FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION NO. 333-39660
PROSPECTUS
Sitestar Corporation
3,857,273 Shares of Common Stock
The 3,857,273 shares of our common stock, $.001 par value, offered hereby
are being offered from time to time by certain of our security holders. Our
common stock trades on the Over-the-Counter Bulletin Board under the symbol
"SYTE".
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
---------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
July 21, 2000
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TABLE OF CONTENTS
PAGE
----
Prospectus Summary......................................................... 3
Selected Consolidated Financial Data....................................... 5
Risk Factors............................................................... 7
Forward-Looking Statements................................................. 23
Use of Proceeds............................................................ 23
Price Range of Our Common Stock............................................ 23
Dividend Policy............................................................ 24
Capitalization............................................................. 25
Plan of Distribution....................................................... 25
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 27
Business................................................................... 32
Management................................................................. 56
Principal and Selling Security Holders..................................... 58
Description of Convertible Debentures...................................... 61
Certain Relationships and Related Transactions............................. 62
Description of Capital Stock............................................... 63
Transfer Agent and Registrar............................................... 64
Legal Matters.............................................................. 64
Experts.................................................................... 64
Where You Can Find More Information........................................ 65
Index to Financial Statements.............................................. F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this prospectus. Each prospective investor is urged to
read this prospectus, and the attached Exhibits, in their entirety.
The Company
We operate a diverse line of Internet-related businesses designed to deliver a
variety of on-line solutions to small to medium sized businesses and to
consumers. We intend to expand our existing lines through internal growth and
the acquisition of related businesses and to further diversify our lines by
acquiring and investing in other emerging Internet-based businesses. Our
strategy is to integrate these businesses into a collaborative network that
leverages our collective knowledge and resources.
Our present businesses include:
INTERNET ACCESS
We offer dial-up and private Internet access services to
residential subscribers and businesses. Our services include comprehensive
technical assistance, large modem banks for rapid access and high-speed
connectivity. We presently target customers within secondary markets outside of
major metropolitan areas because we believe these markets are under-served by
the larger, national Internet service providers. Substantially all of our
present customers are in the mid-Atlantic region due to our acquisition in
December 1999 of Neocom Microspecialists, Inc.
WEB DEVELOPMENT
We offer a variety of services which enable our customers to
implement their Internet goals. Our services include: (1) website design, (2)
web hosting on equipment owned and administered by us, (3) co-location services
for customers who prefer access to their servers but require the reliability,
security and performance of our on-site facilities, (4) the design of banner
advertisements and consulting as to how and where to place banner
advertisements; and (5) advising clients how to position their websites to
improve placement in various Internet search engines.
E-COMMERCE SERVICES
--- Internet E-Commerce---
We design and operate customized online "storefronts" for businesses
to enable them to offer and sell merchandise over the Internet. Our e-commerce
services include secure online payment processing, technical support and
installation of additional e-mail accounts. We presently operate three
e-commerce websites:(1) Greattools.com, which offers specialty tool products for
light to heavy industrial applications; (2) Holland-Amercian.com, which offers
imported and domestic specialty gourmet foods; and (3) Soccersite.com, which
offers soccer-related merchandise and apparel. We derive revenues from these
sites from commissions on the sales of merchandise. All products are shipped
directly from the fulfillment center.
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--- Portals and Community Web Sites ---
We are also actively seeking to develop innovative ways for consumers
to interact effectively through the Internet. We design and offer 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 to
develop software that provides the ability to target ads based on demographics
and usage patterns.
--- Value Added Content ---
We develop content that provides 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.
We have engaged in our current business strategy since July 1999. While
we are actively seeking acquisition and investment opportunities, we cannot
assure you that we complete any additional acquisitions or that our strategy
will be successful.
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The Offering.
SHARES OF COMMON STOCK
OFFERED IN THIS PROSPECTUS
COMMON STOCK TO BE SOLD
BY SELLING STOCKHOLDERS ................................3,857,273 shares
TOTAL SHARES OF COMMON STOCK TO BE OUTSTANDING
AFTER THE OFFERING ...............................27,937,098 shares
USE OF PROCEEDS BY THE COMPANY.......................... The Company will not
receive any proceeds
from the sale of common
stock by the selling
stockholders
OVER-THE-COUNTER BULLETIN BOARD SYMBOL..................... SYTE
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements, related notes and other
financial information included elsewhere in this prospectus. The consolidated
statements of operations data for the fiscal years ended December 31, 1999 and
1998 and the period from June 1, 1997 (inception) to December 31, 1997, and the
consolidated balance sheets data as of December 31, 1999, 1998 and 1997, are
derived from our consolidated financial statements which have been audited by
Merdinger Fruchter Rosen & Corso, P.C. and are included in this prospectus.
The selected data presented below for the three month periods ended
March 31, 2000 and 1999 are derived from the unaudited statements of our company
included elsewhere in this prospectus. Historical results are not necessarily
indicative of future results.
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<TABLE>
<CAPTION>
JUNE 1, 1997 FISCAL YEAR ENDED THREE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, MARCH 31,
SEPTEMBER 30, ------------- ------------- -----------------------------
1997 1998 1999 1999 2000
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Net sales................................ $ - $ - $ 223,749 $ - $ 429,604
Cost of sales............................ - - 124,859 - 239,666
------------- ------------- ------------- ------------- -------------
Gross profit........................ - - 98,890 - 189,938
Operating expenses:
General and administrative.......... 370,650 3,217,247 44,941 673,823
Loss From Operations of Business
Transferred Under Contractual
Obligation........................ 194,069 113,844 239,653 33,395 42,233
------------- ------------- ------------- ------------- -------------
Total operating expenses.......... 194,069 484,494 3,456,900 78,336 716,056
------------- ------------- ------------- ------------- -------------
Operating loss.................... 194,069 (484,494) (3,358,010) (78,336) (526,118)
Other (expense) income net............... - - (13,679) - 11,747
------------- ------------- ------------- ------------- -------------
Net loss.......................... $ (194,069) $ (484,494) $ (3,371,689) $ (78,336) $ (514,371)
============= ============= ============= ============= =============
Net loss attributable to
common shares................... $ (194,069) $ (484,494) $ (3,371,689) $ (78,336) $ (514,371)
============= ============= ============= ============= =============
Basic and diluted net loss per
common share............................ $ (0.01) $ (0.03) $ (0.18) $ (0.00) $ (0.02)
============= ============= ============= ============= =============
Weighted average common
shares used in determining
net loss per share...................... 17,081,430 17,081,430 18,932,268 23,382,389 24,159,826
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, MARCH 31,
------------------------------------ -----------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents................................ $ 59,306 $ - $ 45,328 $ 30,825
Working capital (deficiency).............................
Total assets............................................. 1,126,534 902,311 6,888,733 6,357,461
Long-term debt........................................... - - 606,887 574,115
Total stockholders' equity (deficiency).................. 433,731 (122,420) 4,252,065 3,737,694
</TABLE>
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RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should consider the following factors carefully before deciding to purchase any
shares of our common stock.
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 the new and rapidly evolving
e-commerce markets. 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.
A HIGH PERCENTAGE OF OUR ASSETS ARE INTANGIBLE ASSETS
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. The intangible assets recorded in connection with
recent acquisitions represent approximately 79% of our total assets and
approximately 134% of our stockholders' equity at March 31, 2000. The
amortization of these intangible assets likely 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 DIVISIONS, 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 divisions include:
o lack of the widespread commercial use of the Internet, which may
prevent our operating divisions from succeeding; and
o intensifying competition for the products and services our operating
divisions offer, which could lead to the failure of some of our
operating divisions.
The other material risks relating to our operating divisions are more fully
described below under "Risks Particular to Our Operating Divisions."
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OUR BUSINESS MODEL IS UNPROVEN.
Our strategy is based on an unproven business model. Our operating strategy
is to integrate our operating divisions 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
efforts within our operating divisions and investments to further leverage our
resources. Our business model depends on our ability to share information within
our network of operating divisions. If competition develops among our operating
companies and portfolio investments, 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 assets and the income/loss and revenue attributable to our operating
assets 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 divisions. 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 divisions.
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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 divisions;
* changes in equity losses or income and amortization of goodwill
related to the acquisition or divestiture of interests in operating
divisions;
* changes in our methods of accounting for our operating company
interests, which may result from changes in our ownership percentages
of our operating divisions;
* 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 divisions; 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.
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
We believe that our success will depend on continued employment by us and
our operating divisions 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.
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As of May 31, 2000, all of our executive management personnel have worked
for us for approximately one year. However, management of our Neocom subsidiary
have operated that Company for several years. 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
divisions.
The success of some of our operating divisions also depends on their having
highly trained technical and marketing personnel. Our operating divisions 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.
OUR EXPENSES WILL INCREASE AS WE GROW OUR BUSINESS
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.
OUR OPERATING DIVISIONS ARE GROWING RAPIDLY AND WE MAY HAVE DIFFICULTY ASSISTING
THEM IN MANAGING THEIR GROWTH.
Our operating divisions have grown, and we plan for 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 future operating companies we acquire 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
division 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.
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WE FACE COMPETITION FROM OTHER POTENTIAL ACQUIRERS OF E-COMMERCE COMPANIES.
In our attempts to acquire 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.
OUR SUCCESS COULD BE IMPAIRED BY VALUATIONS PLACED ON INTERNET-RELATED COMPANIES
BY THE FINANCIAL MARKETPLACE
Our strategy involves creating value for our shareholders 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 divisions. While we
generally do not anticipate selling our interests in our operating divisions, 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.
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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 Neocom, and Greattools.com. Acquisitions may result in
the potentially dilutive issuances 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 our 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.
UNCERTAINTIES ASSOCIATED WITH SELLING ASSETS
A significant element of our business plan involves selling, in public or
private offerings, portions of the companies we have acquired and developed. Our
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 our 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 77% of our total assets and approximately 115% 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.
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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 operate with us.
If we cannot acquire interests in attractive companies, our strategy to
build a collaborative network of operating divisions may not succeed.
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 smaller
percentages 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. 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.
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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.
RISKS PARTICULAR TO OUR OPERATING DIVISIONS
We and our operating divisions' result of operations, and accordingly the
price of our common stock, may be adversely affected by the following factors:
* lack of acceptance of the Internet as an advertising or electronic
commerce 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.
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THE SUCCESS OF OUR OPERATING DIVISIONS DEPENDS ON THE DEVELOPMENT OF THE
E-COMMERCE MARKET, WHICH IS UNCERTAIN.
All of our operating divisions 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 divisions may not succeed.
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 DIVISIONS 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 divisions 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.
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In addition, some of our operating divisions 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 divisions' competitors
may develop Internet products or services that are superior to, or have greater
market acceptance than, the solutions offered by our operating divisions. If our
operating companies are unable to compete successfully against their
competitors, our operating divisions may fail.
Many of our operating divisions' competitors have greater brand recognition
and greater financial, marketing and other resources than our operating
companies. This may place our operating divisions 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 divisions 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 our 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 divisions
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.
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SOME OF OUR OPERATING DIVISIONS 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 we seek aggressively to protect our proprietary rights, our 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 impractical for us to control the dissemination of our work
and use of our services. We also license content from third parties and it is
possible that we could become subject to infringement actions based upon the
content licensed from those third parties. We generally obtain representations
as to the origin and ownership of such licensed content and attempt to receive
indemnification agreements from third party licensors for this type of
liability; however, this may not adequately protect us in certain circumstances.
Any of these claims, with or without merit, could subject us to costly
litigation and the diversion of our technical and management personnel. If we
incur costly litigation and our personnel are not effectively deployed, our
expenses and losses will increase and our profits, if any, will decrease.
SOURCE OF SUPPLY FOR GREATTOOLS.COM.
Since 1999, Greattools.com has been operating pursuant to an oral agreement
with Global Sourcing Group, a power tool wholesaler located in Thousand Oaks,
California, which supplies 100% of the products sold by the Company in its Web
site. While we anticipate that we will continue operating under the oral
agreement, we intend to enter into a written exclusive fulfillment agreement
with Global Sourcing Group as soon as it is practicable. We intend to enter into
this fulfillment arrangement to insure that Global Sourcing Group will continue
to source all of the company's 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. We rely on Mr. Manlunas'
relationship with Global Sourcing Group for its Greattools.com's fulfillment
needs.
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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, a specialty
foods wholesaler and retailer located in Bellflower, California, which supplies
100% of the products sold by Holland-American.com in its Web site. While we
anticipate that we will continue operating under the oral agreement, we intend
to enter into a written exclusive fulfillment agreement with Holland American
International Specialties 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, whose members consist of certain of our shareholders,
including Frederick T. Manlunas, owns Holland American International
Specialties. Our Chairman of the Board, Mr. Manlunas, beneficially owns and
controls 32.75% of the total outstanding membership interest of IFCO Group, LLC.
OUR OPERATING DIVISIONS THAT PUBLISH OR DISTRIBUTE CONTENT OVER THE INTERNET MAY
SUBJECT US TO LEGAL LIABILITY.
We may be subject to legal claims relating to the content on our 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 divisions on their Web sites is drawn from
data compiled by other parties, including governmental and commercial sources,
and our operating divisions re-enter the data. This data may have errors. If any
of our Web site content is improperly used or if any of our operating divisions
supply incorrect information, it could result in unexpected liability. We may
not have insurance to cover these claims or our insurance may not provide
sufficient coverage. If our operating divisions incur substantial cost because
of this type of unexpected liability, their expenses will increase and their
profits, if any, will decrease.
OUR OPERATING DIVISIONS' COMPUTER AND COMMUNICATIONS SYSTEMS MAY FAIL, WHICH MAY
DISCOURAGE CONTENT PROVIDERS FROM USING OUR OPERATING DIVISIONS' SYSTEMS.
All of our operating divisions' businesses depend on the efficient and
uninterrupted operation of their computer and communications hardware systems.
Any system interruptions that cause our Web sites to be unavailable to Web
browsers may reduce the attractiveness of our Web sites to third party content
providers. If third party content providers are unwilling to use our 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.
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OUR BUSINESSES MAY BE DISRUPTED IF WE ARE UNABLE TO UPGRADE OUR SYSTEMS TO MEET
INCREASED DEMAND.
Capacity limits on some of our operating divisions' 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 Web sites continues to increase, we must expand and
upgrade their technology, transaction processing systems and network hardware
and software. Our operating divisions may be unable to accurately project the
rate of increase in use of our Web sites. In addition, our operating divisions
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 divisions are unable to appropriately upgrade their systems and
network hardware and software, the operations and processes of our operating
divisions may be disrupted.
WE MAY NOT BE ABLE TO ATTRACT A LOYAL BASE OF USERS TO OUR WEB SITES.
While content is important to all our Web sites, our operating divisions
are particularly dependent on content to attract business. Our success depends
upon their ability to deliver compelling Internet content to their targeted
users. If our operating divisions are unable to develop Internet content that
attracts a loyal user base, the revenues and profitability of our operating
divisions 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 divisions may have difficulty distinguishing the
content on their Web sites to attract a loyal base of users.
WE MAY BE UNABLE TO ACQUIRE OR MAINTAIN EASILY IDENTIFIABLE WEB SITE ADDRESSES
OR PREVENT THIRD PARTIES FROM ACQUIRING WEB SITE ADDRESSES SIMILAR TO OURS.
Some of our operating divisions hold various Web site addresses relating to
our brands. These operating divisions 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 Web sites. In these
instances, our operating divisions 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
divisions 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.
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SOME OF OUR OPERATING DIVISIONS ARE DEPENDENT ON BARTER TRANSACTIONS THAT DO NOT
GENERATE CASH REVENUE.
Our operating divisions may enter into barter transactions in which they
provide advertising for other internet companies in exchange for advertising for
the operating division. In a barter transaction the operating division 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 division. Limited cash flows may adversely
affect a operating company's ability 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 divisions that depend on such transactions
do not add sufficient security features to their future product releases, our
products may not gain market acceptance or there may be additional legal
exposure to them.
Despite the measures some of our operating divisions 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 divisions, 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 DIVISIONS FROM REMAINING
CURRENT WITH THEIR TECHNICAL RESOURCES AND MAINTAINING COMPETITIVE PRODUCT AND
SERVICE OFFERINGS.
The markets in which our operating divisions 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,
wemust adapt to rapidly changing markets by continually improving the
responsiveness, services and features of our products and services and by
developing new features to meet the needs of our customers. Our success will
depend, in part, on our operating divisions' 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 divisions 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 DIVISIONS.
As of May 31, 2000, 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 divisions.
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, 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, including the selling shareholders listed in this
prospectus sell substantial amounts of our common stock, including shares issued
upon the conversion of outstanding convertible securities, 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 is such.
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 divisions;
* new sales formats or new products or services offered by us, our
operating divisions and their competitors;
* conditions or trends in the Internet industry in general and the
e-commerce industry in particular;
* announcements by our operating divisions and their competitors of
technological innovations;
* announcements by us or our operating divisions or our competitors of
significant acquisitions, strategic partnerships or joint ventures;
* changes in the market valuations of our operating divisions and other
Internet companies;
* our capital commitments;
* additions or departures of our key personnel and key personnel of our
operating divisions; 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.
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FORWARD-LOOKING STATEMENTS
Some of the information contained in this prospectus contains
forward-looking statements. These forward-looking statements include, but are
not limited to, statements about our industry, plans, objectives, expectations,
intentions and assumptions and other statements contained in the prospectus that
are not historical facts. When used in this prospectus, the words "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate" and similar
expressions as well as expressions of "strategy" "corporate focus," and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by these
forward-looking statements.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of common
stock offered hereby by the selling security holders.
PRICE RANGE OF OUR COMMON STOCK
Our common stock commenced trading on the NASD OTC Bulletin Board under
the symbol "IFCO" on October 1998. In August 1999 we changed our symbol to
"SYTE." 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
because we had not received final comments from the Securities and Exchange
Commission on our Form 10-SB registration statement. From December 16, 1999 to
April 16, 2000, our Common Stock was traded over-the-counter and was quoted on
the National Quotations Board's Electronic Quotation Service "Pink Sheets." On
April 16, 2000, we resumed trading on the NASD OTC Bulletin Board under the
symbol "SYTE." On July 14, 1999 we effected a 3-for-1 stock split. All prices
listed below reflect this split.
The following table shows the high and low closing bid prices of our
common stock for the periods presented. The quotations shown below reflect
interdealer prices, without retail mark-up, mark-down or commissions, and may
not represent actual transactions.
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High Low
----- ----
1998
For the quarter ended December 31, 1998 $1.03 $1.00
1999
For the quarter ended March 31, 1999 $1.03 $1.00
For the quarter ended June 30, 1999 $1.03 $1.00
For the quarter ended September 30, 1999 $3.75 $0.88
For the quarter ended December 31, 1999 $2.19 $0.45
2000
For the quarter ended March 31, 2000 $1.25 $0.85
For the period ended May 31, 2000 $2.00 $0.75
The closing price of our common stock on June 16, 2000 was $0.875.
At May 31, 2000, there were approximately 118 shareholders of record of
our common stock. Within the holders of record of our common stock are
depositories such as Cede & Co. that hold shares of stock for brokerage firms
which, in turn, hold shares of stock for beneficial owners.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our Common Stock.
We currently intend to retain all available funds for use in our business and
therefore do not anticipate paying any cash dividends in the foreseeable future.
Any future determination relating to dividend policy will be made in the
discretion of our Board of Directors and will depend on a number of factors,
including the future earnings, capital requirements, financial condition and
future prospects and such other factors as our Board of Directors may deem
relevant.
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CAPITALIZATION
The following table sets forth our cash position and capitalization as
of March 31, 2000. The information set forth below should be read in conjunction
with our consolidated financial statements and the related notes included
elsewhere in this prospectus.
March 31, 2000
-------------
Cash and cash equivalents......................................... $ 30,825
=============
Long-term debt.................................................... 574,115
=============
Stockholders' equity:
Preferred stock, $.001 par value; authorized 10,000,000
shares; 0 issued and outstanding.............................. -
Common stock; $.001 par value; authorized 75,000,000
shares; issued and outstanding 24,159,826 shares............ 24,160
Additional paid-in capital................................... 8,347,174
Note receivable - Stockholder................................ (69,017)
Accumulated deficit.......................................... (4,564,623)
-------------
Total stockholders' deficiency............................. 3,737,694
-------------
Total capitalization.............................................. $ 4,311,809
=============
PLAN OF DISTRIBUTION
The selling security holders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of our common stock being offered pursuant to this prospectus on any stock
exchange, market or trading facility on which the shares are traded or in
private transactions. These sales may be at fixed or negotiated prices. The
selling security holders may use any one or more of the following methods when
selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account
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o an exchange distribution in accordance with the rules of the
applicable exchange
o privately negotiated transactions
o short sales
o broker-dealers may agree with the selling security holders to
sell a specified number of shares at a stipulated price per
share
o a combination of any of these methods of sale
o any other method permitted by applicable law
The selling security holders may also sell shares under Rule 144 under
the Securities Act, if available, rather than under this prospectus.
The selling security holders may also engage in short sales against the
box, puts and calls and other transactions in securities of our company or
derivatives of our company securities and may sell or deliver shares in
connection with these trades. The selling security holders may pledge their
shares to their brokers under the margin provisions of customer agreements. If a
selling security holder defaults on a margin loan, the broker may, from time to
time, offer and sell the pledged shares.
Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. The selling security holders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales. In such event, any
commissions received by these broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling security holders. We have agreed to indemnify the selling security
holders against specified losses, claims, damages and liabilities, including
liabilities under the Securities Act.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and related footnotes for the
year ended December 31, 1999 included elsewhere in this prospectus. The
discussion of results, causes and trends should not be construed to imply any
conclusion that such results or trends will necessarily continue in the future.
OVERVIEW
Prior to July 1999, we engaged primarily in the distribution of specialty
food products. In July 1999, we changed our business focus to internet-related
businesses, and on September 30, 1999 we sold substantially all of the assets
related to our specialty food distribution business.
Since that change in focus, we have derived revenues primarily from fees
from customers for providing Internet access and fees from various web
development services, including website design, web hosting and co-location. In
the future we plan to derive revenue from the design and placement of banner
advertisements and online marketing and promotion services. We also derive
revenues from commissions from product sales originated from our websites, which
as of March 31, 2000 included Greattools.com, Holland-American.com and
Soccersite.com. In these transactions, we in essence act as an agent for various
fulfillment centers, which ship the goods directly to the purchaser. We do not
take title to the goods sold, which eliminates any inventory risk to us.
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.
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.
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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.
In the future the net revenues for our e-commerce subsidiaries will consist
of commissions earned per transaction upon shipment of products and acceptance
of products by our customers net of any allowance for future returns.
Acquisitions and Divestitures
On July 27, 1999, a group of our stockholders acquired 100% of the
outstanding common stock of Sitestar, Inc., a Delaware corporation that provides
Internet access services to customers in Maryland, in exchange for 3,491,428
shares of their issued and outstanding shares of our common stock.
Simultaneously, they contributed Sitestar Inc.'s net assets to us 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, Inc. The fair market
value of the acquisition was determined by the net assets acquired. We did not
record any goodwill since we were essentially a non-operating shell holding
company at this time as a result of the approval to sell Holland American
International Specialities on July 15, 1999.
On September 30, 1999, we sold all of the assets related to our specialty
food distribution business, which we operated under the name Holland American
International Specialties ("HAIS"). These assets represented approximately 99%
of our assets as of December 31, 1998. The purchaser of these assets was a
partnership whose partners included some of our stockholders, including
Frederick Manlunas, the Chairman of the Board. Because the sale was not an
arms-length transaction, we had the business valued by an independent appraiser
to determine the fair value purchase price. Based on this valuation, the
purchase price was $900,000, paid as follows: (1) $200,000 was offset against
our $200,000 liability to Mr. Manlunas relating to services he provided to
Sitestar, (2) $654,000 by the assumption of all trade, short-term and long-term
liabilities, and (3) $46,000 by a promissory note bearing interest at 8% per
annum and payable in three annual installments of $15,333. We accounted for this
sale by deferring the gain on sale until such time as the $46,000 note 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, our risk of loss on
the liabilities was not eliminated by the assumption of liabilities by the
purchaser, given the financial condition of the purchaser. 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", and will continue to be so reported for periods after September
30, 1999, until such time as the assumed liabilities of HAIS have been
refinanced and are no longer our contingent obligations or the purchaser becomes
adequately capitalized.
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On December 15, 1999, we acquired Neocom Microspecialists, Inc. ("Neocom"),
a company based in Virginia which provides internet access and website services,
for 6,782,353 shares of Common Stock, of which 2,000,000 shares were held back
to possible misrepresentations. This acquisition was accounted for as a purchase
and we recorded goodwill of $$2,862,307 and a customer list asset of $2,622,000
in connection with the acquisition. See Note 4 of Notes to Consolidated
Financial Statements.
In January 2000, we sold certain assets and liabilities of our wholly owned
subsidiary, Sitestar, Inc. for $34,703 in cash plus a note receivable in the
amount of $10,000. We recognized a gain on sale of these certain assets of
$49,316. We retained the "Sitestar" trademark and "Sitestar.com" URL.
At March 31, 2000, our intangible assets resulting from the purchase of
Neocom were $5,005,934, and represented approximately 79% of our total assets
and approximately 134% of our stockholders' equity. The amortization of these
intangible assets will be the largest single expense item in our statement of
operations for the foreseeable future and will be approximately $1.4 million in
2000. This material concentration of intangible assets increases the risk of a
large charge to earnings if 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. In addition, the intangible
assets could increase, thus increasing the yearly amortization, if we issue any
of the 2,000,000 contingent shares which may be issued in connection with the
Neocom acquisition. See Note 4 of Notes to Consolidated Financial Statements.
Results of Operations
REVENUES. Our revenues were $223,749 for the year ended December 31, 1999
and $429,604 for the three months ended March 31, 2000. Revenues for the year
ended December 31, 1999 were from our Neocom and Sitestar, Inc. subsidiaries
from their respective dates of acquisition. As discussed above, our statements
of operations reflect no revenues for our transferred business. The increase in
revenues in the three months ended March 31, 2000 is due to the inclusion of
revenues from Neocom for the full quarter. Revenues during the year ended
December 31, 1999 were primarily Internet access fees, and revenues during the
three months ended March 31, 2000 were primarily Interet access fees and fees
for web development services.
COST OF GOODS SOLD. Cost of revenues consist primarily of costs associated
with providing Internet access to our customers principally communication lines
and depreciation, and principally salaries and benefits of those employees
providing web development services.
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SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $330,650 and $3,217,247 during the years ended December 31, 1998,
and 1999, respectively. This increase of $2,886,597 was due primarily to an
increase in compensation expense, principally due to a non-cash expense of
$2,000,000 resulting from the issuance of 1,926,170 shares of Common Stock to
our Chief Executive Officer for services rendered and $549,242 resulting from
the issuance of 564,075 shares of Common Stock issued to consultants for
services rendered.In 1999 we also expensed $59,769 resulting from amortization
of intangible assets. The remaining increase in selling, general and
administrative expenses are the increased operating associated with our
Sitestar, Inc. and Neocom subsidiaries from the respective dates of acquisition.
Selling, general and administrative expenses were $44,941 and $673,823 for the
three months ended March 31, 1999 and 2000, respectively. This increase of
$628,882 was due primarily to amortization of intangible assets of $358,614, an
increase of salaries and related benefits of $137,665, and an increase in
professional fees of $62,909.
The loss from operations of business transferred under contractual
obligations relates to our specialty food distribution business which we sold on
September 30, 1999. Generally accepted accounting principles requires us to
account for any losses incurred by HAIS on the equity method until such time as
the assumed liabilities of HAIS have been refinanced and are no longer our
contingent obligations or the purchaser becomes adequately capitalized. This
loss was $113,844 and $239,653 for the years ended December 31, 1998 and 1999,
respectively, and $33,395 and $42,233 in the three months ended March 31, 1999
and 2000, respectively. These liabilities were refinanced in May 2000, and thus
no loss from these operations will be reflected in our financial statements for
periods after that date.
The gain on sale of assets in the three months ended March 31, 2000 was due
to the sale of certain assets and liabilities of our Sitestar, Inc. subsidiary
in January 2000.
Interest expense related to interest incurred on obligations we assumed
with the acquisition of Neocom.
As a result of the foregoing, we incurred net losses of $484,494 and
$3,371,689 for the years ended December 31, 1998 and 1999, respectively, and net
losses of $78,336 and $514,371 for the three months ended March 31, 1999 and
2000.
LIQUIDITY AND CAPITAL RESOURCES
Our business plan has required, and is expected to continue to require,
substantial capital to fund operations, capital expenditures, and 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.
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We believe that the net cash position 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 12 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 our shareholders or us. 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.
On May 11, 2000 we issued two convertible debentures aggregating $500,000.
The debentures bear interest at 12% per annum and are due on May 1, 2001. The
debentures are convertible into our common stock at a rate equal to the lower of
$.70 or 60% of the average of the three lowest closing bid price for the common
stock during the 20 trading days immediately preceding the conversion date. In
addition, we also issued three-year warrants to purchase an aggregate of 250,000
shares of common stock at an initial exercise price of $0.77 per share. Due to
the preferential conversion feature of these debentures we will capitalize
$242,857 (which represents the value of additional shares issuable upon
conversion at the $.70 conversion price verses the number of shares issuable
upon conversion at the market value at the date of issuance)as debt issuance
costs and amortize this amount over the term of the debentures. In addition, the
warrants issued in connection with these debentures have an exercise price below
the market value of our stock on the date of issuance, therefore we will
capitalize an additional $67,500 (which represents the difference in the market
value at the date of issuance less the $.77 exercise price time the number of
warrants issued) of debt issuance costs associated with the issuance of the
250,000 warrants that will be amortized over the term of these debentures.
The Company and the Purchasers have also agreed that, upon the
effectiveness of the registration statement, of which this prospectus is a part,
provided that the trading price of the Common Stock is at least $1.00 for the
ten (10) consecutive trading days immediately preceding the effective date, the
debenture purchasers will be obligated to purchase, and the Company shall be
obligated to sell to the debenture purchasers, additional debentures in the
aggregate principal amount of Five Hundred Thousand ($500,000) and additional
warrants to purchase an aggregate of 250,000 shares of Common Stock for an
aggregate purchase price of Five Hundred Thousand Dollars ($500,000), with the
closing of such purchase to occur within thirty (30) days of the Effective Date.
The terms of the additional debentures and the additional warrants will be
identical to the terms of the Debentures and the Warrants as described in this
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prospectus, provided that the initial conversion price for the additional
debentures will be seventy-seven hundredths of one dollar ($.77). We have agreed
to register under the Securities Act the common stock underlying the additional
debentures and the Additional Warrants as part of this prospectus. Due to the
potential preferential conversion feature of these debentures we will capitalize
a yet to be determined cost as debt issuance costs and amortize this amount over
the term of the debentures. In addition, the warrants to be issued in connection
with these debentures potentially have an exercise price below the market value
of our stock on the date of issuance, therefore we will also capitalize an
additional yet to be determined debt issuance costs associated with the issuance
of the 250,000 warrants that will be amortized over the term of these
debentures.
Impact of Year 2000
We instituted a comprehensive program to address potential Year 2000 impacts and
as a result, critical systems and infrastructure operated smoothly through the
arrival of Year 2000 and leap year boundaries. We experienced no Year 2000
related disruptions in the products and services provided by its significant
suppliers or other third-party business relationships.
Forward looking statements
This prospectus contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Readers are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of us to install new kiosks, general market conditions,
and competition and pricing. Although we believe the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements contained in the report will prove to be
accurate.
BUSINESS
COMPANY OVERVIEW
We are 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:
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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 provides
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.
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.
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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.
COMPANY HISTORY
We were incorporated in Nevada under the name of White Dove Systems, Inc.
in December 1992.
In October 1998 we acquired all the issued and outstanding shares of
Interfoods Consolidated, Inc., a California corporation, in exchange for
5,580,000 shares of our Common Stock. Interfoods Consolidated, Inc., operating
under the trade name of Holland American International Specialties, is a
retailer and wholesaler of imported and domestic specialty gourmet foods.
Holland American's product offering ranges from exotic European delicacies to
mainstream specialty candies, chocolates and other confectionery products. In
connection with this acquisition , we changed our name from White Dove Systems,
Inc. to Interfoods Consolidated, Inc. in October 1998.
In July 1999 a partnership consisting of a a majority of our 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 those shareholders. Simultaneous
with the closing of this transaction, those shareholders contributed all the
issued and outstanding shares of Sitestar, Inc. to us as contributed capital.
Sitestar, Inc. 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 divisions. Soccersite.com was an
operating subsidiary of Sitestar, Inc.. To better reflect our new primary
corporate focus as an Internet holding company, we changed our 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
managed by our Chairman, Frederick Manlunas. Mr. Manlunas owns a 14.6% of the
capital stock of Global Sourcing Group. Greattools.com is an online low cost
retailer of power tools.
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Effective September 30, 1999 we sold the non-Internet assets of Holland
American International Specialties to IFCO Group, LLC, 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. Holland American International Specialties will
continue to serve as Holland-American.com's exclusive fulfillment center. The
purchase consideration of $900,000 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.
Effective December 15, 1999, we consummated the 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 toissue 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 May 31, 2000, (i) Neocom provided Internet access
and other Internet services to approximately 5,700 customers in the Southern
Virginia area.
INTERNET INDUSTRY BACKGROUND
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. 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.
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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 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.
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.
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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. we define a secondary
market to be 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.
OUR 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.
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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 plans 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 acquired 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 Forrester Research, worldwide
e-commerce sales are expected to 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
-----------------------------
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
---------------------
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
-------------------
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
--------------------
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, or 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.
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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.
OUR INTERNET SUBSIDIARIES AND SERVICES
Sitestar.net & Neocom Microspecialists
---------------------------------------
Product Offerings
-----------------
Internet Access
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.
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.
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.
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.
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Website Design
We have provided web site design services since 1996 and, as of May 31, 2000,
have developed web sites for over 350 customers.
Banner Development
We also design banner advertisements for our customers and, as of May 31, 2000,
we have developed 350 banner advertisements.
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.
Customers and Marketing
-----------------------
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.
Competition
-----------
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.
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We believe that we compete favorably based on these factors, particularly
due to our:
o Regionally focused operating strategy;
o Highly responsive 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, Voyager.net, US Online and OneMain;
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 IBM and
Microsoft;
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., Juno
Online 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.
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Many of the major cable companies and some other Internet access providers
have begun to offer 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.
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.
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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. 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.
GOVERNMENT REGULATION
There is currently only a small body of laws and regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted at the international, federal, state and
local levels with respect to the Internet, covering issues such as user privacy,
freedom of expression, pricing, characteristics and quality of products and
services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. Moreover, a number of laws and regulations have been
proposed and are currently being considered by federal, state and foreign
legislatures with respect to these issues. The nature of any new laws and
regulations and the manner in which existing and new laws and regulations may be
interpreted and enforced cannot be fully determined.
In addition, there is substantial uncertainty as to the applicability
to the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy. The vast majority of these laws were adopted prior to the
advent of the Internet and, as a result, did not contemplate the unique issues
and environment of the Internet. Future developments in the law might decrease
the growth of the Internet, impose taxes or other costly technical requirements,
create uncertainty in the market or in some other manner have an adverse effect
on the Internet. These developments could, in turn, have a material adverse
effect on our business, prospects, financial condition and results of
operations.
We provide our services through data transmissions over public
telephone lines and other facilities provided by telecommunications companies.
These transmissions are subject to regulation by the Federal Communications
Commission, state public utility commissions and foreign governmental
authorities. However, we are not subject to direct regulation by the Federal
Communications Commission or any other governmental agency, other than
regulations applicable to businesses generally. Nevertheless, as Internet
services and telecommunications services converge or the services we offer
expand, there may be increased regulation of our business, including regulation
by agencies having jurisdiction over telecommunications services. Additionally,
existing telecommunications regulations affect our business through regulation
of the prices we pay for transmission services, and through regulation of
competition in the telecommunications industry.
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The Federal Communications Commission has ruled that calls to Internet
service providers are jurisdictionally interstate and that Internet service
providers should not pay access charges applicable to telecommunications
carriers. Several telecommunications carriers are advocating that the Federal
Communications Commission regulate the Internet in the same manner as other
telecommunications services by imposing access fees on Internet service
providers. The Federal Communications Commission is examining inter-carrier
compensation for calls to Internet service providers, which could affect
Internet service providers' costs and consequently substantially increase the
costs of communicating via the Internet. This increase in costs could slow the
growth of Internet use and thereby decrease the demand for our services.
Greattools.com
--------------
Product Offerings
-----------------
Greattools.com is a direct merchandiser of specialty tool products
designed for light to heavy industrial applications. We market our products
under the name GreatTools 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. The Greattools Direct brand is owned by our
fulfillment center Global Sourcing Group. 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.
All GREAT TOOLS DIRECT products are designed and manufactured in China
by Tehao and Hitachi, two large manufacturers of industrial products, according
to 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. We are 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 merchandise sold and not on the aggregate sales price of a sale
transaction.
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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.
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 our target market.
Database Marketing and Catalog Sales
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.
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<PAGE>
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. 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.
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.
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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.
Possible Acquisitions
--------------------
If we believe a favorable opportunity to acquire a retailer of power tools
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
-----------------
Holland American International Specialties 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. 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 Holland American International Specialties. This fulfillment arrangement
with Holland American International Specialties negates any necessity for us to
carry inventory. As part of our fulfillment arrangement, Holland American
International Specialties 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 or maintain inventory 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.
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<PAGE>
We believe that we have maintained a positive relationship with Holland
American International Specialties. As a result, we act as their exclusive
online agent for all their products. 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.
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, in selecting products for our Web site.
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. Currently, specialty food is
principally sold through the following retail channels:
o supermarkets;
o gourmet and specialty food stores;
50
<PAGE>
o mail order catalogs;
o department stores;
o 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.
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 commission on
the wholesale price and distributors generally purchase the product at a
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, we believe that 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.
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<PAGE>
We believe that sales of gourmet and specialty food over the Internet
provides a means to address many of these challenges.
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.
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 the knowledge of our
fulfillment center's personnel 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 report,
the next generation will have aslant 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.
We believe that convenience is the driving force spurring the desires of
America's specialty gourmet food product needs. 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
reaching our objectives.
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. Certain of these competitors such
as Whole Foods Market, Wild Oats and Bristol Farms, market and sell their
products over the Internet.
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<PAGE>
We enjoy two 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; and (2) the convenience
of online shopping.
Possible Acquisitions
--------------------
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
-----------------
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.
53
<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.
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<PAGE>
FACILITIES
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 for
Greatools.com, Soccersite.com and Holland-American.com. This lease will expire
in June 2001.
We also own a 12,000 square feet office building in Martinsville,
Virginia which serves as Neocom's principal executive offices. 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.
EMPLOYEES
As of May 31, 2000, we employed 26 full time individuals. We have 7 in
management, 2 in sales and marketing and 17 in administration. Our employees are
not unionized, and we consider our relations with our employees to be favorable.
LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceedings.
55
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to our directors
and executive officers.
Name Age(1) Position
--------------- ------ -------------------
Frederick T. Manlunas 32 Chairman of the Board and
Managing Director
Clinton J. Sallee 28 President and Chief
Executive Officer
Kevork Zoryan 27 Director
----------------------
(1) Ages are given as of May 31, 2000
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 has managed 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.
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<PAGE>
We are currently searching for a Chief Financial Officer. Kevin Pickard of
Pickard & Company, CPA's, P.C. is serving as our temporary part-time Chief
Financial Officer. Pickard & Company, CPA's, P.C. is an accountancy firm based
in Valencia, California.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid to our chief executive
officer and each executive officer with a salary in excess of $100,000 for each
of the last three fiscal years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
---------------------------------------------- ------------------------------------------------
Other Restricted
Annual Stock Options LTIP All Other
Position Year Salary ($) Bonuses($) Compensation Awards SARs Payouts ($) Compensation
-------- ---- ---------- ---------- ------------ ---------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frederick T. 1998 $ 96,000 -- -- -- -- -- --
Manlunas 1999 91,500 -- -- -- -- -- --
Chairman of the 2000 120,000 -- -- -- -- -- --
Board
Clinton J. 1999 -- -- -- -- -- -- --
Sallee 2000 120,000 -- -- 2,000,000 -- -- --
President & Chief
Executive Officer
</TABLE>
The Company currently has no long-term compensation, annuity, pension or
retirement plans.
DIRECTOR COMPENSATION
Our directors do not receive any compensation other than their salaries as
officers of the Company.
BOARD COMMITTEES; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Board of Directors has not established any committees. No executive
officer of our company has served as a director or member of the compensation
committee of any other entity whose executive officers served as a director of
our company.
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<PAGE>
PRINCIPAL AND SELLING SECURITY HOLDERS
The following table sets forth information as of May 31, 2000 with
respect to the beneficial ownership of our common stock both before and
immediately following the offering by:
o each person known by us to own beneficially more than five
percent, in the aggregate, of the outstanding shares of our common
stock,
o the selling security holders in this offering,
o each of our directors and our named executive officers in the
summary compensation table above, and
o all executive officers and directors as group.
The following calculations of the percentages of outstanding shares are
based on 24,159,826 shares of our common stock outstanding as of May 31, 2000.
We determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission, which generally require inclusion of shares
over which a person has voting or investment power. Share ownership in each case
includes shares issuable upon exercise of outstanding options and warrants or
conversion debentures and interest payable thereon that are convertible within
sixty days of May 31, 2000, as described in the footnotes below. Percentage of
ownership is calculated pursuant to Securities and Exchange Commission Rule
13d-3(d)(i).
The number of shares being offered by the selling security holders
represents (i) 200% of the shares of common stock issuable to the selling
security holders upon conversion of debentures and as payment of principal and
interest thereunder and (ii) the shares of common stock issuable to selling
security holders upon exercise of warrants issued to the selling security
holders.
Because the number of shares of common stock issuable upon conversion
of the debentures and as payment of interest thereon is dependent in part upon
the market price of the common stock prior to a conversion and is subject to
certain conversion limitations described elsewhere in this prospectus, the
actual number of shares of common stock that will then be issued in respect of
such conversions or interest payments and, consequently, offered for sale under
this registration statement, cannot be determined at this time. We have
contractually agreed to include herein 3,727,273 shares of common stock issuable
upon conversion of the debentures, payment of interest thereunder and exercise
of the warrants issued to the selling security holders and have disregarded the
conversion limitations for purposes of the table below.
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<PAGE>
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling security holders.
<TABLE>
<CAPTION>
Shares of Common Shares of Common
Stock Beneficially Stock Being Shares of Common
Name and Address of Owned Prior Offered Pursuant Stock Beneficially Owned
Beneficial Owner to this Offering to this Prospectus After this Offering(2)
------------------- ------------------------ ------------------ ------------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Frederick T. Manlunas ................ 3,039,255 12.58% - 3,039,255 10.83%
16133 Ventura Blvd., Suite 635
Encino, California 91436
Clinton J. Sallee
16133 Ventura Blvd., Suite 635
Encino, California 91436............. 1,926,170 7.97% - 1,926,170 6.86%
Kevorak Zoryan
16133 Ventura Blvd., Suite 635
Encino, California 91436............. - * - -
Sterling & Company
9601 Wilshire Blvd., Suite 620
Beverly Hills, California 90210....... 20,000(2) * 20,000 - -
Pickard & Company
28245 Avenue Crocker, Suite 220
Valencia, California 91355........... 30,000(3) * 30,000 - -
Troop Steuber Pasich Reddick & Tobey, LLP
2029 Century Park East, 24th Floor
Los Angeles, California 90027 20,000(4) * 20,000
StockNorth Associates
San Diego, California 60,000(5) * 60,000 -
AJW Partners, LLC
155 First Street, Suite B
Mineola, NY 11501..................... 1,118,182(6) 4.00% 1,118,182 - -
New Millenium Capital Partners II, LLC
155 First Street, Suite B
Mineola, NY 11501..................... 2,609,091(7) 9.33% 2,609,091 - -
All directors and executive
officers as a group
(4 persons)(10)....................... 4,965,543 20.55% - 4,965,425 20.55%
</TABLE>
59
<PAGE>
---------------
* Less than 1%.
(1) Assumes that all of the shares being offered are sold pursuant to this
prospectus.
(2) Consists of 30,000 shares of common stock issued and outstanding. As of the
date of this prospectus, none of these shares were registered or entitled
to be registered for resale under the Securities Act.
(3) Represents 30,000 shares of common stock issuable upon exercise of
warrants.
(4) Represents 20,000 shares of common stock issuable upon exercise of
warrants.
(5) Consists of 60,000 shares of common stock issued and outstanding. As of the
date of this prospectus, none of these shares were registered or entitled
to be registered for resale under the Securities Act.
(6) Represents 818,182 shares of common stock issuable upon conversion of
debentures and as payment of interest thereon and 300,000 shares of common
stock issuable upon exercise of warrants.
(7) Represents 1,909,091 shares of common stock issuable upon conversion of
debentures and as payment of interest thereon and 700,000 shares of common
stock issuable upon exercise of warrants.
We will prepare and file all amendments and supplements to the registration
statement as may be necessary in accordance with the rules and regulations of
the Securities Act of 1933, as amended (the "Securities Act") to keep it
effective until the earlier to occur of the following: the date as of which all
shares of common stock offered hereby may be resold in a public transaction
without volume limitations or other material restrictions without registration
under the Securities Act, including without limitation, pursuant to Rule 144
under the Securities Act; or the date as of which all shares of common stock
offered hereby have been resold. We have agreed to pay the expenses, other than
broker discounts and commissions, if any, in connection with this prospectus.
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DESCRIPTION OF CONVERTIBLE DEBENTURES
The securities being offered by the selling security holders consist of
shares of common stock that are issuable upon the conversion of convertible
debentures and upon the exercise of warrants that we issued in a private
offering in May 2000. The debentures are in the original principal amount of
$500,000 and bear interest at a rate of 12% per annum. The warrants to purchase
an aggregate of 250,000 shares of our common stock at an initial exercise price
of $0.77 per share.
The debentures are convertible into common stock at a rate equal to the
lowest of $.70 or 60% of the average of the three lowest closing bid price for
the common stock during the 20 trading days immediately preceding the conversion
date.
The Company and the Purchasers have also agreed that, upon the declaration
of effectiveness of the Registration Statement to be filed pursuant to the
Registration Rights Agreement, provided that the trading price of the Common
Stock is at least $1.00 for the ten (10) consecutive trading days immediately
preceding the Effective Date, the Purchasers will be obligated to purchase, and
the Company shall be obligated to sell and issue to the Purchasers, additional
debentures in the aggregate principal amount of Five Hundred Thousand ($500,000)
and additional warrants to purchase an aggregate of 250,000 shares of Common
Stock for an aggregate purchase price of Five Hundred Thousand Dollars
($500,000), with the closing of such purchase to occur within thirty (30) days
of the Effective Date. The terms of the Additional Debentures and the Additional
Warrants shall be identical to the terms of the Debentures and the Warrants as
described in this prospectus, provided that the Initial Conversion Price (as
defined in the Debentures) for the Additional Debentures shall be seventy-seven
hundredths of one dollar ($.77). The Common Stock underlying the Additional
Debentures and the Additional Warrants shall be Registrable Securities as
defined in the Registration Rights Agreement and shall be included in the
Registration Statement to be filed pursuant to the Registration Rights
Agreement.
However, the debentures may not be converted into common stock, nor may the
holder receive shares in payment of interest, if the debenture holder and any
affiliate would, as a result, beneficially own more than 4.999% of our company's
issued and outstanding shares of common stock. This limitation could be waived
by the holder as to itself by giving 5 days' prior notice to us. Further, as a
separate restriction, a holder may not convert the debentures into common stock,
nor may the holder receive shares in payment of interest, if as a result, he
together with his affiliates would beneficially own in excess of 9.999% of our
company's issued and outstanding common stock. This provision can also be waived
by the holder as to itself by giving 15 days' prior notice to us. However, the
conversion limitations do not preclude a holder from converting and selling all
or a portion of the outstanding principal amount of the debentures that would
result in the beneficial ownership by such holder of less than 4.999% of 9.999%
(as applicable) of the shares of common stock then outstanding, and thereafter
converting and selling an additional similar portion of its holdings. In this
manner such holder could over time receive and sell a number of shares of common
stock in excess of 4.999% or 9.999% (as applicable) of the shares of common
stock outstanding while never beneficially owning more than 4.999% or 9.999% (as
applicable) at any one time.
The number of shares being offered by the selling security holders
represents (i) 200% of the shares of common stock issuable to the selling
security holders upon conversion of the debentures and as payment of interest
thereunder and (ii) the shares of common stock issuable to selling security
holders upon exercise of the warrants issued to the selling security holders.
Because the number of shares of common stock issuable upon conversion of the
debentures and as payment of interest thereon is dependent in part upon the
market price of the common stock prior to a conversion, the actual number of
shares of common stock that will then be issued in respect of such conversions
or interest payments and, consequently, offered for sale under this registration
statement, cannot be determined at this time. We have contractually agreed to
include herein 3,727,273 shares of common stock issuable upon conversion of the
debentures, payment of interest thereunder and exercise of the warrants issued
to the selling security holders.
61
<PAGE>
This prospectus does not cover the sale or other transfer of the debentures
or warrants. If a selling security holder transfers its debentures or warrants
prior to conversion or exercise, the transferee of the debentures or warrants
may not sell the shares of common stock issuable upon conversion or exercise of
the debentures or warrants under the terms of this prospectus unless this
prospectus is appropriately amended or supplemented by us.
For the period a holder holds our debentures or warrants, the holder has
the opportunity to profit from a rise in the market price of our common stock
without assuming the risk of ownership of the shares of common stock issuable
upon conversion of the debentures or exercise of the warrants. The holders of
the debentures and warrants may be expected to voluntarily convert their
debentures or exercise their warrants when the conversion or exercise price is
less than the market price for our common stock. Further, the terms on which we
could obtain additional capital during the period in which the debentures or
warrants remain outstanding may be adversely affected.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective as of September 30, 1999 we sold the non-Internet assets of
Holland American International Specialties to IFCO Group, LLC, 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. Holland American International Specialties will
continue to serve as Holland-American.com's exclusive fulfillment center. The
purchase consideration for the non-Internet assets of Holland American
International Specialties 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 minority equity interest in Sierra Madre
Foods to IFCO Group, LLC 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 was 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 our shareholders, including our Chairman Mr.
Manlunas, acquired all the issued and outstanding shares of Sitestar, Inc.. , a
Delaware corporation, in exchange for 3,491,428 shares of our Common Stock owned
by those shareholders. Simultaneous with the closing of this transaction,
those shareholders contributed the issued and outstanding shares of Sitestar,
Inc. to us as contributed capital. Sitestar, Inc. is a Web development, design
and hosting company formed in 1996 and is based in Annapolis, Maryland.
62
<PAGE>
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
managed by our Chairman Frederick Manlunas, has a 14.6% equity ownership in
Global Sourcing Group.
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.
DESCRIPTION OF CAPITAL STOCK
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.
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,
63
<PAGE>
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.
TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for our common stock is Pacific
Stock Transfer Company, Las Vegas, Nevada.
LEGAL MATTERS
Certain legal matters with respect to the legality of the Shares offered
pursuant to this prospectus will be passed upon for us by our counsel, Sklar
Warren Conway & Williams, LLP, Las Vegas, Nevada.
EXPERTS
The consolidated financial statements of Sitestar Corporation and
subsidiaries for the years ended December 31, 1999 and 1998 have been included
in this prospectus and in the registration statement in reliance upon the report
of Merdinger, Fruchter, Rosen & Corso, LLP, independent certified public
accountants, appearing elsewhere in this prospectus, and upon the authority of
said firm as experts in accounting and auditing.
64
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form SB-2 under the Securities Act of 1933,
and the rules and regulations enacted under its authority, with respect to the
common stock offered in this prospectus. This prospectus, which constitutes a
part of the registration statement, does not contain all of the information set
forth in the registration statement and its exhibits and schedules. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the full text of the contract or other document which is
filed as an exhibit to the registration statement. Each statement concerning a
contract or document which is filed as an exhibit should be read along with the
entire contract or document. For further information regarding us and the common
stock offered in this prospectus, reference is made to this registration
statement and its exhibits and schedules. The registration statement, including
its exhibits and schedules, may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center,
50 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these
documents may be obtained from the Commission at its principal office in
Washington, D.C. upon the payment of the charges prescribed by the Commission.
The Commission maintains a web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The Commission's address on the World Wide
Web is http://www.sec.gov.
All trademarks or trade names referred to in this prospectus are the
property of their respective owners.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
SITESTAR CORPORATION AND SUBSIDIARIES
INDEX
Page
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheet as of December 31, 1999
and March 31, 2000 (unaudited) F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1999 and 1998 and for the
Three Months Ended March 31, 2000 and 1999 (unaudited) F-5
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 1999 and 1998 and the
Three Months Ended March 31, 2000 (unaudited) F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999 and 1998 and for the
Three Months Ended March 31, 2000 and 1999 (unaudited) F-7
Notes to Consolidated Financial Statements F-10
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
SITESTAR CORPORATION
We have audited the accompanying consolidated balance sheet of Sitestar
Corporation and subsidiaries (formerly Interfoods Consolidated, Inc.) as of
December 31, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1999. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sitestar Corporation and subsidiaries (formerly Interfoods Consolidated, Inc.)
as of December 31, 1999, and the results of their consolidated operations and
their consolidated cash flows for each of the two years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1, the
Company's recurring losses and negative cash flow from operations and its
negative working capital raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
discussed in Note 1. The consolidated 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
April 8, 2000
F-2
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 and March 31, 2000 (unaudited)
December 31, March 31,
1999 2000
------------ -------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 45,328 $ 30,825
Accounts receivable, less allowance for
doubtful accounts of $127,000 and $127,000 134,274 160,168
Other current assets 64,178 70,000
------------ -------------
Total current assets 243,780 260,993
PROPERTY AND EQUIPMENT, net 500,451 426,956
ASSETS OF BUSINESS TRANSFERRED
UNDER CONTRACTUAL ARRANGEMENTS
(NOTE RECEIVABLE) 584,475 476,388
CUSTOMER LIST, net of accumulated amortization
of $36,417 and $254,916 2,585,583 2,367,084
EXCESS OF COST OVER FAIR VALUE OF
NET ASSETS ACQUIRED, net of accumulated
amortization of $23,352 and $163,457 2,778,955 2,638,850
INVESTMENTS 160,000 160,000
OTHER ASSETS 35,489 27,190
------------ -------------
TOTAL ASSETS $ 6,888,733 $ 6,357,461
============ =============
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
CONSOLIDATED BALANCE SHEETS, Continued
DECEMBER 31, 1999 AND MARCH 31, 2000 (unaudited)
December 31, March 31,
1999 2000
------------ -------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 288,527 $ 238,406
Accrued expenses 25,890 138,073
Deferred revenue 158,959 164,516
Due to stockholders 274,759 287,036
Note payable - stockholders, current portion 238,681 243,622
Notes payable, current portion 66,089 68,089
Capital lease obligations, current portion 51,102 45,990
------------ -------------
Total current liabilities 1,104,007 1,185,732
LIABILITIES OF BUSINESS TRANSFERRED UNDER
CONTRACTUAL ARRANGEMENTS 925,774 859,920
NOTES PAYABLE - STOCKHOLDERS, less
current portion 68,707 63,766
NOTES PAYABLE, less current portion 474,503 467,922
CAPITAL LEASE OBLIGATIONS, less
current portion 63,677 42,427
------------ -------------
TOTAL LIABILITIES 2,636,668 2,619,767
------------ -------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value, 10,000,000
shares authorized, 0 shares issued and
outstanding - -
Common Stock, $.001 par value, 75,000,000
shares authorized, 24,159,826 shares issued
and outstanding 24,160 24,160
Additional paid-in capital 8,347,174 8,347,174
Note receivable - stockholder (69,017) (69,017)
Accumulated deficit (4,050,252) (4,564,623)
Total stockholders' equity 4,252,065 3,737,694
------------ -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 6,888,733 $ 6,357,461
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
Year ended Three Months Ended
December 31, March 31,
------------------------- -------------------------
1999 1998 2000 1999
----------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
REVENUE $ 223,749 $ - $ 429,604 $ -
COST OF REVENUE 124,859 - 239,666 -
----------- ----------- ---------- -----------
GROSS PROFIT 98,890 - 189,938 -
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,217,247 370,650 673,823 44,941
LOSS FROM OPERATIONS OF
BUSINESS TRANSFERRED
UNDER CONTRACTUAL
OBLIGATIONS 239,653 113,844 42,233 33,395
----------- ----------- ---------- -----------
LOSS FROM OPERATIONS (3,358,010) (484,494) (526,118) (78,336)
OTHER INCOME (EXPENSE)
Gain on sale of assets - - 49,316 -
Interest expense (13,679) - (37,569) -
------------ ----------- ---------- -----------
LOSS BEFORE INCOME TAXES (3,371,689) (484,494) (514,371) (78,336)
INCOME TAXES - - - -
----------- ----------- ---------- -----------
NET LOSS $(3,371,689) $ (484,494) $ (514,371) $ (78,336)
============ =========== ========== ============
BASIC AND DILUTED
LOSS PER SHARE $ (0.18) $ (0.03) $ (0.02) $ 0.00
=========== ========== ========= ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC
AND DILUTED 18,932,268 17,081,430 24,159,826 18,600,036
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Additional Note
Common Stock Paid-in Receivable Accumulated
Shares Amount Capital Stockholder Deficit Total
---------- ----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997, as restated
for a 3 to 1 stock split 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, as
restated for a 3 to 1 stock split 18,600,036 18,600 609,200 (71,657) ( 678,563) (122,420)
Cash contribution 110,275 110,275
Issuance of common stock for cash 53,362 54 49,946 50,000
Common stock issued for services 564,075 564 548,678 549,242
Common stock issued for investment 160,000 160 159,840 160,000
Contribution of Sitestar Inc. 's net asset 91,664 91,664
Payment on note receivable - stockholder 2,640 2,640
Shares issued by principal stockholders
to employee for compensation 2,000,000 2,000,000
Issuance of Shares in connection with
acquisition of Neocom Microspecialists, Inc. 4,782,353 4,782 4,777,571 4,782,353
Net loss (3,371,689) (3,371,689)
---------- ----------- ----------- ----------- ------------ ----------
Balance at December 31, 1999 24,159,826 24,160 8,347,174 (69,017) (4,050,252) 4,252,065
Net loss (unaudited) (514,371) (514,371)
---------- ----------- ----------- ----------- ------------ ----------
Balance at March 31, 2000 (unaudited) 24,159,826 $ 24,160 $ 8,347,174 $ (69,017) $ (4,564,623) $3,737,694
========== =========== =========== ========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
<TABLE>
<CAPTION>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 (unaudited)AND 1999 (unaudited)
Year ended Three Months Ended
December 31, March 31,
------------------------ -----------------------
1999 1998 2000 1999
----------- ----------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,371,689) $ (484,494) $ (514,371) $ (78,336)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Allowance for doubtful accounts - 6,378 - -
Depreciation and
amortization expense 118,775 1,678 382,104 -
Gain on the sale of assets - - (49,316) -
Loss from operations of business
transferred under contractual
arrangements 239,653 - 42,233 33,395
Common stock issued for
services rendered 549,242 - - -
Compensation expense paid by
principal shareholders 2,000,000 - - -
(Increase) decrease in:
Accounts receivable (2,205) 154,234 (25,894) -
Inventories - 87,805 - -
Other assets (43,350) (14,394) (9,522) -
Increase (decrease) in:
Accounts payable and
accrued expenses 150,398 (320,078) 82,238 37,119
Deferred revenue (733) - 5,557 -
Advances from stockholder 194,459 263,000 59,427 (2,980)
----------- ----------- ---------- -----------
Net cash used in operating activities (165,450) (305,871) (27,544) (10,802)
----------- ----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,982) (17,441) (8,739) (2,200)
Cash acquired with acquisition
of subsidiaries 27,026 - - -
Proceeds from sale of assets - - 34,703 -
Repayment of advances from
business transferred under
contractual arrangements 90,721 - - -
Investment - (125,000) - -
----------- ----------- ---------- -----------
Net cash provided by (used in)
investing activities 108,765 (142,441) 25,964 (2,200)
----------- ----------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
<TABLE>
<CAPTION>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 (unaudited) AND 1999 (unaudited)
Year ended Three Months Ended
December 31, March 31,
------------------------ -----------------------
1999 1998 2000 1999
----------- ----------- ---------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in book overdraft - 29,546 - 13,002
Advance from stockholder, net - 39,960 - -
Proceeds from line of credit - 200,000 - -
Proceeds from notes payable - 169,500 - -
Repayment of notes payable (56,427) (50,000) (4,581) -
Repayment of stockholder loan 2,640 - - -
Payment on capital lease obligation (4,475) - (8,342) -
Proceeds from sale of common stock 50,000 - - -
Capital contribution 110,275 - - -
----------- ----------- ---------- -----------
Net cash provided by (used in)
financing activities 102,013 389,006 (12,923) 13,002
----------- ----------- ---------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 45,328 (59,306) (14,503) -
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD - 59,306 45,328 -
----------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ 45,328 $ - $ 30,825 $ -
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-8
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 (unaudited) AND 1999(unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the years ended December 31, 1999 and 1998, the Company paid no income
taxes and interest of approximately $14,000 and $15,000, respectively and during
the three months ended March 31, 2000 and 1999, the Company paid no income taxes
and interest of approximately $38,000 (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 year ended December 31, 1999, the Company acquired equipment totaling
$18,000 with capital lease obligations.
During the year ended December 31, 1999, a group of stockholders contributed net
assets of $91,664 from their acquisition of Sitestar Inc. as additional paid-in
capital.
During the year ended December 31, 1999, the Company issued 564,075 shares of
common stock for services valued at $548,678. The Company also issued 160,000
shares of common stock for a 9% investment in Qliq-on Corporation valued at
$160,000 and 4,782,353 shares of common stock for the acquisition of Neocom
valued at $4,782,353.
F-9
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Sitestar Corporation (formerly Interfoods Consolidated, Inc. and prior
to that was formerly known as Holland American International Specialties
("HAIS")), (the "Company"), began operations on June 1, 1997, under a
partnership agreement, and was incorporated in California on November 4,
1997. On July 26, 1999, the Company restated its Articles of
Incorporation to change the name of the Company to "Sitestar
Corporation." The Company was 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.
In 1999 through the acquisition of two Internet Service Providers, the
Company changed its focus from a food distribution company to an
Internet holding company. The operations of the Company's Internet
subsidiaries are located in the Mid-Atlantic region of the United
States. The Company's corporate office is located in Encino, 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 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in
the accompanying consolidated financial statements, the Company has
recurring losses and negative cash flow from operations and its negative
working capital. These issues raise substantial doubt about its ability
to continue as a going concern.
F-10
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
Basis of Presentation, continued
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in
the accompanying consolidated 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
consolidated 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:
o Line of Credit
The Company is currently in discussions for a proposed $10 to $15
million "best effort" underwriting (See Note 11). 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 the Company to draw down the capital through
the sale of our common stock. This funding would be used to pay down
debt, for acquisition growth and for working capital.
o Net losses and cash flow deficiencies
On December 15, 1999 the Company consummated the acquisition of Neocom
Microspecialists, Inc. ("Neocom"). 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 annual
savings of approximately $195,000 from the reduction of personnel and
achieves as much as 18% savings on our telecommunications costs, which
would translate to approximately $107,000 in annual savings.
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.
F-11
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
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 its operations, and cash flows for
the periods presented. The results of operations for the three months
ended March 31, 2000 are not necessarily indicative of the results for
the entire fiscal year ending December 31, 2000.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, HAIS,
Sitestar, Inc. and Neocom Microspecialists, Inc. from the date of
acquisition. All intercompany accounts and transactions have been
eliminated.
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.
F-12
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
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 operations of
the Company's Internet subsidiaries are located in the Mid-Atlantic
region of the United States. The Company 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.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method based on estimated useful lives from 3 to
7 years and 39 years for the building. Expenditures for maintenance and
repairs are charged to operations as incurred while renewals and
betterments are capitalized. Gains and losses on disposals are included
in the results of operations.
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 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. The Company's
intangible assets which consist of a customer list and excess cost over
fair value of net assets acquired are being amortized over three and
five years, respectively. Amortization expense for he customer list and
excess cost over fair value of net assets acquired was $36,417 and
$23,352, respectively, for the year ended December 31, 1999 and $218,499
(unaudited) and $140,104 (unaudited), respectively, for the three months
ended March 31, 2000.
F-13
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
Software Development Costs
--------------------------
Software development costs, which are included in Other Assets in the
accompanying consolidated balance sheet, 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. At December 31, 1999, capitalized software development costs were
$14,310, net of accumulated amortization of $938. At March 31, 2000,
capitalized software development costs were $14,040 (unaudited), net of
accumulated amortization of $1,208 (unaudited).
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.
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
F-14
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
Revenue Recognition, continued
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 of advertising and marketing as they are
incurred. Advertising and marketing expense for the years ended December
31, 1999 and 1998 was approximately $11,000 and $0, respectively, and
for the three months ended March 31, 2000 and 1999 was $600 and $0,
respectively.
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 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-15
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
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. The Company has no potentially
dilutive securities.
Investment
----------
In December 1999, the Company purchased a 9% equity interest in Qliq-on
Corporation for 160,000 shares of the Company's common stock valued at
$160,000. This investment is being accounted for using the cost method.
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, 1999 and 1998 and March
31, 2000 (unaudited) and 1999 (unaudited), the Company has no items that
represent other comprehensive income and, therefore, has not included a
schedule of comprehensive income in the consolidated financial
statements.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 1999, the FASB issued SFAS No. 136, "Transfer of Assets to a
Not-for-Profit Organization or Charitable Trust that Raises or Holds
Contributions for Others" and SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities." These statements are not applicable
to the Company.
F-16
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 2 - PROPERTY AND EQUIPMENT
The cost of property and equipment at December 31, 1999 and March 31,
2000 consisted of the following:
December 31, March 31,
1999 2000
------------ -------------
(unaudited)
Land $ 10,000 $ 10,000
Building 200,000 200,000
Computer equipment 321,854 221,856
Furniture and fixtures 27,603 36,342
------------ -------------
559,457 468,198
Less accumulated depreciation (59,006) (41,242)
------------ --------------
$ 500,451 $ 426,956
============ =============
Depreciation expense was $59,006 and $1,678 for the years ended December
31, 1999 and 1998, respectively, and $23,500 (unaudited) and $0
(unaudited) for the three months ended March 31, 2000 and 1999,
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. During 1999, this note was reduced to $69,017. The note
receivable is presented as a reduction to stockholders' equity in the
accompanying consolidated financial statements.
F-17
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 4 - ACQUISITIONS
Sitestar, Inc.
--------------
On July 27, 1999, a group of stockholders acquired 100% of the
outstanding common stock of Sitestar, Inc., 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
Inc.'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, Inc. 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 HAIS on July 15, 1999.
The transaction was accounted for in a manner similar to a pooling of
interest. The assets acquired and liabilities assumed is summarized as
follows:
Cash $ 14,063
Equipment, net 95,579
Other assets 8,048
Current liabilities (13,118)
Capital lease obligations (12,908)
---------------
Purchase price $ 91,664
===============
F-18
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 4 - ACQUISITIONS, continued
Neocom Microspecialists, Inc.
-----------------------------
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 any potential unrecorded liabilities.
Of the 4,782,353 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 initial purchase price
was $4,782,353 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 will be adjusted,
when and if, any of the 2,000,000 shares are issued.
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 the customer list valued at $2,622,000, which will be
amortized over its three-year life, and then to excess of cost over fair
value of net assets acquired which will be amortized over five years.
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.
F-19
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 4 - ACQUISITIONS, continued
Neocom Microspecialists, Inc., continued
The fair value of assets acquired and liabilities assumed is summarized
as follows:
Cash $ 12,963
Other current assets 146,719
Equipment, net 360,096
Customer list 2,622,000
Excess cost over fair value of net assets acquired 2,862,307
Other assets 31,614
Current liabilities (315,705)
Notes payable (854,407)
Capital lease obligations (83,234)
--------------
Purchase price $ 4,782,353
===============
The following table presents the unaudited pro forma condensed statement
of operations for the year ended December 31, 1999 and reflects the
results of operations of the Company as if the acquisitions of Sitestar,
Inc. and Neocom Microspecialists, Inc. had been effective January 1,
1999. The pro forma amounts are not necessarily indicative of the
combined results of operations had the acquisition been effective as of
that date, or of the anticipated results of operations, due to cost
reductions and operating efficiencies that are expected as a result of
the acquisition.
Net sales $ 1,946,776
Gross profit $ 814,494
Selling, general, and administrative expenses $ 5,473,530
Net loss $ (5,019,376)
Basic loss per share $ (0.21)
F-20
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 5 - 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, Inc. 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.
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.
F-21
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 5 - SALE OF ASSETS, continued
On September 30, 1999, the Company sold its 9% interest in SMF 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.
On January 1, 2000, the party that acquired the assets of HAIS entered
into an agreement to sell HAIS to the current general manager, who is
also an insignificant stockholder of the Company. At such time that the
liabilities of HAIS are refinanced by the purchaser or the purchaser
capitalizes HAIS, the Company will discontinue accounting for HAIS in
its financial statements and recognize the gain on sale of assets.
NOTE 6 - RELATED PARTY ADVANCES/LOANS
A majority stockholder of the Company has advanced $227,609 for
operating funds. An officer of Sitestar, Inc. advanced the Company
$47,150 for operating funds. The advances are non-interest bearing and
due on demand.
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 included in the
accompanying consolidated balance sheet under liabilities of business
transferred under contractual arrangements.
As part of the acquisition of Neocom, the Company assumed six notes
payable to the former owners, who are current stockholders of the
Company, in the amount of $307,388. The notes bear interest ranging from
8.13% to 10.0%. Principal payments on the notes in 2000, 2001, 2002,
2003 and 2004 are $238,681, $19,764, $19,764, $19,764 and $9,415,
respectively.
F-22
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 7 - NOTES PAYABLE
Notes payable at December 31, 1999 and March 31, 2000 consist of the
following:
December 31, March 31,
1999 2000
---------- ---------
(unaudited)
13.0% - Bank note payable in monthly interest and principal
payments of $1,784 and balance due December 2002. The note
is guaranteed by a 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 Neocom.
$ 135,302 $ 134,155
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 Neocom.
388,669 385,375
5.1% - Asset purchase note payable in monthly installments
of $2,050 for 10 months and $1,700 for 12 months.
16,621 16,481
--------- --------
Total 540,592 536,011
Less current portion 66,089 68,089
--------- --------
Long-term portion $ 474,503 $ 7,922
========= ========
The future principal maturities of these notes are as follows:
Year ending December 31,
2000 $ 66,089
2001 49,124
2002 177,630
2003 247,749
-------------
Total $ 540,592
=============
F-23
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities for its corporate offices,
warehouse and retail store under a non-cancelable operating lease. Total
rent expense for the year ended December 31, 1999 and 1998 was $23,119
and $14,038, respectively, and for the three months ended March 31, 2000
and 1999 was $4,120 (unaudited) and $0 (unaudited) respectively.
During the year ended December 31, 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: (a related
company has assumed some of these amounts, see Note 5. Since the Company
remained the lessee, after the divestiture, the lease commitments are
being presented in detail.)
Capital Operating
Leases Leases
------------ -------------
Year ending December 31,
2000 $ 69,557 $ 25,038
2001 43,920 12,684
2002 30,461 -
2003 3,113 -
------------ -------------
Net Minimum Lease Payments 147,051 $ 37,722
=============
Less: Amounts Representing Interest 32,272
Present Value of Net Minimum
Lease Payments 114,779
Less: Current Portion 51,102
Long-Term Portion $ 63,677
============
Included in property and equipment is capitalized lease equipment of
$152,122 with accumulated amortization of $1,405 at December 31, 1999.
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-24
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 8 - COMMITMENTS AND CONTINGENCIES, Continued
Neocom Acquistion
-----------------
In connection with the Neocom acquisition, the Company is required to
issue an additional 2,000,000 shares of its common stock on the second
anniversary of the acquisition date, if no unforeseen contingencies
arise. The purchase price will be adjusted, when and if, any of the
2,000,000 shares are issued.
NOTE 9 - STOCKHOLDERS' EQUITY
Classes of Shares
-----------------
On July 6, 1999, the Company's Articles of Incorporation authorize the
issues of up to 85,000,000 shares, consisting of 10,000,000 shares of
Preferred Stock, which have a par value of $.001 per share and
75,000,000 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 discretion. As of December 31, 1999, the
Company's Board of Directors has not issued any Preferred Stock.
Common Stock Splits
-------------------
On July 6, 1999, the Company's Board of Directors approved a 3-to-1
stock split increasing the number of shares outstanding from 6,200,012
to 18,600,036. 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 1998, the Company issued 1,860,036 shares of its common stock for
the acquisition of White Dove Systems, Inc. (See Note 1).
In August 1999, three principal stockholders of the Company transferred
1,926,170 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 which was approximately $2,000,000.
F-25
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 9 - STOCKHOLDERS' EQUITY, continued
Common Stock, continued
On December 15, 1999, the Company issued 4,782,353 shares of its common
stock in connection with the acquisition of Neocom valued at $4,782,353,
which was the fair market value of the Company's common stock at the
date of acquisition times the number of shares issued.
On December 27, 1999, the Company issued 160,000 shares of its common
stock for a 9% investment in Qliq-on Corporation valued at $160,000,
which was the fair market value of the Company's common stock on the
transaction date times the number of shares issued.
During 1999, the Company sold 53,362 shares of common stock to an
investor for $50,000 and received $110,275 as a capital contribution
from existing stockholders. Also during 1999, the Company issued 564,075
shares of common stock for services valued at $549,242. The issuance of
these shares were valued at the fair market value of the Company's
common stock at the date shares were issued.
NOTE 10 - INCOME TAXES
The reconciliation of the effective income tax rate to the federal
statutory rate for the years December 31, 1999 and 1998 and the three
months ended March 31, 2000 and 1999 is as follows:
Year ended Three Months Ended
December 31, March 31,
------------------- --------------------
1999 1998 2000 1999
------- ------- -------- --------
(unaudited) (unaudited)
Federal income tax rate 34.0% 34.0% 34.0% 34.0%
Effect of valuation allowance (34.0)% (34.0)% (34.0)% (34.0)%
------- ------- -------- --------
Effective income tax rate 0.0% 0.0% 0.0% 0.0%
======= ======= ======== ========
F-26
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 10 - INCOME TAXES, continued
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 as of December 31, 1999 and March 31, 2000 are as follows:
December 31, March 31,
1999 2000
------------ ------------
(unaudited)
Loss carry forwards $ 1,308,000 $ 1,513,000
Less valuation allowance (1,308,000) (1,513,000)
------------- -------------
$ - $ -
============= =============
At December 31, 1999, 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 years ended December 31, 1999
and 1998, was an increase of $1,145,000 and $97,000, respectively. Net
operating loss carry forwards expire starting in 2012.
NOTE 11 - SUBSEQUENT EVENTS (unaudited)
In January 2000, the Company sold certain assets and liabilities of its
wholly owned subsidiary, Sitestar, Inc. for $34,703 in cash plus a note
receivable in the amount of $10,000. The Company recognized a gain on
sale of these certain assets of $49,316. The Company retained the
"Sitestar" trademark and "Sitestar.com" URL.
F-27
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARIES
(FORMERLY INTERFOODS CONSOLIDATED, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (unaudited)
NOTE 11 - SUBSEQUENT EVENTS (unaudited), continued
On May 11, 2000 the Company issued two convertible debentures
aggregating $500,000. The debentures bear interest at 12% per annum and
are due on May 1, 2001. The debentures are convertible into common
stock at a rate equal to the lowest of $.70 or 60% of the average of
the three lowest closing bid price for the common stock during the 20
trading days immediately preceding the conversion date. In addition,
the Company also issued three-year warrants to purchase an aggregate of
250,000 shares of common stock at an initial exercise price of $0.77
per share. Due to the preferential conversion feature of these
debentures the Company will capitalize $242,857 (which represents the
value of additional shares issuable upon conversion at the $.70
conversion price verses the number of shares issuable upon conversion
at the market value at the date of issuance)as debt issuance costs and
amortize this amount over the term of the debentures. In addition, the
warrants issued in connection with these debentures have an exercise
price below the market value of the Company's stock on the date of
issuance, therefore the Company will capitalize an additional $67,500
(which represents the difference in the market value at the date of
issuance less the $.77 exercise price time the number of warrants
issued) of debt issuance costs associated with the issuance of the
250,000 warrants that will be amortized over the term of these
debentures.
The Company and the above debenture holders have also agreed that, upon
the declaration of effectiveness of the Registration Statement to be
filed pursuant to the Registration Rights Agreement, provided that the
trading price of the Common Stock is at least $1.00 for the ten (10)
consecutive trading days immediately preceding the Effective Date, the
debenture holders will be obligated to purchase, and the Company shall
be obligated to sell and issue to the debenture holders, additional
debentures in the aggregate principal amount of Five Hundred Thousand
($500,000) and additional warrants to purchase an aggregate of 250,000
shares of Common Stock for an aggregate purchase price of Five Hundred
Thousand Dollars ($500,000), with the closing of such purchase to occur
within thirty (30) days of the Effective Date. The terms of the
Additional Debentures and the Additional Warrants shall be identical to
the terms of the Debentures and the Warrants as described above,
provided that the Initial Conversion Price (as defined in the
Debentures) for the Additional Debentures shall be seventy-seven
hundredths of one dollar ($.77).
F-28
<PAGE>
You should rely only on the information contained in this document or to which
we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only when it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary......................................................... 3
Selected Consolidated Financial Data....................................... 5
Risk Factors............................................................... 7
Forward-Looking Statements................................................. 23
Use of Proceeds............................................................ 23
Price Range of Our Common Stock............................................ 23
Dividend Policy............................................................ 24
Capitalization............................................................. 25
Plan of Distribution....................................................... 25
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 27
Business................................................................... 32
Management................................................................. 56
Principal and Selling Security Holders..................................... 58
Description of Convertible Debentures...................................... 61
Certain Relationships and Related Transactions............................. 62
Description of Capital Stock............................................... 63
Transfer Agent and Registrar............................................... 64
Legal Matters.............................................................. 64
Experts.................................................................... 64
Where You Can Find More Information........................................ 65
Index to Financial Statements.............................................. F-1
<PAGE>
------------------------
3,857,273 Shares
SITESTAR CORPORATION
COMMON STOCK
-----------------
PROSPECTUS
-----------------
July 21, 2000
