Merger And Business Development Agreement

MERGER AND BUSINESS DEVELOPMENT AGREEMENT


This Merger and Business Development Agreement dated as of June 23, 1999 (this "Agreement") by and among Spectrum Information Technologies, Inc., doing business as Siti-Sites. com, a Delaware corporation ("SITI"), SITI-II, Inc., a Delaware corporation and a wholly-owned subsidiary of SITI ("SITI-II"), Tropia, Inc., a Delaware corporation ("Tropia"), Red Hat Productions, Inc., a New York corporation ("Red Hat"), and Ari Blank ("A. Blank") and Arjun Nayyar ("Nayyar" and, together with Red Hat and A. Blank, the "Sellers").


WHEREAS, each of Jonathan Blank ("J. Blank"), Lawrence Powers ("L. Powers") and Barclay Powers ("B. Powers") is a shareholder of SITI, and also owns 33-1/3% of the issued and outstanding stock of Red Hat;


WHEREAS, Red Hat owns 55%, A. Blank owns 22-1/2% and Nayyar owns 22- 1/2% of the issued and outstanding stock of Tropia;


WHEREAS, Tropia is engaged in, and is continuing to develop, the Business (as defined below), and in connection therewith has established and is continuing to develop a web site (the "Web Site") relating to the music industry; and


WHEREAS, SITI and the Sellers desire that Tropia become a wholly-owned subsidiary of SITI by merging SITI-II with and into Tropia, and that the Business continue to be developed by J. Blank, A. Blank and Nayyar (collectively, the "Individuals"), all upon the terms and conditions set forth herein;


NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties hereby agree as follows:


1. BUSINESS; BUDGET. The parties intend to use compressed digital music formats such as MP3 to develop a virtual record company which will promote independent music artists by enabling them to distribute their music to a global audience through the Web Site. They further intend for consumers to be able to listen to streaming music on, and to download MP3 versions of songs from, the Web Site. The parties expect Tropia to derive revenues from, among other sources, Web Site viewers who purchase compact discs and other merchandise and products relating to the featured artists, as well as from advertising and from services provided to featured artists. For purposes of this Agreement, "Business" shall refer specifically to and be limited to such Internet based music Web Site targeted at the general public featuring downloadable music, streaming music and the sale of music related merchandise. While the Business may grow to encompass other aspects, the definition of "Business" shall not include such other aspects.


The parties have prepared a budget, a copy of which is attached hereto as Exhibit A (the "Budget"), forecasting the revenues and expenses of the Business for the first six months following the date hereof. The Individuals shall prepare a similar budget for the six month period subsequent thereto (which is expected to be larger and require more funding than the Budget for the first six months following the date hereof) for approval by SITI, which approval shall not be unreasonably withheld. The Individuals and SITI shall also prepare a similar budget for each subsequent 12 month period thereafter.


2. THE MERGER. (a) On or as soon as practicable after the date hereof, the parties shall cause SITI-II to be merged (the "Merger") with and into Tropia by duly executing and filing a certificate of merger (the "Certificate of Merger") with the Secretary of State of the State of Delaware. The Merger shall be effected upon the terms set forth in this Agreement and shall be effective upon the filing of the Certificate of Merger. Tropia shall be the surviving corporation in the merger and shall continue its corporate existence under the laws of the State of Delaware and the separate corporate existence of SITI-II shall cease.


(b) Following the filing of the Certificate of Merger as set forth above, the Merger shall have the effects set forth herein and in the General Corporation Law of the State of Delaware. Without limiting the generality of the foregoing, and subject thereto, after such filing all the property, rights, privileges, powers and franchises of Tropia and Siti-II shall vest in the surviving corporation, and all debts, liabilities, obligations, restrictions, disabilities and duties of Tropia and Siti-II shall become the debts, liabilities, obligations, restrictions, disabilities and duties of the surviving corporation.


(c) Following the filing of the Certificate of Merger as set forth above, (i) the Certificate of Incorporation of Tropia shall become the Certificate of Incorporation of the surviving corporation until amended in accordance with the provisions thereof and applicable law, provided that following the filing of the Certificate of Merger such Certificate of Incorporation shall be amended so that the name of the surviving corporation shall be "Tropia, Inc.", (ii) the By-Laws of SITI-II shall become the By-Laws of the surviving corporation until amended in accordance with the provisions thereof and applicable law, and (iii) L. Powers, Jon Gerber and J. Blank shall be the initial directors of the surviving corporation, and the officers of Tropia immediately prior to the effective date of the Merger shall be the initial officers of the surviving corporation, each to hold office in accordance with the Certificate of Incorporation and the By-Laws of the surviving corporation.


(d) Following the filing of the Certificate of Merger as set forth above, by virtue of the Merger and without any action on the part of SITI- II, Tropia or their respective shareholders, (i) each issued and outstanding share of common stock of Tropia shall be canceled, shall be deemed to be no longer outstanding, shall not be transferable on the books of the surviving corporation and shall be converted automatically into and represent the right to receive the


kind and amount of consideration set forth in this Agreement, and (ii) the shares of common stock, par value $0.001 per share, of SITI-II issued and outstanding shall be converted into and exchangeable for, in the aggregate, 1,000 validly issued, fully paid and non-assessable shares of common stock, par value $0.001, of the surviving corporation, which shall constitute all of the issued and outstanding shares of the surviving corporation.


3. WAIVER OF CONSIDERATION; MERGER CONSIDERATION; ESCROW. (a) L. Powers and B. Powers hereby agree to waive their right to receive any merger consideration to which they would otherwise have been entitled as shareholders of Red Hat in connection with the Merger, and further waive their right to reimbursement of prior cash advances to Red Hat which were used for Tropia's benefit. L. Powers, B. Powers, J. Blank and Red Hat acknowledge and agree that as a result of the foregoing waiver, the amount of merger consideration to be received by Red Hat shall be reduced by 66- 2/3% and that all merger consideration to be received by Red Hat shall be distributed by Red Hat solely to J. Blank on account of his interest in Red Hat.


(b) In connection with the Merger and subject to the terms hereof, the Sellers shall be entitled to receive up to an aggregate of 316,667 shares of SITI's common stock, par value $0.001 ("SITI Shares") in accordance with Section 3(b). The parties acknowledge that the number of SITI Shares to be received by the Sellers has been calculated based upon a total valuation and consideration of 500,000 SITI Shares, and such amount was reduced as a result of the waiver contained in Section 3(a). SITI agrees that it shall reserve 183,333 SITI Shares (which equals the number of additional SITI Shares that would otherwise have been issued to Red Hat but for the waiver contained in Section 3(a)), and that it shall issue such shares in the future (and/or options to acquire such shares at the then current share price) to such management personnel working for Tropia after the date hereof, as SITI and the Chief Executive Officer of Tropia may agree upon.


(c) (i) On the effective date of the Merger, SITI shall issue and deliver a total of 158,333 Siti Shares as follows: (A) 56,250 SITI Shares to A. Blank, (B) 56,250 SITI Shares to Nayyar, and (C) 45,833 SITI Shares to Red Hat (for distribution solely to J. Blank on account of his interest in Red Hat), in consideration of the Merger. Red Hat agrees that it shall distribute such Siti Shares to J. Blank as of the effective date of the Merger, and the shareholders of Red Hat hereby unanimously consent to such distribution.


(ii) On the effective date of the Merger, SITI shall also issue and deliver to Sills Cummis Radin Tischman Epstein & Gross, P.A., as escrow Agent (the "Escrow Agent"), pursuant to an Escrow Agreement dated the date hereof (the "Escrow Agreement"), an additional 158,333 SITI Shares as follows: (A) 56,250 additional SITI Shares in the name of A. Blank, (B) 56,250 additional SITI Shares in the name of Nayyar, and (C) 45,833 additional SITI Shares in the name of Red Hat (for distribution solely to J. Blank on account of his interest in Red Hat), in consideration of the Merger.


(iii)SITI agrees to fund the Business for the 12-month period commencing on the effective date of the Merger (the "First Phase") in accordance with the budgets delivered pursuant to Section 1. If, on the last day of the First Phase, SITI determines, in its good faith discretion, that (A) the actual financial results of the Business are within the amounts in the budgets for the First Phase, and (B) the Web Site has generated sufficient viewer/advertising interest to justify its continued development and support by SITI, SITI shall instruct the Escrow Agent to deliver from escrow all additional SITI Shares to A. Blank, Nayyar and Red Hat (for distribution solely to J. Blank on account of his interest in Red Hat), as the case may be. SITI may, in its sole discretion, deliver additional SITI Shares (or options to acquire additional SITI Shares), to any such person (including J. Blank) in recognition of particular performance achievements during the First Phase, whether as a result of administration, acquisitions or web site development. If, however, the conditions in clauses (A) and (B) above have not been met on the last day of the First Phase, and SITI decides to discontinue the operations of the Business, SITI may instruct the Escrow Agent to deliver from escrow back to SITI all additional SITI Shares in the name of A. Blank, Nayyar, and Red Hat, and shall be deemed to have performed all of its obligations hereunder without further liability or duty to continue the Business. In the event that SITI instructs the Escrow Agent to deliver from escrow back to SITI all additional SITI Shares in the name of A. Blank, Nayyar, and Red Hat, each party shall be deemed to be released from any further obligations hereunder (except for the provisions which shall survive the termination hereof in accordance with Section 13) and SITI shall transfer to the Individuals all of the stock of Tropia (51% to J. Blank, 24.5% to A. Blank and 24.5% to Nayyar) for no additional consideration, provided that prior to such transfer, Tropia shall return to SITI the unused portion of all cash advances or contributions made by SITI to Tropia.


4. CAPITAL CONTRIBUTIONS. (a) On the effective date of the Merger, SITI shall make an initial capital contribution to Tropia in the amount of $100,000, to be used by Tropia for the continued development of the Business, including the Web Site.


(b) During the First Phase, SITI shall make additional contributions to Tropia each month (other than the first month after the date hereof), as necessary in accordance with the budgets delivered pursuant to Section 1 (as such budgets may be modified in accordance with Section 1), or in such other amounts as SITI and the Chief Executive Officer of Tropia may agree upon in their discretion.


5. THE INDIVIDUALS. (a) During the First Phase and for a period of one year thereafter, the Individuals shall devote all reasonable time and effort to the Business to enable the results of operations of the Business to meet or exceed the levels set forth in the Budget or in any subsequent budget. Notwithstanding the foregoing, SITI and Tropia recognize that the Individuals cannot guarantee the performance of Tropia and that the results of operations of Tropia may fail to reach or exceed such levels despite the Individuals' efforts and time


commitments. J. Blank shall be the Chief Executive Officer of Tropia. A. Blank and Nayyar shall be employed by Tropia as Creative Director and Technology Director, respectively, during the First Phase, each to receive a starting salary of $40,000 per year. Thereafter, each Individual shall be paid the salary set forth in each subsequent budget. SITI shall negotiate in good faith with each Individual concerning such Individual's salary (and related terms), and shall take into account such Individual's post-merger contributions to Tropia and SITI, such Individual's future time commitments to Tropia and the reasonable value of such Individual's services in the job market in general. The failure of SITI and any Individual to agree upon such Individual's salary (or related terms) for the period immediately following the First Phase shall not affect such Individual's right to receive additional SITI Shares to which he is entitled under Section 3(b)(iii) if the Business is continued by SITI after the end of the First Phase; provided that such Individual has otherwise performed his obligations under this Agreement in good faith.


(b) The Business is a start-up requiring specialized skills and substantial efforts from each Individual. Therefore, any Individual who quits or resigns his job at Tropia during the First Phase or who fails to perform in good-faith his job at Tropia shall be liable to Tropia; provided that his liability therefore shall be limited solely to the SITI Shares which otherwise would have been delivered to him at the end of the First Phase.


(c) SITI recognizes that each Individual is independent, engages in, and will continue to engage in, other business activities (including, in the case of J. Blank, a motion picture production business), which may include other non-music related Internet businesses (collectively, the "Other Businesses"). Each Individual shall have the right to engage in Other Businesses; provided, that each Individual agrees that while he is an officer or employee of Tropia, he will not engage in Other Businesses whose products or activities directly compete in any material respect with those of the Business (as defined in Section 1). Each Individual further agrees that while he is an officer or employee of Tropia, he shall keep confidential and not use for his own account the trade secrets and other confidential proprietary information and materials of the Business; provided that this restriction shall no longer apply if the stock of Tropia is returned to the Individuals pursuant to Section 3(c)(iii). The Individuals acknowledge and agree that the covenants set forth above are necessary for the protection of SITI and Tropia and that t ...