UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
SITI-SITES.COM, 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 February 8, 2000, the registrant had outstanding 9,705,678 shares of its
Common Stock, par value $.001 per share.
<PAGE>
SITI-SITES.COM, INC. AND SUBSIDIARY
FORM 10-Q
DECEMBER 31, 1999
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Loss and Comprehensive Loss 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION 16
Item 2. Changes in Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Siti-Sites.com, Inc. and Subsidiary
Consolidated Balance Sheets
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31, 1999
(Unaudited) March 31, 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,582 $ 1,007
Other receivables 12
Other assets 38
-------- --------
Total current assets 1,632 1,007
-------- --------
Property and Equipment, net of accumulated depreciation 63 --
Investment in Minutemeals.com -- 23
Investment in Volatile Media, Inc. 500 --
Intangibles:
Goodwill 159 --
Less: Accumulated amortization (49) --
-------- --------
Intangibles, net 110 --
-------- --------
Total assets $ 2,305 $ 1,030
======== ========
Current Liabilities
Accounts payable and other accrued liabilities $ 63 $ 6
Accrued audit and tax 55 18
Accrued legal fees 194 51
Net liabilities of discontinued operations -- 68
-------- --------
Total current liabilities 308 143
-------- --------
Total liabilities 308 143
-------- --------
Commitments -- --
Stockholders' Equity:
Preferred shares, $.001 par value, 5,000 shares authorized and
none issued and outstanding, respectively -- --
Common stock, $.001 par value, 10,000 shares authorized
and 9,546 and 7,904 issued and outstanding, respectively 10 8
Paid-in capital 75,781 73,752
Accumulated deficit (73,487) (72,562)
-------- --------
2,3049 1,198
Treasury stock, 62 shares at cost (311) (311)
-------- --------
Total stockholders' equity 1,993 887
-------- --------
Total liabilities and stockholders' equity $ 2,305 $ 1,030
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Siti-Sites.com, Inc. and Subsidiary
<TABLE>
<CAPTION>
Consolidated Statements of Loss and Comprehensive Loss
(Amounts in thousands, except per share amounts)
(Unaudited) Three months ended Nine months ended
December 31, December 31,
1999 1998 1999 1998
- ------------------------------------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ --
------- ------- ------- -------
Operating costs and expenses:
Selling, general and administrative 487 -- 1,021 --
------- ------- ------- -------
Total operating costs and expenses 487 -- 1,021 --
------- ------- ------- -------
Operating loss (487) -- (1,021) --
------- ------- ------- -------
Other income, net 12 -- 30 --
------- ------- ------- -------
Loss from continuing operations (475) -- (991) --
Income (loss) from discontinued operations 6 (1,060) 66 (1,259)
------- ------- ------- -------
Net loss (469) (1,060) (925) (1,259)
Other comprehensive loss, net of tax -- -- -- --
------- ------- ------- -------
Comprehensive loss $ (469) $(1,060) $ (925) $(1,259)
======= ======= ======= =======
Basic and diluted income (loss) per common share:
Loss from continuing operations $ (.056) $ -- $ (.120) $ --
Income (loss) from discontinued operations .001 (.503) .008 (.654)
------- ------- ------- -------
Net income (loss) per common share $ (.055) $ (.503) $ (.112) $ (.654)
======= ======= ======= =======
Weighted average number of Common Shares used in
basic and diluted calculation 8,486 2,104 8,256 1,926
======= ======= ======= =======
</TABLE>
Interim results are not indicative of the results expected for a full year.
See accompanying notes to consolidated financial statements.
3
<PAGE>
Siti-Sites.com, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended December 31, 1999 1998
- ------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flow from operating activities:
Net Income (loss) $ (925) $(1,259)
Adjustments to reconcile net loss to net cash used by
Operating activities:
Contribution of services by management 88 --
Contribution of rent by management 25 --
Compensation via stock 2 --
Depreciation and amortization 53 --
(Increase) decrease in:
Receivables (12) --
Prepaid expenses and other assets (38) --
Increase (decrease) in:
Accounts payable 52 --
Accrued expenses 180 --
Net liabilities of discontinued operations (68) 1,259
- ------------------------------------------------------------------------------------
Net cash used by continuing operations (643) --
Net cash used by discontinued operations -- (1,845)
- ------------------------------------------------------------------------------------
Net cash used by operating activities (643) (1,845)
- ------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in Volatile Media, Inc. (500) --
Recovery of investment in Minutemeals.com 23 --
Capital expenditures (67) (74)
- ------------------------------------------------------------------------------------
Net cash used by continuing operations (544) --
Net cash used by discontinued operations -- 452
- ------------------------------------------------------------------------------------
Net cash provided by investing activities (544) 378
- ------------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds from the issuance of stock 1,750 --
Proceeds from the exercise of stock options 12 --
- ------------------------------------------------------------------------------------
Net cash provided by continued operations 1,762 --
Net cash provided by discontinued operations -- 927
- ------------------------------------------------------------------------------------
Net cash provided by financing activities 1,762 927
- ------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 575 (540)
Cash and cash equivalents, beginning of year 1,007 1,600
- ------------------------------------------------------------------------------------
Total cash and cash equivalents, end of period $ 1,582 $ 1,060
=========== ============
</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
Siti-Sites.com, Inc., formerly known as Spectrum Information Technologies,
Inc., and its subsidiary Tropia, Inc., a Delaware corporation ("Tropia")
(referred to collectively as "SITI" or the "Company") comprise an Internet media
company seeking to establish websites for the marketing of products and
services. The Company's four current websites relate primarily to the music
industry. The Company intends to develop websites targeted to the interests of
specific demographic groups by entering into joint ventures and strategic
partnerships. As part of this strategy, on June 23, 1999 the Company acquired
Tropia, which promotes and markets the music of selected independent artists on
its website www.tropia.com. (See Note 7.) The Company also recently completed
the acquisition of three music-related websites, HungryBands.com (an e-commerce
website and business promoting and selling music by independent artists),
NewMediaMusic.com (an e-news/magazine business), and NewYorkExpo.com (a music
and Internet conference business). (See Note 10.) In addition, the Company
recently completed a minority investment in a custom music CD compilation and
promotion company, Volatile Media, Inc., which does business as EZCD.com. The
Company has entered into a sharing arrangement with EZCD.com pursuant to which
they will share music content and technology. (See Notes 9 and 10.) SITI
currently employs a total of 14 employees and consultants, as compared to 2
employees in January, 1999. As a result of recent incentive issuances to key
employees and consultants, SITI's issued and outstanding shares have increased
to 9,705,678 shares as of February 8, 2000.
Siti-Sites.com, Inc. 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. The new senior management and
Board of Directors 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 changed its corporate name to Siti-Sites.com, Inc.
after its Annual Meeting of Stockholders on December 14, 1999, but has retained
its stock symbol "SITI ." (See "Part II. Other Information - Item 4. Submission
of Matters to a Vote of Security Holders.")
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 by January 1999. Subsequently, in December, 1999, Lawrence M. Powers,
the Chairman/CEO and a major stockholder of the Company, through Powers & Co (a
sole proprietorship owned by Mr. Powers), Robert Ingenito, the Vice-Chairman and
President of SITI, and John DiNozzi, a business partner of Mr. Ingenito invested
an additional $1,750,000 in the company. (See Note 9.)
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, Tropia. 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.
The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and, accordingly, do not include all of the disclosures
normally made in the Company's annual consolidated financial statements. 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, notwithstanding the investment of approximately $2,750,000 since
December 1998, will remain dependent on its ability to raise additional capital.
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:
December 31, 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,
December 31, 1999 1998
---- ----
(Amounts in thousands)
----------------------
Revenues $ - $ 209
-------------------------
Operating costs and expenses:
Selling, general and
administrative expenses - 1,668
-------------------------
Total operating
costs and expenses - 1,668
-------------------------
Operating Income (Loss) - (1,459)
-------------------------
Other income and (expenses) 6 399
-------------------------
Income (loss) from discontinued
operations $ 6 $ (1,060)
=========================
For the nine months ended,
December 31, 1999 1998
---- ----
(Amounts in thousands)
----------------------
Revenues $ - $ 2,324
-------------------------
Operating costs and expenses:
Selling, general and
administrative expenses 8 4,054
-------------------------
Total operating
costs and expenses 8 4,054
-------------------------
Operating Income (Loss) (8) (1,730)
-------------------------
Other income and (expenses) 74 471
-------------------------
Income from discontinued operations $ 66 $ (1,259)
=========================
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 nine
months ended December 31, 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
6
<PAGE>
agreement, the Company received $10,000 and a waiver of commissions due to such
former employee upon the collection of past due royalties from a former SITI
licensee, and agreed to remit $3,500 to such former employee personally upon
collection. The Company received approximately $28,000 in royalties in October
1999 from the licensee. In December 1999, such former employee further
negotiated for other royalties due the Company of approximately $8,000 for a fee
of approximately $2,000, anticipated to be collected shortly.
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 was refunded $23,000. As a result in
March 1999, the Company recorded an additional charge to income and a write-off
of the 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 seven 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. As of December 1, 1999
the Company determined shares held in escrow pursuant to such acquisition
agreement will not be issued, due to the resignation of key Tropia employees
(who have been replaced by other employees) and recorded an adjustment to the
purchase price. (See Note 7.) This was effected by reducing its common stock
outstanding by the number of reserved shares, approximately 158,333 and reducing
the original investment by approximately $153,000. (See Note 7)
NOTE 4 - INCOME (LOSS) PER COMMON SHARE
Income (loss) per share for the three months ended December 31, 1999 and
1998 was calculated as follows:
Three Months Ended December 31,
1999 1998
-----------------------------------------
Basic Diluted Basic Diluted
(Amounts in thousands, except
per share amounts)
-----------------------------------------
Net Loss $ (469) $ (469) $(1,060) $(1,060)
================== ===================
Weighted average number of
common shares outstanding
during the year 8,486 8,486 2,104 2,104
Common share equivalents -- -- -- --
------------------ -------------------
Weighted average number of
common shares and common share
equivalents used in
calculation of earnings per
common share 8,486 8,486 2,104 2,104
================== ===================
Earnings per common share $ (.055) $ (.055) $ (0.50) $ (0.50)
================== ===================
Income (loss) per share for the nine months ended December 31, 1999 and
1998 was calculated as follows:
7
<PAGE>
Nine Months Ended December 31,
1999 1998
-----------------------------------------
Basic Diluted Basic Diluted
(Amounts in thousands, except
per share amounts)
-----------------------------------------
Net Loss $ (925) $ (925) $(1,259) $ (1259)
================== ===================
Weighted average number of
common shares outstanding
during the year 8,256 8,256 1,926 1,926
Common share equivalents -- -- -- --
------------------ -------------------
Weighted average number of
common shares and common share
equivalents used in
calculation of earnings per
common share 8,256 8,256 1,926 1,926
================== ===================
Earnings per common share $ (.112) $ (.112) $ (0.65) $ (0.65)
================== ===================
Common stock equivalents were not included in the computation of weighted
average shares outstanding for the quarter and nine months ended December 31,
1999 and 1998, respectively, because such inclusion would be anti-dilutive.
NOTE 5 - STATEMENTS OF CASH FLOWS
Nine months ended
December 31,
----------------------
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 $ 88 $ --
Contribution of rent by management $ 25 $ --
Stock issued to prior management and staff $ -- $591
Stock options for prior board of directors and
consultants $ -- $ 33
Compensation via stock $ 2 $ --
Acquisition of Tropia, Inc. $159 $ --
Senior management of Siti-Sites.com, 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 approximately
$88,000 for the nine months ended December 31, 1999 to account for the value of
these services provided by such senior management.
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 acquired
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. To date, the Company has
contributed approximately $400,000 to Tropia operations. The acquisition was
effected by merging Siti-II, Inc., a Delaware corporation and a wholly-owned
subsidiary of SITI, 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 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 acquisition was accounted for as a purchase for financial statement
purposes 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 were in escrow to be delivered one year
after the closing, if certain performance goals were achieved, to Jonathan
Blank, Tropia's former CEO, Arjun Nayyar, Tropia's former Technical Director,
and Ari Blank, Tropia's former Design Director.
In accordance with Accounting Principles Board ("APB") No. 16, the
aggregate purchase price of $306,786 was 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
========
In October, 1999, the Company had 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.), as well as the issuance of 24,155
additional shares of the Company's common stock to Jonathan Blank. But early in
November 1999, Arjun Nayyar and Ari Blank, the developers of the website,
announced, that they were resigning to pursue other interests, and Jonathan
Blank also left the Company at such time, requiring a cutback in Tropia's
expansion and capital consumption. As a result, as of December 1, 1999, the
Company reduced its purchase price and goodwill by approximately $153,000,
representing the dollar value of the acquisition shares held in escrow which
would have been delivered if they had continued their services for one year
after closing. In connection with their described resignation, such three
individuals were informed that, since they determined not to be present to
continue with Tropia's development and operations, none of the foregoing
acquisition, or subsequent, shares would be delivered to them. Their rights to
such shares are now in dispute in connection with claims relating to the Tropia
acquisition agreement and their collective activities since their resignations,
which include their alleged improper use of the Company's intellectual and other
property.
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.
In addition, on September 29, 1999, the Company 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 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 Chairman/CEO,
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.
At SITI's Annual Meeting of Stockholders on December 14, 1999, the
stockholders of SITI approved SITI's second round of financing with Lawrence M.
Powers, the Chairman/CEO and a major stockholder of SITI, with SITI receiving
$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. Mr. Powers had previously loaned $1,250,000 to SITI in
anticipation of receipt of stockholder approval. Under the loan agreement, upon
receipt of the approval of SITI's stockholders, the principal amount of the loan
was applied to the purchase price of the common stock and option, SITI retained
all interest earned on the principal, and SITI's obligation to repay the loan
was deemed to be satisfied. 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 Mr. Powers. The financing was accomplished through
Powers & Co., a sole proprietorship owned by Mr. Powers.
At SITI's Annual Meeting of Stockholders on December 14, 1999, the
stockholders of SITI also (a) elected SITI's board of directors, (b) approved
SITI's Amended and Restated Certificate of Incorporation changing, among other
things, SITI's corporate name to Siti- Sites.com, Inc., (c) approved the
adoption of an employee/director stock option plan, and (d) ratified the
appointment of SITI's independent public accountants. SITI's Amended and
Restated Certificate of Incorporation was filed with the Secretary of State of
the State of Delaware on December 15, 1999. (See "Part II. Other Information -
Item 4. Submission of Matters to a Vote of Security Holders.")
In addition, on December 23, 1999, Lawrence M. Powers, through Powers &
Co., Robert Ingenito, the Vice-Chairman and President of SITI, and John DiNozzi,
a business partner of Mr. Ingenito, purchased additional equity of SITI for an
aggregate of $500,000 (with Mr. Powers investing $250,000 and Messrs. Ingenito
and DiNozzi each investing $125,000). They purchased an aggregate of 400,000
additional shares of SITI common stock and options to purchase an aggregate of
200,000 additional shares of SITI common stock at $2.50 per share, exercisable
for five years. Mr. Powers has made a gift of one-half of the shares of SITI
common stock and the options he acquired in each of the transactions described
above in this Note 9 to his son, Barclay Powers, a Director of SITI.
Also on December 21, 1999, Mr. Powers, through Powers & Co., purchased
from Maurice Schonfeld, a former Director of SITI, 166,666 shares of SITI common
stock, and an option to purchase 100,000 additional shares of common stock at
$0.15 per share, exercisable until December 11, 2003, for an aggregate purchase
price of $33,333, the price paid by Mr. Schonfeld. At that time, Mr. Schonfeld
sold his remaining shares of SITI common stock and his remaining options to Mr.
DiNozzi and to another individual at the price paid by Mr. Schonfeld for such
common stock and options.
Thereafter, on December 23, 1999, SITI agreed to invest $500,000 in
Volatile Media, Inc., which does business as EZCD.com (www.ezcd.com) subject to
negotiation and execution of final documents and made a $500,000 bridge loan to
Volatile Media, Inc. pending the completion of such documents. Such documents
were completed on February 8, 2000 and the amounts due to the Company under the
Bridge Note were applied to its investment in Volatile Media, Inc. As a result,
on such date SITI acquired convertible preferred stock and five-year warrants
(exercisable at substantially higher prices) totaling approximately 4% of
Volatile Media, Inc.'s common stock equity, after conversion and exercise, and
the bridge loan was deemed paid.
10
<PAGE>
EZCD.com, which targets the same college and youth markets as SITI's
websites, combines varied content with services which are useful to artists and
labels. These include an e-commerce and royalty reporting system, automated
publishing software to disseminate tour-dates and other artist generated news,
and e-mail and communication tools. EZCD.com's services to consumers and fans
include personalized music selections and one-click registration for newsletters
and fan clubs, EZCD.com has also developed several non-music marketing partners,
who offer custom CD's as part of their consumer product promotions.
On December 23, 1999, SITI also entered into a Content and Technology
Sharing Agreement with Volatile Media, Inc., under which the music content of
EZCD.com (consisting of approximately 20,000 artists currently), and the
software and related technology for all of its services, will be made available
on a private-label basis to all of the SITI websites. This Sharing Agreement
further provides for linkage between Volatile Media's and SITI's e-commerce
websites (presently www.tropia.com, www.hungrybands.com, www.newmediamusic.com
and www.newyorkexpo.com) for shared promotion and commerce. Pursuant to this
agreement, certain senior executives of SITI will join Volatile Media, Inc.'s
advisory panel.
SITI's business is seeking to grow within the music industry, with an
emphasis on increased music content, and fan and artist data aggregation, to be
followed by extensive data-based marketing to its artists and fan
constituencies. SITI currently employs a total of 14 employees and consultants,
as compared to 2 employees in January, 1999.
NOTE 10 - SUBSEQUENT EVENTS
On January 3, 2000, SITI. acquired all of the assets and certain
liabilities relating to three music-related websites (i) HungryBands.com
(www.hungrybands.com), an e-commerce website and business promoting and selling
music by independent artists, (ii) NewMediaMusic.com (www.newmediamusic.com), an
e-news/magazine business devoted to new Internet music, news releases by artists
and record labels, interviews and other information useful to fans and artists,
and (iii) NewYorkExpo.com (www.newyorkexpo.com), a music and Internet conference
business. The acquired assets consisted primarily of intangible assets.
HungryBands.com was acquired for 150,000 shares of SITI common stock,
payable in three installments through June, 2000 to its founder and owner Ted
Mazola, as certain operating goals are achieved. HungryBands.com had
approximately 1,600 bands signed-up or linked into its website, and is in the
process of adding 1,000 new bands.
SITI acquired NewMediaMusic.com from Mr. Mazola and Steve Zuckerman, and
NewYorkExpo.com from New York Music Expo, Inc., a New Jersey corporation which
is wholly-owned by Mr. Zuckerman, for a total of 60,000 shares of SITI common
stock. In addition, Mr. Zuckerman was granted a 15% interest for three years in
the operating profits of NewYorkExpo.com's music and Internet conference
business, after completing an upcoming March, 2000 Expo (in which he was granted
a 75% interest). Messrs. Mazola and Zuckerman recently joined SITI as
Vice-President/Technology and Vice-President/NewMedia Development, respectively.
In addition, as discussed in Note 9, SITI agreed to invest $500,000 in
Volatile Media, Inc., a custom CD music compilation company which does business
as EZCD.com (www.ezcd.com), subject to negotiation and execution of final
documents, and made a $500,000 bridge loan to Volatile Media, Inc. pending the
completion of such documents. Such documents were completed on February 8, 2000
and the amounts due to the Company under the Bridge Note were applied to its
investment in Volatile Media, Inc. As a result, on such date SITI acquired
convertible preferred stock and five-year warrants (exercisable at substantially
higher prices) totaling approximately 4% of Volatile Media, Inc.'s common stock
equity, after conversion and exercise.
Further, in February, 2000, SITI issued an aggregate of 159,500 additional
shares of its common stock to certain of its employees in consideration of their
services to SITI, raising its issued and outstanding shares to 9,705,678 shares
as of February 8, 2000.
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.
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Website Expenses. Expenses incurred to develop and maintain websites are
expensed as incurred.
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 Siti-Sites.com, Inc., formerly known as Spectrum Information
Technologies, Inc., and its subsidiary, Tropia, Inc., a Delaware corporation
("Tropia" and, together with Siti-Sites.com, Inc., "SITI" 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
Siti-Sites.com, Inc., formerly known as Spectrum Information Technologies,
Inc., and its subsidiary, Tropia, comprise an Internet media company which is
seeking to establish websites for the marketing of products and services.
Siti-Sites.com, Inc. 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. The new senior management and
Board of Directors 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 intends to develop websites targeted to the interests
of specific demographic groups by entering into joint ventures and strategic
partnerships. The Company's current websites relate primarily to the music
industry. The Company changed its corporate name to Siti-Sites.com, Inc. after
its Annual Meeting of Stockholders on December 14, 1999, but has retained its
stock symbol "SITI." (See "Part II. Other Information - Item 4. Submission of
Matters to a Vote of Security Holders.")
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 by January 1999. Subsequently, in December, 1999, Lawrence M. Powers,
the Chairman/CEO and a major stockholder of the Company,through Powers & Co. (a
sole proprietorship owned by Mr. Powers), Robert Ingenito, the Vice-Chairman and
President of SITI, and John DiNozzi, a business partner of Mr. Ingenito invested
an additional $1,750,000 in the Company. (See "Part II - Other Information -
Item 2. Changes in Securities".)
In pursuit of its strategy, on June 23, 1999, the Company acquired 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 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 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.
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, half
of which were delivered at closing, and half of which were in escrow to be
delivered after one year to Jonathan Blank, Tropia's former CEO, Arjun Nayyar,
Tropia's former Technical Director, and Ari Blank, Tropia's former Design
Director, if certain performance goals were achieved. Early in November 1999,
Arjun Nayyar and Ari Blank, the developers of the website, announced they were
resigning to pursue other interests, and Jonathan Blank also left the Company at
such time, requiring a
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cutback in Tropia's expansion and capital consumption. In connection with their
described resignation, such three individuals were informed that, since they
determined not to be present to continue with Tropia's development and
operations, none of the foregoing acquisition, or subsequent, shares would be
delivered to them. Their rights to such shares are now in dispute in connection
with claims relating to the Tropia acquisition agreement and their collective
activities since their resignations, which include their alleged improper use of
the Company's intellectual and other property. (See "Item 5. Other
Information.")
At that time these individuals left the Company, the Board decided to
explore strategic alternatives for Tropia to enhance stockholder value,
including potential strategic partners, or the sale or other disposition of
Tropia or the Tropia website, or the licensing of Tropia's software. Robert
Ingenito, the current Vice-Chairman and President of the Company, who has
extensive experience managing Information Technology, both in its development
and its marketing, was put in charge of all further operations, and the reduced
personnel, at Tropia. Ultimately, the Board determined that it was in the best
interests of the Company and its stockholders to continue to develop Tropia, has
hired new employees and consultants to help do so and has engaged in various
transactions to continue the growth of the Company's overall Internet music
business.
Thereafter, on December 23, 1999, the Company agreed to invest $500,000 in
Volatile Media, Inc., which does business as EZCD.com (www.ezcd.com), subject to
negotiation and execution of final documents, and made a $500,000 bridge loan to
Volatile Media, Inc. pending the completion of such documents. Such documents
were completed and executed on February 8, 2000 and the amounts due to the
Company under the Bridge Note were applied to its investment in Volatile Media,
Inc. As a result, on such date SITI acquired convertible preferred stock and
five-year warrants (exercisable at substantially higher prices) totaling
approximately 4% of Volatile Media, Inc.'s common stock equity, after conversion
and exercise, and the bridge loan was deemed paid.
EZCD.com, which targets the same college and youth markets as SITI's
websites, combines varied content with services which are useful to artists and
labels. These include an e-commerce and royalty reporting system, automated
publishing software to disseminate tour-dates and other artist generated news,
and e-mail and communication tools. EZCD.com's services to consumers and fans
include personalized music selections and one-click registration for newsletters
and fan clubs. EZCD.com has also developed several non-music marketing partners,
who offer custom CD's as part of their consumer product promotions
On December 23, 1999, SITI also entered into a Content and Technology
Sharing Agreement with Volatile Media, Inc., under which the music content of
EZCD.com (consisting of approximately 20,000 artists), and the software and
related technology for all of its services, will be made available on a
private-label basis to all of the SITI's websites. This Sharing Agreement
further provides for linkage between Volatile Media's and SITI's e-commerce
websites (presently www.tropia.com, www.hungrybands.com, www.newmediamusic.com
and www.newyorkexpo.com) for shared promotion and commerce. Pursuant to this
Sharing Agreement, certain senior executives of SITI will join Volatile Media,
Inc.'s advisory panel. (See Notes 9 and 10 to the Consolidated Financial
Statements.)
Thereafter, on January 3, 2000, SITI acquired all of the assets and
certain liabilities relating to three music-related websites (i) HungryBands.com
(www.hungrybands.com), an e-commerce website and business promoting and selling
music by independent artists, (ii) NewMediaMusic.com (www.newmediamusic.com), an
e-news/magazine business devoted to new Internet music, news releases by artists
and record labels, interviews and other information useful to fans and artists,
and (iii) NewYorkExpo.com (www.newyorkexpo.com), a music and Internet conference
business. The acquired assets consisted primarily of intangible assets.
HungryBands.com was acquired for 150,000 shares of SITI common stock,
payable in three installments through June, 2000 to its founder and owner Ted
Mazola, as certain operating goals are achieved. HungryBands.com has
approximately 1,600 bands signed-up or linked into its website, and is in the
process of adding 1,000 new bands.
SITI acquired NewMediaMusic.com from Mr. Mazola and Steve Zuckerman, and
NewYorkExpo.com from New York Music Expo, Inc., a New Jersey corporation which
is wholly-owned by Mr. Zuckerman, for a total of 60,000 shares of SITI common
stock. In addition, Mr. Zuckerman was granted a 15% interest for three years in
the operating profits of NewYorkExpo.com's music and Internet conference
business, after completing an upcoming March, 2000 Expo (in which he was granted
a 75% interest). Messrs. Mazola and Zuckerman recently joined SITI as
Vice-President/Technology and Vice-President/NewMedia Development, respectively.
SITI's business is seeking to grow within the music industry, with an
emphasis on increased music content, and fan and artist data aggregation, to be
followed by extensive data-based marketing to its artists and fan
constituencies. SITI currently employs a total of 14 employees and consultants
as compared to 2 employees in January, 1999. As a result of recent incentive
issuance to key employees and consultants, SITI's issued and outstanding shares
have been increased to 9,705,678 shares as of February 8, 2000.
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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 with the period of December 12, 1998 through December 31, 1998
deemed discontinued.
Three Months Ended December 31,
1999 % 1998 %
(Amounts in thousands)
--------------------------------
Continuing Operations:
Revenues $ 0 -- $ 0 --
Operating costs end expenses:
Selling, general and administrative 487 -- 0 --
-------------- -------------
Total operating costs and expenses 487 -- 0 --
-------------- -------------
Operating loss $(487) -- $ 0 --
============== =============
Nine months Ended December 31,
1999 % 1998 %
(Amounts in thousands)
--------------------------------
Continuing Operations:
Revenues $ 0 -- $ 0 --
Operating costs end expenses:
Selling, general and administrative 1,021 -- 0 --
-------------- -------------
Total operating costs and expenses 1,021 -- 0 --
-------------- -------------
Operating loss $(1,021) -- $ 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 nine months ended
December 31, 1999, operating costs and expenses were primarily composed of other
expenses of approximately $ 202,000 and $204,000, respectively. These fees were
primarily associated with the December 14, 1999 Annual Meeting of Stockholders,
the first such meeting since 1995. These costs included the copying and
distribution of the proxy statement and certain mailings included with the proxy
statement. Legal fees approximated $51,000 and $216,000, respectively, for the
three and nine months ended December 31, 1999. Compensation to employees totaled
approximately $80,000 and $216,000, respectively for the quarter and nine months
ended December 31, 1999. This compensation consisted of management's
contribution of services (See Note 5 to the Consolidated Financial Statements)
as well as the hiring of employees to aid in the development of the Company's
business plan. Accounting fees were approximately $23,000 and $103,000,
respectively for the three and nine months ended December 31, 1999. Outside
services were approximately $40,000 and $87,000, respectively, for the three and
nine months ended December 31, 1999. These fees were
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incurred in connection with the Company's transition resulting from the December
11, 1998 change of control transaction as well as the development of the
Company's business plan.
OPERATING LOSS
The Company had no revenues and the Company's operating loss from
continuing operations for the three and nine months ended December 31, 1999 was
$487,000 and $1,021,000, 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
December 11, 1998 change of control transaction.
OTHER INCOME AND EXPENSE
During the three and nine months ended December 31, 1999, the Company
recognized other income of approximately $12,000 and $30,000, respectively,
which was primarily composed of interest income of approximately $12,000 and
$29,000, respectively. Interest income was directly related to the $2,750,000
invested in the Company in the past year by its controlling shareholders. (See
"- Overview.").
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had working capital of $1,324,000 as
compared to working capital of $864,000 as of March 31,1999. The increase in
working capital is primarily due to the proceeds of the Company's recent
financings in the aggregate amount of $1,750,000, as described above in "-
Overview" and in "Part II. Other Information - Item 2. Changes in Securities."
The Company currently is financing its daily operations primarily through the
application of these proceeds.
Net cash used by continuing operations for operating activities was
approximately $643,000 for the nine months ended December 31, 1999. This use
consisted primarily of payments for legal and accounting fees as well as
compensation to employees and independent contractors.
Net cash used by continuing operations for investing activities was
approximately $544,000 for the nine months ended December 31, 1999 primarily due
to the Company's $500,000 investment in Volatile Media, Inc. (See Note 9 to the
Consolidated Financial Statements). In May 1999 the Company was reimbursed
$23,000 as a result of the termination of its agreement with Minutemeals.com,
Inc. (See Note 2 to the Consolidated Financial Statements). In addition, capital
expenditures totaled approximately $67,000 for the nine months ended December
31, 1999. This amount is attributable primarily to the Company's purchase of
equipment to set up its New York office and develop its business plan.
During the nine months ended December 31, 1999, the Company received
approximately $1,750,000 from the proceeds of the recent financings, as
described above in "- Overview" and in "Part II. Other Information - Item 2.
Changes in Securities." Also, certain options were exercised for an aggregate
exercise price of $12,000 during the nine months ended December 31, 1999.
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, such as 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 sites, 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
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interruptions and the economic impact that such failures have on our customers,
content providers and future advertisers. To date, the Company has not
experienced and does not anticipate any such failures or interruptions.
YEAR 2000 COMPLIANCE ASSESSMENTS
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. 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;
and
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
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.
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; or
o third-party providers of Web resources expend significant
resources to correct their current systems for Year 2000
compliance, resulting an increase.
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.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
At SITI's Annual Meeting of Stockholders on December 14, 1999, the
stockholders of SITI approved SITI's second round of financing with Lawrence M.
Powers, the Chairman/CEO and a major stockholder of SITI, with SITI receiving
$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. Mr. Powers had previously loaned $1,250,000 to SITI in
anticipation of receipt of stockholder approval. Under the loan agreement, upon
receipt of the approval of SITI's stockholders, the principal amount of the loan
was applied to the purchase price of the common stock and option, SITI retained
all interest earned on the principal, and SITI's obligation to repay the loan
was deemed to be satisfied. None of the shares or the option will initially be
registered with the Securities and Exchange Commission for future sale, and were
taken for investment by Mr. Powers. The financing was accomplished through
Powers & Co., a sole proprietorship owned by Mr. Powers.
In addition, on December 23, 1999, Lawrence M. Powers, through Powers &
Co., Robert Ingenito, the Vice-Chairman and President of SITI, and John DiNozzi,
a business partner of Mr. Ingenito, purchased additional equity of SITI for an
aggregate of $500,000 (with Mr. Powers investing $250,000 and Messrs. Ingenito
and DiNozzi each investing $125,000). They purchased an aggregate of 400,000
additional shares of SITI common stock and options to purchase an aggregate of
200,000 additional shares of SITI common stock at $2.50 per share, exercisable
for five years. Mr. Powers has made a gift of one-half of the shares of SITI
common stock and the options he acquired in each of the transactions described
above to his son, Barclay Powers, a Director of SITI.
As discussed in "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview," SITI issued (a) 50,000 shares
of its common stock to Ted Mazola, the Vice-President/Technology of SITI, in
connection with SITI's acquisition of HungryBands.com from Mr. Mazola, and (b)
30,000 shares of its common stock to each of Ted Mazola and Steve Zuckerman, the
Vice-President/NewMedia Development of SITI, in connection with SITI's
acquisition of NewMediaMusic.com from Messrs. Mazola and Zuckerman and of
NewYorkExpo.com from a company owned by Mr. Zuckerman.
Further, in February, 2000, SITI issued an aggregate of 159,500 additional
shares of its common stock to certain of its employees and consultants in
consideration of their services to SITI, raising its issued and outstanding
shares to 9,705,678 shares as of February 8, 2000.
All of the foregoing shares were issued in reliance upon the exemption
from registration provided under Section 4(2) of the Securities Act of 1933, as
amended, on the basis that such transactions did not involve any public
offering. The stockholders who received such shares of SITI had access to all
relevant information regarding SITI 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
SITI used reasonable care to ensure that such stockholders were not
underwriters.
In addition to the foregoing stock issuances, on December 21, 1999, Mr.
Powers, through Powers & Co., purchased from Maurice Schonfeld, a former
Director of SITI, 166,666 shares of SITI common stock, and an option to purchase
100,000 additional shares of common stock at $0.15 per share, exercisable until
December 11, 2003, for an aggregate purchase price of $33,333, the price paid by
Mr. Schonfeld. At that time, Mr. Schonfeld sold his remaining shares of SITI
common stock and his remaining options toMr. DiNozzi and to another individual
at the price paid by Mr. Schonfeld for such common stock and options. . Mr.
DiNozzi and such other individual each purchased an equal number of such shares
and options.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SITI held its Annual Meeting of Stockholders on December 14,1999. The
following is a brief description of each matter voted on at the meeting and a
statement of the number of votes cast for, against or withheld and the number of
abstentions with respect to each matter.
(a) The stockholders elected the following directors to serve as directors
of the Company until their successors have been elected and qualified:
FOR WITHHELD
Barclay Powers (Class I Director) 4,784,017 22,269
Robert Ingenito (Class II Director) 4,784,023 22,263
Lawrence M. Powers (Class III Director) 4,784,022 22,264
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(b) The stockholders approved the Company's Amended and Restated
Certificate of Incorporation, to, among other things, (i) change the name
of the Company to "Siti-Sites.com, Inc.," (ii) increase the number of
authorized shares of Common Stock from 10,000,000 to 35,000,000, and the
number of authorized shares of Preferred Stock from 2,000,000 to
5,000,000, (iii) delete the authorization for and all references to Class
A Stock, which was automatically converted to Common Stock on March 31,
1999, (iv) delete certain limitations on transfers of Common Stock which
were originally designed to preserve net operating loss carry forwards of
the Company which were lost as a result of the change of control
transaction in December, 1998, and (v) further indemnify the Company's
directors, officers and employees against costs and expenses relating to
the performance of their duties.
FOR AGAINST ABSTAIN
4,732,599 31,025 42,661
(c) The stockholders approved a plan of financing to raise additional
funds through a $1.25 million private placement with Lawrence M. Powers.
FOR AGAINST ABSTAIN
4,777,201 24,069 5,015
(d) The stockholders ratified the Company's 1999 Stock Option Plan.
FOR AGAINST ABSTAIN
4,759,795 33,543 12,948
(e) The stockholders ratified the appointment of Edward Isaacs and Company
LLP as the Company's independent public accountant for the fiscal year
ending March 31, 2000.
FOR AGAINST ABSTAIN
4,785,260 14,135 6,890
ITEM 5. OTHER INFORMATION
As discussed in Note 7 to the Consolidated Financial Statements, Tropia
was acquired on June 23, 1999 for an aggregate of 316,666 shares of the
Company's common stock, half of which were delivered at closing, and half of
which were in escrow to be delivered one year after closing if certain
performance goals were achieved, to Jonathan Blank, Tropia's former CEO, Arjun
Nayyar, Tropia's former Technical Director, and Ari Blank, Tropia's former
Design Director. In October, 1999, the Company had 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.), as well as the
issuance of 24,155 additional shares of the Company's common stock to Jonathan
Blank. But early in November 1999, Arjun Nayyar and Ari Blank, the developers of
the Tropia website, announced that they were resigning to pursue other
interests, and Jonathan Blank also left the Company at such time, requiring a
cutback in Tropia's expansion and capital consumption. As a result, as of
December 1, 1999 the Company reduced its purchase price and goodwill by
approximately $153,000, representing the dollar amount of the acquisition shares
held in escrow which would have been delivered if they had continued their
services for one year after closing. In connection with their described
resignation, such three individuals were informed that, since they determined
not to be present to continue with Tropia's development and operations, none of
the foregoing acquisition, or subsequent, shares would be delivered to them.
Their rights to such shares are now in dispute in connection with claims
relating to the Tropia acquisition agreement and their collective activities
since their resignations, which include their alleged improper use of the
Company's intellectual and other property.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Number Title
10.1 Content and Technology Sharing Agreement dated December 23,
1999, between the Company and Volatile Media, Inc.
10.2 Subscription Agreement dated February 8, 2000, between the
Company and Volatile Media, Inc.
10.3 Siti-Sites.com, Inc. 1999 Stock Option Plan
27 Financial Data Schedule
B. Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter ended
December 31, 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Dated: February 11, 2000
SITI-SITES.COM, INC.
By /s/ Lawrence M. Powers
--------------------------------------
Lawrence M. Powers
Chief Executive Officer and
Chairman of the Board of Directors
20
Content and Technology Sharing Agreement
Concurrently with an investment by Siti-Sites.com, Inc. ("SITI") in Volatile
Media, Inc. ("EZCD") of even date herewith, SITI and EZCD do hereby agree to the
following Content and Technology Agreement ( the "C/T Agreement") on the terms
and conditions hereinafter set forth:
1. EZCD shall make all of its websites available by linkage to all of SITI's
websites, enabling SITI to show the content of all of EZCD's array of
artists and services, and undertake e-commerce therefor, at a 15% cash
commission on each transaction resulting from a SITI websites viewer
linking onto any EZCD website, with the fulfillment of the order occurring
at the EZCD site.
2. SITI shall make all of its websites available by linkage to all of EZCD's
websites enabling EZCD to show the content of all of SITI's array of
artists and services, and undertake e-commerce therefor, at a 15% cash
commission on each transaction resulting from an EZCD websites viewer
linking onto any SITI website, with the fulfillment of the order occurring
at the SITI site.
3. EZCD shall make available to SITI artists and websites all of EZCD's
services to artists and fans, including web pages, scheduling /tour
information, interviews, publicity releases, and other services as they
develop, on a private-label basis to SITI (i.e. SITI's various website
brands plus the phrase "powered by EZCD" on any site page with materials
which are services to artists or fans). SITI shall continue to host all
its websites on its own servers, with technology, advice and cooperation
from EZCD's technical staff, to be supplied based on EZCD's reasonable
costs therefor. The charges to SITI generally shall be no less favorable
than EZCD makes to any other affiliate to which this software and services
package is licensed or otherwise provided. However in measuring such "most
favored nation" rate, SITI's performance requirements or volume
commitments shall be substantially comparable to that of the other EZCD
affiliate's contract, resulting in reasonable rate adjustment if they are
not comparable. By way of example, EZCD's existing licensing agreement
with Ebop dated October 25, 1999 shall be a model for the relationship,
subject to the following variations in terms:
a) The payment will be $5,000 at commencement of EZCD's work, and
$5,000 on delivery of the initial version of the model site for use
by SITI, with an additional payment of in an amount not to exceed
$10,000 as mutually agreed upon by the parties in their reasonable
discretion, when SITI is reasonably satisfied with EZCD's full
implementation thereof, and based on such payments, no revenue
sharing thereafter as to SITI's several sites using the EZCD
software. Notwithstanding the foregoing, SITI has waived both of the
$5,000 payments referred to above in consideration of SITI's
investment in EZCD on the date hereof.
b) The software license shall be non-transferable outside the SITI
group of websites, except with EZCD's prior written approval on any
sub-license, but SITI may transfer its entire music group to new
ownership with such license intact without further approval. The
term of the license shall for the life of EZCD's web-based software
(patent pending) for electronic promotion, commerce, facilities for
artists and fans, and reporting. When SITI can develop business
relationships which can use private-branding of the EZCD facilities
for artists and fans, it shall discuss fair
<PAGE>
and reasonable compensation arrangements with EZCD for joining
therein with SITI to implement the relationships.
4. With respect to e-commerce on songs by SITI artists, where the purchaser
has linked to EZCD for such song from the SITI websites and requests it to
be included in a custom compilation CD by EZCD, SITI shall receive its 15%
commission on each song thus included. Independent of this linkage
commission, SITI will also receive royalties as per the standard EZCD
label agreement ( currently $.30 per song, or 30% of the net consumer
purchase price of the song, whichever is less), whenever SITI's website
viewer links to EZCD and purchases a SITI provided song in a custom
compilation CD. Reciprocally, any EZCD song sold from SITI websites as a
result of an EZCD viewer's linkage thereto, shall entitle EZCD to similar
linkage fees, plus royalties as per the standard EZCD label agreement.
5. The parties intend these linkage and e-commerce arrangements to extend to
all of their future artists and services as they grow their respective
businesses. When either party develops any new technology or service that
could be productive for the other party, they will discuss an e-commerce
arrangement similar to the foregoing based on their respective reasonable
costs, and at charges no less favorable than are being made to other
affiliates committing to substantially similar contractual terms
6. EZCD and SITI shall each make available to the other all transaction
records, website traffic reports or other other materials necessary to
monitor e-commerce results hereunder, and ensure fair and prompt payment
therefor to either party.
7. SITI shall further have the right to have either Lawrence Powers or Robert
Ingenito (or another representative of SITI) attend as observers at any or
all of the meetings of the board of directors of EZCD, so long as SITI
owns at least 1% of EZCD's outstanding stock (including SITI's warrants).
Both representatives of SITI shall be promptly appointed to EZCD's
advisory panel, and shall have made available to them all financial and
other materials supplied monthly and quarterly to directors, in order to
monitor SITI's investment in EZCD and observe board meetings effectively,
and shall further have reasonable monthly rights of inquiry and review
with senior executives of EZCD. SITI shall also have the right to review
any material consent resolution of the board of directors of EZCD prior to
its execution.
In Witness Whereof, the parties have executed this C/T Agreement as of the
23rd day of December, 1999.
Siti-Sites.com, Inc. Volatile Media, Inc.
By /s/Lawrence Powers By /s/Jeremy Kagan
-------------------------- ------------------------
Lawrence Powers, Chairman/CEO Jeremy Kagan, President/CEO
VOLATILE MEDIA, INC.
SUBSCRIPTION AGREEMENT
C O N F I D E N T I A L
Volatile Media, Inc.
30 Vandam Street, Suite 4A
New York, NY 10013
Attention: Mr. Jeremy Kagan, President
Ladies and Gentlemen:
1. Application. Siti-Sites.com, Inc. (the "Undersigned"), intending
to be legally bound, hereby subscribes for two (2) units (the "Units"), each
unit consisting of (i) 178,206 shares of Series C Convertible Preferred Stock of
Volatile Media, Inc., a New York corporation (the "Company"), par value $.001
per share, and liquidation preference $1.41 per share (the "Shares"), at per
share purchase price of $1.41, and (ii) warrants to purchase 89,103 shares of
Common Stock of the Company, par value $.001 per share ("Common Stock"), at an
exercise price of $2.81 per share, and warrants to purchase 89,103 shares of
Common Stock at an exercise price of $4.21, at an aggregate purchase price of
Five Hundred Thousand Dollars ($500,000) (the "Purchase Price"). The Shares
purchased now shall be convertible into shares of Common Stock, in accordance
with the terms and conditions set forth on Exhibit A attached hereto and made a
part hereof and will otherwise have the rights, preferences and privileges
substantially as set forth on Exhibit B attached hereto. The warrants purchased
now shall be issued to the Undersigned, substantially in the form of the warrant
attached hereto as Exhibit C. The Undersigned understands that this subscription
is binding upon the Company upon execution and delivery by the Undersigned, and
is thereafter binding upon the Undersigned, and requires the immediate closing
thereof with the Undersigned regardless of other closing terms applicable to
other investors in this offering by the Company.
2. Closing. A closing for the purchase of the Units shall be held
simultaneously with the Company's execution hereof at a place mutually agreeable
to the Company and the Undersigned (the "Closing"). At the Closing, the Company
shall issue and deliver to the Undersigned one or more stock certificates
evidencing the number of Shares set forth above and a warrant to purchase the
number of Shares of Common Stock set forth above against payment of the Purchase
Price by applying the amount due to the Undersigned from the Company under the
terms of the Bridge Note dated December 23, 1999 in the principal amount of
$500,000 made by the Company payable to the order of the Undersigned. The Shares
shall be duly authorized, fully paid and non-assessable.
3. Representations and Warranties. The Undersigned represents,
warrants and acknowledges as follows:
(a) The Undersigned is duly incorporated and validly existing under
the laws of the State of Delaware, with full corporate power and authority to
carry on its business as now conducted.
1
<PAGE>
(b) The execution, delivery and performance of this agreement by the
Undersigned (A) will not violate any laws and (B) will not conflict with or
violate the charter or bylaws of the Undersigned.
(c) The Undersigned and/or its advisors have had a reasonable
opportunity to ask questions of and receive answers from the Company concerning
the Shares, Warrants and the shares issuable upon exercise of the Warrants
(collectively, the "Securities"), and the finances, business, operations and
prospects of the Company as deemed relevant by the Undersigned. Such questions
have been answered, and information provided to the full satisfaction of the
Undersigned or the Undersigned's advisors.
(d) The Undersigned is able to bear the economic risks of an
investment in the Securities for an indefinite period and at the present time
could afford the entire loss of such investment.
(e) The Undersigned understands that an investment in the Securities
involves certain risks and has the knowledge and experience in financial and
business matters generally such that the Undersigned is capable of evaluating
the merits and risks of an investment in the Securities.
(f) The Undersigned understands and acknowledges that the Securities
have not been registered for sale under the Securities Act of 1933, as amended
(the "Securities Act"), or under any state securities laws in reliance upon
exemptions therefrom for non-public offerings, that the Securities may not be
sold or transferred unless the sale or transfer is subsequently registered or an
exemption from such registration is available and that there is no existing
public market available to sell or dispose of the Securities and there is no
assurance that any such market will develop.
(g) The Securities are being purchased solely for the Undersigned's
account, for investment purposes only and not with a view to the distribution,
assignment or resale thereof and no other person on or prior to the Closing will
have a direct or indirect beneficial interest in such Securities.
(h) The Undersigned is authorized to purchase and hold the
Securities and to enter into this Subscription Agreement.
(i) The Undersigned has full power and authority to execute and
deliver this Subscription Agreement and to perform its obligations hereunder.
This Subscription Agreement has been duly and validly authorized, executed and
delivered by the Undersigned and constitutes the valid, binding and enforceable
agreement of the Undersigned and has been completed and executed by an
authorized representative of the Undersigned.
(j) No representations or warranties have been made to the
Undersigned by the Company or any agent, employee or affiliate of the Company,
except as expressly set forth in this Subscription Agreement, and, in making an
investment in the Securities, the Undersigned is relying solely on its own
independent investigation.
2
<PAGE>
(k) The Undersigned acknowledges that legends shall be placed on the
certificates representing the Shares and warrants to the effect that such Shares
and warrants have not been registered under the Securities Act or any state
securities laws.
4. Representations and Warranties. The Company hereby makes the
representations and warranties set forth on Exhibit E.
5. Indemnification. Each party hereto agrees to indemnify and hold
the other party hereto, its successors, assigns, directors, officers, partners,
agents and employees, harmless against any and all claims, damages, liabilities,
costs (including reasonable attorneys' fees), expenses and other losses incurred
by the other party as a result of any claim by a third party relating to the
indemnifying party's breach or alleged breach of its representations,
warranties, covenants or agreements contained in this agreement.
6. Additional Issuances of Series C Convertible Preferred Stock. The
Company agrees that it will not, without the prior written consent of the
Undersigned, issue additional shares of Series C Convertible Preferred Stock in
an amount that would reduce the Undersigned to less than fifty percent (50%)
ownership of such shares of Series C Convertible Preferred Stock. The
Undersigned hereby agrees that if it transfers any of its shares of Series C
Convertible Preferred Stock, other than in accordance with Exhibit B attached
hereto, the Company shall no longer be bound by the foregoing covenant.
7. Confidentiality. Each party (the "receiving party") agrees to
keep in confidence all information about the other party (the "disclosing
party") of a confidential or proprietary nature obtained in connection with the
transactions proposed hereby ("Confidential Information") except for
Confidential Information which (i) at the time of disclosure is generally
available to the public or after disclosure becomes generally available to the
public through no breach of agreement or other wrongful act by the receiving
party, (ii) is required to be disclosed by law, provided that the receiving
party shall furnish prompt written notice of such required disclosure and
reasonably cooperate with the disclosing party, at the disclosing party's cost
and expense, in any effort made by the disclosing party to seek a protective
order or other appropriate protection of its Confidential Information, (iii) was
independently developed by the receiving party, or (iv) was already in the
receiving party's possession from a source which the receiving party reasonably
believed, after due inquiry, owned no duty of confidentiality to the disclosing
party. In addition, the receiving party agrees that it will not use the
Confidential Information for any purpose other than for the purpose of
performing its obligations, or for any other purpose permitted, under this
Subscription Agreement or any other agreements between the parties. The parties
agree that, in view of the unique nature of the Confidential Information to be
disclosed hereunder, irreparable loss could be sustained by the disclosing party
in the event of an unauthorized disclosure of Confidential Information and the
disclosing party would not have an adequate remedy at law in such event.
Therefore, the parties agree that each party hereto shall be entitled to
injunctive relief, including specific enforcement, to enforce the provisions of
this Section 7, in addition to any remedy to which a disclosing party may be
entitled to at law, and the receiving party against whom injunctive relief is
sought agrees not to raise the defense that there is an adequate remedy at law.
3
<PAGE>
8. Press Relases: Public Statements. Except for such disclosures as
are required by law, no public announcements or other public statements
(including in any press conference, trade publication, marketing materials or
otherwise) with respect to the subject matter of this agreement shall be made
without the concurrence of the Company and the Undersigned.
9. Miscellaneous.
(a) This Subscription Agreement, including the Exhibits attached
hereto, and the Agreement between the Company and the Undersigned dated as of
December 23, 1999 (the "Prior Agreement"), constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersede all prior discussions or agreements, written or oral, in respect
thereof. Any conflict between the terms of the Prior Agreement and the terms
hereof shall be governed by this Subscription Agreement.
(b) Upon the written request of the Company or the Undersigned, the
Company or the Undersigned, as applicable, agrees to promptly provide such
information, to execute and deliver such documents and to take, or forbear from
taking, such actions or provide such further assurances as reasonably may be
necessary to correct any errors in documentation and to comply with any and all
laws to which the Company or the Undersigned, as applicable, is subject. The
satisfaction by the Undersigned of its obligations under this subsection shall
be subject to the Company's payment of its reasonable and substantiated costs
associated therewith.
(c) All covenants and agreements contained in this Subscription
Agreement shall survive the execution hereof and bind and inure to the benefit
of the respective successors and permitted assigns of the parties hereto.
(d) Notices required to be given hereunder shall be in writing
(unless specifically stated otherwise) and given by personal delivery,
facsimile, nationally recognized overnight courier or registered or certified
mail, postage prepaid with return receipt requested. Notices shall be addressed,
if to the Company, to the address set forth on the cover page hereof (facsimile
no. (212) 665-1115, Attn: President), and if to a holder of Securities, to the
address maintained in the Company's books and records. Notices delivered
personally shall be deemed given as of actual receipt; notices sent by facsimile
shall be deemed given as of one business day following receipt by sender (from
sender's fax machine) of written confirmation of successful transmission;
notices sent via overnight courier shall be deemed given one business day
following sending; and notices mailed shall be deemed given as of three days
after proper mailing. A party may change its address by notice given in
accordance with this Section 8(d).
(e) This Subscription Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to contracts
entered into and to be performed wholly within said State.
(f) This Subscription Agreement may not be modified except by
written instrument signed by the Company and the holder of Securities that is a
party hereto.
4
<PAGE>
(g) This Subscription Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(h) If any provision of this Subscription Agreement shall be held to
be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not affect or
render illegal, invalid or unenforceable any other provision, and this
Subscription Agreement shall be carried out as if such illegal, invalid or
unenforceable provision were not contained herein.
(i) The Undersigned agrees to enter into a Shareholders' Agreement
containing the terms set forth in Exhibit B hereto in form and substance
reasonably acceptable to the Undersigned.
IN WITNESS WHEREOF, the Undersigned has executed this Subscription
Agreement this 8th day of February, 2000.
SITI-SITES.COM, INC.
By: /s/ Lawrence M. Powers
-------------------------------
(Printed) Lawrence M. Powers
Title: Chairman/CEO
SUBSCRIPTION ACCEPTED AND AGREED TO:
this 8th day of February, 2000
VOLATILE MEDIA, INC.
By: /s/ Jeremy Kagan
------------------------
Jeremy Kagan
President
5
SITI-SITES.COM, INC.
1999 STOCK OPTION PLAN
1. Name and Effective Date
The name of this plan is the Siti-Sites.com, Inc. 1999 Stock Option Plan
(the "Plan"). The Plan shall be effective upon approval by the stockholders of
the Company.
2. Purpose
The purpose of the Plan is to permit the Company and its Affiliates (as
defined below) to attract and retain the best available personnel for positions
of substantial responsibility, to provide additional incentives to employees and
consultants of the Company and its Affiliates, and to promote the success of the
business of the Company and its Affiliates.
3. Definitions
As used in the Plan, the following terms shall have the meanings set forth
below:
(a) "Administrator" shall have the meaning given such term in Section 5
below.
(b) "Affiliate" shall mean any entity that, directly or through one or
more intermediaries, is controlled by, controls or is under common control with
the Company.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Change of Control" shall mean (i) the consummation of a sale,
transfer or other disposition of all or substantially all of the Company's
assets; (ii) approval by the stockholders of the Company of a merger or
consolidation in which securities possessing more than 50% of the total combined
voting power of the Company's outstanding securities are transferred to a Person
or Persons different from the Persons holding those immediately prior to such
transaction; (iii) a change in the composition of the Board over a period of
twenty-four (24) months or less such that a majority of the Board members ceases
to be comprised of individuals who have either been Board members continuously
since the beginning of such period or have been elected or nominated for
selection as Board members by a majority of the continuing Board members; (iv)
approval by the stockholders of the Company of a complete liquidation or
dissolution of the Company; or (v) the acquisition by any Person or related
group of Persons (other than the Company or a Person that directly or indirectly
controls, is controlled by, or is under common control with, the Company) of
beneficial ownership of more than 50% of the Company's outstanding voting stock
without the Board's recommendation.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(f) "Company" shall mean Siti-Sites.com, Inc., a Delaware corporation.
<PAGE>
(g) "Consultant" shall mean any Person who contracts to provide services
to the Company or any Affiliate as an independent contractor.
(h) "Director" shall mean a member of the Board, or the board of directors
of any Affiliate.
(i) "Employee" shall mean any person, including officers, who is an
employee of the Company or any Affiliate .
(j) "Fair Market Value" shall mean, with respect to Shares or other
securities (i) the closing price per Share of the Shares on the principal
exchange on which the Shares are then trading, if any, on such date, or, if the
Shares were not traded on such date, then on the next preceding trading day
during which a sale occurred; or (ii) if the Shares are not traded on an
exchange but are quoted on NASDAQ or a successor quotation system, (A) the last
sales price (if the Shares are then listed as a National Market Issue under the
NASDAQ National Market System) or (B) the mean between the closing
representative bid and asked prices (in all other cases) for the Shares on such
date as reported by NASDAQ or such successor quotation system; or (iii) if the
Shares are not publicly traded on an exchange and not quoted on NASDAQ or a
successor quotation system, the mean between the closing bid and asked prices
for the Shares on such date as determined in good faith by the Administrator; or
(iv) if the provisions of clauses (i), (ii) and (iii) shall not be applicable,
the fair market value established by the Administrator acting in good faith.
(k) "ISO" shall mean an Option intended to qualify as an incentive stock
option within the meaning of Section 422 of the Code, as designated in the
option agreement relating thereto.
(l) "Non-Employee Director" shall mean each Director who is not an
Employee or Consultant and who otherwise is considered a "non-employee" director
for purposes of Rule 16b-3.
(m) "NQSO" shall mean an Option that is not intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code, as
designated in the option agreement relating thereto.
(n) "Option" means an ISO or a NQSO granted pursuant to the Plan.
(o) "Optionee" shall mean an Employee, Consultant or Non-Employee Director
who receives an Option.
(p) "Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, or
government or political subdivision thereof.
(q) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended, or
any successor rule or regulation thereto.
(r) "Shares" shall mean the common stock of the Company, par value $0.001
per share, and such other securities or property as may become the subject of
Options pursuant to Subsection 7(j) below.
2
<PAGE>
(s) "10% Shareholder" shall mean a Person, who together with his or her
spouse, children and trusts and custodial accounts for their benefit,
immediately at the time of the grant of an Option and assuming its immediate
exercise, would beneficially own, within the meaning of Section 424(d) of the
Code, Shares possessing more than ten percent (10%) of the total combined voting
power of all of the outstanding capital stock of the Company or any of its
Affiliates.
4. Shares Subject to the Plan
Subject to Subsection 7(j) below, the maximum aggregate number of Shares
which may be issued to Employees, Consultants and Non-Employee Directors under
the Plan is one million eight hundred thousand (1,800,000). The Shares issued
upon exercise of Options may be authorized and unissued shares, or Shares held
by the Company in its treasury. If any Option shall terminate or expire without
having been exercised in full, the unpurchased Shares that were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan.
5. Administration of the Plan
The Plan shall be administered by the Board, or, at the election of such
Board, by a committee thereof appointed by the Board (the Board or such
committee being hereafter referred to in such capacity as the "Administrator")
composed of not less than two directors, each of whom is a "non-employee
director" as defined in Rule 16b-3, and an "outside director" as defined for
purposes of Section 162(m) of the Code. If such a committee is appointed by the
Board, (a) such committee shall continue to serve in its designated capacity
until otherwise directed by the Board, and (b) from time to time the Board may
increase the size of such committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of such
committee and thereafter directly administer the Plan, all to the extent
permitted by the applicable law. The Administrator shall interpret the Plan,
prescribe, amend and rescind any rules and regulations necessary or appropriate
for the administration of the Plan, and make such other determinations and take
such other actions as it deems necessary or advisable to cause the Plan to
operate in an effective manner. Any interpretation, determination or other
action made or taken by the Administrator shall be final, binding and
conclusive.
The Administrator may employ attorneys, consultants, accountants or other
persons and the Administrator, the Company and its officers and directors shall
be entitled to rely upon the advice, opinions or valuations of any such persons.
No member of the Administrator shall be personally liable for any action,
determination or interpretation taken or made in good faith with respect to the
Plan or any Option, and all members of the Administrator shall be fully
indemnified and protected by the Company in respect of any such action,
determination or interpretation.
6. Eligibility; Grant of Options
Under the Plan, Options may be granted to Employees, Consultants and
Non-Employee Directors; provided, that ISOs may be granted only to Employees.
From time to time as it may determine, the Administrator shall designate those
Employees, Consultants and Non-Employee Directors to whom an Option is to be
granted and the number of Shares to be covered by such Option. In determining
the persons to whom Options shall be granted and the number of Shares to be
covered by each Option, the Administrator shall take into account the nature of
such person's duties, such person's
3
<PAGE>
present and potential contributions to the success of the Company and the
Affiliates and such other factors as it shall deem relevant in connection with
accomplishing the purposes of the Plan. A person who has been granted an Option
or Options under the Plan may, if he or she is otherwise eligible, be granted an
additional Option or Options.
7. Terms and Conditions of Options
Each Option granted under the Plan shall be evidenced by a written
agreement, in a form approved by the Administrator. Each Option shall be
designated in such written agreement as an ISO or a NQSO. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of Shares with respect to which Options designated as ISOs are exercisable
for the first time by any Optionee during any calendar year (under all plans of
the Company or any Affiliate) exceeds $100,000, such excess options shall be
treated as NQSOs. In addition, each Option shall be subject to the following
terms and conditions and to such other terms and conditions as the Administrator
shall deem appropriate:
(a) Option Term
The term of each NQSO shall be fixed by the Administrator. The term
of each ISO shall in no event be more than ten (10) years from the date of
grant, or, in the case of ISOs granted to 10% Percent Shareholders, five
(5) years from the date of grant.
(b) Exercise Price
The purchase price per Share purchasable under each Option shall be
specified by the Administrator at the time such Option is granted. The
purchase price per Share purchasable under each NQSO shall be the price
determined by the Administrator. The purchase price per Share purchasable
under each ISO shall not be less than 100% of the Fair Market Value of a
Share on the date of grant, or, in the case of ISOs granted to 10% Percent
Shareholders, 110% of the Fair Market Value of a Share on the date of
grant.
(c) Time and Method of Exercise
The Administrator shall establish the time or times at which each
Option, or any part thereof, may be exercised. Such date may be
immediately upon the grant of such Option, or may be delayed until the
participant has remained in the employ of the Company or an Affiliate for
a continuous period after the date of grant as shall be determined by the
Administrator. The Administrator shall also establish the form or forms in
which, payment of the option price with respect thereto may be made or
deemed to have been made (including, (i) cash or Shares, or other
consideration, or any combination thereof, having a Fair Market Value on
the exercise date equal to the relevant option price and (ii) a
broker-assisted cashless exercise program established by the
Administrator), provided in each case that such methods avoid
"short-swing" profits to Plan participants under Section 16(b) of the
Securities Exchange Act of 1934, as amended. An Option shall be deemed to
be exercised when written notice of such exercise has been given to the
Company in accordance with the terms of the option agreement by the person
entitled to exercise the Option and the Company has received full payment
for the Shares with respect to which the Option is exercised.
4
<PAGE>
(d) Termination of Directorship or Employment or Consulting Relationship
Subject to Subsection 7(e) below, in the event of termination of an
Optionee's status as a Director, Employee or Consultant, such Optionee
may, but only within three (3) months (or such other period of time not
less than thirty (30) days and not more than twelve (12) months as is
determined by the Administrator, with such determination in the case of an
ISO being made at the time of grant of the Option and not exceeding three
(3) months), after the date of such termination (but in no event later
than the expiration date of the term of his or her Option), exercise his
or her Option to the extent that such Optionee was entitled to exercise it
at the date of such termination. To the extent that such Optionee was not
entitled to exercise his or her Option at the date of such termination, or
if such Optionee does not exercise such Option to the extent so entitled
within the time specified herein, such Option shall terminate. No
termination shall be deemed to occur and this Subsection 7(d) shall not
apply if (i) the Optionee is a Non-Employee Director who becomes an
Employee or a Consultant, or (ii) the Optionee is an Employee who becomes
a Non-Employee Director or a Consultant, or (iii) the Optionee is a
Consultant who becomes a Non-Employee Director or an Employee.
(e) Exercise in the Event of Disability
Notwithstanding Subsection 7(d) above, in the event of termination
of an Optionee's status as a Director, Employee or Consultant as a result
of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), such Optionee may, but only within twelve
(12) months from the date of such termination (but in no event later than
the expiration date of the term of such Optionee's Option), exercise his
or her Option to the extent that such Optionee was entitled to exercise it
at the date of such termination. To the extent that such Optionee was not
entitled to exercise such Option at the date of termination, or if such
Optionee does not exercise such Option to the extent so entitled within
the time specified herein, such Option shall terminate.
(f) Exercise in the Event of Death
In the event of the death of an Optionee while he or she was a
Director, Employee or Consultant, or within thirty (30) days following the
termination of such person's status as a Director, Employee or Consultant,
such Optionee's Option may be exercised, at any time within twelve (12)
months following the date of death (but in no event later than the
expiration date of the term of such Optionee's Option) by such Optionee's
estate or by a person who acquired the right to exercise such Optionee's
Option by bequest or inheritance, but only to the extent such Optionee was
entitled to exercise the option at the date of death or, if earlier, the
date of termination of such person's status as a Director, Employee or
Consultant. To the extent that such Optionee was not entitled to exercise
his or her Option at the date of death or termination, as the case may be,
or if such Optionee (or another person referred to above) does not
exercise such Option to the extent so entitled within the time specified
herein, such Option shall terminate.
5
<PAGE>
(g) Buyout Provisions
The Administrator may at any time offer to buy out any previously
granted Option for a payment in cash, Shares, or other Options, based on
such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
(h) Nontransferability
Options may not be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws
of descent or distribution; provided, however, that the Administrator may
in its discretion grant transferable NQSOs pursuant to option agreements
specifying (i) the manner in which such NQSOs are transferable and (ii)
that any such transfer shall be subject to applicable law. Options may be
exercised, sold, pledged, assigned, hypothecated, transferred or disposed
of during the lifetime of the Optionee only by the Optionee or a
transferee permitted by this Subsection 7(h), or, with respect to NQSOs,
by the guardian or legal representative of such Optionee or transferee if
permitted by applicable law.
(i) Conditions Upon Issuance of Shares
Shares shall not be issued pursuant to the exercise of an Option
unless such exercise and the delivery of such Shares shall comply with all
applicable laws, including, without limitation, the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder.
Each Option may provide that, as a condition to the exercise of such
Option, the Optionee thereof shall deliver to the Administrator at the
time of such exercise (in whole or in part) a written representation that
the Shares being acquired upon such exercise are to be acquired for
investment and not for resale or with a view to the distribution thereof.
The Company may place legends on stock certificates issued under the Plan
as the Administrator deems necessary or appropriate in order to comply
with applicable securities laws, including, but not limited to, legends
restricting the transfer of such stock.
(j) Adjustments
In the event of a change in the common stock of the Company by
reason of any stock dividend, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination or exchange of shares or
similar event, the number and kind of Shares which shall be covered by the
Plan, and the number and kind of Shares subject to outstanding Options,
along with the option price attaching to such Shares, may be appropriately
adjusted consistent with such change in a manner to be determined by the
Administrator to prevent substantial dilution or enlargement of the rights
granted or available participants in the Plan; provided, however, in each
case, that no adjustment shall be made which would cause the Plan to
violate Section 422(b)(1) of the Code with respect to ISOs or would
adversely affect the status of any Option as "performance-based
compensation" under Section 162(m) of the Code.
(k) Change of Control
6
<PAGE>
In the event of a Change of Control of the Company, each Option
granted under the Plan that is still outstanding and not yet vested or
exercisable shall immediately become 100% vested in the Optionee thereof,
as of the first date that the definition of Change of Control has been
fulfilled, and shall be exercisable for the remaining duration of such
Option. Each Option that is exercisable as of the effective date of the
Change of Control will remain exercisable for the remaining duration of
such Option.
8. No Rights as Stockholders; No Right to Continued Service; No Fractional
Shares
No Optionee shall have any rights as a stockholder with respect to any
Shares subject to an Option held by him or her prior to the date of issuance to
him or her of a certificate or certificates for such Shares. Neither the
existence of the Plan, nor any Option held under the Plan shall grant to any
person any right with respect to continued service with the Company or any
Affiliate, nor shall they interfere in any way with the right of the Company or
any Affiliate to terminate such service at any time. No fractional Shares shall
be delivered, nor shall any cash in lieu of fractional shares be paid under the
Plan.
9. Legal Compliance
The Plan and the grant of Options thereunder, and the obligation of the
Company to deliver shares upon exercise of Options, shall be subject to approval
of the Plan by the stockholders of the Company and to all applicable federal,
state or local laws, regulations and rules, and to such approvals of competent
government agencies as may, in the opinion of the Administrator, be required.
10. Amendment and Termination
The Board may amend, terminate or modify the Plan at any time and for any
reason. Amendments require the approval of the Company's stockholders only to
the extent provided by Section 422 of the Code, Rule 16b-3, or any other
applicable law, rule or regulation. No amendment, termination or modification of
the Plan shall alter or amend any rights or obligations under any Option
theretofore granted without the consent of the holder of such Option.
11. Term of Plan
Options may be granted pursuant to the Plan until the tenth anniversary of
the date that the Plan is approved by the stockholders of the Company.
12. Withholding
The Company and the Affiliates are authorized to withhold from any payment
relating to the exercise of an Option under the Plan, including from any payroll
or other payment to an Optionee, amounts of withholding and other taxes due in
connection with any transaction involving an Option, and to take such other
action as the Administrator may deem advisable to enable the Company and the
Optionees to satisfy obligations for the payment of withholding taxes and other
tax obligations relating to any Option. This authority shall include authority
to withhold or receive Shares or other property and to make cash payments in
respect thereof in satisfaction of an Optionee's tax obligations.
7
<PAGE>
13. Governing Law
The provisions of the Plan shall be governed by and construed in
accordance with the laws of the State of New York and applicable Federal law.
8
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF SITI-SITES.COM, INC. AND ITS
SUBSIDIARY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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