UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File Number 0-15596
SPECTRUM INFORMATION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1940923
(State of incorporation) (IRS Employer Identification No.)
594 Broadway, Suite 1001, New York, New York 10012
(Address of principal executive offices) (Zip Code)
(212) 925-1181
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES |X| NO |_|
As of October 25, 1999, the registrant had outstanding approximately 8,301,000
shares of its Common Stock, par value $.001 per share.
<PAGE>
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARY
FORM 10-Q
SEPTEMBER 30, 1999
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Consolidated Balance Sheets 2
Consolidated Statements of Income (Loss) and Comprehensive Loss 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
1
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Spectrum Information Technologies, Inc. and Subsidiary
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets
(Amounts in thousands)
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
(Unaudited)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 645 $ 1,007
Receivables 39
Other assets 48
-------- --------
Total current assets 732 1,007
-------- --------
Property and Equipment, net of accumulated depreciation 49 --
Investment in Minutemeals.com -- 23
Intangibles:
Goodwill 312 --
Less: Accumulated amortization (28) --
-------- --------
Intangibles, net 284 --
-------- --------
Total assets $ 1,065 $ 1,030
======== ========
Current Liabilities
Accounts payable and other accrued liabilities $ 51 $ 6
Accrued audit and tax 47 18
Accrued legal fees 140 51
Net liabilities of discontinued operations -- 68
-------- --------
Total current liabilities 238 143
-------- --------
Total liabilities 238 143
-------- --------
Commitments -- --
Stockholders' Equity:
Common stock, $.001 par value, 10,000 shares authorized and
8,305 and 7,904 issued and outstanding, respectively 8 8
Paid-in capital 74,148 73,752
Accumulated deficit (73,018) (72,562)
-------- --------
1,138 1,198
Treasury stock, 62 shares at cost (311) (311)
-------- --------
Total stockholders' equity 827 887
-------- --------
Total liabilities and stockholders' equity $ 1,065 $ 1,030
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
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Spectrum Information Technologies, Inc. and Subsidiary
<TABLE>
<CAPTION>
Consolidated Statements of Loss and Comprehensive Loss
(Amounts in thousands, except per share amounts) Three months ended Six months ended
(Unaudited) September 30, September 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ --
------- ------- ------- -------
Operating costs and expenses:
Selling, general and administrative 374 -- 534 --
------- ------- ------- -------
Total operating costs and expenses 374 -- 534 --
------- ------- ------- -------
Operating loss (374) -- (534) --
------- ------- ------- -------
Other income, net 8 -- 18 --
------- ------- ------- -------
Loss from continuing operations (366) -- (516) --
Income (loss) from discontinued operations 35 (539) 60 (199)
------- ------- ------- -------
Net loss (331) (539) (456) (199)
Other comprehensive loss, net of tax -- -- -- --
------- ------- ------- -------
Comprehensive loss $ (331) $ (539) $ (456) $ (199)
======= ======= ======= =======
Basic and diluted income (loss) per common share:
Loss from continuing operations $ (.045) $ -- $ (.063) $ --
Income (loss) from discontinued operations .004 (.342) .007 (.126)
------- ------- ------- -------
Net income (loss) per common share $ (.041) $ (.342) $ (.056) $ (.126)
======= ======= ======= =======
Weighted average number of Common Shares
used in basic and diluted calculation 8,141 1,574 8,141 1,574
======= ======= ======= =======
</TABLE>
Interim results are not indicative of the results expected for a full year.
See accompanying notes to consolidated financial statements.
3
<PAGE>
Spectrum Information Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Six months ended September 30, 1999 1998
- -------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flow from operating activities:
Net Income (loss) $ (456) $ (199)
Adjustments to reconcile net loss to net cash used by
Operating activities:
Contribution of services by management 50 --
Contribution of rent by management 25 --
Compensation via stock 2 --
Depreciation and amortization 29 --
(Increase) decrease in:
Receivables (39) --
Prepaid expenses and other assets (48) --
Increase (decrease) in:
Accounts payable 40 --
Accrued expenses 118 --
(Income) loss on discontinued operations (60) 199
- -------------------------------------------------------------------------------------
Net cash used by continuing operations (339) --
Net cash used by discontinued operations (8) (879)
- -------------------------------------------------------------------------------------
Net cash used by operating activities (347) (879)
- -------------------------------------------------------------------------------------
Cash flows from investing activities:
Recovery in investment in Minutemeals.com 23 --
Capital expenditures (50) (85)
- -------------------------------------------------------------------------------------
Net cash used by continuing operations (27) (85)
Net cash provided by discontinued operations -- 449
- -------------------------------------------------------------------------------------
Net cash provided by investing activities (27) 364
- -------------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds from the exercise of stock options 12 --
- -------------------------------------------------------------------------------------
Net cash provided by financing activities 12 --
- -------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (362) (515)
Cash and cash equivalents, beginning of year 1,007 1,600
- -------------------------------------------------------------------------------------
Total cash and cash equivalents, end of period $ 645 $ 1,085
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
Spectrum Information Technologies, Inc. and its subsidiary (collectively,
"Spectrum" or the "Company") comprise an Internet media company which is seeking
to establish websites for the marketing of products and services. As part of
this strategy, on June 23, 1999, the Company consummated its acquisition of
Tropia, Inc., a Delaware corporation ("Tropia"). Tropia promotes, distributes
and markets the music of independent artists on its website www.tropia.com. The
Company was incorporated in Delaware in 1984.
As a result of a change of control of the Company on December 11, 1998,
the Company's senior management and Board of Directors were replaced. Also, as a
result of the change of control, subsequent equity investments and option
exercises, an aggregate of $1,007,000 of new equity was invested in the Company.
The new senior management and Board of Directors have changed the strategic
direction of the Company from being a developer of patented communication
technologies to that of an Internet media company. Consequently, the prior
business operations of the Company were discontinued. The Company is planning to
change its corporate name to Siti-Sites.com, Inc. at its next annual meeting of
stockholders (which is anticipated to occur in December, 1999), and will retain
its stock symbol "SITI".
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of the results of operations for the periods shown and include
the accounts and results of the Company's wholly-owned subsidiary. All
significant intercompany accounts have been eliminated in consolidation. The
results of operations for such periods are not necessarily indicative of the
results expected for the full fiscal year or for any future period.
These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended March 31, 1999. The 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 in the normal course of business. However, because of the Company's
change in control, discontinuance of historical operations and new strategic
direction, 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 highly dependent near term on its ability to raise capital. The
Company expects to close a private placement transaction immediately following
its next annual meeting of stockholders, subject to stockholder approval at such
meeting. (See Note 9.)
5
<PAGE>
NOTE 2 - DISCONTINUED OPERATIONS
As a result of the December 11, 1998 Change of Control Transaction
described in Note 1, the Company discontinued its prior operations. In
accordance with Accounting Principles Board ("APB") Statement #30, "Reporting
the Effects of the Disposal of a Segment of a Business," the prior years'
financial statements have been restated to reflect such discontinuation. All
assets and liabilities of the discontinued segment have been reflected as net
liabilities of discontinued operations. The following table reflects the net
liabilities:
September 30, March 31,
For the periods ended, 1999 1999
--------------------------------
(Amounts in thousands)
----------------------
Refunds receivable $ -- $ 12
Prepaid expenses -- 8
Accounts payable -- (3)
Accrued expenses -- (85)
--------------------------------
Total $ -- $(68)
================================
Operating results from discontinued operations are as follows:
For the three months ended, September 30, 1999 1998
---- ----
(Amounts in thousands)
----------------------
Revenues $ -- $ 529
----------------------
Operating costs and expenses:
Selling, general and administrative expenses -- 1,073
----------------------
Total operating costs and expenses -- 1,073
----------------------
Operating Income (Loss) -- (544)
----------------------
Other income and (expenses) 35 5
----------------------
Income from discontinued operations $ 35 $ (539)
======================
For the six months ended, September 30, 1999 1998
---- ----
(Amounts in thousands)
----------------------
Revenues $ -- $ 2,115
----------------------
Operating costs and expenses:
Selling, general and administrative expenses 8 2,386
----------------------
Total operating costs and expenses 8 2,386
----------------------
Operating Income (Loss) (8) (271)
----------------------
Other income and (expenses) 68 72
----------------------
Income from discontinued operations $ 60 $ (199)
======================
Sales of product from discontinued operations were recognized upon
shipment to the customer. Deferred revenue on licensing agreements was
recognized when earned based on each individual agreement. During the quarter
ended September 30, 1998, two licensing agreements were renegotiated to provide
for lump sum final payments versus ongoing royalties. As these renegotiated
agreements did not require the Company to provide future products or services,
revenue was recognized upon completion of the terms of the agreements.
As part of new management's strategy, the Company sold its Wireless Data
and Cellular Connectivity Technology patents on September 27, 1999 to a
partnership composed primarily of a former employee and counsel to the Company.
Pursuant to the agreement, the Company received $10,000 and a waiver of
commissions due to such former employee upon the collection of past due
6
<PAGE>
royalties from a former Spectrum licensee, provided such royalties were received
within thirty days of such sale agreement. The Company also agreed to remit
$3,500 to such former employee personally upon collection of these royalties.
Through the efforts of such former employee, the Company received approximately
$28,000 in royalties in October 1999 from the licensee.
In March 1999 the Company entered into an Investment and Business
Development Agreement with the creators of a food/lifestyle website,
"minutemeals.com." The Company contributed $105,000 to Minutemeals.com, Inc.,
which owned the website, for a minority interest in that corporation and an
option to evaluate the project in the future. In May 1999 the parties agreed
that it would be in their best interests to cease their arrangement due to
creative differences as to the development path for the website and other
underlying business reasons. The Company announced in May 1999 that the
Investment and Business Development Agreement had been terminated. The Company
then transferred its stock of Minutemeals.com, Inc. back to that corporation in
satisfaction of all of its obligations and received back $23,000 in funding. As
a result in March 1999, the Company recorded an additional charge to income and
a reduction in investment of $82,000.
Note 3 - Property and Equipment and Intangible Assets
Property and equipment are recorded at cost. Depreciation is recorded
using the straight-line method over the estimated useful lives of the assets of
three to five years.
As a result of the June 23, 1999 acquisition agreement with Tropia as
described in Note 7, the Company recognized goodwill of approximately $312,000
and is amortizing this amount over a three-year period.
Note 4 - Income (Loss) Per Common Share
Income (loss) per share for the three months ended September 30, 1999 and
1998 was calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
--------------------------------------------------
Basic Diluted Basic Diluted
(Amounts in thousands, except per share
---------------------------------------
amounts)
--------
<S> <C> <C> <C> <C>
Net Loss $ (331) $ (331) $ (539) $ (539)
======================= =========================
Weighted average number of common shares
outstanding during the year 8,141 8,141 1,574 1,574
Common share equivalents -- -- -- --
----------------------- -------------------------
Weighted average number of common shares
and common share equivalents used in
calculation of earnings per common share 8,141 8,141 1,574 1,574
======================= =========================
Earnings per common share $ (.041) $ (.041) $(0.342) $(0.342)
======================= =========================
</TABLE>
7
<PAGE>
Income (loss) per share for the six months ended September 30, 1999 and
1998 was calculated as follows:
<TABLE>
<CAPTION>
Six Months Ended September 30,
1999 1998
Basic Diluted Basic Diluted
(Amounts in thousands, except per share
---------------------------------------
amounts)
--------
<S> <C> <C> <C> <C>
Net Loss $ (456) $ (456) $ (199) $ (199)
======================== ========================
Weighted average number of common shares
outstanding during the year 8,141 8,141 1,574 1,574
Common share equivalents -- -- -- --
------------------------ ------------------------
Weighted average number of common shares
and common share equivalents used in
calculation of earnings per common share 8,141 8,141 1,574 1,574
======================== ========================
Earnings per common share $ (.056) $ (.056) $(0.126) $(0.126)
======================== ========================
</TABLE>
Common stock equivalents were not included in the computation of weighted
average shares outstanding for the quarter and six months ended September 30,
1999 and 1998, respectively, because such inclusion would be anti-dilutive.
Note 5 - STATEMENTS OF CASH FLOWS
Six months ended
September 30,
----------------------
1999 1998
----------------------
(Amounts in thousands)
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ -- $ --
Cash paid during the year for income taxes $ -- $ 1
Non-cash transactions:
Contribution of salaries by management $ 50 $ --
Contribution of rent by management $ 25 $ --
Stock options for board of directors $ -- $ 16
Compensation via stock $ 2 $ --
Acquisition of Tropia, Inc. $ 307 $ --
Present management of Spectrum Information Technologies, Inc. has been
working without salary and may continue to do so for an undetermined period of
time. The Company has recorded an administrative expense and a capital
contribution of $50,000 to account for the value of these services provided by
management of such company.
NOTE 6 - COMPREHENSIVE LOSS
The Company adopted Statement of Financial Accounting Standard ("SFAS")
No. 130, "Reporting Comprehensive Income," which requires that all components of
comprehensive income and total comprehensive income be reported on one of the
following: a statement of income and comprehensive income, a statement of
comprehensive income or a statement of stockholders' equity. Comprehensive
income is comprised of net income and all changes to stockholders' equity,
except those resulting from investments by owners (changes in paid in capital)
and distributions to owners (dividends).
8
<PAGE>
NOTE 7 - ACQUISITION - TROPIA
In pursuit of its new strategy, on June 23, 1999, the Company consummated
its acquisition of Tropia, which operates an MP3 music site that promotes and
distributes the music of independent artists through its website located at
www.tropia.com. Pursuant to the acquisition agreement, the Company initially
provided $100,000 of capital to Tropia and agreed to provide approximately
$800,000 of additional capital during the 12 months following the acquisition.
The acquisition was effected by merging Siti-II, Inc., a Delaware corporation
and a wholly-owned subsidiary of Spectrum, with and into Tropia.
Tropia is geared towards the college market. The Tropia website, which
went online in May 1999, uses the Internet and data compression technologies,
such as the MP3 (MPEG1, Layer 3) format, to create a compelling experience for
consumers to conveniently access an expanding music catalogue, and a valuable
distribution and promotional platform for music artists. The website will
showcase the music of independent artists and artists signed by independent
record labels. Consumers are able to search the website by artist, by song title
and by genre, and can sample and download complete songs, free of charge, in MP3
format. The website also embodies a 24- hour RealAudio radio station with
multiple free radio streams, classified by genre, to enable consumers to sample
music. CDs and other merchandise (such as posters, t-shirts, hats and stickers)
of featured artists are also being offered through the website. Prior to going
online, the operations of Tropia consisted largely of developing the website and
the infrastructure necessary to attract artists and download music on the
Internet.
For financial statement purposes the acquisition was accounted for as a
purchase and, accordingly, Tropia's results are included in the consolidated
financial statements since the date of acquisition. Tropia, which is now a
wholly-owned subsidiary of the Company, was acquired for an aggregate of 316,666
shares of the Company's common stock (valued at $306,786), half of which were
delivered at closing, and half of which are in escrow to be delivered one year
after the closing, if certain goals are achieved.
In accordance with Accounting Principles Board ("APB") No. 16, the
aggregate purchase price of $306,786 has been allocated to the assets and
liabilities of Tropia, based upon their fair market values as follows:
Computer software $ 748
Accrued expenses (6,075)
---------
Net liabilities acquired (5,327)
Goodwill 312,113
---------
Aggregate Purchase Price $ 306,786
=========
As described in Note 10, in October, 1999, the Company authorized the
issuance of an aggregate of 140,845 additional shares of the Company's common
stock to Ari Blank, Arjun Nayyar and Red Hat Productions, Inc. (with Jonathan
Blank to receive all shares allocated to Red Hat Productions, Inc.), in
recognition of the overall performance of Tropia during the 4-month period
following the Company's acquisition of Tropia, as well as the issuance of 24,155
additional shares of the Company's common stock to Jonathan Blank in recognition
of his individual efforts on behalf of Tropia.
9
<PAGE>
NOTE 8 - LICENSING AGREEMENTS
On September 29, 1999 the Company entered into an agreement with Jad
Records ("Jad") authorizing the Company's use and free digital distribution for
a two-year period of a certain recording performed by Bob Marley. The Company
remitted $25,000 to Jad for such rights. These costs will be amortized over the
life of the contract.
On September 29, 1999 the Company also entered into an agreement with
Ezone Corporation ("Ezone") for the license of certain electronic games and
media ("Games") to the Company for a two-year period. Pursuant to the license
agreement, the Company paid Ezone $5,000 and granted Ezone an option to purchase
5,000 shares of the Company's Common Stock at a strike price of $1.125 per share
upon the delivery of the Games to the Company. The Company recorded options
expense pursuant to SFAS No. 123 of the Financial Accounting Standards Board,
"Accounting for Stock-Based Compensation."
NOTE 9 - OTHER INFORMATION
On July 26, 1999 the Board of Directors elected to enter into an agreement
to raise $1,250,000 in equity capital through a private placement with its major
stockholder Lawrence M. Powers (who is also the Company's Chairman and Chief
Executive Officer). A copy of this agreement is attached as Exhibit 10.1 to this
Form 10-Q.
Under the terms of the stock purchase agreement, the Company will receive
$1,250,000 in exchange for 1,000,000 shares of its common stock, and an option
to purchase an additional 500,000 shares at $2.50 per share, exercisable for
five years. If and when the option is fully exercised, SITI would receive an
additional $1,250,000. None of the shares or the option will initially be
registered with the Securities and Exchange Commission for future sale, and will
be taken for investment by such major stockholder.
The terms of the agreement are subject to stockholder review and approval
at the next annual stockholders' meeting of the Company anticipated to occur in
December, 1999. The private placement is also subject to stockholder approval of
an amendment to the Company's Restated Certificate of Incorporation to increase
the number of authorized shares of common stock. The private placement is
expected to close shortly after stockholder approval.
The Company intends to use the proceeds of the private placement to
develop and expand its operations in the MP3 music field through its music
website www.tropia.com. The previous equity financing of $1,000,000 in December
1998 was also used for its continuing operations focusing on the MP3 music field
and related Internet marketing opportunities. Upon the closing of the private
placement, the Company's capital base will be supplemented by the described
$1.25 million equity infusion provided by this second round of financing.
Although the private-placement described above is subject to the approval
of the Company's stockholders at the next annual meeting, pursuant to an
agreement dated October 5, 1999, Mr. Powers agreed to lend $1,250,000 to the
Company pending the annual meeting. A copy of this agreement is attached as
Exhibit 10.2 to this Form 10-Q. The proceeds of the loan have been invested in
short-term government securities. Under the loan agreement, if the Company's
stockholders approve the terms of such agreement and an Amendment to the
Company's Restated Certificate of Incorporation, the principal amount of the
loan shall be applied to the purchase price of the private-placement, the
Company will retain all interest thereon, and the Company's obligation to repay
the loan shall be deemed to be satisfied. If such stockholder approval is not
obtained, or if the annual meeting does not occur by January 31, 2000, the
principal amount of the loan and all interest thereon shall be paid to Mr.
Powers on account of the loan.
In addition, on August 30, 1999, the Company entered into a three-year
lease for new office space at 594 Broadway, Suite 1001, New York, New York
10012. The Company moved its principal executive offices to this location in
September, 1999. The Company's payment obligations under this lease were
guaranteed by Lawrence M. Powers. In addition, the terms of the lease include
one month of free rent and an escalation of rental payments over the three-year
period. The Company has recorded a deferred rent charge of approximately $6,000.
This charge will be amortized over the life of the lease.
The Company granted 3,500 shares of its common stock to two employees and
a consultant during the month of September 1999. These shares were granted in
consideration of services to the Company. These shares were granted in reliance
upon the exemption from registration provided under Section 4(2) of the
Securities Act, on the basis that such transactions did not involve any public
offering. The stockholders who received such shares of the Company had access to
all relevant information regarding the
10
<PAGE>
Company necessary to evaluate the investment; each such stockholder represented
that the common stock was being acquired for investment only. There was no
general solicitation or advertising involved, and the Company used reasonable
care to ensure that such stockholders were not underwriters.
NOTE 10 - SUBSEQUENT EVENT
In October, 1999, the Company authorized the issuance of an aggregate of
140,845 additional shares of the Company's common stock to Ari Blank, Arjun
Nayyar and Red Hat Productions, Inc. (with Jonathan Blank to receive all shares
allocated to Red Hat Productions, Inc.), the former owners of Tropia, in
recognition of the overall performance of Tropia during the 4-month period
following the Company's acquisition of Tropia. Ari Blank and Arjun Nayyar are
the designers of Tropia's website, are the Treasurer and Secretary,
respectively, of the Company, and are officers of Tropia. Lawrence M. Powers
(the Chairman/ CEO and a major stockholder of the Company), and Barclay Powers
(the Co-President of Tropia and a major stockholder of the Company), who with
Jonathan Blank (the CEO and Co-President of Tropia) own all of the stock of Red
Hat Productions, Inc., have waived their rights to participate in the shares
otherwise receivable by Red Hat Productions, Inc. The Company also recently
authorized the issuance of 24,155 additional shares of the Company's common
stock to Jonathan Blank in recognition of his individual efforts on behalf of
Tropia. To date, none of the foregoing additional shares have been issued.
NOTE 11 - OTHER SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents. Cash and cash equivalents include the Company's
cash balances and short-term investments that mature in 90 days or less when
acquired. Cash and cash equivalents are carried at cost plus accrued interest,
which approximates market.
Use of Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Website Expenses. Expenses incurred to develop and maintain websites are
expensed as incurred.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Quarterly Report on Form 10-Q contains forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
including, but not limited to statements related to business objectives and
strategy of Spectrum Information Technologies, Inc. and its subsidiary
(collectively, "Spectrum" or the "Company"). Such forward-looking statements are
based on current expectations, estimates and projections about the Company's
industry, the beliefs of the Company's management and certain assumptions made
by the Company's management. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict; therefore,
actual results may differ materially from those expressed, forecasted, or
contemplated by any such forward-looking statements. Factors that could cause
actual events or results to differ materially include, among others, those risk
factors set forth in the Company's Annual Report on Form 10-K for the year ended
March 31, 1999. Given these uncertainties, investors are cautioned not to place
undue reliance on any such forward-looking statements. Unless required by law,
the Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, readers should carefully review the risk factors set forth in other
reports or documents the Company files from time to time with the Securities and
Exchange Commission, particularly the Annual Reports on Form 10-K, other
Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
OVERVIEW
Spectrum Information Technologies, Inc. and its subsidiary comprise an
Internet media company which is seeking to establish websites for the marketing
of products and services. Spectrum was incorporated in Delaware in 1984. As a
result of a change of control of the Company in December 1998, the Company's
senior management and Board of Directors were replaced. The new senior
management and Board of Directors changed the strategic direction of the Company
and discontinued its prior business. The Company intends to develop websites
targeted to the interests of specific demographic groups by entering into joint
ventures and strategic partnerships. The Company is planning to change its
corporate name to Siti-Sites.com, Inc. at its next annual meeting of
stockholders (which is anticipated to occur in December, 1999) and plans to
retain its stock symbol "SITI".
On June 23, 1999, the Company consummated its acquisition of Tropia, which
operates an MP3 music site that promotes and distributes the music of
independent artists through its website located at www.tropia.com. Tropia, which
is now a wholly-owned subsidiary of the Company, was acquired for an aggregate
of 316,850 shares of the Company's common stock, half of which were delivered at
closing, and half of which are in escrow to be delivered after one year, if
certain goals are achieved. The Company provided $100,000 of capital to Tropia
initially and agreed to provide approximately $800,000 of additional capital
during the twelve-month period following the acquisition. The acquisition was
effected by merging SITI-II, Inc., a Delaware corporation and a wholly-owned
subsidiary of Spectrum, with and into Tropia. Tropia was partially owned (55%)
by Red Hat Productions, Inc., an award-winning independent film production
company which is owned by Barclay Powers, the Co-President of Tropia and a large
stockholder of the Company, and Jonathan Blank, the Co-President and current
Chief Executive Officer of Tropia. Lawrence M. Powers, the Chairman/CEO and a
large stockholder of the Company, has been a financial participant and one-third
owner of Red Hat Productions, Inc. since 1997. Tropia was also owned (45%) by
Ari Blank and Arjun Nayyar, who are the designers of Tropia's website, the
Treasurer and Secretary, respectively, of the Company, and officers of Tropia.
The fully functioning website, and related business arrangements with
artists and marketing agents, has been under development since February 1999 and
was valued at 500,000 shares of the Company's common stock. However, Lawrence M.
Powers and Barclay Powers (his son) have waived their rights to participate in
the shares otherwise receivable by Red Hat Productions, Inc. from the
acquisition. As a result of this waiver, the shares delivered to Red Hat
Productions, Inc. were reduced proportionately and all such shares were
distributed by Red Hat Productions, Inc. solely to Mr. Blank. The Company will
reserve 183,150 shares of its common stock (which equals the number of
additional shares that would otherwise have been issued but for the waiver) for
issuance in the future (in the form of stock and/or options to acquire stock)
for existing and new management personnel of Tropia.
In October, 1999, the Company authorized the issuance of an aggregate of
140,845 additional shares of the Company's common stock to Ari Blank, Arjun
Nayyar and Red Hat Productions, Inc. (with Jonathan Blank to receive all shares
allocated to Red Hat Productions, Inc.), the former owners of Tropia, in
recognition of the overall performance of Tropia during the 4-month period
following the Company's acquisition of Tropia. Lawrence M. Powers, and Barclay
Powers have waived their rights to participate in
12
<PAGE>
the shares otherwise receivable by Red Hat Productions, Inc. The Company also
recently authorized the issuance of 24,155 additional shares of the Company's
common stock to Jonathan Blank in recognition of his individual efforts on
behalf of Tropia. To date, none of the foregoing additional shares have been
issued.
The Tropia website, which went online in May 1999, showcases the music of
independent artists and artists signed by independent record labels. Consumers
are able to search the website by artist, by song title and by genre, and can
sample and download complete songs free of charge in MP3 format. The website
also embodies a 24-hour RealAudio radio station with multiple free radio
streams, classified by genre, to enable consumers to sample music. CDs and other
merchandise (such as posters, t-shirts, hats and stickers) of featured artists
are also being offered through the website. Prior to going online, the
operations of Tropia consisted largely of developing the website and the
infrastructure necessary to attract artists and download music on the Internet.
The independent artists and record labels are required to agree to permit
the Company to distribute their music over the website without receiving any
royalty. In turn, each independent artist and each artist represented by an
independent record label is given its own webpage within the website, and the
ability to promote and distribute its music to a large number of consumers
worldwide essentially at no cost to the artist. The artists and record labels
are offered attractive sharing arrangements whereby they participate in the
proceeds from the sales of their CDs and other merchandise featured on the
website. The Company's relationship with each artist and independent record
label will be non-exclusive. The Company anticipates that independent artists
and independent record labels will be drawn to the website because they have
been historically underserved by the traditional music industry, and they would
welcome a low cost, low risk method of distribution.
The website is designed to attract a youthful audience (ages 14-25), with
a specific emphasis on college students. The Company believes that college
students will be the ideal audience for the website because they generally:
o are among the highest spenders on music;
o have the most powerful computers and wide-spread broadband
access to the Internet;
o spend a significant amount of time on the Internet;
o share the attitudes and values of, and identify strongly with,
the independent artists featured on the website;
o can be reached fairly easily and inexpensively by campus
newspaper, radio and television stations and promotional tours
by the website's featured artists; and
o will appreciate the value of free downloadable music.
The Company believes that its variety of free downloadable music will help
distinguish the website from other providers of music online. In addition,
consumers will now have the ability to locate independent artists whose music is
not sold through traditional music retailers. The website will also facilitate
communication between fans and independent artists, via its artist websites, to
be followed by tour information and other services attractive to artists and
fans.
The Company expects to create a premier entertainment destination for the
discovery of independent music by designing the website so that both artists and
consumers will have access to the information they desire, in an interface that
is easy, intuitive, uncluttered and attractive. The Company intends to continue
to develop the website further (with video presentations, live performances,
games, etc.) and introduce new products and services, as appropriate, to meet
the needs of artists and consumers. The Company has previously sponsored
concerts in New York, San Francisco and Los Angeles for several emerging groups,
and intends to continue such promotions. Obtaining rights to offer free MP3
downloads from established artists for limited periods is also under discussion,
to attract visitors to the website in the continuing school year.
Many consumers have not yet been able to experience high quality Internet
audio and video due to low bandwidth Internet connections. New platforms, such
as cable and direct subscriber line modem and satellite data broadcast, are
already being created to deliver high-speed access to digital media. Growth will
depend on the investment of billions of dollars by the telecommunications
industry in new infrastructure. In the meantime, high-speed connections will
largely remain limited to larger businesses, research institutions and colleges
and universities. The Company has therefore determined that the college student
market, in large part because of its ready access to high-speed connections and
its spirit of "independence," will prove to offer the greatest opportunity for
developing its business.
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The Company believes that www.tropia.com will become an attractive and
functional site with superior content. For consumers, the site offers the
following advantages:
Radio-Style Interface. Users can "tune into" various radio streams,
classified by genre, which continuously broadcast the music featured on
the site.
Interactivity. An anticipated addition to the site will be chat rooms,
on-line interactive interviews with featured artists and other interactive
functions. Fans will also be able to contact artists directly via e-mail
and to communicate with one another through message boards. In addition,
artists can use their web page to communicate directly with their fans,
advising them of concerts and new releases.
Convenience. The website offers a consumer the ability to listen to or
download songs by featured artists 24 hours a day from the convenience of
his or her home, school or office. If the consumer likes the song, he or
she may buy the CD over the website.
For the independent artists, the site provides these advantages:
Distribution and Promotion. The website offers artists the ability to
promote their music to a global and growing base of consumers through
their own webpage provided at little or no charge, control pricing of
their music and achieve superior economics through revenue sharing on
sales of their CDs and other merchandise.
Marketing. The website will provide artists with various marketing tools,
including public relations assistance, tour and concert promotions, and
e-mail promotions, among others.
Non-Exclusive. The Company's relationship with the artists and the
independent record labels will be on a non-exclusive basis, enabling
featured artists to distribute their music using the website, as well as
other means (such as other websites).
Access to Consumer Feedback and Statistics. Upon the implementation of
tracking software (which is now in progress), artists will receive
detailed information about the number of people visiting their webpage,
listening to their music, downloading their songs, and how many CDs they
sold during the day and over the past month. Artists will then have
valuable information about their fan base.
In the near term, the Company will focus on the following key elements in
the development of the Tropia website (although there can be no assurance as to
the likelihood or the timing of these elements):
o Continue to develop and increase music content
o Use the latest compression formats
o Use e-commerce to generate revenues from sales of CD's and
merchandise
o Provide additional functionality
o Target market the college student market
o Introduce Tropia college TV website
o Become a service based community
o Establish user accounts
14
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RESULTS OF OPERATIONS
The following discussion relates to the Company's continuing operations
since the Change of Control Transaction on December 11, 1998. Any comparisons to
the prior fiscal year would not be applicable, as all prior operations were
discontinued during the third quarter of the prior fiscal year.
The following table sets forth certain financial data for continuing
operations for the periods indicated. As a result of the Company's December 11,
1998 Change of Control Transaction, the Company discontinued its previous
operations. In accordance with Accounting Principles Board, ("APB") Statement
#30, "Reporting the Effects of the Disposal of a Segment of a Business," the
prior years' financial statements have been restated to reflect such
discontinuation.
Three Months Ended September 30,
1999 % 1998 %
(Amounts in thousands)
----------------------
Continuing Operations:
Revenues $ 0 - $ 0 --
Operating costs end expenses:
Selling, general and administrative 374 - 0 --
----- ---- ----- ----
Total operating costs and expenses 374 - 0 --
----- ---- ----- ----
Operating loss $(374) - $ 0 --
===== ==== ===== ====
Six Months Ended September 30,
1999 % 1998 %
(Amounts in thousands)
----------------------
Continuing Operations:
Revenues $ 0 - $ 0 --
Operating costs end expenses:
Selling, general and administrative 534 - 0 --
----- ---- ----- ----
Total operating costs and expenses 534 - 0 --
----- ---- ----- ----
Operating loss $(534) - $ 0 --
===== ==== ===== ====
CONSOLIDATED REVENUES FROM CONTINUING OPERATIONS
In view of the Company's new Internet business strategy and the rapidly
evolving nature of its business, the company had no revenues from continuing
operations.
OPERATING COSTS AND EXPENSES
In accordance with Accounting Principles Board, ("APB") Statement #30,
"Reporting the Effects of the Disposal of a Segment of a Business," the prior
years' financial statements have been restated to reflect such discontinuation.
All assets and liabilities of the discontinued segment have been reflected as
net liabilities of discontinued operations. For the three and six months ended
September 30, 1999, operating costs and expenses were primarily composed of
compensation to employees of approximately $103,000 and $136,000, respectively.
This compensation consisted of management's contribution of services as well as
the hiring of employees for the Tropia subsidiary to aid in the development of
the business plan. Legal fees approximated $136,000 and $165,000, respectively,
for the three and six months ended September 30, 1999. Accounting fees were
approximately $28,000 and $80,000, respectively for the three and six months
ended September 30, 1999. Outside services were approximately $30,000 and
$47,000, respectively, for the three and six months ended September 30, 1999.
These fees were incurred in connection with the
15
<PAGE>
Company's transition resulting from the December 11, 1998 Change of Control
Transaction. Lastly, as a result of the Tropia acquisition the Company
recognized approximately $27,000 and $29,000, respectively in amortization of
goodwill for the three and six months ended September 30, 1999.
OPERATING LOSS
The Company had no revenues and the Company's operating loss from
continuing operations for the three and six months ended September 30, 1999 was
$374,000 and $534,000, respectively, as shown above. This amount is primarily
composed of compensation to employees and contribution of management's services,
legal and accounting fees and the retention of independent contractors to assist
in the development of the Company through its transition, resulting from the
Change of Control on December 11, 1998.
OTHER INCOME AND EXPENSE
During the three and six months ended September 30, 1999, the Company
recognized other income of approximately $8,000 and $18,000, respectively, which
was primarily composed of interest income of approximately $8,000 and $17,000,
respectively. Interest income was directly related to the $1,007,000 invested in
the Company resulting from the December 11, 1998 Change of Control Transaction
(see Note 1 to the Condensed Consolidated Financial Statements contained in
"Part I-Financial Information").
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999 the Company has working capital of $494,000 as
compared to working capital of $864,000 as of March 31,1999. The decline in
working capital is primarily due to the decrease in cash and cash equivalents
from $1,007,000 at March 31, 1999 to $645,000 at September 30, 1999. This
decrease in cash is primarily due to the payment of operating costs and expenses
during the six months ended September 30, 1999. The Company currently is
financing its daily operations primarily through the application of the proceeds
of the investments in the Company in connection with the December 11, 1998
Change of Control Transaction, as well as the proceeds from the exercise of
stock options. The Company has been providing capital to Tropia pursuant to
their June 23, 1999 agreement. Additional capital of approximately $800,000 will
be provided to Tropia during the twelve months after such agreement.
Net cash used by continuing operations for operating activities was
approximately $339,000 for the six months ended September 30, 1999. This use
consisted primarily of payments for legal and accounting fees as well as
compensation to employees.
Net cash used by continuing operations for investing activities was
approximately $27,000 for the six months ended September 30, 1999. In May 1999
the Company was reimbursed $23,000 in funding as a result of the termination of
its agreement with Minutemeals.com, Inc. (see Note 2 to the Condensed
Consolidated Financial Statements contained in "Part I - Financial
Information"). In addition, capital expenditures totaled approximately $50,000
for the six months ended September 30, 1999. The Company purchased equipment in
order to set up the New York office and continue its funding to Tropia pursuant
to their acquisition agreement.
During the six months ended September 30, 1999, certain options were
exercised for an aggregate exercise price of $12,000.
YEAR 2000 IMPLICATIONS
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot distinguish
twenty-first century dates from twentieth century dates. To function properly,
these date-code fields must distinguish twenty-first century dates from
twentieth century dates and, as a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" requirements.
The Company is dependent on the operation of numerous systems that may be
adversely affected by the Year 2000 problem, including internal systems, and
equipment, software and content supplied to the Company by third-party vendors
that may not be Year 2000 compliant, including outside providers of Web-hosting
services on which the Company is currently dependent. In addition, the Company's
future business depends on the successful operation of the Internet following
the commencement of the
16
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Year 2000. If the Internet is inaccessible for an appreciable period of time, or
if users are unable to access our site, the Company's business and revenues
could be materially adversely affected. The Company is also subject to external
forces that might generally affect industry and commerce, such as
telecommunications, utility or transportation company Year 2000 compliance
failures, related service interruptions and the economic impact that such
failures have on our customers, content providers and future advertisers.
YEAR 2000 COMPLIANCE ASSESSMENT PLANS.
The Company has undertaken a two-pronged approach to analyzing the impact
of the Year 2000 problem. First, the Company completed an informal assessment of
its primary internal systems and, based on such assessment and its knowledge of
the specific software and systems, the Company currently believes that its
systems are Year 2000 compliant in all material respects. The Company has not
incurred material costs to date in this informal phase of the assessment
process, and currently does not believe that the cost of additional actions will
have a material effect on its results of operations or financial condition.
Second, the Company has performed a formal assessment of both its internal
systems and the vendor-supplied items and services it employs to determine how
the Year 2000 problem will affect all aspects of operations. The formal process
involved assessment of the following:
o hardware systems, including servers and systems used for data
storage;
o software systems, including applications, development tools
and proprietary code;
o infrastructure systems, including routers, hubs and networks;
o the systems of our business partners
The Company conducted its formal assessment of Year 2000 readiness by
gathering information on each aspect of the systems, reviewing each component or
application for date usage, and examining date representations. With respect to
vendor-supplied items and services, the Company conducted an extensive review of
product compliance information on such items and services available online, in
vendor literature and through trade group information resources, contacting its
vendors for compliance information, and maintaining documentation of assessments
that have been performed by such vendors or outside sources.
RESULTS OF COMPLIANCE EFFORTS TO DATE
Based on the Company's assessments, the Company currently believes that
its internal systems are Year 2000 compliant in all material respects. However,
it is possible that these current internal systems contain undetected errors or
defects with Year 2000 date functions. In addition, although the Company does
not anticipate problems, vendor-supplied items and services could contain
undetected errors or defects which, if not corrected, could result in serious
unanticipated negative consequences, including significant downtime. One
software package, which is used internally and unrelated to website operations,
has been found to be non-compliant, and is in the process of being replaced. The
Company expects this process to be completed upon the close of the third fiscal
quarter.
COSTS OF YEAR 2000 COMPLIANCE ARE NOT EXPECTED TO BE SIGNIFICANT.
Based upon the Company's assessments, the Company is not aware of any
material operational issues or significant costs associated with preparing its
internal systems for the Year 2000, and although the Company has not incurred
material costs to date with respect to the Year 2000 readiness of these internal
systems, the occurrence of any of the following events could materially and
adversely affect the Company's business, results of operations and financial
condition:
o errors and defects that are detected after the formal
assessment process was completed:
o third-party equipment, software or content fails to operate
properly with regard to the year 2000;
o third-party providers of Web resources expend significant
resources to correct their current systems for Year 2000
compliance, resulting in increased costs for their services.
17
<PAGE>
RISK FACTORS.
Please see "Item 1 - Risk Factors That May Affect the Company's Business,
Future Operating Results and Financial Condition" of the Company's Annual Report
on Form 10-K for the year ended March 31, 1999.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On July 26, 1999 the Company's Board of Directors approved an agreement
whereby the Company, in exchange for $1,250,000, will issue to Lawrence M.
Powers (a) 1,000,000 shares of Common Stock, and (b) an option to purchase an
additional 500,000 shares at $2.50 per share, exercisable for five years. This
transaction is described above in further detail in Note 9 to the Condensed
Consolidated Financial Statements contained in "Part I - Financial Information."
In addition, the Company granted 3,500 shares of its common stock to
two employees and a consultant during the month of September 1999. These shares
were granted in consideration of services to the Company. These shares were
issued in reliance upon the exemption from registration provided under Section
4(2) of the Securities Act, on the basis that such transactions did not involve
any public offering. The stockholders who received such shares of the Company
had access to all relevant information regarding the Company necessary to
evaluate the investment; each such stockholder represented that the common stock
was being acquired for investment only. There was no general solicitation or
advertising involved, and the Company used reasonable care to ensure that such
stockholders were not underwriters.
ITEM 5. OTHER INFORMATION
In September, 1999, the members of the Board of Directors of the
Company, Lawrence M. Powers and Robert Ingenito, intended to appoint and
announced the appointment of, Barclay Powers, the Co-President of Tropia and a
major stockholder of the Company, and Jonathan Blank, the Co-President and Chief
Executive Officer of the Tropia, as additional directors. However, the Board
subsequently determined not to complete such appointment and did not formally
adopt the required resolutions. This determination was based in part on the
appointees' reluctance to join the Board at that time due to their other
responsibilities. It was also based on the Board's decision that a Board with
four members would not be in the best interest of the Company at this point
because of the potential to deadlock (two to two) or delay votes on important
matters of corporate policy. The Board ultimately concluded that it is presently
advisable to reserve Board seats beyond the three directors it has nominated and
intends to submit to the Company's stockholders for their approval at the next
annual meeting of stockholders (which is anticipated to occur in December,
1999). The reserved seats could be used to attract other major financial
participants in the Company.
As discussed in Note 9 to the Condensed Consolidated Financial
Statements contained in "Part I- Financial Information," although the $1,250,000
private-placement to Lawrence M. Powers that is described therein is subject to
the approval of the Company's stockholders at the next annual meeting, pursuant
to an agreement dated October 5, 1999, Mr. Powers agreed to lend $1,250,000 to
the Company pending the annual meeting. A copy of the agreement is attached
hereto as Exhibit 10.2.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Number Title
10.1 Stock Purchase Agreement between the Company and
Lawrence M. Powers dated July 26, 1999.
18
<PAGE>
10.2 Letter agreement between the Company and Lawrence
M. Powers dated October 5, 1999.
27 Financial Data Schedule
B. Reports on Form 8-K
On July 1, 1999, the Company filed a Current Report on Form
8-K announcing, at "Item 2 Acquisition or Disposition of Assets" the
Company's acquisition of Tropia, Inc.
On September 7,1999, the Company filed a Current Report on
Form 8-K announcing, at "Item 4 Changes in the Company's Certifying
Accountants" the change of the Company's certifying accountants to
Edward Isaacs & Company LLP.
On September 7, 1999, the Company filed a timely Amendment to
Current Report on Form 8-K containing, at "Item 7 -Financial
Statements, Pro Forma Financial Information," financial statements
and pro forma financial information regarding Tropia, Inc.
19
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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: November 5, 1999
SPECTRUM INFORMATION TECHNOLOGIES, INC.
By /s/ Lawrence M. Powers
--------------------------
Lawrence M. Powers
Chief Executive Officer and
Chairman of the Board of Directors
20
Exhibit 10.1
POWERS & CO.
47 Beech Road
Englewood, New Jersey 07631
July 26, 1999
Spectrum Information Technologies, Inc.
P.O. Box 1006
New York, New York 10268
Re: Stock Purchase Agreement
Gentlemen:
The following sets forth the terms and conditions of a purchase of
securities in Spectrum Information Technologies, Inc. (the "Company") by the
undersigned, to be completed upon the satisfaction of the condition precedent
set forth in Section 2(a) of this Agreement:
1. STOCK PURCHASE. Subject to the satisfaction of the condition precedent
set forth in Section 2(a) hereof, at the Closing (as described in Section 2(b)
hereof) Powers & Company ("Powers") shall purchase 1,000,000 shares of common
stock par value $.001 of the Company (the "Common Stock"), and an option to
acquire 500,000 additional shares of such Common Stock (the "Option"), for a
total purchase price of $1,250,000 (the "Purchase Price"). The terms and
provisions of the Option are set forth in Exhibit A annexed hereto.
2. CONDITION PRECEDENT; CLOSING.
(a) The obligations of each party to effect the purchase and sale of
the Shares and the Option shall be subject to the approval by the Company's
stockholders at the Company's next annual meeting of stockholders of (i) the
terms hereof, and (ii) an amendment to the Company's certificate of
incorporation increasing the number of authorized shares of Common Stock to a
number sufficient to permit the issuance of the Shares and the Option hereunder.
(b) The closing of the purchase and sale of the Shares and the Option
(the "Closing") shall occur as soon as practicable after the satisfaction of the
condition precedent set forth in Section 2(a) hereof, at such location as may be
agreed upon by the Company and Powers. At the Closing, (i) the Company shall
deliver to Powers one or more stock certificates for the Shares, issued in the
name of Powers, or in such name(s) as may be designated by Powers, (ii) the
Company shall deliver to Powers the executed Option, and (ii) Powers shall
deliver to the Company the Purchase Price, payable by bank or certified check.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. These representations
and warranties shall survive for twelve (12) months following the Closing. In
consideration of the purchase and sale described above and the remaining terms
hereof, the Company represents and warrants to its knowledge that as of the date
hereof and as of the date of the Closing, subject to the satisfaction of the
condition precedent set forth in Section 2(a) hereof:
<PAGE>
(a) STOCK OWNERSHIP. Upon issuance, the Common Stock and the shares
underlying the Option will be duly authorized and validly issued, fully paid and
non-assessable. The Option shall be enforceable in accordance with its terms.
(b) TITLE. Following consummation of the transaction, the Company
warrants title to the Common Stock and Option and covenants and agrees at its
expense to defend Powers's right, title and ownership of the Common Stock
(whether issued on the date hereof or upon exercise of the Option) against the
claims and demands of all persons whomsoever.
(c) COMPANY'S GOOD STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all necessary powers to carry on its business as now operated
by it.
(d) AUTHORIZATION TO CONVEY STOCK. (i) The Company has full power
and authority to enter into this Agreement and the Option and the Company has
full power and authority to sell, convey, assign and transfer the Common Stock
and the Option to Powers and otherwise consummate the transaction contemplated
by this Agreement; (ii) this Agreement constitutes the valid and binding
obligation of the Company, enforceable in accordance with its terms; (iii)
neither the execution and delivery of this Agreement and the Option, nor the
consummation of the transaction contemplated herein in the manner herein
provided, will violate any agreement to which the Company is a party or by which
the Company is bound, or any law, order, decree or judgment applicable to the
Company; and (iv) no authorization, approval or consent of any third party is
required for the lawful execution, delivery and performance of this Agreement
and the Option by the Company.
4. REPRESENTATIONS AND WARRANTIES OF POWERS. In consideration of the
purchase and sale described above and the remaining terms hereof, Powers has
executed and delivered to the Company the Investor's Representation Letter
attached hereto as Exhibit B, pursuant to which it makes certain representations
and warranties to the Company as of the date hereof and as of the date of the
Closing.
5. MODIFICATION, DISCHARGE, TERMINATION. Neither this Agreement nor any
provisions hereof shall be modified, discharged, or terminated except by an
instrument in writing signed by the party against whom any waiver, change,
discharge, or termination is sought.
6. NOTICES. Any notice, demand, or other communication that any party
hereto may be required, or may elect, to give to anyone interested hereunder
shall be sufficiently given if (a) deposited, postage prepaid, registered or
certified, return receipt requested, addressed to such address as may be given
herein; or (b) delivered personally at such address.
7. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the parties' benefit and the
benefit of the parties' successors, legal representatives, and assigns.
8. ENTIRE AGREEMENT. This Agreement and its Exhibits hereto contains the
entire agreement of the parties, and there are no representations, covenants, or
other agreements except as stated or referred to herein.
2
<PAGE>
9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, both substantive and
remedial.
10. SEVERABILITY. If any provision of this Agreement shall be held to be
void or unenforceable under the laws of any place governing its construction or
enforcement, this Agreement shall not be voidable as a result thereof, but shall
be construed to be otherwise in force with the same effect as though such
provisions were omitted.
11. SECTION HEADINGS. The section headings contained herein are for
reference purpose only and shall not in any way affect the meaning or
interpretation of this Agreement.
If the foregoing accurately reflects our agreement, please so indicate in
the appropriate space below.
SPECTRUM INFORMATION POWERS & CO.
TECHNOLOGIES, INC.
By: /s/ Jon Gerber By: /s/ Lawrence M. Powers
-------------------- ----------------------
Name: Jon Gerber Name: Lawrence M. Powers
Title: Vice President Its: Owner/Sole Proprietor
3
Exhibit 10.2
Mr. Lawrence M. Powers
Powers & Co.
47 Beech Road
Englewood, New Jersey 07631
October 5, 1999
Spectrum Information Technologies, Inc.
594 Broadway, Suite 1001
New York, New York 10012
Re: Stock Purchase Agreement
Gentlemen:
Pursuant to the Stock Purchase Agreement dated July 26, 1999 (the "Stock
Purchase Agreement"), I have agreed to purchase 1,000,000 shares of common stock
of Spectrum Information Technologies, Inc. (the "Company"), and an option to
acquire 500,000 additional shares of common stock for $2.50 per share,
exercisable for five years, for a total purchase price of $1,250,000 (the
"Purchase Price"). Furthermore, to obtain office space for the Company and its
subsidiary, Tropia, Inc. ("Tropia"), in August, 1999, and other credit, I have
been required to guarantee a $250,000 three-year lease, obtain several of my
personal credit cards for use by the Company's and Tropia's employees and
advance nominal short-term credit to the Company and Tropia for equipment
purchases.
My obligation to purchase the common stock and the option is subject to the
satisfaction of the condition precedent that the Company's stockholders approve,
at the next annual meeting of stockholders (the "Annual Meeting"), (i) the terms
of the Stock Purchase Agreement and (ii) an amendment to the Company's
certificate of incorporation increasing the number of authorized shares of
common stock. Since the Annual Meeting is not expected to occur until late
November, 1999, you have asked that I consider making a loan to the Company in
the amount of the Purchase Price (the "Loan") which can be applied to the
purchase price if approval is obtained at the Annual Meeting. In consideration
of the Loan, the recent lease guarantee and my other extensions of credit to
date, I require the following agreement:
1. It is agreed that I will make the Loan to the Company under the
terms, and upon satisfaction of the conditions, set forth below. In the event
such conditions are not satisfied or waived and the Annual Meeting has not
occurred by January 31, 2000, this Agreement shall terminate.
2. My agreement to make the Loan to the Company prior to the Annual
Meeting is subject to the satisfaction of the following conditions:
(a) all financing, joint venture, operating or other projects
undertaken or under discussion by the Company or Tropia at such time, are
acceptable to me;
<PAGE>
(b) the nominees for director to be presented to the stockholders of
the Company for election at the next annual meeting are acceptable to me; and
(c) the officers of the Company and the officers and directors of
Tropia at such time are acceptable to me.
3. In the event that the Company's stockholders approve the matters
described above at the Annual Meeting, the principal amount of the Loan shall be
deemed to be paid to the Company on account of the Purchase Price and the
Company shall be entitled to retain all interest earned thereon. In the event
that the Company's stockholders do not approve the matters described above at
the Annual Meeting, or if the Annual Meeting has not occurred by January 31,
2000, the principal amount of the Loan, together with all interest thereon,
shall be promptly repaid to me in full satisfaction of the Loan.
4. In contemplation of the Loan I have placed short-term government
securities with an aggregate face amount of $1,250,000 into an account in the
name of the Company. The Company acknowledges that I have not yet made the Loan
and that such funds shall not constitute Company property unless and until I
notify the Company, in writing, that the conditions set forth above have been
satisfied or waived. The Company further acknowledges that unless and until the
Loan is made, I shall have control over, and the right to make all decisions
with respect to the investment or disposition of such short-term government
securities, including the right to transfer them to another account. The Company
shall cooperate with me in all reasonable respects to effectuate any decision I
may make with respect to such short-term government securities, or the proceeds
thereof, while under my control, or to transfer such short-term government
securities, or the proceeds thereof, out of the Company's name upon the
termination of this Agreement.
If the foregoing is acceptable, please execute a copy of this letter where
indicated below and return it to me.
Very truly yours,
ACKNOWLEDGED AND AGREED TO AS
OF THIS 5th DAY OF OCTOBER, 1999:
SPECTRUM INFORMATION TECHNOLOGIES, INC.
By:
-----------------------------
Title:
-----------------------------
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF SPECTRUM INFORMATION
TECHNOLOGIES, INC. AND ITS SUBSIDIARY AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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0
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