 Claims will, in any event, receive 100 percent of the allowed amount of their Class 2 Claims in value under the Plan. Class 2 Claims are to be paid out of a pool set aside for the payment of Class 2 Claims consisting of $3.5 million in Cash and as many shares of Reorganized Spectrum Common Stock as may be necessary to provide holders of Class 2 Claims with 100 percent of the Allowed amount of their Claims. (the "Class 2 Distribution Pool"). Distributions will be made to holders of an Allowed Claim pro rata based on an aggregate amount of Claims Filed other than Claims that have been disallowed (or allowed in the reduced amount) by Final Order. There will be a reserve for Disputed Claims. Once allowance of all Disputed Claims has been resolved, holders of Allowed Class 2 Claims will get additional Cash distributions up to 100 percent of the amount of the Allowed Claim. After all Disputed Claims have been Allowed or Disallowed by a Final Order, any remaining funds will be returned to Reorganized Spectrum for operations. In the event that the aggregate amount of the Allowed Claims exceeds $3.5 million and thus there are insufficient funds to pay 100 percent of the amount of the Allowed Class 2 Claims in cash, the unpaid balance of Allowed Class 2 Claims will be converted into an equivalence in shares of Reorganized Spectrum Common Stock. The calculation for determining the equivalent shares will be the same as the calculation used for the determination of equivalent shares used for Class 4 Allowed Claims. No interest will be paid on Class 2 Claims. D. Class 3 - Class Action Claims: Class 3 is unimpaired under the Plan and not entitled to vote. Class 3 Claims will be treated pursuant to the terms set forth in the Class Action Settlement. It is expected that the Class Action Settlement will provide that: (1) the Debtors will pay $250,000 to the Class Action Trust; (2) assuming that SIT is successful in the Home Action, the issuers of the directors and officers insurance policies that are the subject of the Home Action will pay the proceeds of such policies to the Class Action Trust; (3) on the Effective Date, Reorganized Spectrum will issue to the Class Action Trustee a certificate representing a number of shares of Class A Preferred Stock equal to the number of shares of Distributable Common Stock; (4) the Class Action Trustee will make distributions of cash to the individual Class Action Plaintiffs in accordance with the terms of the Class Action Trust Agreement; and (5) when the Class Action Trustee has determined the proper allocation of the shares of the Class A Preferred Stock issued to the Class Action Trust among the individual Class Plaintiffs, the Class Action Trustee will return the stock certificate to Reorganized Spectrum with instructions to reissue certificates in the appropriate pro rata share amounts to the individual Class Plaintiffs. Confirmation of the Plan is contingent on (a) the entry of a Final Order of the District Court approving the Class Action Settlement Motion, and (b) successful resolution of the Home Action. E. Class 4 - Other Securities Claims: Class 4 is impaired under the Plan. Class 4 Claims shall be converted into an equivalence in shares of Reorganized Spectrum Common Stock. The calculation for determining the equivalent shares for Class 3 Claims shall be one (1) share of Reorganized Spectrum Common Stock for each $11.50 of an allowed Class 4 Claim. F. Class 5 - Equity Interests: Class 5 is impaired under the Plan. Holders of Existing Spectrum Common Stock will receive one share of Reorganized Spectrum Common Stock in exchange for each 100 shares of Existing Spectrum Common Stock pursuant to the Reverse Stock Split. Holders of Options for Existing Spectrum Common Stock will receive New Options to purchase Reorganized Spectrum Common Stock at an exercise price adjusted in accordance with the Reverse Stock Split. Such New Options will entitle the holder to purchase one percent of the number of shares that could be purchased under the Existing Spectrum Options. No Fractional Shares of Reorganized Spectrum Common Stock will be issued. Where the Reverse Stock Split would create such fractional shares, Holders of Allowed Class 5 Claims will receive shares of Reorganized Spectrum Common Stock that have been rounded up or down to the nearest whole number. G. Class 6 - Equitably Subordinated Claims - Class 6 is impaired under the Plan. Class 6 Claims shall receive the same treatment as Class 4 Claims. IV. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES A. Assumption of Executory Contracts and Unexpired Leases. On the Effective Date, and to the extent permitted by applicable law, all executory contracts (including unexpired leases) of the Debtors will be assumed in accordance with the provisions of section 365 and section 1123 of the Bankruptcy Code, except for (a) any and all executory contracts which are the subject of separate motions filed pursuant to section 365 of the Bankruptcy Code by the Debtors prior to the commencement of the Confirmation Hearing, (b) such contracts as are listed on any "Schedule of Rejected Executory Contracts and Unexpired Leases" filed by the Debtors on or before entry of the Confirmation Order, all of which contracts shall be rejected pursuant to the provisions of section 365 and section 1123 of the Bankruptcy Code, and (c) any and all such contracts rejected prior to entry of the Confirmation Order. B. Bar Date for Rejection Damages. If the rejection of an executory contract or unexpired lease pursuant to Section IV.A. above gives rise to a Claim by the other party or parties to such contract or lease, such Claim, to the extent that it is timely Filed and is an Allowed Claim, shall be classified in Class 2, as applicable; provided, however, that the Unsecured Claim arising from the rejection shall be forever barred and shall not be enforceable against the Debtors, Reorganized Spectrum, its successors or properties, unless a proof of claim is Filed and served on Reorganized Spectrum within 30 days after the date of notice of the entry of an order of the Bankruptcy Court rejecting the executory contract or unexpired lease, including, if applicable, the Confirmation Order. C. Special Executory Contract Issues. 1. Obligations To Indemnify Officers and Directors. a. Any obligation of the Debtors to indemnify any individual serving as one of its present officers or directors or any individual who served in such capacity on or after January 31, 1996 by reason of such individual's past or future service in such capacity, or as a director, officer or partner of another corporation, partnership or other legal entity at the behest of the Debtors, to the extent provided in the applicable certificate of incorporation, bylaws or similar constituent documents or by statutory law or written agreement with the Debtors, shall (except as expressly provided in the following subparagraph (b)) be deemed and treated as an executory obligation assumed by Reorganized Spectrum as of the Effective Date pursuant to the Plan and section 365 of the Bankruptcy Code. Accordingly, such indemnification obligations shall survive and be unaffected by entry of the Confirmation Order irrespective of whether such indemnification obligations are owed for acts or events occurring before or after the Petition Date. b. The obligation of the Debtors to indemnify any Person not within the scope of Section IV.C.1.a. above shall be rejected and shall terminate and be discharged to the extent provided by section 502(e) of the Bankruptcy Code or otherwise, as of the Confirmation Date. c. Pursuant to the Amended Spectrum Certificate, individuals in respect of whom indemnity obligations are assumed by Reorganized Spectrum pursuant to the Plan and section 365 of the Bankruptcy Code or arise in the future by reason of such individual's service as a director or officer of Reorganized Spectrum, shall be deemed to have served at the request of the predecessors of Reorganized Spectrum to the extent that they served as directors or officers of the Debtors prior to the Effective Date. 2. Effect Of Implementation Of The Plan On Existing Employment Agreements. Confirmation of the Plan and the occurrence of the Effective Date is not intended to and shall not constitute a change of ownership or change in control, as defined in any employment agreement in effect on the Effective Date to which either of the Debtors is a party. 3. Contracts Entered Into On Or After The Petition Date. All contracts, leases and other agreements entered into by the Debtor in Possession on or after the Petition Date which have not been breached by the other party or terminated in accordance with their terms by the Debtor in Possession on or prior to the Confirmation Date, shall remain in full force and effect as against Reorganized Spectrum. V. SUBSTANTIVE CONSOLIDATION This Plan contemplates substantive consolidation of the estates of SIT and Cellular into a single bankruptcy estate and the merger of those two corporations into a single surviving corporation. Prior to the Confirmation Hearing, the Debtors will file with the Bankruptcy Court a motion seeking substantive consolidation. If granted, the legal rights and priorities of each Claim and Interest holder of SIT and Cellular will be treated as having a single recourse against the assets of the consolidated estate. All Claim holders who have asserted a Claim against both SIT and Cellular from or related to the same underlying obligation or cause of action, whether the basis for the asserted liability of SIT or Cellular arises by contract or by operation of law, will likewise be treated as having a single Claim against the assets of the consolidated estate. As a result of giving effect to the substantive consolidation of the SIT and Cellular estates, the Claims and Interests of either SIT or Cellular against or in each other will receive no distribution pursuant to this Plan. VI. MEANS FOR EXECUTION AND IMPLEMENTATION OF THE PLAN A. On the Effective Date. The following shall occur on the Effective Date: 1. Reverse Stock Split. Reorganized Spectrum will effect the Reverse Stock Split on the Effective Date. 2. Continuation of Business. As of and after the Effective Date, Reorganized Spectrum shall continue to engage in business in accordance with the Plan and related documents. a. Distribution to the Disbursing Agent. Reorganized Spectrum shall transmit or cause to be transmitted to the Disbursing Agent on or before the Effective Date sufficient Cash and Reorganized Spectrum Common Stock: (i) make the Distributions to the holders of Allowed Claims and Interests required by the Plan to be made on or as soon as practicable after the Effective Date; and (ii) establish the reserves required by the Plan. b. Distribution by the Disbursing Agent. The Disbursing Agent shall make the Distributions pursuant to the Plan to the holders of Allowed Claims and Allowed Interests as applicable on the Effective Date. 3. Authorization on the Effective Date. The adoption of the Amended Spectrum Certificate and the Amended Spectrum Bylaws, or similar constituent documents for Reorganized Spectrum; the initial selection of directors and officers for Reorganized Spectrum; the distribution of Cash and issuance and distribution of Reorganized Spectrum Common Stock and Class A Preferred Stock, the adoption, execution, delivery, conveyance, assignment, and implementation of all contracts, leases, agreements, documents, instruments, amendments, schedules, releases, indentures and other agreements related to any of the foregoing or the Plan, the adoption, execution and implementation of employment, retirement and indemnification agreements, incentive compensation programs, retirement income plans, welfare benefit plans and other employee plans and related agreements, including the Reorganized Spectrum Management Stock Option Plan; and the other matters provided for under the Plan involving the corporate structure of the Debtors or Reorganized Spectrum or corporate action to be taken by or required by the Debtors or Reorganized Spectrum shall be authorized and approved in all respects without any requirement of further action by stockholders or directors of the Debtors or Reorganized Spectrum. 4. Execution of Documents to Effect the Plan. The respective Chairman of the Board of Directors, the President, any Vice President, the Chief Accounting Officer, or Corporate Secretary of the Debtors and Reorganized Spectrum shall be authorized to execute all such documents and other papers, and take all such actions as may be necessary or appropriate to effectuate and further evidence the terms and conditions of the Plan, agreements approved thereby, or orders of the Bankruptcy Court relating thereto. The respective Secretary or any Assistant Secretary of the Debtors or Reorganized Spectrum shall be authorized to certify or attest to any of the foregoing actions. 5. Adoption of Amended Certificate and Bylaws. Reorganized Spectrum shall adopt the Amended Certificate and the Amended Spectrum Bylaws in conformance with section 303 of the Delaware General Corporation Law and pursuant to section 1123(a)(5)(I) of the Bankruptcy Code. The Amended Spectrum Certificate and Amended Spectrum Bylaws shall contain provisions which, among other provisions, shall authorize the issuance of the Reorganized Spectrum Common Stock, Class A Preferred Stock and Preferred Stock. The Amended Spectrum Certificate and Amended Spectrum Bylaws will become effective upon (x) Confirmation of the Plan, (y) the occurrence of the Effective Date, and (z) the filing with the Delaware Secretary of State of a certificate of amendment reflecting the Amended Spectrum Certificate. On the Effective Date or as soon thereafter as is practicable, pursuant to applicable state law, Reorganized Spectrum shall file with the applicable state governmental agencies or offices any required constituent documents for Reorganized Spectrum. Following the Effective Date, Reorganized Spectrum shall retain the right to merge, consolidate, dissolve, or take any other corporate action in accordance with applicable nonbankruptcy law, including amending its certificate and bylaws pursuant to applicable nonbankruptcy law to provide for the issuance of nonvoting equity securities. 6. Authorization of Stock. Reorganized Spectrum shall cause ten million shares of Reorganized Spectrum Common Stock, one million shares of Class A Preferred Stock and two million shares of Preferred Stock to be authorized for issuance in the Amended Spectrum Certificate and shall issue and deposit with the Disbursing Agent sufficient shares of such Reorganized Spectrum Common Stock as are required for the initial distribution to holders of Allowed Claims and Interests in Classes 2, 4, 5 and 6 under the Plan and shall issue and deposit with the Class Action Trustee sufficient shares of Class A Preferred Stock as are required for eventual distribution to holders of Class 3 Claims. Reorganized Spectrum shall also reserve for issuance sufficient shares of such Reorganized Spectrum Common Stock as are required for distribution to holders of Disputed Claims and Disputed Interests in Classes 2, 4, 5 and 6 pending the allowance or disallowance of such Disputed Claims or Disputed Interests. In addition, Reorganized Spectrum shall reserve for issuance sufficient shares of Reorganized Spectrum Common Stock to satisfy the payment of Management Administrative Claims as detailed in Section III.A.1.b herein. 7. Authorization of Stock Options. Reorganized Spectrum shall authorize the stock options and other incentive compensation awards provided for in the Reorganized Spectrum Management Stock Option Plan and issue such stock options and other awards under the terms and conditions provided for therein. Reorganized Spectrum also shall reserve for issuance sufficient shares of Reorganized Spectrum Common Stock as are required to be issued upon exercise or payment of the stock options and other incentive awards provided for in the Reorganized Spectrum Management Stock Option Plan. 8. Adoption of the Reorganized Spectrum Management Stock Option Plan On the Effective Date, Reorganized Spectrum shall adopt the Reorganized Spectrum Management Stock Option Plan which shall include the Spectrum Technologies, Inc. 1996 Stock Incentive Plan (the "Stock Incentive Plan") and the Spectrum Technologies, Inc. 1996 Incentive Deferral Plan (the "Incentive Deferral Plan"). a. The Stock Incentive Plan The Stock Incentive Plan will provide for the grant of stock options, stock appreciation rights, restricted stock, stock bonuses and other stock-based incentive compensation to key employees of Reorganized Spectrum. In addition, the Stock Incentive Plan will provide for the grant of stock options and stock awards to nonexecutive directors of Reorganized Spectrum. A copy of the Stock Incentive Plan is attached as Exhibit J to the Disclosure Statement. b. The Incentive Deferral Plan. The Incentive Deferral Plan will provide for the deferred distribution to employees of Reorganized Spectrum of shares of Reorganized Spectrum Stock. Shares allocated to each employee shall be distributed to such persons in three equal installments on a deferred basis, as follows. The first installment shall be distributed during the three day period commencing three days after Reorganized Spectrum files its Quarterly Report on Form 10-Q for its fiscal quarter ending December 31, 1997; the second installment shall be distributed during the three day period commencing three days after Reorganized Spectrum files its Quarterly Report on Form 10-Q for its fiscal quarter ending June 30, 1998; and the third installment shall be distributed during the three day period commencing three days after Reorganized Spectrum files is Quarterly Report on Form 10-Q for its fiscal quarter ending December 31, 1998; provided that all shares allocated to an employee will be immediately distributed to such employee in the event of such employee's death or disability or in the event the employment of such employee is terminated by Reorganized Spectrum without cause. A copy of the Incentive Deferral Plan is attached as Exhibit K to the Disclosure Statement. B. Funding of Plan. Cash payments required by the Plan shall be provided from the funds of the Estate and from funds generated by operation of the Debtor's and Reorganized Spectrum's business. C. Revesting of Assets. Except as otherwise provided in any provision of the Plan, agreements entered into in connection therewith, or the Confirmation Order, on the Effective Date all property of the Estate shall revest in Reorganized Spectrum, free and clear of all Claims, liens, encumbrances and other interests of any Person, and Reorganized Spectrum may thereafter operate its business and may use, acquire and dispose of property and compromise or settle any Claims or Interests without the supervision or approval of the Bankruptcy Court, free of any restrictions of the Bankruptcy Code, the Bankruptcy Rules, the Local Bankruptcy Rules of the United States Bankruptcy Court for the Eastern District of New York, and the guidelines and requirements of the Office of the United States Trustee for the Eastern District of New York, other than those restrictions expressly imposed by the Plan or the Confirmation Order. Without limiting the foregoing, Reorganized Spectrum may pay the fees and charges that it incurs on or after the Effective Date for Professional Persons' fees, disbursements, expenses or related support services relating to the Reorganization Cases without application to the Bankruptcy Court. From and after the Effective Date, Reorganized Spectrum may use, acquire, and dispose of property without the supervision or approval of the Bankruptcy Court, free of any restrictions of the Bankruptcy Code, other than those restrictions expressly imposed by the Plan, agreements entered into in connection therewith, or the Confirmation Order. D. Management of Reorganized Spectrum. 1. Officers and Directors. The Debtors have included in the Disclosure Statement a list designating the individuals who will serve initially as the directors and the executive officers of Reorganized Spectrum commencing on the Effective Date. This list may be amended at any time prior to the Effective Date upon such notice as may be required by the Bankruptcy Court. Subject to any requirement of Bankruptcy Court approval under section 1129(a)(5) of the Bankruptcy Code, those persons so designated shall be authorized to assume their offices as of the Effective Date and shall be authorized to continue to serve in such capacities thereafter pending further action of the Board of Directors or stockholders of Reorganized Spectrum in accordance with applicable state law and Reorganized Spectrum's then-existing certificate of incorporation and bylaws. 2. New Employment And Incentive Compensation Programs. a. Employment Agreements. Reorganized Spectrum intends to enter into, assume, or assume as modified employment agreements with certain of its executive officers. Any employment agreements that are to take effect on or before the Effective Date shall be subject to the approval of the Bankruptcy Court, summaries of which will be Filed prior to the hearing on the Disclosure Statement. In addition, as of the Effective Date, Reorganized Spectrum shall have the authority to: (a) enter into employment, retirement, indemnification and other agreements with its active directors, officers and employees, and (b) implement retirement income plans, welfare benefit plans and other plans for active employees. Such agreements and plans may include equity, bonus and other incentive plans in which officers and other employees of Reorganized Spectrum may be eligible to participate. b. Reorganized Spectrum Management Stock Option Plan. On the Effective Date, Spectrum shall adopt and implement the Reorganized Spectrum Management Stock Option Plan which shall include the Stock Incentive Plan and Incentive Deferral Plan and shall thereupon be bound by the terms and conditions thereof. Nothing contained in the Plan shall limit the right of Reorganized Spectrum to modify or terminate any stock incentive plan or plans adopted, including the Reorganized Spectrum Management Stock Option Plan, or to adopt any additional stock option, incentive or other benefit plans or programs in accordance with applicable nonbankruptcy law and Reorganized Spectrum's then-existing bylaws and charter. E. Release of Liens. Except as otherwise provided in the Plan or in any contract, instrument or other agreement or document created in connection with the Plan, on the Effective Date, all mortgages, deeds of trust, liens or other security interests against property of the Estate shall be released, and all right, title and interest of any holder of such mortgages, deeds of trust, liens or other security interests shall revert to Reorganized Spectrum and its successors and assigns. F. Exemption From Certain Transfer Taxes. Pursuant to section 1146(c) of the Bankruptcy Code, the issuance, transfer or exchange of Reorganized Spectrum Common Stock; the creation of any mortgage, deed of trust or other security interest; the making or assignment of any lease or sublease; or the making or delivery of any deed or other instrument of transfer under, in furtherance of, or in connection with, the Plan, including any deeds, bills of sale or assignments executed in connection with the Plan, agreements entered into in connection therewith, or the Confirmation Order, shall not be subject to any stamp tax, real estate transfer tax or similar tax. G. Cancellation and Surrender of Instruments, Securities, and Other Documentation. On the Effective Date, except as otherwise provided by the Plan, all Existing Spectrum Stock Options, and any other rights to acquire Existing Spectrum Common Stock or other Interests shall be deemed canceled and of no further force or effect without any further action on the part of the Bankruptcy Court or any Person. The holders of such canceled instruments, shall have no rights arising from or relating to such instruments or the cancellation thereof, except the rights provided pursuant to the Plan. Except to the extent, if any, otherwise provided in the Plan, agreements entered into in connection therewith, and the Confirmation Order, as a condition to participation under the Plan, within 2 years following the Effective Date a holder of certificates representing shares of Existing Spectrum Common Stock that desires to receive the property to be distributed on account of an Allowed Claim or Allowed Interest based on such shares shall surrender the share certificate or certificates representing such equity interests to the Disbursing Agent or its designee. Any stock certificate, or note, which is lost, stolen, mutilated, or destroyed, shall be deemed surrendered when the holder of a Claim based thereon delivers to the applicable stock transfer agent, Disbursing Agent or its designee: (a) evidence satisfactory to the Disbursing Agent or its designee of the loss, theft, mutilation, or destruction of such instrument or certificate, and (b) such security or indemnity as may be required by the stock transfer agent, Disbursing Agent or its designee to hold each of them harmless with respect thereto. H. Applicability of Sections 1125 and 1145 of the Bankruptcy Code to Reorganized Spectrum Common Stock, Class A Preferred Stock and Preferred Stock Issued Under the Plan. The protection afforded by section 1125 of the Bankruptcy Code with regard to the solicitation of acceptances or rejections of this Plan, and with regard to the offer, issuance, sale or purchase of the Reorganized Spectrum Common Stock, issued to holders of Claims and Interests under the Plan and distributed pursuant to the Plan, shall apply to the full extent provided by law, and the entry of the Confirmation Order shall constitute the determination by the Bankruptcy Court that the Debtors, Reorganized Spectrum, the Creditors' Committee, and each of their respective officers, directors, partners, employees, members or agents, and each Professional Person, attorney, accountant, or other professional employed by any of them, shall have acted in good faith and in compliance with the applicable provisions of the Bankruptcy Code pursuant to section 1125 of the Bankruptcy Code. In addition, the exemption from the requirements of Section 5 of the Securities Act of 1933, 15 U.S.C. Section 77e, and any state or local law requiring registration for the offer or sale of a security provided for in section 1145 of the Bankruptcy Code shall apply to the Reorganized Spectrum Common Stock or Class A Preferred Stock issued under the Plan in exchange for a Claim, an Administrative Claim or an Interest. I. Voting of Reorganized Spectrum Common Stock and Class A Preferred Stock Held by the Disbursing Agent or Class Action Trustee. Authorized and issued shares of Reorganized Spectrum Common Stock held by a Disbursing Agent for distribution to the holder of an Allowed Claim or Allowed Interest shall not be entitled to vote in any election of directors of Reorganized Spectrum, or any other matter requiring the vote of shareholders, until such time as the Reorganized Spectrum Common Stock has actually been distributed to the holder of the Allowed Claim, or Allowed Interest. In addition, a holder of a Disputed Claim or Disputed Interest shall not be entitled to vote in any election of directors of Reorganized Spectrum, or any other matter requiring the vote of shareholders until such time as the Disputed Claim or Disputed Interest has become an Allowed Claim or an Allowed Interest, and the holder of such Allowed Claim or Allowed Interest has received its distribution and become a shareholder of record of Reorganized Spectrum. The Class Action Trustee shall be entitled to vote Class A Preferred Stock that has not yet been distributed to a Class Action Plaintiff and is held by the Class Action Trustee, however, the Class Action Trustee shall be required to vote the Class A Preferred Stock in the same proportions and the same manner as the holders of shares of Reorganized Spectrum Common Stock have voted. J. Setoffs. Except as otherwise provided in the Plan, agreements entered into in connection therewith, the Confirmation Order, or in agreements previously approved by Final Order of the Bankruptcy Court, Reorganized Spectrum may, pursuant to section 553 of the Bankruptcy Code or applicable nonbankruptcy law, set off against any Allowed Claim before any distribution is made on account of such Claim, any and all of the claims, rights and causes of action of any nature that the Debtors or Reorganized Spectrum may hold against the holder of such Allowed Claim; provided, however, that neither the failure to effect such a setoff nor the allowance of any Claim hereunder shall constitute a waiver or release by the Debtors or Reorganized Spectrum of any such claims, rights and causes of action that the Debtors or Reorganized Spectrum may possess against such holder. To the extent the Debtors or Reorganized Spectrum fail to setoff against a third party and seek to collect a Claim from such third party after a distribution to such third party pursuant to the Plan on account of its Allowed Claim, Reorganized Spectrum shall be entitled to full recovery on its Claim against such third party. K. Objection to Claims. The Debtors will file a list of all Disputed Claims (the "Disputed Claims List"), other than Administrative Claims, with the Bankruptcy Court on or before the hearing on approval of the Disclosure Statement. The comments of the Creditors Committee will be solicited prior to the filing of the Disputed Claims List. Any Claims, other than Administrative Claims, that have been Filed prior to the Filing of the Disputed Claims List and that are not included on the Disputed Claims List shall be deemed Allowed Claims. Unless another date is established by the Bankruptcy Court, all objections to Claims shall be Filed and served on the holders of such Claims within 45 days after the Effective Date, except as extended by an agreement between the claimant and Reorganized Spectrum or by order of the Bankruptcy Court upon an application filed by Reorganized Spectrum. After the Effective Date, only Reorganized Spectrum and the Post-Effective Date Committee shall have the authority to File and prosecute objections to Claims and only Reorganized Spectrum, upon notice to the Post-Effective Date Committee shall have the authority to settle or compromise objections to Claims. Notwithstanding any prior order of the Bankruptcy Court or the provisions of Bankruptcy Rule 9019, as of the Effective Date, Reorganized Spectrum may settle or compromise any Disputed Claim without approval of the Bankruptcy Court. L. Discharge of the Debtors and Injunction. Except as otherwise provided in the Plan and agreements entered into in connection therewith: 1. The rights afforded in the Plan, and the treatment of all Claims and Interests therein, shall be in exchange for, and in complete satisfaction, discharge and release of, all Claims, including without limitation, all Administrative Claims, Secured Claims, Priority Tax Claims, other priority Claims and Unsecured Claims, including any interest accrued on such Claims from and after the Petition Date, against the Debtors, the Debtors in Possession, and Reorganized Spectrum, or any of their assets or properties, and shall terminate all Interests of any nature whatsoever. 2. On the Effective Date, the Debtors shall be deemed discharged and released to the fullest extent permitted by section 1141 of the Bankruptcy Code from all Claims that arose prior to the Effective Date, including without limitation, all Administrative Claims, Secured Claims, Priority Tax Claims, other priority Claims and Unsecured Claims, including any interest accrued on such Claims from and after the Petition Date, against the Debtors and the Debtor in Possession, or any of their assets or properties, and all debts of the kind specified in sections 101(12), 502(g), 502(h) or 502(i) of the Bankruptcy Code. The discharge and release shall be effective, in each case whether or not: (a) a proof of claim or proof of interest based on such Claim, Administrative Claim, or Interest is Filed or deemed Filed pursuant to section 501 of the Bankruptcy Code, (b) a Claim, Administrative Claim, or Interest is allowed pursuant to the Bankruptcy Code, or (c) the holder of a Claim, Administrative Claim, or Interest has accepted the Plan. 3. All Persons shall be permanently enjoined by section 524 of the Bankruptcy Code from asserting against Reorganized Spectrum, its successors, or its assets or properties, any other or further Claims, Administrative Claims, or Interests based upon any act or omission, transaction, or other activity of any kind or nature that occurred prior to the Confirmation Date. The discharge shall void any judgment against the Debtors or Reorganized Spectrum at any time obtained to the extent that it relates to a Claim, Administrative Claim or Interest discharged or terminated. 4. On and after the Effective Date, all Persons who have held, currently hold or may hold a Claim, Administrative Claim or Interest discharged or terminated pursuant to the terms of the Plan shall be permanently enjoined by section 524 of the Bankruptcy Code from taking any of the following actions on account of any such discharged Claim or terminated Interest: (a) commencing or continuing in any manner any action or other proceeding against the Debtors, Reorganized Spectrum, its successors, assets or properties; (b) enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order against the Debtors, Reorganized Spectrum, its successors, assets, properties, agents or representatives; (c) creating, perfecting or enforcing any lien or encumbrance against the Debtors, Reorganized Spectrum, its successors, assets, properties agents or representatives; (d) asserting any setoff, right of subrogation or recoupment of any kind against any obligation due to the Debtors, Reorganized Spectrum, its successors, assets, properties, agents or representatives; and (e) commencing or continuing any action, in any manner, in any place, that does not comply with or is inconsistent with the provisions of the Plan or the Confirmation Order. Any Person violating such injunction may be liable for actual damages, including costs and attorneys' fees and, in appropriate circumstances, punitive damages. 5. On and after the Effective Date, all Persons who have held, currently hold or may hold a Claim, Administrative Claim or Interest discharged or terminated pursuant to the terms of the Plan are permanently enjoined by section 524 of the Bankruptcy Code from commencing or continuing in any manner any action or other proceeding against any party on account of a Claim or cause of action that was property of the Estate, including without limitation, any derivative Claims capable of being brought on behalf of the Debtors or Reorganized Spectrum, and all such Claims and causes of action shall remain exclusively vested in Reorganized Spectrum to the maximum extent such Claims and causes of action were vested in the Debtor in Possession. 6. The requirements of this Plan shall be binding upon and govern the acts of all Persons including, without limitation, all holders of Claims, Administrative Claims and Interests, all filing agents or officers, title agents or companies, recorders, registrars, administrative agencies, Governmental Units and departments, agencies or officials thereof, secretaries of state, and all other Persons who may be required by law, the duties of their office, or contract to accept, file, register, record or release any documents or instruments, or who may be required to report or insure any title or state of title in or to any of the assets of the Debtors and/or Reorganized Spectrum. M. Preservation of Rights of Action. Except as provided in any other contract, instrument, release, indenture or other agreement entered into in connection with the Plan, in accordance with section 1123(b) of the Bankruptcy Code, Reorganized Spectrum shall retain and may enforce any Claims, rights and causes of action, including rights and causes of action arising under the Bankruptcy Code which are commenced prior to the closing of the Reorganization Case, that the Debtors or their Estate may hold against any Person. Reorganized Spectrum or its successor(s) may pursue such retained Claims, rights or causes of action, as appropriate, in accordance with the best interests of Reorganized Spectrum or its successor(s) holding such rights of action. N. Compromise of Controversies. Pursuant to Bankruptcy Rule 9019, and in consideration for the classification, distribution and other benefits provided under the Plan, the provisions of this Plan shall constitute a good faith compromise and settlement of all Claims or controversies resolved pursuant to the Plan. The entry of the Confirmation Order shall constitute the Bankruptcy Court's approval of all compromises or settlements provided for in the Plan, and the Bankruptcy Court's findings shall constitute its determination that such compromises and settlements are in the best interests of the Debtors, Reorganized Spectrum, the Estate, and any Person holding Claims against or Interests in the Debtors, and are fair, equitable and reasonable. O. Limitation of Liability. Neither the Debtors, Reorganized Spectrum, the Creditors' Committee, or any of their respective officers, directors, partners, employees, members or agents, nor any Professional Persons, attorneys, accountants or other professionals employed by any of them, shall have or incur any liability to any Person for any act taken or omission made in good faith in connection with or related to formulating, implementing, confirming, or consummating the Plan (including soliciting acceptances or rejections thereof), the Disclosure Statement or any contract, instrument, release or other agreement or document entered into in connection with the Plan, or regarding any distributions made pursuant to the Plan, except as expressly provided in such contract, instrument, release or other agreement or document entered into in connection with the Plan. The entry of the Confirmation Order shall constitute the determination by the Bankruptcy Court that the Debtors, Reorganized Spectrum the Creditors' Committee, and each of their respective officers, directors, partners, employees, members or agents, and each Professional Person employed by any of them, have acted in good faith through the Confirmation Date with respect to the foregoing. P. Professional Fees and Expenses. The reasonable and necessary professional fees and expenses incurred by the Debtors, the Reorganized Debtor, the Disbursing Agent, the Creditors' Committee from and after the Effective Date in connection with the consummation and implementation of the Plan shall be paid by the Disbursing Agent in the ordinary course of business without further order of the Bankruptcy Court; provided, however, that any unresolved dispute as to such professional compensation and reimbursement of expenses shall be submitted to and resolved by the Bankruptcy Court. VII. CONDITIONS PRECEDENT A. Conditions - The following are conditions precedent to confirmation of the Plan. 1. A Final Order of the Bankruptcy Court is entered granting the SIT/Cellular Substantive Consolidation Motion. 2. A Final Order of the District Court is entered granting approval of the Class Action Settlement Motion. 3. The Debtors are successful in the Home Action Litigation. B. Waiver of Conditions. The Debtors may waive any conditions set forth in this Article VII at any time, without notice, without leave of or order of the Bankruptcy Court and without any formal action other than proceeding to confirm the Plan. VIII. DISTRIBUTION A. General. 1. Disbursing Agent. Reorganized Spectrum and such other Person(s) as may be approved by the Debtors or Reorganized Spectrum and the Bankruptcy Court, such as a stock transfer agent for any Existing Spectrum Common Stock or for Reorganized Spectrum Common Stock, shall act as Disbursing Agent(s) under the Plan. Any such Disbursing Agent may, with the prior approval of Reorganized Spectrum, employ or contract with other Persons to assist in or to perform the distribution required. Each Disbursing Agent shall serve without fidelity bond, except as required by Reorganized Spectrum, and each third-party hired as a Disbursing Agent shall receive from Reorganized Spectrum, and on terms acceptable to Reorganized Spectrum without further Bankruptcy Court approval, reasonable compensation for distribution services rendered pursuant to the Plan and reimbursement of reasonable out-of-pocket expenses, if required, incurred in connection with such services. 2. Cash Payments. Cash payments made pursuant to the Plan shall be in U.S. dollars by checks drawn on a domestic bank selected by the Debtors or Reorganized Spectrum, or by wire transfer from a domestic bank, at the option of the Debtors or Reorganized Spectrum; provided, however, that Cash payments to foreign Creditors may be made, at the option of the Debtors or Reorganized Spectrum, in such currency and by such means as are necessary or customary in a particular foreign jurisdiction. 3. Compliance With Tax Requirements. In connection with the Plan, to the extent applicable, each Disbursing Agent shall comply with all tax withholding and reporting requirements imposed on it by any Governmental Unit, and all distributions pursuant to the Plan shall be subject to such withholding and reporting requirements. The Disbursing Agent may withhold the entire distribution due to any holder of an Allowed Claim or Interest until such time as such holder provides the necessary information to comply with any withholding requirements of any Governmental Unit, or provides to the Disbursing Agent the Cash necessary to comply with any applicable withholding requirements. Any property so withheld will then be paid by the Disbursing Agent to the appropriate taxing authority. If the holder of an Allowed Claim or Allowed Interest fails to provide the necessary information to comply with any withholding requirements of any Governmental Unit, or fails to provide to the Disbursing Agent the Cash necessary to comply with any applicable withholding requirements within 2 years from the date of first notification by the Disbursing Agent to the holder of the Allowed Claim or Allowed Interest of the need for such information or for the Cash necessary to comply with any applicable withholding requirements, then the holder's distribution shall be treated as an undeliverable distribution in accordance with Section VIII.B.4 of the Plan. 4. Persons To Receive Distributions. All distributions to holders of Allowed Claims or Allowed Interests shall be made to the Person who appeared as the holder of such Allowed Claim or Allowed Interest on the Distribution Record Date. The Debtors, the Disbursing Agent, Reorganized Spectrum and their employees, agents and professionals shall bear no responsibility for ensuring that distributions under the Plan are forwarded to Persons who became the transferee or assignee of an Allowed Claim or Allowed Interest unless the transaction reflecting such transfer is reflected in the claims register of stock transfer agent's records as of the Distribution Record Date. B. Distribution of Reorganized Spectrum Common Stock and Class A Preferred Stock. 1. Distribution. a. Reorganized Spectrum Common Stock. As soon as practicable following the Effective Date, the Disbursing Agent shall make an initial distribution of Reorganized Spectrum Common Stock to the holders of Allowed Claims and Allowed Interests in Classes 4, 5 and 6. Holders of Class 2 Claims will only receive shares of Reorganized Spectrum Common Stock in the event that there is insufficient cash to pay all Allowed Class 2 Claims in Cash. In that event a subsequent distribution of Reorganized Spectrum Common Stock will be made to holders of Allowed Class 2 Claims for the difference between the Allowed Amount of their Claims and the Cash received or to be received under the Plan ("Cash Deficiency Amount"). One share of Reorganized Spectrum Common Stock will distributed for each $11.50 of Cash Deficiency Amount. b. Class A Preferred Stock. As soon as practicable following the Effective Date, Reorganized Spectrum shall make a distribution to the Class Action Trustee of a single stock certificate of Class A Preferred Stock representing a number of shares of Class A Preferred Stock equal to the number of shares of Distributable Common Stock. 2. Estimation Of And Reserve For Disputed Claims And Interests. Reorganized Spectrum shall reserve sufficient shares of Reorganized Spectrum Common Stock based upon the "face amount" of the existing Disputed Claims and Disputed Interests in Classes 3 and 4 for issuance and distribution to the holders thereof if, as, and when such Disputed Claims and Disputed Interests become Allowed Claims and Allowed Interests. The "face amount" of a Disputed Claim or Disputed Interest means the amount set forth on the proof of claim or proof of interest unless the Disputed Claim or Disputed Interest has been estimated for distribution purposes. Where no amount has been specified on the face of a proof of claim or proof of interest, or where the Disputed Claim or Disputed Interest has been estimated for purposes of allowance and distribution by the Bankruptcy Court, the "face amount" shall be the amount fixed by the Bankruptcy Court in connection with a motion of the type described in the following paragraph, unless otherwise agreed between the claimant or interest holder and the Debtors or Reorganized Spectrum. As to any Disputed Claim (including Claims based upon rejection of executory contracts or leases) or Disputed Interest, the Bankruptcy Court, upon motion by the Debtors or Reorganized Spectrum shall determine the amount sufficient to reserve, and may estimate for purposes of allowance and distribution, the likely maximum allowed amount of the Disputed Claim or Disputed Interest. Any Person whose Disputed Claim or Disputed Interest is so estimated shall have recourse only to the reserve established for such Person's Disputed Claim or Disputed Interest (and not to Reorganized Spectrum, holders of Reorganized Spectrum Common Stock or Class A Preferred Stock, holders of Existing Spectrum Common Stock, any Person receiving a distribution under the Plan, or to any assets distributed on account of any Allowed Claims or Allowed Interests) if such Person's Claim or Interest, as finally allowed, exceeds the maximum estimated amount thereof. THUS, THE BANKRUPTCY COURT'S ESTIMATION FOR PURPOSES OF ALLOWANCE AND DISTRIBUTION OF A DISPUTED CLAIM OR DISPUTED INTEREST WILL LIMIT THE DISTRIBUTION TO BE MADE THEREON, REGARDLESS OF THE AMOUNT FINALLY ALLOWED ON ACCOUNT OF SUCH DISPUTED CLAIM OR DISPUTED INTEREST. 3. Distribution On Disputed Claims Or Disputed Interests Which Become Allowed Claims Or Allowed Interests. From the securities authorized and reserved for issuance on account of a Disputed Claim or Disputed Interest in accordance with the preceding subsection of the Plan, and within 90 days following the allowance by Final Order of all or a portion of a Disputed Claim or Disputed Interest, Reorganized Spectrum shall issue and the Disbursing Agent shall distribute, the Reorganized Spectrum Common Stock to which the holder of such newly Allowed Claim or Allowed Interest is then entitled under the terms of the Plan. Concurrently with such distribution, Reorganized Spectrum shall pay (without interest) or issue to the holder of the newly Allowed Claim or Allowed Interest an amount, if any, equal to the allocable portion of any consideration distributed on, received for, with respect to, or on account of previously issued Reorganized Spectrum Common Stock. Surplus authorized but unissued Reorganized Spectrum Common Stock reserved on account of Disputed Claims or Disputed Interests which are either disallowed, or allowed in a lesser amount than the amount reserved therefor, shall be released to Reorganized Spectrum free of any restrictions thereon imposed by the Plan. Nothing provided for herein shall limit the ability of Reorganized Spectrum to issue and distribute Reorganized Spectrum Common Stock in satisfaction of a Claim or Interest which would otherwise be determined to be nondischargeable based upon defective notice or otherwise. 4. Undeliverable Distributions. a. Holding of Undeliverable Distributions. If any distribution is returned to a Disbursing Agent as undeliverable, no further distributions shall be made to the holder of the Allowed Claim or Allowed Interest on which such distribution was made unless and until the Disbursing Agent is notified in writing of such holder's then-current address. Undeliverable distributions shall remain in the possession of the Disbursing Agent until such time as a distribution becomes deliverable or is deemed canceled in accordance with Section VIII.B.4.b of the Plan. Any unclaimed distribution held by a Disbursing Agent shall be accounted for separately, but the Disbursing Agent shall be under no duty to invest any such unclaimed distribution in any manner. b. Failure To Claim Undeliverable Distributions. Any holder of an Allowed Claim or Allowed Interest that does not present a Claim for an undeliverable distribution within 2 years after the date upon which a distribution is first made available to such holder, or that does not comply with any precondition to distribution provided for in the Plan (including surrender of Existing Spectrum Common Stock or other instruments as required by Section VI.G of the Plan or compliance with the tax withholding requirements of Section VIII.A.3 of the Plan) within 2 years after notice is sent to the holder regarding the holder's noncompliance with a precondition to distribution, shall have its right to any distribution discharged and shall be forever barred from asserting any such Claim against Reorganized Spectrum or its property. In such cases: (a) any Cash held for distribution on account of such Allowed Claim or Allowed Interest, including consideration distributed on, received for, with respect to, or on account of previously issued Reorganized Spectrum Common Stock (issued and outstanding or reserved for issuance), shall be the property of Reorganized Spectrum, free of any restrictions thereon; and (b) Reorganized Spectrum Common Stock held for issuance or distribution on account of such Allowed Claim or Allowed Interest shall either be canceled or otherwise treated as determined by Reorganized Spectrum. To the extent that such undeliverable Cash, and/or Reorganized Spectrum Common Stock, or any rights thereto, are held by a Disbursing Agent, the Disbursing Agent shall return such Cash and the securities evidencing such Reorganized Spectrum Common Stock, or any rights thereto, to Reorganized Spectrum, and the securities and rights so returned shall be canceled or otherwise treated as Reorganized Spectrum may determine is appropriate. Nothing contained in the Plan shall require Reorganized Spectrum in its capacity as Disbursing Agent to attempt to locate any holder of an Allowed Claim or Allowed Interest, other than to mail distributions to the claimant's or interestholder's last known address. If, for any reason, a Disbursing Agent does not return such securities evidencing such Reorganized Spectrum Common Stock to Reorganized Spectrum as required herein, the subsequent treatment of such securities by Reorganized Spectrum after the obligation to return such securities arises herein shall be unaffected by such nonreturn. All unclaimed or undistributed distributions under this subsection shall, pursuant to section 347(b) of the Bankruptcy Code, be the property of Reorganized Spectrum and shall not be subject to the unclaimed property or escheat laws of any Governmental Unit. IX. EFFECTIVE DATE The occurrence of the Effective Date shall be conditioned upon satisfaction of each of the following conditions: A. A Confirmation Order confirming the Plan, as such Plan may have been modified with the consent of the Debtors, has been entered. B. The Conditions Precedent set forth in Section VII of the Plan have been met. In addition to the foregoing, the Effective Date shall occur, if at all, only on a date selected by the Debtors which is not earlier than the first business day after ten (10) days (as calculated in accordance with Bankruptcy Rule 9006(a)) following the Confirmation Date, and is not later than the later of (a) 30 days after the Confirmation Date and (b) the first business day on which no stay of the Confirmation Order is and remains in effect that is after ten (10) days (as calculated in accordance with Bankruptcy Rule 9006(a)) following the Confirmation Date. X. CONFIRMATION REQUEST The Debtors request Confirmation of the Plan under section 1129(a) or, if necessary, section 1129(b) of the Bankruptcy Code. XI. RETENTION OF JURISDICTION Following Confirmation, the Bankruptcy Court shall retain such jurisdiction as is legally permissible, including, without limitation, for the following purposes: A. To determine the allowability, classification, or priority of Claims and Interests upon objection by Reorganized Spectrum and/or the Post-Effective Date Committee; B. To construe and to take any action to enforce and execute the Plan, the Confirmation Order, or any other order of the Bankruptcy Court, to issue such orders as may be necessary for the implementation, execution, performance and consummation of the Plan and all matters referred to herein, and to determine all matters that may be pending before the Bankruptcy Court in the Reorganization Case on or before the Effective Date with respect to any Person; C. To protect the property of the Estate revesting in Reorganized Spectrum from Claims against, or interference with such property, including actions to quiet or otherwise clear title to such property based upon the terms and provisions of this Plan, or to determine Reorganized Spectrum's exclusive ownership of claims and causes of action retained under the Plan; D. To determine any and all allocations for allowance of compensation and expense reimbursement of Professional Persons for periods on or before the Effective Date; E. To determine any other request for payment of Administrative Claims or expenses; F. To resolve any dispute regarding the implementation, execution, consummation or interpretation of the Plan; G. To determine motions for the rejection, assumption, or assignment of executory contracts or unexpired leases and to determine the allowance of any Claims resulting from the rejection of executory contracts and unexpired leases; H. To determine all applications, motions, adversary proceedings, contested matters, and any other litigated matters instituted prior to the closing of the Reorganization Case; I. To determine such other matters, and for such other purposes, as may be provided in the Confirmation Order; J. To modify the Plan under section 1127 of the Bankruptcy Code, to remedy any defect or omission in the Plan, or to reconcile any inconsistency in the Plan so as to carry out its intent and purposes; K. To issue injunctions or take such other actions or make such other orders as may be necessary or appropriate to restrain interference with the Plan or its execution or implementation by any Person; and L. To issue such order in aid of consummation of the Plan and the Confirmation Order, notwithstanding any otherwise applicable nonbankruptcy law, with respect to any person, to the full extent authorized by the Bankruptcy Code. XII. MISCELLANEOUS PROVISIONS A. Amendment and Modification of the Plan. The Plan may be amended or modified before the Effective Date only by the Debtors or, following the Effective Date, only by Reorganized Spectrum to the extent provided in section 1127 of the Bankruptcy Code. B. Withdrawal or Revocation of the Plan. The Debtors reserve the right to revoke or withdraw the Plan prior to the Confirmation Date. If the Debtors revoke or withdraw the Plan, or if Confirmation of the Plan does not occur, then the Plan shall be null and void, and nothing contained herein shall: (1) constitute a wavier or release of any Claims by or against, or any Interests in, the Debtors, or (2) prejudice in any manner the rights of the Debtors or holders of Claims or Interests in any further proceedings involving the Debtors. C. Payment of Fees in Connection with Balloting. Each plan administrator, trustee, fiscal agent, or similar Person providing services at the Debtors' request, related to balloting pursuant to the Plan shall also receive, subject to the approval of the Bankruptcy Court, reasonable compensation for such services and reimbursement of reasonable out-of-pocket expenses incurred in connection with such services. D. Committees. (1) The Creditors Committee will continue in existence from and after the Effective Date as the Post-Effective Date Committee for the limited purpose of filing and prosecuting objections to Claims. The Post-Effective Date Committee shall be a "party in interest" within the meaning of Section 1109(b) of the Bankruptcy Code with respect to the resolution by litigation or settlement of any Disputed Claim, and shall have standing to object to any Disputed Claim and to any proposed settlement of any Disputed claim. (2) The Post-Effective Date Committee shall have no powers or duties other than those referred to above except that the Post-Effective Date Committee may perform such other functions as are consistent with winding up its functions and discharging its duties to holders of General Unsecured Claims. (3) Members of the Post-Effective Date Committee will be compensated for their reasonable and necessary expenses incurred in the performance of their duties by Reorganized Spectrum, and the reasonable fees and expenses of the attorneys retained by the Post-Effective Date Committee will be paid by Reorganized Spectrum except that Reorganized Spectrum will not be obligated to pay more than $50,000 in aggregate for such expenses and attorneys' fees. Such payment and reimbursement of fees and expenses shall be subject to determination and allowance by the Bankruptcy Court if Reorganized Spectrum objects to any such fees and expenses. (4) Upon substantial completion of its functions as designated herein, the Post-Effective Date Committee shall be dissolved pursuant to a Final Order. E. Successors and Assigns. The rights, benefits and obligations of any Person named or referred to in the Plan shall be binding on, and shall inure to the benefit of, the heirs, executors, administrators, successors and/or assigns of such Person. F. Severability of Provisions of the Plan. The Provisions of this Plan shall not be severable unless such severance is agreed to by the Debtors or Reorganized Spectrum, and such severance would constitute a permissible modification of the Plan pursuant to section 1127 of the Bankruptcy Code. SPECTRUM INFORMATION TECHNOLOGIES, INC. DATED: Brooklyn, New York By February 8, 1996 --------------------------- Donald J. Amoruso Chief Executive Officer and Chairman of the Board of Directors 2700 Westchester Avenue Purchase, New York 10577 (914) 251-1800 Submitted by: SPECTRUM CELLULAR CLEARY, GOTTLIEB, STEEN CORPORATION & HAMILTON By - -------------------------- --------------------------- George Weisz (GW 7120) Donald J. Amoruso A Member of the Firm Chief Executive Officer and One Liberty Plaza Chairman of the Board of New York, New York 10006 Directors (212) 225-2000 2700 Westchester Avenue Purchase, New York 10577 (914) 251-1800 EXHIBIT B [FILED] [on file with the Bankruptcy Court and the Securities and Exchange Commission and incorporated by reference herein] EXHIBIT C [FILED] [on file with the Bankruptcy Court and the Securities and Exchange Commission and incorporated by reference herein] EXHIBIT D [on file with the Bankruptcy Court and the Securities and Exchange Commission and incorporated by reference herein] [FILED] EXHIBIT E [to be filed with the Bankruptcy Court and the Securities and Exchange Commission and incorporated by reference herein] [TO BE FILED] EXHIBIT F SPECTRUM INFORMATION TECHNOLOGIES, INC. SUMMARY OF LIQUIDATION Estimated Estimated Book Value Liquidation STATEMENT OF May-96 Estimated Value ASSETS (Unaudited) Recovery % (Unaudited) ----------- ---------- ----------- Current Assets: Cash & Investments 11,929,271 100% 11,929,271 (A) Accounts Receivable, net 1,306,227 50% 653,114 (B) Inventory, net 45,455 75% 34,091 (C) Prepaids 151,869 1% 1,519 (D) Other 82,720 0% 0 (E) ----------- ----------- $13,515,542 $12,617,994 Owned Property & Equipment: Property, Plant & Equipment 1,419,651 0 Accumulated Depreciation (1,201,565) 0 ----------- ------- ---------- $218,096 10% 21,809 (F) ----------- ------- ---------- ----------- ------- ---------- Deferred Patent Costs $355,828 0% 0 (G) ----------- ------- ---------- TOTAL ASSETS $14,089,456 $12,639,803 =========== ========== APPLICATION OF ESTIMATED LIQUIDATION PROCEEDS Estimated Liquidation Proceeds $12,639,803 Less: Secured Claims 264,556 (H) Less: Administrative and Corporate Wind-Down Expenses 6,513,949 (I) Less: Priority Tax Claims (estimate) 45,000 (J) ---------- TOTAL ESTIMATED ASSETS AVAILABLE FOR DISTRIBUTION TO UNSECURED CLAIMS $5,816,298 ========== Present Estima- Es- Present Value ted Re- timated Value Es- Re- Estimated covery Recovery timated Re- covery Claim % Amount covery (O) % --------- ------- -------- ----------- ------ Class 1 - Priority Non Tax Claims 0 0% 0 (K) Class 2 - Unsecured Claims 6,838,269 85.06% 5,816,298 (L) 5,234,668 76.55% Class 3 - Class Action 675,669,900 0% 0 Class 4 - Securities claims 6,953,937 0% 0 (M) Class 5 - Equity claims 9,201,054 0% 0 (N) IV. PRINCIPAL ASSUMPTIONS A. The Company assumes that it will realize 100% of the estimated cash and investments balance as of the liquidation date. Additionally, on February 6, 1996, the Company and U.S. Robotics executed an agreement settling all disputes and providing a license payment to Spectrum of $6,000,000. The agreement is subject to bankruptcy court approval, however, the payment is included in the Company's projected cash and investments in this liquidation analysis. A hearing on the settlement is scheduled before the bankruptcy court for March 7, 1996. If the settlement is not approved, the assets available for distribution to unsecured creditors will be reduced accordingly. The payment is also included in the Company's business plan and projected results set forth in Section IX herein. B. The estimated liquidation of the accounts receivable was determined based upon a review of the various different classes of receivables. The most significant portion of the accounts receivable balance originates from long term royalty obligations arising from licensing agreements related to Spectrum's proprietary technology. The Company has assumed a 50% realization in a distressed liquidation. Based on the advice of the independent accountants, the Company, in January 1996, reduced its accounts receivable and accounts payable $4,450,000 to reflect deferred license fees that are directly offset by advertising obligations to the Company's licensees. These adjustments will be reflected in the Company's Annual Report on Form 10-K for the Fiscal Year Ended March 31, 1996. C. The estimated liquidation value of inventory is 75% based upon the assumption that the inventory will be sold to licensees. Inventory is carried on the books at cost, and the Company believes it will be able to dispose of the inventory at a substantial percentage of its cost in a distressed liquidation. The Company owns no obsolete inventory. D. Prepaid expenses relate primarily to premiums associated with insurance coverage and have been assigned minimal value in the liquidation analysis because it is unlikely that the Company would be able to recover any significant cash proceeds from these assets. E. This liquidation analysis assumes no recovery value for other assets because they are primarily associated with security deposits paid to current and former lessors of real property. F. Management has estimated a 10% realization rate for a distressed liquidation of owned property & equipment which is primarily furniture and obsolete computer equipment. G. The deferred patent costs represent the unamortized expense associated with the development of the Company's patents and are not relevant to the value of the patents in a distressed liquidation. This deferred royalty income associated with the license of the Company's patents is reflected in the accounts receivable entry. H. The Secured Claim is composed of a claim by Kelley Drye & Warren. I. The Company's management has estimated the administrative and wind-down expenses. The administrative expenses are composed of projected professional fees, accrued professional fees that have been held back to date pursuant to court order, severance benefits associated with post-petition employment agreements and post-petition leases and accounts payable. The Company has estimated total wind-down expenses of $3,000,000 The wind down expenses are based on a monthly run rate of $250,000 over one (1) year associated with expenses related primarily to resolution of the thirty-four (34) disputed claims pending against the Company and the expenses entailed in the conversion to a Chapter 7 case. Since the proposed settlement of the Class Action requires confirmation of the Debtors' Plan of Reorganization, the Company believes that absent such confirmation, substantial incremental expense would be incurred litigating the merits of, or otherwise liquidating the, Class Action claims and\or litigating the priority of such claims. This assumption is reasonable because the Class Action presents a large number of extremely complicated legal and factual issues. The trustee would be forced to spend resources beyond those which the Company might have to expend because of his lack of familiarity with each claim. The trustee will also incur additional administrative expenses associated with retaining the new accountants and financial advisors necessary to administer the estate over this period. J. The Priority Tax Claim is an estimate of the 1994 Dallas city and county property taxes. K. There are no Priority Non-Tax Claims. L. To date, the Company has reconciled 205 unsecured claims composing the estimated value of liquidated unsecured claims. The Company has thirty-four (34) pending disputed claims alleging total damages of $17.9 million. For the liquidation analysis, Management has estimated the recoverable value of these claims, together with undisputed claims, when liquidated by the trustee at approximately $6.8 million. This estimate reflects a significant reduction for disputed claims from the full amount claimed because the Company, based on its analysis of the disputed claims, believes that some of the claims lack merit and others are inflated. The Company has objected to some claims and is in the process of objecting to others. In a liquidation analysis, the Company believes that the liquidating trustee would have difficulty achieving the favorable results that the Company projects in the Plan based on the trustee's lack of familiarity with the claims and records of the Company and unavailability of Company personnel to defend the claims. Additionally, the Company believes liquidation and the difficulties liquidating disputed claims and administering the case would delay distribution to the claimants for approximately one (1) year. Accordingly, the Company has estimated that the total recoverable value of disputed claims, together with undisputed claims, of $3.5 million in the projected results under the Plan set forth in Section IX of the Disclosure Statement. M. Includes the full value of claims filed by Gene Morgan Financial, which the bankruptcy court has ruled is statutorily subordinated pursuant to Bankruptcy Code Section 510(b) ($6,287,109) and claims filed by shareholders related to alleged violations of securities laws that the Company believes are duplicative of the Class Action claim ($666,828). N. The Company believes that the Equity Claims would be treated pari passu (without preference) with the Class Action and Securities claims and has estimated the value of the Equity Claim based on the market capitalization of the Company determined by using the average of the closing bid and ask price of the Company's stock as of February 2, 1996 ($.115). O. Based on the delay arising from the difficulty liquidating disputed claims, including but not limited to the Class Action, this liquidation analysis assumes that any ultimate payments made to the classes would not occur for approximately one (1) year. The present value of the claims assumes a ten percent (10%) discount. EXHIBIT G UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK - --------------------------------------x In re : : Chapter 11 Case Nos. SPECTRUM INFORMATION : 195 10690 260 TECHNOLOGIES, INC., : 195 10692 260 DEALER SERVICES BUSINESS : 195 10693 260 SYSTEMS, INC., AND SPECTRUM : CELLULAR CORPORATION, : : Debtors. : - --------------------------------------X PARTIES IN INTEREST Alfred Dimino, Esq. Office of The United States Trustee Eastern District of New York 825 East Gate Boulevard Suite 304 Garden City, New York 11530 Michael Richman, Esq. Ron D'Aversa, Esq. Mayer, Brown & Platt 1675 Broadway New York, New York 10019 Howard Seife, Esq. Winston & Strawn 200 Park Avenue New York, New York 10166 Luskin & Stern 330 Madison Avenue New York, New York 10017 Attn: Michael Luskin, Esq. Law Office of Burton S.Weston 1615 Northern Boulevard Suite 103 Manhasset, New York 11030 Attn: Burton S. Weston, Esq. Leonard Lazarus EAB Plaza West Tower, 14th Floor Uniondale, New York 11556-0210 Lowenstein, Sandler, Kohl, Fisher & Boylan 65 Livingston Avenue Roseland, New Jersey 07068-1791 Attn: Gary F. Eisenberg, Esq. McDermott, Will & Emery 1211 Avenue of the Americas New York, New York 10036 Attn: Joseph E. Saracheck, Esq. Tracy Hope Davis, Esq. Jeffrey M. Rosenblum, Esq. Jeffrey M. Rosenblum, P.C. 98 Cutter Mill Road, Suite 384N Great Neck, New York 11021 Nathan M. Fuchs, Esq. Securities and Exchange Commission 7 World Trade Center New York, New York 10048 Michael A. Berman, Esq. Office of the General Counsel Securities and Exchange Commission 450 Fifth Street, N.W. (Stop 6-6) Washington, D.C. 20549 Gary S. Jacobson, Esq. James S. Carr, Esq. Kelley Drye & Warren 101 Park Avenue New York, New York 10178 Productive Computer Center 816 W. Lincoln Hwy. DeKalb, IL 60115 Regina Stango Kelbon, Esq. Blank, Rome, Cominsky & McCauley 1200 Four Penn Center Plaza Philadelphia, PA 19103 Michael S. Tucker, Esq. Weltman, Weinberg & Reis Co., L.P.A. Lakeside Place 323 Lakeside Avenue, West, Suite 200 Cleveland, OH 44113-1099 Mark L. Sax, Esq. Sax & Associates 2925 Briarpark, Suite 1150 Houston, TX 77042 Mark S. Mandel, Esq. Jones, Day, Reavis & Pogue 599 Lexington Avenue New York, NY 10022 Neda Morvillo, Esq. William J. Gannon, Esq. Brown & Wood One World Trade Center New York, NY 10048 Richard M. Rubenstein Providian Corporation Providian Center, 6th Floor 400 West Market Street Post Office Box 32830 Louisville, Kentucky 40202 EXHIBIT H [TO BE FILED] EXHIBIT I [TO BE FILED] EXHIBIT J [TO BE FILED] EXHIBIT K [TO BE FILED] -----END PRIVACY-ENHANCED MESSAGE-----