UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2001 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 |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| The aggregate market value of the voting Common Stock (par value $0.001 per share) held by non-affiliates as of June 22, 2001 was approximately $415,000 based on the last price at which the Common Stock was sold on June 22, 2001 of $.08 as reported by the National Quotation Bureau. 15,517,178 shares of Common Stock were outstanding as of June 22, 2001. The following documents are incorporated herein by reference: (1) Annual Report to security holders on Form 10-K for the year ended March 31, 2000 (the "Form 10-K for 1999"); (2) Annual Report to security holders on Form 10-K for the year ended March 31, 1999, as amended by Amendment No. 1 on Form 10-K/A (collectively, the "Form 10-K for 1999"); (3) Quarterly Report to security holders on Form 10-Q for the quarter ended December 31, 1999 (the "Form 10-Q for 12/31/99"); (4) Definitive Proxy Statement on Schedule 14A relating to the Company's Annual Meeting on December 14, 1999 (the "Proxy Statement as of 12/14/99"); Such documents are referred to in Parts I, II, III and IV of this Annual Report on Form 10-K in several places. ANNUAL REPORT ON FORM 10-K MARCH 31, 2001 PART I PAGE ------ ---- ITEM 1. BUSINESS 1 ITEM 2. PROPERTIES 12 ITEM 3. LEGAL PROCEEDINGS 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 13 SECURITY HOLDERS PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK 13 AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED FINANCIAL DATA 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 21 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 21 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 22 ITEM 11. EXECUTIVE COMPENSATION 23 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 26 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K 28 PART I ITEM 1. BUSINESS Introduction SITI-Sites.com, Inc., a Delaware corporation, and its various divisions (hereafter referred to collectively as "SITI" or the "Company") is an Internet media company with three websites for the marketing of news and services. The Company's current websites relate entirely to the music industry, and promotional services for independent artists not affiliated with major record companies. The Company intends to develop these websites further by entering into strategic partnerships and affiliations. As part of this strategy, in June, 1999 the Company acquired Tropia, which promotes and markets the music of selected independent artists on its website www.Tropia.com. The Company next acquired three music-related businesses, www.HungryBands.com (an e-commerce website and business promoting and selling music by independent artists), www.NewMediaMusic.com (an e-news/magazine business), and www.NewYorkExpo.com (a music and Internet conference business), all in January, 2000. The terms of these January, 2000 acquisitions are further described in "Note 10. Goodwill" to the Consolidated Financial Statements referred to in "Part II Item 8. Financial Statements and Supplementary Data." The Company is still developing its software, music sites and business, and its revenues are negligible (See SITI's Business Plan). It has written off all development and operating costs. In addition, during fiscal 2000 the Company made a $500,000 investment in a music CD custom compilation and promotion company, Volatile Media, Inc., which did business as EZCD.com, now in bankruptcy liquidation. The investment was previously written off at March 31, 2000 because of uncertainties in EZCD's financing plans and ability to continue operations. The Company also entered a content and technology sharing agreement with EZCD.com pursuant to which they were to share music content and technology, which was not adequately performed by EZCD and may result in litigation. The April 21-22, 2001 Music & Internet Expo also lost approximately $350,000 and there are no present plans to hold it again. The Company has decided to discontinue the operations of the New York Expo business segment. (See "Item 1. - Business - Risk Factors - EZCD Investment Loss" and Note 1(b) to the Consolidated Financial Statements.) As of June 1, 2001, SITI employed a total of 15 employees and consultants, as compared to 2 employees in January, 1999. Full-time employees were reduced by 5 in early May, 2001 to reduce overhead. As a result of financings and incentive issuances to key employees and consultants, SITI's issued and outstanding shares have increased to approximately 15,500,000 shares as of June 15, 2001. Corporate History SITI-Sites.com, Inc. was incorporated in Delaware in 1984 under management and control persons who left in 1995. As a result of a second change of control of the Company in December, 1998, the Company's senior management and Board of Directors were replaced. The present 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. All prior business operations of the Company were discontinued. The Company changed its corporate name to SITI-Sites.com, Inc. from Spectrum Information Technologies, Inc., after its Annual Meeting of Stockholders on December 14, 1999, and its former stock symbol "SITI" is now "SITN." (See Proxy Statement as of December 14, 1999.) As a result of the change of control and subsequent equity investments (and option exercises) through June 15, 2001, the directors and senior executive officers of the Company (along with family and associates) have invested approximately $4,000,000 in cash for equity in the Company. Recent publicized difficulties of other Internet marketing businesses in obtaining equity financing, which may continue indefinitely, have led the Company's investor/management to conclude they must finance its future growth themselves, at least in the short term. 1 SITI's Business Plan The Company's business strategy in the music field is to build a database marketing operation, which renders an array of specialized services to musical artists and their fans, and to music and consumer products businesses, at modest fees on a continuing basis. A major investor and member of senior management of the Company (Robert Ingenito) is highly experienced in database marketing techniques he developed and practiced successfully in several private and publicly owned businesses. This plan has been underway since January, 2000 and major portions of the necessary software have been completed and are in use. Portions of the artists' promotion services software, and the news content sharing software are still being revised. The Company considers its 3,000 musical artists and their fans, a beginning group of prospects for sale of SITI's artist promotion services. Thousands of additional artists are available through database sources known to the Company. These musical artists are mostly emerging rock/pop groups, i.e. independent and not affiliated with major record companies, in many genres and locales, each comprising several artists and some fan following. The Company's software team has been revising and expanding its websites to handle the various publications, and artist and fan services which will be offered to its potential database. Revenue sources are expected to be fees for targeted music news syndications for consumer product and music companies. Revenue sources for artist promotion services are expected to include monthly service fees for distribution of band communications to their fans, touring locations, clubs and play dates, new record releases, promotion of bands at their own websites, and hyperlinks to the various websites and stores where their music is sold. The implementation of the Company's business plan is occurring, in part, through its www.NewMediaMusic.com newsletter, a free e-magazine in operation this past year and a half. It contains current new media music news (i.e. digital music coverage, analysis and interviews on key industry problems) and is seen by thousands of industry professionals, artists and fans regularly. E-mails from readers and other comments on this newsletter indicate that it is a respected source of news and analysis. Artists are being offered free subscriptions to this newsletter, and to a new weekly artist edition thereof, to encourage their future participation in promotional services, analysis of industry issues, and merchandising services to be made available to them, through the Company's band and fan registry. The software underlying the NewMediaMusic newsletter is being revised for the addition of targeted, personalized information in each viewer's interest area, and the newsletter services and archives are expected to become additional revenue sources to SITI through syndication to product marketers, service charges and advertising revenues. This e-magazine in business, artist, fan and special market editions will provide increasingly focused information, and linkages for the Company's database of artists, fans and affiliated websites in the music field. SITI has added a new streaming radio player to the existing embedded radio on its Tropia website, which will play its emerging artists' music along with other content, in multiple streams by genre preference. These Internet streaming radio channels are expected to become bases for sale of promotional services for emerging artists, and product advertising across multiple listener preference communities. The initial source for these emerging artists are the Company's www.Tropia.com and www.HungryBands.com music websites which play and sell CDs and MP3 downloads. Additional groups of artists and fans are expected to be added to SITI's music websites, or solely to its artist communication database, from other established music websites or artist services websites. The Company is attracting a growing supply of music news and information from many sources to enhance its database. Further implementation of SITI's strategy occurred through its ownership of www.NewYorkExpo.com and its related Internet music exposition held for the past two years in New York City. In May 2001, the Company decided to discontinue the New York Expo due to insufficient sponsorship and attendance. Internet music sites took booths at these expos, joined in the panels of experts, interacted with each other and with SITI's marketing development team, and 2 provided current information to emerging artists and fans. The 2001 Expo was held in April 2001 at Madison Square Garden, but resulted in losses because of insufficient sponsorship and attendance. These Expos, however, placed the Company at the fulcrum of providers of music services, equipment and new technology, along with emerging digital music industry problems. Its founder, Steven Zuckerman, has become a consultant to the Company and is no longer a full-time employee. No assurances can be given that the Company will successfully complete the above-described database developments, or its ongoing software development, or achieve the revenues sought from the described business plan. (See "Item 1. Business - Risk Factors".) Management Background Lawrence M. Powers, Investor and Chairman/CEO of the Company, is a businessman and securities lawyer who helped build several large public companies as a lawyer, director and financial adviser, and later as a chairman/chief executive officer. Most recently, he founded and built Spartech Corporation (NYSE), now a $1 billion plastics manufacturing group assembled from many small businesses, starting as Chairman of a previously bankrupt shell (1978) with few assets, and becoming CEO in 1984. Raising some $200 million during his 1980's tenure, he, together with the management team he assembled, built one of the largest plastic processing companies in the U.S. by 1992 (12 plants). Spartech has now become a world leader (50 plants) since his retirement. He remained on the board until 1995, and is still a major securities holder of Spartech. The core management team he previously assembled at Spartech Corporation has remained in place, building it to its present value. Mr. Powers was educated at Yale Law School, and senior executive programs at Harvard Business School (between 1980-1998) and most recently, in its Information Technology management program. His specialty has, for decades, been developing strategies and financing, combined with acquisitions and strategic partnerships. He and his family have invested $2,700,000 in SITI equity. Robert Ingenito, Investor and Vice Chairman/President of the Company , is a nationally known figure in the direct marketing industry, using databases for "data mining" in customer development. He was the President and a principal of Axciom Corporation (NASDAQ), an $800 million database management firm, when it first went public (and a director along with Mr. Powers in the 1980's). Most recently, Mr. Ingenito founded and managed Access Communications and Access Direct, two established data service companies. Access Direct produces high volume, highly segmented mail correlated to its clients' segmented databases. Access Communications produces critical documents from on-line transmissions from its clients, and was sold to Axciom Corporation in 1999. Mr. Ingenito is active in managing SITI's development strategy, and with other investors, has invested $900,000 in SITI equity. John Iannitto, Investor and Executive Vice-President of the Company, has a 25-year background in advertising, consumer product management, marketing and promotions, operating his own successful agency, RSI Marketing, for 20 years. Before starting his own marketing business, he was a product manager at General Foods and Lever Brothers. His clients at RSI Marketing include Johnson & Johnson (Personal Products), and also its joint venture with Merck (Drug Products), McNeil Consumer Healthcare (Tylenol) and Merial (Veterinary Products). Mr. Iannitto received his M.B.A. at Pace University and his A.B. at St. Francis College in New York. His expertise is in development of new product launch programs, and marketing established brands and services. He is active in management supervision of the New Media Music newsletter expansion, intended to also generate artists and fans for the Company's services business, and other new and ongoing projects of the Company. Toni Ann Tantillo is Chief Financial Officer, Vice President, Secretary and Treasurer for the Company. She has served as the Company's Chief Financial Officer since December 1999. Prior to her election, she worked as an independent consultant to SITI since the change of control in December 1998. She was the Controller of SITI from 1995 to December 1998, when such change of control occurred. Ms. Tantillo, a Certified Public Accountant was educated at Iona College in New Rochelle, New York. 3 Paul Marshall is a key consultant who, through his company, acts as Director of Technology for the Company, and is in charge of its websites, and their underlying software. He heads a six-person team of software developers, and a designer. Mr. Marshall began working as a full-time consultant with the Company in May, 2001. He has been managing the software development, integration of all the Company's websites into a single format, adding the features necessary for its artists and fan services operations, new radio features, absorption of more artists into the database, new feature pages and linkages with strategic affiliates. Mr. Marshall is a Columbia University graduate, was trained at TIAA/CREEF in financial services software development, has been developing and consulting on software for 15 years in the New York area, and founded Maxus Systems, a virtual reality decisions support system. His consulting clients have included large publishers, the Departments of the Navy and Defense, and financial organizations. Ted Mazola is Vice President/Web Operations, and founded the Company's division HungryBands.com, and co-founded the NewMediaMusic.com division. He was employed in computer operations at Brooklyn Union Gas Company when he started these two web businesses independently, and thereafter sold them to SITI for stock. He studied engineering at the College of Staten Island, New York. Traditional Methods for Distribution of Music Recorded music is recognized as one of the most popular forms of entertainment. It is a $44 billion industry, approximately 20% of which is independent music. Until the late 1990s, the distribution of music by the music industry had remained relatively unchanged for many years. Artists were generally required to sign exclusive contracts with record labels who would develop, distribute and promote their recordings. The major record labels have, to a great extent, controlled the type and quantity of music made available to consumers. As a result, the number of artists served by the existing music distribution system has been fairly small, compared to the number of artists who desire to pursue their music as a career. Moreover, consolidation within the industry accelerated sharply during the 1990's, further reducing the number of distribution channels. Partly as a consequence of these acquisitions, the major labels have confronted spiraling costs, diminishing their already-low incentives to take risks with unknown bands. Critics have noted that the industry has failed to develop any consistent "breakout" artists or music styles since the hip-hop and alternative movements emerged in the late 1980s. The Internet and Digital Music The music industry is changing, however, due to the popularity of the Internet and the advent of compressed digital music formats, including the MP3 format, which itself may be replaced by subsequent formats. The Internet has grown rapidly in recent years, driven by the development of the World Wide Web, intuitive web browsers and faster connections, the proliferation of multimedia PCs and the emergence of compelling Web-based content. In recent years, with more and more consumers buying multimedia PCs with a sound card, speakers and a CD-ROM or DVD-ROM drive, people have increasingly used their computers to play music. Many consumers have not been able to experience high quality Internet audio and video because of their relatively low bandwidth Internet connections. New platforms, such as cable and direct subscriber line modem and satellite data broadcast, are being expanded to deliver high-speed access to digital media. Growth will depend on the investment of billions of dollars by the telecommunications industry in new infrastructure. In the meantime, high-speed connections will largely remain limited to larger businesses, research institutions and colleges. Another impediment to the transmission of music over the Internet has been the large size of music files. For example, a three-minute song can occupy more than thirty megabytes of storage. Storing and transferring audio files can be expensive and slow. To address this problem, compression formats have been developed. One of the first widely accepted standards for the compression of music was MP3, adopted by the Moving Picture Experts Group. The MP3 standard offers at least 10:1 compression and audio integrity at near-CD quality. MP3 playback is currently available on 4 most operating environments such as Microsoft Windows 95, Windows 98, Windows NT and Mac OS, most major versions of UNIX (including Linux, the platform for SITI's websites) and many other operating environments. The development of compression formats such as MP3 and the increased availability of higher bandwidth Internet connections have made it practical to transmit music over the Internet. Now a series of hottest sounding compression formats are coming into use, and will replace the MP3 format in the next few years. In addition, the transmission of music over the Internet has been made more desirable by the recent introduction of certain products to enable consumers to move the audio content from a PC to a portable listening device. Portable audio players capable of storing and playing back downloaded MP3 audio files have been introduced and many new types are in development. The Company believes that these types of products will be desirable for many listeners on the website. The Company's existing radio player on its www.Tropia.com website, and its new radio player for all of its sites will make more audio from many sources available to its site visitors. As a result, aside from the traditional music distribution channels there are now other alternatives: complete digital music content and information clearinghouses (such as MP3.com (being acquired by Vivendi Universal), which uses data compression technologies to distribute and promote the music of a wide variety of artists), more traditional record label structures (such as EMusic.com, Inc. (now owned by Vivendi Universal)) and a combination of both. Artists will now have much greater control of their product, their marketing, their distribution channels, even their pricing. But no matter how much the music industry may change, artists will always need exposure. With musicians all over the world able to produce and distribute their music globally, it will become increasingly important (and difficult) to be seen and heard. The Company believes that its news and analysis and its artist and fan services on a database model that can sort and present blocks of information automatically, as expanded by its affiliations, will set the Company apart from other websites which base their business model only upon selling music over the Internet. Intellectual Property The Company may be liable to third parties for content on its websites and CDs the Company distributes: 1. if the music, text, graphics or other content on its websites or CDs violates their copyright, trademark or other intellectual property rights; 2. if the artists or independent record labels associated with the websites violate their contractual obligations to others by providing content on the websites; or 3. if content distributed over its websites or if the CDs are deemed obscene or defamatory. The Company may also be subject to these types of liability for content that is accessible from its websites through any links to other websites. The Company attempts to minimize these types of liability by requiring representations and warranties relating to its artists' ownership of and rights to distribute and submit their content and by taking related measures to review content on the websites. Artists also agree to indemnify the Company against liability it might sustain due to the content they provide. It is the Company's belief that the artist is responsible for the material he or she submits. However, in the future, the Company could be found liable for content made available on the websites. Although the Company has not experienced a material loss due to content-related liability to date, its websites are relatively new and the Company cannot give assurances that its measures to limit this liability will continue to be successful or that the Company will not be held liable for the websites' content. Liability or alleged liability could harm the Company's business by damaging its reputation, requiring it to incur legal costs and diverting management's attention away from the Company's business. Moreover, future claims may not be adequately covered by insurance. With respect to all of its websites, the Company's intellectual property includes its trademarks and copyrights, proprietary software, and other proprietary rights it may possess. The Company believes that its intellectual property is important to its success and its competitive position and seeks to protect it. However, its efforts may be inadequate. 5 In addition, third parties may claim that the Company violated their intellectual property rights. To the extent that such a claim is successful against the Company, the Company may be required to pay damages, obtain a license to use such third party's intellectual property or use non-infringing methods to conduct its activities. It is possible that a license from such a third party would not be available on commercially acceptable terms, or at all, or that the Company would be unable to conduct its activities in a non-infringing manner. (See "Item 1. Business - Risk Factors") There is also no assurance that the measures taken by the Company will adequately protect the confidentiality of the Company's proprietary information or that others will not independently develop products or technology that are equivalent or superior to those of the Company. Any litigation regarding the Company's or a third party's proprietary rights could be costly and divert management's attention, result in the loss of certain of the Company's proprietary rights, require the Company to seek licenses from third parties and prevent the Company from selling its products and services, any one of which could have a material adverse effect on the Company's business, results of operations and financial condition. (See "Item 1. Business - Risk Factors") Competition The market for the online promotion and distribution of music and music-related products and services is highly competitive and rapidly changing, with many large and small competitors. With no substantial barriers to entry on the Internet, the Company expects that competition will continue to intensify, including its niche in providing music news and database services to businesses, artists and fans. The Company faces competitive pressures from other providers of online music content which distribute free downloadable music, such as MP3.com, Inc., Napster.com, and various other companies. These competitors and several others offer services to emerging artists and their fans, some of which will be offered by the Company. In addition, although they generally do not offer the ability to download complete songs for free, the Company also potentially faces competition from: 1. Other providers of online music content such as EMusic.com, Inc. and Launch Media, Inc. 2. Companies offering MP3 or other audio compression formats, such as those of AT&T Corp., IBM Corporation, Liquid Audio, Inc., Microsoft Corporation, and RealNetworks, Inc. Some of these companies also offer customers the ability to download music from their websites. 3. Online destination sites, including online prerecorded music retailers like Amazon.com, Inc. and CDNow Inc. 4. Online "portals" like America Online, Inc., Excite, Inc., InfoseekCorporation, Lycos, Inc. and Yahoo!, Inc. 5. Traditional music industry companies such as BMG Entertainment, a unit of Bertelsmann AG; EMI Group plc; Sony Corporation; Time Warner Inc. and Universal Music Group, a unit of Vivendi Universal., all of whom have entered the online commercial community with large resources and content. Many of the Company's existing and potential competitors have longer operating histories, greater brand name recognition, larger artists on consumer bases and significantly greater financial, technical and marketing resources. The Company cannot give assurances that websites maintained by its existing and potential competitors will not be perceived by consumers, artists, fans or others as being superior to the Company's. The Company also cannot give assurances that the Company will be able to maintain or increase its database of artists and fans, its website traffic levels, purchase inquiries and number of click-throughs on any online advertisements, or that competitors will not experience greater growth than the Company does. Increased competition could result in advertising price reduction, reduced margins or loss of market share, any of which could harm the Company's business. In addition, because of the rapidly changing structure of the Internet, the Company in the future may find itself competing with suppliers of software critical to its business. 6 Government Regulation Laws and regulations directly applicable to Internet communications, commerce and advertising, including laws relating to privacy, intellectual property and content (such as obscenity, pornography, libel and defamation laws), are becoming more prevalent. Although the Company's operations are currently based in New York, the governments of other states, the United States and foreign countries may attempt to regulate the Company's activities on the Internet or to levy sales and other taxes relating to its activities. The Company does not currently intend to collect sales, use or other taxes on the sale of goods and services on its websites other than on sales in New York. However, one or more states or foreign jurisdictions may seek to impose tax collection obligations on companies that engage in online commerce. If they do, these obligations could limit the growth of electronic commerce in general and limit the Company's ability to profit from the sale of goods and services over the Internet. The Company cannot predict how any of these laws and regulations might affect its business. In addition, these uncertainties make it difficult to ensure compliance with laws and regulations governing the Internet. These laws and regulations could harm the Company by subjecting the Company to liability or forcing the Company to change how it does business. Employees and Consultants As of June 1, 2001 the Company had 15 employees and consultants in operations and general administration. SITI executives, Messrs. Powers, Ingenito and Iannitto, have been working without cash compensation and, will continue to do so for at least the year ended March 31, 2002. Mr. Ingenito and Iannitto, will receive stock and options for their services over the next fiscal year. (See "Item 11. - Executive Compensation - Employment Agreements.") The Company has recorded an administrative expense and a capital contribution of $262,500 to account for the value of these services provided by executive management of the Company during the year ended March 31, 2001. The Company's future performance depends in significant part on its ability to continue to attract, retain and motivate, highly qualified technical and management personnel, for whom competition is intense. The Company may also continue to employ independent contractors and agents to support its development, marketing and administrative organizations, and presently employs four in such category. None of the Company's employees is represented by any collective bargaining unit. The Company believes that its relations with its employees, consultants and agents are good. Prior Company History For a discussion of the Company's prior business, all of which operations were discontinued after the 1998 change of control and resignation of all senior management in December 1998, as well as its bankruptcy reorganization 1995-1997, see the Form 10-K for 1999, "Item 1. Business - Prior Company History," "Item 1. Business - Change of Control," and Item 3. Legal Proceedings - Other Proceedings." These discussions must be considered in light of the new direction and nature of the Company's business in the Form 10-K for 1999, and the Form10-Q for 12/31/99. Risk Factors Risk factors may affect the Company's business, future operating results and financial condition. In addition to the other information in this Annual Report on Form10-K, and the Form 10-K for 1999, the following risk factors should be considered in evaluating the Company's business and prospects. Limited Operating History in New Business The Company's senior management and Board of Directors were replaced in December 1998 following the change of control transaction. The present senior management and Board changed the direction and nature of the Company's business, and have had a difficult time in developing a workable revenue model in the field of digital music. 7 Prior to that time, the Company had engaged in other businesses and developed a negative image which needed to be overcome. The Company does not expect the former businesses to provide any material future revenues. (See the Form 10-K for 1999, "Item 1. - Business - Prior Company History and Item 1. - Business - Change of Control.") History of Losses; Anticipation of Future Losses The Company has not achieved profitability and expects to incur operating losses for the foreseeable future. The Company anticipates that in the foreseeable future it will depend substantially on revenue from the sale to artists and fans of targeted information and services, and the syndication of music news and analysis to other marketers. Neither CDs nor merchandise has been sold in material amounts by any of its websites to date. The Company will need to generate significant revenues from repackaging its news database for other marketers and selling its artist promotion services, in order to achieve and maintain profitability. The Company cannot give assurances that it will be able to do so. Even if profitability is achieved, the Company cannot give assurances that it can sustain or increase profitability on a quarterly or annual basis in the future. (See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.") EZCD Investment Loss The Company invested $500,000 in January, 2000 in its strategic affiliate EZCD.com, coupled with an agreement for content and technology sharing. EZCD has been in bankruptcy liquidation since August 2000. The Company determined to write-off the entire investment as of March 31, 2000 because of uncertainties as to EZCD's future operations. Such risk factor is endemic to investing in start-up Internet companies, in the music field or elsewhere, and such general risk has been increased by the recent drop in today's value of several Internet music companies and the resulting attrition in their financing sources. New Market The market for online music services, promotion and distribution is relatively new and rapidly evolving. As a result, demand and market acceptance for the Company's products and services are subject to a high degree of uncertainty and risk. The Company is attempting to capitalize on a talent pool of independent artists not currently served by the traditional recording industry. There is no assurance that consumers will continue to be interested in listening to or purchasing music from these artists. If this new market fails to develop, develops more slowly than expected or becomes saturated with competitors, or the Company's products and services do not achieve or sustain market acceptance, the Company's business could be harmed. (See "Item 1. - Business - Competition.") Development of New Standards for the Electronic Delivery of Music The Company currently relies on MP3 technology for both brand identity and as a delivery method for the digital distribution of music. The Company does not own or control MP3 technology. The onset of competing industry standards for the electronic delivery of music could significantly affect the way the Company operates its business as well as the public's perception of the Company. For example, some of the major recording studios have announced a plan to develop a universal standard for the electronic delivery of music, called the Secured Digital Music Initiative, or SDMI. In addition, major corporations such as Microsoft Corporation, Dolby, IBM Corporation, AT&T Corp. and Sony Corporation have launched efforts to establish proprietary audio formats that will compete with the MP3 format. Some competitive formats offer security and rights-tracking features that MP3 technology does not currently offer. Widespread industry and consumer acceptance of any of these audio formats could significantly harm the Company's business if it is unable to adapt and respond to such changing standards. Although the Company is not tied exclusively to the use of MP3 technology or to any other specific standard for the electronic delivery of music, if a proprietary music delivery format receives widespread industry and consumer acceptance, the Company may be required to license additional technology and information from third parties (which may be competitors of the Company) in order to adopt such a format. The 8 Company cannot provide any assurance that this third-party technology and information will be made available to the Company on commercially reasonable terms, if at all. News Gathering Several other companies provide digital music news and analysis such as WebNoize, Insider, Reuters, The Wall Street Journal, the New York Times and many magazines. Few of them are earning large revenues from marketing music news, and subscription formats have not proven lucrative yet. The Company faces continuing competition from all of these news sources. MP3 Technology is Controversial The traditional music industry has not embraced the development of the MP3 format to deliver music, in part because users of MP3 technology can download and distribute unauthorized or "pirated" copies of copyrighted recorded music over the Internet. Although the Company's philosophy of dealing only with independent artists and independent record labels will not facilitate music piracy and can support multiple audio compression and delivery technologies, the Company may still face opposition from a number of different music industry sources including record companies and studios, the Recording Industry Association of America and certain artists, due to the Company's use of MP3 technology. In addition, adverse news or events relating to MP3 technology generally may harm the Company's business. Continued Development and Maintenance of the Internet and the Availability of Increased Bandwidth to Consumers The success of the Company's business will depend largely on the development and maintenance of the Internet infrastructure to make the Internet a viable commercial marketplace for the long term. This includes maintenance of a reliable network with the necessary speed, data capacity and security, as well as timely development of complementary products such as high-speed modems, for providing reliable Internet access and services. Because global commerce on the Internet and the online exchange of information is new and evolving, the Company cannot predict whether the Internet will prove to be a viable commercial marketplace in the long term. The success of the Company's business will rely on the continued improvement of the Internet as a convenient means of consumer interaction and commerce, as well as an efficient medium for the delivery and distribution of music. The success of the Company's business will also depend on the ability of its artists and consumers to continue to upload and download MP3 and other music files, as well as to conduct commercial transactions using its websites, without significant delays that may be associated with decreased availability of Internet bandwidth. Consumers will need to access the websites over a high-bandwidth connection, such as cable or direct subscriber line modem or satellite data broadcast. If such broadband distribution networks do not achieve widespread consumer acceptance, the Company may be unable to effectively distribute content in its most compelling format. There is no assurance that broadband distribution networks will ever achieve consumer acceptance, and if they do not, the Company's growth may be limited. Lack of "Name-Brand" Recognition Many consumers remain unfamiliar with shopping on the Internet. Concerns about transaction security, potential credit-card or other fraud, service problems and the like have resulted in a retail environment favoring well-established retail names. Retailers who have established themselves in brick-and-mortar stores (like the Gap), catalogue sales (like Lands End) or early Internet sales (like Amazon) are able to leverage early success into new markets. Consequently, the continuing entry of established music retailers into the downloadable music business will pose a substantial competitive threat for the Company's business. (See "Item 1. - Business - Competition.") 9 Future Acquisitions May Cause Dilution or Adversely Affect Operating Results As part of the Company's business strategy, the Company may seek to acquire other websites for the marketing of products and services over the Internet. The Company has no current agreements or commitments with respect to any such acquisition and there can be no assurance that the Company will enter into any such agreements or commitments. In the event of such future acquisitions, the Company could (i) issue equity securities that would dilute current stockholders' percentage ownership in the Company; (ii) incur substantial debt; or (iii) assume contingent liabilities. Such actions could cause the Company's operating results or the price of the Company's common stock to decline. In addition, the Company may not be able to successfully integrate any businesses, products, technologies or personnel that may be acquired in the future. The Company May Need to Obtain Additional Financing Management believes that current cash and cash equivalents will be sufficient to meet the Company's anticipated cash needs for working capital and capital expenditures for the nine months ended December 31, 2001. If shareholders Powers and Ingenito remain satisfied with results of the software and database content development now in process, they presently intend to invest an additional $500,000 into equity of the Company in fiscal 2002. The Company's ability to continue its operations is highly dependent on its future ability to raise capital, upon the achievement of the business objectives described in "Item 1. Business" and profitable operations therefrom, and the ability to generate sufficient cash from operations and financing sources to (i) meet obligations, (ii) fund more rapid expansion, (iii) develop new or enhance existing services or products, (iv) respond to competitive pressures; and (v) acquire complementary businesses, technologies, content or products. The Company cannot give assurances that these objectives will be met, that acceptable alternatives will be found or that additional financing will be available on terms favorable to it, or at all. (See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.") Retention and Integration of Employees and Consultants The Company's future performance will be substantially dependent on the continued services of its management and the Company's ability to retain and motivate them. (See "Item 10. Directors and Executive Officers of the Registrant.") The loss of the services of any of the Company's officers or senior managers could harm the Company's business. The Company generally does not have long-term employment agreements with its key personnel. Most of the Company's management team joined the Company since December 1999. If the Company's senior managers are unable to work effectively as a team, the Company's business would be harmed. The Company's future success will also depend on its ability to attract, train, retain and motivate other highly skilled technical, managerial, marketing and support personnel. Competition for these personnel is intense, especially for engineers and web designers, and the Company may be unable to attract sufficiently qualified personnel. The Company will need to integrate these employees into its business. The Company's inability to hire, integrate and retain qualified personnel in sufficient numbers may reduce the quality of the Company's programs, products and services, and could harm the Company's business. Continued Upgrading of Technology Infrastructure The Company must continue to add hardware and enhance software to accommodate increased content and use of its websites. If the Company is unable to increase the data storage and processing capacity of its systems at least as fast as the growth in demand, its websites may become unstable and may fail to operate for unknown periods of time. Unscheduled downtime could harm the Company's business and also could discourage users of the websites and reduce future revenues. 10 Systems Failure Substantially all of the Company's hardware, operations and records are currently located in SITI's offices at 594 Broadway in New York, at the offices of Globix (a New York based service provider), and in the home offices of two of its software developers. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events could damage these systems and cause interruptions in the Company's services. Computer viruses, electronic break-ins or other similar disruptive problems could result in reductions or termination of the Company's services by its customers or otherwise adversely affect the website or the Company's off premises providers. The Company's business could be adversely affected if its systems were affected by any of these occurrences. The Company's insurance policies may not adequately compensate the Company for any losses that may occur due to any failures or interruptions in its systems. The Company does not presently have any backup systems or a formal disaster recovery plan. The websites must be able to accommodate a high volume of traffic and may in the future experience slow response times or decreased traffic for a variety of reasons. In addition, the Company's customers depend on Internet service providers, online service providers and other website operators for access to the Company's websites. Many of them have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to the Company's systems. Moreover, the Internet network infrastructure may not be able to support continued growth. Any of these problems could adversely affect the Company's business. Web Security Concerns Could Hinder E-Commerce A significant barrier to e-commerce and communications over the Internet has been the need for secure transmission of confidential information. Internet usage may not increase at the rate the Company expects unless some of these concerns are adequately addressed and found acceptable by the market. Internet usage could also decline if any well-publicized compromise of security occurred. The Company may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. Any such protections may not be available at a reasonable price or at all. If a third person were able to misappropriate the personal information of the websites' users, the users could sue or bring claims against the Company. Government Regulation The Company's business is subject to rapidly changing laws and regulations. These laws and regulations could harm the Company by subjecting it to liability or forcing it to change how it does business. (See "Item 1. - Business - Government Regulation.") Liability for Content The Company may be liable to third parties for content on its websites and on the CDs the Company distributes or for content that is accessible from its websites through links to other websites. The Company attempts to minimize these types of liability. However, there can be no assurance that these measures will be successful or that the Company will not be found liable for content. Liability or alleged liability could harm the Company's business by damaging its reputation, requiring the Company to incur legal costs in defense, exposing the Company to awards of damages and costs and diverting management's attention away from the Company's business. (See "Item 1. Business - Intellectual Property.") Inadequate Intellectual Property Protection The Company believes that its intellectual property is important to its success and its competitive position and seeks to protect it. However, its efforts may be inadequate. In addition, third parties may claim that the Company violated their intellectual property rights. To the extent that such claim is successful against the Company, the Company 11 may be required to pay damages, obtain a license to use such third party's intellectual property or use non-infringing methods to conduct its activities. (See "Item 1. - Business - Intellectual Property.") Market Listing; Volatility of Stock Price The Company's common stock has been traded on the OTC Bulletin Board. The market for the Company's common stock has been relatively illiquid and subject to wide fluctuations. There can be no assurance that an active public market for the common stock will develop or be sustained. Further, the market price of the Company's common stock may be highly volatile based on quarterly variations in operating results, acquisitions by the Company, investment or other losses, announcements of technological innovations or new products by the Company or its competitors, or other events or factors. Forward-Looking Statements This Annual Report on Form 10-K contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to statements related to pending discussions, business objectives and strategy of the Company. Such forward-looking statements are based on current expectations, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by the Company's management. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed, forecasted, or contemplated by any such forward-looking statements. Factors that could cause actual events or results to differ materially include, among others, those set forth in "Risk Factors." 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 (the "SEC"), particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. ITEM 2. PROPERTIES The Company's headquarters occupy some 2,500 square feet of office space in an office building located at Broadway and Houston Street in New York, New York. The Company holds a lease for such offices expiring on August 31, 2002. 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 included an initial month of free rent, and an escalation of rental payments over the three-year period. This charge will be amortized over the life of the lease. The Company believes that its properties and facilities are suitable and adequate for its purposes for the foreseeable future. (See "Part IV - Item 14. Note 5 to the Consolidated Financial Statements.") ITEM 3. LEGAL PROCEEDINGS As of the date of this report the Company knows of no pending or threatened legal actions against the Company that would have a material impact on the operations or financial condition of the Company. On May 1, 2000, the former officers of Tropia (Jonathan Blank, Ari Blank and Arjun Nayyer) entered into a settlement agreement with the Company in connection with various claims and their activities after their resignations during the third quarter of fiscal 2000. As a result of the agreement, all claims have been settled and they have returned an additional 50,000 shares to the Company resulting in an increase in treasury stock and a corresponding gain on litigation settlement of approximately $19,000. In addition, the former officers have waived any and all of their rights to the 158,333 escrowed shares related to the original acquisition of Tropia. 12 Defaults by EZCD.com and its officers as to its investment representations, and its content and technology sharing agreement with the Company could result in litigation or other legal complications, and attendant costs and efforts by the Company's management to resolve such matters. EZCD.com filed for bankruptcy liquidation in August, 2000 and the Company is making claims in such proceeding. Other Proceedings From 1995-1997 the Company went through a bankruptcy reorganization, as described in the Form 10-K for 1999, "Item 3. Legal Proceedings." In addition, for a discussion of past securities related proceedings involving management of the Company before the 1998 change of control, see the Form 10-K for 1999, "Item 3. Legal Proceedings." From time to time in previous years, the Company had been a party to other legal actions and proceedings incidental to its business. As of the date of this report, however, the Company knows of no other pending or threatened legal actions that could have a material impact on the operations or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of the Company, par value $0.001 per share (the "Common Stock"), was traded in the NASDAQ System from 1987 through April, 1995. NASDAQ delisted the Company from the National Market System because the Company failed to meet certain net tangible asset and bid and ask price criteria in April, 1995 as it went into reorganization. The stock is currently being traded on the NASD OTC Bulletin Board. There are currently 12 registered market makers for the Common Stock. In March, 1997, the Company's Reorganization Plan became effective, which included a 75:1 reverse stock split. On that day, the Company's reorganized common stock became eligible for trading under the symbol "SITI", which symbol was modified by NASDAQ to "SITN" in January, 2000. The range of high and low closing bid prices for the Common Stock for the fiscal years 2001 and 2000 are set forth below. The National Quotation Bureau provided this information which may not reflect actual transactions. 13 HIGH AND LOW BID PRICES 2001 2000 Low High Low High First Quarter (6/00) $0.13 $0.69 First Quarter (6/99) $0.94 $2.50 Second Quarter (9/00) 0.16 0.25 Second Quarter (9/99) 1.00 2.25 Third Quarter (12/00) 0.11 0.19 Third Quarter (12/99) 0.56 1.38 Fourth Quarter (3/01) 0.09 0.15 Fourth Quarter (3/00) 0.53 1.13 On June 22, 2001, the last reported bid and ask prices of the Common Stock were $.08 and $.14, respectively. As of June 22, 2001 there were approximately 5,000 holders of record of the Company's Common Stock (which amounts do not include the number of shareholders whose shares are held of record by brokerage houses but include each brokerage house as one shareholder). The Company has paid no dividends for the fiscal years ended March 31, 2001, 2000 and 1999 and the Company has no current plans to pay dividends in the foreseeable future. The Company plans to retain earnings, if any, to finance development and expansion of the Company's operations. Payment of cash dividends, if any, in the future will be determined by the Company's Board of Directors in light of future earnings, capital requirements, financial condition and other relevant considerations. Recent Sales of Unregistered Securities For a discussion of sales of unregistered securities by the Company during the portion of its 2000 fiscal year ending prior to February, 2000 see the Form 10-K for 1999, "Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters - Recent Sales of Unregistered Securities" and the Form 10-Q for 12/31/99, "Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II. Item 2. Changes in Securities." For a discussion of sales of unregistered securities by the Company during the remaining portion of its 2000 fiscal year see the Form 10-K for 2000, "Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters - Recent Sales of Unregistered Securities." For a discussion of sales of unregistered securities by the Company during the 2001 fiscal year ending prior to January 1, 2001, see the Form 10-Q for 12/31/00, "Part II. Item 2. Changes in Securities." All of the shares of Common Stock issued by the Company during the 2000 and 2001 fiscal years as described above and in the referenced Form 10-K for 1999 and the Form 10-Q for 12/31/00, were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act, on the basis that such transactions did not involve any public offering. The stockholders who received such shares of the Company had access to all relevant information regarding the Company necessary to evaluate the investment; each such stockholder represented that the Common Stock was being acquired for investment only. There was no general solicitation or advertising involved, and the Company used reasonable care to ensure that such stockholders were not underwriters. 14 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial information relating to the financial condition and results of continuing and discontinued operations of the Company and should be read in conjunction with the consolidated financial statements and notes included elsewhere in this Annual Report on Form 10-K. CONTINUING AND DISCONTINUED OPERATIONS For the Years Ended March 31, ------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ (Amounts in thousands, except per share amounts) Summary of Operations: Total revenues of continuing operations 2 1 0 0 0 Loss from continuing operations (1,646) (1,731) (484) -- -- Loss from continuing operations per common share (0.117) (0.201) (0.15) -- -- Net income (loss) from continuing and discontinued operations (2,002) (1,708) (1,804) (3,077) (6,180) Net income (loss) per share from continuing and discontinued operations (0.143) (0.198) (0.56) (2.33) (6.04) Weighted average common Shares outstanding 14,024 8,622 3,200(a) 1,325 1,022 Summary of Financial Position: Total assets 1,096 1,541 1,030 1,600 6,043 Long-term debt -- -- -- -- -- Stockholders' equity 903 1,371 887 678 2,161 Dividends per share None None None None None (a) See Note 1(i) to Financial Statements regarding increase in outstanding shares in December, 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Organization and 1998 Change of Control The Company is an Internet media company with three websites for the marketing of news and services. The Company's current websites relate entirely to the music industry. The Company intends to develop these websites further by entering into strategic partnerships and affiliations. As part of this strategy, in June, 1999 the Company acquired Tropia, which promotes and markets the music of selected independent artists on its website www.Tropia.com. The Company next acquired 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), all in January, 2000. As of March 31, 2001, the Company discontinued the operations of the New York Expo as a result of increased losses associated with the production of the Expo. In addition, during fiscal 2000, the Company made and wrote-off a $500,000 investment in a music CD custom compilation and promotion company, Volatile Media, Inc., which did business as EZCD.com, now in bankruptcy liquidation. Such investment was written off at March 31, 2000 because of uncertainties in EZCD's financing plans and ability to continue operations. The Company also entered a technology sharing agreement with EZCD.com pursuant to which they were to share music content and technology, which was not adequately performed by EZCD. Such default could result in litigation. (See "Item 1. - Business - Risk Factors - EZCD Investment Loss; - Reliance on Artists and Independent Record Labels.") SITI currently employs a total of 15 employees and consultants. As a result of recent financings and 15 incentive issuances to key employees and consultants, SITI's issued and outstanding shares have increased to approximately 15,500,000 shares as of June 15, 2001. SITI's history under former management and control persons goes back to 1984 when it was incorporated in Delaware. As a result of a change of control of the Company in December, 1998, the Company's senior management and Board of Directors were replaced. The current 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. All prior business operations of the Company were discontinued. The Company changed its corporate name to SITI-Sites.com, Inc. from Spectrum Information Technologies, Inc. after its Annual Meeting of Stockholders on December 14, 1999, and its former stock symbol "SITI" is now "SITN". As a result of the change of control, subsequent equity investments and option exercises through June, 2001, the directors and senior executive officers of the Company (along with family and associates) have invested or committed approximately $4,000,000 in cash for equity in the Company. In view of the Company's Internet business strategy and the rapidly evolving nature of its business, the following information relating to the results of the Company's prior discontinued operations should not be relied upon as an indication of future performance. All of the Company's operations prior to January 1, 1999 are discontinued operations. The following information should also be read in conjunction with the consolidated financial statements and the notes thereto, included elsewhere in this Annual Report on Form 10-K. SUMMARY OF OPERATIONS; CONTINUING AND DISCONTINUED The following discussion relates to the Company's continuing operations since the Change of Control Transaction and its prior operations which were discontinued December 31, 1998. CONTINUING OPERATIONS The following table sets forth certain financial data for continuing operations for the periods indicated. As a result of the December 11, 1998 Change of Control Transaction described in the Form 10-K for 1999 "Item 1. Business-Change of Control," the Company discontinued its previous operations. In addition, during fiscal 2001, the Company discontinued its New York Expo business segment. In accordance with Accounting Principles Board, ("APB") Statement #30, "Reporting the Effects of the Disposal of a Segment of a Business," the fiscal 1999 and 2000 financial statements have been restated to reflect the discontinued operations. All assets and liabilities of the discontinued segment have been reflected as net liabilities of discontinued operations. Years Ended March 31, - -------------------------------------------------------------------------------- Continuing Operations: 2001 2000 1999 - -------------------------------------------------------------------------------- (Amounts in thousands) Revenues $ 2 $ 1 $ 0 ---------------------------------- Operating costs and expenses: Cost of sales 1 -- -- Impairment of goodwill 134 -- -- Selling, general and administrative 1,594 1,275 414 ---------------------------------- Total operating costs and expenses 1,729 1,275 414 ---------------------------------- Operating loss $(1,727) $(1,274) $ (414) ================================== The three-month reporting period for continuing operations begins January 1, 1999 and ends March 31, 1999 and is not a full fiscal year, whereas the data for fiscal 2001 and 2000 are for a complete 12-month period. 16 CONSOLIDATED REVENUES FROM CONTINUING OPERATIONS During the fiscal years ended March 31, 2001 and 2000, SITI's revenues were nominal. During the fiscal year ended March 31, 1999, the Company began to implement its new Internet business strategy, and there were no revenues from continuing operations. OPERATING COSTS AND EXPENSES FROM CONTINUING OPERATIONS During the fiscal year ended March 31, 2001, operating costs and expenses increased approximately $454,000 or 36% as compared to the prior fiscal year as a result of increased selling, general and administrative expenses of approximately $319,000 or 25%. As a result of the Change of Control Transaction and the discontinuance of operations during the 1999 fiscal year, the Company experienced greater operating costs and expenses (primarily selling, general and administrative expenses) for the 2000 fiscal year as compared to the same period in the 1999 fiscal year by approximately $861,000. The increase in selling, general and administrative expenses of approximately $319,000 or 25% for the twelve months ended March 31, 2001 as compared to the same periods in the prior fiscal year is primarily due to increased personnel and related expenses of approximately $479,000 or 161%. Insurance expense increased approximately $39,000 or 975% for fiscal 2001 as compared to fiscal 2000. These increases in personnel and related expenses and insurance expense are due to the hiring of staff and officers. As a result of the Company's acquisitions during the prior fiscal year as well as the outfitting of offices, the Company recorded increased depreciation and amortization of approximately $37,000 or 47% for the fiscal 2001 year as compared to the fiscal year ended March 31, 2000. For the twelve months ended March 31, 2001, co-location fees and website expenses increased approximately $14,000 or 82% and $30,000 or 300%, respectively, as compared to the same period in the prior fiscal year as a result of the Company's increased activity associated with its websites. Also, the Company wrote off certain licensing agreements during the quarter ended June 30, 2000 that were entered into in the prior fiscal year. These agreements were determined to no longer be of value, and the Company recorded a charge of approximately $28,000, resulting in an increase from the prior fiscal year of approximately $20,000 or 250%. These increases were partially offset by a decline of $170,000 or 82% in other expenses for the fiscal year ended March 31, 2001 as compared to the fiscal year ended March 31, 2000. During the prior fiscal year, the Company held its Annual Meeting of Stockholders which resulted in costs of approximately $200,000 and no meeting was held during the current fiscal year. Legal fees for the year ended March 31, 2001 decreased approximately $111,000 or 65% as compared to the same period in the prior fiscal year as a result of a decline in corporate organizational matters. Accounting expenses decreased approximately $19,000 or 17% for the fiscal year ended March 31, 2001 as compared to the fiscal year ended March 31, 2000. The Company also wrote off goodwill of $134,000 which was considered impaired based on continuing negative cash flows for the remaining amortization period. For the fiscal year ended March 31, 2000, selling, general and administrative expenses consisted of approximately $298,000 in personnel and related expenses to hire officers and staff. Legal fees totaled approximately $171,000 for the twelve months ended March 31, 2000 resulting from corporate organizational matters and acquisition negotiations. For the fiscal year ended March 31, 2000, other expenses amounted to approximately $207,000 due to the printing and mailing costs associated with the annual meeting of the shareholders in December 1999, the first held since 1995. Outside services were approximately $207,000 for the twelve months ended March 31, 2000, primarily for accounting and other consultants before corporate offices were rented. For the twelve months ended March 31, 2000, accounting expenses totaled approximately $113,000 as a result of costs associated with the prior year's audit. As a result of SITI's move from executives' personal offices to an office in Manhattan in September 1999, the Company recorded approximately $73,000 in rent expense for the fiscal year ended March 31, 2000. SITI recognized approximately $77,000 in depreciation and amortization for the twelve months ended March 31, 2000 as a result of the acquisitions of Tropia Inc., HungryBands.com, NewMediaMusic.com and NewYorkExpo.com. For the twelve months ended March 31, 2000, SITI recognized approximately $34,000 in expenses for its transfer agent, public relations and costs of issuing press releases. The remaining $95,000 in operating costs and expenses relate to several costs associated in maintaining the office, such as 17 telephone in the amount of approximately $17,000; office supplies in the amount of approximately $14,000; server co-location fees of approximately $17,000; and various expenses totaling approximately $47,000. The operating costs and expenses for the fiscal year ended March 31, 1999 were primarily composed of compensation to employees via stock and options (See the Form 10-K for 1999 "Item 1. Business-Change of Control") and legal and accounting fees incurred while the Company went through its transition resulting from the December 11, 1998 Change of Control Transaction. (See "Operating Loss from Continuing Operations.") OPERATING LOSS FROM CONTINUING OPERATIONS The Company's operating loss for the twelve months ended March 31, 2001 increased approximately $453,000 or 36% to $1,727,000 for the twelve months ended March 31, 2001 as compared to a $1,274,000 operating loss during the prior fiscal year. This increased loss is directly related to increased operating costs and expenses for the current fiscal year. For the fiscal year ended March 31, 2000, SITI experienced an operating loss from continuing operations of approximately $1,274,000 due to the Company's efforts to grow in its industry. For the three months of continuing operations in the fiscal year 1999, the Company experienced an operating loss of approximately $414,000 (the previous nine months represent operations discontinued on January 1, 1999). The operating loss was primarily composed of compensation to employees via stock and options (See the Form 10-K for 1999 "Item 1. Business-Change of Control") and legal and accounting fees incurred while the Company went through its transition resulting from the December 11, 1998 Change of Control Transaction. The operating loss for fiscal 1999 is not indicative of a full year's operations. OTHER INCOME AND EXPENSE RELATED TO CONTINUING OPERATIONS Other expenses (net of income) decreased approximately $538,000 or 118% for fiscal 2001 as compared to fiscal 2000 primarily due to the $500,000 loss on the investment in EZCD the Company recorded during fiscal 2000. This decrease is further attributed to a $19,000 gain associated with a settlement agreement between the Company and former officers of Tropia as well as a $28,000 gain on the sale of marketable securities. These decreases were partially offset by a $10,000 or 24% decline in interest income for the fiscal year ended March 31, 2001 as compared to the fiscal year ended March 31, 2000. This decrease is directly related to decreased cash balances. For the fiscal year ended March 31, 2000, SITI recognized approximately $457,000 in other expenses primarily due to the $500,000 loss on the investment in EZCD. (See "Item 1. Business - Risk Factors - EZCD Investment Loss.") This loss was partially offset by interest income of $43,000. This interest income is a result of the investment of increased cash balances resulting from private placements and stock purchases during the current fiscal year. The company had no income from continuing operations during the fiscal year ended March 31, 1999. The expenses were primarily compensation to employees via stock and options as well as legal and accounting fees incurred while the Company went through its transition resulting from the December 11, 1998 Change of Control Transaction. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2001 the Company had working capital of $782,000 as compared to $1,093,000 for the prior fiscal year. The $311,000 decline is primarily due to a decrease in the Company's cash balances offset by a decrease in payables and accrued expenses for the fiscal year ended March 31, 2001 as compared to the prior fiscal year. The increased working capital for the prior fiscal year was due to the infusions of cash after the December, 1998 Change of Control transaction. A total of approximately $4,000,000 in cash has been invested in the Company since 1998. The following information, to the extent that it relates to prior discontinued operations, should not be relied on as an indicator of future performance. 18 Net cash used by operations increased $412,000 for the twelve months ended March 31, 2001 as compared to the twelve months ended March 31, 2000 as a result of the Company experiencing an increase in operating loss of approximately $453,000. Also, net cash used by discontinued operations increased approximately $297,000 for the fiscal year ended March 31, 2001 as compared to fiscal 2000. Net cash used by operations decreased from $1,956,000 in fiscal 1999 to approximately $973,000 in fiscal 2000. During the 1999 fiscal year, SITI discontinued its prior operations resulting in a $1,925,000 use of cash for discontinued operations. However, during the 2000 fiscal year, cash was used entirely to develop the Company's Internet business strategy (continuing operations). Net cash used by investing activities decreased from a $1,082,000 for fiscal 2000 to $153,000 for the twelve months ended March 31, 2001 as compared to the prior fiscal year. This decrease is primarily due to the EZCD investment of $500,000 during the prior fiscal year. Also, during fiscal 2000, the Company purchased marketable securities totaling approximately $486,000. During the current fiscal year, the Company sold the securities as well as additional securities that it had purchased. Net cash provided by investing activities decreased from $273,000 in fiscal 1999 to approximately $1,082,000 net cash used in investing activities in the current fiscal year primarily due to the purchase of approximately $486,000 in marketable securities and the $500,000 investment in EZCD. In May 1999 the Company was reimbursed $23,000 as a result of the termination of its agreement with Minutemeals.com, Inc. As of March 31, 2000, the Company wrote-off its investment in Volatile Media, Inc. (See "Item 1. Business - Risk Factors - EZCD - - Investment Loss") As a result of the change of control in December, 1998 and the exercise of options, net cash provided by financing activities for the fiscal year ended March 31, 1999 totaled approximately $1,090,000, all used in continuing operations. The Company received approximately $1,750,000 from the proceeds of the financings. (See "Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters,") and certain options were exercised for an aggregate of approximately $12,000 during the fiscal year ended March 31, 2000. As a result of the June 2000 financings the company received approximately $1,150,000 in proceeds for the fiscal year ended March 31, 2001. Capital expenditures amounted to approximately $47,000, $119,000 and $74,000, respectively, for the twelve months ended March 31, 2001, March 31, 2000 and March 31, 1999. Capital expenditures in 2001 and 2000 were for computer and office equipment, used in continuing operations. For the fiscal year ended March 31, 1999, capital expenditures relate entirely to discontinued operations terminated in December, 1998. The Company currently is financing its daily operations through the application of the proceeds of the investments in the Company since December 1998 (see "Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters"). Management believes that current cash and cash equivalents will be sufficient to meet the Company's anticipated cash needs for working capital and capital expenditures for the next nine months. If shareholders Powers and Ingenito remain satisfied with results of the software and database content development now in process, they presently intend to invest a total of $500,000 in equity of the Company in fiscal 2002. Further, the Company's ability to continue its operations is highly dependent on its future ability to raise capital, upon the achievement of the business objectives described in "Item 1. Business" and profitable operations therefrom, and the ability to generate sufficient cash from operations and financing sources to (i) meet obligations, (ii) fund more rapid expansion, (iii) develop new or enhance existing services or products, (iv) respond to competitive pressures; and (v) acquire complementary businesses, technologies, content or products. The Company cannot give assurances that these objectives will be met, that acceptable alternatives will be found or that additional financing will be available on terms favorable to it, or at all. If adequate funds are not available or are not available on acceptable terms, the Company's ability to fund expansion, take advantage of unanticipated opportunities, develop or enhance services or products or otherwise respond to competitive pressures would be significantly limited. If the Company raises additional funds by issuing equity or convertible debt securities, the percentage ownership of its stockholders will be reduced, and these securities may have rights, preferences or privileges senior to those of such stockholders. Except as otherwise disclosed therein, the accompanying consolidated financial 19 statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. INFLATION The Company does not believe that the relatively moderate rates of inflation in recent years have had a significant effect on its net revenue and profitability. SUMMARY OF DISCONTINUED OPERATIONS As a result of the losses incurred relating to the April 21-22, 2001 Expo, the Company discontinued the operations associated with the segment. For a full discussion of the Company's discontinued operations for the fiscal year ended March 31, 1999, see the Form 10-K for 1999. Below is a table representing operating results from the discontinued operations. OPERATING RESULTS FROM DISCONTINUED OPERATIONS Operating Results from Discontinued Operations Fiscal Year Ended March 31, Period Ended Dec. 31, 2001 2000 1998 (a) ---------------------------------------------------- Revenues 78 93 2,324 ---------------------------------------------------- Operating costs and expenses Cost of sales 133 55 -- Selling, general & administrative 301 88 4,115 ---------------------------------------------------- Total operating costs and expenses 434 143 4,115 ---------------------------------------------------- Operating income (loss) (356) (50) (1,791) Other income and (expenses) 0 73 471 ---------------------------------------------------- Income(loss) from discontinued operations (356) 23 (1,320) ==================================================== (a) The nine-month reporting period for discontinued operations ends December 31, 1998 and is not a full fiscal year. 20 REVENUES FROM DISCONTINUED OPERATIONS During the fiscal year ended March 31, 2001, SITI's revenues from the discontinued operation were approximately $78,000 as compared to the same period in the prior fiscal year where SITI recorded gross revenues of approximately $93,000 from the March 2000 New York Expo sponsored by the Company. The $15,000 decline in revenues is due to decreased ticket sales and sponsorship associated with the April 21-22, 2001 Expo as compared to the March 2000 Expo. OPERATING COSTS AND EXPENSES FROM DISCONTINUED OPERATIONS During the fiscal year ended March 31, 2001, operating costs and expenses from discontinued operations increased approximately $291,000 or 203% as compared to the twelve months ended March 31, 2000. This increase is primarily due to a $78,000 or 142% increase in cost of sales and an increase of approximately $213,000 or 242% in selling, general and administrative expenses. The increase of approximately $78,000 or 142% in cost of sales for the twelve months ended March 31, 2001 as compared to the twelve months ended March 31, 2000 is directly related to the increased costs associated in sponsoring the expanded New York Expo in 2001. The increase in selling, general and administrative expenses of approximately $213,000 or 242% for fiscal 2001 as compared to fiscal 2000 is primarily due to the $185,000 or 456% increase in personnel and related expenses. This increase is due to the hiring of staff and executives to assist in the production of the New York Expo. This increase was partially offset by a decrease in commissions of approximately $27,000 or 118% for the year ended March 31, 2001 as compared to the year ended March 31, 2000. Commissions declined as a direct result of the losses incurred in connection with the April 21-22, 2001 Expo. OPERATING LOSS FROM DISCONTINUED OPERATION For the fiscal year ended March 31, 2001, the Company's operating loss associated with its discontinued operation increased approximately $379,000 or 1,648% as compared to the same period in the prior fiscal year primarily due to the increased operating expenses and decreased revenues associated with the April 21-22, 2001 Expo. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company had no short-term investments as of March 31, 2001, except for certain 90-day bonds the Company has purchased. These investments are classified as available for sale securities whereby any unrealized gain or loss is recorded on the balance sheet as a separate component of stockholders' equity. Market risk relating to the Company's interest bearing cash equivalents held as of March 31, 2001 is considered to be immaterial. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information called for by this item is set forth in the Company's consolidated financial statements and supplementary data contained in this report, and can be found at the pages listed in the following index on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On October 2, 2000, the Registrant was notified that Edward Isaacs & Company LLP had merged with McGladrey & Pullen, LLP and that the successor firm would replace Edward Isaacs & Company LLP as the auditor for the Registrant. McGladrey & Pullen, LLP was appointed as the Registrant's new auditor. 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors and Executive Officers of the Company The following table sets forth information with respect to the directors and executive officers of the Company: Name Age Position with the Company Lawrence M. Powers 69 Chairman, Chief Executive Officer Robert Ingenito 58 Vice Chairman of the Board, President John Iannitto 52 Executive Vice President Barclay V. Powers 38 Director Toni Ann Tantillo 34 Chief Financial Officer, Vice President, Secretary and Treasurer Theodore Mazola 30 Vice President, Technical Director Business Experience of Directors and Executive Officers Lawrence M. Powers, 69, has served as the Company's Chairman of the Board and Chief Executive Officer since the change of control transaction in December, 1998. Mr. Powers has been a private investor since 1992. Beginning in 1978 and continuing to his retirement in 1992, he built Spartech Corporation (NYSE), from a previously bankrupt corporation with few assets, into what has become a $1 billion plastics manufacturing group operating 50 plants. Raising some $200 million during his tenure, he and Spartech's key managers built one of the largest plastic processing companies in the U.S. by 1992 (12 plants at the time). The management team he assembled has continued successfully. He remained on the board of Spartech until 1995, and is still a major securities holder of Spartech. Mr. Powers, a securities lawyer in New York from 1957 through 1981, was educated at Yale Law School and senior executive programs at Harvard Business School. Mr. Powers is the father of Barclay V. Powers, a Director of the Company. Robert Ingenito,58, has served as a Director of the Company since the change of control transaction in December, 1998. Mr. Ingenito was a founder and, since 1989, served as Chief Executive Officer of Access Communications and Access Direct, two established data service companies. Access Direct produces high volume, highly segmented mail correlated to its clients segmented databases; Access Communications produces critical documents from on-line transmissions from its clients and was sold in 1999. Prior to that, he was the President and a principal of Axciom Corporation (NYSE) when it went public in 1982. Axciom has become an $800 million database management firm, and purchased Access Communications in 1999. John Iannitto, 52, has served the Company as Executive Vice-President since June, 2000. He has a 25-year background in advertising, consumer product management, marketing and promotions, operating his own successful agency, RSI Marketing, for 20 years. Before starting his own marketing business, he was a product manager at General Foods and Lever Brothers. His clients at RSI Marketing include Johnson & Johnson (Personal Products), and also its joint venture with Merck (Drug Products), McNeil Consumer Healthcare (Tylenol) and Merial (Veterinary Products). Mr. Iannitto received his M.B.A. at Pace University and his A.B. at St. Francis College in New York. His expertise is in development of new product launch programs, and marketing established brands and services. 22 Barclay V. Powers, 38, has served as a Director of the Company since 1999. He is a graduate of Columbia University, and was an executive associate for five years to the Chairman/CEO of Spartech, specializing in marketing projects, acquisitions and joint ventures. Since 1992 has been an independent film producer, making and marketing documentaries and a feature film, all aimed at the college youth market. Barclay Powers is the son of Lawrence M. Powers, Chairman and CEO of the Company. Toni Ann Tantillo, 34, has served as the Company's Chief Financial Officer, Vice President, Secretary and Treasurer since December 1999. Prior to her election, she worked as an independent consultant to SITI since the change of control in December 1998. From 1995 to December, 1998, Ms. Tantillo was the Asst. Controller and Controller of SITI. Ms. Tantillo, a Certified Public Accountant was educated at Iona College in New Rochelle, New York. Ted Mazola, 30, has served as the Company's Vice President/Technical Director since January, 2000. He founded the Company's division HungryBands.com, and co-founded the NewMediaMusic.com division. Prior to his election, he was employed in computer operations at Brooklyn Union Gas Company when he started these two web businesses and sold them to SITI. Compliance with Section 16 of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who beneficially own more than 10% of the Company's common stock (collectively, "Reporting Persons"), to file reports of ownership and changes in ownership with the SEC. Reporting Persons are required by SEC regulations to furnish the Company with copies of all such reports. To the Company's knowledge, based on a review of such reports to the Company and certain representations of the Reporting Persons, the Company believes that during the 2001 fiscal year, all Reporting Persons timely complied with all applicable Section 16(a) filing requirements except as set forth below. ITEM 11. EXECUTIVE COMPENSATION Compensation of Executive Officers The following table sets forth the total annual compensation paid or accrued by the Company for services in all capacities for Mr. Lawrence M. Powers in fiscal 2001 and 2000, who served as Chief Executive Officer and during the Company's 1999 fiscal year, where he was the Chief Executive Officer for approximately three months, and four individuals who were among the highest paid employees for the fiscal year ended March 31, 2001. The table also includes two individuals who were among the highest paid employees for the 2000 fiscal year but were not executive officers at the end of such fiscal year (collectively, the "Named Executive Officers"). The Company had one executive officers serving as such at the end of its 2001 fiscal year whose aggregate compensation exceeded $100,000. 23 Summary Compensation Table Long-Term Compensation Payouts Annual Compensation Grants & Awards Other Restricted Shares Name and Annual Stock Underlying All other Principal Position Year Salary Bonus Comp. Awards Options LTIP Payouts Comp. - ------------------ ---- --------- ----- ------ ---------- ---------- ------------ --------- Lawrence M. Powers 2001 125,000(1) -0- -0- -0- -0- -0- -0- Chairman and Chief 2000 75,000(1) -0- -0- -0- -0- -0- -0- Executive Officer 1999 18,250(1)(5) -0- -0- -0- -0- -0- -0- Robert Ingenito 2001 100,000(1) -0- -0- -0- -0- -0- -0- Vice-Chairman and 2000 25,000(1) -0- -0- -0- -0- -0- -0- President 1999 -0- -0- -0- -0- -0- -0- -0- Jon M. Gerber 2001 -0- -0- -0- -0- -0- -0- -0- Former Executive Vice-, 2000 59,231(2) -0- -0- -0- -0- -0- -0- President, Secretary, 1999 12,500(1) -0- -0- -0- -0- -0- -0- Treasurer and Director Toni Ann Tantillo 2001 69,874 1,375(6) -0- -0- -0- -0- -0- Chief Financial Officer, 2000 12,980(5) 14,100(3) 11,700(4) -0- -0- -0- -0- Vice President, 1999 -0- -0- -0- -0- -0- -0- -0- Secretary and Treasurer Theodore Mazola 2001 68,000 2,000(6) -0- -0- -0- -0- -0- Vice-President, 2000 22,231(5) -0- -0- -0- -0- -0- -0- Technical Director 1999 -0- -0- -0- -0- -0- -0- -0- Steven Zuckerman 2001 68,000(7) 16,813(6) -0- -0- -0- -0- -0- Vice-President, 2000 21,250(5) -0- -0- -0- -0- -0- -0- Technical Director 1999 -0- -0- -0- -0- -0- -0- -0- Jonathan Blank 2001 -0- -0- -0- -0- -0- -0- -0- Former Chief Executive 2000 17,500(5) -0- -0- -0- -0- -0- -0- Officer - Tropia, Inc. 1999 -0- -0- -0- -0- -0- -0- -0- (1) This amount represents Mr. Powers', Mr. Ingenito's and Mr. Gerber's contribution of services charged against earnings. No compensation was paid by the Company to Messrs. Powers or Ingenito with respect to these services. Mr. Ingenito's contribution began in January 2000. (2) Included in this amount is Mr. Gerber's contribution through for the first quarter of the current fiscal year. Mr. Gerber began collecting a salary during the second quarter of the 2000 fiscal year, and left the Company in September, 1999. (3) Represents the dollar value associated with a stock bonus granted based upon performance in February, 2000. 24 (4) Represents compensation as an independent consultant for the period December 1, 1999 to January 31, 2000. (5) Represents partial year compensation based upon individual election as officer. Mr. Blank left the Company in December, 1999. (6) Represents the dollar value associated with a stock bonus granted based upon performance for the 2001 fiscal year. (7) Mr. Zuckerman became a consultant in May, 2001 and his salary and bonus arrangements were terminated. Option Grants in Last Year There were no options granted during the fiscal years ended March 31, 2001 and March 31, 2000. Certain of the Named Individuals did purchase options as referred to in "Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters." Option Exercises and Year-End Values There were no options exercised by the Named Executive Officers during the 2001 fiscal year. Any options held by such individuals were purchased pursuant to stock purchase agreements. (See "Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.") Compensation of Directors At present, the Board does not award compensation to its directors. Employment Agreements At present the Company does not maintain employment agreements or other arrangements with its executive officers, except for the agreements described below: In connection with the ongoing services of Messrs. Ingenito and Iannitto, they have agreed that the Company will not pay them cash compensation for the fiscal years ended March 31, 2001 and 2002, but will grant options and have granted shares as follows: Fiscal 2001 Fiscal 2002 ----------- ----------- Robert Ingenito 300,000 shares Options to purchase 300,000 shares at $.50 per share, exercisable for five years (until 6/30/2006) John Iannitto 200,000 shares Options to purchase 200,000 shares at $.50 per share, exercisable for five years (until 6/30/2006) Mr. Powers does not expect to receive any cash compensation, stock or options for his services for such two fiscal years. At present, the Company does not have a Compensation Committee. 25 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information, as of June 22, 2001, as to the beneficial ownership of the Company's common stock (including shares which may be acquired within sixty days pursuant to stock options) by (1) each person or group of affiliated persons known by the Company to own beneficially more than 5% of the outstanding shares of the Company's common stock, (2) the Named Executive Officers, (3) each of the Company's directors, and (4) all directors and executive officers of the Company as a group. Unless otherwise noted, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned. Shares of Common Stock Beneficially Owned Name of Owner Number Percent of Class - -------------------------------------------------------------------------------- Lawrence M. Powers 8,436,666(1) 54.4% 47 Beech Road Englewood, NJ 07631 Robert Ingenito 3,166,667(2)(4) 20.4% 80 Ruland Road Melville, NY 11747-6200 Barclay V. Powers 4,818,333 31.1% 665 Walther Way Los Angeles, CA 90049 John Iannitto 1,700,000(3)(4)(5) 11.0% D/B/A RSI Marketing 171 Madison Avenue New York, NY 10016 Toni Ann Tantillo 55,834 * 115 Whitman Road Yonkers, NY 10710 Theodore Mazola 200,000 1.3% 36 Fieldway Avenue Staten Island, NY 10308 Steven Zuckerman 200,000 1.3% 519 Bloomfield Avenue Apt #6G Caldwell, NJ Jonathan Blank (former officer) 16,546 * 4239 Coolidge Avenue Los Angeles, CA 90066 Current Directors and 12,517,500(6) 80.7% Executive Officers as a Group (7 persons): - ---------- 26 * Less than 1% (1) Consists of 6,736,666 shares and options to purchase an additional 1,700,000 shares of SITI's common stock. Shares and options held by Mr. Lawrence Powers also include 3,968,333 shares and options to purchase an additional 850,000 shares held by his son, Barclay V. Powers, as to which Lawrence Powers disclaims voting power or investment therein. (2) Consists of 2,166,667 shares and options to purchase an additional 1,000,000 shares of SITI's common stock. Shares held by Mr. Ingenito also include 841,667 shares and options to purchase and additional 400,000 shares held by John DiNozzi. (3) Consists of 1,200,000 shares and options to purchase an additional 500,000 shares of SITI's common stock. (4) Does not include options payable under their employment arrangements for fiscal 2002. (See "Item 11. - Executive Compensation - Employment Agreements.") (5) Represents shares and options held by RSI Marketing, a sole proprietorship owned by John Iannitto. (6) Consists of a total of 9,717,500 shares and options to purchase an additional 2,800,000 shares of SITI's common stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Steven Gross, an investor, was formerly a law partner of Mr. Powers. Mr. Gross is now a senior partner of Sills Cummis Radin Tischman Epstein & Gross, P.A., a large law firm based in Newark, NJ. His law firm was counsel to the Company until March 31, 2000. FINANCING IN FISCAL 2001 As of June 8, 2000, principal investors, directors and executives, Lawrence M. Powers, Robert Ingenito and John Iannitto, agreed with the Company to invest an additional $1,000,000 for common stock and options, on the following basis: (a) Mr. Powers would invest $500,000 for 2,000,000 shares of common stock, together with options, to purchase an additional 1,000,000 shares for $.50 per share, exercisable for five years. (b) Messrs. Ingenito and Iannitto would each invest $250,000 for 1,000,000 shares of common stock, respectively, together with options, respectively, to purchase an additional 500,000 for shares for $.50 per share, exercisable for five years. Messrs. Powers, Ingenito and Iannitto divided their respective investments further among family members and business associates, consisting of Barclay V. Powers, John DiNozzi and Mr. Iannitto's son (a minor child) in varying amounts by gift or by assignment. 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K: 1. Consolidated Financial Statements: The consolidated financial statements filed as a part of this report are listed in the "Index to Consolidated Financial Statements" at Item 8. 2. Consolidated Financial Statement Schedules: The consolidated financial statement schedule filed as part of this report is listed in the "Index to Consolidated Financial Statements " at Item 8. Schedules other than that listed on the accompanying Index to Consolidated Financial Statements are omitted for the reason that they are either not required, not applicable, or the required information is included in the consolidated financial statements or notes thereto. 3. Exhibits 2.1 Acquisition Agreement Between the Company and Tropia, Inc. (4) 3.1 Certificate of Incorporation of SITI-Sites.com, Inc. as amended. (3) 3.2 Amended and Restated Bylaws of SITI-Sites.com, Inc., as amended (3) 3.3 Restated Certificate of Incorporation of the Company (3) 3.4 Restated Bylaws of the Company. (3) 10.1 Investment and Business Development Agreement Among the Company, Minutemeals.com, Inc., Joseph Langhan and Donald Moore, dated March 19, 1999 (5) 10.2 Stock Purchase Agreement Between the Company and Powers & Co. dated December 11, 1998 (5) 10.3 Stock Purchase Agreement Between the Company and Robert Ingenito dated December 12, 1998 (5) 10.4 Stock Purchase Agreement Between the Company and Steven Gross dated December 12, 1998 (5) 10.5 Option Agreement Entered Into Between the Company and Maurice W. Schonfeld (5) 10.6 Termination Agreement Dated as of May 28, 1999 Among the Company, Minutemeals.com, Inc., Joseph Langhan, and Donald Moore (5) 10.7 Stock Purchase Agreement dated July 26, 1999 (Powers) (3) 10.8 Content and Technology Sharing Agreement dated December 23, 1999, between the Company and Volatile Media, Inc. (6) 10.9 Stock Purchase Agreement dated December 23, 1999 (Powers and Ingenito) (2) 10.10 Option Agreement dated December 23, 1999 Entered Into Between the Company and Lawrence M. Powers (2) 10.11 Option Agreement dated December 23, 1999 Entered Into Between the Company and Robert Ingenito (2) 10.12 Subscription Agreement dated February 8, 2000 Between the Company and Volatile Media, Inc. (6) 10.13 SITI-Sites.com, Inc. 1999 Stock Option Plan (6) 10.14 Purchase Agreement dated January 3, 2000, between the Company and Theodore Mazola (7) 10.15 Purchase Agreement-2 dated January 3, 2000, among the Company and Theodore Mazola and Steven Zuckerman(7) 10.16 Letter Agreement dated January 3, 2000, executed by New York Music Expo, Inc. in favor of the Company(7) 28 10.17 Settlement Agreement Dated May 1, 2000 Among the Company and Jonathan Blank, Ari Blank and Arjun Nayyer (2) 10.18 Stock Purchase Agreement dated June 8, 2000 (Powers, Ingenito and Iannitto) (2) 10.19 Employment Arrangements Agreement dated June 12, 2000 Entered Into Between the Company and Messrs. Robert Ingenito and John Iannitto(2) 10.20 Stock Option Agreement Dated June 8, 2000, Entered Into Between the Company and Lawrence Powers (2) 10.21 Stock Option Agreement Dated June 8, 2000, Entered Into Between the Company and Robert Ingenito (2) 10.22 Stock Option Agreement Dated June 8, 2000, Entered Into Between the Company and John Iannitto (2) 10.23 Stock Purchase Agreement dated June 13, 2000 (Colvil Investments, LLC purchase) (2) 10.24 Stock Option Agreement Dated June 13, 2000, Entered Into Between the Company and Colvil Investments, LLC (2) 10.25 Stock Purchase Agreement dated June 16, 2000 (Steven Gross purchase) (2) 10.26 Stock Option Agreement Dated June 16, 2000, Entered Into Between the Company and Steven Gross (2) Notes: (1) Filed Herewith. (2) Previously Filed as an Exhibit to the Company's Annual Report on Form 10-K for the Fiscal Year ended March 31, 2000, and incorporated herein by reference (3) Previously Filed as an Exhibit to the Company's Definitive Proxy Statement Effective December 14, 1999, and incorporated herein by reference. (4) Previously Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1999, and incorporated herein by reference. (5) Previously Filed as an Exhibit to the Company's Annual Report on Form 10-K for the Fiscal Year ended March 31, 1999, and incorporated herein by reference. (6) Previously Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999. (7) Previously Filed as an Exhibit to the Company's Current Report on Form 8-K dated January 18, 2000. (b) Reports on Form 8-K: There were no reports filed on Form 8-K for the three months ended March 31, 2001. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SITI-SITES.COM, INC. Dated: July 6, 2001 By /s/ Toni Ann Tantillo --------------------------------------------- Toni Ann Tantillo (Chief Financial Officer, Vice President, Secretary and Treasurer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated: July 6, 2001 By /s/ Lawrence M. Powers --------------------------------------------- Lawrence M. Powers (Chief Executive Officer and Chairman of the Board of Directors) Dated: July 6, 2001 By /s/ Robert Ingenito --------------------------------------------- Robert Ingenito (President and Vice-Chairman of the Board of Directors) Dated: July 6, 2001 By /s/ Barclay V. Powers --------------------------------------------- Barclay V. Powers (Director) 30 SITI-Sites.com, Inc. and Subsidiary Index to Consolidated Financial Statements And Financial Statement Schedule Report of Independent Certified Public Accountants F-2 Report of Independent Certified Public Accountants F-3 Report of Independent Certified Public Accountants F-4 Consolidated Balance Sheets as of March 31, 2001 and 2000 F-5 Consolidated Financial Statements for Each of the Three Years in the Period Ended March 31, 2001 Consolidated Statements of Operations and Comprehensive Loss F-6 Consolidated Statements of Stockholders' Equity F-7 Consolidated Statements of Cash Flows F-8 Notes to Consolidated Financial Statements F-9 - F-26 F-1 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Siti-Sites.com, Inc. New York, New York We have audited the consolidated balance sheet of Siti-Sites.com, Inc. and subsidiary as of March 31, 2001, and the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Siti-Sites.com, Inc. and subsidiary as of March 31,2001, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1c to the financial statements, the Company has suffered recurring losses from operations and cash may not be sufficient to meet the needs of the Company for the next year. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1c. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ McGladrey & Pullen, LLP McGladrey & Pullen, LLP White Plains, New York June 8, 2001 F-2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of SITI-Sites.com, Inc. New York, New York We have audited the accompanying consolidated balance sheet of SITI-Sites.com, Inc. and subsidiary (the "Company") as of March 31, 2000, and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SITI-Sites.com, Inc. and subsidiary at March 31,2000, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. EDWARD ISAACS & COMPANY LLP White Plains, New York May 25, 2000 F-3 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of SITI-Sites.com, Inc. New York, New York We have audited the accompanying consolidated balance sheet (not separately shown herein) of SITI-Sites.com, Inc. (formerly known as "Spectrum Information Technologies, Inc.") and Subsidiary as of March 31, 1999, and the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SITI-Sites.com, Inc. and Subsidiary at March 31, 1999, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The Company has experienced significant losses from continuing operations for the three years ended March 31, 1999, largely due to professional fees incurred in its 1997 bankruptcy reorganization, and in defending itself in the numerous litigation cases prior to January 26, 1995 discussed in Note 6 to the consolidated financial statements and the decline in its prior business. In December 1998, new investors invested in excess of $1 million for a controlling interest in the Company. As a result of this change of control transaction, the Company's senior management and Board of Directors were replaced, the Company's prior business was discontinued and the Company changed the direction and nature of the Company's business. The Company is now seeking to establish several websites for the marketing of products and services over the Internet. However, because of significant recurring losses, the Company's change of control, the discontinuance of its prior business and its new strategic direction, there remains a substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainties discussed herein. /s/ BDO Seidman, LLP BDO Seidman, LLP New York, New York June 11, 1999 F-4 SITI-Sites.com, Inc. and Subsidiary Consolidated Balance Sheets (Amounts in thousands) March 31, 2001 2000 - -------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 326 $ 714 Marketable securities 624 491 Receivables and other assets 25 52 Net assets of discontinued operation -- 6 -------- -------- Total current assets 975 1,263 -------- -------- Equipment, net of accumulated depreciation 121 109 Intangibles: Goodwill 289 236 Less:Accumulated amortization (289) (67) -------- -------- Intangibles, net -- 169 -------- -------- Total assets $ 1,096 $ 1,541 ======== ======== Liabilities and Stockholders' Equity: Current Liabilities Accounts payable and accrued liabilities $ 114 $ 100 Accrued legal fees -- 70 Net liabilities of discontinued operation 79 -- -------- -------- Total current liabilities 193 170 -------- -------- Total liabilities 193 170 -------- -------- Commitments and contingencies Stockholders' Equity: Preferred stock $.001 par value, 5,000 shares authorized, respectively, and none issued and outstanding -- -- Common stock, $.001 par value, 35,000 shares authorized, respectively, and 15,517 and 9,812 issued and outstanding, respectively 16 10 Paid-in capital 77,486 75,938 Accumulated deficit (76,272) (74,270) -------- -------- 1,230 1,678 Treasury stock, 112 and 62 shares at cost, respectively (330) (311) Accumulated Other Comprehensive Income 3 4 -------- -------- Total stockholders' equity 903 1,371 -------- -------- Total liabilities and stockholders' equity $ 1,096 $ 1,541 ======== ======== See accompanying notes to consolidated financial statements. F-5 SITI-Sites.com, Inc. and Subsidiary Consolidated Statements of Operations and Comprehensive Loss (Amounts in thousands, except per share amounts) Year ended March 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------- Revenues $ 2 $ 1 $ -- -------- -------- -------- Operating costs and expenses: Cost of sales 1 -- -- Impairment of goodwill 134 -- -- Selling, general and administrative expenses 1,594 1,275 414 -------- -------- -------- Total operating costs and expenses 1,729 1,275 414 -------- -------- -------- Operating loss (1,727) (1,274) (414) -------- -------- -------- Other income (expense): Interest income 32 42 12 Gain on litigation settlement 19 1 -- Gain on sale of marketable securities 28 -- -- Loss on investment in Minutemeals.com -- -- (82) Other income 2 -- -- Loss on investment in Volatile Media (EZCD.com) -- (500) -- -------- -------- -------- Total other income (expense), net 81 (457) (70) -------- -------- -------- Loss from continuing operations (1,646) (1,731) (484) -------- -------- -------- Discontinued operations: Income (loss) from discontinued operations -- 65 (1,320) Income (loss) from discontinued operations - Expo (356) (42) -------- -------- -------- Income (loss) from discontinued operations (356) 23 (1,320) -------- -------- -------- Net loss $ (2,002) $ (1,708) $ (1,804) Other Comprehensive Income (Loss), net (1) 4 3 -------- -------- -------- Comprehensive loss $ (2,003) $ (1,704) $ (1,801) ======== ======== ======== Basic and diluted loss per common share: Lossfrom continuing operations $ (.117) $ (.201) $ (.151) Income (loss) on discontinued operations (.025) .003 (.413) -------- -------- -------- Net loss per common share $ (.143) $ (.198) $ (.564) ======== ======== ======== Weighted Average Number of Common Shares used in basic and diluted calculation (see note 1 (i) to financial statements) 14,024 8,622 3,200 ======== ======== ======== See accompanying notes to consolidated financial statements. F-6 SITI-Sites.com, Inc. and Subsidiary Consolidated Statements of Stockholders' Equity (Amounts in thousands) Class A Convertible Preferred Stock Common Stock ------------------------- ---------------------- Paid-in Accumulated Shares $ Shares $ Capital Deficit ------------------------------------------------------------------------------------- Balance, March 31, 1998 813 $ 1 1,557 $ 2 $ 71,740 $(70,758) Net loss -- -- -- -- -- (1,804) Conversion of Class A convertible (813) (1) 813 1 -- -- Preferred stock to common stock Unrealized gain on marketable securities -- -- -- -- -- -- Issuance of common stock and options -- -- 5,534 5 1,716 -- Purchase of treasury stock -- -- -- -- -- -- Contribution of services by management -- -- -- -- 31 -- Contribution of administrative services -- -- -- -- 250 -- Contribution of rent by management 15 ------------------------------------------------------------------------------------- Balance, March 31, 1999 -- $ -- 7,904 $ 8 $ 73,752 $(72,562) Net loss -- -- -- -- -- (1,708) Issuance of common stock and options -- -- 1,908 2 2,048 -- Unrealized gain on marketable securities -- -- -- -- -- -- Contribution of services by management -- -- -- -- 113 -- Contribution of rent by management 25 ------------------------------------------------------------------------------------- Balance, March 31, 2000 -- $ -- 9,812 $ 10 $ 75,938 $(74,270) Net loss -- -- -- -- -- (2,002) Issuance of common stock -- -- 5,705 6 1,280 -- Unrealized gain on marketable securities -- -- -- -- -- -- Contribution of services by management -- -- -- -- 268 -- Settlement agreement ===================================================================================== Balance, March 31, 2001 -- $ -- 15,517 $ 16 $ 77,486 $(76,272) ===================================================================================== Treasury Stock --------------------- Accumulated Other Shares $ Comprehensive Total Income ------------------------------------------------------- Balance, March 31, 1998 4 $ (304) $ (3) $ 678 Net loss -- -- -- (1,804) Conversion of Class A convertible -- -- -- -- Preferred stock to common stock Unrealized gain on marketable securities -- -- 3 3 Issuance of common stock and options -- -- -- 1,721 Purchase of treasury stock 58 (7) -- (7) Contribution of services by management -- -- -- 31 Contribution of administrative services -- -- -- 250 Contribution of rent by management 15 ------------------------------------------------------- Balance, March 31, 1999 62 $ (311) $ -- $ 887 Net loss -- -- -- (1,708) Issuance of common stock and options -- -- -- 2,050 Unrealized gain on marketable securities -- -- 4 4 Contribution of services by management -- -- -- 113 Contribution of rent by management 25 ------------------------------------------------------- Balance, March 31, 2000 62 $ (311) $ 4 $ 1,371 Net loss -- -- -- (2,002) Issuance of common stock -- -- -- 1,286 Unrealized gain on marketable securities -- -- (1) (1) Contribution of services by management -- -- -- 268 Settlement agreement 60 (19) (19) ======================================================= Balance, March 31, 2001 112 $ (330) $ 3 $ 903 ======================================================= See accompanying notes to consolidated financial statements. F-7 SITI-Sites.com, Inc. and Subsidiary Consolidated Statements of Cash Flows (Amounts in thousands) Year ended March 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flow from operating activities: Net loss $(2,002) $(1,708) $(1,804) Adjustments to reconcile net loss to net cash used by continuing activities: Loss on Volatile Media, Inc. (EZCD.com) -- 500 -- Gain on litigation settlement (19) -- -- Gain on sale of marketable securities (28) -- -- Depreciation/amortization, including goodwill impairment 249 77 -- Compensation to employees and consultantsvia stock and options 68 75 250 Contribution of services by management 210 113 31 Contribution of rent by management -- 25 15 (Increase)decrease in: Receivables and other assets 27 (52) -- Increase(decrease) in: Accounts payable (95) 75 4 Accrued liabilities 38 (4) 71 Net liabilities of discontinued operation 85 (74) -- (Income)loss on discontinued operations 356 (23) 1,320 Loss on investment in Minutemeals.com -- -- 82 ------- ------- ------- Net cash used by continuing operations (1,111) (996) (31) Net cash provided (used) by discontinued operations (274) 23 (1,925) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by operating activities (1,385) (973) (1,956) - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Proceeds from sale of marketable securities 2,233 -- 449 Proceeds from sale of property and equipment -- -- 3 Purchase of marketable securities (2,339) (486) -- Investment in Volatile Media, Inc. (EZCD.com) -- (500) -- Recovery of investment in Minutemeals.com -- 23 -- Purchase of property and equipment (47) (119) (74) Investment in Minutemeals.com -- -- (105) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash (used) provided by investing activities (153) (1,082) 273 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flow from financing activities: Proceeds from the issuance of common stock 1,150 1,750 800 Proceeds from the exercise of stock options and warrants -- 12 297 Purchase of treasury stock -- -- (7) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities 1,150 1,762 1,090 - ------------------------------------------------------------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (388) (257) (593) Cash and cash equivalents, beginning of year 714 1,007 1,600 - ------------------------------------------------------------------------------------------------------------------------------------ Total cash and cash equivalents, end of year (excluding cash amounts in net assets of discontinued operations) $ 326 $ 714 $ 1,007 ======= ======= ======= See accompanying notes to consolidated financial statements. F-8 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BUSINESS SITI-Sites.com, Inc., a Delaware corporation, and its various divisions, (referred to collectively as "SITI" or the "Company") operate as an Internet media company with three websites for the marketing of news and services. The Company's current websites relate entirely to the music industry. The Company intends to develop these websites further by entering into strategic partnerships and affiliations. As part of this strategy, in June, 1999 the Company acquired Tropia, Inc. which promotes and markets the music of selected independent artists on its website www.Tropia.com. On June 20, 2000, Tropia, Inc. was merged into SITI-Sites.com, Inc. The Company next acquired three music-related websites, www.HungryBands.com (an e-commerce website and business promoting and selling music by independent artists), www.NewMediaMusic.com (an e-news/magazine business), and www.NewYorkExpo.com (a music and Internet conference business), all in January, 2000. As a result of the loss associated with 2001 Expo and the inability to produce significant revenue, the Company wrote off approximately $113,000 of goodwill and discontinued its New York Expo division effective March 31, 2001. (See Notes 1(b) and 10.) In fiscal 2000, the Company had made a $500,000 investment in a custom music CD compilation and promotion company, Volatile Media, Inc., which did business as EZCD.com, now in bankruptcy liquidation. The investment was written off at March 31, 2000. (See Note 12 - Other Agreements). The authorized shares have been increased to 35,000,000 common shares and 5,000,000 preferred shares as described in the Proxy Statement as of 12/14/99. SITI-Sites.com, Inc. was incorporated in Delaware in 1984 under former management and control persons. As a result of a change of control of the Company in December, 1998, the Company's senior management and Board of Directors were replaced. The new senior management and Board of Directors changed the strategic direction of the Company from being a developer of patented communication technologies, to that of an Internet media company. (b) DISCONTINUED OPERATIONS As a result of the losses associated with the April 21-22, 2001 Music and Internet Expo, the Company discontinued these operations resulting in a loss of approximately $356,000 and $42,000, respectively, for the fiscal 2001 and 2000. As a result of the December 11, 1998 Change of Control Transaction described in Note 1(a), the Company discontinued its previous operations resulting in a loss of $1,320,000 from the discontinued operations for the fiscal year ended March 31, 1999. 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 discontinuations. All assets and liabilities of the discontinued segments have been reflected as net assets or liabilities of discontinued operations. The following table reflects the net assets and liabilities: F-9 For the periods ended, March 31, 2001 2000 ------------------ (Amounts in thousands) Cash 33 36 Customer deposits 28 7 Refunds receivable -- Prepaid expenses and other -- Accounts payable -- -- Accrued expenses (140) (37) ------------------ Total (79) 6 ================== Operating results from discontinued operations are as follows: New York Expo.com: For the periods ended, March 31, 2001 2000 ------------------- (Amounts in thousands) Revenues $ 78 $ 93 ------------------- Operating costs and expenses: Cost of Sales 133 55 Selling, general and administrative expenses 301 80 ------------------- Total operating costs and expenses 434 135 ------------------- Operating Loss (356) (42) Other income and (expenses) -- ------------------- Income (loss) from discontinued operations $(356) $ (42) =================== Operations prior to 1998 Change of Control: For the periods ended, March 31, 2000 1999 --------------------- (Amounts in thousands) Revenues $ -- $ 2,324 --------------------- Operating costs and expenses: Cost of Sales -- -- Selling, general and administrative expenses 8 4,115 --------------------- Total operating costs and expenses 8 4,115 --------------------- Operating Loss (8) (1,791) Other income and (expenses) 73 471 --------------------- Income (loss) from discontinued operations $ 65 $(1,320) ===================== (c) MANAGEMENT'S PLAN Management believes that current cash and cash equivalents will be sufficient to meet the Company's anticipated cash needs for working capital and capital expenditures for the next nine months. If certain shareholders remain satisfied with results of the software and database content development now in process, these shareholders presently intend to invest a total of $500,000 into equity of the Company in fiscal 2002. There can be no assurance that the shareholders will remain satisfied with the results or that they will invest the additional equity in the Company. F-10 (d) 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. (e) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts and results of operations of the Company's Tropia subsidiary (which was merged with and into the parent on June 20, 2000) and the Company's HungryBands.com, NewMediaMusic.com and NewYorkExpo.com divisions. All significant intercompany accounts and transactions have been eliminated in consolidation. (f) 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 from the original date of maturity. Cash and cash equivalents are carried at cost plus accrued interest, which approximates market. (g) MARKETABLE SECURITIES The Company does not intend to hold its investments to maturity, and classifies these securities as available-for-sale and carries them at fair value. Unrealized holding gains and losses (determined by specific identification) on investments classified as available-for-sale, are carried as a separate component of stockholders' equity. (h) REVENUE RECOGNITION Sales of product from discontinued operations for fiscal 1999 were recognized upon shipment to the customer. Deferred revenue on licensing agreements was recognized when earned based on each individual agreement. During the fiscal year ending March 31, 1999 several 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. These revenues are shown in Note 1(b). (i) LOSS PER COMMON SHARE Loss per share for the fiscal years ended March 31, 2001, March 31, 2000 and March 31, 1999 was based on the weighted average number of common shares. Common stock equivalents were not included in the computation of weighted average shares outstanding for all periods presented because such inclusion would be anti-dilutive. Because of the substantial sales of common stock and options in December 1998, the weighted average number of 3,200,000 shares of common stock for the year ended March 31, 1999 is not fully reflective of the 7,904,345 shares outstanding as of March 31, 1999. (j) EQUIPMENT Equipment are recorded at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets of 3 to 7 years. (See Note 13) F-11 (k) INTANGIBLES Goodwill is recorded based upon the excess of the purchase price over the fair market value of assets purchased and is amortized over a three year period (See Note 10). The carrying amount of goodwill is reviewed if facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the estimated undiscounted cash flows of the entity acquired over the remaining amortization period, the carrying amount of goodwill is decreased by the estimated shortfall of cash flows. In the last quarter of fiscal 2001, the Company determined its goodwill was impaired based on continuing negative cash flows over the remaining amortization period and wrote off approximately $134,000. (l) COMPREHENSIVE LOSS Comprehensive loss is comprised of net loss and all changes to stockholders' equity, except those resulting from investments by owners (changes in paid in capital) and distributions to owners (dividends). For all periods presented, comprehensive loss is comprised of unrealized holding gains or losses on marketable securities. Other comprehensive loss for the year ended March 31, 2001 is net of the reclassification adjustment of $28,000 for realized gains recognized in net loss for the year then ended. (m) WEBSITE EXPENSES In March 2000, the Emerging Issues Task Force of the Financial Accounting Standards Board issued consensuses on an emerging accounting issue entitled "Accounting for Web Site Development Costs" (Issue 00-2). These consensuses addressed costs incurred in the planning stage, the application and infrastructure development stage, graphics development stage, the content development stage, and the operating stage. The consensuses call for capitalization or expense treatment of various costs depending on certain criteria. The consensuses are applicable for costs incurred for fiscal quarters beginning after June 30, 2000 and allows a company to adopt the consensuses as a cumulative effect of a change in accounting principles. The web site development costs incurred during the year ended March 31, 2001 were associated with the operating stage and were expensed as provided for in Issue 00-2. Web site development costs incurred through June 30, 2000 were expensed and the Company has elected to not capitalize any previously eligible costs. 2. INVESTMENT IN MARKETABLE SECURITIES As of March 31, 2001, and 2000 the Company's equity reflects accumulated income of approximately $3,000 and $4,000, respectively, which represents the recognition of unrealized holding gains for the Company's investments determined to be available for sale, previously carried at the lower of cost or market. During the fiscal year ended March 31, 2001, the Company realized approximately $28,000 in gains associated with the sale of marketable securities. There were no realized gains for the fiscal years ended March 31, 2000 and March 31, 1999. Marketable securities as of March 31, 2001 were comprised of investments in government securities which consisted primarily of Federal Home Loan Bank Discount Notes. The aggregate cost, fair value and unrealized holding gains for those Notes held at March 31, 2001 are as follows: F-12 Aggregate Gross Unrealized Cost Basis Fair Value Holding Gain - ----------------------------------------------------------------------------------------------------------- March 31, 2001: (Amounts in thousands) Government securities, maturing Between 1 and 3 years $621 $624 $3 ================================================================== Marketable securities as of March 31, 2000 were comprised of investments in government securities which consisted primarily of U.S. Treasury Notes. The aggregate cost, fair value and unrealized holding gains for U.S. Treasury Notes held at March 31, 2000 are as follows: Aggregate Gross Unrealized Cost Basis Fair Value Holding Gain - ----------------------------------------------------------------------------------------------------------- March 31, 2000: (Amounts in thousands) Government securities, maturing Between 1 and 3 years $487 $491 $4 ================================================================== 3. STOCKHOLDERS' EQUITY (a) CLASS A CONVERTIBLE PREFERRED STOCK Shares of Class A Convertible Preferred Stock were convertible to common stock on a one-to-one basis upon the request of the holder and were automatically converted on March 31, 1999. Until March 31, 1999, holders of such shares had a liquidation preference in bankruptcy and had the same voting rights as the common stockholders. During the fiscal year ended March 31, 1999 all shares previously not converted (approximately 813,000), were converted from preferred stock to common stock. (b) STOCK AND OPTION ISSUANCES The Company has issued common stock and options under the provisions of: (i) 1991 AND 1992 STOCK OPTION PLANS The Company had two Stock Option Plans (the "1991 and 1992 Plans") covering the issuance of incentive and non-qualified stock options to key employees, consultants and non-employee directors of the Company and its subsidiaries, but such Plans are no longer in operation. No options are presently outstanding with the 1991 and 1992 Plans. Additional information follows: Shares Subject Weighted Average to Options Exercise Price ------------------ --------------------- Outstanding at March 31, 1998 at $84.38 - $337.50 per share 45,898 $172.54 Extinguished at $84.38 - $225.00 per share -- $ -- ---------------------------------------- Outstanding at March 31, 1999 at $84.38 - $337.50 per share 45,898 $172.54 Extinguished at $84.38 - $337.50 per share (45,898) $172.54 ---------------------------------------- Outstanding at March 31, 2001 at $84.38 - $337.50 per share -- $ -- ======================================== F-13 (ii) 1996 INCENTIVE DEFERRAL PLAN During fiscal 1999, the Company reacquired 57,341 shares of treasury stock collateralizing the officer and employee loans with a fair value of approximately $7,000 resulting in a bad debt expense of $73,000. (iii) 1996 STOCK INCENTIVE PLAN The 1996 Stock Incentive Plan authorized the issuance of 276,079 shares of Reorganized SITI Common Stock, or options to purchase such common stock, to employees, officers, and directors of the Company. Pursuant to this Plan, the three non-executive directors who were in the employ of the Company on the Effective Date were specifically allocated an aggregate of 34,077 shares to be distributed as follows: 300 shares on the Effective Date, 11,259 during June 1998, 11,259 during November 1998 and 11,259 during June 1999. During fiscal 1998, 7,400 shares with a fair market value of $9,250 were distributed to employees and directors of the Company as additional compensation. Total options, under the plan, granted to employees and officers of the Company with various vesting periods and performance criteria totaled 209,815, and such Plan is no longer in operation. Additional information as follows: Weighted Shares Subject Average to Options Exercise Price ----------------------------- Outstanding at March 31, 1999 at $1.69-$2.15 per share 75,577 $2.14 Granted, exercised and extinguished -- $ -- ---------------------- Outstanding at March 31, 2000 at $1.69-$2.15 per share 75,577 $2.14 Extinguished at $2.15 per share (34,077) $2.15 ---------------------- Outstanding at March 31, 2001 at $1.69-$2.15 per share 41,500 $2.13 ====================== The following table summarizes information about stock options outstanding and exercisable at March 31, 2001: Outstanding and Weighted Average Remaining Weighted Average Range of Exercise Prices Exercisable at Contractual Life (Years) Exercise Price March 31, 2001 ------------------------------------------------------------------------------------------------- $1.69 to $2.15 41,500 6.39 $2.13 F-14 (iv) 1998 CONSULTANT STOCK INCENTIVE PLAN The 1998 Consultant Stock Incentive Plan authorizes the issuance of 100,000 shares of Reorganized SITI Common Stock, or options to purchase such Common Stock, to non-employees and consultants of the Company. There were no options granted during fiscal 2001 and 2000. Shares Weighted Subject Average to Exercise Options Price -------------------- Outstanding at March 31, 1999 at $0.875 -$2.15 per share 40,000 $1.19 Granted, exercised and extinguished -- $ -- ----------------- Outstanding at March 31, 2000 at $0.875 -$2.15 per share 40,000 $1.19 Granted, exercised and extinguished -- $ -- ----------------- Outstanding at March 31, 2001 at $0.875 -$2.15 per share 40,000 $1.19 ================= The following table summarizes information about non-employee and consultant stock options outstanding and exercisable at March 31, 2001: Range of Exercise Prices Outstanding and Weighted Average Remaining Weighted Average Exercisable at Contractual Life (Years) Exercise Price March 31, 2001 ------------------------------------------------------------------------------------------------------ $0.875 to $2.15 40,000 7.15 $1.19 (v) 1999 STOCK OPTION PLAN As of December 14, 1999, the Company's shareholders approved new option plans and a stock incentive plan, for employees, consultants and non-employee directors all described in the Proxy Statement as of 12/14/99, but no options or shares have been issued from such plans through March 31, 2001 and 2000. (vi) SEVERANCE OPTIONS In connection with the change of control transaction described in Note 1(a), the Company's prior management granted options to acquire an aggregate of 300,000 shares of Reorganized SITI Common Stock as part of a severance package for employees, officers and/or directors of the Company who were resigning and executing settlement agreements in connection with the change of control transaction. This plan was implemented concurrently with the December 11, 1998 stock purchase agreement between the Company and Powers & Co. (a sole proprietorship owned by Lawrence M. Powers) and the option agreements were executed on December 11, 1998. F-15 Additional information as follows: Weighted Average Shares Exercise Subject to Price Options ---------------------- Outstanding at March 31, 1999 at $0.35 per share $0.35 300,000 Granted, exercised and extinguished $0.00 0 ------------------ Outstanding at March 31, 2000 at $0.35 per share $0.35 300,000 Granted, exercised and extinguished $0.00 0 ------------------ Outstanding at March 31, 2001 at $0.35 per share $0.35 300,000 ================== The following table summarizes information about severance stock options outstanding and exercisable at March 31, 2001: Range of Exercise Prices Outstanding and Weighted Average Remaining Weighted Average Exercisable at Contractual Life (Years) Exercise Price March 31, 2001 ------------------------------------------------------------------------------------------------- $0.35 per share 300,000 2.71 $0.35 (vii) PRO FORMA EFFECT OF SHARES AND OPTIONS GRANTED TO EMPLOYEES The Company applies the Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for their stock option plans. Under APB Opinion 25, no compensation cost is recognized if the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant. SFAS No. 123 of the Financial Accounting Standards Board, "Accounting for Stock-Based Compensation", which is effective for transactions entered into after December 15, 1995, requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock option plans and stock-based compensation had been determined in accordance with the fair value method prescribed by SFAS No. 123. There were no stock options granted to employees during the fiscal years ended March 31, 2001 and 2000. However, there were 1,005,000 shares issued as compensation during the fiscal year ended March 31, 2001. There were 315,750 stock options granted during the fiscal year ended March 31, 1999. The Company estimates the fair value of each stock option at the grant date by using the Black Scholes option-pricing model with the following weighted-average assumptions used for grants in 2001 and 1999: no dividends paid; expected volatility of 304.3% and 46.1%, respectively; weighted-average risk free interest rate of 5.01% and 5.46%, respectively; and expected lives of 1-10 years. F-16 Under the accounting provisions of SFAS No. 123, the Company's net loss and earnings per share would have been reduced to the pro forma amounts indicated below: 2001 2000 1999 (In thousands, except per share data) ------------------------------------------------------- Net Income: As reported $(2,002) $(1,708) $(1,804) Pro forma $(2,004) $(1,708) $(1,835) Basic and diluted earnings per share: As reported $(0.143) $(0.20) $(0.56) Pro forma $(0.143) $(0.20) $(0.57) 4. CONCENTRATIONS OF CREDIT RISK, FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. The Company currently invests most of its excess cash investments in discounted notes with financial institutions. At times, such investments were in excess of the FDIC insurance limit. The carrying amount of these investments approximates the fair value due to their short-term maturity. 5. COMMITMENTS AND CONTINGENCIES The Company's headquarters occupy some 2,500 square feet of office space in an office building located at Broadway and Houston Street in New York, New York. The Company holds a lease for such offices expiring on August 31, 2002. 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 an initial month of free rent, and an escalation of rental payments over the three-year period. This charge will be amortized over the life of the lease. The Company believes that its properties and facilities are suitable and adequate for its purposes for the foreseeable future. Total rent expense for 2001, 2000, and 1999 was approximately $90,000, $94,000 and $161,000, respectively. For the fiscal year ended March 31, 1999 the rent is included in the loss from discontinued operations. The rent which would have been paid under more normal circumstances, after vacating the Purchase New York facility on December 31, 1998, had been estimated to be $25,000 and $15,000 for the period April 1999 through August 1999 and January 1, 1999 through March 31, 1999, respectively, although the rents were not in fact paid. These amounts have, however, been included in Administrative Expenses and as an addition to Paid in Capital. F-17 Future minimum annual rental commitments for all noncancellable operating leases are as follows: Years Ended March 31, - ----------------------------------------------------------------------- (Amounts in thousands) 2002 $ 73 2003 31 - ----------------------------------------------------------------------- Total $ 104 ===== 6. INCOME TAXES Deferred income taxes are provided for temporary differences between amounts reported for financial statement and income tax purposes. Deferred tax assets consist of: March 31, 2001 2000 ------------------------------------------------------------------------- (Amounts in thousands) Tax benefit of net operating loss carryforwards including current year loss $1,483 $659 Tax benefit of write-off of investment -- 200 Valuation allowance (1,483) (859) ----------------------------------------------------------- ----- $ -- $ -- ====== ==== The Company's expectation of continued operating losses for the foreseeable future makes realization of the benefit of any of the deferred tax assets unlikely at this time. Therefore, at March 31, 2001, the Company recorded a deferred tax asset with a valuation allowance of equal value. The change in the valuation allowance for the two years in the period ended March 31, 2001 was $624,000 and $680,000. Due to the change in control of ownership in December 1998, the Company's net operating loss carryforwards from prior years up to the date of the change of control were terminated. The Company has the following net operating loss carryforwards expiring in the years noted: fiscal 2020 - $358,000; fiscal 2021 - $1,295,000; and fiscal 2022 - $ 2,061,000. F-18 The differences between the statutory Federal income tax rate of 34% and the income taxes reported in the statements of operations are as follows: Year Ended Year Ended March 31, 2000 March 31, 2001 ------------------------------ (Amounts in thousands) Net loss $(1,708) $(2,002) ===================== Statutory rate ................................. $ (581) $ (681) State and local tax - net of federal tax benefit (103) (119) Loss from which no tax benefit was provided ....................... 684 800 --------------------- Total Tax Provision $ -- $ -- ===================== 7. LITIGATION As of the date of this report the Company knows of no pending or threatened legal actions against the Company that would have a material impact on the operations or financial condition of the Company. On May 1, 2000, the former officers of Tropia (Jonathan Blank, Ari Blank and Arjun Nayyer) entered into a settlement agreement with the Company in connection with various claims and their activities since their resignations during the third quarter of the fiscal 2000. As a result of the agreement, all claims have been settled and they have returned an additional 50,000 shares to the Company resulting in an increase in treasury stock and a corresponding gain on litigation settlement of approximately $18,750. In addition, the former officers have waived any and all of their rights to the 158,333 escrowed shares related to the original acquisition of Tropia. Continuing defaults by EZCD.com as to its investment representations, and its content and technology sharing agreement with the Company could result in litigation or other legal complications, and attendant costs and efforts by the Company's management to resolve such matters. EZCD.com filed for bankruptcy liquidation in August, 2000 and the Company is making claims in such proceeding. From time to time in previous years, the Company had been a party to other legal actions and proceedings incidental to its business. As of the date of this report, however, the Company knows of no other pending or threatened legal actions that could have a material impact on the operations or financial condition of the Company. F-19 8. STATEMENTS OF CASH FLOWS Years ended March 31, --------------------------- 2001 2000 1999 --------------------------- (Amounts in thousands) Supplemental disclosures of cash flow information: Cash paid during the year for income taxes $ 10 $ 3 $ 10 Non-cash transactions: Conversion of Class A Preferred Stock to Common Stock $ -- $ -- $ 1 Issuance of stock pursuant to the plan or reorganization $ -- $ -- $591 Compensation to consultants and employees via stock and options $ 68 $ 75 $283 Contribution by management (rent and compensation) $ 210 $ 138 $ 46 Gain on litigation $ (19) $ -- $ -- Tropia acquisition $ -- $ 153 $ -- HungryBands.com, NewMediaMusic.com and NewYorkExpo.com acquisitions $ 53 $ 58 $ -- Discontinued Operations Non-cash transactions: Depreciation $ 8 $ -- $ -- Compensation to employees via stock $ 16 $ -- $ -- Contribution of services $ 58 $ -- $ -- 9. SEGMENT INFORMATION The Company has divided its operations into 3 reportable segments: Tropia/HungryBands, NewMediaMusic and Corporate. The reporting segments follow the same accounting policies used for the Company's consolidated financial statements as described in the summary of significant accounting policies. Management evaluates a segment's performance based upon profit or loss from operations before income taxes. Intersegment sales or transfers are recorded based on prevailing market prices. The Company determines its reporting segment based upon its varying product lines. Following is a tabulation of business segment information for the fiscal years ended March 31, 2001 and March 31, 2000. F-20 Tropia/ NewMedia Inter- Hungry Bands Music Corporate Segment Total ------------ ----- --------- ------- ----- Year ended March 31, 2001 - --------------- Sales 1 1 2 Operating loss (350) (576) (801) (1,727) Interest Income 32 32 Other Expense -- -- Loss from discontinued operations (356) (356) Net loss (350) (576) (1,076) 0 (2,002) Assets 1,096 1,096 Depreciation and amortization 8 16 225 249 Tropia/ NewMedia Inter- Hungry Bands Music Corporate Segment Total ------------ ----- --------- ------- ----- Year ended March 31, 2000 (Amounts in thousands) - --------------- Sales 1 1 Operating loss (463) (21) (790) (1,274) Interest Income 42 42 Other Expense (500) (500) Income from discontinued operations 23 23 Net loss (463) (21) (1,224) 0 (1,708) Assets 1,541 1,541 Depreciation and amortization 3 0 74 77 10. GOODWILL In June, 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. 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 was acquired for an aggregate of 316,666 shares of the Company's common stock (valued at $306,786), with 158,333 shares delivered at closing, and 158,333 shares held 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. Such individuals have since waived F-21 any rights to the escrowed 158,333 shares, and have returned 50,000 of the shares delivered to them at the 1999 closing. (See Note 12) In accordance with Accounting Principles Board ("APB") No. 16, the adjusted aggregate purchase price of $153,393 was allocated to the assets and liabilities of Tropia, based upon their estimated fair values as follows: Computer software $ 748 Accrued expenses (6,075) --------- Net liabilities acquired (5,327) Goodwill 158,720 --------- Aggregate Purchase Price $ 153,393 ========= In January 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. In accordance with Accounting Principles Board ("APB") No. 16, the aggregate purchase price of $79,688 was allocated to the assets and liabilities of HungryBands.com, based upon their estimated fair values as follows: Other assets $ 700 Software 240 ------- Net assets acquired 940 Goodwill 78,748 ------- Aggregate Purchase Price $79,688 ======= 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 (approximately $31,875) 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 the March, 2000 Expo (in which he retained a 75% interest). In accordance with Accounting Principles Board ("APB") No. 16, the aggregate purchase price of $31,875 was allocated to the assets and liabilities of NewMediaMusic.com and New York Expo.com, based upon their estimated fair values as follows: Cash $ 30,416 Receivables 15,175 Other assets 15,750 Customer deposits (71,300) Due to S. Zuckerman (10,041) -------- Net liabilities acquired (20,000) Goodwill 51,875 -------- Aggregate Purchase Price $ 31,875 ======== The proforma results of operations for the acquisitions, had the acquisitions occurred at the beginning of fiscal year 2000, are not significant, and accordingly, have not been provided. F-22 As a result of management's review of the carrying amount of goodwill, on March 31, 2001, the Company wrote off $134,000 of goodwill as a result of the losses associated with the 2001 Expo, the discontinuation of the New York Expo business segment, and the estimated future undiscounted cash flows associated with the remaining entities. Of the $134,000, approximately $21,000 relates to the NewYork Expo and the remaining $113,000 relates to the other divisions acquired as described above. 11. 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 were written off during the current fiscal year. 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. Throughout the current fiscal year, the Company has entered into certain royalty agreements with artists whereby, the Company is obligated to reimburse the artists $5.00 per sale of an artist's CD. Such sales have been nominal for the twelve months ended March 31, 2001 and 2000. 12. OTHER AGREEMENTS Investment in Volatile Media The Company invested $500,000 in January, 2000 in its strategic affiliate EZCD.com, coupled with an agreement for content and technology sharing. EZCD has been in bankruptcy liquidation since August 2000 and, as a result, the Company decided to write-off the entire investment because of such uncertainties associated with EZCD's future operations. Such risk factor is endemic to investing in start-up Internet companies, in the music field or elsewhere, and such risk has been increased by the recent drop in today's value of several Internet music companies and the resulting attrition in their financing sources. (See Note 7.) Other The Company also entered into other agreements with certain companies (TVMV.com and Listen.com) for content and technology sharing. Pursuant to these sharing agreements, SITI is to receive a certain percentage of revenues from the banner advertising. As of March 31, 2001 and 2000, revenues from such advertising have been nominal. On April 9, 2000, SITI entered into a Business Development Agreement with Mediaviewer.com to develop an improved radio player whereby the costs to develop such player are funded by SITI. These costs are not expected to exceed $25,000 payable in installments based upon certain prescribed performance objectives. The first installment ($8,333) was paid upon execution. On May 1, 2000, the former officers of Tropia (Jonathan Blank, Ari Blank and Arjun Nayyer) entered into a settlement agreement with the Company in connection with various claims and their activities since their resignations during the third quarter of the current fiscal year. As a result of the agreement, all claims have been settled and they have returned an additional 50,000 shares to the Company. In addition, the former officers have waived any and all of their rights to the 158,333 escrowed shares related to the original acquisition of Tropia. The 50,000 returned shares are valued at approximately $18,750. F-23 As of June 8, 2000, principal investors, directors and executives, Lawrence M. Powers, Robert Ingenito and John Iannitto, agreed with the Company to invest an additional $1,000,000 for common stock and options, on the following basis: (a) Mr. Powers would invest $500,000 for 2,000,000 shares of common stock, together with options, to purchase an additional 1,000,000 shares for $.50 per share, exercisable for five years. (b) Messrs. Ingenito and Iannitto would each invest $250,000 for 1,000,000 shares of common stock, respectively, together with options, respectively, to purchase an additional 500,000 for shares for $.50 per share, exercisable for five years. Messrs. Powers, Ingenito and Iannitto divided their respective investments further among family members and business associates, consisting of Barclay V. Powers, John DiNozzi and Mr. Iannitto's son (a minor) in varying amounts by gift or by assignment. On June 12, 2000, the Company entered into employment arrangements with Messrs. Ingenito and Iannitto. In connection with their ongoing services, Messrs. Ingenito and Iannitto, have agreed that the Company will not pay them cash compensation for the fiscal years ended March 31, 2001 and 2002, but will grant stock and options as follows: Fiscal 2001 Fiscal 2002 ----------- ----------- Robert Ingenito 300,000 shares Options to purchase 300,000 shares at $.50 per share, exercisable for five years (until 6/30/2006) John Iannitto 200,000 shares Options to purchase 200,000 shares at $.50 per share, exercisable for five years (until 6/30/2006) Mr. Powers does not expect to receive any cash compensation, stock or options for his services for such two fiscal years. On June 13, 2000, the Company entered into a stock purchase agreement with Colvil Investments, LLC, ("Colvil") whereby Colvil agreed to invest $100,000 for 400,000 shares of the Company's common stock, together with options, to purchase an additional 200,000 shares for $.50 per share, exercisable for five years. On June 16, 2000, the Company entered into a stock purchase agreement with Steven Gross whereby Mr. Gross agreed to invest $50,000 for 200,000 shares of the Company's common stock, together with options, to purchase an additional 100,000 shares for $.50 per share, exercisable for five years. 13. EQUIPMENT As of March 31, 2001 and 2000, equipment consisted of the following: (Amounts in thousands) 2001 2000 ----------------- Computer Equipment and Furniture $ 159 115 Computer Software 7 4 Accumulated Depreciation (45) (10) ----------------- Equipment, net $ 121 109 ================= F-24 14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES As of March 31, 2001 and 2000, accounts payable and accrued liabilities were comprised of the following: 2001 2000 -------------- (Amounts in thousands) Accrued audit and tax fees $ 60 $ 54 Accounts payable 5 0 Deferred Rent 8 6 Accrued expenses 41 40 ---- ---- $114 $100 ==== ==== 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of unaudited quarterly results of operations for the years ended March 31, 2001 and 2000. (In thousands except per share data) Quarter Ended 2000 Mar. 31 Dec. 31 Sept. 30 June 30 - --------------------------------------------------------------------------------------- Net sales 1 0 0 0 Cost of sales 0 0 0 0 - --------------------------------------------------------------------------------------- Gross profit 1 0 0 0 - --------------------------------------------------------------------------------------- Loss from continuing operations (740) (475) (366) (150) Income (loss) from discontinued operations (42) 6 35 24 - --------------------------------------------------------------------------------------- Net loss (782) (469) (331) (126) Income (loss) per common share: Continuing operations (0.067) (0.056) (0.045) (0.019) Discontinued operations (0.004) 0.001 0.004 0.003 - --------------------------------------------------------------------------------------- Total (0.071) (0.055) (0.041) (0.016) ======================================================================================= F-25 Quarter Ended 2001 Mar. 31 Dec. 31 Sept. 30 June 30 - ------------------------------------------------------------------------------------------- Net sales 1 1 0 0 Cost of sales 0 1 0 0 - ------------------------------------------------------------------------------------------- Gross profit 1 0 0 0 - ------------------------------------------------------------------------------------------- Loss from continuing operations (497) (420) (316) (413) Loss from discontinued operations (144) (24) (121) (67) - ------------------------------------------------------------------------------------------- Net loss (641) (444) (437) (480) Loss per common share: Continuing operations (0.032) (0.028) (0.021) (0.038) Discontinued operations (0.009) (0.001) (0.008) (0.006) - ------------------------------------------------------------------------------------------- Total (0.041) (0.029) (0.029) (0.044) =========================================================================================== F-26