Registration No. 0-27763
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT No. 3
to
FORM 10-SB
FILED October 22, 1999
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12 (g) OF THE SECURITIES EXCHANGE ACT OF 1934
SITESTAR CORPORATION
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(Name of Small Business Issuer in Its Charter)
NEVADA 88-0397234
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16133 VENTURA BLVD., SUITE 635, ENCINO, CA 91436
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(Address of Principal Executive Office) (ZipCode)
(818) 981-4519
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Telephone Number
Securities to be registered under Section 12(b)
of the Exchange Act:
None
Securities to be registered under Section 12(g)
of the Exchange Act:
COMMON STOCK, $0.001 PAR VALUE
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(Title of class)
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TABLE OF CONTENTS
Page
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PART I
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Item 1. Description of Business....................................... 1
Item 2. Management's Discussion and Analysis
or Plan of Operation......................................26
Item 3. Description of Property.......................................50
Item 4. Security Ownership of Certain Beneficial Owners
and Management............................................51
Item 5. Directors, Executive Officers, Promoters and
Control Persons...........................................52
Item 6. Executive Compensation........................................53
Item 7. Certain Relationships and Related Transactions................53
Item 8. Description of Securities.....................................54
PART II
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Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters...............55
Item 2. Legal Proceedings.............................................56
Item 3. Changes in and Disagreements with Accountants.................56
Item 4. Recent Sales of Unregistered Securities.......................56
Item 5. Indemnification of Directors and Officers.....................57
PART F/S
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Financial Statements.....................................................58/F-1
PART III
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Item 1. Index to Exhibits.............................................59
Signatures ..............................................................60
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PART I
Item 1. DESCRIPTION OF BUSINESS
OVERVIEW
Sitestar Corporation (the "Company" or "Sitestar") is a diversified
Internet holding company. Our near term strategy is to acquire and invest in
emerging Internet-based enterprises to create a broad and diverse set of core
Internet businesses that deliver a variety of online solutions. In addition to
developing and integrating Internet-based technologies, our primary objective is
to create a mix of Internet operating companies and Internet-related portfolio
investments that will enhance the value of our current businesses in the
following areas:
o Internet e-commerce
We design and offer customized e-commerce services which include the
ability to create and operate an online "storefront" and sell
merchandise over the Internet. We will also continue to enhance and
expand our products and services towards opportunities surrounding the
growth of the Internet and the electronic commerce industry.
o Value-added content
We have developed and will continue developing content that provide
the ability to target specific demographics. We will also continue to
pursue innovative niche oriented value-added content in segments we
believe are underdeveloped and under-served. We are actively seeking
opportunities to develop innovative ways for consumers to retrieve and
access information effectively through the Internet.
o Internet Service Providers (ISP)
We offer a full range of dial-up Internet access services to
residential subscribers and dedicated and dial-up Internet access to
business customers within the secondary markets of the mid-Atlantic
region which we believe have been historically under-served by the
larger, national Internet service providers. We will continue to
pursue and focus on acquisition opportunities within the secondary
locations in the mid-Atlantic region to further expand our Internet
access coverage.
o Internet Portals/Community Web sites
We will continue to pursue innovative portal and community web-based
destinations. We are actively seeking to develop innovative ways for
consumers to interact effectively through the Internet. The Company
designs and offers customized packages which include the ability to
change advertisements quickly and frequently, to conduct advertising
test campaigns with rapid result delivery and to track daily usage
statistics. The Company has developed and will continue developing
software that provides the ability to target ads based on demographics
and usage patterns.
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o Strategic investments in internet-related ventures
We intend to continue to evaluate new Internet related opportunities
to further our investment in our Internet strategy and also to seek
out opportunities to increase shareholder value. We are currently in
preliminary discussions with a number of Internet related enterprises
for possible investment opportunities. However, we cannot assure you
that we will successfully complete any of the investments we are
currently evaluating.
We will attempt to develop and refine the products and services of our
existing businesses and businesses or assets we acquire with the goal of
significantly increasing revenue as new products are commercially introduced.
Additionally, we will continue to pursue strategic investments in new
Internet-related opportunities to leverage our existing assets. Our operating
strategy is to integrate our subsidiaries and future Internet portfolio
investments into a collaborative network that leverages our collective knowledge
and resources. We will actively explore synergistic opportunities such as cross
marketing and co-development efforts within our subsidiaries and investments to
further leverage our resources.
CORPORATE HISTORY
We were incorporated under the name of White Dove Systems, Inc. in December
1992 under the laws of the State of Nevada to engage in any lawful corporate
activity.
In October 1998 we acquired all the issued and outstanding shares of
Interfoods Consolidated, Inc. ("IFCO"), a California corporation, in exchange
for 5,580,000 shares of our Common Stock. IFCO, operating under the trade name
of Holland American International Specialties ("HAIS"), is a retailer and
wholesaler of imported and domestic specialty gourmet foods. IFCO began its
operations in June 1997 with the purchase of the inventory assets and trade name
of HAIS from an unrelated third party. HAIS' product offering ranges from exotic
European delicacies to mainstream specialty candies, chocolates and other
confectionery products. In connection with this acquisition and in order to
properly reflect the new corporate focus, we changed our name from White Dove
Systems, Inc. to Interfoods Consolidated, Inc. in October 1998.
In January 1999 we acquired 9% of the outstanding Common Stock of Sierra
Madre Foods, Inc. ("SMF"), a California corporation, through a joint venture
arrangement with the debtor-in-possession who owns the remaining 91% of the
outstanding Common Stock of SMF, for $200,000. SMF, formerly known as Queen
International Foods ("QIF"), is a manufacturer and wholesaler of frozen Mexican
food products such as burritos and chimichangas. We acquired our equity interest
through the U.S. Bankruptcy court proceedings along with the
debtor-in-possession as our joint venture partner. QIF filed for Chapter 11
Bankruptcy protection on April 1998. We formed SMF as a joint venture with the
debtor-in-possession for the sole purpose of acquiring substantially all of the
assets of QIF from the U.S. Bankruptcy court. Our $200,000 purchase
consideration for our 9% stake, along with the consideration paid by our joint
venture partners, were paid to the U.S. Bankruptcy court trustee for
substantially all of the assets of QIF.
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In July 1999 a majority of IFCO shareholders, including our Chairman Mr.
Manlunas, acquired all the issued and outstanding shares of Sitestar, Inc..
("SYTE"), a Delaware corporation, in exchange for 3,491,428 shares of our Common
Stock owned by the majority IFCO shareholders. Simultaneous with the closing of
this transaction, the IFCO shareholders contributed SYTE to IFCO as contributed
capital. SYTE is a Web development, design and hosting company formed in 1996
and is based in Annapolis, Maryland. This acquisition included Soccersite.com
which is currently one of our operating subsidiaries. Soccersite.com was an
operating subsidiary of SYTE. As a result of this acquisition and shareholder
contribution, we changed our corporate focus from a food holding company to an
Internet holding company. To better reflect our new primary corporate focus we
changed our corporate name from Interfoods Consolidated, Inc. to Sitestar
Corporation in July 1999.
In August 1999 we acquired substantially all of the assets of
Greattools.com in exchange for 49,000 shares of our Common Stock. We acquired
the assets of Greattools.com from Global Sourcing Group, Greattools.com's
current fulfillment center. Gateway Holdings, Inc., a private investment company
our Chairman Frederick Manlunas is managing, has a 14.6% equity ownership in
Global Sourcing Group. Greattools.com is an online low cost retailer of power
tools.
Effective as of September 30, 1999 we sold the non-Internet assets of HAIS
to IFCO Group, LLC ("IFCO GROUP"), whose members consist of certain shareholders
of the Company, including Frederick T. Manlunas, our Chairman of the Board. We
retained the assets consisting of the Internet web site Holland-American.com.
HAIS will continue to serve as Holland-American.com's exclusive fulfillment
center. The purchase consideration for HAIS was $900,000 and was based upon a
business appraisal by an independent third party appraiser. The consideration
included $200,000 which was to be offset against the Company's liability to Mr.
Manlunas for services rendered in connection to the acquisition of Sitestar,
Inc., the assumption of $654,000 of liabilities and a promissory note in the
amount of $46,000. The note bears interest at a rate of 8% per annum, and is
payable in annual installments of $15,333, and is due and payable on September
30, 2002. The note is secured by HAIS' accounts receivable and inventory.
On September 30, 1999 we sold our 9% equity interest in SMF to IFCO Group
for $200,000. The consideration was paid in the form of assumption of $160,000
of debt related to the investment and the balance of $40,000 paid by a
promissory note payable in three annual installments of $13,334 each. The note
bears interest at a rate of 8% per annum. The purchase consideration was equal
to our original investment in January 1999.
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RECENT EVENTS
Effective December 15, 1999, we have consummated the previously disclosed
acquisition of Neocom Microspecialists, Inc. ("Neocom") in exchange for
6,782,353 shares of Sitestar Common Stock for 100% of the outstanding shares of
Neocom. Effective upon the closing of the acquisition, we issued 4,782,353
shares of our Common Stock and have reserved 2,000,000 shares of Common Stock
that we have agreed to issue on the second anniversary of the acquisition based
on certain contingencies. The certain contingencies are related to potential
unrecorded liabilities. Of the 6,782,353 shares issued for Neocom, 900,000
shares were issued in exchange for certain liabilities that the majority of
Neocom's selling shareholders have agreed to assume based on a debt assumption
agreement executed and delivered at the closing of the acquisition.
Neocom is an Internet service provider and Web development company based in
Martinsville, Virginia. As of October 31, 1999, (i) Neocom provided Internet
access and other Internet services to approximately 4,700 customers in the
Southern Virginia area and (ii) its revenues for the ten months ended October
31, 1999 were $1.454 million. Based on our current estimates we believe that
Neocom's annualized revenues would be approximately $1.745 million for the
fiscal year ending December 31, 1999.
POSSIBLE FUTURE ACQUISITIONS
The originally disclosed letter of intent we signed with Eastern Shorenet
has officially expired as of October 31, 1999. Although, we continue to have an
ongoing dialogue with the Eastern Shorenet principals towards trying to complete
a transaction, there is no assurance that we will successfully complete a
transaction with them.
We are also currently in preliminary discussions with a number of Internet
service providers for potential acquisitions in targeted markets in the
Mid-Atlantic region. However, there is no assurance that we will successfully
complete any of the acquisitions we are currently evaluating. All discussions we
are conducting are at an early stage and we have not made any decisions to make
any acquisitions at this time.
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MARKET OPPORTUNITY
OVERVIEW. We believe that the Internet has become an important global
medium enabling growing numbers of people to obtain and share information and
conduct business electronically. Its expanded use has made the Internet a
critical tool for information and communications for many users. We believe that
Internet access and enhanced Internet services, including Web hosting and
electronic commerce services, represent two of the fastest growing segments of
the telecommunications services market. International Data Corporation ("IDC")
estimates that at the end of 1997 there were over 38 million Web users in the
United States and over 68 million worldwide, and projects that by the end of
2002 the number of Web users will increase to over 135 million in the United
States and over 319 million worldwide. We believe that the availability of
Internet access, advancements in technologies required to navigate the Internet,
and the proliferation of content and applications available over the Internet
have attracted a rapidly growing number of Internet users.
GROWTH IN BUSINESS USE OF THE INTERNET. We believe that the dramatic growth
in Internet usage in recent years, combined with enhanced functionality,
accessibility and security, has made the Internet increasingly attractive to
businesses as a medium for communication and commerce. We feel that for many
businesses, the Internet has created a new communication and sales channel which
enables large numbers of geographically dispersed organizations and consumers to
be reached quickly and cost-effectively. IDC estimates that the number of
consumers buying goods and services on the Internet will grow from 17.6 million
in 1997 to 128.4 million in 2002, and that the total value of goods and services
purchased over the Internet will increase from approximately $12 billion in 1997
to approximately $426 billion by 2002.
We believe that businesses will increasingly add a variety of enhanced
services and applications to their basic Internet access, Web sites and
e-commerce applications in order to more fully capitalize on the power of the
Internet. We feel that these services and applications will allow them to more
efficiently and securely communicate company information, expand and enhance
their distribution channels, increase productivity through back-office
automation, ensure reliability and reduce costs. We see opportunities for growth
in the following areas:
o DEMAND FOR INTERNET ACCESS SERVICES.
Internet access services represent the means by which ISPs
interconnect their customers to the Internet or corporate intranets
and extranets. According to Forrester Research, Internet access
revenues from businesses are expected to increase from less than $1
billion in 1997 to more than $16 billion in 2002. Due, in part, to
their size, small and medium sized enterprises often seek to outsource
these services..
o DEMAND FOR WEB HOSTING SERVICES.
Many businesses are seeking to outsource to ISPs services such as Web
hosting, collocation and file transfer protocol data storage and
retrieval.
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o DEMAND FOR SECURE PRIVATE NETWORKS.
We believe that concerns relating to the security of internal and
proprietary information, data loss and reduced transmission speed has
led businesses to demand Internet services that include the ability to
provide electronic security monitoring and threat responses.
THE SMALL AND MEDIUM SIZED ENTERPRISE MARKET. We define this market as
business enterprises having sales of less than $20.0 million per annum and
enterprises having less than 100 employees. We have specifically targeted small
and medium sized enterprises because:
o We believe that these enterprises increasingly need high-speed data
and Internet connections to access business information and to
communicate more effectively with employees, customers and vendors.
o We believe that a relatively small percentage of these enterprises
currently utilize the Internet, but that this number is increasing
rapidly. The small and medium sized enterprise segment is expected to
be one of the fastest growing segments of the Internet industry.
o Many of these enterprises lack the resources and expertise to develop,
maintain and expand, on a cost-effective basis, the facilities and
network systems necessary for successful Internet operations.
o We believe that these enterprises will prefer an Internet service
provider with locally-based personnel who are available to assist in
developing and implementing their growing use of the Internet and to
respond to technical problems in a timely manner.
o We believe that these enterprises rely more heavily on their Internet
service provider than larger enterprises and tend to change Internet
service providers relatively infrequently.
INTERNET SERVICES IN SECONDARY MARKETS. Small and medium sized enterprises
are often concentrated in so-called "secondary markets" to avoid the higher
costs associated with locating in a metropolitan area. A secondary market is any
market smaller than the 100 most populated U.S. metropolitan markets. However,
national ISPs have historically placed their largest points of presence, or
POPs, only in or around densely populated major cities. A POP is an access point
at which customers in a traditional ISP network architecture can connect to data
circuits in order to obtain Internet access and other services. While customers
located within a few miles from these POPs often receive cost savings on their
access pricing, customers located in secondary markets that are as close as 20
to 75 miles away from these POPs have typically been charged higher prices for
Internet access services.
We believe that small and medium sized enterprises located in high-growth
secondary markets are currently underserved by both national and local providers
of Internet access and related services. National ISPs, on the one hand,
typically lack the local presence to provide local support. Local ISPs, on the
other hand, often lack the requisite scale and resources to provide a full range
of services at acceptable quality and pricing levels.
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OUR GROWTH STRATEGY
Our goal is to be a premier Internet company that offers products ranging
from Internet access and a complete suite of Internet products and services to a
variety of e-commerce platforms targeting small and medium sized enterprises in
our target markets. We would like to offer a variety of business-to-consumer and
business-to-business e-commerce solutions to our customers.
Key elements of our strategy include:
FOCUS GROWTH ON SECONDARY MARKETS. We intend to expand into selected
secondary markets by replicating our regional network and marketing model. Our
network architecture and scalable sales and marketing plan are designed to allow
us to penetrate additional regions rapidly and cost-effectively.
MARKET A VARIETY OF SERVICES TO NEW AND EXISTING CUSTOMERS. We intend to
offer a comprehensive suite of a variety of products and services to meet the
expanding needs and complexity of our customers' Internet operations allowing us
to increase revenue per customer and maintain a high customer retention rate by
strengthening relationships with our customers.
USE OF CENTRALIZED SALES AND MARKETING OPERATIONS. We intend to use our
centralized sales and marketing staff to help implement our regional strategy
cost-effectively. We intend to hire and train additional local sales and
marketing personnel within our target regions to complement the core of our
sales and marketing staff, which will continue to be concentrated in one
centralized location to maximize efficiency. These regionally located employees
are intended to add local market knowledge, expertise and familiarity to our
sales and marketing efforts and allow us to maintain a field presence in each of
our regions, while maximizing our central operations.
STRATEGIC RELATIONSHIPS AND ACQUISITIONS. We intend to enter into strategic
relationships, such as partnerships and joint ventures, and to make acquisitions
to expand our line of enhanced products and services.
As part of this strategy, we recently consummated the acquisition of the
previously disclosed letter of intent to acquire Neocom Microspecialists, Inc.,
a provider of Web hosting and co-location services in the Mid-Atlantic region.
This acquisition is consistent with our growth strategy of building our presence
in secondary markets that have traditionally been under served by the larger
Internet services companies. In addition, we are also actively seeking
acquisition opportunities and/or candidates in the Mid-Atlantic region that
would help us achieve critical mass in terms of our Internet access, development
and hosting customers.
INTERNET INDUSTRY OVERVIEW
We believe that Internet commerce is reshaping the way consumers and
businesses conduct business. According to new projections from Forrester
Research, worldwide e-commerce sales will reach as high as $3.2 trillion in
2003, representing nearly 5% of all global sales. These sales figures include
business-to-business and business-to-consumer sales and EDI (electronic data
interchange) orders placed on the Internet, but exclude the value of financial
transactions. E-commerce is defined as the trade of goods and services in which
the final order is placed over the Internet.
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Growth in Electronic Commerce
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We feel strongly that the growing popularity of the Internet represents an
opportunity for companies like us to take advantage of the potential for
commercial transactions conducted online, referred to as electronic commerce or
e-commerce. International Data, Inc., a market research firm, estimates that
business-to-consumer commerce over the Internet will increase from over $12
billion worldwide at the end of 1997 to approximately $425 billion worldwide by
the end of 2002. In addition, Jupiter Communications, another market research
firm, predicts that by 2002, 44% of Internet users will make purchases online,
as compared to an estimated 22% that did so in 1997. Several factors are driving
the growth in both business to consumer and business to business electronic
commerce. These factors include:
o increasing familiarity with the Internet;
o broadening consumer acceptance of online shopping;
o increasing acceptance on online distribution relationships by
businesses;
o improved online network security and infrastructure;
o the growing base of personal computers and improved Internet access;
and
o expanding network bandwidth and access speeds.
We believe that the Internet is particularly well-suited for promoting,
marketing, selling and distributing merchandise both on a retail and a wholesale
level, permitting customers throughout the world to have direct access to
suppliers. Online stores can provide direct customer service and product
information to a large number of customers at the same time with a substantially
smaller sales staff than traditional stores. Online stores also have the ability
to rapidly and continually update such information. Internet merchandisers,
unlike traditional stores, do not have the same expenses associated with
operation of physical stores and warehouse facilities, and can change stores
design without substantial cost. In contrast to catalog merchandisers, Internet
retailers can react quickly to change product descriptions, pricing or product
mix and are not subject to the costs of catalog publication and distribution.
Additionally, online merchandisers have the ability to track directly customer
responses and preferences which enables the merchandisers to customize their
online stores to target specific customer groups and individuals.
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Changing Demographics
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In the early days of the Internet, users consisted mainly of young,
technology-savvy or upscale males. Today, while the online population has
appears to have changed drastically, it remains a fairly elite group.
Demographics from Mediamark Research show that Internet users are approximately
twice as likely to have high household incomes, college degrees and management
positions than the overall U.S. population. They are also more likely to be
young and single. Geographically, Internet users can be found in all corners of
the U.S., although, according to researcher Inteco, the level of Internet use in
several major metropolitan areas exceeds the overall U.S. average.
Consumer Acceptance
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We believe broadening consumer acceptance and retailer ambitions will
combine to fuel a rapid growth in online retail sales and to drive more than 40
million U.S. households to shop online by 2003, producing $108 billion revenues.
According to Forrester Research, online retail sales will account for 6% of U.S.
consumer retail spending in the U.S. by 2003. Analysts estimate that by the end
of 1998, nearly 9 million U.S. households will have shopped online for travel
services and retail goods other than automobiles, generating $7.8 billion in
online sales. We expect these numbers to grow rapidly over the next five years
as high speed Internet connections become more popular and consumers overcome
security and privacy concerns and embrace the convenience of Web shopping.
Corporate E-Commerce
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Although retail online shopping appears to receive more attention, analysts
predict a much larger growth in business-to-business e-commerce. Forrester
Research estimates that by year 2003, consumers will spend $108 billion to buy
goods online, while businesses will spend $1.3 trillion. As expected, computing
and electronic equipment will remain one of the largest categories of goods
traded between businesses, reaching $395 billion in revenue by 2003, while other
industries, such as cars and petrochemicals, will also top the $150 billion
mark. In addition to the $1.3 trillion in business-to-business sales of
products, Forrester also reports that online transactions in business services
will equal $220 billion by 2003. Michael Putnam of Forrester Research states
that "Just as the Internet has revolutionized the goods industries, the services
industry is going to be reinvented."
Internet-based businesses have already created more than 200 on-line
marketplaces for conducting business-to-business (B2B) electronic commerce.
These Internet locations bring buyers and sellers together in a central
marketplace and, in addition, provide services such as procurement management,
financial settlement and quality assurance. These services enhance the B2B
sites' value to the end customers and allow it to become an integral part of
those customers' business processes.
By providing a central on-line hub that automates transactions, aggregates
information, improves market reach and provides related services, we believe
these B2B sites will help their participants reduce both product and process
costs. By resolving information-based inefficiencies, they act as catalysts to
compress time, slash costs and improve processes in ways that were previously
unimaginable. Leading research firms estimate that product and process cost
savings afforded by B2B sites will amount to $57 billion by 2003.
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Sitestar.net
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Product Offerings
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Internet Access
Sitestar.net offers a variety of Internet access solutions. These solutions
range from 56K and ISDN dial-up accounts to 3Mbps wireless access connections.
We are one of the few ISP's in the county of Anne Arundel in Maryland to offer
Internet access with wireless technology. Our wireless service ranges in speed
from 128Kbps to up to 3Mbps. We are also offering high-speed Digital Subscriber
Line (DSL) service in Annapolis, Baltimore, and Washington D.C. All dial-up
accounts include e-mail, unlimited Internet access, Usenet newsgroups and
require no long-term contracts. The prices of our Internet services range from
16.95 to 79.95 per month.
Web Services. Our Web services help organizations and individuals
implement their Web site goals. We offer complete Web hosting services that
enable customers to establish a Web site presence without maintaining their own
Web servers and high-speed connectivity to the Internet.
Web Hosting
We offer a variety of Web hosting services which enable our customers to
establish and maintain a Web site on the Internet using Web servers and related
equipment owned and administered by us. Our Web hosting services utilizes both
Unix and Windows NT Servers. Standard hosting services include access to the web
site via FTP and/or Microsoft FrontPage.
E-commerce
We also provide electronic commerce solutions for consumers and businesses. We
develop and operate an on-line "storefront" and sell merchandise over the
Internet. Our e-commerce services include secure online payment processing
services, technical support and additional e-mail accounts.
Co-location
We offer co-location services, providing telecommunications facilities for
customer-owned Web servers, for customers who prefer to own and have physical
access to their servers but require the reliability, security and performance of
our on-site facilities. Our co-location customers house their equipment at our
secure network operating facility and receive direct high-speed connections to
the Internet.
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Website Design
We have provided web site design services since 1996 and, as of September 1999,
have developed web sites for 250 customers. We provide a free initial
consultation. Our customers can choose from several customized possible web
layouts for their business requirements. After our customer's selection, we
develop a prototype site and work with customers to design the site to their
specifications
Banner Development
We also design banner advertisements for our customers and, as of September,
1999, we have developed 300 banner advertisements. Our banner development
services include banner design and development, maintenance and traffic
reporting. We also provide consulting services to clients who need guidance on
where and how to post banners on other Web sites.
Online Marketing
We offer web site marketing services that continually build upon our customer's
current search engine listing to improve their placement in the different search
engines. Our services include the evaluation of our customers' search engine
positioning to assure easy accessibility to Internet users. We maximize our
customers search engine positioning by including industry specific key words
that are likely to be used by Internet users. Initial launch of our customer's
web site reaches over 400 search engines and services.
Customers and Marketing
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Our customer base consists primarily of small and medium sized enterprises
and dial-up customers located in secondary markets.
We use targeted marketing and media advertising to develop brand awareness
and supplement these efforts with our highly customized sales process and
personalized customer service. Through our marketing managers, we seek to
develop strong customer relationships within local communities.
Our marketing managers will also provide assistance and support to our
centralized sales staff. This enables us to evaluate customers' needs more
effectively, to design customized solutions and to reinforce our local presence
as a value-added provider of enhanced Internet services. Our marketing managers
also identify market trends, provide constant data regarding changes in the
competitive landscape and also may identify and initiate contact with new
customers. We also attend trade shows and other events to further reach the
targeted small and medium sized enterprises in each region.
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Competition
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The Internet services market is extremely competitive and highly
fragmented. We face competition from numerous types of ISPs, including national
ISPs, and anticipate that competition will only intensify in the future as the
ISP industry consolidates. We believe that the primary competitive factors in
the Internet services market include:
o Pricing;
o Quality and breadth of products and services;
o Ease of use;
o Personal customer support and service; and
o Brand awareness.
We believe that we compete favorably based on these factors, particularly
due to our:
o Regionally focused operating strategy;
o Superior customer support and service;
o High performance; and
o Competitive pricing.
Our current competitors include many large companies that have
substantially greater market presence, brand-name recognition and financial
resources than we do. Some of our local or regional competitors may also enjoy
greater recognition within a particular community. We currently compete, or
expect to compete, with the following types of companies:
o national Internet service providers, such as PSINet, Inc., Concentric
Network Corporation, Earthlink, Netcom and Mindspring;
o providers of Web hosting, collocation and other Internet-based
business services, such as Verio, Inc. and Navisite;
o numerous regional and local Internet service providers, some of which
have significant market share in their particular market area;
o established on-line service providers, such as America Online, Inc.
and Prodigy;
o computer hardware and other technology companies that provide Internet
connectivity with their or other products, including the International
Business Machines Corporation and Microsoft Corporation;
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o national long distance carriers such as AT&T Corporation, MCI
WorldCom, Inc., Qwest Communications International Inc. and Sprint
Communications Company, L.P.;
o regional Bell operating companies and local telephone companies;
o providers of free Internet service, including NetZero, Inc. and
MicroWorkz Computer Corporation; cable operators or their affiliates,
including At Home Corporation and Time Warner Entertainment Company,
L.P.;
o terrestrial wireless and satellite Internet service providers; and
o non-profit or educational ISPs.
Many of the major cable companies and some other Internet access providers
have begun to offer or are exploring the possibility of offering Internet
connectivity through the use of cable modems. Cable companies, however, are
faced with large-scale upgrades of their existing plant, equipment and
infrastructure in order to support connections to the Internet backbone via
high-speed cable access devices. We believe that there is a trend toward
horizontal integration through acquisitions or joint ventures between cable
companies and telecommunications carriers. Other alternative service companies
have also announced plans to enter the Internet connectivity market with various
wireless terrestrial and satellite-based service technologies. In addition,
several competitive local exchange carriers and other Internet access providers
have launched national or regional digital subscriber line programs providing
high speed Internet access using the existing copper wire telephone
infrastructure. Several of these competitive local exchange carriers have
announced strategic alliances with local, regional and national service
providers to provide broadband Internet access. If we are unable to provide
technologically competitive service, our revenues and profit margins may decline
materially, and our ability to attract additional customers may suffer.
Recently, several national access providers have begun to offer dial-up
Internet access for free or at substantial discounts to prevailing rates, which
may result in significant pricing pressure for dial-up Internet access services.
We also believe that manufacturers of computer hardware and software products,
media and telecommunications companies and others will continue to enter the
Internet services market, which will also intensify competition, especially for
dial-up access providers. If we are unable to compete with lower-cost providers
by providing superior service and support, our revenues and profit margins may
decline materially, and our ability to attract additional customers may suffer.
Acquisition Strategy
--------------------
We recently consummated the acquisition of the previously disclosed letter
of intent to acquire Neocom Microspecialists, Inc., a provider of Internet
access, Web hosting and co-location services in the Mid-Atlantic region. This
acquisition is consistent with our growth strategy of building our presence in
secondary markets that have traditionally been under served by the larger
Internet services companies. In addition, we are also actively seeking
acquisition opportunities and/or candidates in the Mid-Atlantic region that
would help us achieve critical mass in terms of our Internet access, development
and hosting customers.
13
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Greattools.com
- --------------
Product Offerings
-----------------
Founded in January 1998, Greattools.com is a direct merchandiser of
over 60 specialty tool products designed for light to heavy industrial
applications. We market our products under the name Great Tools Direct(TM) and
maintain a diverse product line comprised of five categories: (1) Power Tools;
(2) Cutting Tools; (3) Masonry; (4) Accessories; and (5) Automotive. We offer a
comprehensive product line aggregating approximately 90 different models of
cordless drills, batteries, cutting tools, sanders, grinders and miscellaneous
power tool accessories. Our main product and primary source of revenue is the
cordless drill. Sales from cordless drill account for about 80% of our
Greattools.com revenues. We offer a variety of cordless drills from the least
powerful 2.4volt model to the more advanced 18.8volt power drill. The 14.4volt
cordless drill has become a popular consumer drill for household use due to its
price affordability. We offer a 16.8volt drill and an 18.8volt drill at
discounted prices. We have recently introduced a 24volt drill and plan on
introducing other products based on our assessment of trends and market demand.
All GREAT TOOLS DIRECT products are designed and manufactured in China
by Tehao and Hitachi, two large manufacturers of industrial products, according
to strict specifications determined by our fulfillment center. Our fulfillment
center, Global Sourcing Group, frequently develops innovative design concepts in
an effort to improve and differentiate their product line from existing
competition. Greattools.com is not an exclusive distributor of Tehao and Hitachi
products.
Our home page features advertisements, testimonials and promotions for
various in-stock merchandise. Our in-stock merchandise is carried entirely by
our fulfillment center at no extra charge to us. Greattools.com acts as an
online distribution agent for Global Sourcing Group. This fulfillment
arrangement with Global Sourcing Group negates any necessity for us to carry
inventory. As part of our fulfillment arrangement, Global Sourcing Group ships
all merchandise purchased from the Greattools.com site directly to customers
eliminating any need for us to maintain costly operational overhead. As a result
of this arrangement, we don't have to take title to the merchandise we sell and
we don't have to purchase merchandise from Global Sourcing every time we sell
products online. Since Greattools.com is merely an online agent for our
fulfillment center, we only derive our revenues from our agreed upon commissions
earned on each merchandise sold and not on the aggregate sales price of a sale
transaction
The web site provides customers with product information and the
ability to directly purchase products over the Internet in a secure environment.
We maintain a standard refund policy to any consumer who purchases a defective
product. We have a thirty-day money back guarantee wherein we refund or replace
any products within thirty days from purchase. From inception, we have refunded
on the average less than three percent of our sales.
14
<PAGE>
Customers and Marketing
-----------------------
Our target market consists of retail customers located throughout the
United States, Canada and South America. We target value-oriented consumers,
do-it-yourselfers and contractors who use power tools for light to heavy
industrial applications. We also target professionals who require tools in their
daily activity, such as plumbers, carpenters, electricians and a variety of
other services and repair professionals.
The retail segment also includes consumers who use power tools for
household applications. These include hobbyists, homemakers, students and other
do-it-yourselfers.
The Company's market development strategy is based on several marketing
channels:
Direct Response Advertising
We advertise in specialty magazines and consumer publications, including
Popular Mechanics (circulation: 1,000,000), American Woodworker (circulation:
400,000), Wood Magazine (circulation: 650,000), Popular Woodworker (circulation:
220,000) and American How To (circulation: 750,000). We believe that these
publications are the most efficient medium to reach its target market. The
advertisements highlight our product line and feature the Internet address as
the primary means of ordering products, as well as a toll-free telephone number.
Database Marketing
We have created a database of customers for repeat sales and special
promotions. The database currently contains over 3,500 names. Each time a
customer places an order online, the database is updated to reflect that
customer's information and buying patterns. Due to the database's sorting
capabilities, we believe it receives a greater percentage of responses from
direct mail to the database targets than it would receive from a generic mass
mailing. We repeatedly mail marketing materials, catalogs and brochures to our
customers. Our catalog, produced once a year, lists the products we maintain in
our fulfillment center's warehouse and products our fulfillment center can order
directly from Tehao. The catalog is mailed to all of the 3,500 names on our
mailing list as well as new potential customers generated by our Web site and
regular advertisements.
We believe that a large portion of our potential success relies on the
reputation we have created in our "Great Tools Direct" brand name. However, we
do not have any specific plans to protect our mark "Great Tools Direct" by
filing a trademark application with the United States Patent and Trademark
office (PTO). We have conducted a trademark search on the label Great Tools
Direct which did not result in the discovery of any other commercial entity
using the Great Tools Direct or a substantially similar label in the United
States. We decided that we could better use our limited capital in advertising
and other expenses rather than investing in protecting the Great Tools Direct
brand name.
15
<PAGE>
Power Tools Industry
--------------------
Dominated by large home centers and hardware and lumber cooperatives such
as Home Depot, Loews, Menard's, Ace and True Value, the tool market is large,
highly fragmented and characterized by multiple channels of distribution. The
distribution channels in the power tools market include retail outlets, small
distributorships, national, regional and local distributors, direct mail
suppliers, large warehouse stores and manufacturer's own direct sales forces.
Products imported from low-cost labor countries have increased the
competitive pressures on pricing. Cost pressures from more established name
brands are providing a focus on high quality, low cost alternatives. Aggressive
value pricing has redefined the basis for competition in many of the Company's
product lines.
There are many discount retailers in the industry offering products at
competitive prices and blurring the distinction between wholesale and retail
such as Home Depot, Menards and Wal-Mart. Warehouse clubs and other category
leaders are establishing a new economic framework for the retail business,
forcing industry participants to reduce costs. Major marketers have focused on
value pricing strategies, changing the nature of merchandising throughout the
industry.
Competition
-----------
The power tool market in which we operate is extremely competitive, and we
expect such competition to intensify in the future. Our current and prospective
competitors include many large companies that have substantially greater market
presence and financial, technical, marketing and other resources than we have.
We compete with many retailers and direct marketers who sell merchandise over
the Internet and through catalogs. We also compete with traditional retailers
who sell similar merchandise to that sold by us. Those retailers usually offer
brand name products at prices higher than our products. As newer and more
powerful tools are being introduced into the market, intense competition between
manufacturers has developed. Companies in the industry are developing new
features to attract customers and tools are becoming more reliable, efficient
and quiet. At the same time, prices are becoming more competitive as power tool
companies are vying to gain market share. Moreover, as brand delineation becomes
more challenging, pricing becomes more competitive, thus further increasing the
drive to gain market share.
We believe that our ability to compete successfully depends on a number of
factors, including: (1) our ability to continually provide the customer with
value by offering quality products at prices lower than the prices usually
charged for name brand products; and (2) maintaining a flexible product line and
quickly adapting to the changing needs and tastes of the market.
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<PAGE>
Acquisition Strategy
--------------------
We believe there are acquisition opportunities among the many small sellers
of power tools. If we believe a favorable opportunity exists, we anticipate that
we will enter into discussions with the owners of such businesses regarding the
possibility of an acquisition by the Company. As of the date hereof, we do not
have any agreements or pending acquisitions and have not entered into any
letters of intent with respect to pending acquisitions. No assurance can be
given that we will identify satisfactory acquisition candidates or, if
identified, that we will be able to consummate an acquisition on terms
acceptable to us.
Holland-American.com
- --------------------
Product Offerings
-----------------
In October 1998, HAIS created an online division to respond to the needs of
the emerging online specialty foods segment. Since October 1998,
Holland-American.com has been an online purveyor of imported and domestic
specialty gourmet foods. We sell specialty products, such as condiments, sauces
and toppings, entrees, prepared foods and soups, breads, pasta, grains and
beans, crackers/snacks, desserts and confections and oils and vinegar. Our
approximate revenues for the eleven months ending November 30, 1999 are $7,500.
We intend to increase our sales volume significantly in the next twelve months
once sufficient capital resources are available by increasing our marketing
efforts to reach a broader audience.
Our in-stock merchandise is carried entirely by our fulfillment center at
no extra charge to us. Holland-American.com acts as an online distribution agent
for HAIS. This fulfillment arrangement with HAIS negates any necessity for us to
carry inventory. As part of our fulfillment arrangement, HAIS ships all
merchandise purchased from the Holland-American.com site directly to customers
eliminating any need for us to maintain costly operational overhead. As a result
of this arrangement, we don't have to take title to the merchandise we sell and
we don't have to purchase merchandise from HAIS every time we sell products
online. Since Holland-American.com is merely an online agent for our fulfillment
center, we only derive our revenues from our agreed upon commissions earned on
each merchandise sold and not on the aggregate sales price of a sale
transaction.
We have maintained a solid relationship with HAIS even after our
divestiture of the non-Internet business in September 1999. As a result, we act
as their exclusive online agent for all their products. We provide all the
maintenance to the web site through our own personnel in Sitestar.net and we
coordinate closely with HAIS personnel with regards to product and pricing
updates. We conduct all the marketing efforts needed to promote the site. We
view Holland-American.com as an integral part of our e-commerce strategy since
it gives us an online presence in the emerging specialty gourmet foods industry.
17
<PAGE>
Specialty Foods Industry
------------------------
Specialty Food Market Today
The products we sell are known as "gourmet and specialty food," defined by
the industry as a whole as distinctive food of high quality. This includes
traditional gourmet food and confections. This category also includes branded
specialty products which are available in specialty restaurants or retail shops.
Our criteria for determining whether to classify a food product as gourmet or
specialty include:
o cost of ingredients;
o cost of processing;
o freshness/perishability;
o uniqueness;
o newness/cutting edge;
o cost of packaging; and
o cost of importation/distribution.
We work closely with our fulfillment center, Holland American International
Specialties, our former food distribution division, in selecting products for
our Web site through a formal review process which involves review of the
supplier background and the details of their product line. Our fulfillment
center's product review committee then samples representative products from each
supplier and rates the products by standardized criteria.
Retail Market
The retail food market involves the sale of food products to individual
consumers and households. The gourmet and specialty food industry is a sizable
segment of the United States retail food market. According to a 1995 market
report published by Packaged Facts, retail sales of gourmet and specialty food
are projected to reach approximately $48 billion in 2000. Currently, specialty
food is principally sold through the following retail channels:
o supermarkets;
o gourmet and specialty food stores;
o mail order catalogs;
o department stores;
o 32-television shopping channels; and
o discount warehouse retailers.
The combination of the size of the specialty food market and the growth of
online shopping have created what we believe to be a sizable market opportunity.
18
<PAGE>
Wholesale Market
The wholesale market consists of specialty food retailers, gift shops,
caterers, restaurants and other resellers of specialty food products.
Traditionally, suppliers of specialty food have distributed their products
either by using a food broker to sell to retailers at wholesale prices, or by
selling their products to specialty food distributors who in turn sell to
retailers. In these arrangements, food brokers generally receive a 10%
commission on the wholesale price and distributors generally purchase the
product at a 20% to 25% discount from the supplier's wholesale price. The
assortment of specialized food brokers and distributors that currently supports
the industry is highly fragmented. As a result, many retail outlets for
specialty food products are underserved or have limited access to these food
brokers and distributors.
Online opportunity in Specialty Foods
In both the retail and wholesale markets, we believe electronic commerce
offers opportunities to improve the specialty food shopping experience and
selection. We believe traditional specialty food businesses face a number of
challenges in providing a satisfying experience:
o the specialty food market is highly fragmented with no single dominant
retailer or wholesaler, and we estimate there are at least 5,000
suppliers throughout the United States;
o this fragmentation leaves both retail and wholesale customers without
access to a broad base of specialty food products;
o distributors who carry specialty food products are limited in the
products they can offer by inventory holding costs, inventory spoilage
and warehouse size, which restricts the supply and selection available
for customers;
o mail order catalogs are not updated as inventory level or consumer
demand changes and are expensive to produce and mail; and
o traditional retail stores have costs associated with occupying and
operating a physical store and selection is limited by the size of the
store and inventory considerations.
We believe that sales of gourmet and specialty food over the Internet
provides a means to address many of these challenges.
19
<PAGE>
Customers and Marketing
Specialty foods are value-added, premium-priced items that are specifically
targeting consumers who are willing to pay a premium. The Company's primary
target market consists of discriminating consumers who seek imported specialty
gourmet foods. According to the National Association of the Specialty Food
Trade, such consumers typically share certain of the following demographics: (1)
Reside on the Pacific Coast or in New England; (2) Live in an urban community;
(3) are in the 25-44 age group; (4) College educated; (5) A professional or
proprietor/manager; (6) Earn upwards of $50,000 per annum; and (7) Have children
under the age of six.
We also have a potential to market to multiple secondary target markets in
the wholesale sector. Such potential customers include corporate coffeehouses,
restaurant chains, gift shops, supermarkets, grocery stores, institutional
accounts and other specialty stores.
The cornerstone in our marketing strategy is our personnel's knowledge of
the consumer. We believe that tomorrow's specialty food consumer will have a
broader age range from teens to elderly and will be more health conscious and
adventurous when it comes to specialty foods products. According to the
International Dairy-Deli-Bakery Association's 1996 year-end report, the next
generation will have a slant toward global environmentalism, blurred political
boundaries and cross-cultural values. In terms of the food consumer of tomorrow,
the report found that "clean" or "organic" food will be in great demand as baby
boomers and young people, with their concern for the environment, do more
shopping.
The development of the Holland-American.com market potential is predicated
upon the establishment of a diversified product portfolio capable of serving the
different types of imported specialty gourmet food needs of its target
customers. This would be crucial if we intend to exploit the opportunity to
influence "impulse" purchases. According to a 1996 A.C. Nielsen (Schaumburg,
Illinois) survey, cookies, crackers and other specialty snacks are among the
"high impulse" items.
We believe that convenience is the driving force spurring the desires of
America's specialty gourmet food product needs. A growing number of consumers
are embracing the convenience of shopping for specialty foods online. Our
commitment to carrying a comprehensive product line, making shopping a fun and
easy experience for the consumer and shipping orders in a timely manner will
play a critical role in our objective in achieving critical mass.
Competition
-----------
We operate in a competitive environment. The industry is dominated by large
regional retail establishments such as Whole Foods Market, Wild Oats, Trader
Joe's, Gelson's and Bristol Farm that rely heavily on aggressive marketing
campaigns and customer referrals. Many of these traditional retailers offer
diverse product lines and competitive pricing. In some instances, these firms do
market their products over the Internet such as Whole Foods Market, Wild Oats
and Bristol Farms.
20
<PAGE>
We enjoy three competitive advantages over these larger, regional firms:
(1) More diverse product lines, enabling the Company to act as a single-source
provider for all the customer's specialty foods needs; (2) the convenience of
online shopping; and (3) Prompt shipment of all customer orders.
Acquisition Strategy
--------------------
We intend to consider potential acquisitions to attempt to increase our
market share and revenues. To date, we have not entered into discussions with
any specific acquisition candidates. No assurance can be given that we will
identify satisfactory acquisition candidates or, if identified, that we will be
able to consummate an acquisition on terms acceptable to us.
Soccersite.com
- --------------
Product Offerings
-----------------
Through our acquisition of SYTE, we now own Soccersite.com which has been
an operating subsidiary since July 1999. Soccersite.com is a content-oriented
and e-commerce Internet site with over 400 pages of information about the sport
of soccer. We provide traditional news on recent professional soccer games, and
we allow visitors to post amateur league and tournament information and training
camps. We also provide a forum for coaches to interact with players and other
coaches. We also host a special section that caters to young soccer enthusiasts.
In addition, we provide a search capacity for visitors to explore specific
topics. All content information is provided free of charge to the visitor.
To capitalize on the retail opportunities associated with our web site, we
created SoccerMall, an e-commerce retailer of soccer-related merchandise and
apparel. All orders to SoccerMall are fulfilled directly by us through our
relationship with a local distributor in Annapolis, Maryland. Our in-stock
merchandise is carried entirely by our fulfillment center at no extra charge to
us. Soccersite.com acts as an online distribution agent for the local Annapolis
distributor. This fulfillment arrangement with this local distributor negates
any necessity for us to carry inventory. As part of our fulfillment arrangement,
the local distributor ships all merchandise purchased from the Soccersite.com
site directly to customers eliminating any need for us to maintain costly
operational overhead. As a result of this arrangement, we don't have to take
title to the merchandise we sell and we don't have to purchase merchandise from
the local distributor every time we sell products online. Since Soccersite.com
is merely an online agent for our fulfillment center, We only derive our
revenues from our agreed upon commissions earned on each merchandise sold and
not on the aggregate sales price of a sale transaction. Soccersite.com generated
sales volume of approximately $10,000 for the twelve month ending December 31,
1998.
21
<PAGE>
Soccer Industry
---------------
Widely regarded as the world's most popular sport, soccer is growing at a
rapid pace in the United States. Largely attributed to the expansive Latino
immigrant fan base, Southern California has become the epicenter for the soccer
community in North America. According to the Los Angeles Times, attendance at
international soccer games hosted in Los Angeles is up over 200% from its
introduction in 1997. In comparison to other professional Los Angeles sports
teams, the L.A. Galaxy (Major League Soccer professional team) consistently drew
larger home game crowds than any other local team except the Los Angeles Dodgers
with the local fan base largely comprised of members of the Latino community.
Strategy Research Corp., a leading industry association which tracks trends in
the Latino community, estimates the Southern California Latino consumers yield a
collective buying power of $57 billion.
Customers and Marketing
-----------------------
To date, we have had no targeted marketing campaign. Nonetheless,
word-of-mouth advertising and traffic generated by search engines, have resulted
in nearly one million visitors to the web site in the past year.
In addition to retail sales through SoccerMall, we sell advertising space
on the web site to merchants and manufacturers.
We are currently developing a marketing strategy designed to attract more
consumers to the web site, build greater advertising opportunities and further
advance the sport of soccer. This strategy will likely include sponsoring
amateur and professional soccer events, advertising in major industry
publications and participating in cooperative ventures with industry
associations.
Competition
-----------
There are numerous soccer-related organizations which have a presence on
the Internet. Most web sites are retail e-commerce websites offering soccer
merchandise and apparel. There are a smaller number of web sites that look to
combine a content-oriented format with the convenience of retail, including
Soccerweek.com and Soccermadness.com.
Acquisition Strategy
--------------------
We believe there are acquisition opportunities among the providers of value
added information about the sport of soccer. In furtherance of our acquisition
strategy, we anticipate reviewing and conducting investigations of potential
acquisitions. If we believe a favorable opportunity exists, we anticipate that
we will enter into discussions with the owners of such businesses regarding the
possibility of an acquisition by us. As of the date hereof, we do not have any
agreements or pending acquisitions and have entered into any letters of intent
with respect to pending acquisitions. No assurance can be given that we will
identify satisfactory acquisition candidates or, if identified, that we will be
able to consummate an acquisition on terms acceptable to us.
22
<PAGE>
Neocom Microspecialists, Inc.
- ----------------------------
Effective December 15, 1999, we have consummated the previously announced
acquisition of Neocom Microspecialists, Inc.("Neocom") in exchange for 4,782,353
shares of Sitestar common stock. As part of the purchase consideration and based
on certain contingencies, we have agreed to issue an additional 2,000,000 shares
of Sitestar common stock to the Neocom shareholders on the second anniversary of
the acquisition. Neocom is an Internet service provider and Web development
company based in Martinsville, Virginia. As of October 31, 1999, (i) Neocom
provided Internet access and other Internet services to approximately 4,700
customers in the Southern Virginia area and (ii) its revenues for the ten months
ended October 31, 1999 were $1.454 million. Based on our current estimates we
believe that Neocom's annualized revenues would be approximately $1.745 million
for the fiscal year ending December 31, 1999.
Product Offerings
-----------------
We provide dial-up and private Internet access, design customized web
sites, host customer web sites on our computer networks, and offer related
e-commerce services to individual and business subscribers outside of large
metropolitan areas in the mid-Atlantic region, particularly southern Virginia.
We offer subscribers comprehensive technical assistance, large modem banks
providing rapid access to the Internet, and high speed connectivity. In
addition, our home page web sites serve as regional portals, offering local and
national news and weather, community resources, advertising, and links to other
local and national content providers.
Customers and Marketing
-----------------------
Our customer base consists primarily of small and medium sized enterprises
and dial-up customers located in secondary markets, specifically southern
Virginia.
We use targeted marketing and media advertising to develop brand awareness
and supplement these efforts with our highly customized sales process and
personalized customer service. Through our marketing managers, we seek to
develop strong customer relationships within local communities.
23
<PAGE>
Our marketing managers will also provide assistance and support to our
centralized sales staff. This enables us to evaluate customers' needs more
effectively, to design customized solutions and to reinforce our local presence
as a value-added provider of enhanced Internet services. Our marketing managers
also identify market trends, provide constant data regarding changes in the
competitive landscape and also may identify and initiate contact with new
customers. We also attend trade shows and other events to further reach the
targeted small and medium sized enterprises in each region.
Competition
-----------
The market for Internet access and related services is extremely
competitive. We expect competition to increase as Internet use grows and
established national Internet service providers, telecommunications and computer
related vendors expand their traditional products and services. The significant
financial resources of many of our competitors could lead to severe price
cutting in an effort to secure market share, which could have a negative effect
on our revenues and results of operations. We cannot assure you of our survival
in this intensely competitive and rapidly evolving Internet services market. Our
competitors in the markets in which we operate include:
- national and regional commercial Internet service providers such as
OneMain.com, BiznessOnline.com, US Online, Earthlink and Mindspring;
- established on-line commercial information providers such as AOL,
Prodigy and MSN;
- local Internet service providers in Virginia and the mid-Atlantic
states namely Virginia, Maryland, Pennsylvania, Delaware and West
Virginia who provide products and services that are similar to ours to
small to medium sized businesses;
- cable television operators such as Time Warner and
Tele-Communications, Inc;
- national long distance telecommunications carriers such as AT&T, MCI
Worldcom, and Sprint;
- computer hardware and software companies, such as IBM and Compaq; and
- regional telephone operating companies such as Bell Atlantic.
24
<PAGE>
We also believe that new competitors will continue to enter the Internet
access market, such as large computer hardware and software companies, media and
telecommunications entities, and companies that provide direct service to
residential customers, including cable television operators, wireless
communication companies, local and long distance telephone companies and
electric utility companies.
Many of our competitors are larger and have greater financial, technical,
and operating resources than we do. We cannot assure you of our survival in this
intensely competitive environment. We will need to distinguish ourselves by our
product and service knowledge, our responsiveness to our targeted market of
small to medium sized businesses, our ability to market and sell customized
combinations of products and services within our market, and our capacity to
offer a diverse Internet product line. We also believe that our ability to be
flexible and to respond quickly in providing solutions to our customer's
Internet needs will be an advantage over some of our competitors.
Acquisition Strategy
--------------------
Our strategy is to rapidly build a base of Internet subscribers through
acquisitions and internal growth. We believe there are acquisition opportunities
among the Internet service providers in our geographic target. In furtherance of
our acquisition strategy, we anticipate reviewing and conducting investigations
of potential acquisitions. If we believe a favorable opportunity exists, we
anticipate that we will enter into discussions with the owners of such
businesses regarding the possibility of an acquisition by us. As of the date
hereof, we do not have any agreements or pending acquisitions and have not
entered into any letters of intent with respect to pending acquisitions. No
assurance can be given that we will identify satisfactory acquisition candidates
or, if identified, that we will be able to consummate an acquisition on terms
acceptable to us.
EMPLOYEES
As of December 31, 1999, we employed thirty (30) full time individuals. We
have six in management, five in sales and marketing and nineteen in
administration. Our employees are not unionized, and we consider our relations
with our employees to be favorable.
25
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
OUR FINANCIAL STATEMENTS AND THE RELATED NOTES TO THE FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS REGISTRATION STATEMENT. THE FOLLOWING INCLUDES A
NUMBER OF FORWARD-LOOKING STATEMENTS THAT REFLECT OUR CURRENT VIEWS WITH RESPECT
TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. WE USE WORDS SUCH AS ANTICIPATES,
BELIEVES, EXPECTS, FUTURE, AND INTENDS, AND SIMILAR EXPRESSIONS TO IDENTIFY
FORWARD-LOOKING STATEMENTS. INVESTORS SHOULD NOT PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS REGISTRATION
STATEMENT. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR OUR PREDICTIONS. FOR A DESCRIPTION OF THESE RISKS, SEE THE
SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS."
OVERVIEW
- --------
We changed our corporate focus from that of a food holding company to an
Internet holding company with the acquisition of Sitestar Corporation in July
1999. Soon after concluding this acquisition, we started focusing on acquiring
and investing in Internet-based enterprises. Our mission is to develop our
Internet operating subsidiaries and future investments in other Internet
enterprises into highly focused and successful stand-alone Internet businesses.
We intend to achieve a fast-track development process by tapping the services,
support and knowledge of individuals and organizations that have extensive
experience in developing Internet concepts and technologies.
In July 1999, we began to implement our current strategy of acquiring and
investing in emerging internet based enterprises to create a broad and diverse
set of core Internet businesses which deliver a variety of online solutions. In
addition to developing and integrating internet-based technologies, our primary
objective is to create a mix of Internet operating companies and
Internet-related portfolio investments that will enhance the value of its core
holdings.
Our Internet services subsidiary began providing Internet services to its
customers in 1996 by providing Internet access and enhanced products and
services to small and medium sized enterprises in selected high growth markets.
We target primarily small and medium sized enterprise customers located in
selected high growth secondary markets. We currently provide our customers with
Internet access and enhanced products and services in the mid-Atlantic area of
the United States. We have designed our comprehensive suite of enhanced products
and services to meet the expanding needs of our customers and to increase our
revenue per customer. The products and services we provide include:
* Internet access services;
* Web design services;
* Web hosting services;
* End to end e-commerce solutions;
* Online marketing consulting; and
* Management of mission critical Internet applications.
26
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
On September 30, 1999, the Company sold all of the assets related to the
Company's international food distribution business, also known as Holland
American International Specialties ("HAIS"). The assets represent approximately
99% of the Company's assets as of December 31, 1998. The acquirer of the assets
is a partnership with the partners being a group of stockholders of the Company.
Given that the sale was not an arms-length transaction, the Company had the
business valued by an independent appraiser to determine the fair value purchase
price. The sales price was $900,000, which is to be paid as follows: 1) $200,000
is to be offset against the Company's liability to the a stockholder, 2)
$654,000 for the buyer's assumption of all trade, short-term and long-term
liabilities, and 3) the remaining $46,000 in the form of a note payable to the
Company in three annual installments of $15,333 each plus accrued interest at 8%
per annum. The Company has accounted for this sale by deferring the $46,000 gain
on sale until such time as the $46,000 note receivable is collected and by
leaving the assets and liabilities of HAIS on the Company's balance sheet under
the captions "Assets of business transferred under contractual arrangements
(notes receivable)" and "Liabilities of business transferred under contractual
arrangements," respectively since the risk of loss has not been transferred to
the new owners as the Company is still the debtor for certain obligations of
HAIS. The historical operations of HAIS have been presented in the statement of
operations under the caption "Loss from operations of business transferred under
contractual arrangements." To the extent that the operations of HAIS report a
net loss in periods after September 30, 1999, the Company will record such
losses in the statement of operations under the caption "Loss from operations of
business transferred under contractual arrangements." The Company will continue
to account for the sale of HAIS in this manner until such time that the net
assets of HAIS have been reduced to $0 or the net assets of HAIS have been
realized by the Company in cash.
On December 15, 1999, we completed the acquisition of another Internet
company, Neocom Microspecialists, Inc. With the two recent acquisitions of
Internet companies, the intangible assets purchased as a result of these
acquisitions represent approximately 82% of our total assets and approximately
110% of our stockholders' equity. Further, amortization of these intangible
assets will be the largest single expense item in our statement of operations
and will be approximately $1.8 million in 2000. This material concentration of
intangible assets increases the risk of a large charge to earnings in the event
that the recoverability of these intangible assets is impaired. If we are unable
to recover the costs of these intangible assets, our financial performance may
be negatively impacted in the coming periods through a write down or write off
of these intangible assets.
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Prior to our change in corporate focus from that of a food holding company
to that of an Internet holding company, we generated all of our revenues from
sales of specialty food products. We have historically derived a majority of our
revenues from small independent specialty food retail customers. From inception
until July 1999, we generated revenues exclusively from wholesale and retail
sales of our food products. We derived income from our wholesale and retail
sales from the excess of the wholesale and retail prices we charged our
customers over the product costs we paid our suppliers. We had a wholesale
program in which we sold bulk quantities of specialty food products to
registered retailers at wholesale prices. In this program, we purchased products
from suppliers at a distributor's discounted price and derived income from the
difference between this discounted price and the wholesale price we charged.
Additionally, our retail customers paid for orders by cash or credit card while
we paid our suppliers on extended terms. As a result, we were able to increase
our working capital between the time we received payment for orders and the time
we were required to pay suppliers.
As a result of our change in corporate focus from a food holding company to
an Internet holding company, we now have two other sources of income. Our
e-commerce operating subsidiaries now derive our income from commissions. We are
agents of our fulfillment centers and merely generate our revenues from
commissions per transaction, which represent the gross selling price charged to
our customers less the amount we pay to the fulfillment center. Our customers
pay us directly and we remit the cost of the goods to our fulfillment centers
less our agreed upon commission amount. As a result of this arrangement, the
extent of our financial agreement with our fulfillment centers are relegated to
the periodic transfer and remittance of our product costs. We do not take title
to the goods sold on our e-commerce sites which eliminates any inventory risks
on our part. We forward all orders directly to our fulfillment centers which
eliminates the need to take possession of the goods and merchandise sold on our
e-commerce sites. Our fulfillment centers ship the purchased good directly to
our customers on our behalf. The shipping and handling costs related to every
transaction are added to the total cost of the goods sold which the customers
have to bear.
Our Internet service provider operating subsidiaries derive their income
from the excess of the Internet service prices we charge our customers over the
cost of service we pay our suppliers. Additionally, our retail customers pay for
services by cash or credit card while we pay our suppliers on extended terms. As
a result, we are able to increase our working capital between the time we
receive payment for services and the time we are required to pay suppliers.
We are operating under an oral agreement with our fulfillment centers and
have no long-term obligations to continue the relationship with them if we deem,
solely at our own discretion, that it is no longer in our best interest to
continue the current arrangements. However, we intend to formalize official
written fulfillment agreements with them as soon as practicable.
Net revenues for our e-commerce subsidiaries consist of commissions earned
per transaction upon shipment of products and acceptance of products by our
customers net of any allowance for future returns.
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We have a limited operating history on which to base an evaluation of our
business and prospects. You must consider our prospects in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
such as online commerce. To address these risks, we must obtain sufficient
operating capital, maintain and expand our customer base, continue to increase
our product offerings, successfully implement our business, marketing and
promotional strategies, continue to develop our order processing technology,
respond to competitive developments in the specialty food market, and attract,
retain and motivate qualified personnel. We cannot assure you that we will be
successful in addressing these risks and our failure could be harmful to our
business, prospects, financial condition and results of operations.
FOOD DISTRIBUTION OPERATIONS
- ----------------------------
Our food distribution operations represented our specialty gourmet foods
business which we divested effective September 30, 1999. The net revenues of our
food distribution operations had grown since inception, from $1,553,926 in 1997
to $2,175,867 in 1998. Specialty food sales were inherently seasonal, with
highest volumes during the fourth quarter holiday season. Additionally, the
business had a large gift-giving component. As a result of these two factors,
approximately 46% of the 1998 sales were realized in the fourth quarter. We had
taken steps intended to reduce the magnitude of this trend such as expanding our
product selection, and emphasizing non-holiday occasions and personal
consumption. However, we expected fourth quarter sales to continue to represent
a disproportionate amount of annual sales in the future.
INTERNET OPERATIONS
- -------------------
Our Internet operations are represented by our current Internet service
provider and e-commerce operating subsidiaries. Due to our change in primary
corporate focus, these will be the industry segments in which we are going to
focus. Our costs would include expenses associated with running an Internet
holding company. These expenses are mainly related to the maintenance of the
corporate office, payroll, legal, accounting, public relations and other
administrative expenses.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
FOOD DISTRIBUTION OPERATIONS
- ----------------------------
Our food distribution operations incurred a net loss of $40,786 in the nine
months ended September 30, 1999 and $41,507 for the nine months ending September
30, 1998. There were no significant fluctuations on our net losses as business
conditions for both periods remained essentially the same.
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INTERNET OPERATIONS
- --------------------
REVENUES. Net revenues for our Internet service provider subsidiaries
consist of service sales to customers. Revenues are recognized upon delivery of
service. Net revenues for our e-commerce subsidiaries consist of commissions
earned per transaction upon shipment of products and acceptance of products by
our customers net of any allowance for future returns. Net revenues increased to
$18,864 for the nine months ended September 30, 1999 from $0 for the nine months
ended September 30, 1998. This increase is a result of the acquisition of
Sitestar in July 1999. We realized their revenues for the month of August and
September 1999. As a result of our acquisition strategy and our recent
acquisitions of Internet service providers and e-commerce companies, we expect
to experience strong revenue growth in the coming years.
COST OF GOODS SOLD. Cost of goods sold consists primarily of the costs of
Products and services sold to customers and actual outbound shipping and
handling costs. Cost of goods sold increase to $22,740 for the nine months ended
September 30, 1999 from $0 for the nine months ended September 30, 1998. As a
result of our acquisition strategy and our recent acquisitions of Internet
service providers and e-commerce companies, we expect to have a substantial
increase in our cost of goods sold as our revenues increase.
SELLING, GENERAL AND ADMINISTRATIVE. Sales and marketing expenses consist
primarily of advertising and promotional expenditures and payroll and related
expenses for personnel engaged in sales and marketing activities. Selling,
general and administrative expenses increased to $455,938 for the nine months
ended September 30, 1999 compared to $0 for the nine months ended September 30,
1998. This increase is primarily attributable to the increase in general and
administrative personnel and an increase in corporate expenses as a result of
our shift in corporate focus. We expect to incur the same amount of selling,
general and administrative expenses as we implement our growth strategy.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE SEVEN MONTHS ENDED
DECEMBER 31, 1997
FOOD DISTRIBUTION OPERATIONS
- ----------------------------
Our food distribution operations incurred losses of $113,844 for the twelve
months ended December 31, 1998 compared to $194,069 for the seven month ended
December 31 ,1997. The increase was primarily attributable to an increase in
selling, general and administrative expenses as a result of longer fiscal year.
However, on an annualized basis, the seven month ended net loss would have been
approximately the same amount as the twelve months ended December 31, 1998.
Our food distribution operations incurred net losses of $484,494 for the
twelve months ending December 31, 1998 compared to a net loss of $194,069 for
the seven months ending December 31, 1997. The significant increase of $290,425
was primarily attributable to an increase in selling, general and administrative
expenses as a result of longer fiscal year and a significant increase on our
corporate expenses relating to increased payroll, legal, accounting and interest
expenses.
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INTERNET OPERATIONS
- --------------------
REVENUES. There were no revenues for the twelve months ending December 31,
1998 and seven months ending December 31, 1997 due to the divestiture of our
food distribution operations.
COST OF GOODS SOLD. Cost of goods sold consists primarily of the costs of
Products and services sold to customers and actual outbound shipping and
handling costs. There were no cost of goods sold for the twelve month ending
December 31, 1998 and seven months ending December 31, 1997 due to the
divestiture of our food distribution operations.
SELLING, GENERAL AND ADMINISTRATIVE. General and administrative expenses
consist primarily of rent, public relations, officers' salaries and consulting
services. Selling, general and administrative expenses increased to $370,650 for
the year ended December 31, 1998 from $0 in the seven months ended December 31,
1997. This increase was primarily attributable to the lack of activity in the
seven months ended December 31, 1997 due to the divestiture of our food
distribution business, and to the one time consulting service of $200,000. We
expect the consulting services to be non-recurring, while we expect the
remainder of the general and administrative expenses to be recurring.
LIQUIDITY AND CAPITAL RESOURCES
Our business plan has required, and is expected to continue to require,
substantial capital to fund operations, capital expenditures, expansion of sales
and marketing capabilities and acquisitions.
To date, we have financed our operation primarily through short-term
borrowings and internally generated cash flow form our operations. In addition
since December 31, 1998, we borrowed approximately $415,000 from various
investors and approximately $144,000 from our stockholders in exchange for
promissory notes in these principal amounts which bear interest at the rate of 8
percent per year.
We believe that the net cash position on a pro forma basis with the
acquisition of Sitestar and Neocom, together with our existing cash and cash
equivalents, will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 6 months. Thereafter, we may be
required to seek additional sources of financing. We may also be required to
raise additional financing before such time. If additional funds are raised
through the issuance of equity securities, our existing shareholders may
experience significant dilution. Furthermore, additional financing may not be
available when needed or, if available, such financing may not be on terms
favorable to us or our shareholders. If such sources of financing are
insufficient or unavailable, or if we experience shortfalls in anticipated
revenue or increases in anticipated expenses, we may need to slow down or stop
the expansion of our e-commerce business, including our ISPs and reduce our
marketing and development efforts. Any of these events could harm our business,
financial condition or results of operations.
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IMPACT OF THE YEAR 2000 ISSUE
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may recognize a date using 00 as the year 1900
rather than the year 2000. This, in turn, could result in major system failures
or miscalculations, and is generally referred to as the year 2000 issue. We have
formulated and, to a large extent, implemented a plan to address our year 2000
issues.
During 1999, we established a year 2000 compliance program to coordinate
our efforts to resolve our year 2000 issues. We are addressing our year 2000
issues through a comprehensive assessment of both our internal systems and the
systems of our external operating and suppliers.
INTERNAL SYSTEMS ASSESSMENT AND REVIEW
Our internal systems assessment and review consists of four-phases, which
we expect to complete by the end of the third quarter of 1999:
* ASSESSMENT--We have conducted an inventory of our existing systems,
performed risk assessment on these systems, prioritized the importance
of these systems, and determined appropriate allocation of resources.
This assessment is substantially complete.
* ANALYSIS AND PLANNING--We have selected corrective methods where
needed, developed appropriate test standards, determined conversion
sequences where needed, and established a detailed timeline for
correcting any known year 2000 problems. This analysis and planning is
substantially complete.
* CONVERSION AND TESTING--We are developing and modifying operating
codes, purchasing or installing vendor-provided solutions and
conducting unit and system tests. Our conversion and testing phase is
substantially complete.
* IMPLEMENTATION--We have begun modifying previously non-compliant
systems, installing third party solutions, updating operational
procedures, and training our employees as needed. This implementation
phase is substantially complete.
We also face risks from customer-provided hardware and software that we
host in our data centers that in many cases has been customized by outside
service providers or customer personnel. While we inform our customers that they
are responsible for year 2000 compliance of their hosted hardware and software,
we cannot assure you that our customers will take the steps necessary to achieve
year 2000 compliance. The failure of our customers and third-party providers to
ensure that their hosted hardware and software is year 2000 compliant could
disrupt our operations and materially adversely affect our financial condition
and operating results.
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EXTERNAL SYSTEMS ASSESSMENT AND REVIEW
We have also conducted a four-phase review of the systems of our
operatings, suppliers, and other third parties (including equipment providers
and other telecommunications service providers) to assess their year 2000
compliance efforts. The first phase, which is completed, included identifying
our critical operatings, suppliers, and vendors. This phase involved requesting
information from these critical operatings, analyzing their responses, studying
their published year 2000 statements, performing our own risk assessments,
prioritizing the importance of potential non-compliant systems and determining
appropriate allocation of resources.
Our second phase includes developing personal contacts with critical
operatings' year 2000 staff, articulating our concerns and requesting assistance
from them with respect to their products. This phase is substantially complete.
Our third phase includes receiving information from responses to our requests
for assistance, researching Web sites, making phone contacts and summarizing the
results of the information that we receive. Finally, our fourth phase includes
actively evaluating different systems, testing critical operatings' year 2000
updates, reviewing such information with our management team and identifying any
additional resources that may be needed. We believe that phases three and four
of our review will be substantially complete prior to the end of the third
quarter of 1999.
We have reviewed and analyzed the year 2000 compliance of Sitestar.net,
which we acquired in July 1999. We are in the process of integrating
Sitestar.net into our operations. We do not believe that this integration of
their systems with ours will have an adverse effect on our year 2000 compliance
status.
During the year ended December 31, 1998, we spent over $8,000 in connection
with the upgrade and continuing build-out of our technical operations and
network. We believe that all of this newly acquired equipment is year 2000
compliant. We have incurred costs and expect to incur additional costs in 1999
in connection with our year 2000 program, which we believe will not be material.
We currently believe that our most likely worst case scenario related to
the year 2000 issue is associated with concerns with our suppliers' products and
software. If one or more of our suppliers experience year 2000 problems which
result in decreased Internet usage and that delay or interfere with our ability
to receive or transmit our customers' data, our business and operations could be
adversely affected.
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We believe that our plan to address year 2000 issues will be fully executed
prior to January 1, 2000; however, any failure of this plan could have a
material adverse effect on our operating results. Despite the testing performed
by us and our vendors, our products, services and systems may contain undetected
errors or defects associated with year 2000 date functions. In the event any
material errors or defects are not detected and fixed, or third parties cannot
timely provide us with products, services or systems that meet the year 2000
requirements, our operating results could be materially adversely affected. We
cannot guarantee that we will be able to timely and successfully modify our
products, services and systems to comply with year 2000 requirements if we have
failed to accurately assess, test and correct year 2000 issues. Known or unknown
errors or defects that affect the operation of our products, services or systems
could result in a delay in the receipt of payment, interruption of network
services, cancellation of customer contracts, diversion of development
resources, damage to our reputation and litigation costs. We cannot guarantee
that these or other factors relating to year 2000 compliance issues will not
have a material adverse effect on our business.
We have prepared a contingency plan in the event that any of our products,
services or systems remain non-compliant as of December 31, 1999. As part of
this contingency plan, we may replace any non-compliant suppliers or other third
party providers with those with demonstrated year 2000 compliance.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
We operate in a rapidly changing environment that involves a number of
risks, some of which are beyond our control. Forward-looking statements in this
document and those made from time to time by us are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements concerning the expected future revenues or earnings
or concerning projected plans, performance, product development, product release
or product shipment, as well as other estimates related to future operations are
necessarily only estimates of future results and there can be no assurance that
actual results will not materially differ from expectations. We undertake no
obligation to publicly release the results of any revisions to forward-looking
statements which may be made to reflect events or circumstances occurring after
the date such statements were made or to reflect the occurrence of unanticipated
events.
Factors that could cause actual results to differ materially from results
anticipated in forward-looking statements include, but are not limited to the
following:
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RISKS PARTICULAR TO SITESTAR CORPORATION
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU MAY EVALUATE US.
Our new corporate philosophy was formulated in July 1999. Although we have
grown significantly since then, we have a limited operating history upon which
you may evaluate our business and prospects. We and our wholly owned operating
companies are among the many companies that have entered into the emerging
e-commerce market. All of our operating companies are in the early stages of
their development. Our business and prospects must be considered in light of the
risk, expense and difficulties frequently encountered by companies in an early
stage of development, particularly companies in new and rapidly evolving markets
such as e-commerce. If we are unable to effectively allocate our resources and
help grow existing operating companies, our stock price may be adversely
affected and we may be unable to execute our strategy of developing a
collaborative network of operating companies.
CHANGE IN COMPOSITION OF ASSETS AND EXPENSES
The change in our corporate focus from a food holding company to an
Internet holding company has resulted in a dramatic change in the composition of
our assets and expenses. With the recent acquisitions of Internet companies, the
intangible assets purchased as a result of these acquisitions represent
approximately 82% of our total assets and approximately 110% of our
stockholders' equity. Further, amortization of these intangible assets will be
the largest single expense item in our statement of operations. This material
concentration of intangible assets increases the risk of a large charge to
earnings in the event that the recoverability of these intangible assets is
impaired.
OUR BUSINESS DEPENDS UPON THE PERFORMANCE OF OUR OPERATING COMPANIES, WHICH IS
UNCERTAIN.
Economic, governmental, industry and internal company factors outside our
control affect each of our operating companies. If our operating companies do
not succeed, the value of our assets will decline. The material risks relating
to our operating companies include:
o lack of the widespread commercial use of the Internet, which may
prevent our operating companies from succeeding; and
o intensifying competition for the products and services our operating
companies offer, which could lead to the failure of some of our
operating companies.
The other material risks relating to our operating companies are more fully
described below under "Risks Particular to Our Operating Companies."
OUR BUSINESS MODEL IS UNPROVEN.
Our strategy is based on an unproven business model. Our operating strategy
is to integrate our subsidiaries and future Internet portfolio investments into
a collaborative network that leverages our collective knowledge and resources.
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We will actively explore synergistic opportunities such as cross marketing
efforts within our subsidiaries and investments to further leverage our
resources. Our business model depends on our ability to share information within
our network of operating companies. If competition develops among our operating
companies, we may be unable to fully benefit from the sharing of information
within our network of operating companies. If we cannot convince companies of
the value of our business model, our ability to attract new companies will be
adversely affected and our strategy of building a collaborative network may not
succeed.
WE MAY HAVE TO TAKE CERTAIN ACTIONS TO AVOID REGISTRATION UNDER THE INVESTMENT
COMPANY ACT OF 1940.
We believe that we are actively engaged in the business of e-commerce
through our network of operating companies. However, due to a significant
possibility that many of our future operating companies may not be
majority-owned subsidiaries, changes in the value of our interests in our
operating companies and the income/loss and revenue attributable to our
operating companies could require us to register as an investment company under
the Investment Company Act unless we take action to avoid being required to
register. For example, we may be unable to sell minority interests we would
otherwise want to sell and may need to sell some assets which are not considered
to be investment securities, including interests in operating companies. We may
also have to ensure that we retain at least a 25% ownership interest in our
operating companies after their initial public offerings. In addition, we may
have to acquire additional income or loss-generating assets that we might not
otherwise have acquired or may have to forgo opportunities to acquire interests
in companies that we would otherwise want to acquire would be important to our
strategy. It is not feasible for us to register as an investment company because
the Investment Company Act regulations are inconsistent with our strategy of
actively managing, operating and promoting collaboration among our network of
operating companies.
FLUCTUATIONS IN OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT OUR STOCK PRICE
We expect that our quarterly results will fluctuate significantly due to
many factors, including:
* the operating results of our operating companies;
* changes in equity losses or income and amortization of goodwill
related to the acquisition or divestiture of interests in operating
companies;
* changes in our methods of accounting for our operating company
interests, which may result from changes in our ownership percentages
of our operating companies;
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* sales of equity securities by our operating companies, which could
cause us to recognize gains or losses under applicable accounting
rules;
* the pace of development or a decline in growth of the e-commerce
market;
* intense competition from other potential acquirors of B2B e-commerce
companies, which could increase our cost of acquiring interests in
additional companies, and competition for the goods and services
offered by our operating companies; and
* our ability to effectively manage our growth and the growth of our
operating companies during the anticipated rapid growth of the
e-commerce market.
We believe that period-to-period comparisons of our operating results are
not meaningful. Additionally, if our operating results in one or more quarters
do not meet securities analysts' or your expectations, the price of our common
stock could decrease.
OUR SUCCESS IS DEPENDENT ON OUR KEY PERSONNEL AND THE KEY PERSONNEL OF OUR
OPERATING COMPANIES.
We believe that our success will depend on continued employment by us and
our operating companies of senior management and key technical personnel. If one
or more members of our senior management or our operating companies' senior
management were unable or unwilling to continue in their present positions, our
business and operations could be disrupted. Although, our management team has
had their own successes in other industries, our senior management team has
limited experience in the Internet industry.
As of September 30, 1999, all of our management personnel have worked for
us for less than one year. Our efficiency may be limited while these employees
and future employees are being integrated into our operations. In addition, we
may be unable to find and hire additional qualified management and professional
personnel to help lead us and our operating companies.
The success of some of our operating companies also depends on their having
highly trained technical and marketing personnel. Our operating companies will
need to continue to hire additional personnel as their businesses grow. A
shortage in the number of trained technical and marketing personnel could limit
the ability of our operating companies to increase sales of their existing
products and services and launch new product offerings.
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Our expenses will increase as we build an infrastructure to implement our
business model. For example, we expect to hire additional employees, expand
information technology systems and lease more space for our corporate offices.
In addition, we plan to significantly increase our operating expenses to:
* broaden our operating company support capabilities;
* explore acquisition opportunities and alliances with other companies;
and
* facilitate business arrangements among our operating companies.
Expenses may also increase due to the potential effect of goodwill
amortization and other charges resulting from completed and future acquisitions.
If any of these and other expenses are not accompanied by increased revenue, our
operating losses will be greater than we anticipate.
OUR OPERATING COMPANIES ARE GROWING RAPIDLY AND WE MAY HAVE DIFFICULTY ASSISTING
THEM IN MANAGING THEIR GROWTH.
Our operating companies have grown, and we expect them to continue to grow,
rapidly by adding new products and services and hiring new employees. This
growth is likely to place significant strain on their resources and on the
resources we allocate to assist our operating companies. In addition, our
management may be unable to convince the future operating companies wherein we
have a minority interest to adopt our ideas for effectively and successfully
managing their growth.
We may compete with some of our future investors and shareholders and
operating companies, and our operating companies may compete with each other.
Our current and future operating companies and future internet portfolio
investments may overlap in their geographic coverage. One of our operating
subsidiaries or future portfolio investments may possibly compete for the same
customers in the same geographic region. In addition, our current and future
shareholders may compete with us in terms of their own internet portfolio
investments and other internet-related acquisitions. Some of our current or
future shareholders may engage in their own investment activities which may
directly compete with our own acquisition and investment parameters.
WE FACE COMPETITION FROM OTHER POTENTIAL ACQUIRERS OF E-COMMERCE COMPANIES.
We face competition from other capital providers including publicly-traded
Internet companies, venture capital companies and large corporations. Many of
these competitors have greater financial resources and brand name recognition
than we do. These competitors may limit our opportunity to acquire interests in
new operating companies. If we cannot acquire interests in attractive companies,
our strategy to build a collaborative network of operating companies may not
succeed.
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OUR SUCCESS COULD BE IMPAIRED BY VALUATIONS PLACED ON INTERNET-RELATED COMPANIES
BY THE FINANCIAL MARKETPLACE
Our strategy involves creating value for our shareholders and the employees
of our operating companies by helping our operating companies grow and access
the capital markets. We are therefore dependent on the market for
Internet-related companies in general and for public offerings of those
companies in particular. To date, there have been a substantial number of
Internet-related initial public offerings and additional offerings are expected
to be made in the future. If the market for Internet-related companies and
initial public offerings were to weaken for an extended period of time, the
ability of our operating companies to grow and access the capital markets will
be impaired, and we may need to provide additional capital to our operating
companies.
WE MAY BE UNABLE TO OBTAIN MAXIMUM VALUE FOR OUR OPERATING COMPANY INTERESTS.
We have significant positions in our operating companies. While we
generally do not anticipate selling our interests in our operating companies, if
we were to divest all or part of them, we may not receive maximum value for
these positions. For future operating companies with publicly-traded stock, we
may be unable to sell our interest at then-quoted market prices. Furthermore,
for those operating companies that do not have publicly-traded stock, the
realizable value of our interests may ultimately prove to be lower than the
carrying value currently reflected in our consolidated financial statements.
RISKS INHERENT TO OUR ACQUISITION STRATEGY
We have in the past, and intend to in the future, to expand through the
acquisition of businesses, technologies, products and services, such as the
recent acquisitions of Sitestar Corporation, and Greattools.com. Acquisitions
may result in the potentially dilutive issuance of equity securities, the
incurrence of additional debt, development costs and the amortization of
goodwill and other intangible assets. Further, acquisitions involve a number of
special problems, including difficulty integrating technologies, operations and
personnel and diversion of management attention in connection with both
negotiating the acquisitions and integrating the assets. There can be no
assurance that we will be successful in addressing such problems. In addition,
growth associated with numerous acquisitions places significant strain on our
managerial and operational resources. Our future operating results will depend
to a significant degree on its ability to successfully manage growth and
integrate acquisitions. Furthermore, many of our operating companies are
early-stage companies, with limited operating histories and limited or no
revenues; there can be no assurance that we will be successful in developing
such companies.
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UNCERTAINTIES ASSOCIATED WITH SELLING ASSETS
A significant element of our business plan involves selling, in public or
private offerings, portions of the companies it has acquired and developed. The
Company's ability to engage in any such transactions, the timing of such
transactions and the amount of proceeds from such transactions are dependant on
market and other conditions largely beyond our control. Accordingly, there can
be no assurance that we will be able to engage in such transactions in the
future or that when we are able to engage in such transactions they will be at
favorable prices. If we were unable to liquidate portions of its portfolio
companies at favorable prices, our business, financial condition and results of
operations would be adversely affected.
UNCERTAINTIES OF THE RECOVERABILITY OF INTANGIBLE ASSETS
As a result of our change in corporate focus from a food holding company to
an Internet holding company, the composition of our assets and expenses have
dramatically changed. With the recent acquisitions of Internet companies, the
intangible assets purchased as a result of these acquisitions represent
approximately 82% of our total assets and approximately 110% of our
stockholders' equity. Further amortization of these intangible assets will be
the largest single expense item in our statement of operations. If we are unable
to recover the costs of these intangible assets, our financial performance may
be negatively impacted in the coming periods through a write down or write off
of these intangible assets.
WE MAY NOT HAVE OPPORTUNITIES TO ACQUIRE INTERESTS IN ADDITIONAL COMPANIES.
We may be unable to identify companies that complement our strategy, and
even if we identify a company that complements our strategy, we may be unable to
acquire an interest in the company for many reasons, including:
* failure to agree on the terms of the acquisition, such as the amount
or price of our acquired interest;
* incompatibility between us and management of the company;
* competition from other acquirers of e-commerce companies;
* a lack of capital to acquire an interest in the company; and
* the unwillingness of the company to operating with us.
If we cannot acquire interests in attractive companies, our strategy to
build a collaborative network of operating companies may not succeed.
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OUR RESOURCES AND OUR ABILITY TO MANAGE NEWLY ACQUIRED OPERATING COMPANIES MAY
BE STRAINED AS WE ACQUIRE MORE AND LARGER INTERESTS IN E-COMMERCE COMPANIES.
We have acquired, and plan to continue to acquire, significant interests in
both Business to Consumer and Business to Business e-commerce companies that
complement our business strategy. In the future, we may acquire larger
percentages or larger interests in companies than we have in the past, or we may
seek to acquire 100% ownership of companies as we have done in our initial
stages of development. These larger acquisitions may place significantly greater
strain on our resources, ability to manage such companies and ability to
integrate them into our collaborative network. Future acquisitions are subject
to the following risks:
* Our acquisitions may cause a disruption in our ongoing support of our
operating companies, distract our management and other resources and
make it difficult to maintain our standards, controls and procedures.
* We may acquire interests in companies in e-commerce markets in which
we have little experience.
* We may not be able to facilitate collaboration between our operating
companies and new companies that we acquire.
* To fund future acquisitions we may be required to incur debt or issue
equity securities, which may be dilutive to existing shareholders.
OUR SYSTEMS AND THOSE OF OUR OPERATING COMPANIES AND THIRD PARTIES MAY NOT BE
YEAR 2000 COMPLIANT, WHICH COULD DISRUPT OUR OPERATIONS AND THE OPERATIONS OF
OUR OPERATING COMPANIES.
Many computer programs have been written using two digits rather than four
digits to define the applicable year. This poses a problem at the end of the
century because these computer programs may recognize a date using "00" as the
year 1900, rather than the year 2000. This in turn could result in major system
failures or miscalculations and is generally referred to as the Year 2000 issue.
We may realize exposure and risk if our systems and the systems on which our
operating companies are dependent to conduct their operations are not Year 2000
compliant. Our potential areas of exposure include products purchased from third
parties, computers, software, telephone systems and other equipment used
internally. If our present efforts and the efforts of our operating companies to
address the Year 2000 compliance issues are not successful, or if distributors,
suppliers and other third parties with which we and our operating companies
conduct business do not successfully address such issues, our business and the
businesses of our operational companies may not be operational for a period of
time. If the Web-hosting facilities of our operating companies are not Year 2000
compliant, their production Web sites would be unavailable and they would not be
able to deliver services to their users.
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RISKS PARTICULAR TO OUR OPERATING COMPANIES
Sitestar and our operating companies' result of operations, and accordingly
the price of its common stock, may be adversely affected by the following
factors:
* lack of acceptance of the Internet as an advertising medium;
* inability to develop a large base of users of its Web sites who
possess demographic characteristics attractive to advertisers;
* lower advertising rates;
* slow development of the e-commerce market;
* lack of acceptance of its Internet content;
* loss of key content providers;
* intense competition;
* loss of key personnel; and
* inability to manage growth.
THE SUCCESS OF OUR OPERATING COMPANIES DEPENDS ON THE DEVELOPMENT OF THE
E-COMMERCE MARKET, WHICH IS UNCERTAIN.
All of our operating companies rely on the Internet for the success of
their businesses. The development of the e-commerce market is in its early
stages. If widespread commercial use of the Internet does not develop, or if the
Internet does not develop as an effective medium for the provision of products
and services, our operating companies may not succeed.
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Our long-term success depends on widespread market-acceptance of
e-commerce. A number of factors could prevent such acceptance, including the
following:
* the unwillingness of businesses to shift from traditional processes to
e-commerce processes;
* the necessary network infrastructure for substantial growth in usage
of e-commerce may not be adequately developed;
* increased government regulation or taxation may adversely affect the
viability of e-commerce;
* insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times for
the users of e-commerce; and
* concern and adverse publicity about the security of e-commerce
transactions.
OUR OPERATING COMPANIES MAY FAIL IF THEIR COMPETITORS PROVIDE SUPERIOR INTERNET-
RELATED OFFERINGS OR CONTINUE TO HAVE GREATER RESOURCES THAN OUR OPERATING
COMPANIES HAVE.
Competition for Internet products and services is intense. As the market
for e-commerce grows, we expect that competition will intensify. Barriers to
entry are minimal, and competitors can offer products and services at a
relatively low cost. Our operating companies compete for a share of a
customer's:
* purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels;
* dollars spent on consulting services with many established information
systems and management consulting firms; and
* advertising budget with online services and traditional off-line
media, such as print and trade associations.
In addition, some of our operating companies compete to attract and retain
a critical mass of buyers and sellers. Several companies offer competitive
solutions that compete with one or more of our operating companies. We expect
that additional companies will offer competing solutions on a stand-alone or
combined basis in the future. Furthermore, our operating companies' competitors
may develop Internet products or services that are superior to, or have greater
market acceptance than, the solutions offered by our operating companies. If our
operating companies are unable to compete successfully against their
competitors, our operating companies may fail.
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Many of our operating companies' competitors have greater brand recognition
and greater financial, marketing and other resources than our operating
companies. This may place our operating companies at a disadvantage in
responding to their competitors' pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other initiatives.
DEPENDENCE ON VENDOR RELATIONSHIPS
Our operating subsidiaries are currently, and expect to be in the future,
dependent on a number of vendor relationships. These relationships include
arrangements relating to the creation of traffic on Sitestar-affiliated Web
sites and resulting generation of advertising and commerce-related revenue. The
termination of, or the failure of such Sitestar-affiliated Web sites to renew on
reasonable terms, such relationships could have an adverse effect on our
business, results of operations and financial condition. Our operating companies
also are generally dependent on other vendor relationships with advertisers,
sponsors and partners. Most of these arrangements do not require future minimum
commitments to use our services, are often not exclusive and are often
short-term or may be terminated at the convenience of the other party. There can
be no assurance that these vendors will not reassess their commitment to our
operating companies at any time in the future, or that they will not develop
their own competitive services or products. Further, there can be no assurance
that the services of these companies will achieve market acceptance or
commercial success and therefore there can be no assurance that our existing
relationships will result in sustained or successful business partnerships or
significant revenues for us.
SOME OF OUR OPERATING COMPANIES MAY BE UNABLE TO PROTECT THEIR PROPRIETARY
RIGHTS AND MAY INFRINGE ON THE PROPRIETARY RIGHTS OF OTHERS.
Proprietary rights, particularly in the form of copyrights, are important
to the success and competitive position of many of our operating companies.
Although our operating companies seek to protect their proprietary rights, their
actions may be inadequate to protect any trademarks, copyrights and other
proprietary rights. In addition, effective copyright and trademark protection
may be unenforceable or limited in certain countries, and the global nature of
the Internet makes it impossible for some of our operating companies to control
the dissemination of their work and use of their services. Some of our operating
companies also license content from third parties and it is possible that they
could become subject to infringement actions based upon the content licensed
from those third parties. Our operating companies generally obtain
representations as to the origin and ownership of such licensed content;
however, this may not adequately protect them. Any of these claims, with or
without merit, could subject our operating companies to costly litigation and
the diversion of their technical and management personnel. If our operating
companies incur costly litigation and their personnel are not effectively
deployed, the expenses and losses incurred by our operating companies will
increase and their profits, if any, will decrease.
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SOURCE OF SUPPLY FOR GREATTOOLS.COM.
Since 1999, Greattools.com has been operating pursuant to an oral agreement
with Global Sourcing Group ("GSG"), a power tool wholesaler located in Thousand
Oaks, California, which supplies 100% of the products sold by the Company in its
Web site. While the Company anticipates that it will continue operating under
the oral agreement, it intends to enter into a written exclusive fulfillment
agreement with GSG as soon as it's practicable. The Company intends to enter
into this fulfillment arrangement to assure it could continue to source all of
its products.
Gateway Holdings, Inc. the private equity fund managed by our Chairman
Frederick T. Manlunas beneficially owns and controls 14.6% of the total
outstanding shares of Global Sourcing Group. The Company is reliant on Mr.
Manlunas' relationship with GSG for its Greattools.com's fulfillment needs.
SOURCE OF SUPPLY FOR HOLLAND-AMERICAN.COM.
Since September 1999, Holland-American.com has been operating pursuant to
an oral agreement with Holland American International Specialties ("HAIS"), a
specialty foods wholesaler and retailer located in Bellflower, California, which
supplies 100% of the products sold by the Company in its Web site. While the
Company anticipates that it will continue operating under the oral agreement, it
intends to enter into a written exclusive fulfillment agreement with HAIS as
soon as it's practicable. We intend to enter into this fulfillment arrangement
to assure it could continue to source all of its products.
IFCO Group, LLC ("IFCO"), whose members consist of certain shareholders of
the Company, including Frederick T. Manlunas, owns HAIS. Our Chairman of the
Board, Mr. Manlunas, beneficially owns and controls 32.75% of the total
outstanding membership interest of IFCO Group, LLC. However, the Company is not
reliant on Mr. Manlunas' relationship with HAIS for its Holland-American.com's
fulfillment needs.
OUR OPERATING COMPANIES THAT PUBLISH OR DISTRIBUTE CONTENT OVER THE INTERNET MAY
BE SUBJECT TO LEGAL LIABILITY.
Some of our operating companies may be subject to legal claims relating to
the content on their Web sites, or the downloading and distribution of this
content. Claims could involve matters such as defamation, invasion of privacy
and copyright infringement. Providers of Internet products and services have
been sued in the past, sometimes successfully, based on the content of material.
In addition, some of the content provided by our operating companies on their
Web sites is drawn from data compiled by other parties, including governmental
and commercial sources, and our operating companies re-enter the data. This data
may have errors. If any of our operating companies' Web site content is
improperly used or if any of our operating companies supply incorrect
information, it could result in unexpected liability. Any of our operating
companies that incur this type of unexpected liability may not have insurance to
cover the claim or its insurance may not provide sufficient coverage. If our
operating companies incur substantial cost because of this type of unexpected
liability, the expenses incurred by our operating companies will increase and
their profits, if any, will decrease.
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OUR OPERATING COMPANIES' COMPUTER AND COMMUNICATIONS SYSTEMS MAY FAIL, WHICH MAY
DISCOURAGE CONTENT PROVIDERS FROM USING OUR OPERATING COMPANIES' SYSTEMS.
All of our operating companies' businesses depend on the efficient and
uninterrupted operation of their computer and communications hardware systems.
Any system interruptions that cause our operating companies' Web sites to be
unavailable to Web browsers may reduce the attractiveness of our operating
companies' Web sites to third party content providers. If third party content
providers are unwilling to use our operating companies' Web sites, our business,
financial condition and operating results could be adversely affected.
Interruptions could result from natural disasters as well as power loss,
telecommunications failure and similar events.
OUR OPERATING COMPANIES' BUSINESSES MAY BE DISRUPTED IF THEY ARE UNABLE TO
UPGRADE THEIR SYSTEMS TO MEET INCREASED DEMAND.
Capacity limits on some of our operating companies' technology, transaction
processing systems and network hardware and software may be difficult to project
and they may not be able to expand and upgrade their systems to meet increased
use.
As traffic on our operating companies' Web sites continues to increase,
they must expand and upgrade their technology, transaction processing systems
and network hardware and software. Our operating companies may be unable to
accurately project the rate of increase in use of their Web sites. In addition,
our operating companies may not be able to expand and upgrade their systems and
network hardware and software capabilities to accommodate increased use of their
Web sites. If our operating companies are unable to appropriately upgrade their
systems and network hardware and software, the operations and processes of our
operating companies may be disrupted.
OUR OPERATING COMPANIES MAY NOT BE ABLE TO ATTRACT A LOYAL BASE OF USERS TO
THEIR WEB SITES.
While content is important to all our operating companies' Web sites, our
operating companies are particularly dependent on content to attract business.
Our success depends upon the ability of these operating companies to deliver
compelling Internet content to their targeted users. If our operating companies
are unable to develop Internet content that attracts a loyal user base, the
revenues and profitability of our operating companies could be impaired.
Internet users can freely navigate and instantly switch among a large number of
Web sites. Many of these Web sites offer original content. Thus, our operating
companies may have difficulty distinguishing the content on their Web sites to
attract a loyal base of users.
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OUR OPERATING COMPANIES MAY BE UNABLE TO ACQUIRE OR MAINTAIN EASILY IDENTIFIABLE
WEB SITE ADDRESSES OR PREVENT THIRD PARTIES FROM ACQUIRING WEB SITE ADDRESSES
SIMILAR TO THEIRS.
Some of our operating companies hold various Web site addresses relating to
their brands. These operating companies may not be able to prevent third parties
from acquiring Web site addresses that are similar to their addresses, which
could adversely affect the use by businesses of our operating companies' Web
sites. In these instances, our operating companies may not grow as we expect.
The acquisition and maintenance of Web site addresses generally is regulated by
governmental agencies and their designees. The regulation of Web site addresses
in the United States and in foreign countries is subject to change. As a result,
our operating companies may not be able to acquire or maintain relevant Web site
addresses in all countries where they conduct business. Furthermore, the
relationship between regulations governing such addresses and laws protecting
trademarks is unclear.
SOME OF OUR OPERATING COMPANIES ARE DEPENDENT ON BARTER TRANSACTIONS THAT DO NOT
GENERATE CASH REVENUE.
Our operating companies plans to enter into barter transactions in which
they provide advertising for other internet companies in exchange for
advertising for the operating company. In a barter transaction the operating
company will reflect the sales of the advertising received as an expense and the
value of the advertising provided, in an equal amount, as revenue. However,
barter transactions also do not generate cash revenue, which may adversely
affect the cash flows of some of our operating companies. Limited cash flows may
adversely affect a operating company's abilities to expand its operations and
satisfy its liabilities.
RISKS RELATING TO THE INTERNET INDUSTRY
CONCERNS REGARDING SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL
INFORMATION OVER THE INTERNET MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS.
We believe that concern regarding the security of confidential information
transmitted over the Internet prevents many potential customers from engaging in
online transactions. If our operating companies that depend on such transactions
do not add sufficient security features to their future product releases, our
operating companies' products may not gain market acceptance or there may be
additional legal exposure to them.
Despite the measures some of our operating companies have taken, the
infrastructure of each of them is potentially vulnerable to physical or
electronic break-ins, viruses or similar problems. If a person circumvents the
security measures imposed by any one of our operating companies, he or she could
misappropriate proprietary information or cause interruption in operations of
the operating company. Security breaches that result in access to confidential
information could damage the reputation of any one of our operating companies
and expose the operating company affected to a risk of loss or liability. Some
of our operating companies may be required to make significant investments and
efforts to protect against or remedy security breaches. Additionally, as
e-commerce becomes more widespread, our operating companies' customers will
become more concerned about security. If our operating companies are unable to
adequately address these concerns, they may be unable to sell their goods and
services.
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RAPID TECHNOLOGICAL CHANGES MAY PREVENT OUR OPERATING COMPANIES FROM REMAINING
CURRENT WITH THEIR TECHNICAL RESOURCES AND MAINTAINING COMPETITIVE PRODUCT AND
SERVICE OFFERINGS.
The markets in which our operating companies operate are characterized by
rapid technological change, frequent new product and service introductions and
evolving industry standards. Significant technological changes could render
their existing Web site technology or other products and services obsolete. The
e-commerce market's growth and intense competition exacerbate these conditions.
If our operating companies are unable to successfully respond to these
developments or do not respond in a cost-effective way, our business, financial
condition and operating results will be adversely affected. To be successful,
our operating companies must adapt to their rapidly changing markets by
continually improving the responsiveness, services and features of their
products and services and by developing new features to meet the needs of their
customers. Our success will depend, in part, on our operating companies' ability
to license leading technologies useful in their businesses, enhance their
existing products and services and develop new offerings and technology that
address the needs of their customers. Our operating companies will also need to
respond to technological advances and emerging industry standards in a
cost-effective and timely manner.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES MAY PLACE FINANCIAL BURDENS ON
OUR BUSINESS AND THE BUSINESSES OF OUR OPERATING COMPANIES.
As of September 30, 1999, there were few laws or regulations directed
specifically at e-commerce. However, because of the Internet's popularity and
increasing use, new laws and regulations may be adopted. These laws and
regulations may cover issues such as the collection and use of data from Web
site visitors and related privacy issues, pricing, content, copyrights, online
gambling, distribution and quality of goods and services. The enactment of any
additional laws or regulations may impede the growth of the Internet and
e-commerce, which could decrease the revenue of our operating companies and
place additional financial burdens on our business and the businesses of our
operating companies.
Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. For example, Congress recently
enacted laws regarding online copyright infringement and the protection of
information collected online from children. Although these laws may not have a
direct adverse effect on our business or those of our operating companies, they
add to the legal and regulatory burden faced by e-commerce companies.
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RISKS RELATING TO FUTURE OFFERINGS
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT SHAREHOLDERS MAY DECREASE THE
PRICE OF OUR COMMON STOCK.
If our shareholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, in the public market
following future offerings, then the market price of our common stock could
fall. Restrictions under the securities laws and certain lock-up agreements
limit the number of shares of common stock available for sale in the public
market.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
The market price for our common stock is likely to be highly volatile as
the stock market in general and the market for Internet-related stocks and the
stock. The trading prices of many technology and Internet-related company stocks
have reached historical highs within the last year and have reflected relative
valuations substantially above historical levels. During the same period, the
stocks of these companies have also been highly volatile and have recorded lows
well below such historical highs. We cannot assure you that our common stock
will trade at the same levels of other Internet stocks or that Internet stocks
in general will sustain their current market prices.
The following factors will add to our common stock price's volatility:
* actual or anticipated variations in our quarterly operating results
and those of our operating companies;
* new sales formats or new products or services offered by us, our
operating companies and their competitors;
* changes in our financial estimates and those of our operating
companies by securities analysts;
* conditions or trends in the Internet industry in general and the
e-commerce industry in particular;
* announcements by our operating companies and their competitors of
technological innovations;
* announcements by us or our operating companies or our competitors of
significant acquisitions, strategic partnerships or joint ventures;
* changes in the market valuations of our operating companies and other
Internet companies;
* our capital commitments;
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* additions or departures of our key personnel and key personnel of our
operating companies; and
* sales of our common stock.
Many of these factors are beyond our control. These factors may decrease
the market price of our common stock, regardless of our operating performance.
Item 3. Description of Property.
We lease our principal executive offices, as well as our administrative
offices, which are located in a 1,084 square feet office facility in Encino,
California at an annual rent of $24,715.20. This facility also houses our
customer service, administrative and corporate center functions. This lease will
expire in June 2001.
We also lease 2,100 square feet of office space in Annapolis, Maryland.
This facility houses Sitestar.net's, Greattools.com's and Holland-American.com's
executive offices, customer service, and administrative functions. This lease is
currently on a month-to-month basis with a rental fee of $33,072 per annum.
In addition, we now own a 12,000 square feet office building in
Martinsville, Virginia which serves as Neocom's principal executive offices. We
acquired this property along with the acquisition of Neocom. This facility
houses Neocom's customer service, administrative and corporate functions.
Neocom's principal noteholders have a senior lien on the property. The lien on
the property was a result of the working capital credit facility taken by Neocom
against the property. The bank note is payable in monthly principal and interest
installments of $6,400 or $76,800 per annum with the balance due September 2003.
Our annual rents are subject to adjustments. We anticipate that we will
require additional space for our ISP operations as we expand, and we believe
that we will be able to obtain suitable space as needed on commercially
reasonable terms.
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Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of September 30, 1999
regarding the record and beneficial ownership of the Common Stock by: (i) any
individual or group (as that term is defined in the federal securities laws) of
affiliated individuals or entities who is known by the Company to be the
beneficial owner of more than five percent of the outstanding shares of our
Common Stock; (ii) each executive officer and Director of the Company; and (iii)
the executive officers and Directors of the Company as a group.
Name and Address of Number of Shares Percent
Beneficial Owner Beneficially Owned (1) of Class (2)
- ------------------ ---------------------- ------------
Frederick T. Manlunas 3,039,255 12.99%
16133 Ventura Blvd., Suite 635
Encino, CA 91436
Clinton J. Sallee 1,926,170 8.24%
16133 Ventura Blvd., Suite 635
Encino, CA 91436
Franklin Christopher 1,483,857 6.35%
326 First Street, Suite 26
Annapolis, MD 21403
Kevorak Zoryan -0- *
16133 Ventura Blvd., Suite 635
Encino, CA 91436
All directors and officers 6,449,282 27.58%
as a group (4 persons)
* Less than 1%
- ---------------------------------------
(1) We believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock beneficially
owned by them. A person is deemed to be the beneficial owner of securities
which may be acquired by such person within 60 days from the date of this
registration statement upon the exercise of options, warrants or
convertible securities. Each beneficial owner's percentage of ownership is
determined by assuming all options, warrants or convertible securities that
are held by such person (but not held by any other person) and which are
exercisable or convertible within 60 days of this registration statement
have been exercised or converted.
(2) Percent of class is based on 23,394,919 shares of Common Stock outstanding
as of December 31, 1999.
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Item 5. Directors, Executive Officers, Promoters and Control persons.
The following table sets forth certain information with respect to the
directors and executive officers of Sitestar.
Name Age(1) Position
- --------------- ------ -------------------
Frederick T. Manlunas 31 Chairman of the Board and
Managing Director
Clinton J. Sallee 27 President and Chief
Executive Officer
Kevorak Zoryan 26 Director
- ----------------------
(1) Ages are given as of September 30, 1999
FREDERICK T. MANLUNAS, has been a Director of the Company since October of 1998
and has served as the Company's Chairman of the Board since July 1999. Mr.
Manlunas manages Gateway Holdings, Inc., a private equity fund based in Los
Angeles since 1995. Prior to founding Gateway, Mr. Manlunas was an Associate
with Arthur Andersen LLP's Retail Management Consulting division from 1991 to
1995. Mr. Manlunas also serves as Director for MenuDirect, Inc., a Delaware
corporation, and Xcel Medical Pharmacy, a California corporation. Mr. Manlunas
received a Bachelor of Science degree in Journalism from Florida International
University and he earned a Masters of Business Administration degree from
Pepperdine University.
CLINTON J. SALLEE has been a Director of the Company since May of 1999 and has
served as the Company's President and Chief Executive Officer since July 1999.
In 1996, Mr. Sallee founded Sallee Zoryan, a concept development firm, where he
served as President since inception. Prior to founding Sallee Zoryan, Mr. Sallee
was an Associate with W.E. Myers & Company, a boutique investment bank,
specializing in industry consolidations. Mr. Sallee earned a Bachelor of Science
degree in Business Administration from the Marshall School of Business at the
University of Southern California in 1994.
KEVORK A. ZORYAN has been a Director of the Company since July of 1999. From
March 1997 to July 1999, Mr. Zoryan served on the acquisition team of the Morgan
Stanley Real Estate Fund, a leading international private equity real estate
investment fund. From March 1995 to May 1996, Mr. Zoryan served as an analyst of
the JE Robert Companies, and from June 1993 to February 1995, as a staff analyst
with Ernst & Young. Mr. Zoryan co-founded Sallee Zoryan, a concept development
firm in 1996, and currently serves as its Partner. Mr. Zoryan earned a BS in
Business Administration from the Marshall School of Business at the University
of Southern California in 1994. He currently attends the Harvard Business School
as a member of the MBA Class of 2001.
The Company is currently actively searching for a Chief Financial Officer.
Management has interviewed several candidates and expects to finalize its
selection before the end of the current quarter.
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ITEM 6. EXECUTIVE COMPENSATION.
The following table summarizes the compensation by the Company to Frederick
T. Manlunas, its former President and CEO for the last three fiscal years. No
officer of the Company received compensation in excess of $100,000 during such
years.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long Term Compensation
---------------------------------------------- ------------------------------------------------
Other Restricted
Annual Stock Options LTIP All Other
Position Year Salary ($) Bonuses($) Compensation Awards SARs Payouts ($) Compensation
- -------- ---- ---------- ---------- ------------ ---------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frederick T. 1998 96,000 -- -- -- -- -- --
Manlunas 1999 120,000 -- -- -- -- -- --
Chairman of the
Board
Clinton J. 1999 120,000 -- -- -- -- -- --
Sallee
President & Chief
Executive Officer
</TABLE>
The Company currently has no long-term compensation, annuity, pension or
retirement plans.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Effective as of September 30, 1999 we sold the non-Internet assets of HAIS
to IFCO Group, LLC ("IFCO"), whose members consist of certain shareholders of
the Company, including Frederick T. Manlunas, our Chairman of the Board. We
retained the assets consisting of the Internet web site Holland-American.com.
HAIS will continue to serve as Holland-American.com's exclusive fulfillment
center. The purchase consideration for HAIS was $900,000 and was based upon a
business appraisal by an independent third party appraiser. The consideration
included $200,000 which was to be offset against the Company's liability to Mr.
Manlunas for services rendered in connection to the acquisition of Sitestar,
Inc., the assumption of $654,000 of liabilities and a promissory note in the
amount of $46,000. The note bears interest at a rate of 8% per annum, and is
payable in annual installments of $15,333, and is due and payable on September
30, 2002. The note is secured by HAIS' accounts receivable and inventory.
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On September 30, 1999, we sold our 9% equity interest in SMF to IFCO for
$200,000. The consideration was paid in the form of assumption of $160,000 of
debt related to the investment and the balance of $40,000 paid by a promissory
note payable in three annual installments of $13,334 each. The note bears
interest at a rate of 8% per annum. The purchase consideration was equal to our
original investment in January 1999.
On July 1999, a majority of IFCO shareholders, including our Chairman Mr.
Manlunas, acquired all the issued and outstanding shares of Sitestar, Inc..
("SYTE"), a Delaware corporation, in exchange for 3,491,428 shares of our Common
Stock owned by the majority IFCO shareholders. Simultaneous with the closing of
this transaction, the IFCO shareholders contributed SYTE to IFCO as contributed
capital. SYTE is a Web development, design and hosting company formed in 1996
and is based in Annapolis, Maryland. This acquisition included Soccersite.com
which is currently one of our operating subsidiaries.
In August 1999, we acquired substantially all of the assets of
Greattools.com in exchange for 49,000 shares of our Common Stock. We acquired
the assets of Greattools.com from Global Sourcing Group, Greattools.com's
current fulfillment center. Gateway Holdings, Inc., a private investment company
our Chairman Frederick Manlunas is managing, has a 14.6% equity ownership in
Global Sourcing Group. Greattools.com is an online low cost retailer of power
tools.
In January 1999, Mr. Manlunas, a majority stockholder of the Company,
loaned $80,300 to the Company for use as working capital based on an oral
agreement. The amounts owed to Mr. Manlunas are not accruing interest, and are
due and payable upon demand. To date, the Company has made no payments to Mr.
Manlunas in satisfaction of this obligation.
ITEM 8. DESCRIPTION OF SECURITIES.
Common Stock
- ------------
We are authorized to issue 75,000,000 shares of common stock, par value
$0.001 per share. Holders of common stock are entitled to one vote for each
share held of record on all matters on which the holders of common stock are
entitled to vote. There are no redemption or sinking fund provisions applicable
to the common stock. The outstanding shares of common stock are, and the common
stock issuable pursuant to this registration statement will be, when issued,
fully paid and non-assessable.
54
<PAGE>
Preferred Stock
- ---------------
We are authorized to issue 10,000,000 shares of "blank check" preferred
stock, par value $0.001 per share, in one or more series from time to time with
such designations, rights and preferences as may be determined from time to time
by the Board of Directors, including, but not limited to (i) the designation of
such series; (ii) the dividend rate of such series, the conditions and dates
upon which such dividends shall be payable, the relation which such dividends
shall bear to the dividends payable on any other class or classes or series of
our capital stock and whether such dividends shall be cumulative or
non-cumulative; (iii) whether the shares of such series shall be subject to
redemption for cash, property or rights, including securities of any other
corporation, by Sitestar or upon the happening of a specified event and, if made
subject to any such redemption, the times or events, prices, rates, adjustments
and other terms and conditions of such redemption; (iv) the terms and amount of
any sinking fund provided for the purchase or redemption of the shares of such
series (v) whether or not the shares of such series shall be convertible into,
or exchangeable for, at the option of either the holder or Sitestar or upon the
happening of a specified event, shares of any other class or classes or of any
other series of the same class of Sitestar's capital stock and, if provision be
made for the conversion or exchange, the times or events, prices, rates,
adjustments and other terms and conditions of such conversions or exchanges;
(vi) the restrictions, if any, on the issue or reissue of any additional
preferred stock; (vii) the rights of the holders of the shares of such series
upon the voluntary or involuntary liquidation, dissolution or winding up of
Sitestar; and (viii) the provisions as to voting, optional and/or other special
rights and preferences, if any, including, without limitation, the right to
elect one or more directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which adversely affect the
voting power or other rights of the holders of the common stock. In the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a way of discouraging, delaying or preventing an acquisition or change in
control of Sitestar.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity
and Other Shareholder Matters.
Our Common Stock was traded over-the-counter and was quoted on the OTC
Bulletin Board (symbol "SYTE") until December 15, 1999. On December 16, 1999,
our common stock was temporarily de-listed from the NASD OTC Bulletin Board
pending the effective date of our Form 10-SB registration statement. Once our
registration statement is deemed effective by the SEC, we expect our Common
Stock to be re-listed on the OTC Bulletin Board. Our Common Stock is currently
traded over-the-counter and is currently quoted on the National Quotations
Board's Electronic Quotation Service. On July 14, 1999 we effected a 3-for-1
stock split. All prices listed below reflect this split. The closing bid price
for the Common Stock was $1.00 on December 31, 1999.
55
<PAGE>
Set forth below are the high and low closing bid prices for the Common
Stock of the company for each quarterly period commencing September 30, 1998:
Period Low High
------ --- ----
1998
----
Quarter ended December 31, 1998 1.00 1.03
1999
----
Quarter ended March 31, 1999 1.00 1.03
Quarter ended June 30, 1999 1.00 1.03
Quarter ended September 30, 1999 .875 3.75
Quarter ended December 31, 1999 .45 2.1875
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
As of December 31, 1999 the Company had 112 shareholders of record.
Item 2. Legal Proceedings.
The Company is not involved in any material pending legal proceedings.
Item 3. Changes in and Disagreements with Accountants.
Not Applicable.
Item 4. Recent Sales of Unregistered Securities.
(a) Securities Sold
In October 1998, in connection with the acquisition of Interfoods
Consolidated, Inc., we issued 5,580,000 shares of our Common Stock to the
shareholders of Interfoods Consolidated, Inc. The issuance of these shares was
exempt from the registration an prospectus delivery requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.
56
<PAGE>
In July 1999 a majority of IFCO shareholders, including our Chairman, Mr.
Manlunas, acquired all the issued and outstanding shares of Sitestar, Inc.
("SYTE"), a Delaware corporation, in exchange for 3,491,428 shares of our Common
Stock owned by the majority IFCO shareholders. Simultaneous with the closing of
this transaction, the IFCO shareholders contributed SYTE to IFCO as contributed
capital. SYTE is a Web development, design and hosting company formed in 1996
and is based in Annapolis, Maryland. This acquisition included Soccersite.com
which is currently one of our operating subsidiaries. Soccersite.com was an
operating subsidiary of SYTE.
In August 1999, in connection with the acquisition of Greattools.com, we
issued 49,000 shares of our Common Stock to the shareholders of Global Sourcing
Group . The issuance of these shares was exempt from the registration an
prospectus delivery requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof.
In July 1999, we issued and sold an aggregate of 140,000 shares of our
Common Stock for $140,000. The issuance and sale of these shares was exempt from
the registration and prospectus delivery requirements of the Securities Act of
1933 pursuant to Section 4(2) thereof.
In December 1999, in connection with the acquisition of Neocom
Microspecialists, Inc., we issued 4,782,353 shares of our Common Stock to the
shareholders of Neocom. The issuance of these shares was exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933,
as amended, pursuant to Section 4(2) thereof.
Item 5. Indemnification of Directors and Officers.
Except for acts or omissions which involve intentional misconduct, fraud or
known violation of law or for the payment of dividends in violation of Nevada
Revised Statutes, there shall be no personal liability of a director or officer
to the Company, or its stockholders for damages for breach of fiduciary duty as
a director or officer. The Company may indemnify any person for expenses
incurred, including attorneys fees, in connection with their good faith acts if
they reasonably believe such acts are in and not opposed to the best interests
of the Company and for acts for which the person had no reason to believe his or
her conduct was unlawful. The Company may indemnify the officers and directors
for expenses incurred in defending a civil or criminal action, suit or
proceeding as they are incurred in advance of the final disposition of the
action, suit or proceeding, upon receipt of an undertaking by or on behalf of
the director or officer to repay the amount of such expenses if it is ultimately
determined by a court of competent jurisdiction in which the action or suit is
brought determined that such person is fairly and reasonably entitled to
indemnification for such expenses which the court deems proper.
57
<PAGE>
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to officers, directors or persons controlling the Company pursuant
to the foregoing, the Company has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933, as amended, and is therefore
unenforceable.
PART F/S
Financial Statements
The following financial statements are attached to this report and filed as
a part thereof.
INDEX TO FINANCIAL STATEMENTS
INTERFOODS CONSOLIDATED, INC.
Report of Independent Public Accountants....................................F-2
Balance Sheets as of December 31, 1997 and 1998 and for the
Nine Months Ended September 30, 1999 (Unaudited) and 1998
(Unaudited)...............................................................F-3
Statements of Operations for the Year Ended December 31, 1998,
Seven Months Ended December 31, 1997 and for the Nine Months
Ended September 30, 1999 (Unaudited) and 1998 (Unaudited)..................F-4
Statements of Stockholders' Equity for the Years Ended December 31, 1998
and 1997 and for the Nine Months Ended September 30, 1999 (Unaudited)......F-5
Statements of Cash Flows for the Year Ended December 31, 1998,
Seven Months Ended December 31, 1997 and the Nine Months
Ended September 30, 1999 (Unaudited) and 1998 (Unaudited)..................F-6
Notes to Financial Statements...............................................F-8
58/F-1a
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
Report of Independent Public Accountants...................................F-23
Consolidated Balance Sheets as of December 31, 1998 and 1997...............F-24
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997................................................F-25
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 1998 and 1997................................................F-26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997.................................................F-27
Notes to Consolidated Financial Statements.................................F-29
NEOCOM MICROSPECIALISTS, INC.
Report of Independent Public Accountants...................................F-36
Balance Sheets as of December 31, 1998 and 1997............................F-37
Statements of Operations for the Years Ended December 31, 1998 and 1997....F-38
Statement of Stockholders' Deficiency for the Years Ended December 31,
1998 and 1997.............................................................F-39
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997....F-40
Notes to Consolidated Financial Statements.................................F-42
INTERFOODS CONSOLIDATED, INC
Proforma Financial Information.............................................F-53
Proforma Balance Sheet as of September 30, 1999............................F-54
Proforma Statement of Operations for the year ended December 31, 1998......F-55
Proforma Statement of Operations for the nine months ended
September 30, 1999.......................................................F-56
Notes to Proforma Financial Statements.....................................F-57
F-1b
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
INTERFOODS CONSOLIDATED, INC.
We have audited the accompanying balance sheets of Interfoods Consolidated, Inc.
as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficiency) and cash flows for the year ended December 31,
1998 and the initial period June 1, 1997 to December 31, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interfoods Consolidated, Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the year ended December 31, 1998 and the initial period June 1, 1997
to December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has had net losses and cash flow deficiencies from operations since
inception and the Company is in default on its line of credit. These factors,
among others, as discussed in Note 1 to the financial statements, raise
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 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
October 12, 1999
F-2
<PAGE>
<TABLE>
INTERFOODS CONSOLIDATED, INC.
BALANCE SHEETS
<CAPTION>
December 31, September 30,
1998 1997 1999 1998
----------- ---------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ - $ 59,306 $ 54,809 $ -
Accounts Receivable, Less Allowance for
Doubtful Accounts of $16,378, $10,000,
$0 and $10,000, respectively 196,206 356,818 146,339
Inventories 542,081 661,630 512,215
Other Current Assets 20,381 45,900 36,505 150,329
----------- ---------- ----------- -----------
Total Current Assets 758,668 1,123,654 91,314 808,883
EQUIPMENT AND FURNITURE, Net 18,643 2,880 114,827 3,421
ASSETS OF BUSINESS TRANSFERRED UNDER CONTRACTUAL
ARRANGEMENTS (NOTE RECEIVABLE) - - 844,081 -
OTHER INTANGIBLE ASSETS - - 118,433 -
INVESTMENT 125,000 - - -
----------- ---------- ----------- -----------
TOTAL ASSETS $ 902,311 $1,126,534 $ 1,168,655 $ 812,304
=========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES
Book Overdraft $ 29,546 - $ - $ 7,684
Accounts Payable and Accrued Expenses 372,725 692,803 12,254 239,225
Line of Credit 200,000 - - 200,000
Advance from Stockholders 302,960 - 557,411 22,668
Notes Payable 119,500 - - 19,519
Capital Lease Obligations - Current Portion - - 5,112 -
----------- ---------- ----------- -----------
Total Current Liabilities 1,024,731 692,803 574,777 489,096
LIABILITIES OF BUSINESS TRANSFERRED UNDER
CONTRACTUAL ARRANGEMENTS - - 546,048 -
CAPITAL LEASE OBLIGATIONS, Less Current Portion - - 12,908 -
----------- ---------- ----------- -----------
TOTAL LIABILITIES 1,024,731 692,803 1,133,733 489,096
----------- ---------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8) - - - -
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock, $.001 par value, 25,000,000 shares
authorized, 18,600,036, 16,740,000, 18,600,036
and 16,740,000 shares issued and
outstanding, respectively 18,600 16,740 18,600 16,740
Additional Paid-in Capital 609,200 611,060 2,958,118 611,060
Note Receivable - Stockholder ( 71,657) - ( 8,102) ( 69,016)
Accumulated Deficit ( 678,563) ( 194,069) ( 2,933,694) ( 235,576)
----------- ---------- ----------- -----------
Total Stockholders' Equity (Deficiency) ( 122,420) 433,731 34,922 323,208
----------- ---------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIENCY) $ 902,311 $ 1,126,534 $ 1,168,655 $ 812,304
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
<TABLE>
INTERFOODS CONSOLIDATED, INC.
STATEMENTS OF OPERATIONS
<CAPTION>
Seven
Year Ended Months Ended Nine Months Ended
December 31, December 31, September 30,
1998 1997 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES $ - - $ 18,684 $ -
COST OF GOODS SOLD - - 22,740 -
------------ ------------ ------------ -----------
GROSS LOSS - - ( 4,056) -
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 370,650 - 2,198,517 -
LOSS FROM OPERATIONS OF BUSINESS
TRANSFERRED UNDER CONTRACTUAL
OBLIGATIONS 113,844 194,069 40,786 41,507
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ( 484,494) ( 194,O69) (2,243,359) ( 41,507) -
INTEREST EXPENSE - - 11,772 -
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES ( 484,494) ( 194,069) (2,255,131) ( 41,507)
INCOME TAXES - - - -
------------ ------------ ------------ ------------
NET LOSS $( 484,494) $( 194,069) $(2,255,131) $( 41,507)
============ =========== ============ ============
BASIC AND DILUTED LOSS PER SHARE -
NET INCOME $( 0.03) $( 0.01) $( 0.12) $( 0.00)
============ =========== ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED 17,081,430 16,740,000 18,600,036 16,740,000
============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
<TABLE>
INTERFOODS CONSOLIDATED, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIENCY)
<CAPTION>
Additional Note
Common Stock Paid-in Receivable Accumulated
Shares Amount Capital Stockholder Deficit Total
---------- ---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1997 - $ - $ - $ $ - $ -
Issuance of Shares for Cash 16,740,000 16,740 611,060 - 627,800
Net Loss - - - ( 194,069) ( 194,069)
---------- ---------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 16,740,000 16,740 611,060 ( 194,069) 433,731
Increase in Note Receivable -
Stockholder ( 71,657) ( 71,657)
Issuance of Shares in Merger with
White Dove Systems, Inc. 1,860,036 1,860 ( 1,860) - -
Net Loss - - - - ( 484,494) ( 484,494)
---------- ---------- ----------- ----------- ---------- -----------
Balance at December 31, 1998 18,600,036 18,600 609,200 ( 71,657) ( 678,563) ( 122,420)
Cash Contributions (Unaudited) - - 140,275 - 140,275
Contribution of Sitestar
Corporation's Net Assets
(Unaudited) - - 208,643 - 208,643
Payment on Note Receivable -
Stockholder 63,555 - 63,555
Shares Issued by Principal
Stockholders to Employee
for Compensation - - 2,000,000 - 2,000,000
Net Loss (unaudited) - - ( 2,255,131) (2,255,131)
---------- ---------- ----------- ----------- ------------ -----------
Balance at September 30, 1999
(unaudited) 18,600,036 $ 18,600 $ 2,958,118 $( 8,102) $( 2,933,694) $ 34,922
========== ========== =========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
<TABLE>
INTERFOODS CONSOLIDATED, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Seven
Year Ended Months Ended Nine Months Ended
December 31, December 31, September 30,
1998 1997 1999 1998
------------ ------------ ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $( 484,494) $( 194,069) $( 2,255,131) $( 41,507)
Adjustments to Reconcile Net Loss
to Net Cash Used In Operating Activities:
Allowance for Doubtful Accounts 6,378 10,000 - 6,378
Depreciation and Amortization Expense 1,678 - 8,273 -
Compensation Expense Paid by Principal
Shareholders - - 2,000,000 -
(Increase) Decrease in:
Accounts Receivable 154,234 ( 366,818) 84,656 204,101
Inventories 87,805 ( 661,630) 101,669 80,399
Other Current Assets ( 14,394) ( 45,900) ( 54,774) ( 104,429)
Increase (Decrease) in:
Accounts Payable and Accrued Expenses ( 320,078) 692,803 ( 239,902) ( 453,578)
Advances from Stockholder 263,000 - 27,000 -
------------ ------------ ------------ -----------
Net Cash Used In Operating Activities ( 305,871) ( 565,614) ( 328,209) ( 308,636)
------------ ------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Equipment and Furniture ( 17,441) ( 2,880) ( 5,830) ( 541)
Investment ( 125,000) - ( 75,000) -
------------ ------------ ------------ -----------
Net Cash Used In Investing Activities ( 142,441) ( 2,880) ( 80,830) ( 541)
------------ ------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Book Overdraft 29,546 - 36,973 7,684
Advance from Stockholder, Net 39,960 - 215,696 22,668
Proceeds from Line of Credit 200,000 - - 200,000
Proceeds from Notes Payable 169,500 - 416,309 19,519
Repayment of Notes Payable ( 50,000) - ( 354,218) -
Repayment of Capital Lease Obligations - - ( 6,583) -
Cash Contributed With Sitestar Corporation Assets - - 15,396 -
Additional Paid-in Capital - - 140,275 -
Issuance of Common Stock - 627,800 - -
------------ ------------ ------------ -----------
Net Cash Provided By Financing Activities 389,006 627,800 463,848 249,871
------------ ------------ ------------ -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ( 59,306) 59,306 54,809 ( 59,306)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 59,306 - - 59,306
------------ ------------ ------------ -----------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ - $ 59,306 $ 54,809 $ -
============ =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
INTERFOODS CONSOLIDATED, INC.
STATEMENT OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the year ended December 31, 1998 and the seven months ended December 31,
1997, the Company paid no income taxes and interest of approximately $15,000 and
$0, respectively.
During the nine months ended September 30, 1999 and 1998, the company paid no
income taxes and interest of approximately $16,750 (unaudited) and $0
(unaudited), respectively.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS
In 1998, the Company sold its gift basket business, Wrap-It Up, for $71,657. A
note receivable was received for the total sales price.
During the nine months ended September 30, 1999, the Company acquired equipment
totaling $38,340 (Unaudited) with capital lease obligations.
During the nine months ended September 30, 1999, a group of stockholders
contributed net assets of $7,943,000 (Unaudited) from their acquisition of
Sitestar Corporation as additional paid-in capital.
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Interfoods Consolidated, Inc. (the "Company"), formerly known as
Holland American International Specialties ("HAIS"), began operations
on June 1, 1997, under a partnership agreement, and was incorporated
in California on November 4, 1997. The Company is in the international
specialty foods distribution business. The Company's customers are
specialty and ethnic grocery stores, gift shops and hotels located
primarily in California. The Company's corporate office is located in
Encino, California and has a warehouse and retail facility located in
Bellflower, California.
Mergers
-------
The Company is the successor by merger, which was effective on October
25, 1998, to White Dove Systems, Inc., a Nevada corporation ("WDVE").
The exchange rate in the reincorporating merger was one and one fifth
shares of WDVE's common stock for one share of the Company's common
stock. Due to WDVE's lack of business activity prior to the merger, no
excess cost over fair value of net assets acquired was recorded.
On March 20, 1998, HAIS completed a stock purchase agreement with DHS
Industries, Inc. ("DHS") whereby DHS issued 31,942,950 shares of its
common stock in exchange for all of the issued and outstanding common
stock of HAIS. The acquisition was accounted for as a pooling of
interest. However, on September 30, 1998 the agreement was rescinded
and the stockholders of HAIS returned the shares of DHS for their
shares of HAIS.
Basis of Presentation
---------------------
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. As shown in the
financial statements, the Company has had net losses and cash flow
deficiencies from operations since inception and the Company is in
default on its line of credit. These issues raise substantial doubt
about the Company's ability to continue as a going concern.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn is dependent upon the
Company's ability to generate positive cash flows from operations. The
financial statements do not include any adjustments, relating to the
recoverability and classification of recorded asset amounts and
classifications of liabilities that might be necessary should the
Company be unable to continue its existence. Management plans to take
the following steps that it believes will be sufficient to provide the
Company with the ability to continue in existence and alleviate the
concerns:
F-8
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Line of Credit Default
----------------------
o The Company is currently in discussions for a proposed $10 to $15
million "best effort" underwriting. The proposed financing
structure is through an Equity Line, which the Company would
propose to achieve through a shelf registration using Form SB-2.
Once effective, the Equity Line would allow us to draw down the
capital through the sale of our common stock. This funding would
be used pay down debt, for growth, working and acquisition
capital.
Net losses and cash flow deficiencies
-------------------------------------
o On December 15, 1999 the Company consummated the acquisition of
Neocom Microspecialists, Inc. ("Neocom"). For the ten months
ended October 31, 1999, Neocom operations generated breakeven
cash flow. On an annualized basis, the Company's management has
projected to generate sales of approximately $2.0 million and
cash flows from operations of $444,000 in the first twelve months
of the Company's ownership of Neocom. Management will achieve
these targets in the first twelve months through an aggressive
marketing campaign to increase sales and an aggressive cost
cutting program, which they will implement on their first month
of operations. These cost reductions will come from the reduction
in personnel from 22 to 12 and the reduction of their
telecommunications costs by replacing our current telecom
provider to another national telecom provider. Management has
estimated an annual savings of approximately $195,000 from the
reduction of personnel and achieve as much as an 18% savings on
our telecommunications costs which would translate to
approximately $107,000 in annual savings.
o Also, the Company intends to acquire other Internet service
providers in the mid-Atlantic region that are cash flow positive,
which would be accretive to the Company's earnings. They intend
to consummate these transactions as stock-for-stock exchanges
combined with some form of cash consideration, after the
completion of the Company's secondary stock offering, to achieve
their aggressive growth strategy.
Interim Financial Information
-----------------------------
The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which in
the opinion of management, are necessary to fairly state the Company's
financial position, the results of operations and cash flows for the
periods presented. The results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of results for the
entire year ending December 31, 1999.
F-9
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from these estimates.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments including cash,
accounts receivable, accounts payable and accrued expenses and advance
from stockholders, the carrying amounts approximate fair value due to
their short maturities. The amounts shown for line of credit and notes
payable also approximate fair value because current interest rates and
terms offered to the Company for similar debt are substantially the
same.
Cash and Cash Equivalents
------------------------
For purposes of the statements of cash flows, the Company defines cash
equivalents as all highly liquid debt instruments purchased with a
maturity of three months or less, plus all certificates of deposit.
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and accounts
receivables. The Company places its cash with high quality financial
institutions and at times may exceed the FDIC $100,000 insurance
limit. The Company sells its products predominantly in California and
extends credit based on an evaluation of the customer's financial
condition, generally without collateral. Exposure to losses on
receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses, if required.
Inventories
-----------
Inventories consist of certain types of specialty foods, which are
held specifically for resale. Inventories are stated at the lower of
cost or market, with cost determined on a first-in, first-out basis.
F-10
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Equipment and Furniture
-----------------------
Equipment and furniture are stated at cost. Depreciation is computed
using the straight-line method based on estimated useful lives from 5
to 7 years.
Impairment of Long-Lived Assets
-------------------------------
In accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standard ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", long-lived assets are evaluated for
impairment whenever events or changes in circumstances indicate that
the carrying amounts of such assets may not be recoverable. Impairment
losses would be recognized if the carrying amounts of the assets
exceed the fair value of the assets.
Intangible Assets
-----------------
The Company continually monitors its intangible assets to determine
whether any impairment has occurred. In making such determination with
respect to these assets, the Company evaluates the performance on an
undiscounted cash flow basis, of the intangible assets or group of
assets which gave rise to assets carrying amount. Should an impairment
be identified, a loss would be reported to the extent that the
carrying value of the related intangible asset exceeds the fair value
of that intangible asset using an undiscounted cash flow method.
Revenue Recognition
-------------------
Product sales are recognized upon delivery of product to the customer.
Sales are adjusted for any future returns or allowances.
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Deferred taxes are provided on a
liability method whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of
enactment.
F-11
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Loss Per Share
------------------
In accordance with SFAS No. 128, "Earnings Per Share", the basic loss
per common share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares
outstanding. Diluted loss per common share is computed similar to
basic loss per common share except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the
additional common shares were dilutive.
Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its
components in the financial statements. As of December 31, 1998 and
1997, the Company has no items that represent other comprehensive
income and, therefore, has not included a schedule of comprehensive
income in the financial statements.
Impact of Year 2000 Issue
-------------------------
During the year ended December 31, 1998, the Company conducted an
assessment of issues related to the Year 2000 and determined that no
issues existed which would cause its computer systems not to properly
utilize dates beyond December 31, 1999. At this time, the Company
cannot fully determine the impact that Year 2000 issues will have on
its customers or suppliers. If the Company's customers and suppliers
don't convert their systems to become Year 2000 compliant, the Company
may be adversely impacted.
F-12
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 2 - EQUIPMENT AND FURNITURE
The cost of equipment and furniture consisted of the following as of:
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------- ------------------------------
1998 1997 1999 1998
------------- ------------ -------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Computers $ 1,300 $ - $ 80,128 $ -
Furniture and Fixtures 19,021 2,880 58,897 3,421
------------ ------------- ------------- ------------
20,321 2,880 139,025 3,421
Less: Accumulated
Depreciation 1,678 - 24,198 -
------------ ------------- -------------- ------------
$ 18,643 $ 2,880 $ 114,827 $ 3,421
============ ============= ============= ============
</TABLE>
Depreciation expense was $1,678 and $0 for the year ended December 31,
1998 and the seven months ended December 31, 1997, respectively, and
$1,306 (unaudited) and $0 (unaudited) for the six months ended June
30, 1999 and 1998, respectively.
NOTE 3 - NOTE RECEIVABLE - STOCKHOLDER
In 1997, the Company purchased for $2,800 the trade name "Wrap-It Up"
and operated the business through April 1998. In April 1998, the
Company sold the business to a stockholder of the Company for $71,657,
which was equal to the amount of the Company's investment (which was
the cost of inventories used in the operations) at the time of sale.
The sales price was consummated by the stockholder's issuance, to the
Company, of a promissory note for the full sales price. The note
receivable is due on demand, and secured by common stock of the
Company, owned by the stockholder. The note receivable is presented as
a reduction to stockholders' equity in the accompanying financial
statements.
F-13
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 4 - INVESTMENT
As of December 31, 1998, the Company paid a $125,000 deposit on the
acquisition of a 9% interest of Sierra Madre Foods, Inc. (see Note 13
- Subsequent Events "Acquisition").
NOTE 5 - LINE OF CREDIT
As of December 31, 1998, the Company had a $200,000 line of credit
that expired on May 4, 1999. On the expiration date the line of credit
was extended to September 4, 1999 and was not paid on the extended
expiration date. The line bears interest at United National Bank
Lending Index ("UNBLI"), plus 1% (UNBLI was 8.25%, 8.25% and 9.00% on
June 30, 1999, December 31, 1998 and 1997, respectively).
The Line of credit is secured by substantially all assets of the
Company and is guaranteed by the Company's general manager and his
spouse. The Company's ability to borrow money under this line of
credit is based upon a percentage of defined accounts receivable and
inventory. The outstanding line of credit was $200,000 as of December
31, 1998.
The line of credit agreement contains a covenant that requires the
Company to maintain stockholders' equity of at least $200,000. As of
December 31, 1998 the Company was not in compliance with this covenant
and technically is in default. Also, the line of credit was due in
full on September 4, 1999.
NOTE 6 - ADVANCES FROM STOCKHOLDERS
A majority stockholder of the Company has advanced $80,300 for
operating funds. The advances are non-interest bearing and due on
demand. Also, a minority stockholder of the Company has drawn advances
from his personal credit card accounts for operating funds. The
balance due at December 31, 1998 was $22,660. The Company is making
the minimum payments each month.
Also, a group of significant stockholders consummated the Company's
merger with WDVE by providing access to the merger candidate and
consulting services. The activities relate to identifying the merger
candidate, the negotiation as to the cost of the acquisition and the
acquisition costs. The stockholder has charged the Company a fee of
$200,000, which has been recorded as a liability. Since the Company
has determined that the costs have no future value to the Company the
fee was expensed during 1998.
F-14
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 7 - NOTES PAYABLE
Notes payable consist of the following as of:
<TABLE>
<CAPTION>
December 31, September 30,
---------------------- --------------------
1998 1997 1999 1998
-------- -------- -------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
12% - Note payable with all accrued
interest and principal due on
December 15, 1999 $ 50,000 $ - $ - $ -
8% - Note payable with all accrued
interest and principal due on demand 29,000 - - 19,519
Non-interest bearing note payable
due in March 1999 25,000 - - -
19% - Note payable with all accrued
interest and principal due on demand,
note is secured by certain accounts
receivable of the Company 15,500 - - -
-------- -------- -------- --------
Total $119,500 $ - $ - $ 19,519
======== ======== ======== =========
</TABLE>
The 8% and 12% notes payable mentioned above, along with two other
notes issued in 1999 totaling $181,591, were assumed by the purchasers
of Holland American International Specialties (See Note 13). Due to
the nature of the accounting for this transaction, the four notes
payable assumed by the purchasers still remain liabilities on the
Company's balance sheet under the caption, Liabilities of Business
Transferred Under Contractual Arrangements. See Note 13 for more
details of how this transaction was accounted for.
F-15
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities for its corporate offices,
warehouse and retail store under non-cancelable operating leases.
Total rent expense for the year ended December 31, 1998 and the seven
months ended December 31, 1997 and for the nine months ended September
30, 1999 (unaudited) and 1998 (unaudited) was $50,000, $21,000,
$49,443 (unaudited) and $18,000 (unaudited), respectively.
During the nine months ended September 30, 1999, the Company entered
into non-cancelable capital lease agreements for the purchase of
equipment. The equipment purchased secures the obligations.
Future minimum lease payments under non-cancelable capital and
operating leases with initial or remaining terms of one year or more
are as follows: (These amounts have been assumed by a related company,
see Note 13 - Subsequent Events. Since the Company remained the
lessee, after the divestiture, the lease commitments are being
presented in detail.)
Capital
Leases Operating
(Unaudited) Leases
----------- -----------
Year ending December 31,
1999 $ 6,968 $ 61,000
2000 13,937 63,000
2001 13,937 52,000
2002 6,055 20,000
2003 4,479 -
Thereafter 747 -
--------- -----------
Net Minimum Lease Payments 46,123 $ 196,000
===========
Less: Amounts Representing Interest 11,705
---------
Present Value of Net Minimum
Lease Payments 34,418
Less: Current Portion 4,156
---------
Long-Term Portion $ 30,262
Litigation
----------
The Company is involved in certain legal proceedings and claims that
arise in the normal course of business. Management does not believe
that the outcome of these matters will have a material adverse effect
on the Company's financial position or results of operations.
F-16
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 9 - STOCKHOLDERS' EQUITY
Classes of Shares
-----------------
The Company's Articles of Incorporation authorize the issues of up to
35,000,000 shares, consisting of 10,000,000 shares of Preferred Stock,
which have a par value of $.001 per share and 25,000,000 shares of
common stock, which have a par value of $.001.
Preferred Stock
---------------
Preferred Stock, any series, shall have the powers, preferences,
rights, qualifications, limitations and restrictions as fixed by the
Company's Board of Directors in its sole discretions. As of December
31, 1998, the Company's Board of Directors had not authorized or
issued any Preferred Stock.
Common Stock Splits
-------------------
On May 1, 1998, the Company's Board of Directors declared a 100 to 1
common stock split. Also, on October 26, 1998, the Company's Board of
Directors declared a 3 to 1 reverse common stock split. All applicable
share and per share data presented have been adjusted for the stock
splits.
Common Stock
------------
During 1997, the Company issued 5,580,000 shares of its common stock
for proceeds of $627,800.
During 1998, the Company issued 620,012 shares of its common stock for
the acquisition of White Dove Systems, Inc. (See Note 1).
NOTE 10 - COST OF GOODS SOLD
The Company has a key employee who is the principal contact with the
suppliers for the inventory purchased for the Company's Holland
related products. If the employee was terminated, for any reason, the
Company could potentially lose access to approximately 30% of its
product mix, and would be forced to purchase these items from other
suppliers at a cost approximately 10% - 15% higher than the current
cost, which would have a significant impact on the Company's gross
profit.
F-17
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 11 - INCOME TAXES
The reconciliation of the effective income tax rate to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
December 31, September 30,
--------------------------- ----------------------------
1998 1997 1999 1998
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Federal Income
Tax Rate 34.00% 34.00% 34.00% 34.00%
Effect of Valuation
Allowance ( 34.00)% ( 34.00)% ( 34.00)% ( 34.00)%
--------- --------- --------- ---------
Effective Income Tax Rate 0.00% 0.00% $ 0.00% $ 0.00%
========== ========== ========= =========
</TABLE>
Deferred tax assets and liabilities reflect the net effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
--------------------------- ----------------------------
1998 1997 1999 1998
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Deferred Tax Assets
Loss Carry forwards $ 163,000 $ 66,000 $ 347,000 $ 80,000
Less: Valuation Allowance ( 163,000) ( 66,000) $(347,000) ( 80,000)
----------- ----------- --------- ---------
Net Deferred Tax Assets $ - $ - $ - $ -
=========== ========== ========= =========
</TABLE>
At December 31, 1998 and 1997, the Company has provided a valuation
allowance for the deferred tax asset since management has not been
able to determine that the realization of that asset is more likely
than not. The net change in the valuation allowance for the year ended
December 31, 1998, the seven months ended December 31, 1997 and the
nine months ended September 30, 1999 (unaudited) increased by $97,000,
$66,000 and $184,000 (unaudited), respectively. Net operating loss
carry forwards expire starting in 2012 and 2013.
F-18
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 12 - ACQUISITION
On June 1, 1997, the Company purchased its food inventory and a
business name from an unrelated third party for $500,000. In
conjunction with the purchase, the Company commenced operations of its
international specialty foods business at the same location of the
previous owner.
NOTE 13 - SUBSEQUENT EVENTS
Acquisitions
------------
On July 27, 1999, a group of stockholders acquired 100% of the
outstanding common stock of Sitestar Corporation, a Delaware
corporation, in exchange for 3,491,428 shares of their issued and
outstanding shares of the Company's common stock. Simultaneously, they
contributed Sitestar Corporation's net assets to the Company with the
fair market value of the net assets acquired credited to additional
paid-in capital on behalf of the stockholders who purchased the
Sitestar Corporation. The fair market value of the acquisition was
determined by the net assets acquired. The Company did not record any
goodwill since the Company was essentially a non-operating shell
holding company at this time as a result of the approval to sell
Holland American International Specialties on July 15, 1999 (see
below).
The transaction was accounted for in a manner similar to a pooling of
interest. The assets acquired and labilities assumed is summarized as
follows:
Cash $ 15,396
Other current assets 3,500
Equipment, net 94,498
Intangible assets 125,400
Accounts payable and accrued expenses ( 12,131)
Capital lease obligations ( 18,020)
------------
Purchase price $ 208,643
============
F-19
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 13 - SUBSEQUENT EVENTS (Continued)
On December 15, 1999, the Company completed the acquisition of Neocom
Microspecialists, Inc., a Virginia corporation ("Neocom") in exchange
for 6,782,353 shares of the Company's common stock for 100% of the
outstanding shares of Neocom. Effective upon the closing of the
acquisition, the Company issued 4,782,353 shares of its common stock.
In addition the Company is required to issue an additional 2,000,000
shares of its common stock on the second anniversary of the
acquisition date. The shares are held back for adjustment to the sales
price for any potential unrecorded liabilities. Of the 6,782,353
shares issued for Neocom, 900,000 shares were issued in exchange for
certain liabilities amounting to approximately $900,000 that the
majority of Neocom's selling shareholders have agreed to assume based
on a debt assumption agreement. The Company is currently in
negotiations to rescind the agreement which would result in the
Company being primarily liable for approximately $900,000 of notes
payable assumed as a result of the acquisition and the Company being
able to retire 900,000 shares of its Common Stock. The purchase price
was $6,782,353 and is calculated by multiplying the number of shares
issued times $1.00, which approximates the market value of the
Company's stock at the date of acquisition.
The transaction was accounted for by the purchase method of
accounting; accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on the estimated fair
values at the date of acquisition. The excess of the purchase price
over the estimated fair value of tangible net assets acquired will
first be attributed to a covenant not to compete valued at $680,000
which will be amortized over the five year life of the contract,
second to the customer list valued at $2,622,000, which will be
amortized over its three year life, and third to excess of cost over
fair value of net assets acquired which will be amortized over five
year. The customer list has been determined by multiplying the current
market value per customer times the number of customer purchased at
the time of the acquisition. The operations of Neocom have not been
included in the financial statements since the date of the acquisition
was after September 30, 1999.
F-20
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 13 - SUBSEQUENT EVENTS (Continued)
On January 8, 1999, the Company acquired for $200,000 a 9% equity
interest in Sierra Madre Foods, Inc ("SMF") formerly known as Queen
International Foods ("QIF") a manufacture and wholesaler of frozen
Mexican food products such as frozen burritos and chimichangas. The
Company acquired its 9% interest from QIF bankruptcy proceedings along
with the Debtor-in-Possession as its joint venture partners.
Sale of Assets
--------------
On July 15, 1999, the Company's board of directors approved a
resolution to discontinue the Company's business of food distribution
as a result of its anticipated acquisition of its Internet related
activities (the purchase of Sitestar Corporation as described above).
On September 30, 1999, the Company sold all of the assets related to
the Company's international food distribution business, also known as
Holland American International Specialties ("HAIS"). The assets
represent approximately 99% of the Company's assets as of December 31,
1998. The acquirer of the assets is a partnership with the partners
being a group of stockholders of the Company. Given that the sale was
not an arms-length transaction, the Company had the business valued by
an independent appraiser to determine the fair value purchase price.
The sales price was $900,000, which is to be paid as follows: 1)
$200,000 is to be offset against the Company's liability to a
stockholders, 2) $654,000 for the buyer's assumption of all trade,
short-term and long-term liabilities, and 3) the remaining $46,000 in
the form of a note payable to the Company in three annual installments
of $15,333 each plus accrued interest at 8% per annum. The Company has
accounted for this sale by deferring the $46,000 gain on sale until
such time as the $46,000 note receivable is collected and by leaving
the assets and liabilities of HAIS on the Company's balance sheet
under the captions "Assets of business transferred under contractual
arrangements (notes receivable)" and "Liabilities of business
transferred under contractual arrangements," respectively since the
risk of loss has not been transferred to the new owners as the Company
is still the debtor for certain obligations of HAIS. The historical
operations of HAIS have been presented in the statement of operations
under the caption "Loss from operations of business transferred under
contractual arrangements." To the extent that the operations of HAIS
report a net loss in periods after September 30, 1999, the Company
will record such losses in the statement of operations under the
caption "Loss from operations of business transferred under
contractual arrangements." The Company will continue to account for
the sale of HAIS in this manner until such time that the net assets of
HAIS have been reduced to $0 or the net assets of HAIS have been
realized by the Company in cash.
F-21
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 13 - SUBSEQUENT EVENTS (Continued)
On September 30, 1999, the Company sold its 9% interest in SMF (see
Acquisitions above) for an amount equal to the Company's investment of
$200,000. The purchaser of the assets is a partnership with the
partners being a group of stockholders of the Company. Given that the
sale was not an arms-length transaction, the Company had the business
valued by an independent appraiser to determine the fair value
purchase price. The sales price of $200,000 is to be paid as follows:
1) $160,000 for the buyer's assumption of debt related to the
investment, and 2) the remaining $40,000 in the form of a note payable
to the Company in three annual installments of $13,333 each plus
accrued interest at 8% per annum.
Since the assets and liabilities have been sold to a group of former
employees of the Company, the cash consideration was minimal, the
Company is still liable for the outstanding liabilities, and the
acquirers have limited financial investment in the acquiring company,
the Company has not successfully severed itself from the risk of
ownership. The divestiture has been presented with the gross assets
and liabilities sold denoted on the face of the financial statements.
Also, since the acquiring company is a highly leveraged company,
Company has not recognized the corresponding gain on the sale of the
net assets.
Common Stock
------------
On July 6, 1999, the Company restated its Articles of Incorporation to
increase the authorized number of common shares to be issued to
75,000,000, and authorized a 3-to-1 stock split to increase the number
of shares outstanding from 6,200,012 to 18,600,036. All capital
structure and per share calculations have been retroactively effected
for the stock split.
In August, 1999, three principal stockholders of the Company
transferred 1,900,000 shares of their issued and outstanding Company
common stock to a Company employee for compensation. The Company has
recorded the transaction as compensation expense and additional
paid-in capital at the fair market value of the Company's common stock
on the date of the transfer.
Company Name
------------
On July 26, 1999, the Company restated its Articles of Incorporation
to change the name of the Company to "Sitestar Corporation."
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
SITESTAR CORPORATION
We have audited the accompanying consolidated balance sheets of Sitestar
Corporation and Subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sitestar Corporation and
Subsidiary as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $163,704 and $138,423 for the years ended
December 31, 1998 and 1997, respectively. These factors, among others, as
discussed in Note 1 to the financial statements, raise 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 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
October 6, 1999
F-23
<PAGE>
<TABLE>
SITESTAR CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 3,923 $ 4,744
Inventory 15,600 -
----------- ----------
Total Current Assets 19,523 4,744
EQUIPMENT, Net 46,393 16,005
EXCESS OF COST OVER FAIR VALUE OF
NET ASSETS ACQUIRED, Net of
Accumulated Amortization of $376 9,728 -
INVESTMENT IN UNCONSOLIDATED AFFILIATE - 2,800
----------- ----------
TOTAL ASSETS $ 75,644 $ 23,549
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 28,603 $ 825
Advances from Related Party 20,200 12,100
----------- ----------
Total Current Liabilities 48,803 12,925
----------- ----------
COMMITMENTS AND CONTINGENCIES (Note 4) - -
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, 200,000
shares authorized, 92,000 shares
issued and outstanding 920 920
Additional Paid-in Capital 328,048 148,127
Accumulated Deficit ( 302,127) ( 138,423)
----------- ----------
Total Stockholders' Equity 26,841 10,624
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 75,644 $ 23,549
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
<PAGE>
<TABLE>
SITESTAR CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
REVENUE $ 69,128 $ 51,012
COST OF REVENUE 108,191 60,319
----------- ----------
GROSS LOSS ( 39,063) ( 9,307)
SELLING GENERAL AND ADMINISTRATIVE EXPENSES 123,720 129,116
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE ( 921) -
----------- ----------
LOSS BEFORE INCOME TAXES ( 163,704) ( 138,423)
INCOME TAXES - -
----------- ----------
NET LOSS $( 163,704) $( 138,423)
=========== ==========
BASIC LOSS PER COMMON SHARE $( 1.78) $( 1.50)
=========== ==========
DILUTED LOSS PER COMMON SHARE $( 1.78) $( 1.50)
=========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 92,000 92,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-25
<PAGE>
<TABLE>
SITESTAR CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<CAPTION>
Additional Discount
Common Stock Paid-in on Accumulated
Shares Amount Capital Stock Deficit Total
------ -------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 - $ - $ - $ - $ - $ -
Issuance of Shares as Founder's Stock 92,000 920 - ( 920) - -
Fair Value of Services and Equipment
Contributed by Related Party - - 149,047 - - 149,047
Reclassification of Discount on Stock
to Additional Paid-In Capital - - ( 920) 920 - -
Net Loss - - - - ( 138,423) ( 138,423)
------ -------- ---------- ---------- ---------- ---------
Balance at December 31, 1997 92,000 920 148,127 - ( 138,423) 10,624
Fair Value of Services and Equipment
Contributed by Related Party - - 179,921 - - 179,921
Net Loss - - - - ( 163,704) ( 163,704)
------ -------- ---------- ---------- ---------- ---------
Balance at December 31, 1998 92,000 $ 920 $ 328,048 $ - $( 302,127) $ 26,841
====== ======= ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE>
<TABLE>
SITESTAR CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $( 163,704) $ ( 138,423)
Adjustments to Reconcile Net Loss
to Net Cash Used in Operating
Activities:
Depreciation and Amortization 5,930 2,798
Contribution of Services by Related Party 145,166 132,876
Equity in Loss of Unconsolidated Affiliate 921 -
Changes in Assets and Liabilities:
Increase in Accounts Payable
and Accrued Expenses 8,678 825
----------- -----------
Total Cash Used in Operating Activities ( 3,009) ( 1,924)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Equipment ( 1,187) ( 2,632)
Investment in Soccersite, Inc. - ( 2,800)
Acquisition of Soccersite, Inc.,
Net of Cash Acquired ( 4,725) -
----------- -----------
Total Cash Used in Investing Activities ( 5,912) ( 5,432)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from Related Party 8,100 12,100
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS: ( 821) 4,744
CASH AND CASH EQUIVALENTS -
Beginning Of Period 4,744 -
----------- -----------
CASH AND CASH EQUIVALENTS -
End Of Period $ 3,923 $ 4,744
========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
For the years ended December 31, 1998 and 1997, the Company paid no interest or
income taxes.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
A related company owned by the principal stockholder of the Company contributed
services and equipment. The fair value of these services and equipment amounted
to $179,921 and $149,047 for the years ended December 31, 1998 and 1997,
respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
F-28
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Sitestar Corporation (the "Company") began operations on January 1,
1997 as a sole proprietorship and was incorporated on February 20,
1997. Operations are conducted from facilities located in the state of
Maryland. The Company is a full service website marketing company
specializing in developing, marketing and hosting high quality
websites. In addition, the Company sells computer equipment to its
customers.
Acquisition
-----------
In November 1997, the Company entered into a joint venture with two
partners and each purchased a one-third interest in Soccersite, Inc.
In July 1998, the Company purchased the remaining two thirds interest.
This wholly owned subsidiary is a marketing website.
Basis of Presentation
---------------------
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company had minimal
revenue and significant net losses for the years ended December 31,
1998 and 1997. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
In view of the matters described in the preceding paragraph,
recoverability of the equipment and excess cost over fair value of net
assets acquired shown in the accompanying consolidated balance sheets
are dependent upon continued operations of the Company, which in turn
is dependent upon the Company's ability to generate positive cash
flows from operations. The financial statements do not include any
adjustments, relating to the recoverability and classification of
recorded asset amounts and classifications of liabilities that might
be necessary should the Company be unable to continue its existence.
Management plans to take the following steps that it believes will be
sufficient to provide the Company with the ability to continue in
existence:
o The Company has been acquired by a publicly held company (see
Note 7).
o The Company is working to raise additional capital and debt
financing to fund operations, increase revenue and reduce
operating costs.
F-29
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the Company and Soccersite, Inc. from the date of
acquisition July 7, 1998, after the elimination of intercompany
accounts and transactions.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments including cash,
accounts payable, accrued expenses and advances from related party,
the carrying amounts approximate fair value due to their short
maturities.
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company defines cash
equivalents as all highly liquid debt instruments purchased with a
maturity of three months or less, plus all certificates of deposit.
Concentration of Credit Risk
----------------------------
The Company places its cash in what it believes to be credit-worthy
financial institutions. Cash balances did not exceed FDIC insured
levels during the year.
Inventory
---------
The Company purchases inventory of equipment specifically against
customer orders. Inventory is stated at the lower of cost or market.
Cost is determined by the first-in, first-out method.
Equipment
---------
Equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets of 5 years.
F-30
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-Lived Assets
-----------------
Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. When required, impairment
losses on assets to be held and used are recognized based on the fair
value of the assets and long-lived assets to be disposed of are
reported at the lower of carrying amount of fair value less cost to
sell.
Excess of Cost Over Fair Value of Net Assets Acquired
-----------------------------------------------------
The Company continually monitors its excess of cost over fair value of
net assets acquired (which is amortized over ten years) to determine
whether any impairment of this asset has occurred. In making such
determination with respect to excess cost over fair value of net
assets acquired, the Company evaluates the performance, on an
undiscounted cash flow basis, of the underlying assets or group of
assets which gave rise to this amount.
Revenue Recognition
-------------------
Revenue from the sale of services or products is recognized at the
point the services are performed or products delivered and accepted by
the customer.
Income Taxes
------------
The Company has been a subchapter S corporation. Income is passed
through to the stockholders who pay personally their share of the
applicable taxes. Therefore, no provision for income taxes was made at
December 31, 1998 and 1997.
Subsequent to the termination of the Company's S Corporation election
(see Note 7), provisions for income taxes are based on taxes payable
or refundable for the current year and deferred taxes on temporary
differences between the amount of taxable income and pretax financial
income and between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or
settled as prescribed by Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
F-31
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Loss Per Share
------------------
In accordance with SFAS No. 128, "Earning Per Share", the basic loss
per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares
outstanding. Diluted loss per common share is computed similar to
basic loss per common share except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the
additional common shares were dilutive.
Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its
components in the financial statements. As of December 31, 1998 and
1997, the Company has no items that represent other comprehensive
income and, therefore, has not included a schedule of comprehensive
income in the financial statements.
Advertising Costs
-----------------
Advertising costs are charged to operations when incurred.
Impact of Year 2000 Issue
-------------------------
During the year ended December 31, 1998, the Company conducted an
assessment of issues related to the Year 2000 and determined that no
issues existed which would cause its computer systems not to properly
utilize dates beyond December 31, 1999. At this time, the Company
cannot fully determine the impact of Year 2000 issues will have on its
customers or suppliers with regard to their own business software. If
the Company's customers or suppliers don't convert their systems to
become Year 2000 compliant, the Company may be adversely impacted.
F-32
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - EQUIPMENT
Equipment is summarized as follows at December 31,:
1998 1997
---------- ----------
Computer Equipment $ 54,745 $ 18,803
Less: Accumulated Depreciation 8,352 2,798
---------- ----------
$ 46,393 $ 16,005
========== ==========
Depreciation expense was $5,554 and $2,798 for the years ended
December 31, 1998 and 1997, respectively.
NOTE 3 - RELATED PARTY
A related company owned by the principal stockholder of the Company
provided services (programming and administrative labor, use of
premises, insurance and telephone) and equipment. The fair value of
these services and equipment amounting to $179,921 and $149,047 for
the years ended December 31, 1998 and 1997, respectively, were
recorded as additional paid-in capital.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Office Space
------------
For the years ended December 31, 1998 and 1997, the Company was
provided office space by a related company (see Note 3), the fair
value of which was $13,222 and $12,194, respectively. The space was
occupied on a month-to-month basis.
NOTE 5 - ADVERTISING COSTS
Advertising costs incurred and recorded as expense in the consolidated
statements of operations were $13,825 and $12,911 for the years ended
December 31, 1998 and 1997, respectively.
NOTE 6 - ACQUISITION
On July 15, 1998, the Company acquired the remaining two-third
interest of Soccersite, Inc. for $6,000, in addition to the $1,879
original one-third interest for a total purchase price of $7,879. The
acquisition was accounted for by the purchase method of accounting;
accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on the estimated fair values at
the date of acquisition. The excess of the purchase price over
estimated fair value of net assets acquired of $10,104 has been
recorded as excess of cost over fair value of net assets acquired,
which is being amortized over ten years.
F-33
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 6 - ACQUISITION (continued)
The estimated fair value of assets acquired and liabilities assumed is
summarized as follows:
Cash $ 1,275
Other Assets 10,104
Liabilities ( 3,500)
--------
Purchase Price $ 7,879
========
NOTE 7 - SUBSEQUENT EVENTS
Leases
------
In 1999, the Company entered into various non-cancelable capital and
operating lease agreements for various equipment. The future minimum
lease payments under non-cancelable capital and operating leases with
initial or remaining terms of one year or more are as follows:
Capital Operating
Year Ended December 31, Leases Lease
---------- -----------
1999 $ 8,357 $ 2,425
2000 16,340 21,065
2001 16,340 -
2002 7,982 -
---------- ----------
Net Minimum Lease Payments 49,019 $ 23,490
==========
Less: Amounts Representing
Interest 4,010
----------
Present Value of Net Minimum
Lease Payment $ 45,009
==========
The assets of the Company are subject to a lien by the lessor of a
capital obligation. In addition, the lease is secured by the personal
guarantee of two stockholders of the Company.
Office Space
------------
In 1999, the Company continued to occupy the office space of a related
party through the termination of the lease. Upon termination of the
lease, the related party vacated the space and the Company is
occupying the premises on a month-to-month basis until such time a
lease is negotiated.
F-34
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 7 - SUBSEQUENT EVENTS (continued)
Sale of Company
---------------
On July 27, 1999, the stockholders of the Company consummated an
agreement exchanging all of the issued and outstanding shares of the
Company's common stock for 3,491,428 shares of a publicly held
corporation's common stock.
Income Taxes
------------
As a result of the sale of the Company described above, the Subchapter
S Corporation status has been terminated.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS' OF
NEOCOM MICROSPECIALISTS, INC.
We have audited the accompanying balance sheets of Neocom Microspecalists, Inc.
as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' deficiency and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Neocom Microspecialists, Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 of the
accompanying financial statements, the Company has had recurring losses,
incurred a cash operating deficit from operations, has a stockholders'
deficiency and a negative working capital which 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 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
October 1, 1999
F-36
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
BALANCE SHEETS
DECEMBER 31,
December 31,
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,243 $ 22,064
Accounts receivable, less allowance for
doubtful accounts of $21,000 and $7,000 196,822 88,020
Other current assets 8,333 15,906
------------ -----------
Total current assets 213,398 125,990
PROPERTY AND EQUIPMENT, less accumulated
depreciation of $201,724 and $133,880 368,818 112,964
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
less accumulated amortization of
$23,194 and $9,194 28,805 32,805
EXCESS COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED, less accumulated amortization
of $1,623 47,054 -
OTHER ASSETS 12,911 -
---------- ----------
TOTAL ASSETS $ 670,986 $ 271,759
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 109,682 $ 251,584
Deferred revenue 230,457 46,294
Notes payable stockholders 120,000 -
Notes payable - current portion 159,094 170,408
Capital lease obligations - current portion 13,919 18,440
------------ -----------
Total current liabilities 633,152 486,726
NOTES PAYABLE, less current portion 534,703 8,798
CAPITAL LEASE OBLIGATIONS, less current portion 28,067 25,451
------------ ------------
TOTAL LIABILITIES 1,195,922 520,975
---------- -----------
COMMITMENTS AND CONTINGENCIES (Note 6) - -
STOCKHOLDERS' DEFICENCY
Common stock, no par value, 1,000 shares
authorized, 500 shares issued and
outstanding 480,000 480,000
Accumulated deficit (1,004,936) ( 729,216)
----------- -----------
Total stockholders' deficiency ( 524,936) ( 249,216)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICENCY $ 670,986 $ 271,759
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
---------------------------------
1998 1997
--------------- --------------
REVENUE $ 1,302,009 $ 1,236,470
COSTS OF REVENUE 497,922 488,923
--------------- --------------
GROSS PROFIT 804,087 747,547
OPERATING EXPENSES
Selling, general and administrative
expenses 999,692 838,492
Research and development costs 3,121 14,000
--------------- --------------
Total operating expenses 1,002,813 852,492
--------------- --------------
LOSS FROM OPERATIONS ( 198,726) ( 104,945)
INTEREST EXPENSE ( 76,994) ( 35,119)
--------------- --------------
LOSS BEFORE TAXES ( 275,720) ( 140,064)
PROVISION FOR INCOME TAXES - -
--------------- --------------
NET LOSS $( 275,720) $( 140,064)
=============== =============
BASIC AND DILUTED LOSS PER SHARE $( 551.4) $( 280.1)
=============== =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 500 500
=============== =============
The accompanying notes are an integral part of the financial statements.
F-38
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDING DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Accumulated
Shares Amount Deficit Total
----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 500 $ 480,000 $( 589,152) $( 109,152)
Net Loss - - ( 140,064) ( 140,064)
----------- ---------- ------------- -----------
Balance at December 31, 1997 500 480,000 ( 729,216) ( 249,216)
Net Loss - - ( 275,720) ( 275,720)
----------- ---------- ------------- -----------
Balance at December 31, 1998 500 $ 480,000 $ (1,004,936) $ ( 524,936)
=========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $( 275,720) $( 140,064)
Adjustments to reconcile net loss to cash
provided by (used in)
operating activities:
Allowance for doubtful accounts 14,000 7,000
Depreciation and amortization expense 83,467 57,367
(Increase) decrease in:
Accounts receivable ( 122,802) 43
Other current assets 7,573 ( 8,257)
Other assets ( 12,911) -
Increase (decrease) in:
Accounts payable and accrued expenses ( 141,902) 162,236
Deferred revenue 184,163 23,734
----------- -----------
Net cash provided by (used in) operating
activities ( 264,132) 102,059
----------- -----------
Cash flows from investing activities:
Purchase of equipment ( 205,035) ( 23,891)
Capitalization of software development costs ( 10,000) ( 19,000)
Acquisition of assets from Netsus, net of
cash received ( 55,000) -
----------- -----------
Net cash used in investing activities ( 270,035) ( 42,891)
----------- -----------
Cash flows from financing activities:
Advances from stockholders 120,000 -
Advances from notes payable 779,040 -
Repayment of notes payable ( 308,127) ( 17,828)
Repayment of capital lease obligations ( 70,567) ( 25,790)
----------- -----------
Net cash provided by (used in) financing
activities 520,346 ( 43,618)
----------- -----------
NET INCREASE (DECREASE) IN CASH ( 13,821) 15,550
CASH AND CASH EQUIVALENTS - Beginning of year 22,064 6,514
----------- -----------
CASH AND CASH EQUIVALENTS - End of year $ 8,243 $ 22,064
============ ==========
F-40
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the years ended December 31, 1998 and 1997, the Company paid no income
taxes and approximately $46,500 and $21,200, respectively, for interest.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
During the years ended December 31, 1998 and 1997, the Company purchased
equipment and furniture with fair market values of $68,663 and $58,615 by
capital lease obligations.
During the year ended December 31, 1998, the Company issued a promissory note in
the amount of $43,677 for the purchase of the assets of Netsus, LLC.
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Neocom Microspecialists, Inc. (the "Company") is a sub chapter
S-Corporation formed in 1990 in the State of Virginia. The Company
provides Internet related services to companies and consumers and
develops computer software for sale to the furniture manufacturing
industry. The Company provides its services primarily in the Southwest
region of the state of Virginia.
Basis of Presentation
---------------------
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. For the years ended
December 31, 1998 and 1997, the Company has had net losses and
incurred a cash operating deficit from operations for the year ended
December 31, 1998, and as of December 31, 1998 and 1997, the Company
had a stockholders' deficiency and its current liabilities exceed its
current assets. These matters raise substantial doubt about the
Company's ability to continue as a going concern.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn is dependent upon the
Company's ability to generate positive cash flows from operations. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and
classifications of liabilities that might be necessary should the
Company be unable to continue its existence. Management plans to take
the following steps that it believes will be sufficient to provide the
Company with the ability to continue in existence:
On December 15, 1999, Sitestar Corporation acquired the Company. For
the eleven months ended November 30, 1999, the Company had positive
cash flow from operations. On an annualized basis, The Company's new
management projects to generate sales of approximately $2.0 million
and cash flows from operations of $555,000 or 28% in the first twelve
months of the new ownership. Management will achieve these targets in
the first twelve months through an aggressive cost cutting program,
which we will implement on our first month of operations. These costs
reductions will come from the reduction in personnel from 22 to 12 and
the reduction of our telecommunications costs by replacing our current
telecom provider to another national telecom provider. Management has
estimated an annual savings of approximately $195,000 from the
reduction of personnel and achieve as much as an 18% savings on our
telecommunications costs which would translate to approximately
$107,000 in annual savings.
F-42
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments including cash,
accounts receivable, accounts payable and accrued expenses and notes
payable stockholders, the carrying amounts approximate fair value due
to their short maturities. The amounts shown for notes payable and
capital lease obligations also approximate fair value because current
interest rates and terms offered to the Company for similar debt are
substantially the same.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and accounts
receivables. The Company places its cash with high quality financial
institutions and at times may exceed the FDIC $100,000 insurance
limit. The Company provides its services in the Southwest region of
the state of Virginia, and exposures to losses on receivables are
principally dependent on each customer's financial condition. The
Company performs ongoing credit evaluations of its customers'
financial conditions and generally does not require collateral on
accounts receivable. The Company monitors its exposure for credit
losses and maintains allowances for anticipated losses, when required.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is computed
using the double-declining balance method based on the following
estimated useful lives from 3 to 7 years and 39 years for buildings.
F-43
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Software Development Costs
--------------------------
Software development costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Cost of Computer Software to Be Sold, Leased, or
Otherwise Marketed." Capitalization of software development costs
begins upon the establishment of technological feasibility and is
discontinued when the product is available for sale. The establishment
of technological feasibility and the ongoing assessment for
recoverability of capitalized software development costs require
considerable judgment by management with respect to certain external
factors, including, but not limited to, technological feasibility,
anticipated future gross revenues, estimated economic life, and
changes in software and hardware technologies. Capitalized software
development costs are comprised primarily of salaries and payroll
costs.
Amortization of capitalized software development costs is provided on
a product-by-product basis on the straight-line method over the
estimated economic life of the products (not to exceed three years).
Management periodically compares estimated net realizable value by
product to the amount of software development costs capitalized for
that product to ensure the amount capitalized is not in excess of the
amount to be recovered through revenues. Any such excess of
capitalized software development costs over expected net realizable
value is expensed at that time.
Impairment of Long-Lived Assets
-------------------------------
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of",
long-lived assets are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amounts of such
assets may not be recoverable. Impairment losses would be recognized
if the carrying amounts of the assets exceed the fair value of the
assets.
Deferred Revenue
----------------
Deferred revenue represents collections from customers in advance for
services not yet performed and are recognized as revenue in the month
service is provided.
F-44
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
-------------------
The Company recognizes revenue related to software licenses and
software maintenance in compliance with the American Institute of
Certified Public Accountants ("AICPA") Statements of Position No.
97-2, "Software Revenue Recognition." Product revenue is recognized
when the Company delivers the product to the customer and the Company
believes that collectibility is probable. The Company usually has
agreements with its customers to deliver the requested product for a
fixed price. Any insignificant post-contract support obligations are
accrued for at the time of the sale. Post-contract customer support
("PCS") that is bundled with an initial licensing fee and is for one
year or less is recognized at the time of the initial licensing, if
collectability of the resulting receivables is probable. The estimated
cost to the Company to provide such services is minimal and
historically, the enhancements offered during the PCS period have been
minimal. The Company sells PCS under a separate agreement. The
agreements are for a one to two years with a fixed number of hours of
service for each month of the contract. The Contract stipulates a
fixed monthly payment, nonrefundable, due each month and any service
hours incurred above the contractual amount is bill as incurred.
Revenue is recognized under these agreements ratably over the term of
the agreement. Revenue for services rendered in excess of the fixed
monthly hours contained in the contracts are recognized as revenue as
incurred.
The Company sells ISP services under annual and monthly contracts.
Under the Annual contracts, the subscriber pays a one-time fee, which
is recognized as revenue ratably over the life of the contract. Under
the monthly contracts, the subscriber is billed monthly and revenue is
recognized ratably over the month.
Sales of computer hardware are recognized as revenue upon delivery and
acceptance of the product by the customer. Sales are adjusted for any
future returns or allowances.
Advertising and Marketing Costs
-------------------------------
The Company expenses costs associated with advertising and marketing
as they are incurred.
Research and Development Costs
------------------------------
Research and development costs are charged to expense as incurred.
These costs consist primarily of salaries and payroll costs related to
computer software development.
F-45
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
------------
The Company elected to be taxed under the sub chapter S-corporation
provisions of the federal income tax laws. Under these provisions, the
stockholders are liable for income tax on their respective shares of
the Company's taxable income or loss.
Net Loss Per Share
------------------
The Company presents net loss per share in accordance with SFAS No.
128, "Earnings Per Share". The basic loss per common share is computed
by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding. Diluted loss per common
share is computed similar to basic loss per common share except that
the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common
shares had been issued and if the additional common shares were
dilutive.
Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its
components in the financial statements. As of December 31, 1998 and
1997, the Company has no items that represent other comprehensive
income and, therefore, has not included a schedule of comprehensive
income in the financial statements.
Impact of Year 2000 Issue
-------------------------
During the year ended December 31, 1998, the Company conducted an
assessment of issues related to the Year 2000 and determined that no
issues existed which would cause its computer systems not to properly
utilize dates beyond December 31, 1999. At this time, the Company
cannot fully determine the impact of Year 2000 issues will have on its
customers or suppliers. If the Company's customers and suppliers don't
convert their systems to become Year 2000 compliant, the Company may
be adversely impacted.
F-46
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - PROPERTY AND EQUIPMENT
The cost of property and equipment consisted of the following as of
December 31,:
1998 1997
------------ -------------
Land $ 8,000 $ -
Building 142,000 -
Computers 342,048 191,400
Furniture and Fixtures 78,494 55,444
------------ ------------
570,542 246,844
Less: Accumulated Depreciation 201,724 133,880
------------ ------------
$ 368,818 $ 112,964
=========== ===========
Depreciation expense was $67,844 and $48,172 for the years ended
December 31, 1998 and 1997, respectively.
NOTE 3 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997, the Company paid
approximately $20,000 for rent expense to a company owned by the
Company's majority stockholders. For the eight months ended August 30,
1998, the Company paid approximately $13,000 for rent expense to a
company related to the Company's majority stockholders. In August 1998
the Company purchased its facilities from a company related to the
majority Stockholders of the Company for $150,000, which was the
current market value at the date of acquisition.
NOTE 4 - NOTES PAYABLE STOCKHOLDERS
During the year ended December 31, 1998, the Company borrowed $120,000
from three stockholders. The notes bear interest at 10.0% and are due
on demand.
F-47
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following as of December 31,:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
9.7% - Bank note payable in monthly interest
and principal payments of $1,140. The note is
guaranteed by a stockholder of the Company. $ 8,798 $ 20,976
9.0% - Bank note payable in monthly interest
only payments. Due on demand. - 65,000
8.5% - Bank note payable in monthly interest only
payments. Due on demand. 87,579 93,230
13.0% - Bank note payable in monthly interest and principal
payments of $1,784 and balance due December 2002. The note
is guaranteed by the majority stockholders of the Company
and secured by a deed of trust against personal
residencies of three stockholders and the Company's
building. Also, the bank has a blanket lien against all
other current and future assets of the Company. 139,957 -
Prime plus 1.5% - Bank note payable in monthly interest and
principal payments of $6,400 and balance due September
2003. The note is secured by a deed of trust against
personal residencies of three stockholders and the
Company's building. Also, the bank has a blanket lien
against all other current and future assets of the Company. 417,886 -
5.1% - Asset purchase note payable in monthly installments
of $2,050 for 10 months and $1,700
for 12 months. 39,577 -
------------ -----------
693,797 179,206
Less: Current Portion 159,094 170,408
------------ -----------
Long-term Portion $ 534,703 $ 8,798
=========== ===========
</TABLE>
The future principal maturities of these notes are as follows:
Year ending December 31,
1999 $ 159,094
2000 60,971
2001 49,124
2002 177,630
2003 246,978
-----------
Total $ 693,797
==========
F-48
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under non-cancelable equipment
leases.
Future minimum lease payments under non-cancelable equipment leases
with initial or remaining terms of one year or more are as follows:
Year ending December 31,
1999 $ 18,428
2000 17,457
2001 8,143
2002 6,844
2003 3,113
-------------
Total 53,985
Less: Amount Representing Interest 11,999
------------
Minimum Lease Payments 41,986
Less: Current Portion 13,919
------------
Long-term Portion $ 28,067
The following is a summary of equipment held under capital leases as
of December 31,:
1998 1997
----------- ----------
Computers $ 110,245 $ 67,626
Furniture & Fixtures 34,775 8,587
----------- ----------
145,020 76,213
Less: Accumulated
Depreciation 54,114 28,848
----------- ----------
Total $ 90,906 $ 47,365
============ ==========
Litigation
----------
The Company is involved in certain legal proceedings and claims that
rise in the normal course of business. Management does not believe
that the outcome of these matters will have a material adverse effect
on the Company's financial position or results of operations.
F-49
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 7 - ACQUISITION
On October 22, 1998, the Company purchased assets, patents and trade
names from Netsus, L.L.C. ("Netsus") in exchange for $55,000 and a
non-interest bearing promissory note payable with installments in the
first 12 months of $2,050 and the subsequent 12 months of $1,700. The
Company estimated the net present value of the payments to be $98,677
by using an interest rate comparable to its other long-term debt,
which is the purchase price. Netsus is an Internet service provider in
the state of Virginia. The acquisition was accounted for by the
purchase method of accounting; accordingly, the purchase price has
been allocated to the assets acquired on the estimated fair values at
the date of acquisition. The excess of the purchase price over the
estimated fair value of the net assets acquired of $48,677 has been
recorded as excess cost over fair value of net assets required, which
is being amortized over five years. The acquired assets have been
incorporated in the operations of the Company since the date of
acquisition. The estimated fair value of the assets acquired is
summarized as follows:
Equipment $ 50,000
Other Assets 48,677
----------
Purchase Price $ 98,677
=========
The following table presents the unaudited pro forma condensed
statements of operations for the years ended December 31, 1998 and
1997 and reflects the results of operations of the Company as if the
acquisition of Netsus, assets had been effective January 1, 1997. The
pro forma amounts are not necessarily indicative of the combined
results of operations had the acquisition been effective as of the
date, or of the anticipated results of operations due to cost
reductions and operating efficiencies that are expected as a result of
the acquisition.
1998 1997
(Unaudited) (Unaudited)
----------- -----------
Net Sales $ 1,420,325 $ 1,363,104
Gross Profit $ 1,133,991 $ 971,528
Selling, General and
Administrative Expenses $ 1,398,369 $ 1,093,191
Net Loss $( 264,378) $( 121,663)
Net Loss Per Share $( 528.8) $( 243.3)
F-50
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - SEGMENT INFORMATION
During 1998 and 1997, the Company had two principal operating
segments: 1) the development and sale of software and 2) Internet
related services. The following table provides information segregated
by the two segments and the corporate activities:
Year Ended December 31,
1998 1997
------------ ------------
Revenue:
Hardware & Software $ 653,481 $ 844,758
ISP 648,528 391,712
Corporate - -
------------ ------------
Total Revenue: $ 1,302,009 $ 1,236,470
============ ===========
Cost of Revenue:
Hardware & Software $ 299,402 $ 376,791
ISP 198,520 112,132
Corporate - -
------------ ------------
Total Cost of Revenue: $ 497,922 $ 488,923
============ ============
Gross Profit:
Hardware & Software $ 354,079 $ 467,967
ISP 450,008 279,580
Corporate - -
------------ ------------
Total Gross Profit: $ 804,087 $ 747,547
============ ============
Operating Expenses:
Hardware & Software $ 661,176 $ 488,242
ISP 27,264 55,169
Corporate 314,373 309,081
------------ ------------
Total Operating Expenses: $ 1,002,813 $ 852,492
============ ============
F-51
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - SEGMENT INFORMATION (Continued)
Year Ended December 31,
1998 1997
------------ ------------
Net Income (Loss):
Hardware & Software $( 307,097) $( 20,276)
ISP 422,744 224,411
Corporate ( 391,367) ( 344,199)
------------ ------------
Total Net Income (Loss): $( 275,720) $( 140,064)
============ ============
Identifiable Assets:
Hardware & Software $ 129,249 $ 82,001
ISP 168,902 29,031
Corporate 372,835 160,727
------------- -------------
Total Assets: $ 670,986 $ 271,759
============ ============
Depreciation and Amortization
Expense:
Hardware & Software $ 16,078 $ 17,310
ISP 21,010 6,128
Corporate 46,379 33,929
-------------- ------------
Total Depreciation and
Amortization Expense: $ 83,467 $ 57,367
============= ============
F-52
<PAGE>
PRO FORMA FINANCIAL INFORMATION
INTERFOODS CONSOLIDATED, INC.
On December 15, 1999, the registrant acquired Neocom Microspecialists, Inc.
("Neocom"). Additionally, on September 30, 1999, the Company sold all of the
assets relating to its specialty foods operations. The details of these
transactions are presented in the notes to the financial statements presented
elsewhere in this document.
The pro forma balance sheet reflects the historical consolidated balance sheet
of the Company, after giving effect to the purchase of Neocom as if the
transactions had occurred on January 1, 1998.
The pro forma statements of operations for the nine months ended September 30,
1999 and the year ended December 31, 1998 reflect the historical statement of
operations of the Company, after giving effect to the sale of the specialty food
assets and the purchase of Neocom. Pro forma adjustments have been made to give
effect to these transactions as if they had occurred as of January 1, 1999.
F-53
<PAGE>
<TABLE>
INTERFOODS CONSOLDATED, INC.
PROFORMA BALANCE SHEET
SEPTEMBER 30, 1999
<CAPTION>
Interfoods Neocom
Balance Sheet Balance Sheet Proforma Adjustments Adjusted
09/30/99 09/30/99 Dr Cr 09/30/99
------------ ------------- --------------------------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and Cash Equivalents $ 54,809 $ 18,910 $ 73,719
Accounts Receivable - 188,344 188,344
Inventories - - -
Other Current Assets 36,505 11,670 48,175
------------ ------------- -----------
Total Current Assets 91,314 218,924 310,238
Equipment and Furniture, Net 114,827 347,797 462,624
Capitalized Software Development
Costs 29,083 29,083
Assets of business transferred
Under contractual arrangements
(Note Receivable) 844,081 844,081
Excess Cost Over Fair Value of -
Net Assets Acquired - 42,854 1) 4,068,022 4,110,876
Other Assets and Intangible Assets 118,433 1) 3,302,000 3,420,433
Investment - -
------------ ------------- -----------
Total Assets $ 1,168,655 $ 638,658 $ 9,177,335
============ ============= ===========
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities
Book Overdraft $ - $ - $ -
Accounts payable and Accrued
Expenses 12,254 154,545 166,799
Deferred Revenue 149,368 149,368
Line of Credit - - -
Advance from Stockholders' 557,411 313,412 870,823
Notes Payable - Current Portion - 8,690 8,690
Captial Lease Obligations -
Current Portion 5,112 37,542 42,654
------------ ------------- -----------
Total Current Liabilities 574,777 663,557 1,238,334
Liabilities of business transferred
under contractual arrangements 546,048 546,048
Notes Payable 534,703 534,703
Capital Lease Obligations, Less
Current Portion 12,908 28,067 40,975
------------ ------------- -----------
Total Liabilities 1,133,733 1,226,327 2,360,060
------------ ------------- -----------
Commitments and Contigencies
Stockholders Equity (Deficiency)
Common Stock 18,600 480,000 1) 480,000 1) 6,782 25,382
Additional Paid-in Capital 2,958,118 - 6,775,571 9,733,689
Note Receivable-Stockholder ( 8,102) - ( 8,102)
Accumulated Deficit (2,933,694) (1,067,669) 1) 1,067,669 (2,933,694)
------------ ------------- -----------
Total Stockholders Equity
(Deficiency) 34,922 (587,669) 6,817,275
------------ ------------- -----------
Total Liabilities and
Stockholders Equity
(Deficiency) $1,168,655 $ 638,658 $ 9,177,335
============ ============= ===========
</TABLE>
F-54
<PAGE>
<TABLE>
INTERFOODS CONSOLDATED, INC.
PROFORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<CAPTION>
Interfoods Sitestar Neocom
Statement Of Statement Of Statement Of
Operations Operations Operations Proforma Adjustments Adjusted
12/31/98 12/31/98 12/31/98 Dr Cr 12/31/98
------------ ------------- ------------- -------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales $ - $ 69,128 $ 1,302,009 1,371,137
Cost of Goods Sold - 108,191 497,922 606,113
------------ ------------- ------------- -----------
Gross Profit (Loss) - (39,063) 804,087 765,024
Operating Expenses
Selling, General and
Administrative Expenses 370,650 123,720 999,692 2) 1,832,175 3,326,237
Loss from operations of business
transferred under contractual
arrangements (113,844) - - 3) 113,844 -
Equity in Loss of unconsolidated
affiliate 921 921
Research and Development costs - - 3,121 3,121
------------ ------------- ------------- -----------
Loss From Operations (484,494) (163,704) (198,726) (2,565,255)
Interest Expense - - 76,994 76,994
Loss Before Income Taxes (484,949) (163,704) (275,720) (2,642,249)
------------ ------------- ------------- -----------
Taxes - - - -
------------ ------------- ------------- -----------
Net Loss $ (484,494) $ (163,704) $ (275,720) $(2,642,249)
============ ============= ============= ===========
Basic and Diluted Net Loss Per
Share
Historical $ (0.03)
==========
Proforma $ (0.13)
==========
Weighted Average Shares
Outstanding
Historical 17,081,430
==========
Proforma 20,963,783
==========
</TABLE>
F-55
<PAGE>
<TABLE>
INTERFOODS CONSOLIDATED, INC.
PROFORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<CAPTION>
Interfoods Sitestar Neocom
Statement Of Statement Of Statement Of
Operations Operations Operations Proforma Adjustments Adjusted
09/30/99 07/27/99 09/30/99 Dr Cr 09/30/99
------------ ------------- ------------- -------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 18,684 $ 135,464 $ 1,319,834 $ 1,473,982
Cost of Goods Sold 22,740 132,971 747,534 903,245
------------ ------------- ------------- -----------
Gross Profit (Loss) (4,056) 2,493 572,300 570,737
Selling, General and
Administrative Expenses 2,198,517 111,295 551,467 2) 1,374,131 4,235,410
Loss from operations of business
transferred under contractual
arrangements ( 40,786) - - 3) 40,786 -
------------ ------------- ------------- -----------
Income (Loss) From
Operations (2,243,359) (108,802) 20,833 (3,664,673)
Interest Expense 11,772 41 83,566 95,379
------------ ------------- ------------- -----------
Loss Before Income Taxes (2,255,131) (108,843) (62,733) (3,760,052)
Taxes - - - -
------------ ------------- ------------- -----------
Net Loss $ (2,255,131) $ (108,843) $ (62,733) $ (3,760,052)
============= ============= ============= ===========
Basic and Dilusted
Loss Per Share
Historical $ (0.12)
==========
Proforma $ (0.17)
==========
Weighted Average Shares
Outstanding
Historical 18,600,036
==========
Proforma 22,482,389
==========
</TABLE>
F-56
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
INTERFOODS CONSOLIDATED, INC.
Balance Sheet, September 30, 1999
---------------------------------
1) To reflect the acquisition of Neocom as if it occurred
on September 30, 1999.
Neocom was acquired by the Company exchanging 6,782,353 shares of the
Company's common stock for 100% of the outstanding shares of Neocom.
Effective upon the closing of the acquisition, the Company issued
4,782,353 shares of its common stock. In addition, the Company is
required to issue the additional 2,000,000 shares of its common stock
on the second anniversary of the acquisition date. The shares are held
back for adjustment to the sales price for any potential unrecorded
liabilities. Of the 6,782,353 shares issued for Neocom, 900,000 shares
were issued in exchange for certain liabilities that the majority of
Neocom's selling shareholders have agreed to assume based on a debt
assumption agreement. The Company is currently in negotiations to
rescind the agreement, however, for purposes of the pro forma
financial statements those shares have been included. The purchase
price was $6,782,353 and is calculated by multiplying the number of
shares issued times $1.00, which approximates the market value of the
Company's stock at the date of acquisition. The purchase price
allocation, as if the acquisition took place at September 30, 1999, is
as follows:
Current assets $ 218,924
Equipment and furniture 347,797
Customer list 2,622,000
Covenant not to compete 680,000
Excess cost over fair
value of net assets
acquired $ 4,110,876
Other assets 29,083
Current liabilities ( 663,557)
Long-term liabilities ( 562,770)
-----------
Purchase Price $ 6,782,353
===========
F-57
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
INTERFOODS CONSOLIDATED, INC.
Statement of Operations for the nine months September 30, 1999 and the year
ended December 31, 1998
---------------------------------------------------------------------------
2) To reflect amortization of excess cost over the fair value of net
assets acquired over a five-year period, the customer lists over
a three-year period and the covenant not-to-compete over
five-years.
3) To reflect the sale of the specialty foods assets as if it
occurred on January 1, 1998.
F-58
<PAGE>
PART III
Item 1. INDEX TO EXHIBITS
The following exhibits are filed with this Registration Statement:
Exhibit
Number Description
- ------- -------------------------------
2.1.1 Agreement and Plan of Reorganization, dated October 25, 1998*
2.2.1 Agreement and Plan of Reorganization, dated July 27, 1999*
2.3 Asset Sale and Agreement re divestiture of Holland American
Specialties, dated September 30, 1999*
2.4 Asset Sale and Agreement re divestiture of Sierra Madre Foods, Inc.,
dated September 30, 1999*
2.5 Letter of Intent to Acquire Eastern Shore Net, dated August 17, 1999*
2.6 Letter of Intent to Acquire Neocom Microspecialists, Inc., dated
September 2, 1999*
2.7 Plan and Agreement of Share Exchange, re acquisition of Neocom Micro-
specialists, Inc., dated December 15, 1999*
2.8 Neocom Debt Assumption Agreement dated December 15, 1999*
3.1(i) Articles of Incorporation of the Registrant (December 17, 1992)*
3.1(ii) Amended Articles of Incorporation (July 29, 1998)*
3.1(iii) Amended Articles of Incorporation (October 26, 1998)*
3.1(iv) Amended Articles of Incorporation (July 14, 1999)*
3.1(v) Amended Articles of Incorporation (July 28, 1999)*
3.2(i) By-laws of the Registrant (December 17, 1992)*
21 Subsidiaries of the Registrant*
27 Financial Data Schedule (amended)
99 Lease for Corporate Office*
* Previously Filed
59
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
SITESTAR CORPORATION
(Registrant)
Amendment No. 3
Date: February 29, 2000 By: /s/ Frederick T. Manlunas
-------------------------------
Frederick T. Manlunas
Chairman of the Board
60
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> Dec-31-1999 DEC-31-1998
<PERIOD-START> Jan-01-1999 JAN-01-1998
<PERIOD-END> Sep-30-1999 DEC-31-1998
<CASH> 54,809 0
<SECURITIES> 0 0
<RECEIVABLES> 0 212,584
<ALLOWANCES> 0 16,378
<INVENTORY> 0 542,081
<CURRENT-ASSETS> 91,314 758,668
<PP&E> 139,025 20,321
<DEPRECIATION> 24,198 1,678
<TOTAL-ASSETS> 1,168,655 902,311
<CURRENT-LIABILITIES> 574,777 1,024,731
<BONDS> 0 0
0 0
0 0
<COMMON> 18,600 18,600
<OTHER-SE> 16,322 (141,020)
<TOTAL-LIABILITY-AND-EQUITY> 1,168,655 902,311
<SALES> 18,684 0
<TOTAL-REVENUES> 18,684 0
<CGS> 22,740 0
<TOTAL-COSTS> 2,243,359 484,494
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11,772 0
<INCOME-PRETAX> (2,255,131) (484,494)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,255,131) (484,494)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,255,131) (484,494)
<EPS-BASIC> (0.12) (0.03)
<EPS-DILUTED> (0.12) (0.03)
</TABLE>
