UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 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) (I.R.S. Employer Identification No.)
P.O. Box 1006, New York, New York 10268
(Address of principal executive offices) (Zip Code)
(914) 251-1800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO ____
As of August 12, 1999, the registrant had outstanding approximately 8,187,990
shares of its Common Stock, par value $.001 per share.
<PAGE>
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Consolidated Balance Sheets............................................... 1
Consolidated Statements of Income (Loss).................................. 2
Consolidated Statements of Cash Flows..................................... 3
Notes to Consolidated Financial Statements................................ 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 9
PART II. OTHER INFORMATION.............................................. 15
Item 1. Legal Proceedings ............................................... 15
Item 2. Changes in Securities............................................ 15
Item 6. Exhibits and Reports on Form 8-K................................. 15
<PAGE>
PART I. FINANCIAL INFORMATION
Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands)
June 30, 1999 March 31, 1999
(Unaudited)
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,045 $ 1,007
Prepaid expenses 1
----------- ----------
Total current assets 1,046 1,007
----------- ----------
Property and Equipment, net of accumulated depreciation 1 -
Investment in Minutemeals.com - 23
Intangibles:
Goodwill 312 -
Less: Accumulated amortization (2) -
----------- ----------
Intangibles, net 310 -
----------- ----------
Total assets $ 1,357 $ 1,030
=========== ==========
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and other accrued liabilities $17 $6
Accrued audit and tax 65 18
Accrued legal fees 79 51
Net liabilities of discontinued operations 70 68
Total current liabilities 231 143
----------- ----------
Total liabilities 231 143
----------- ----------
Commitments - -
Stockholders' Equity:
Common stock, $.001 par value, 10,000 shares
authorized and 8,301 and 7,904 issued and
outstanding, respectively 8 8
Paid-in capital 74,117 73,752
Accumulated deficit (72,688) (72,562)
----------- ----------
1,437 1,198
Treasury stock, 62 shares at cost (311) (311)
----------- ----------
Total stockholders' equity 1,126 887
----------- ----------
Total liabilities and stockholders' equity $1,357 $1,030
=========== ==========
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
1
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Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Statements of Income (Loss)
(Amounts in thousands, except per share amounts)
Three months ended June 30, 1999 1998
(Unaudited) (Unaudited)
- --------------------------------------------------------------------------------
Revenues $ - $ -
----------- ----------
Operating costs and expenses:
Selling, general and administrative expenses 160 -
----------- ----------
Total operating costs and expenses 160 -
----------- ----------
Operating loss (160) -
----------- ----------
Other income:
Interest income 10 -
----------- ----------
Total other income 10 -
----------- ----------
Loss from continuing operations (150) -
----------- ----------
Discontinued operations:
Income from discontinued operations 24 340
Income from discontinued operations 24 340
----------- ----------
Net income (loss) $ (126) $ 340
Other comprehensive loss, net of tax - -
----------- ----------
Comprehensive loss $ (126) $ 340
=========== ==========
Basic income (loss) per common share:
Loss from continuing operations $ (.019) $ -
Income from discontinued operations .003 .217
----------- ----------
Net income (loss) per common share $ (.016) $ .217
=========== ==========
Diluted income (loss) per common share:
Loss from continuing operations $ (.019) $ -
Income from discontinued operations .003 .143
----------- ----------
Net income (loss) per common share $ (.016) $ .143
=========== ==========
Weighted average number of Common Shares
used in basic calculation 7,980 1,567
=========== ==========
Weighted average number of Common Shares
used in diluted calculation 7,980 2,367
=========== ==========
Interim results are not indicative of the results expected for a full year.
See accompanying notes to consolidated financial statements.
2
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Spectrum Information Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
Three months ended June 30, 1999 1998
- --------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Cash flow from operating activities:
Net income (loss) $ (126) $ 340
Adjustments to reconcile net income (loss) to
net cash provided (used) by continuing activities:
Depreciation and amortization 2 -
Contribution of services by management 31 -
Contribution of rent by management 15 -
(Increase) in prepaid expenses (1) -
Increase in:
Accounts payable 5 -
Accrued liabilities 75 -
(Income) loss on discontinued operations - (340)
----------------------------
Net cash provided by continuing operations 1 -
Net cash provided (used) by discontinued operations 2 (1,050)
- --------------------------------------------------------------------------------
Net cash provided (used) by operating activities 3 (1,050)
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Recovery of investment in Minutemeals.com 23 -
Purchase of property and equipment - (75)
- --------------------------------------------------------------------------------
Net cash provided (used) by investing activities 23 (75)
- --------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds from the exercise of stock options and warrants 12 -
- --------------------------------------------------------------------------------
Net cash used by financing activities 12 -
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 38 (1,125)
Cash and cash equivalents, beginning of year 1,007 1,600
- --------------------------------------------------------------------------------
Total cash and cash equivalents, end of year
(including cash amounts in net liabilities
of discontinued operations) $ 1,045 $ 475
============================
See accompanying notes to consolidated financial statements.
3
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Spectrum Information Technologies, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - the Company and Basis of Presentation
Spectrum Information Technologies, Inc. and Subsidiaries (collectively,
"Spectrum" or the "Company") is an Internet media company which is seeking to
establish several 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
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
shareholders, 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 subsidiaries. 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 (which is anticipated to occur in
October, 1999), subject to stockholder approval at such meeting. (See Note 8.)
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:
4
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June 30, March 31,
For the periods ended, 1999 1999
-------------------------
(Amounts in thousands)
--------------------
Refunds receivable - 12
Prepaid expenses and other - 8
Accounts payable - (3)
Accrued expenses (70) (85)
-------------------------
Total (70) (68)
=========================
Operating results from discontinued operations are as follows:
For the periods ended, June 30, 1999 1998
---- ----
(Amounts in thousands)
--------------------
Revenues $ - $ 1,586
-------------------------
Operating costs and expenses:
Selling, general and administrative expenses 8 1,313
-------------------------
Total operating costs and expenses 8 1,313
-------------------------
Operating Income (Loss) (8) 273
-------------------------
Other income and (expenses) 32 67
-------------------------
Income from discontinued operations $ 24 $ 340
=========================
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 June 30,
1999 no licensing agreements were renegotiated. However, during the quarter
ended June 30, 1998 one licensing agreement was renegotiated to provide for lump
sum final payment versus ongoing royalties. As this renegotiated agreement did
not require the Company to provide future products or services, revenue was
recognized upon completion of the terms of the agreements.
In March 1999 the Company entered into an Investment and Business
Development Agreement with the creators of a food/lifestyle web site,
"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, the Company has 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 five
years.
5
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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 quarters ended June 30, 1999 and 1998 was
calculated as follows:
Three Months Ended June 30,
1999 1998
Basic Diluted Basic Diluted
(Amounts in thousands)
--------------------
Net Income (loss) ($126) ($126) $ 340 $ 340
============== =============
Weighted average number of common shares
outstanding during the year 7,980 7,980 1,567 1,567
Common share equivalents - preferred stock - - - 800
Common share equivalents - stock options - - - -
-------------- -------------
Weighted average number of common shares
and common share equivalents used in
calculation of earnings per common share 7,980 7,980 1,567 2,367
============== =============
Earnings per common share ($.016) ($.016) $0.217 $0.143
============== =============
Common stock equivalents were not included in the computation of weighted
average shares outstanding for the quarter ended June 30, 1999 because such
inclusion would be anti-dilutive. For the quarter ended June 30, 1998, stock
options were not included in the computation of weighted average shares
outstanding because such inclusion would be anti-dilutive.
Note 5 - Statements of Cash Flows
Three months ended June 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 $ 31 $ -
Contribution of rent by management $ 15 $ -
Stock options for board of directors $ - $ 16
Acquisition of Tropia, Inc. $ 307 $ -
6
<PAGE>
Present management of the parent company 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 $31,250 to
account for the value of these services provided by management of the parent
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). For all periods presented,
comprehensive income is comprised of unrealized holding losses on marketable
securities.
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 agreement, the Company is initially providing
$100,000 of capital to Tropia and 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
--------
$306,786
7
<PAGE>
Note 8 - Subsequent Event
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
shareholder, Lawrence M. Powers (who is also the Company's Chairman and Chief
Executive Officer).
Under the terms of the 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 shareholder.
The terms of the agreement are subject to stockholder review and approval
at the next annual stockholders' meeting of the Company anticipated for October
of 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
(most of which remains intact as cash capital) 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.
Note 9. 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.
8
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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 the Company. Such forward-looking statements are based on current
expectations, estimates and projections about the Company's industry,
management's beliefs 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 Subsidiaries is an Internet
media company which is seeking to establish several 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
shareholders 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 has agreed to provide $100,000 of
capital to Tropia initially and approximately $800,000 of additional capital
during the next twelve months. 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, a large shareholder of the Company, and Jonathan Blank, the current
Chief Executive Officer of Tropia. Lawrence M. Powers, the Chairman/CEO and a
large shareholder 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, the designers of the website who are now employees
of Tropia.
9
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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.
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:
[BULLET] are among the highest spenders on music;
[BULLET] have the most powerful computers and wide-spread
broadband access to the Internet;
[BULLET] spend a significant amount of time on the Internet;
[BULLET] share the attitudes and values of, and identify strongly with, the
independent artists featured on the website;
[BULLET] can be reached fairly easily and inexpensively by campus
newspaper, radio and television stations and promotional tours by
the website's featured artists; and
[BULLET] will appreciate the value of free downloaded 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.
10
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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,
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 coming 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.
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:
[BULLET] Radio-Style Interface. Users can "tune into" various radio
streams, classified by genre, which continuously broadcast the
music featured on the site.
[BULLET] 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.
[BULLET] 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:
[BULLET] 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.
[BULLET] Marketing. The website will provide artists with various
marketing tools, including public relations assistance, tour and
concert promotions, and e-mail promotions, among others.
[BULLET] 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).
11
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[BULLET] 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):
[BULLET] Continue to develop and increase music content
[BULLET] Use the latest compression formats
[BULLET] Use e-commerce to generate revenues from sales of cd's and
merchandise
[BULLET] Provide additional functionality
[BULLET] Target market the college student market
[BULLET] Introduce tropia college tv website
[BULLET] Become a service based community
[BULLET] Establish user accounts
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 June 30,
------------------------------
1999 % 1998 %
------------------------------
Continuing Operations: (Amounts in thousands)
Revenues 0 - 0 -
Operating costs and expenses:
Selling, general and administrative 160 - 0 -
Total operating costs and expenses 160 - 0 -
Operating income (loss) $(160) - 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
The operating costs and expenses are primarily composed of compensation to
employees and legal and accounting fees which have been incurred while the
Company goes through its transition resulting from the December 11, 1998 Change
12
<PAGE>
of Control Transaction. See "Operating Loss" below. 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.
Operating Loss
The Company had no revenues and the Company's operating loss from
continuing operations for the three months ended June 30, 1999 was $160,000, as
shown above. This amount is primarily composed of legal and accounting fees and
contribution of salaries and rent by management which have been incurred while
the Company goes through its transition resulting from the December 11, 1998
Change of Control Transaction.
Other Income and Expense
The company had no income from continuing operations. The expenses are
primarily legal and accounting fees and contribution of salaries and rent by
management which have been incurred while the company goes through its
transition resulting from the December 11, 1998 Change of Control Transaction.
Liquidity and Capital Resources
As of June 30, 1999 the Company has working capital of $815,000 which
follows from the infusion of cash as a result of the December 11, 1998 Change of
Control Transaction.
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 the June 23, 1999 agreement. Additional capital of
approximately $800,000 will be provided to Tropia during the twelve months after
such agreement.
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 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.
13
<PAGE>
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 is nearing completion of 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 or can readily be brought into compliance with the application of
corrective software modifications. In many cases, the Company expects these
modifications to be provided by the vendors of the computer and software
products. 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 is in the process of performing 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 Company expects to complete this second phase of its assessment by September
30, 1999. The formal process involves assessment of the following:
- hardware systems, including servers and systems used for data storage;
- software systems, including applications, development tools and
proprietary code;
- infrastructure systems, including routers, hubs and networks;
- the systems of our business partners
The Company is conducting 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 is conducting 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 near completed informal assessment and the Company's progress
on the formal assessment, the Company currently believes that its internal
systems are, or can readily be made, 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, which is used internally and unrelated to
website operations, has been found to be non-compliant, and has been scheduled
to be replaced prior to September 30, 1999.
Costs of Year 2000 Compliance Are Not Expected to Be Significant.
Based upon the near completed informal assessment and the extent of
completion of the formal assessment, 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:
14
<PAGE>
[BULLET] errors and defects that are detected after the formal assessment
process is complete;
[BULLET] third-party equipment, software or content fails to operate
properly with regard to the year 2000;
[BULLET] 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.
RISK FACTORS.
Please see the Company's Annual Report on Form 10-K (filed with the
Commission on July 14, 1999), "Item 1 - Risk Factors That May Affect the
Company's Business, Future Operating Results and Financial Condition."
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company has been a party to other legal actions and
proceedings incidental to its business. As of the date of this report, however,
the Company knows of no other pending or threatened legal actions that could
have a material impact on the financial condition of the Company.
Item 2. Changes in Securities
As reported on an Amendment No. 1 on Schedule 13D/A (filed on June 10,
1999), on May 19, 1999, Jon M. Gerber, Vice President, Treasurer and Secretary
of the Company, exercised his option to purchase 80,000 shares of Common Stock
at $0.15 per share, and tendered $12,000 of personal funds in cash.
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 at "Consolidated Financial
Statements -- Note 8 - Subsequent Event."
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
10.2 Stock Option of Lawrence M. Powers
27 Financial Data Schedule
15
<PAGE>
B. Reports on Form 8-K
On April 5, 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 MinuteMeals.com, Inc.
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.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Dated: August 16, 1999
SPECTRUM INFORMATION TECHNOLOGIES, INC.
By /s/ Lawrence M. Powers
------------------------
Lawrence M. Powers
Chief Executive Officer and
Chairman of the Board of Directors
By /s/ Jon M. Gerber
-------------------
Jon M. Gerber
Vice President, Secretary and Treasurer
17
<PAGE>
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.
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.
2
<PAGE>
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: By:
------------------------------ ----------------------------
Name: Jon Gerber Name: Lawrence M. Powers
Title: Vice President Its: Owner/Sole Proprietor
3
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT is made as of the _______ day of __________,
1999, by and between Spectrum Information Technologies, Inc. a Delaware
Corporation (the "Company") and Powers & Co. (the "Optionee".
WHEREAS, the Company and the Optionee have entered into a Stock Purchase
Agreement dated July 26, 1999, providing for the sale to the Optionee of shares
of common stock, par value $0.001 per share, of The Company (the "Common
Stock"), and the stock option described herein for an aggregate purchase price
of $1,250,000, subject to conditions precedent set forth therein; and
WHEREAS, the conditions precedent set forth in such Stock Purchase
Agreement have been satisfied;
NOW, THEREFORE, in consideration of the payment described, the mutual
covenants hereinafter set forth and for other good and valuable consideration,
the parties hereto agree as follows:
1. GRANT OF OPTION. The Company hereby grants to the Optionee the right and
option (hereafter called this "Option"), to purchase all or any part of an
aggregate of 500,000 shares of Common Stock on the terms and conditions set
forth herein.
2. EXERCISE PRICE AND EXPIRATION. The exercise price and the expiration
dates as to the share underlying this Option shall be as follows:
Number of Share Exercise Price Expiration Date
- --------------- --------------- ---------------
500,000 $2.50 per share ______________, 2004
3. DURATION. This Option shall become exercisable upon issuance of this
Agreement and shall remain exercisable at the stated price through the
expiration date set forth above. To facilitate partial transfer, exercise or
sale, this Option may be subdivided into options in smaller denominations upon
the Optionee's request in writing from time to time.
4. LIMITATION ON DISPOSITION. This Option and shares of Common Stock
underlying this Option have not been registered under the Securities Act of 1933
(the "Act") or under applicable state securities laws and, therefore, cannot be
sold, assigned, or otherwise transferred unless subsequently registered under
the Act and under applicable state securities laws or an exemption from such
registration is then available. The Optionee hereby agrees that it will not
sell, assign, or transfer this Option or the shares of Common Stock underlying
this Option unless they are registered under the Act and under applicable state
securities laws or an exemption from such registration is then available,
according to a legal opinion reasonably acceptable to the Company.
<PAGE>
5. MANNER OF EXERCISE OF OPTION. This Option may be exercised, subject to
the terms and conditions contained herein, by delivering written notice to the
Chief Executive Officer or Treasurer of the Company at its principal office no
less than three days in advance of the proposed exercise date. Such notice shall
specify the number of shares of Common Stock with respect to which this Option
is being exercised and the effective date of the proposed exercise and shall be
signed by the Optionee. The notice shall be accompanied by a certified check or
cash in the amount of the aggregate option exercise price for such number of
shares. In no event shall stock be issued or certificates be delivered until
full payment shall have been received by the Company as to such exercise or
partial exercise, nor shall the Optionee have any right or status as a
shareholder of such underlying shares prior to such exercise. Certificates for
shares of Common Stock purchased upon the exercise of this Option shall be
delivered to the Optionee as soon as practicable following the effective date on
which this Option is exercised.
6. ADJUSTMENT ON RECAPITALIZATION, MERGER OR REORGANIZATION. If the
outstanding shares of the Common Stock of the Company are subdivided,
consolidated, increased, decreased, changed into or exchanged for a different
number or kind of shares or securities of the Company through reorganization,
merger, recapitalization, reclassification, capital adjustment or otherwise, or
if the Company shall issue Common Stock as a dividend or upon a stock split,
then the number of shares subject to the unexercised portion of this Option
shall be appropriately adjusted by the Board of Directors of the Company. Any
such adjustment shall be made without change in the total exercise price
applicable to the unexercised portion of this Option. If, in the event of a
merger or consolidation, the Company is not the surviving corporation, and the
event that the agreement of merger or consolidation does not provide for the
substitution of a new option for this Option, or for the assumption of this
Option by the surviving corporation, or in the event of the dissolution or
liquidation of the Company, the Optionee shall have the right immediately prior
to the effective date of such merger, consolidation, dissolution or liquidation,
to exercise this Option in whole or in part, provided, however, that this Option
shall not be exercisable in whole or in part later than the date noted in
paragraph 2 above. Any adjustments made pursuant to this paragraph shall be made
by the Board of Directors of the Company, whose good faith determination in
compliance with Delaware law, as to what adjustment shall be made and the extent
thereof, shall be final, binding and conclusive. In computing any adjustment
hereunder, any fractional share which might otherwise become subject to this
Option shall be eliminated.
SPECTRUM INFORMATION TECHNOLOGIES, INC
By: ___________________________________________________
Jon Gerber, Vice-President, Secretary and Treasurer
OPTIONEE
POWERS & CO.
By: ___________________________________________________
Lawrence M. Powers, Owner
2
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SPECTRUM INFORMATION TECHNOLOGIES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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