Registration No. 0-27763
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT No. 1
to
FORM 10-SB
FILED October 22, 1999
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12 (g) OF THE SECURITIES EXCHANGE ACT OF 1934
SITESTAR CORPORATION
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(Name of Small Business Issuer in Its Charter)
NEVADA 88-0397234
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16133 VENTURA BLVD., SUITE 635, ENCINO 91436
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(Address of Principal Executive Office) (ZipCode)
(818) 981-4519
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Telephone Number
Securities to be registered under Section 12(b)
of the Exchange Act:
None
Securities to be registered under Section 12(g)
of the Exchange Act:
COMMON STOCK, $0.001 PAR VALUE
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(Title of class)
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TABLE OF CONTENTS
Page
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PART I
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Item 1. Description of Business....................................... 1
Item 2. Management's Discussion and Analysis
or Plan of Operation......................................26
Item 3. Description of Property.......................................49
Item 4. Security Ownership of Certain Beneficial Owners
and Management............................................50
Item 5. Directors, Executive Officers, Promoters and
Control Persons...........................................51
Item 6. Executive Compensation........................................52
Item 7. Certain Relationships and Related Transactions................52
Item 8. Description of Securities.....................................53
PART II
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Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters...............54
Item 2. Legal Proceedings.............................................55
Item 3. Changes in and Disagreements with Accountants.................55
Item 4. Recent Sales of Unregistered Securities.......................55
Item 5. Indemnification of Directors and Officers.....................56
PART F/S
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Financial Statements.....................................................57/F-1
PART III
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Item 1. Index to Exhibits.............................................58
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PART I
Item 1. DESCRIPTION OF BUSINESS
OVERVIEW
Sitestar Corporation (the "Company" or "Sitestar") is a diversified
Internet holding company. Our near term strategy is to acquire and invest in
emerging Internet-based enterprises to create a broad and diverse set of core
Internet businesses that deliver a variety of online solutions. In addition to
developing and integrating Internet-based technologies, our primary objective is
to create a mix of Internet operating companies and Internet-related portfolio
investments that will enhance the value of our current businesses in the
following areas:
o Internet e-commerce
We design and offer customized e-commerce services which include the
ability to create and operate an online "storefront" and sell
merchandise over the Internet. We will also continue to enhance and
expand our products and services towards opportunities surrounding the
growth of the Internet and the electronic commerce industry.
o Value-added content
We have developed and will continue developing content that provide
the ability to target specific demographics. We will also continue to
pursue innovative niche oriented value-added content in segments we
believe are underdeveloped and under-served. We are actively seeking
opportunities to develop innovative ways for consumers to retrieve and
access information effectively through the Internet.
o Internet Service Providers (ISP)
We offer a full range of dial-up Internet access services to
residential subscribers and dedicated and dial-up Internet access to
business customers within the secondary markets of the mid-Atlantic
region which we believe have been historically under-served by the
larger, national Internet service providers. We will continue to
pursue and focus on acquisition opportunities within the secondary
locations in the mid-Atlantic region to further expand our Internet
access coverage.
o Internet Portals/Community Web sites
We will continue to pursue innovative portal and community web-based
destinations. We are actively seeking to develop innovative ways for
consumers to interact effectively through the Internet. The Company
designs and offers customized packages which include the ability to
change advertisements quickly and frequently, to conduct advertising
test campaigns with rapid result delivery and to track daily usage
statistics. The Company has developed and will continue developing
software that provides the ability to target ads based on demographics
and usage patterns.
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o Strategic investments in internet-related ventures
We intend to continue to evaluate new Internet related opportunities
to further our investment in our Internet strategy and also to seek
out opportunities to increase shareholder value. We are currently in
preliminary discussions with a number of Internet related enterprises
for possible investment opportunities. However, we cannot assure you
that we will successfully complete any of the investments we are
currently evaluating.
We will attempt to develop and refine the products and services of our
existing businesses and businesses or assets we acquire with the goal of
significantly increasing revenue as new products are commercially introduced.
Additionally, we will continue to pursue strategic investments in new
Internet-related opportunities to leverage our existing assets. Our operating
strategy is to integrate our subsidiaries and future Internet portfolio
investments into a collaborative network that leverages our collective knowledge
and resources. We will actively explore synergistic opportunities such as cross
marketing and co-development efforts within our subsidiaries and investments to
further leverage our resources.
CORPORATE HISTORY
We were incorporated under the name of White Dove Systems, Inc. in December
1992 under the laws of the State of Nevada to engage in any lawful corporate
activity.
In October 1998 we acquired all the issued and outstanding shares of
Interfoods Consolidated, Inc. ("IFCO"), a California corporation, in exchange
for 5,580,000 shares of our Common Stock. IFCO, operating under the trade name
of Holland American International Specialties ("HAIS"), is a retailer and
wholesaler of imported and domestic specialty gourmet foods. IFCO began its
operations in June 1997 with the purchase of the inventory assets and trade name
of HAIS from an unrelated third party. HAIS' product offering ranges from exotic
European delicacies to mainstream specialty candies, chocolates and other
confectionery products. In connection with this acquisition and in order to
properly reflect the new corporate focus, we changed our name from White Dove
Systems, Inc. to Interfoods Consolidated, Inc. in October 1998.
In January 1999 we acquired 9% of the outstanding Common Stock of Sierra
Madre Foods, Inc. ("SMF"), a California corporation, through a joint venture
arrangement with the debtor-in-possession who owns the remaining 91% of the
outstanding Common Stock of SMF, for $200,000. SMF, formerly known as Queen
International Foods ("QIF"), is a manufacturer and wholesaler of frozen Mexican
food products such as burritos and chimichangas. We acquired our equity interest
through the U.S. Bankruptcy court proceedings along with the
debtor-in-possession as our joint venture partner. QIF filed for Chapter 11
Bankruptcy protection on April 1998. We formed SMF as a joint venture with the
debtor-in-possession for the sole purpose of acquiring substantially all of the
assets of QIF from the U.S. Bankruptcy court. Our $200,000 purchase
consideration for our 9% stake, along with the consideration paid by our joint
venture partners, were paid to the U.S. Bankruptcy court trustee for
substantially all of the assets of QIF.
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In July 1999 a majority of IFCO shareholders, including our Chairman Mr.
Manlunas, acquired all the issued and outstanding shares of Sitestar, Inc..
("SYTE"), a Delaware corporation, in exchange for 3,491,428 shares of our Common
Stock owned by the majority IFCO shareholders. Simultaneous with the closing of
this transaction, the IFCO shareholders contributed SYTE to IFCO as contributed
capital. SYTE is a Web development, design and hosting company formed in 1996
and is based in Annapolis, Maryland. This acquisition included Soccersite.com
which is currently one of our operating subsidiaries. Soccersite.com was an
operating subsidiary of SYTE. As a result of this acquisition and shareholder
contribution, we changed our corporate focus from a food holding company to an
Internet holding company. To better reflect our new primary corporate focus we
changed our corporate name from Interfoods Consolidated, Inc. to Sitestar
Corporation in July 1999.
In August 1999 we acquired substantially all of the assets of
Greattools.com in exchange for 49,000 shares of our Common Stock. We acquired
the assets of Greattools.com from Global Sourcing Group, Greattools.com's
current fulfillment center. Gateway Holdings, Inc., a private investment company
our Chairman Frederick Manlunas is managing, has a 14.6% equity ownership in
Global Sourcing Group. Greattools.com is an online low cost retailer of power
tools.
Effective as of September 30, 1999 we sold the non-Internet assets of HAIS
to IFCO Group, LLC ("IFCO GROUP"), whose members consist of certain shareholders
of the Company, including Frederick T. Manlunas, our Chairman of the Board. We
retained the assets consisting of the Internet web site Holland-American.com.
HAIS will continue to serve as Holland-American.com's exclusive fulfillment
center. The purchase consideration for HAIS was $900,000 and was based upon a
business appraisal by an independent third party appraiser. The consideration
included $200,000 which was to be offset against the Company's liability to Mr.
Manlunas for services rendered in connection to the acquisition of Sitestar,
Inc., the assumption of $654,000 of liabilities and a promissory note in the
amount of $46,000. The note bears interest at a rate of 8% per annum, and is
payable in annual installments of $15,333, and is due and payable on September
30, 2002. The note is secured by HAIS' accounts receivable and inventory.
On September 30, 1999 we sold our 9% equity interest in SMF to IFCO for
$200,000. The consideration was paid in the form of assumption of $160,000 of
debt related to the investment and the balance of $40,000 paid by a promissory
note payable in three annual installments of $13,334 each. The note bears
interest at a rate of 8% per annum. The purchase consideration was equal to our
original investment in January 1999.
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RECENT EVENTS
Effective December 15, 1999, we have consummated the previously disclosed
acquisition of Neocom Microspecialists, Inc. ("Neocom") in exchange for
5,882,353 shares of Sitestar Common Stock for 100% of the outstanding shares of
Neocom. Effective upon the closing of the acquisition, we issued 3,882,353
shares of our Common Stock and have reserved 2,000,000 shares of Common Stock
that we have agreed to issue on the second anniversary of the acquisition based
on certain contingencies. The certain contingencies are related to potential
unrecorded liabilities. In addition, we issued an additional 900,000 shares of
Common Stock 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. The Debt Assumption
agreement stipulates that we will advance the debt service payments of the
liabilities on behalf of the majority of the selling Neocom shareholders and
that we will treat these debt service payments as shareholder advances. The
majority of the selling Neocom shareholders will pay the shareholder advances
with the proceeds of the sale of the 900,000 shares of our Common Stock upon
registration of these securities. As part of the transaction, we have agreed to
grant them registration rights, as soon as practicable, for the 900,000 shares
of Common Stock issued in exchange for the debt assumption. In the meantime, we
are finalizing a Pledge Agreement with the selling Neocom shareholders to use
the 900,000 shares of our Common Stock as security against the shareholder
advance.
Neocom is an Internet service provider and Web development company based in
Martinsville, Virginia. As of October 31, 1999, (i) Neocom provided Internet
access and other Internet services to approximately 4,700 customers in the
Southern Virginia area and (ii) its revenues for the ten months ended October
31, 1999 were $1.454 million. Based on our current estimates we believe that
Neocom's annualized revenues would be approximately $1.745 million for the
fiscal year ending December 31, 1999.
POSSIBLE FUTURE ACQUISITIONS
The originally disclosed letter of intent we signed with Eastern Shorenet
has officially expired as of October 31, 1999. Although, we continue to have an
ongoing dialogue with the Eastern Shorenet principals towards trying to complete
a transaction, there is no assurance that we will successfully complete a
transaction with them.
We are also currently in preliminary discussions with a number of Internet
service providers for potential acquisitions in targeted markets in the
Mid-Atlantic region. However, there is no assurance that we will successfully
complete any of the acquisitions we are currently evaluating. All discussions we
are conducting are at an early stage and we have not made any decisions to make
any acquisitions at this time.
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MARKET OPPORTUNITY
OVERVIEW. We believe that the Internet has become an important global
medium enabling growing numbers of people to obtain and share information and
conduct business electronically. Its expanded use has made the Internet a
critical tool for information and communications for many users. We believe that
Internet access and enhanced Internet services, including Web hosting and
electronic commerce services, represent two of the fastest growing segments of
the telecommunications services market. International Data Corporation ("IDC")
estimates that at the end of 1997 there were over 38 million Web users in the
United States and over 68 million worldwide, and projects that by the end of
2002 the number of Web users will increase to over 135 million in the United
States and over 319 million worldwide. We believe that the availability of
Internet access, advancements in technologies required to navigate the Internet,
and the proliferation of content and applications available over the Internet
have attracted a rapidly growing number of Internet users.
GROWTH IN BUSINESS USE OF THE INTERNET. We believe that the dramatic growth
in Internet usage in recent years, combined with enhanced functionality,
accessibility and security, has made the Internet increasingly attractive to
businesses as a medium for communication and commerce. We feel that for many
businesses, the Internet has created a new communication and sales channel which
enables large numbers of geographically dispersed organizations and consumers to
be reached quickly and cost-effectively. IDC estimates that the number of
consumers buying goods and services on the Internet will grow from 17.6 million
in 1997 to 128.4 million in 2002, and that the total value of goods and services
purchased over the Internet will increase from approximately $12 billion in 1997
to approximately $426 billion by 2002.
We believe that businesses will increasingly add a variety of enhanced
services and applications to their basic Internet access, Web sites and
e-commerce applications in order to more fully capitalize on the power of the
Internet. We feel that these services and applications will allow them to more
efficiently and securely communicate company information, expand and enhance
their distribution channels, increase productivity through back-office
automation, ensure reliability and reduce costs. We see opportunities for growth
in the following areas:
o DEMAND FOR INTERNET ACCESS SERVICES.
Internet access services represent the means by which ISPs
interconnect their customers to the Internet or corporate intranets
and extranets. According to Forrester Research, Internet access
revenues from businesses are expected to increase from less than $1
billion in 1997 to more than $16 billion in 2002. Due, in part, to
their size, small and medium sized enterprises often seek to outsource
these services..
o DEMAND FOR WEB HOSTING SERVICES.
Many businesses are seeking to outsource to ISPs services such as Web
hosting, collocation and file transfer protocol data storage and
retrieval.
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.
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THE SMALL AND MEDIUM SIZED ENTERPRISE MARKET. We define this market as
business enterprises having sales of less than $20.0 million per annum and
enterprises having less than 100 employees. We have specifically targeted small
and medium sized enterprises because:
o We believe that these enterprises increasingly need high-speed data
and Internet connections to access business information and to
communicate more effectively with employees, customers and vendors.
o We believe that a relatively small percentage of these enterprises
currently utilize the Internet, but that this number is increasing
rapidly. The small and medium sized enterprise segment is expected to
be one of the fastest growing segments of the Internet industry.
o Many of these enterprises lack the resources and expertise to develop,
maintain and expand, on a cost-effective basis, the facilities and
network systems necessary for successful Internet operations.
o We believe that these enterprises will prefer an Internet service
provider with locally-based personnel who are available to assist in
developing and implementing their growing use of the Internet and to
respond to technical problems in a timely manner.
o We believe that these enterprises rely more heavily on their Internet
service provider than larger enterprises and tend to change Internet
service providers relatively infrequently.
INTERNET SERVICES IN SECONDARY MARKETS. Small and medium sized enterprises
are often concentrated in so-called "secondary markets" to avoid the higher
costs associated with locating in a metropolitan area. A secondary market is any
market smaller than the 100 most populated U.S. metropolitan markets. However,
national ISPs have historically placed their largest points of presence, or
POPs, only in or around densely populated major cities. A POP is an access point
at which customers in a traditional ISP network architecture can connect to data
circuits in order to obtain Internet access and other services. While customers
located within a few miles from these POPs often receive cost savings on their
access pricing, customers located in secondary markets that are as close as 20
to 75 miles away from these POPs have typically been charged higher prices for
Internet access services.
We believe that small and medium sized enterprises located in high-growth
secondary markets are currently underserved by both national and local providers
of Internet access and related services. National ISPs, on the one hand,
typically lack the local presence to provide local support. Local ISPs, on the
other hand, often lack the requisite scale and resources to provide a full range
of services at acceptable quality and pricing levels.
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OUR GROWTH STRATEGY
Our goal is to be a premier Internet company that offers products ranging
from Internet access and a complete suite of Internet products and services to a
variety of e-commerce platforms targeting small and medium sized enterprises in
our target markets. We would like to offer a variety of business-to-consumer and
business-to-business e-commerce solutions to our customers.
Key elements of our strategy include:
FOCUS GROWTH ON SECONDARY MARKETS. We intend to expand into selected
secondary markets by replicating our regional network and marketing model. Our
network architecture and scalable sales and marketing plan are designed to allow
us to penetrate additional regions rapidly and cost-effectively.
MARKET A VARIETY OF SERVICES TO NEW AND EXISTING CUSTOMERS. We intend to
offer a comprehensive suite of a variety of products and services to meet the
expanding needs and complexity of our customers' Internet operations allowing us
to increase revenue per customer and maintain a high customer retention rate by
strengthening relationships with our customers.
USE OF CENTRALIZED SALES AND MARKETING OPERATIONS. We intend to use our
centralized sales and marketing staff to help implement our regional strategy
cost-effectively. We intend to hire and train additional local sales and
marketing personnel within our target regions to complement the core of our
sales and marketing staff, which will continue to be concentrated in one
centralized location to maximize efficiency. These regionally located employees
are intended to add local market knowledge, expertise and familiarity to our
sales and marketing efforts and allow us to maintain a field presence in each of
our regions, while maximizing our central operations.
STRATEGIC RELATIONSHIPS AND ACQUISITIONS. We intend to enter into strategic
relationships, such as partnerships and joint ventures, and to make acquisitions
to expand our line of enhanced products and services.
As part of this strategy, we recently consummated the acquisition of the
previously disclosed letter of intent to acquire Neocom Microspecialists, Inc.,
a provider of Web hosting and co-location services in the Mid-Atlantic region.
This acquisition is consistent with our growth strategy of building our presence
in secondary markets that have traditionally been under served by the larger
Internet services companies. In addition, we are also actively seeking
acquisition opportunities and/or candidates in the Mid-Atlantic region that
would help us achieve critical mass in terms of our Internet access, development
and hosting customers.
INTERNET INDUSTRY OVERVIEW
We believe that Internet commerce is reshaping the way consumers and
businesses conduct business. According to new projections from Forrester
Research, worldwide e-commerce sales will reach as high as $3.2 trillion in
2003, representing nearly 5% of all global sales. These sales figures include
business-to-business and business-to-consumer sales and EDI (electronic data
interchange) orders placed on the Internet, but exclude the value of financial
transactions. E-commerce is defined as the trade of goods and services in which
the final order is placed over the Internet.
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Growth in Electronic Commerce
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We feel strongly that the growing popularity of the Internet represents an
opportunity for companies like us to take advantage of the potential for
commercial transactions conducted online, referred to as electronic commerce or
e-commerce. International Data, Inc., a market research firm, estimates that
business-to-consumer commerce over the Internet will increase from over $12
billion worldwide at the end of 1997 to approximately $425 billion worldwide by
the end of 2002. In addition, Jupiter Communications, another market research
firm, predicts that by 2002, 44% of Internet users will make purchases online,
as compared to an estimated 22% that did so in 1997. Several factors are driving
the growth in both business to consumer and business to business electronic
commerce. These factors include:
o increasing familiarity with the Internet;
o broadening consumer acceptance of online shopping;
o increasing acceptance on online distribution relationships by
businesses;
o improved online network security and infrastructure;
o the growing base of personal computers and improved Internet access;
and
o expanding network bandwidth and access speeds.
We believe that the Internet is particularly well-suited for promoting,
marketing, selling and distributing merchandise both on a retail and a wholesale
level, permitting customers throughout the world to have direct access to
suppliers. Online stores can provide direct customer service and product
information to a large number of customers at the same time with a substantially
smaller sales staff than traditional stores. Online stores also have the ability
to rapidly and continually update such information. Internet merchandisers,
unlike traditional stores, do not have the same expenses associated with
operation of physical stores and warehouse facilities, and can change stores
design without substantial cost. In contrast to catalog merchandisers, Internet
retailers can react quickly to change product descriptions, pricing or product
mix and are not subject to the costs of catalog publication and distribution.
Additionally, online merchandisers have the ability to track directly customer
responses and preferences which enables the merchandisers to customize their
online stores to target specific customer groups and individuals.
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Changing Demographics
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In the early days of the Internet, users consisted mainly of young,
technology-savvy or upscale males. Today, while the online population has
appears to have changed drastically, it remains a fairly elite group.
Demographics from Mediamark Research show that Internet users are approximately
twice as likely to have high household incomes, college degrees and management
positions than the overall U.S. population. They are also more likely to be
young and single. Geographically, Internet users can be found in all corners of
the U.S., although, according to researcher Inteco, the level of Internet use in
several major metropolitan areas exceeds the overall U.S. average.
Consumer Acceptance
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We believe broadening consumer acceptance and retailer ambitions will
combine to fuel a rapid growth in online retail sales and to drive more than 40
million U.S. households to shop online by 2003, producing $108 billion revenues.
According to Forrester Research, online retail sales will account for 6% of U.S.
consumer retail spending in the U.S. by 2003. Analysts estimate that by the end
of 1998, nearly 9 million U.S. households will have shopped online for travel
services and retail goods other than automobiles, generating $7.8 billion in
online sales. We expect these numbers to grow rapidly over the next five years
as high speed Internet connections become more popular and consumers overcome
security and privacy concerns and embrace the convenience of Web shopping.
Corporate E-Commerce
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Although retail online shopping appears to receive more attention, analysts
predict a much larger growth in business-to-business e-commerce. Forrester
Research estimates that by year 2003, consumers will spend $108 billion to buy
goods online, while businesses will spend $1.3 trillion. As expected, computing
and electronic equipment will remain one of the largest categories of goods
traded between businesses, reaching $395 billion in revenue by 2003, while other
industries, such as cars and petrochemicals, will also top the $150 billion
mark. In addition to the $1.3 trillion in business-to-business sales of
products, Forrester also reports that online transactions in business services
will equal $220 billion by 2003. Michael Putnam of Forrester Research states
that "Just as the Internet has revolutionized the goods industries, the services
industry is going to be reinvented."
Internet-based businesses have already created more than 200 on-line
marketplaces for conducting business-to-business (B2B) electronic commerce.
These Internet locations bring buyers and sellers together in a central
marketplace and, in addition, provide services such as procurement management,
financial settlement and quality assurance. These services enhance the B2B
sites' value to the end customers and allow it to become an integral part of
those customers' business processes.
By providing a central on-line hub that automates transactions, aggregates
information, improves market reach and provides related services, we believe
these B2B sites will help their participants reduce both product and process
costs. By resolving information-based inefficiencies, they act as catalysts to
compress time, slash costs and improve processes in ways that were previously
unimaginable. Leading research firms estimate that product and process cost
savings afforded by B2B sites will amount to $57 billion by 2003.
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Sitestar.net
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Product Offerings
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Internet Access
Sitestar.net offers a variety of Internet access solutions. These solutions
range from 56K and ISDN dial-up accounts to 3Mbps wireless access connections.
We are one of the few ISP's in the county of Anne Arundel in Maryland to offer
Internet access with wireless technology. Our wireless service ranges in speed
from 128Kbps to up to 3Mbps. We are also offering high-speed Digital Subscriber
Line (DSL) service in Annapolis, Baltimore, and Washington D.C. All dial-up
accounts include e-mail, unlimited Internet access, Usenet newsgroups and
require no long-term contracts. The prices of our Internet services range from
16.95 to 79.95 per month.
Web Services. Our Web services help organizations and individuals
implement their Web site goals. We offer complete Web hosting services that
enable customers to establish a Web site presence without maintaining their own
Web servers and high-speed connectivity to the Internet.
Web Hosting
We offer a variety of Web hosting services which enable our customers to
establish and maintain a Web site on the Internet using Web servers and related
equipment owned and administered by us. Our Web hosting services utilizes both
Unix and Windows NT Servers. Standard hosting services include access to the web
site via FTP and/or Microsoft FrontPage.
E-commerce
We also provide electronic commerce solutions for consumers and businesses. We
develop and operate an on-line "storefront" and sell merchandise over the
Internet. Our e-commerce services include secure online payment processing
services, technical support and additional e-mail accounts.
Co-location
We offer co-location services, providing telecommunications facilities for
customer-owned Web servers, for customers who prefer to own and have physical
access to their servers but require the reliability, security and performance of
our on-site facilities. Our co-location customers house their equipment at our
secure network operating facility and receive direct high-speed connections to
the Internet.
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Website Design
We have provided web site design services since 1996 and, as of September 1999,
have developed web sites for 250 customers. We provide a free initial
consultation. Our customers can choose from several customized possible web
layouts for their business requirements. After our customer's selection, we
develop a prototype site and work with customers to design the site to their
specifications
Banner Development
We also design banner advertisements for our customers and, as of September,
1999, we have developed 300 banner advertisements. Our banner development
services include banner design and development, maintenance and traffic
reporting. We also provide consulting services to clients who need guidance on
where and how to post banners on other Web sites.
Online Marketing
We offer web site marketing services that continually build upon our customer's
current search engine listing to improve their placement in the different search
engines. Our services include the evaluation of our customers' search engine
positioning to assure easy accessibility to Internet users. We maximize our
customers search engine positioning by including industry specific key words
that are likely to be used by Internet users. Initial launch of our customer's
web site reaches over 400 search engines and services.
Customers and Marketing
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Our customer base consists primarily of small and medium sized enterprises
and dial-up customers located in secondary markets.
We use targeted marketing and media advertising to develop brand awareness
and supplement these efforts with our highly customized sales process and
personalized customer service. Through our marketing managers, we seek to
develop strong customer relationships within local communities.
Our marketing managers will also provide assistance and support to our
centralized sales staff. This enables us to evaluate customers' needs more
effectively, to design customized solutions and to reinforce our local presence
as a value-added provider of enhanced Internet services. Our marketing managers
also identify market trends, provide constant data regarding changes in the
competitive landscape and also may identify and initiate contact with new
customers. We also attend trade shows and other events to further reach the
targeted small and medium sized enterprises in each region.
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Competition
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The Internet services market is extremely competitive and highly
fragmented. We face competition from numerous types of ISPs, including national
ISPs, and anticipate that competition will only intensify in the future as the
ISP industry consolidates. We believe that the primary competitive factors in
the Internet services market include:
o Pricing;
o Quality and breadth of products and services;
o Ease of use;
o Personal customer support and service; and
o Brand awareness.
We believe that we compete favorably based on these factors, particularly
due to our:
o Regionally focused operating strategy;
o Superior customer support and service;
o High performance; and
o Competitive pricing.
Our current competitors include many large companies that have
substantially greater market presence, brand-name recognition and financial
resources than we do. Some of our local or regional competitors may also enjoy
greater recognition within a particular community. We currently compete, or
expect to compete, with the following types of companies:
o national Internet service providers, such as PSINet, Inc., Concentric
Network Corporation, Earthlink, Netcom and Mindspring;
o providers of Web hosting, collocation and other Internet-based
business services, such as Verio, Inc. and Navisite;
o numerous regional and local Internet service providers, some of which
have significant market share in their particular market area;
o established on-line service providers, such as America Online, Inc.
and Prodigy;
o computer hardware and other technology companies that provide Internet
connectivity with their or other products, including the International
Business Machines Corporation and Microsoft Corporation;
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;
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o providers of free Internet service, including NetZero, Inc. and
MicroWorkz Computer Corporation; cable operators or their affiliates,
including At Home Corporation and Time Warner Entertainment Company,
L.P.;
o terrestrial wireless and satellite Internet service providers; and
o non-profit or educational ISPs.
Many of the major cable companies and some other Internet access providers
have begun to offer or are exploring the possibility of offering Internet
connectivity through the use of cable modems. Cable companies, however, are
faced with large-scale upgrades of their existing plant, equipment and
infrastructure in order to support connections to the Internet backbone via
high-speed cable access devices. We believe that there is a trend toward
horizontal integration through acquisitions or joint ventures between cable
companies and telecommunications carriers. Other alternative service companies
have also announced plans to enter the Internet connectivity market with various
wireless terrestrial and satellite-based service technologies. In addition,
several competitive local exchange carriers and other Internet access providers
have launched national or regional digital subscriber line programs providing
high speed Internet access using the existing copper wire telephone
infrastructure. Several of these competitive local exchange carriers have
announced strategic alliances with local, regional and national service
providers to provide broadband Internet access. If we are unable to provide
technologically competitive service, our revenues and profit margins may decline
materially, and our ability to attract additional customers may suffer.
Recently, several national access providers have begun to offer dial-up
Internet access for free or at substantial discounts to prevailing rates, which
may result in significant pricing pressure for dial-up Internet access services.
We also believe that manufacturers of computer hardware and software products,
media and telecommunications companies and others will continue to enter the
Internet services market, which will also intensify competition, especially for
dial-up access providers. If we are unable to compete with lower-cost providers
by providing superior service and support, our revenues and profit margins may
decline materially, and our ability to attract additional customers may suffer.
Acquisition Strategy
--------------------
We recently consummated the acquisition of the previously disclosed letter
of intent to acquire Neocom Microspecialists, Inc., a provider of Internet
access, Web hosting and co-location services in the Mid-Atlantic region. This
acquisition is consistent with our growth strategy of building our presence in
secondary markets that have traditionally been under served by the larger
Internet services companies. In addition, we are also actively seeking
acquisition opportunities and/or candidates in the Mid-Atlantic region that
would help us achieve critical mass in terms of our Internet access, development
and hosting customers.
13
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Greattools.com
- --------------
Product Offerings
-----------------
Founded in January 1998, Greattools.com is a direct merchandiser of
over 60 specialty tool products designed for light to heavy industrial
applications. We market our products under the name Great Tools Direct(TM) and
maintain a diverse product line comprised of five categories: (1) Power Tools;
(2) Cutting Tools; (3) Masonry; (4) Accessories; and (5) Automotive. We offer a
comprehensive product line aggregating approximately 90 different models of
cordless drills, batteries, cutting tools, sanders, grinders and miscellaneous
power tool accessories. Our main product and primary source of revenue is the
cordless drill. Sales from cordless drill account for about 80% of our
Greattools.com revenues. We offer a variety of cordless drills from the least
powerful 2.4volt model to the more advanced 18.8volt power drill. The 14.4volt
cordless drill has become a popular consumer drill for household use due to its
price affordability. We offer a 16.8volt drill and an 18.8volt drill at
discounted prices. We have recently introduced a 24volt drill and plan on
introducing other products based on our assessment of trends and market demand.
All GREAT TOOLS DIRECT products are designed and manufactured in China
by Tehao and Hitachi, two large manufacturers of industrial products, according
to strict specifications determined by our fulfillment center. Our fulfillment
center, Global Sourcing Group, frequently develops innovative design concepts in
an effort to improve and differentiate their product line from existing
competition. Greattools.com is not an exclusive distributor of Tehao and Hitachi
products.
Our home page features advertisements, testimonials and promotions for
various in-stock merchandise. Our in-stock merchandise is carried entirely by
our fulfillment center at no extra charge to us. Greattools.com acts as an
online distribution agent for Global Sourcing Group. This fulfillment
arrangement with Global Sourcing Group negates any necessity for us to carry
inventory. As part of our fulfillment arrangement, Global Sourcing Group ships
all merchandise purchased from the Greattools.com site directly to customers
eliminating any need for us to maintain costly operational overhead. As a result
of this arrangement, we don't have to purchase merchandise from Global Sourcing
every time we sell products online. We derive our revenues from commissions
earned on each merchandise sold.
The web site provides customers with product information and the
ability to directly purchase products over the Internet in a secure environment.
We maintain a standard refund policy to any consumer who purchases a defective
product. We have a thirty-day money back guarantee wherein we refund or replace
any products within thirty days from purchase. From inception, we have refunded
on the average less than three percent of our sales.
14
<PAGE>
Customers and Marketing
-----------------------
Our target market consists of retail customers located throughout the
United States, Canada and South America. We target value-oriented consumers,
do-it-yourselfers and contractors who use power tools for light to heavy
industrial applications. We also target professionals who require tools in their
daily activity, such as plumbers, carpenters, electricians and a variety of
other services and repair professionals.
The retail segment also includes consumers who use power tools for
household applications. These include hobbyists, homemakers, students and other
do-it-yourselfers.
The Company's market development strategy is based on several marketing
channels:
Direct Response Advertising
We advertise in specialty magazines and consumer publications, including
Popular Mechanics (circulation: 1,000,000), American Woodworker (circulation:
400,000), Wood Magazine (circulation: 650,000), Popular Woodworker (circulation:
220,000) and American How To (circulation: 750,000). We believe that these
publications are the most efficient medium to reach its target market. The
advertisements highlight our product line and feature the Internet address as
the primary means of ordering products, as well as a toll-free telephone number.
Database Marketing
We have created a database of customers for repeat sales and special
promotions. The database currently contains over 3,500 names. Each time a
customer places an order online, the database is updated to reflect that
customer's information and buying patterns. Due to the database's sorting
capabilities, we believe it receives a greater percentage of responses from
direct mail to the database targets than it would receive from a generic mass
mailing. We repeatedly mail marketing materials, catalogs and brochures to our
customers. Our catalog, produced once a year, lists the products we maintain in
our fulfillment center's warehouse and products our fulfillment center can order
directly from Tehao. The catalog is mailed to all of the 3,500 names on our
mailing list as well as new potential customers generated by our Web site and
regular advertisements.
We believe that a large portion of our potential success relies on the
reputation we have created in our "Great Tools Direct" brand name. However, we
do not have any specific plans to protect our mark "Great Tools Direct" by
filing a trademark application with the United States Patent and Trademark
office (PTO). We have conducted a trademark search on the label Great Tools
Direct which did not result in the discovery of any other commercial entity
using the Great Tools Direct or a substantially similar label in the United
States. We decided that we could better use our limited capital in advertising
and other expenses rather than investing in protecting the Great Tools Direct
brand name.
15
<PAGE>
Power Tools Industry
--------------------
Dominated by large home centers and hardware and lumber cooperatives such
as Home Depot, Loews, Menard's, Ace and True Value, the tool market is large,
highly fragmented and characterized by multiple channels of distribution. The
distribution channels in the power tools market include retail outlets, small
distributorships, national, regional and local distributors, direct mail
suppliers, large warehouse stores and manufacturer's own direct sales forces.
Products imported from low-cost labor countries have increased the
competitive pressures on pricing. Cost pressures from more established name
brands are providing a focus on high quality, low cost alternatives. Aggressive
value pricing has redefined the basis for competition in many of the Company's
product lines.
There are many discount retailers in the industry offering products at
competitive prices and blurring the distinction between wholesale and retail
such as Home Depot, Menards and Wal-Mart. Warehouse clubs and other category
leaders are establishing a new economic framework for the retail business,
forcing industry participants to reduce costs. Major marketers have focused on
value pricing strategies, changing the nature of merchandising throughout the
industry.
Competition
-----------
The power tool market in which we operate is extremely competitive, and we
expect such competition to intensify in the future. Our current and prospective
competitors include many large companies that have substantially greater market
presence and financial, technical, marketing and other resources than we have.
We compete with many retailers and direct marketers who sell merchandise over
the Internet and through catalogs. We also compete with traditional retailers
who sell similar merchandise to that sold by us. Those retailers usually offer
brand name products at prices higher than our products. As newer and more
powerful tools are being introduced into the market, intense competition between
manufacturers has developed. Companies in the industry are developing new
features to attract customers and tools are becoming more reliable, efficient
and quiet. At the same time, prices are becoming more competitive as power tool
companies are vying to gain market share. Moreover, as brand delineation becomes
more challenging, pricing becomes more competitive, thus further increasing the
drive to gain market share.
We believe that our ability to compete successfully depends on a number of
factors, including: (1) our ability to continually provide the customer with
value by offering quality products at prices lower than the prices usually
charged for name brand products; and (2) maintaining a flexible product line and
quickly adapting to the changing needs and tastes of the market.
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<PAGE>
Acquisition Strategy
--------------------
We believe there are acquisition opportunities among the many small sellers
of power tools. If we believe a favorable opportunity exists, we anticipate that
we will enter into discussions with the owners of such businesses regarding the
possibility of an acquisition by the Company. As of the date hereof, we do not
have any agreements or pending acquisitions and have not entered into any
letters of intent with respect to pending acquisitions. No assurance can be
given that we will identify satisfactory acquisition candidates or, if
identified, that we will be able to consummate an acquisition on terms
acceptable to us.
Holland-American.com
- --------------------
Product Offerings
-----------------
In October 1998, HAIS created an online division to respond to the needs of
the emerging online specialty foods segment. Since October 1998,
Holland-American.com has been an online purveyor of imported and domestic
specialty gourmet foods. We sell specialty products, such as condiments, sauces
and toppings, entrees, prepared foods and soups, breads, pasta, grains and
beans, crackers/snacks, desserts and confections and oils and vinegar. Our
approximate revenues for the eleven months ending November 30, 1999 are $7,500.
We intend to increase our sales volume significantly in the next twelve months
once sufficient capital resources are available by increasing our marketing
efforts to reach a broader audience.
Our in-stock merchandise is carried entirely by our fulfillment center at
no extra charge to us. Holland-American.com acts as an online distribution agent
for HAIS. This fulfillment arrangement with HAIS negates any necessity for us to
carry inventory. As part of our fulfillment arrangement, HAIS ships all
merchandise purchased from the Holland-American.com site directly to customers
eliminating any need for us to maintain costly operational overhead. As a result
of this arrangement, we don't have to purchase merchandise from HAIS every time
we sell products online. We derive our revenues from commissions earned on each
merchandise sold.
We have maintained a solid relationship with HAIS even after our
divestiture of the non-Internet business in September 1999. As a result, we act
as their exclusive online agent for all their products. We provide all the
maintenance to the web site through our own personnel in Sitestar.net and we
coordinate closely with HAIS personnel with regards to product and pricing
updates. We conduct all the marketing efforts needed to promote the site. We
view Holland-American.com as an integral part of our e-commerce strategy since
it gives us an online presence in the emerging specialty gourmet foods industry.
17
<PAGE>
Specialty Foods Industry
------------------------
Specialty Food Market Today
The products we sell are known as "gourmet and specialty food," defined by
the industry as a whole as distinctive food of high quality. This includes
traditional gourmet food and confections. This category also includes branded
specialty products which are available in specialty restaurants or retail shops.
Our criteria for determining whether to classify a food product as gourmet or
specialty include:
o cost of ingredients;
o cost of processing;
o freshness/perishability;
o uniqueness;
o newness/cutting edge;
o cost of packaging; and
o cost of importation/distribution.
We work closely with our fulfillment center, Holland American International
Specialties, our former food distribution division, in selecting products for
our Web site through a formal review process which involves review of the
supplier background and the details of their product line. Our fulfillment
center's product review committee then samples representative products from each
supplier and rates the products by standardized criteria.
Retail Market
The retail food market involves the sale of food products to individual
consumers and households. The gourmet and specialty food industry is a sizable
segment of the United States retail food market. According to a 1995 market
report published by Packaged Facts, retail sales of gourmet and specialty food
are projected to reach approximately $48 billion in 2000. Currently, specialty
food is principally sold through the following retail channels:
o supermarkets;
o gourmet and specialty food stores;
o mail order catalogs;
o department stores;
o 32-television shopping channels; and
o discount warehouse retailers.
The combination of the size of the specialty food market and the growth of
online shopping have created what we believe to be a sizable market opportunity.
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<PAGE>
Wholesale Market
The wholesale market consists of specialty food retailers, gift shops,
caterers, restaurants and other resellers of specialty food products.
Traditionally, suppliers of specialty food have distributed their products
either by using a food broker to sell to retailers at wholesale prices, or by
selling their products to specialty food distributors who in turn sell to
retailers. In these arrangements, food brokers generally receive a 10%
commission on the wholesale price and distributors generally purchase the
product at a 20% to 25% discount from the supplier's wholesale price. The
assortment of specialized food brokers and distributors that currently supports
the industry is highly fragmented. As a result, many retail outlets for
specialty food products are underserved or have limited access to these food
brokers and distributors.
Online opportunity in Specialty Foods
In both the retail and wholesale markets, we believe electronic commerce
offers opportunities to improve the specialty food shopping experience and
selection. We believe traditional specialty food businesses face a number of
challenges in providing a satisfying experience:
o the specialty food market is highly fragmented with no single dominant
retailer or wholesaler, and we estimate there are at least 5,000
suppliers throughout the United States;
o this fragmentation leaves both retail and wholesale customers without
access to a broad base of specialty food products;
o distributors who carry specialty food products are limited in the
products they can offer by inventory holding costs, inventory spoilage
and warehouse size, which restricts the supply and selection available
for customers;
o mail order catalogs are not updated as inventory level or consumer
demand changes and are expensive to produce and mail; and
o traditional retail stores have costs associated with occupying and
operating a physical store and selection is limited by the size of the
store and inventory considerations.
We believe that sales of gourmet and specialty food over the Internet
provides a means to address many of these challenges.
19
<PAGE>
Customers and Marketing
Specialty foods are value-added, premium-priced items that are specifically
targeting consumers who are willing to pay a premium. The Company's primary
target market consists of discriminating consumers who seek imported specialty
gourmet foods. According to the National Association of the Specialty Food
Trade, such consumers typically share certain of the following demographics: (1)
Reside on the Pacific Coast or in New England; (2) Live in an urban community;
(3) are in the 25-44 age group; (4) College educated; (5) A professional or
proprietor/manager; (6) Earn upwards of $50,000 per annum; and (7) Have children
under the age of six.
We also have a potential to market to multiple secondary target markets in
the wholesale sector. Such potential customers include corporate coffeehouses,
restaurant chains, gift shops, supermarkets, grocery stores, institutional
accounts and other specialty stores.
The cornerstone in our marketing strategy is our personnel's knowledge of
the consumer. We believe that tomorrow's specialty food consumer will have a
broader age range from teens to elderly and will be more health conscious and
adventurous when it comes to specialty foods products. According to the
International Dairy-Deli-Bakery Association's 1996 year-end report, the next
generation will have a slant toward global environmentalism, blurred political
boundaries and cross-cultural values. In terms of the food consumer of tomorrow,
the report found that "clean" or "organic" food will be in great demand as baby
boomers and young people, with their concern for the environment, do more
shopping.
The development of the Holland-American.com market potential is predicated
upon the establishment of a diversified product portfolio capable of serving the
different types of imported specialty gourmet food needs of its target
customers. This would be crucial if we intend to exploit the opportunity to
influence "impulse" purchases. According to a 1996 A.C. Nielsen (Schaumburg,
Illinois) survey, cookies, crackers and other specialty snacks are among the
"high impulse" items.
We believe that convenience is the driving force spurring the desires of
America's specialty gourmet food product needs. A growing number of consumers
are embracing the convenience of shopping for specialty foods online. Our
commitment to carrying a comprehensive product line, making shopping a fun and
easy experience for the consumer and shipping orders in a timely manner will
play a critical role in our objective in achieving critical mass.
Competition
-----------
We operate in a competitive environment. The industry is dominated by large
regional retail establishments such as Whole Foods Market, Wild Oats, Trader
Joe's, Gelson's and Bristol Farm that rely heavily on aggressive marketing
campaigns and customer referrals. Many of these traditional retailers offer
diverse product lines and competitive pricing. In some instances, these firms do
market their products over the Internet such as Whole Foods Market, Wild Oats
and Bristol Farms.
20
<PAGE>
We enjoy three competitive advantages over these larger, regional firms:
(1) More diverse product lines, enabling the Company to act as a single-source
provider for all the customer's specialty foods needs; (2) the convenience of
online shopping; and (3) Prompt shipment of all customer orders.
Acquisition Strategy
--------------------
We intend to consider potential acquisitions to attempt to increase our
market share and revenues. To date, we have not entered into discussions with
any specific acquisition candidates. No assurance can be given that we will
identify satisfactory acquisition candidates or, if identified, that we will be
able to consummate an acquisition on terms acceptable to us.
Soccersite.com
- --------------
Product Offerings
-----------------
Through our acquisition of SYTE, we now own Soccersite.com which has been
an operating subsidiary since July 1999. Soccersite.com is a content-oriented
and e-commerce Internet site with over 400 pages of information about the sport
of soccer. We provide traditional news on recent professional soccer games, and
we allow visitors to post amateur league and tournament information and training
camps. We also provide a forum for coaches to interact with players and other
coaches. We also host a special section that caters to young soccer enthusiasts.
In addition, we provide a search capacity for visitors to explore specific
topics. All content information is provided free of charge to the visitor.
To capitalize on the retail opportunities associated with our web site, we
created SoccerMall, an e-commerce retailer of soccer-related merchandise and
apparel. All orders to SoccerMall are fulfilled directly by us through our
relationship with a local distributor in Annapolis, Maryland. Our in-stock
merchandise is carried entirely by our fulfillment center at no extra charge to
us. Soccersite.com acts as an online distribution agent for the local Annapolis
distributor. This fulfillment arrangement with this local distributor negates
any necessity for us to carry inventory. As part of our fulfillment arrangement,
the local distributor ships all merchandise purchased from the Soccersite.com
site directly to customers eliminating any need for us to maintain costly
operational overhead. As a result of this arrangement, we don't have to purchase
merchandise from the local distributor every time we sell products online. We
derive our revenues from commissions earned on each merchandise sold.
Soccersite.com generated sales volume of approximately $10,000 for the twelve
month ending December 31, 1998.
21
<PAGE>
Soccer Industry
---------------
Widely regarded as the world's most popular sport, soccer is growing at a
rapid pace in the United States. Largely attributed to the expansive Latino
immigrant fan base, Southern California has become the epicenter for the soccer
community in North America. According to the Los Angeles Times, attendance at
international soccer games hosted in Los Angeles is up over 200% from its
introduction in 1997. In comparison to other professional Los Angeles sports
teams, the L.A. Galaxy (Major League Soccer professional team) consistently drew
larger home game crowds than any other local team except the Los Angeles Dodgers
with the local fan base largely comprised of members of the Latino community.
Strategy Research Corp., a leading industry association which tracks trends in
the Latino community, estimates the Southern California Latino consumers yield a
collective buying power of $57 billion.
Customers and Marketing
-----------------------
To date, we have had no targeted marketing campaign. Nonetheless,
word-of-mouth advertising and traffic generated by search engines, have resulted
in nearly one million visitors to the web site in the past year.
In addition to retail sales through SoccerMall, we sell advertising space
on the web site to merchants and manufacturers.
We are currently developing a marketing strategy designed to attract more
consumers to the web site, build greater advertising opportunities and further
advance the sport of soccer. This strategy will likely include sponsoring
amateur and professional soccer events, advertising in major industry
publications and participating in cooperative ventures with industry
associations.
Competition
-----------
There are numerous soccer-related organizations which have a presence on
the Internet. Most web sites are retail e-commerce websites offering soccer
merchandise and apparel. There are a smaller number of web sites that look to
combine a content-oriented format with the convenience of retail, including
Soccerweek.com and Soccermadness.com.
Acquisition Strategy
--------------------
We believe there are acquisition opportunities among the providers of value
added information about the sport of soccer. In furtherance of our acquisition
strategy, we anticipate reviewing and conducting investigations of potential
acquisitions. If we believe a favorable opportunity exists, we anticipate that
we will enter into discussions with the owners of such businesses regarding the
possibility of an acquisition by us. As of the date hereof, we do not have any
agreements or pending acquisitions and have entered into any letters of intent
with respect to pending acquisitions. No assurance can be given that we will
identify satisfactory acquisition candidates or, if identified, that we will be
able to consummate an acquisition on terms acceptable to us.
22
<PAGE>
Neocom Microspecialists, Inc.
- ----------------------------
Effective December 15, 1999, we have consummated the previously announced
acquisition of Neocom Microspecialists, Inc.("Neocom") in exchange for 4,782,353
shares of Sitestar common stock. As part of the purchase consideration and based
on certain contingencies, we have agreed to issue an additional 2,000,000 shares
of Sitestar common stock to the Neocom shareholders on the second anniversary of
the acquisition. Neocom is an Internet service provider and Web development
company based in Martinsville, Virginia. As of October 31, 1999, (i) Neocom
provided Internet access and other Internet services to approximately 4,700
customers in the Southern Virginia area and (ii) its revenues for the ten months
ended October 31, 1999 were $1.454 million. Based on our current estimates we
believe that Neocom's annualized revenues would be approximately $1.745 million
for the fiscal year ending December 31, 1999.
Product Offerings
-----------------
We provide dial-up and private Internet access, design customized web
sites, host customer web sites on our computer networks, and offer related
e-commerce services to individual and business subscribers outside of large
metropolitan areas in the mid-Atlantic region, particularly southern Virginia.
We offer subscribers comprehensive technical assistance, large modem banks
providing rapid access to the Internet, and high speed connectivity. In
addition, our home page web sites serve as regional portals, offering local and
national news and weather, community resources, advertising, and links to other
local and national content providers.
Customers and Marketing
-----------------------
Our customer base consists primarily of small and medium sized enterprises
and dial-up customers located in secondary markets, specifically southern
Virginia.
We use targeted marketing and media advertising to develop brand awareness
and supplement these efforts with our highly customized sales process and
personalized customer service. Through our marketing managers, we seek to
develop strong customer relationships within local communities.
23
<PAGE>
Our marketing managers will also provide assistance and support to our
centralized sales staff. This enables us to evaluate customers' needs more
effectively, to design customized solutions and to reinforce our local presence
as a value-added provider of enhanced Internet services. Our marketing managers
also identify market trends, provide constant data regarding changes in the
competitive landscape and also may identify and initiate contact with new
customers. We also attend trade shows and other events to further reach the
targeted small and medium sized enterprises in each region.
Competition
-----------
The market for Internet access and related services is extremely
competitive. We expect competition to increase as Internet use grows and
established national Internet service providers, telecommunications and computer
related vendors expand their traditional products and services. The significant
financial resources of many of our competitors could lead to severe price
cutting in an effort to secure market share, which could have a negative effect
on our revenues and results of operations. We cannot assure you of our survival
in this intensely competitive and rapidly evolving Internet services market. Our
competitors in the markets in which we operate include:
- national and regional commercial Internet service providers such as
OneMain.com, BiznessOnline.com, US Online, Earthlink and Mindspring;
- established on-line commercial information providers such as AOL,
Prodigy and MSN;
- local Internet service providers in Virginia and the mid-Atlantic
states namely Virginia, Maryland, Pennsylvania, Delaware and West
Virginia who provide products and services that are similar to ours to
small to medium sized businesses;
- cable television operators such as Time Warner and
Tele-Communications, Inc;
- national long distance telecommunications carriers such as AT&T, MCI
Worldcom, and Sprint;
24
<PAGE>
- computer hardware and software companies, such as IBM and Compaq; and
- regional telephone operating companies such as Bell Atlantic.
We also believe that new competitors will continue to enter the Internet
access market, such as large computer hardware and software companies, media and
telecommunications entities, and companies that provide direct service to
residential customers, including cable television operators, wireless
communication companies, local and long distance telephone companies and
electric utility companies.
Many of our competitors are larger and have greater financial, technical,
and operating resources than we do. We cannot assure you of our survival in this
intensely competitive environment. We will need to distinguish ourselves by our
product and service knowledge, our responsiveness to our targeted market of
small to medium sized businesses, our ability to market and sell customized
combinations of products and services within our market, and our capacity to
offer a diverse Internet product line. We also believe that our ability to be
flexible and to respond quickly in providing solutions to our customer's
Internet needs will be an advantage over some of our competitors.
Acquisition Strategy
--------------------
Our strategy is to rapidly build a base of Internet subscribers through
acquisitions and internal growth. We believe there are acquisition opportunities
among the Internet service providers in our geographic target. In furtherance of
our acquisition strategy, we anticipate reviewing and conducting investigations
of potential acquisitions. If we believe a favorable opportunity exists, we
anticipate that we will enter into discussions with the owners of such
businesses regarding the possibility of an acquisition by us. As of the date
hereof, we do not have any agreements or pending acquisitions and have not
entered into any letters of intent with respect to pending acquisitions. No
assurance can be given that we will identify satisfactory acquisition candidates
or, if identified, that we will be able to consummate an acquisition on terms
acceptable to us.
EMPLOYEES
As of December 31, 1999, we employed thirty (30) full time individuals. We
have six in management, five in sales and marketing and nineteen in
administration. Our employees are not unionized, and we consider our relations
with our employees to be favorable.
25
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
OUR FINANCIAL STATEMENTS AND THE RELATED NOTES TO THE FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS REGISTRATION STATEMENT. THE FOLLOWING INCLUDES A
NUMBER OF FORWARD-LOOKING STATEMENTS THAT REFLECT OUR CURRENT VIEWS WITH RESPECT
TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. WE USE WORDS SUCH AS ANTICIPATES,
BELIEVES, EXPECTS, FUTURE, AND INTENDS, AND SIMILAR EXPRESSIONS TO IDENTIFY
FORWARD-LOOKING STATEMENTS. INVESTORS SHOULD NOT PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS REGISTRATION
STATEMENT. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR OUR PREDICTIONS. FOR A DESCRIPTION OF THESE RISKS, SEE THE
SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS."
OVERVIEW
- --------
We changed our corporate focus from that of a food holding company to an
Internet holding company with the acquisition of Sitestar Corporation in July
1999. Soon after concluding this acquisition, we started focusing on acquiring
and investing in Internet-based enterprises. Our mission is to develop our
Internet operating subsidiaries and future investments in other Internet
enterprises into highly focused and successful stand-alone Internet businesses.
We intend to achieve a fast-track development process by tapping the services,
support and knowledge of individuals and organizations that have extensive
experience in developing Internet concepts and technologies.
In July 1999, we began to implement our current strategy of acquiring and
investing in emerging internet based enterprises to create a broad and diverse
set of core Internet businesses which deliver a variety of online solutions. In
addition to developing and integrating internet-based technologies, our primary
objective is to create a mix of Internet operating companies and
Internet-related portfolio investments that will enhance the value of its core
holdings.
Our Internet services subsidiary began providing Internet services to its
customers in 1996 by providing Internet access and enhanced products and
services to small and medium sized enterprises in selected high growth markets.
We target primarily small and medium sized enterprise customers located in
selected high growth secondary markets. We currently provide our customers with
Internet access and enhanced products and services in the mid-Atlantic area of
the United States. We have designed our comprehensive suite of enhanced products
and services to meet the expanding needs of our customers and to increase our
revenue per customer. The products and services we provide include:
* Internet access services;
* Web design services;
* Web hosting services;
* End to end e-commerce solutions;
* Online marketing consulting; and
* Management of mission critical Internet applications.
26
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Prior to our change in corporate focus from that of a food holding company
to that of an Internet holding company, we generated all of our revenues from
sales of specialty food products. We have historically derived a majority of our
revenues from small independent specialty food retail customers. From inception
until July 1999, we generated revenues exclusively from wholesale and retail
sales of our food products. We derived income from our wholesale and retail
sales from the excess of the wholesale and retail prices we charged our
customers over the product costs we paid our suppliers. We had a wholesale
program in which we sold bulk quantities of specialty food products to
registered retailers at wholesale prices. In this program, we purchased products
from suppliers at a distributor's discounted price and derived income from the
difference between this discounted price and the wholesale price we charged.
Additionally, our retail customers paid for orders by cash or credit card while
we paid our suppliers on extended terms. As a result, we were able to increase
our working capital between the time we received payment for orders and the time
we were required to pay suppliers.
As a result of our change in corporate focus from a food holding company to
an Internet holding company, we now have two other sources of income. Our
e-commerce operating subsidiaries now derive our income from commissions. We are
agents of our fulfillment centers and merely generate our revenues from
commissions per transaction. Our customers pay us directly and we remit the cost
of the goods to our fulfillment centers less our agreed upon commission amount.
As a result of this arrangement, the extent of our financial agreement with our
fulfillment centers are relegated to the periodic transfer and remittance of our
product costs. We do not take title to the goods sold on our e-commerce sites
which eliminates any inventory risks on our part. We forward all orders directly
to our fulfillment centers which eliminates the need to take possession of the
goods and merchandise sold on our e-commerce sites. Our fulfillment centers ship
the purchased good directly to our customers on our behalf. The shipping and
handling costs related to every transaction are added to the total cost of the
goods sold which the customers have to bear.
Our Internet service provider operating subsidiaries derive their income
from the excess of the Internet service prices we charge our customers over the
cost of service we pay our suppliers. Additionally, our retail customers pay for
services by cash or credit card while we pay our suppliers on extended terms. As
a result, we are able to increase our working capital between the time we
receive payment for services and the time we are required to pay suppliers.
We are operating under an oral agreement with our fulfillment centers and
have no long-term obligations to continue the relationship with them if we deem,
solely at our own discretion, that it is no longer in our best interest to
continue the current arrangements. However, we intend to formalize official
written fulfillment agreements with them as soon as practicable.
Net revenues for our e-commerce subsidiaries consist of commissions earned
per transaction upon shipment of products and acceptance of products by our
customers net of any allowance for future returns.
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We have a limited operating history on which to base an evaluation of our
business and prospects. You must consider our prospects in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
such as online commerce. To address these risks, we must obtain sufficient
operating capital, maintain and expand our customer base, continue to increase
our product offerings, successfully implement our business, marketing and
promotional strategies, continue to develop our order processing technology,
respond to competitive developments in the specialty food market, and attract,
retain and motivate qualified personnel. We cannot assure you that we will be
successful in addressing these risks and our failure could be harmful to our
business, prospects, financial condition and results of operations.
DISCONTINUED OPERATIONS
- -----------------------
Our discontinued operations represented our specialty gourmet foods
business which we divested effective September 30, 1999. The net revenues of our
discontinued operations had grown since inception, from $1,553,926 in 1997 to
$2,175,867 in 1998. Specialty food sales were inherently seasonal, with highest
volumes during the fourth quarter holiday season. Additionally, the business had
a large gift-giving component. As a result of these two factors, approximately
46% of the 1998 sales were realized in the fourth quarter. We had taken steps
intended to reduce the magnitude of this trend such as expanding our product
selection, and emphasizing non-holiday occasions and personal consumption.
However, we expected fourth quarter sales to continue to represent a
disproportionate amount of annual sales in the future.
CONTINUED OPERATIONS
Our continued operations are represented by our current Internet service
provider and e-commerce operating subsidiaries. Due to our change in primary
corporate focus, these will be the industry segments we are going to focus on.
Our costs would include expenses associated with running an Internet holding
company. These expenses are mainly related to the maintenance of the corporate
office, payroll, legal, accounting, public relations and other administrative
expenses.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
DISCONTINUED OPERATIONS
- -----------------------
Our discontinued operations incurred a net loss of $40,786 in the nine
months ended September 30, 1999 and $41,507 for the nine months ending September
30, 1998. There were no significant fluctuations on our net losses as business
conditions for both periods remained essentially the same.
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CONTINUED OPERATIONS
- --------------------
REVENUES. Net revenues for our Internet service provider subsidiaries
consist of service sales to customers. Revenues are recognized upon delivery of
service. Net revenues for our e-commerce subsidiaries consist of commissions
earned per transaction upon shipment of products and acceptance of products by
our customers net of any allowance for future returns. Net revenues increased to
$18,864 for the nine months ended September 30, 1999 from $0 for the nine months
ended September 30, 1998. This increase is a result of the acquisition of
Sitestar in July 1999. We realized their revenues for the month of August and
September 1999. As a result of our acquisition strategy and our recent
acquisitions of Internet service providers and e-commerce companies, we expect
to experience strong revenue growth in the coming years.
COST OF GOODS SOLD. Cost of goods sold consists primarily of the costs of
Products and services sold to customers and actual outbound shipping and
handling costs. Cost of goods sold increase to $22,740 for the nine months ended
September 30, 1999 from $0 for the nine months ended September 30, 1998. As a
result of our acquisition strategy and our recent acquisitions of Internet
service providers and e-commerce companies, we expect to have a substantial
increase in our cost of goods sold as our revenues increase.
SELLING, GENERAL AND ADMINISTRATIVE. Sales and marketing expenses consist
primarily of advertising and promotional expenditures and payroll and related
expenses for personnel engaged in sales and marketing activities. Selling,
general and administrative expenses increased to $455,938 for the nine months
ended September 30, 1999 compared to $0 for the nine months ended September 30,
1998. This increase is primarily attributable to the increase in general and
administrative personnel and an increase in corporate expenses as a result of
our shift in corporate focus. We expect to incur the same amount of selling,
general and administrative expenses as we implement our growth strategy.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE SEVEN MONTHS ENDED
DECEMBER 31, 1997
DISCONTINUED OPERATIONS
- -----------------------
Our discontinued operations incurred losses of $113,844 for the twelve
months ended December 31, 1998 compared to $194,069 for the seven month ended
December 31 ,1997. The increase was primarily attributable to an increase in
selling, general and administrative expenses as a result of longer fiscal year.
However, on an annualized basis, the seven month ended net loss would have been
approximately the same amount as the twelve months ended December 31, 1998.
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Our discontinued operations incurred net losses of $484,494 for the twelve
months ending December 31, 1998 compared to a net loss of $194,069 for the seven
months ending December 31, 1997. The significant increase of $290,425 was
primarily attributable to an increase in selling, general and administrative
expenses as a result of longer fiscal year and a significant increase on our
corporate expenses relating to increased payroll, legal, accounting and interest
expenses.
CONTINUED OPERATIONS
- --------------------
REVENUES. There were no revenues for the twelve months ending December 31,
1998 and seven months ending December 31, 1997 due to the divestiture of our
discontinued operations.
COST OF GOODS SOLD. Cost of goods sold consists primarily of the costs of
Products and services sold to customers and actual outbound shipping and
handling costs. There were no cost of goods sold for the twelve month ending
December 31, 1998 and seven months ending December 31, 1997 due to the
divestiture of our discontinued operations.
SELLING, GENERAL AND ADMINISTRATIVE. General and administrative expenses
consist primarily of rent, public relations, officers' salaries and consulting
services. Selling, general and administrative expenses increased to $370,650 for
the year ended December 31, 1998 from $0 in the seven months ended December 31,
1997. This increase was primarily attributable to the lack of activity in the
seven months ended December 31, 1997 due to the divestiture of our discontinued
business, and to the one time consulting service of $200,000. We expect the
consulting services to be non-recurring, while we expect the remainder of the
general and administrative expenses to be recurring.
LIQUIDITY AND CAPITAL RESOURCES
Our business plan has required, and is expected to continue to require,
substantial capital to fund operations, capital expenditures, expansion of sales
and marketing capabilities and acquisitions.
To date, we have financed our operation primarily through short-term
borrowings and internally generated cash flow form our operations. In addition
since December 31, 1998, we borrowed approximately $415,000 from various
investors and approximately $144,000 from our stockholders in exchange for
promissory notes in these principal amounts which bear interest at the rate of 8
percent per year.
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We believe that the net cash position on a pro forma basis with the
acquisition of Sitestar and Neocom, together with our existing cash and cash
equivalents, will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 6 months. Thereafter, we may be
required to seek additional sources of financing. We may also be required to
raise additional financing before such time. If additional funds are raised
through the issuance of equity securities, our existing shareholders may
experience significant dilution. Furthermore, additional financing may not be
available when needed or, if available, such financing may not be on terms
favorable to us or our shareholders. If such sources of financing are
insufficient or unavailable, or if we experience shortfalls in anticipated
revenue or increases in anticipated expenses, we may need to slow down or stop
the expansion of our e-commerce business, including our ISPs and reduce our
marketing and development efforts. Any of these events could harm our business,
financial condition or results of operations.
IMPACT OF THE YEAR 2000 ISSUE
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may recognize a date using 00 as the year 1900
rather than the year 2000. This, in turn, could result in major system failures
or miscalculations, and is generally referred to as the year 2000 issue. We have
formulated and, to a large extent, implemented a plan to address our year 2000
issues.
During 1999, we established a year 2000 compliance program to coordinate
our efforts to resolve our year 2000 issues. We are addressing our year 2000
issues through a comprehensive assessment of both our internal systems and the
systems of our external operating and suppliers.
INTERNAL SYSTEMS ASSESSMENT AND REVIEW
Our internal systems assessment and review consists of four-phases, which
we expect to complete by the end of the third quarter of 1999:
* ASSESSMENT--We have conducted an inventory of our existing systems,
performed risk assessment on these systems, prioritized the importance
of these systems, and determined appropriate allocation of resources.
This assessment is substantially complete.
* ANALYSIS AND PLANNING--We have selected corrective methods where
needed, developed appropriate test standards, determined conversion
sequences where needed, and established a detailed timeline for
correcting any known year 2000 problems. This analysis and planning is
substantially complete.
* CONVERSION AND TESTING--We are developing and modifying operating
codes, purchasing or installing vendor-provided solutions and
conducting unit and system tests. Our conversion and testing phase is
substantially complete.
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* IMPLEMENTATION--We have begun modifying previously non-compliant
systems, installing third party solutions, updating operational
procedures, and training our employees as needed. This implementation
phase is substantially complete.
We also face risks from customer-provided hardware and software that we
host in our data centers that in many cases has been customized by outside
service providers or customer personnel. While we inform our customers that they
are responsible for year 2000 compliance of their hosted hardware and software,
we cannot assure you that our customers will take the steps necessary to achieve
year 2000 compliance. The failure of our customers and third-party providers to
ensure that their hosted hardware and software is year 2000 compliant could
disrupt our operations and materially adversely affect our financial condition
and operating results.
EXTERNAL SYSTEMS ASSESSMENT AND REVIEW
We have also conducted a four-phase review of the systems of our
operatings, suppliers, and other third parties (including equipment providers
and other telecommunications service providers) to assess their year 2000
compliance efforts. The first phase, which is completed, included identifying
our critical operatings, suppliers, and vendors. This phase involved requesting
information from these critical operatings, analyzing their responses, studying
their published year 2000 statements, performing our own risk assessments,
prioritizing the importance of potential non-compliant systems and determining
appropriate allocation of resources.
Our second phase includes developing personal contacts with critical
operatings' year 2000 staff, articulating our concerns and requesting assistance
from them with respect to their products. This phase is substantially complete.
Our third phase includes receiving information from responses to our requests
for assistance, researching Web sites, making phone contacts and summarizing the
results of the information that we receive. Finally, our fourth phase includes
actively evaluating different systems, testing critical operatings' year 2000
updates, reviewing such information with our management team and identifying any
additional resources that may be needed. We believe that phases three and four
of our review will be substantially complete prior to the end of the third
quarter of 1999.
We have reviewed and analyzed the year 2000 compliance of Sitestar.net,
which we acquired in July 1999. We are in the process of integrating
Sitestar.net into our operations. We do not believe that this integration of
their systems with ours will have an adverse effect on our year 2000 compliance
status.
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During the year ended December 31, 1998, we spent over $8,000 in connection
with the upgrade and continuing build-out of our technical operations and
network. We believe that all of this newly acquired equipment is year 2000
compliant. We have incurred costs and expect to incur additional costs in 1999
in connection with our year 2000 program, which we believe will not be material.
We currently believe that our most likely worst case scenario related to
the year 2000 issue is associated with concerns with our suppliers' products and
software. If one or more of our suppliers experience year 2000 problems which
result in decreased Internet usage and that delay or interfere with our ability
to receive or transmit our customers' data, our business and operations could be
adversely affected.
We believe that our plan to address year 2000 issues will be fully executed
prior to January 1, 2000; however, any failure of this plan could have a
material adverse effect on our operating results. Despite the testing performed
by us and our vendors, our products, services and systems may contain undetected
errors or defects associated with year 2000 date functions. In the event any
material errors or defects are not detected and fixed, or third parties cannot
timely provide us with products, services or systems that meet the year 2000
requirements, our operating results could be materially adversely affected. We
cannot guarantee that we will be able to timely and successfully modify our
products, services and systems to comply with year 2000 requirements if we have
failed to accurately assess, test and correct year 2000 issues. Known or unknown
errors or defects that affect the operation of our products, services or systems
could result in a delay in the receipt of payment, interruption of network
services, cancellation of customer contracts, diversion of development
resources, damage to our reputation and litigation costs. We cannot guarantee
that these or other factors relating to year 2000 compliance issues will not
have a material adverse effect on our business.
We have prepared a contingency plan in the event that any of our products,
services or systems remain non-compliant as of December 31, 1999. As part of
this contingency plan, we may replace any non-compliant suppliers or other third
party providers with those with demonstrated year 2000 compliance.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
We operate in a rapidly changing environment that involves a number of
risks, some of which are beyond our control. Forward-looking statements in this
document and those made from time to time by us are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements concerning the expected future revenues or earnings
or concerning projected plans, performance, product development, product release
or product shipment, as well as other estimates related to future operations are
necessarily only estimates of future results and there can be no assurance that
actual results will not materially differ from expectations. We undertake no
obligation to publicly release the results of any revisions to forward-looking
statements which may be made to reflect events or circumstances occurring after
the date such statements were made or to reflect the occurrence of unanticipated
events.
Factors that could cause actual results to differ materially from results
anticipated in forward-looking statements include, but are not limited to the
following:
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RISKS PARTICULAR TO SITESTAR CORPORATION
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU MAY EVALUATE US.
Our new corporate philosophy was formulated in July 1999. Although we have
grown significantly since then, we have a limited operating history upon which
you may evaluate our business and prospects. We and our wholly owned operating
companies are among the many companies that have entered into the emerging
e-commerce market. All of our operating companies are in the early stages of
their development. Our business and prospects must be considered in light of the
risk, expense and difficulties frequently encountered by companies in an early
stage of development, particularly companies in new and rapidly evolving markets
such as e-commerce. If we are unable to effectively allocate our resources and
help grow existing operating companies, our stock price may be adversely
affected and we may be unable to execute our strategy of developing a
collaborative network of operating companies.
OUR BUSINESS DEPENDS UPON THE PERFORMANCE OF OUR OPERATING COMPANIES, WHICH IS
UNCERTAIN.
Economic, governmental, industry and internal company factors outside our
control affect each of our operating companies. If our operating companies do
not succeed, the value of our assets will decline. The material risks relating
to our operating companies include:
o lack of the widespread commercial use of the Internet, which may
prevent our operating companies from succeeding; and
o intensifying competition for the products and services our operating
companies offer, which could lead to the failure of some of our
operating companies.
The other material risks relating to our operating companies are more fully
described below under "Risks Particular to Our Operating Companies."
OUR BUSINESS MODEL IS UNPROVEN.
Our strategy is based on an unproven business model. Our operating strategy
is to integrate our subsidiaries and future Internet portfolio investments into
a collaborative network that leverages our collective knowledge and resources.
We will actively explore synergistic opportunities such as cross marketing
efforts within our subsidiaries and investments to further leverage our
resources. Our business model depends on our ability to share information within
our network of operating companies. If competition develops among our operating
companies, we may be unable to fully benefit from the sharing of information
within our network of operating companies. If we cannot convince companies of
the value of our business model, our ability to attract new companies will be
adversely affected and our strategy of building a collaborative network may not
succeed.
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WE MAY HAVE TO TAKE CERTAIN ACTIONS TO AVOID REGISTRATION UNDER THE INVESTMENT
COMPANY ACT OF 1940.
We believe that we are actively engaged in the business of e-commerce
through our network of operating companies. However, due to a significant
possibility that many of our future operating companies may not be
majority-owned subsidiaries, changes in the value of our interests in our
operating companies and the income/loss and revenue attributable to our
operating companies could require us to register as an investment company under
the Investment Company Act unless we take action to avoid being required to
register. For example, we may be unable to sell minority interests we would
otherwise want to sell and may need to sell some assets which are not considered
to be investment securities, including interests in operating companies. We may
also have to ensure that we retain at least a 25% ownership interest in our
operating companies after their initial public offerings. In addition, we may
have to acquire additional income or loss-generating assets that we might not
otherwise have acquired or may have to forgo opportunities to acquire interests
in companies that we would otherwise want to acquire would be important to our
strategy. It is not feasible for us to register as an investment company because
the Investment Company Act regulations are inconsistent with our strategy of
actively managing, operating and promoting collaboration among our network of
operating companies.
FLUCTUATIONS IN OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT OUR STOCK PRICE
We expect that our quarterly results will fluctuate significantly due to
many factors, including:
* the operating results of our operating companies;
* changes in equity losses or income and amortization of goodwill
related to the acquisition or divestiture of interests in operating
companies;
* changes in our methods of accounting for our operating company
interests, which may result from changes in our ownership percentages
of our operating companies;
* sales of equity securities by our operating companies, which could
cause us to recognize gains or losses under applicable accounting
rules;
* the pace of development or a decline in growth of the e-commerce
market;
* intense competition from other potential acquirors of B2B e-commerce
companies, which could increase our cost of acquiring interests in
additional companies, and competition for the goods and services
offered by our operating companies; and
* our ability to effectively manage our growth and the growth of our
operating companies during the anticipated rapid growth of the
e-commerce market.
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We believe that period-to-period comparisons of our operating results are
not meaningful. Additionally, if our operating results in one or more quarters
do not meet securities analysts' or your expectations, the price of our common
stock could decrease.
OUR SUCCESS IS DEPENDENT ON OUR KEY PERSONNEL AND THE KEY PERSONNEL OF OUR
OPERATING COMPANIES.
We believe that our success will depend on continued employment by us and
our operating companies of senior management and key technical personnel. If one
or more members of our senior management or our operating companies' senior
management were unable or unwilling to continue in their present positions, our
business and operations could be disrupted. Although, our management team has
had their own successes in other industries, our senior management team has
limited experience in the Internet industry.
As of September 30, 1999, all of our management personnel have worked for
us for less than one year. Our efficiency may be limited while these employees
and future employees are being integrated into our operations. In addition, we
may be unable to find and hire additional qualified management and professional
personnel to help lead us and our operating companies.
The success of some of our operating companies also depends on their having
highly trained technical and marketing personnel. Our operating companies will
need to continue to hire additional personnel as their businesses grow. A
shortage in the number of trained technical and marketing personnel could limit
the ability of our operating companies to increase sales of their existing
products and services and launch new product offerings.
Our expenses will increase as we build an infrastructure to implement our
business model. For example, we expect to hire additional employees, expand
information technology systems and lease more space for our corporate offices.
In addition, we plan to significantly increase our operating expenses to:
* broaden our operating company support capabilities;
* explore acquisition opportunities and alliances with other companies;
and
* facilitate business arrangements among our operating companies.
Expenses may also increase due to the potential effect of goodwill
amortization and other charges resulting from completed and future acquisitions.
If any of these and other expenses are not accompanied by increased revenue, our
operating losses will be greater than we anticipate.
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OUR OPERATING COMPANIES ARE GROWING RAPIDLY AND WE MAY HAVE DIFFICULTY ASSISTING
THEM IN MANAGING THEIR GROWTH.
Our operating companies have grown, and we expect them to continue to grow,
rapidly by adding new products and services and hiring new employees. This
growth is likely to place significant strain on their resources and on the
resources we allocate to assist our operating companies. In addition, our
management may be unable to convince the future operating companies wherein we
have a minority interest to adopt our ideas for effectively and successfully
managing their growth.
We may compete with some of our future investors and shareholders and
operating companies, and our operating companies may compete with each other.
Our current and future operating companies and future internet portfolio
investments may overlap in their geographic coverage. One of our operating
subsidiaries or future portfolio investments may possibly compete for the same
customers in the same geographic region. In addition, our current and future
shareholders may compete with us in terms of their own internet portfolio
investments and other internet-related acquisitions. Some of our current or
future shareholders may engage in their own investment activities which may
directly compete with our own acquisition and investment parameters.
WE FACE COMPETITION FROM OTHER POTENTIAL ACQUIRERS OF E-COMMERCE COMPANIES.
We face competition from other capital providers including publicly-traded
Internet companies, venture capital companies and large corporations. Many of
these competitors have greater financial resources and brand name recognition
than we do. These competitors may limit our opportunity to acquire interests in
new operating companies. If we cannot acquire interests in attractive companies,
our strategy to build a collaborative network of operating companies may not
succeed.
OUR SUCCESS COULD BE IMPAIRED BY VALUATIONS PLACED ON INTERNET-RELATED COMPANIES
BY THE FINANCIAL MARKETPLACE
Our strategy involves creating value for our shareholders and the employees
of our operating companies by helping our operating companies grow and access
the capital markets. We are therefore dependent on the market for
Internet-related companies in general and for public offerings of those
companies in particular. To date, there have been a substantial number of
Internet-related initial public offerings and additional offerings are expected
to be made in the future. If the market for Internet-related companies and
initial public offerings were to weaken for an extended period of time, the
ability of our operating companies to grow and access the capital markets will
be impaired, and we may need to provide additional capital to our operating
companies.
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WE MAY BE UNABLE TO OBTAIN MAXIMUM VALUE FOR OUR OPERATING COMPANY INTERESTS.
We have significant positions in our operating companies. While we
generally do not anticipate selling our interests in our operating companies, if
we were to divest all or part of them, we may not receive maximum value for
these positions. For future operating companies with publicly-traded stock, we
may be unable to sell our interest at then-quoted market prices. Furthermore,
for those operating companies that do not have publicly-traded stock, the
realizable value of our interests may ultimately prove to be lower than the
carrying value currently reflected in our consolidated financial statements.
RISKS INHERENT TO OUR ACQUISITION STRATEGY
We have in the past, and intend to in the future, to expand through the
acquisition of businesses, technologies, products and services, such as the
recent acquisitions of Sitestar Corporation, and Greattools.com. Acquisitions
may result in the potentially dilutive issuance of equity securities, the
incurrence of additional debt, development costs and the amortization of
goodwill and other intangible assets. Further, acquisitions involve a number of
special problems, including difficulty integrating technologies, operations and
personnel and diversion of management attention in connection with both
negotiating the acquisitions and integrating the assets. There can be no
assurance that we will be successful in addressing such problems. In addition,
growth associated with numerous acquisitions places significant strain on our
managerial and operational resources. Our future operating results will depend
to a significant degree on its ability to successfully manage growth and
integrate acquisitions. Furthermore, many of our operating companies are
early-stage companies, with limited operating histories and limited or no
revenues; there can be no assurance that we will be successful in developing
such companies.
UNCERTAINTIES ASSOCIATED WITH SELLING ASSETS
A significant element of our business plan involves selling, in public or
private offerings, portions of the companies it has acquired and developed. The
Company's ability to engage in any such transactions, the timing of such
transactions and the amount of proceeds from such transactions are dependant on
market and other conditions largely beyond our control. Accordingly, there can
be no assurance that we will be able to engage in such transactions in the
future or that when we are able to engage in such transactions they will be at
favorable prices. If we were unable to liquidate portions of its portfolio
companies at favorable prices, our business, financial condition and results of
operations would be adversely affected.
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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 operating with us.
If we cannot acquire interests in attractive companies, our strategy to
build a collaborative network of operating companies 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 larger
percentages or larger interests in companies than we have in the past, or we may
seek to acquire 100% ownership of companies as we have done in our initial
stages of development. These larger acquisitions may place significantly greater
strain on our resources, ability to manage such companies and ability to
integrate them into our collaborative network. Future acquisitions are subject
to the following risks:
* Our acquisitions may cause a disruption in our ongoing support of our
operating companies, distract our management and other resources and
make it difficult to maintain our standards, controls and procedures.
* We may acquire interests in companies in e-commerce markets in which
we have little experience.
* We may not be able to facilitate collaboration between our operating
companies and new companies that we acquire.
* To fund future acquisitions we may be required to incur debt or issue
equity securities, which may be dilutive to existing shareholders.
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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 COMPANIES
Sitestar and our operating companies' result of operations, and accordingly
the price of its common stock, may be adversely affected by the following
factors:
* lack of acceptance of the Internet as an advertising medium;
* inability to develop a large base of users of its Web sites who
possess demographic characteristics attractive to advertisers;
* lower advertising rates;
* slow development of the e-commerce market;
* lack of acceptance of its Internet content;
* loss of key content providers;
* intense competition;
* loss of key personnel; and
* inability to manage growth.
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THE SUCCESS OF OUR OPERATING COMPANIES DEPENDS ON THE DEVELOPMENT OF THE
E-COMMERCE MARKET, WHICH IS UNCERTAIN.
All of our operating companies rely on the Internet for the success of
their businesses. The development of the e-commerce market is in its early
stages. If widespread commercial use of the Internet does not develop, or if the
Internet does not develop as an effective medium for the provision of products
and services, our operating companies may not succeed.
Our long-term success depends on widespread market-acceptance of
e-commerce. A number of factors could prevent such acceptance, including the
following:
* the unwillingness of businesses to shift from traditional processes to
e-commerce processes;
* the necessary network infrastructure for substantial growth in usage
of e-commerce may not be adequately developed;
* increased government regulation or taxation may adversely affect the
viability of e-commerce;
* insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times for
the users of e-commerce; and
* concern and adverse publicity about the security of e-commerce
transactions.
OUR OPERATING COMPANIES MAY FAIL IF THEIR COMPETITORS PROVIDE SUPERIOR INTERNET-
RELATED OFFERINGS OR CONTINUE TO HAVE GREATER RESOURCES THAN OUR OPERATING
COMPANIES HAVE.
Competition for Internet products and services is intense. As the market
for e-commerce grows, we expect that competition will intensify. Barriers to
entry are minimal, and competitors can offer products and services at a
relatively low cost. Our operating companies compete for a share of a
customer's:
* purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels;
* dollars spent on consulting services with many established information
systems and management consulting firms; and
* advertising budget with online services and traditional off-line
media, such as print and trade associations.
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In addition, some of our operating companies compete to attract and retain
a critical mass of buyers and sellers. Several companies offer competitive
solutions that compete with one or more of our operating companies. We expect
that additional companies will offer competing solutions on a stand-alone or
combined basis in the future. Furthermore, our operating companies' competitors
may develop Internet products or services that are superior to, or have greater
market acceptance than, the solutions offered by our operating companies. If our
operating companies are unable to compete successfully against their
competitors, our operating companies may fail.
Many of our operating companies' competitors have greater brand recognition
and greater financial, marketing and other resources than our operating
companies. This may place our operating companies at a disadvantage in
responding to their competitors' pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other initiatives.
DEPENDENCE ON VENDOR RELATIONSHIPS
Our operating subsidiaries are currently, and expect to be in the future,
dependent on a number of vendor relationships. These relationships include
arrangements relating to the creation of traffic on Sitestar-affiliated Web
sites and resulting generation of advertising and commerce-related revenue. The
termination of, or the failure of such Sitestar-affiliated Web sites to renew on
reasonable terms, such relationships could have an adverse effect on our
business, results of operations and financial condition. Our operating companies
also are generally dependent on other vendor relationships with advertisers,
sponsors and partners. Most of these arrangements do not require future minimum
commitments to use our services, are often not exclusive and are often
short-term or may be terminated at the convenience of the other party. There can
be no assurance that these vendors will not reassess their commitment to our
operating companies at any time in the future, or that they will not develop
their own competitive services or products. Further, there can be no assurance
that the services of these companies will achieve market acceptance or
commercial success and therefore there can be no assurance that our existing
relationships will result in sustained or successful business partnerships or
significant revenues for us.
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SOME OF OUR OPERATING COMPANIES MAY BE UNABLE TO PROTECT THEIR PROPRIETARY
RIGHTS AND MAY INFRINGE ON THE PROPRIETARY RIGHTS OF OTHERS.
Proprietary rights, particularly in the form of copyrights, are important
to the success and competitive position of many of our operating companies.
Although our operating companies seek to protect their proprietary rights, their
actions may be inadequate to protect any trademarks, copyrights and other
proprietary rights. In addition, effective copyright and trademark protection
may be unenforceable or limited in certain countries, and the global nature of
the Internet makes it impossible for some of our operating companies to control
the dissemination of their work and use of their services. Some of our operating
companies also license content from third parties and it is possible that they
could become subject to infringement actions based upon the content licensed
from those third parties. Our operating companies generally obtain
representations as to the origin and ownership of such licensed content;
however, this may not adequately protect them. Any of these claims, with or
without merit, could subject our operating companies to costly litigation and
the diversion of their technical and management personnel. If our operating
companies incur costly litigation and their personnel are not effectively
deployed, the expenses and losses incurred by our operating companies will
increase and their profits, if any, will decrease.
SOURCE OF SUPPLY FOR GREATTOOLS.COM.
Since 1999, Greattools.com has been operating pursuant to an oral agreement
with Global Sourcing Group ("GSG"), a power tool wholesaler located in Thousand
Oaks, California, which supplies 100% of the products sold by the Company in its
Web site. While the Company anticipates that it will continue operating under
the oral agreement, it intends to enter into a written exclusive fulfillment
agreement with GSG as soon as it's practicable. The Company intends to enter
into this fulfillment arrangement to assure it could continue to source all of
its products.
Gateway Holdings, Inc. the private equity fund managed by our Chairman
Frederick T. Manlunas beneficially owns and controls 14.6% of the total
outstanding shares of Global Sourcing Group. The Company is reliant on Mr.
Manlunas' relationship with GSG for its Greattools.com's fulfillment needs.
SOURCE OF SUPPLY FOR HOLLAND-AMERICAN.COM.
Since September 1999, Holland-American.com has been operating pursuant to
an oral agreement with Holland American International Specialties ("HAIS"), a
specialty foods wholesaler and retailer located in Bellflower, California, which
supplies 100% of the products sold by the Company in its Web site. While the
Company anticipates that it will continue operating under the oral agreement, it
intends to enter into a written exclusive fulfillment agreement with HAIS as
soon as it's practicable. We intend to enter into this fulfillment arrangement
to assure it could continue to source all of its products.
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IFCO Group, LLC ("IFCO"), whose members consist of certain shareholders of
the Company, including Frederick T. Manlunas, owns HAIS. Our Chairman of the
Board, Mr. Manlunas, beneficially owns and controls 32.75% of the total
outstanding membership interest of IFCO Group, LLC. However, the Company is not
reliant on Mr. Manlunas' relationship with HAIS for its Holland-American.com's
fulfillment needs.
OUR OPERATING COMPANIES THAT PUBLISH OR DISTRIBUTE CONTENT OVER THE INTERNET MAY
BE SUBJECT TO LEGAL LIABILITY.
Some of our operating companies may be subject to legal claims relating to
the content on their Web sites, or the downloading and distribution of this
content. Claims could involve matters such as defamation, invasion of privacy
and copyright infringement. Providers of Internet products and services have
been sued in the past, sometimes successfully, based on the content of material.
In addition, some of the content provided by our operating companies on their
Web sites is drawn from data compiled by other parties, including governmental
and commercial sources, and our operating companies re-enter the data. This data
may have errors. If any of our operating companies' Web site content is
improperly used or if any of our operating companies supply incorrect
information, it could result in unexpected liability. Any of our operating
companies that incur this type of unexpected liability may not have insurance to
cover the claim or its insurance may not provide sufficient coverage. If our
operating companies incur substantial cost because of this type of unexpected
liability, the expenses incurred by our operating companies will increase and
their profits, if any, will decrease.
OUR OPERATING COMPANIES' COMPUTER AND COMMUNICATIONS SYSTEMS MAY FAIL, WHICH MAY
DISCOURAGE CONTENT PROVIDERS FROM USING OUR OPERATING COMPANIES' SYSTEMS.
All of our operating companies' businesses depend on the efficient and
uninterrupted operation of their computer and communications hardware systems.
Any system interruptions that cause our operating companies' Web sites to be
unavailable to Web browsers may reduce the attractiveness of our operating
companies' Web sites to third party content providers. If third party content
providers are unwilling to use our operating companies' Web sites, our business,
financial condition and operating results could be adversely affected.
Interruptions could result from natural disasters as well as power loss,
telecommunications failure and similar events.
OUR OPERATING COMPANIES' BUSINESSES MAY BE DISRUPTED IF THEY ARE UNABLE TO
UPGRADE THEIR SYSTEMS TO MEET INCREASED DEMAND.
Capacity limits on some of our operating companies' technology, transaction
processing systems and network hardware and software may be difficult to project
and they may not be able to expand and upgrade their systems to meet increased
use.
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As traffic on our operating companies' Web sites continues to increase,
they must expand and upgrade their technology, transaction processing systems
and network hardware and software. Our operating companies may be unable to
accurately project the rate of increase in use of their Web sites. In addition,
our operating companies may not be able to expand and upgrade their systems and
network hardware and software capabilities to accommodate increased use of their
Web sites. If our operating companies are unable to appropriately upgrade their
systems and network hardware and software, the operations and processes of our
operating companies may be disrupted.
OUR OPERATING COMPANIES MAY NOT BE ABLE TO ATTRACT A LOYAL BASE OF USERS TO
THEIR WEB SITES.
While content is important to all our operating companies' Web sites, our
operating companies are particularly dependent on content to attract business.
Our success depends upon the ability of these operating companies to deliver
compelling Internet content to their targeted users. If our operating companies
are unable to develop Internet content that attracts a loyal user base, the
revenues and profitability of our operating companies could be impaired.
Internet users can freely navigate and instantly switch among a large number of
Web sites. Many of these Web sites offer original content. Thus, our operating
companies may have difficulty distinguishing the content on their Web sites to
attract a loyal base of users.
OUR OPERATING COMPANIES MAY BE UNABLE TO ACQUIRE OR MAINTAIN EASILY IDENTIFIABLE
WEB SITE ADDRESSES OR PREVENT THIRD PARTIES FROM ACQUIRING WEB SITE ADDRESSES
SIMILAR TO THEIRS.
Some of our operating companies hold various Web site addresses relating to
their brands. These operating companies may not be able to prevent third parties
from acquiring Web site addresses that are similar to their addresses, which
could adversely affect the use by businesses of our operating companies' Web
sites. In these instances, our operating companies may not grow as we expect.
The acquisition and maintenance of Web site addresses generally is regulated by
governmental agencies and their designees. The regulation of Web site addresses
in the United States and in foreign countries is subject to change. As a result,
our operating companies may not be able to acquire or maintain relevant Web site
addresses in all countries where they conduct business. Furthermore, the
relationship between regulations governing such addresses and laws protecting
trademarks is unclear.
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SOME OF OUR OPERATING COMPANIES ARE DEPENDENT ON BARTER TRANSACTIONS THAT DO NOT
GENERATE CASH REVENUE.
Our operating companies plans to enter into barter transactions in which
they provide advertising for other internet companies in exchange for
advertising for the operating company. In a barter transaction the operating
company will reflect the sales of the advertising received as an expense and the
value of the advertising provided, in an equal amount, as revenue. However,
barter transactions also do not generate cash revenue, which may adversely
affect the cash flows of some of our operating companies. Limited cash flows may
adversely affect a operating company's abilities to expand its operations and
satisfy its liabilities.
RISKS RELATING TO THE INTERNET INDUSTRY
CONCERNS REGARDING SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL
INFORMATION OVER THE INTERNET MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS.
We believe that concern regarding the security of confidential information
transmitted over the Internet prevents many potential customers from engaging in
online transactions. If our operating companies that depend on such transactions
do not add sufficient security features to their future product releases, our
operating companies' products may not gain market acceptance or there may be
additional legal exposure to them.
Despite the measures some of our operating companies have taken, the
infrastructure of each of them is potentially vulnerable to physical or
electronic break-ins, viruses or similar problems. If a person circumvents the
security measures imposed by any one of our operating companies, he or she could
misappropriate proprietary information or cause interruption in operations of
the operating company. Security breaches that result in access to confidential
information could damage the reputation of any one of our operating companies
and expose the operating company affected to a risk of loss or liability. Some
of our operating companies may be required to make significant investments and
efforts to protect against or remedy security breaches. Additionally, as
e-commerce becomes more widespread, our operating companies' customers will
become more concerned about security. If our operating companies are unable to
adequately address these concerns, they may be unable to sell their goods and
services.
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RAPID TECHNOLOGICAL CHANGES MAY PREVENT OUR OPERATING COMPANIES FROM REMAINING
CURRENT WITH THEIR TECHNICAL RESOURCES AND MAINTAINING COMPETITIVE PRODUCT AND
SERVICE OFFERINGS.
The markets in which our operating companies operate are characterized by
rapid technological change, frequent new product and service introductions and
evolving industry standards. Significant technological changes could render
their existing Web site technology or other products and services obsolete. The
e-commerce market's growth and intense competition exacerbate these conditions.
If our operating companies are unable to successfully respond to these
developments or do not respond in a cost-effective way, our business, financial
condition and operating results will be adversely affected. To be successful,
our operating companies must adapt to their rapidly changing markets by
continually improving the responsiveness, services and features of their
products and services and by developing new features to meet the needs of their
customers. Our success will depend, in part, on our operating companies' ability
to license leading technologies useful in their businesses, enhance their
existing products and services and develop new offerings and technology that
address the needs of their customers. Our operating companies will also need to
respond to technological advances and emerging industry standards in a
cost-effective and timely manner.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES MAY PLACE FINANCIAL BURDENS ON
OUR BUSINESS AND THE BUSINESSES OF OUR OPERATING COMPANIES.
As of September 30, 1999, there were few laws or regulations directed
specifically at e-commerce. However, because of the Internet's popularity and
increasing use, new laws and regulations may be adopted. These laws and
regulations may cover issues such as the collection and use of data from Web
site visitors and related privacy issues, pricing, content, copyrights, online
gambling, distribution and quality of goods and services. The enactment of any
additional laws or regulations may impede the growth of the Internet and
e-commerce, which could decrease the revenue of our operating companies and
place additional financial burdens on our business and the businesses of our
operating companies.
Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. For example, Congress recently
enacted laws regarding online copyright infringement and the protection of
information collected online from children. Although these laws may not have a
direct adverse effect on our business or those of our operating companies, they
add to the legal and regulatory burden faced by e-commerce companies.
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RISKS RELATING TO FUTURE OFFERINGS
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT SHAREHOLDERS MAY DECREASE THE
PRICE OF OUR COMMON STOCK.
If our shareholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, in the public market
following future offerings, then the market price of our common stock could
fall. Restrictions under the securities laws and certain lock-up agreements
limit the number of shares of common stock available for sale in the public
market.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
The market price for our common stock is likely to be highly volatile as
the stock market in general and the market for Internet-related stocks and the
stock. The trading prices of many technology and Internet-related company stocks
have reached historical highs within the last year and have reflected relative
valuations substantially above historical levels. During the same period, the
stocks of these companies have also been highly volatile and have recorded lows
well below such historical highs. We cannot assure you that our common stock
will trade at the same levels of other Internet stocks or that Internet stocks
in general will sustain their current market prices.
The following factors will add to our common stock price's volatility:
* actual or anticipated variations in our quarterly operating results
and those of our operating companies;
* new sales formats or new products or services offered by us, our
operating companies and their competitors;
* changes in our financial estimates and those of our operating
companies by securities analysts;
* conditions or trends in the Internet industry in general and the
e-commerce industry in particular;
* announcements by our operating companies and their competitors of
technological innovations;
* announcements by us or our operating companies or our competitors of
significant acquisitions, strategic partnerships or joint ventures;
* changes in the market valuations of our operating companies and other
Internet companies;
* our capital commitments;
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* additions or departures of our key personnel and key personnel of our
operating companies; and
* sales of our common stock.
Many of these factors are beyond our control. These factors may decrease
the market price of our common stock, regardless of our operating performance.
Item 3. Description of Property.
We lease our principal executive offices, as well as our administrative
offices, which are located in a 1,084 square feet office facility in Encino,
California at an annual rent of $24,715.20. This facility also houses our
customer service, administrative and corporate center functions. This lease will
expire in June 2001.
We also lease 2,100 square feet of office space in Annapolis, Maryland.
This facility houses Sitestar.net's, Greattools.com's and Holland-American.com's
executive offices, customer service, and administrative functions. This lease is
currently on a month-to-month basis with a rental fee of $33,072 per annum.
In addition, we now own a 12,000 square feet office building in
Martinsville, Virginia which serves as Neocom's principal executive offices. We
acquired this property along with the acquisition of Neocom. This facility
houses Neocom's customer service, administrative and corporate functions.
Neocom's principal noteholders have a senior lien on the property. The lien on
the property was a result of the working capital credit facility taken by Neocom
against the property. The bank note is payable in monthly principal and interest
installments of $6,400 or $76,800 per annum with the balance due September 2003.
Our annual rents are subject to adjustments. We anticipate that we will
require additional space for our ISP operations as we expand, and we believe
that we will be able to obtain suitable space as needed on commercially
reasonable terms.
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Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of September 30, 1999
regarding the record and beneficial ownership of the Common Stock by: (i) any
individual or group (as that term is defined in the federal securities laws) of
affiliated individuals or entities who is known by the Company to be the
beneficial owner of more than five percent of the outstanding shares of our
Common Stock; (ii) each executive officer and Director of the Company; and (iii)
the executive officers and Directors of the Company as a group.
Name and Address of Number of Shares Percent
Beneficial Owner Beneficially Owned (1) of Class (2)
- ------------------ ---------------------- ------------
Frederick T. Manlunas 3,039,255 12.99%
16133 Ventura Blvd., Suite 635
Encino, CA 91436
Clinton J. Sallee 1,926,170 8.24%
16133 Ventura Blvd., Suite 635
Encino, CA 91436
Franklin Christopher 1,483,857 6.35%
326 First Street, Suite 26
Annapolis, MD 21403
Kevorak Zoryan -0- *
16133 Ventura Blvd., Suite 635
Encino, CA 91436
All directors and officers 6,449,282 27.58%
as a group (4 persons)
* Less than 1%
- ---------------------------------------
(1) We believe that all persons named in the table have sole voting and
investment power with respect to all shares of common stock beneficially
owned by them. A person is deemed to be the beneficial owner of securities
which may be acquired by such person within 60 days from the date of this
registration statement upon the exercise of options, warrants or
convertible securities. Each beneficial owner's percentage of ownership is
determined by assuming all options, warrants or convertible securities that
are held by such person (but not held by any other person) and which are
exercisable or convertible within 60 days of this registration statement
have been exercised or converted.
(2) Percent of class is based on 18,600,036 shares of Common Stock outstanding
as of September 30, 1999.
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Item 5. Directors, Executive Officers, Promoters and Control persons.
The following table sets forth certain information with respect to the
directors and executive officers of Sitestar.
Name Age(1) Position
- --------------- ------ -------------------
Frederick T. Manlunas 31 Chairman of the Board and
Managing Director
Clinton J. Sallee 27 President and Chief
Executive Officer
Kevorak Zoryan 26 Director
- ----------------------
(1) Ages are given as of September 30, 1999
FREDERICK T. MANLUNAS, has been a Director of the Company since October of 1998
and has served as the Company's Chairman of the Board since July 1999. Mr.
Manlunas manages Gateway Holdings, Inc., a private equity fund based in Los
Angeles since 1995. Prior to founding Gateway, Mr. Manlunas was an Associate
with Arthur Andersen LLP's Retail Management Consulting division from 1991 to
1995. Mr. Manlunas also serves as Director for MenuDirect, Inc., a Delaware
corporation, and Xcel Medical Pharmacy, a California corporation. Mr. Manlunas
received a Bachelor of Science degree in Journalism from Florida International
University and he earned a Masters of Business Administration degree from
Pepperdine University.
CLINTON J. SALLEE has been a Director of the Company since May of 1999 and has
served as the Company's President and Chief Executive Officer since July 1999.
In 1996, Mr. Sallee founded Sallee Zoryan, a concept development firm, where he
served as President since inception. Prior to founding Sallee Zoryan, Mr. Sallee
was an Associate with W.E. Myers & Company, a boutique investment bank,
specializing in industry consolidations. Mr. Sallee earned a Bachelor of Science
degree in Business Administration from the Marshall School of Business at the
University of Southern California in 1994.
KEVORK A. ZORYAN has been a Director of the Company since July of 1999. From
March 1997 to July 1999, Mr. Zoryan served on the acquisition team of the Morgan
Stanley Real Estate Fund, a leading international private equity real estate
investment fund. From March 1995 to May 1996, Mr. Zoryan served as an analyst of
the JE Robert Companies, and from June 1993 to February 1995, as a staff analyst
with Ernst & Young. Mr. Zoryan co-founded Sallee Zoryan, a concept development
firm in 1996, and currently serves as its Partner. Mr. Zoryan earned a BS in
Business Administration from the Marshall School of Business at the University
of Southern California in 1994. He currently attends the Harvard Business School
as a member of the MBA Class of 2001.
The Company is currently actively searching for a Chief Financial Officer.
Management has interviewed several candidates and expects to finalize its
selection before the end of the current quarter.
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ITEM 6. EXECUTIVE COMPENSATION.
The following table summarizes the compensation by the Company to Frederick
T. Manlunas, its former President and CEO for the last three fiscal years. No
officer of the Company received compensation in excess of $100,000 during such
years.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long Term Compensation
---------------------------------------------- ------------------------------------------------
Other Restricted
Annual Stock Options LTIP All Other
Position Year Salary ($) Bonuses($) Compensation Awards SARs Payouts ($) Compensation
- -------- ---- ---------- ---------- ------------ ---------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frederick T. 1998 96,000 -- -- -- -- -- --
Manlunas 1999 120,000 -- -- -- -- -- --
Chairman of the
Board
Clinton J. 1999 120,000 -- -- -- -- -- --
Sallee
President & Chief
Executive Officer
</TABLE>
The Company currently has no long-term compensation, annuity, pension or
retirement plans.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Effective as of September 30, 1999 we sold the non-Internet assets of HAIS
to IFCO Group, LLC ("IFCO"), whose members consist of certain shareholders of
the Company, including Frederick T. Manlunas, our Chairman of the Board. We
retained the assets consisting of the Internet web site Holland-American.com.
HAIS will continue to serve as Holland-American.com's exclusive fulfillment
center. The purchase consideration for HAIS was $900,000 and was based upon a
business appraisal by an independent third party appraiser. The consideration
included $200,000 which was to be offset against the Company's liability to Mr.
Manlunas for services rendered in connection to the acquisition of Sitestar,
Inc., the assumption of $654,000 of liabilities and a promissory note in the
amount of $46,000. The note bears interest at a rate of 8% per annum, and is
payable in annual installments of $15,333, and is due and payable on September
30, 2002. The note is secured by HAIS' accounts receivable and inventory.
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On September 30, 1999, we sold our 9% equity interest in SMF to IFCO for
$200,000. The consideration was paid in the form of assumption of $160,000 of
debt related to the investment and the balance of $40,000 paid by a promissory
note payable in three annual installments of $13,334 each. The note bears
interest at a rate of 8% per annum. The purchase consideration was equal to our
original investment in January 1999.
On July 1999, a majority of IFCO shareholders, including our Chairman Mr.
Manlunas, acquired all the issued and outstanding shares of Sitestar, Inc..
("SYTE"), a Delaware corporation, in exchange for 3,491,428 shares of our Common
Stock owned by the majority IFCO shareholders. Simultaneous with the closing of
this transaction, the IFCO shareholders contributed SYTE to IFCO as contributed
capital. SYTE is a Web development, design and hosting company formed in 1996
and is based in Annapolis, Maryland. This acquisition included Soccersite.com
which is currently one of our operating subsidiaries.
In August 1999, we acquired substantially all of the assets of
Greattools.com in exchange for 49,000 shares of our Common Stock. We acquired
the assets of Greattools.com from Global Sourcing Group, Greattools.com's
current fulfillment center. Gateway Holdings, Inc., a private investment company
our Chairman Frederick Manlunas is managing, has a 14.6% equity ownership in
Global Sourcing Group. Greattools.com is an online low cost retailer of power
tools.
In January 1999, Mr. Manlunas, a majority stockholder of the Company,
loaned $80,300 to the Company for use as working capital based on an oral
agreement. The amounts owed to Mr. Manlunas are not accruing interest, and are
due and payable upon demand. To date, the Company has made no payments to Mr.
Manlunas in satisfaction of this obligation.
ITEM 8. DESCRIPTION OF SECURITIES.
Common Stock
- ------------
We are authorized to issue 75,000,000 shares of common stock, par value
$0.001 per share. Holders of common stock are entitled to one vote for each
share held of record on all matters on which the holders of common stock are
entitled to vote. There are no redemption or sinking fund provisions applicable
to the common stock. The outstanding shares of common stock are, and the common
stock issuable pursuant to this registration statement will be, when issued,
fully paid and non-assessable.
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Preferred Stock
- ---------------
We are authorized to issue 10,000,000 shares of "blank check" preferred
stock, par value $0.001 per share, in one or more series from time to time with
such designations, rights and preferences as may be determined from time to time
by the Board of Directors, including, but not limited to (i) the designation of
such series; (ii) the dividend rate of such series, the conditions and dates
upon which such dividends shall be payable, the relation which such dividends
shall bear to the dividends payable on any other class or classes or series of
our capital stock and whether such dividends shall be cumulative or
non-cumulative; (iii) whether the shares of such series shall be subject to
redemption for cash, property or rights, including securities of any other
corporation, by Sitestar or upon the happening of a specified event and, if made
subject to any such redemption, the times or events, prices, rates, adjustments
and other terms and conditions of such redemption; (iv) the terms and amount of
any sinking fund provided for the purchase or redemption of the shares of such
series (v) whether or not the shares of such series shall be convertible into,
or exchangeable for, at the option of either the holder or Sitestar or upon the
happening of a specified event, shares of any other class or classes or of any
other series of the same class of Sitestar's capital stock and, if provision be
made for the conversion or exchange, the times or events, prices, rates,
adjustments and other terms and conditions of such conversions or exchanges;
(vi) the restrictions, if any, on the issue or reissue of any additional
preferred stock; (vii) the rights of the holders of the shares of such series
upon the voluntary or involuntary liquidation, dissolution or winding up of
Sitestar; and (viii) the provisions as to voting, optional and/or other special
rights and preferences, if any, including, without limitation, the right to
elect one or more directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which adversely affect the
voting power or other rights of the holders of the common stock. In the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a way of discouraging, delaying or preventing an acquisition or change in
control of Sitestar.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity
and Other Shareholder Matters.
Our Common Stock was traded over-the-counter and was quoted on the OTC
Bulletin Board (symbol "SYTE") until December 15, 1999. On December 16, 1999,
our common stock was temporarily de-listed from the NASD OTC Bulletin Board
pending the effective date of our Form 10-SB registration statement. Once our
registration statement is deemed effective by the SEC, we expect our Common
Stock to be re-listed on the OTC Bulletin Board. Our Common Stock is currently
traded over-the-counter and is currently quoted on the National Quotations
Board's Electronic Quotation Service. On July 14, 1999 we effected a 3-for-1
stock split. All prices listed below reflect this split. The closing bid price
for the Common Stock was $1.00 on December 31, 1999.
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Set forth below are the high and low closing bid prices for the Common
Stock of the company for each quarterly period commencing September 30, 1998:
Period Low High
------ --- ----
1998
----
Quarter ended December 31, 1998 1.00 1.03
1999
----
Quarter ended March 31, 1999 1.00 1.03
Quarter ended June 30, 1999 1.00 1.03
Quarter ended September 30, 1999 .875 3.75
Quarter ended December 31, 1999 .45 2.1875
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
As of December 31, 1999 the Company had 112 shareholders of record.
Item 2. Legal Proceedings.
The Company is not involved in any material pending legal proceedings.
Item 3. Changes in and Disagreements with Accountants.
Not Applicable.
Item 4. Recent Sales of Unregistered Securities.
(a) Securities Sold
In October 1998, in connection with the acquisition of Interfoods
Consolidated, Inc., we issued 5,580,000 shares of our Common Stock to the
shareholders of Interfoods Consolidated, Inc. The issuance of these shares was
exempt from the registration an prospectus delivery requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.
55
<PAGE>
In July 1999 a majority of IFCO shareholders, including our Chairman, Mr.
Manlunas, acquired all the issued and outstanding shares of Sitestar, Inc.
("SYTE"), a Delaware corporation, in exchange for 3,491,428 shares of our Common
Stock owned by the majoriity IFCO shareholders. Simultaneous with the closing of
this transaction, the IFCO shareholders contributed SYTE to IFCO as contributed
capital. SYTE is a Web development, design and hosting company formed in 1996
and is based in Annapolis, Maryland. This acquisition included Soccersite.com
which is currently one of our operating subsidiaries. Soccersite.com was an
operating subsidiary of SYTE.
In August 1999, in connection with the acquisition of Greattools.com, we
issued 49,000 shares of our Common Stock to the shareholders of Global Sourcing
Group . The issuance of these shares was exempt from the registration an
prospectus delivery requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof.
In May 1999, we issued and sold an aggregate of 140,000 shares of our
Common Stock for $140,000. The issuance and sale of these shares was exempt from
the registration and prospectus delivery requirements of the Securities Act of
1933 pursuant to Section 4(2) thereof.
In December 1999, in connection with the acquisition of Neocom
Microspecialists, Inc., we issued 4,782,353 shares of our Common Stock to the
shareholders of Neocom. The issuance of these shares was exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933,
as amended, pursuant to Section 4(2) thereof.
Item 5. Indemnification of Directors and Officers.
Except for acts or omissions which involve intentional misconduct, fraud or
known violation of law or for the payment of dividends in violation of Nevada
Revised Statutes, there shall be no personal liability of a director or officer
to the Company, or its stockholders for damages for breach of fiduciary duty as
a director or officer. The Company may indemnify any person for expenses
incurred, including attorneys fees, in connection with their good faith acts if
they reasonably believe such acts are in and not opposed to the best interests
of the Company and for acts for which the person had no reason to believe his or
her conduct was unlawful. The Company may indemnify the officers and directors
for expenses incurred in defending a civil or criminal action, suit or
proceeding as they are incurred in advance of the final disposition of the
action, suit or proceeding, upon receipt of an undertaking by or on behalf of
the director or officer to repay the amount of such expenses if it is ultimately
determined by a court of competent jurisdiction in which the action or suit is
brought determined that such person is fairly and reasonably entitled to
indemnification for such expenses which the court deems proper.
56
<PAGE>
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to officers, directors or persons controlling the Company pursuant
to the foregoing, the Company has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933, as amended, and is therefore
unenforceable.
PART F/S
Financial Statements
The following financial statements are attached to this report and filed as
a part thereof.
INDEX TO FINANCIAL STATEMENTS
INTERFOODS CONSOLIDATED, INC.
Report of Independent Public Accountants....................................F-2
Balance Sheets as of December 31, 1997 and 1998 and for the
Nine Months Ended September 30, 1999 (Unaudited) and 1998
(Unaudited)...............................................................F-3
Statements of Operations for the Year Ended December 31, 1998,
Seven Months Ended December 31, 1997 and for the Nine Months
Ended September 30, 1999 (Unaudited) and 1998 (Unaudited)..................F-4
Statements of Stockholders' Equity for the Years Ended December 31, 1998
and 1997 and for the Nine Months Ended September 30, 1999 (Unaudited)......F-5
Statements of Cash Flows for the Year Ended December 31, 1998,
Seven Months Ended December 31, 1997 and the Nine Months
Ended September 30, 1999 (Unaudited) and 1998 (Unaudited)..................F-6
Notes to Financial Statements...............................................F-8
57/F-1a
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
Report of Independent Public Accountants...................................F-23
Consolidated Balance Sheets as of December 31, 1998 and 1997...............F-24
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997................................................F-25
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 1998 and 1997................................................F-26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997.................................................F-27
Notes to Consolidated Financial Statements.................................F-29
NEOCOM MICROSPECIALISTS, INC.
Report of Independent Public Accountants...................................F-36
Balance Sheets as of December 31, 1998 and 1997............................F-37
Statements of Operations for the Years Ended December 31, 1998 and 1997....F-38
Statement of Stockholders' Deficiency for the Years Ended December 31,
1998 and 1997.............................................................F-39
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997....F-40
Notes to Consolidated Financial Statements.................................F-42
INTERFOODS CONSOLIDATED, INC
Proforma Financial Information.............................................F-53
Proforma Balance Sheet as of December 31, 1998.............................F-54
Proforma Statement of Operations as of December 31, 1998...................F-55
Proforma Balance Sheet as of September 30, 1999............................F-56
Proforma Statement of Operations as of September 30, 1999..................F-57
Notes to Proforma Financial Statements.....................................F-58
F-1b
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
INTERFOODS CONSOLIDATED, INC.
We have audited the accompanying balance sheets of Interfoods Consolidated, Inc.
as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficiency) and cash flows for the year ended December 31,
1998 and the initial period June 1, 1997 to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interfoods Consolidated, Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the year ended December 31, 1998 and the initial period June 1, 1997
to December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has had net losses and cash flow deficiencies from operations since
inception and the Company is in default on its line of credit. These factors,
among others, as discussed in Note 1 to the financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
October 12, 1999
F-2
<PAGE>
<TABLE>
INTERFOODS CONSOLIDATED, INC.
BALANCE SHEETS
<CAPTION>
December 31, September 30,
1998 1997 1999 1998
----------- ---------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ - $ 59,306 $ 54,809 $ -
Accounts Receivable, Less Allowance for
Doubtful Accounts of $16,378, $10,000,
$0 and $10,000, respectively 196,206 356,818 146,339
Inventories 542,081 661,630 512,215
Note Receivable - Stockholder 71,657 - 8,102 69,016
Other Current Assets 20,381 45,900 36,505 150,329
----------- ---------- ----------- -----------
Total Current Assets 830,325 1,123,654 99,416 877,899
EQUIPMENT AND FURNITURE, Net 18,643 2,880 114,827 3,421
EXCESS OF COST OVER FAIR VALUE OF NET
ASSETS ACQUIRED, Net of Accumulated
Amortization of $257,421 - - 7,476,936 -
ASSETS SOLD TO RELATED PARTY - - 844,081 -
OTHER INTANGIBLE ASSETS - - 118,433 -
INVESTMENT 125,000 - - -
----------- ---------- ----------- -----------
TOTAL ASSETS $ 973,968 $1,126,534 $ 8,653,693 $ 881,320
=========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES
Book Overdraft $ 29,546 - $ - $ 7,684
Accounts Payable and Accrued Expenses 372,725 692,803 12,254 239,225
Line of Credit 200,000 - - 200,000
Advance from Stockholders 302,960 - 557,411 22,668
Notes Payable 119,500 - - 19,519
Capital Lease Obligations - Current Portion - - 5,112 -
----------- ---------- ----------- -----------
Total Current Liabilities 1,024,731 692,803 574,777 489,096
LIABILITIES SOLD TO RELATED PARTY - - 546,048 -
CAPITAL LEASE OBLIGATIONS, Less Current Portion - - 12,908 -
----------- ---------- ----------- -----------
TOTAL LIABILITIES 1,024,731 692,803 1,133,733 489,096
----------- ---------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8) - - - -
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock, $.001 par value, 25,000,000 shares
authorized, 6,200,012 and 5,580,000 shares
issued and outstanding, respectively 18,600 16,740 18,600 16,740
Additional Paid-in Capital 609,200 611,060 10,692,475 611,060
Accumulated Deficit ( 678,563) ( 194,069) ( 3,191,115) ( 235,576)
----------- ---------- ----------- -----------
Total Stockholders' Equity (Deficiency) ( 50,763) 433,731 7,519,960 392,224
----------- ---------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIENCY) $ 973,968 $ 1,126,534 $ 8,653,693 $ 881,320
=========== =========== =========== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
<TABLE>
INTERFOODS CONSOLIDATED, INC.
STATEMENTS OF OPERATIONS
<CAPTION>
Seven
Year Ended Months Ended Nine Months Ended
December 31, December 31, September 30,
1998 1997 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES $ - - $ 18,684 $ -
COST OF GOODS SOLD - - 22,740 -
------------ ------------ ------------ -----------
GROSS LOSS - - ( 4,056) -
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 370,650 - 2,455,938 -
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ( 370,650) - (2,459,994) -
INTEREST EXPENSE - - 11,772 -
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES ( 370,650) - (2,471,766) -
INCOME TAXES - - - -
------------ ------------ ------------ ------------
NET LOSS FROM CONTINUED OPERATIONS ( 370,650) - (2,471,766) -
LOSS FROM DISCONTINUED OPERATIONS
(Net of applicable income tax effect
of $0, due to valuation allowance
for uncertainty of realization) ( 113,844) ( 194,069) ( 40,786) ( 41,507)
NET LOSS $( 484,494) $( 194,069) $(2,512,552) $( 41,507)
============ =========== ============ ============
BASIC AND DILUTED LOSS PER SHARE -
FROM CONTINUED OPERATIONS $( 0.02) $( 0.00) $( 0.14) $( 0.00)
BASIC AND DILUTED LOSS PER SHARE -
DISCONTINUED OPERATIONS $( 0.01) $( 0.01) $( 0.00) $( 0.00)
BASIC AND DILUTED LOSS PER SHARE -
NET INCOME $( 0.03) $( 0.01) $( 0.14) $( 0.00)
============ =========== ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND DILUTED 17,081,430 16,740,000 18,600,036 16,740,000
============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
<TABLE>
INTERFOODS CONSOLIDATED, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIENCY)
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at June 1, 1997 - $ - $ - $ - $ -
Issuance of Shares for Cash 16,740,000 16,740 611,060 - 627,800
Net Loss - - - ( 194,069) ( 194,069)
---------- ---------- ----------- ----------- -----------
Balance at December 31, 1997 16,740,000 16,740 611,060 ( 194,069) 433,731
Issuance of Shares in Merger with
White Dove Systems, Inc. 1,860,036 1,860 ( 1,860) - -
Net Loss - - - ( 484,494) ( 484,494)
---------- ---------- ----------- ----------- ----------
Balance at December 31, 1998 18,600,036 18,600 609,200 ( 678,563) ( 50,763)
Cash Contributions (Unaudited) - - 140,275 - 140,275
Contribution of Sitestar
Corporation's Net Assets (Unaudited) - - 7,943,000 - 7,943,000
Shares Issued by Principal Stockholders
to Employee for Compensation - - 2,000,000 - 2,000,000
Net Loss (unaudited) - ( 2,512,552) ( 2,512,552)
---------- ---------- ----------- ----------- -----------
Balance at September 30, 1999 (unaudited) 18,600,036 $ 18,600 $10,692,475 $( 3,191,115) $ 7,519,960
========== ========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
<TABLE>
INTERFOODS CONSOLIDATED, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Seven
Year Ended Months Ended Nine Months Ended
December 31, December 31, September 30,
1998 1997 1999 1998
------------ ------------ ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $( 484,494) $( 194,069) $( 2,512,552) $( 41,507)
Adjustments to Reconcile Net Loss
to Net Cash Used In Operating Activities:
Allowance for Doubtful Accounts 6,378 10,000 - 6,378
Depreciation and Amortization Expense 1,678 - 265,694 -
Compensation Expense Paid by Principal
Shareholders - - 2,000,000 -
(Increase) Decrease in:
Accounts Receivable 154,234 ( 366,818) 84,656 204,101
Inventories 87,805 ( 661,630) 101,669 80,399
Other Current Assets ( 14,394) ( 45,900) ( 54,774) ( 104,429)
Increase (Decrease) in:
Accounts Payable and Accrued Expenses ( 320,078) 692,803 ( 239,902) ( 453,578)
Advances from Stockholder 263,000 - 27,000 -
------------ ------------ ------------ -----------
Net Cash Used In Operating Activities ( 305,871) ( 565,614) ( 328,209) ( 308,636)
------------ ------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Equipment and Furniture ( 17,441) ( 2,880) ( 5,830) ( 541)
Investment ( 125,000) - ( 75,000) -
------------ ------------ ------------ -----------
Net Cash Used In Investing Activities ( 142,441) ( 2,880) ( 80,830) ( 541)
------------ ------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Book Overdraft 29,546 - 36,973 7,684
Advance from Stockholder, Net 39,960 - 215,696 22,668
Proceeds from Line of Credit 200,000 - - 200,000
Proceeds from Notes Payable 169,500 - 416,309 19,519
Repayment of Notes Payable ( 50,000) - ( 354,218) -
Repayment of Capital Lease Obligations - - ( 6,583) -
Cash Contributed With Sitestar Corporation Assets - - 15,396 -
Additional Paid-in Capital - - 140,275 -
Issuance of Common Stock - 627,800 - -
------------ ------------ ------------ -----------
Net Cash Provided By Financing Activities 389,006 627,800 463,848 249,871
------------ ------------ ------------ -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ( 59,306) 59,306 54,809 ( 59,306)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 59,306 - - 59,306
------------ ------------ ------------ -----------
CASH AND CASH EQUIVALENTS -
END OF PERIOD $ - $ 59,306 $ 54,809 $ -
============ =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
INTERFOODS CONSOLIDATED, INC.
STATEMENT OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the year ended December 31, 1998 and the seven months ended December 31,
1997, the Company paid no income taxes and interest of approximately $15,000 and
$0, respectively.
During the nine months ended September 30, 1999 and 1998, the company paid no
income taxes and interest of approximately $16,750 (unaudited) and $0
(unaudited), respectively.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS
In 1998, the Company sold its gift basket business, Wrap-It Up, for $71,657. A
note receivable was received for the total sales price.
During the nine months ended September 30, 1999, the Company acquired equipment
totaling $38,340 (Unaudited) with capital lease obligations.
During the nine months ended September 30, 1999, a group of stockholders
contributed net assets of $7,943,000 (Unaudited) from their acquisition of
Sitestar Corporation as additional paid-in capital.
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Interfoods Consolidated, Inc. (the "Company"), formerly known as
Holland American International Specialties ("HAIS"), began operations
on June 1, 1997, under a partnership agreement, and was incorporated
in California on November 4, 1997. The Company is in the international
specialty foods distribution business. The Company's customers are
specialty and ethnic grocery stores, gift shops and hotels located
primarily in California. The Company's corporate office is located in
Encino, California and has a warehouse and retail facility located in
Bellflower, California.
Mergers
-------
The Company is the successor by merger, which was effective on October
25, 1998, to White Dove Systems, Inc., a Nevada corporation ("WDVE").
The exchange rate in the reincorporating merger was one and one fifth
shares of WDVE's common stock for one share of the Company's common
stock. Due to WDVE's lack of business activity prior to the merger, no
excess cost over fair value of net assets acquired was recorded.
On March 20, 1998, HAIS completed a stock purchase agreement with DHS
Industries, Inc. ("DHS") whereby DHS issued 31,942,950 shares of its
common stock in exchange for all of the issued and outstanding common
stock of HAIS. The acquisition was accounted for as a pooling of
interest. However, on September 30, 1998 the agreement was rescinded
and the stockholders of HAIS returned the shares of DHS for their
shares of HAIS.
Basis of Presentation
---------------------
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. As shown in the
financial statements, the Company has had net losses and cash flow
deficiencies from operations since inception and the Company is in
default on its line of credit. These issues raise substantial doubt
about the Company's ability to continue as a going concern.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn is dependent upon the
Company's ability to generate positive cash flows from operations. The
financial statements do not include any adjustments, relating to the
recoverability and classification of recorded asset amounts and
classifications of liabilities that might be necessary should the
Company be unable to continue its existence. Management plans to take
the following steps that it believes will be sufficient to provide the
Company with the ability to continue in existence and alleviate the
concerns:
F-8
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Line of Credit Default
----------------------
o The Company is currently in discussions for a proposed $10 to $15
million "best effort" underwriting. The proposed financing
structure is through an Equity Line, which the Company would
propose to achieve through a shelf registration using Form SB-2.
Once effective, the Equity Line would allow us to draw down the
capital through the sale of our common stock. This funding would
be used pay down debt, for growth, working and acquisition
capital.
Net losses and cash flow deficiencies
-------------------------------------
o On December 15, 1999 the Company consummated the acquisition of
Neocom Microspecialists, Inc. ("Neocom"). For the ten months
ended October 31, 1999, after non-cash transactions Neocom
operations have achieved breakeven. On an annualized basis, the
Company's management has projected to generate sales of
approximately $2.0 million and cash flows from operations, after
non-cash transactions, 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 cost
cutting program, which they will implement on their first month
of operations. These cost reductions will come from the
reduction in personnel from 22 to 12 and the reduction of their
telecommunications costs by replacing our current telecom
provider to another national telecom provider. Management has
estimated an annual savings of approximately $195,000 from the
reduction of personnel and achieve as much as an 18% savings on
our telecommunications costs which would translate to
approximately $107,000 in annual savings.
o Also, the Company intends to acquire other Internet service
providers in the mid-Atlantic region that are cash flow positive,
which would be accretive to the Company's earnings. They intend
to consummate these transactions as stock-for-stock exchanges
combined with some form of cash consideration, after the
completion of the Company's secondary stock offering, to achieve
their aggressive growth strategy.
Interim Financial Information
-----------------------------
The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which in
the opinion of management, are necessary to fairly state the Company's
financial position, the results of operations and cash flows for the
periods presented. The results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of results for the
entire year ending December 31, 1999.
F-9
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from these estimates.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments including cash,
accounts receivable, accounts payable and accrued expenses and advance
from stockholders, the carrying amounts approximate fair value due to
their short maturities. The amounts shown for line of credit and notes
payable also approximate fair value because current interest rates and
terms offered to the Company for similar debt are substantially the
same.
Cash and Cash Equivalents
------------------------
For purposes of the statements of cash flows, the Company defines cash
equivalents as all highly liquid debt instruments purchased with a
maturity of three months or less, plus all certificates of deposit.
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and accounts
receivables. The Company places its cash with high quality financial
institutions and at times may exceed the FDIC $100,000 insurance
limit. The Company sells its products predominantly in California and
extends credit based on an evaluation of the customer's financial
condition, generally without collateral. Exposure to losses on
receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses, if required.
Inventories
-----------
Inventories consist of certain types of specialty foods, which are
held specifically for resale. Inventories are stated at the lower of
cost or market, with cost determined on a first-in, first-out basis.
F-10
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Equipment and Furniture
-----------------------
Equipment and furniture are stated at cost. Depreciation is computed
using the straight-line method based on estimated useful lives from 5
to 7 years.
Impairment of Long-Lived Assets
-------------------------------
In accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standard ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", long-lived assets are evaluated for
impairment whenever events or changes in circumstances indicate that
the carrying amounts of such assets may not be recoverable. Impairment
losses would be recognized if the carrying amounts of the assets
exceed the fair value of the assets.
Revenue Recognition
-------------------
Product sales are recognized upon delivery of product to the customer.
Sales are adjusted for any future returns or allowances.
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Deferred taxes are provided on a
liability method whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of
enactment.
Net Loss Per Share
------------------
In accordance with SFAS No. 128, "Earnings Per Share", the basic loss
per common share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares
outstanding. Diluted loss per common share is computed similar to
basic loss per common share except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the
additional common shares were dilutive.
F-11
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its
components in the financial statements. As of December 31, 1998 and
1997, the Company has no items that represent other comprehensive
income and, therefore, has not included a schedule of comprehensive
income in the financial statements.
Impact of Year 2000 Issue
-------------------------
During the year ended December 31, 1998, the Company conducted an
assessment of issues related to the Year 2000 and determined that no
issues existed which would cause its computer systems not to properly
utilize dates beyond December 31, 1999. At this time, the Company
cannot fully determine the impact that Year 2000 issues will have on
its customers or suppliers. If the Company's customers and suppliers
don't convert their systems to become Year 2000 compliant, the Company
may be adversely impacted.
NOTE 2 - EQUIPMENT AND FURNITURE
The cost of equipment and furniture consisted of the following as of:
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------- ------------------------------
1998 1997 1999 1998
------------- ------------ -------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Computers $ 1,300 $ - $ 80,128 $ -
Furniture and Fixtures 19,021 2,880 58,897 3,421
------------ ------------- ------------- ------------
20,321 2,880 139,025 3,421
Less: Accumulated
Depreciation 1,678 - 24,198 -
------------ ------------- -------------- ------------
$ 18,643 $ 2,880 $ 114,827 $ 3,421
============ ============= ============= ============
</TABLE>
Depreciation expense was $1,678 and $0 for the year ended December 31,
1998 and the seven months ended December 31, 1997, respectively, and
$1,306 (unaudited) and $0 (unaudited) for the six months ended June
30, 1999 and 1998, respectively.
F-12
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 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, of an amount equal to the December
31, 1998 market value to cover the face value of the note as of
December 31, 1998.
NOTE 4 - INVESTMENT
As of December 31, 1998, the Company paid a $125,000 deposit on the
acquisition of a 9% interest of Sierra Madre Foods, Inc. (see Note 13
- Subsequent Events "Acquisition").
NOTE 5 - LINE OF CREDIT
As of December 31, 1998, the Company had a $200,000 line of credit
that expired on May 4, 1999. On the expiration date the line of credit
was extended to September 4, 1999 and was not paid on the extended
expiration date. The line bears interest at United National Bank
Lending Index ("UNBLI"), plus 1% (UNBLI was 8.25%, 8.25% and 9.00% on
June 30, 1999, December 31, 1998 and 1997, respectively).
The Line of credit is secured by substantially all assets of the
Company and is guaranteed by the Company's general manager and his
spouse. The Company's ability to borrow money under this line of
credit is based upon a percentage of defined accounts receivable and
inventory. The outstanding line of credit was $200,000 as of December
31, 1998.
The line of credit agreement contains a covenant that requires the
Company to maintain stockholders' equity of at least $200,000. As of
December 31, 1998 the Company was not in compliance with this covenant
and technically is in default. Also, the line of credit was due in
full on September 4, 1999.
F-13
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 6 - ADVANCES FROM STOCKHOLDERS
A majority stockholder of the Company has advanced $80,300 for
operating funds. The advances are non-interest bearing and due on
demand. Also, a minority stockholder of the Company has drawn advances
from his personal credit card accounts for operating funds. The
balance due at December 31, 1998 was $22,660. The Company is making
the minimum payments each month.
Also, a group of significant stockholders consummated the Company's
merger with WDVE by providing access to the merger candidate and
consulting services. The activities relate to identifying the merger
candidate, the negotiation as to the cost of the acquisition and the
acquisition costs. The stockholder has charged the Company a fee of
$200,000, which has been recorded as a liability. Since the Company
has determined that the costs have no future value to the Company the
fee was expensed during 1998.
F-14
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 7 - NOTES PAYABLE
Notes payable consist of the following as of:
<TABLE>
<CAPTION>
December 31, September 30,
---------------------- --------------------
1998 1997 1999 1998
-------- -------- -------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
12% - Note payable with all accrued
interest and principal due on
December 15, 1999 $ 50,000 $ - $ 50,000 $ -
8% - Note payable with all accrued
interest and principal due on demand 29,000 - 19,987 -
Non-interest bearing note payable
due in March 1999 25,000 - - -
19% - Note payable with all accrued
interest and principal due on demand,
note is secured by certain accounts
receivable of the Company 15,500 - - -
3% per month notes payable with all
accrued interest and principal due
from November 22, 1999 through
November 30, 1999 - - 97,942 -
15% - Note payable with monthly
interest and principal payments of
$1,662 - - 13,662 -
-------- -------- -------- --------
Total $119,500 $ - $181,591 $ -
======== ======== ======== =========
</TABLE>
Notes payable of $181,591 as of September 30, 1999 has been assumed by
a related company (see Note 13 - Subsequent Events). Since, the
Company remains the debtor the notes are being present in detail.
F-15
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities for its corporate offices,
warehouse and retail store under non-cancelable operating leases.
Total rent expense for the year ended December 31, 1998 and the seven
months ended December 31, 1997 and for the nine months ended September
30, 1999 (unaudited) and 1998 (unaudited) was $50,000, $21,000,
$49,443 (unaudited) and $18,000 (unaudited), respectively.
During the nine months ended September 30, 1999, the Company entered
into non-cancelable capital lease agreements for the purchase of
equipment. The equipment purchased secures the obligations.
Future minimum lease payments under non-cancelable capital and
operating leases with initial or remaining terms of one year or more
are as follows: (These amounts have been assumed by a related company,
see Note 13 - Subsequent Events. Since the Company remained the
lessee, after the divestiture, the lease commitments are being
presented in detail.)
Capital
Leases Operating
(Unaudited) Leases
----------- -----------
Year ending December 31,
1999 $ 6,968 $ 61,000
2000 13,937 63,000
2001 13,937 52,000
2002 6,055 20,000
2003 4,479 -
Thereafter 747 -
--------- -----------
Net Minimum Lease Payments 46,123 $ 196,000
===========
Less: Amounts Representing Interest 11,705
---------
Present Value of Net Minimum
Lease Payments 34,418
Less: Current Portion 4,156
---------
Long-Term Portion $ 30,262
Litigation
----------
The Company is involved in certain legal proceedings and claims that
arise in the normal course of business. Management does not believe
that the outcome of these matters will have a material adverse effect
on the Company's financial position or results of operations.
F-16
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 9 - STOCKHOLDERS' EQUITY
Classes of Shares
-----------------
The Company's Articles of Incorporation authorize the issues of up to
35,000,000 shares, consisting of 10,000,000 shares of Preferred Stock,
which have a par value of $.001 per share and 25,000,000 shares of
common stock, which have a par value of $.001.
Preferred Stock
---------------
Preferred Stock, any series, shall have the powers, preferences,
rights, qualifications, limitations and restrictions as fixed by the
Company's Board of Directors in its sole discretions. As of December
31, 1998, the Company's Board of Directors had not authorized or
issued any Preferred Stock.
Common Stock Splits
-------------------
On May 1, 1998, the Company's Board of Directors declared a 100 to 1
common stock split. Also, on October 26, 1998, the Company's Board of
Directors declared a 3 to 1 reverse common stock split. All applicable
share and per share data presented have been adjusted for the stock
splits.
Common Stock
------------
During 1997, the Company issued 5,580,000 shares of its common stock
for proceeds of $627,800.
During 1998, the Company issued 620,012 shares of its common stock for
the acquisition of White Dove Systems, Inc. (See Note 1).
NOTE 10 - COST OF GOODS SOLD
The Company has a key employee who is the principal contact with the
suppliers for the inventory purchased for the Company's Holland
related products. If the employee was terminated, for any reason, the
Company could potentially lose access to approximately 30% of its
product mix, and would be forced to purchase these items from other
suppliers at a cost approximately 10% - 15% higher than the current
cost, which would have a significant impact on the Company's gross
profit.
F-17
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 11 - INCOME TAXES
The reconciliation of the effective income tax rate to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
December 31, September 30,
--------------------------- ----------------------------
1998 1997 1999 1998
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Federal Income
Tax Rate 34.00% 34.00% 34.00% 34.00%
Effect of Valuation
Allowance ( 34.00)% ( 34.00)% ( 34.00)% ( 34.00)%
--------- --------- --------- ---------
Effective Income Tax Rate 0.00% 0.00% $ 0.00% $ 0.00%
========== ========== ========= =========
</TABLE>
Deferred tax assets and liabilities reflect the net effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
--------------------------- ----------------------------
1998 1997 1999 1998
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Deferred Tax Assets
Loss Carry forwards $ 163,000 $ 66,000 $ 347,000 $ 80,000
Less: Valuation Allowance ( 163,000) ( 66,000) $(347,000) ( 80,000)
----------- ----------- --------- ---------
Net Deferred Tax Assets $ - $ - $ - $ -
=========== ========== ========= =========
</TABLE>
At December 31, 1998 and 1997, the Company has provided a valuation
allowance for the deferred tax asset since management has not been
able to determine that the realization of that asset is more likely
than not. The net change in the valuation allowance for the year ended
December 31, 1998, the seven months ended December 31, 1997 and the
nine months ended September 30, 1999 (unaudited) increased by $97,000,
$66,000 and $184,000 (unaudited), respectively. Net operating loss
carry forwards expire starting in 2012 and 2013.
F-18
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 12 - ACQUISITION
On June 1, 1997, the Company purchased its food inventory and a
business name from an unrelated third party for $500,000. In
conjunction with the purchase, the Company commenced operations of its
international specialty foods business at the same location of the
previous owner.
NOTE 13 - SUBSEQUENT EVENTS
Acquisitions
------------
On July 27, 1999, a group of stockholders acquired 100% of the
outstanding common stock of Sitestar Corporation, a Delaware
corporation, in exchange for 3,491,428 shares of their issued and
outstanding shares of the Company's common stock. Simultaneously, they
contributed Sitestar Corporations net assets to the Company with the
fair market value of the net assets acquired credited to additional
paid-in capital on behalf of the stockholders who purchased the
Sitestar Corporation. The fair market value of the acquisition was
determined by the market value of the Company's common stock at the
date the acquisition was announced to the public. 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 of $7,734,357 has been recorded
as the excess cost over the fair value of net assets acquired, which
is being amortized over five years and $125,400 for customer list,
which is being amortized over three 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. The
operations of Sitestar Corporation have been included in the financial
statements since the date of the contribution. The estimated fair
value of the assets acquired and liabilities assumed is summarized as
follows:
Cash $ 15,396
Other current assets 3,500
Equipment, net 94,498
Excess cost over fair value of
net assets acquired 7,734,357
Other intangible assets 125,400
Accounts payable and accrued expenses ( 12,131)
Capital lease obligations ( 18,020)
------------
Purchase price $ 7,943,000
============
F-19
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 13 - SUBSEQUENT EVENTS (Continued)
On December 15, 1999, the Company completed the acquisition of Neocom
Microspecialists, Inc., a Virginia corporation ("Neocom") in exchange
for 5,882,353 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 3,882,353 shares of its common stock.
In addition the Company is required to issue an additional 2,000,000
shares of its common stock on the second anniversary of the
acquisition date. The shares are held back for adjustment to the sales
price for any potential unrecorded liabilities. In addition, the
Company issued an additional 900,000 shares of common stock in
exchange for certain liabilities that the majority of Neocom's selling
shareholders have agreed to assume based on a debt assumption
agreement. The Debt Assumption agreement stipulates that the Company
will advance the debt service payments of the liabilities on behalf of
the selling Neocom shareholders and that the Company will treat these
debt service payments as shareholder advances. The selling Neocom
shareholders will pay the shareholder advances with the proceeds of
the sale of the 900,000 shares of the Company's common stock upon
registration of these securities. As part of the transaction, the
Company has agreed to grant them registration rights, as soon as
practicable, for the 900,000 shares of the Company's common stock
issued in exchange for the debt assumption. Currently, the Company is
finalizing a pledge agreement with the selling Neocom shareholders to
use the 900,000 shares of the Company's common stock as security
against the shareholder advance. The fair market value of the
acquisition was determined by the market value of the Company's common
stock at the date the acquisition was announced to the public. 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 of $768,022 has
been recorded as the excess cost over the fair value of net assets
acquired, which is being amortized over five years and $2,622,000 for
the customer list, which is being amortized over three years and
$680,000 for a covenant not to compete, which is being amortized over
the life of the covenant of 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. The
operations of Neocom have not been included in the financial
statements since the date of the acquisition was after September 30,
1999.
F-20
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 13 - SUBSEQUENT EVENTS (Continued)
The estimated fair value of the assets acquired and liabilities
assumed is summarized as follows:
Unaudited
------------
Cash $ 18,910
Accounts Receivable 188,344
Other current assets 11,670
Equipment, net 622,797
Excess cost over fair value
of net assets acquired 810,876
Other Assets and Intangible Assets 3,331,083
Accounts payable and accrued expenses ( 154,545)
Deferred revenue ( 149,368)
Payable to stockholders' ( 188,412)
Notes payable ( 543,393)
Capital lease obligations ( 65,609)
-------------
Purchase Price $ 3,882,353
============
On January 8, 1999, the Company acquired for $200,000 a 9% equity
interest in Sierra Madre Foods, Inc ("SMF") formerly known as Queen
International Foods ("QIF") a manufacture and wholesaler of frozen
Mexican food products such as frozen burritos and chimichangas. The
Company acquired its 9% interest from QIF bankruptcy proceedings along
with the Debtor-in-Possession as its joint venture partners.
Sale of Assets
--------------
On July 15, 1999, the Company's board of directors approved a
resolution to discontinue the Company's business of food distribution
as a result of its anticipated acquisition of its Internet related
activities (the purchase of Sitestar Corporation as described above).
On September 30, 1999, the Company sold all of the assets related to
the Company's international food distribution business, also, known as
Holland American International Specialties. The assets represent
approximately 99% of the Company's assets as of December 31, 1998. The
acquirer of the assets is a partnership with the partners being a
group of stockholders of the Company. Given that the sale was not an
arms-length transaction, the Company had the business valued by an
independent appraiser to determine the fair value purchase price. The
sales price was $900,000, which is to be paid as follows: 1) $200,000
is to be offset against the Company's liability to the a stockholder,
2) $654,000 for the buyer's assumption of all trade, short-term and
long-term liabilities as of July 31, 1999, 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.
F-21
<PAGE>
INTERFOODS CONSOLIDATED, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
AND 1998 (UNAUDITED)
NOTE 13 - SUBSEQUENT EVENTS (Continued)
On September 30, 1999, the Company sold its 9% interest in SMF (see
Acquisitions above) for an amount equal to the Company's investment of
$200,000. The purchaser of the assets is a partnership with the
partners being a group of stockholders of the Company. Given that the
sale was not an arms-length transaction, the Company had the business
valued by an independent appraiser to determine the fair value
purchase price. The sales price of $200,000 is to be paid as follows:
1) $160,000 for the buyer's assumption of debt related to the
investment, and 2) the remaining $40,000 in the form of a note payable
to the Company in three annual installments of $13,333 each plus
accrued interest at 8% per annum.
Since the assets and liabilities have been sold to a group of former
employees of the Company, the cash consideration was minimal, the
Company is still liable for the outstanding liabilities, and the
acquirers have limited financial investment in the acquiring company,
the Company has not successfully severed itself from the risk of
ownership. The divestiture has been presented with the gross assets
and liabilities sold denoted on the face of the financial statements.
Also, since the acquiring company is a highly leveraged company,
Company has not recognized the corresponding gain on the sale of the
net assets.
Common Stock
------------
On July 6, 1999, the Company restated its Articles of Incorporation to
increase the authorized number of common shares to be issued to
75,000,000, and authorized a 3-to-1 stock split to increase the number
of shares outstanding from 6,200,012 to 18,600,036. All capital
structure and per share calculations have been retroactively effected
for the stock split.
In August, 1999, three principal stockholders of the Company
transferred 1,900,000 shares of their issued and outstanding Company
common stock to a Company employee for compensation. The Company has
recorded the transaction as compensation expense and additional
paid-in capital at the fair market value of the Company's common stock
on the date of the transfer.
Company Name
------------
On July 26, 1999, the Company restated its Articles of Incorporation
to change the name of the Company to "Sitestar Corporation."
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
SITESTAR CORPORATION
We have audited the accompanying consolidated balance sheets of Sitestar
Corporation and Subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sitestar Corporation and
Subsidiary as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $163,704 and $138,423 for the years ended
December 31, 1998 and 1997, respectively. These factors, among others, as
discussed in Note 1 to the financial statements, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
October 6, 1999
F-23
<PAGE>
<TABLE>
SITESTAR CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 3,923 $ 4,744
Inventory 15,600 -
----------- ----------
Total Current Assets 19,523 4,744
EQUIPMENT, Net 46,393 16,005
EXCESS OF COST OVER FAIR VALUE OF
NET ASSETS ACQUIRED, Net of
Accumulated Amortization of $376 9,728 -
INVESTMENT IN UNCONSOLIDATED AFFILIATE - 2,800
----------- ----------
TOTAL ASSETS $ 75,644 $ 23,549
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 28,603 $ 825
Advances from Related Party 20,200 12,100
----------- ----------
Total Current Liabilities 48,803 12,925
----------- ----------
COMMITMENTS AND CONTINGENCIES (Note 4) - -
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, 200,000
shares authorized, 92,000 shares
issued and outstanding 920 920
Additional Paid-in Capital 328,048 148,127
Accumulated Deficit ( 302,127) ( 138,423)
----------- ----------
Total Stockholders' Equity 26,841 10,624
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 75,644 $ 23,549
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
<PAGE>
<TABLE>
SITESTAR CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
REVENUE $ 69,128 $ 51,012
COST OF REVENUE 108,191 60,319
----------- ----------
GROSS LOSS ( 39,063) ( 9,307)
SELLING GENERAL AND ADMINISTRATIVE EXPENSES 123,720 129,116
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE ( 921) -
----------- ----------
LOSS BEFORE INCOME TAXES ( 163,704) ( 138,423)
INCOME TAXES - -
----------- ----------
NET LOSS $( 163,704) $( 138,423)
=========== ==========
BASIC LOSS PER COMMON SHARE $( 1.78) $( 1.50)
=========== ==========
DILUTED LOSS PER COMMON SHARE $( 1.78) $( 1.50)
=========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 92,000 92,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-25
<PAGE>
<TABLE>
SITESTAR CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<CAPTION>
Additional Discount
Common Stock Paid-in on Accumulated
Shares Amount Capital Stock Deficit Total
------ -------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 - $ - $ - $ - $ - $ -
Issuance of Shares as Founder's Stock 92,000 920 - ( 920) - -
Fair Value of Services and Equipment
Contributed by Related Party - - 149,047 - - 149,047
Reclassification of Discount on Stock
to Additional Paid-In Capital - - ( 920) 920 - -
Net Loss - - - - ( 138,423) ( 138,423)
------ -------- ---------- ---------- ---------- ---------
Balance at December 31, 1997 92,000 920 148,127 - ( 138,423) 10,624
Fair Value of Services and Equipment
Contributed by Related Party - - 179,921 - - 179,921
Net Loss - - - - ( 163,704) ( 163,704)
------ -------- ---------- ---------- ---------- ---------
Balance at December 31, 1998 92,000 $ 920 $ 328,048 $ - $( 302,127) $ 26,841
====== ======= ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
<PAGE>
<TABLE>
SITESTAR CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $( 163,704) $ ( 138,423)
Adjustments to Reconcile Net Loss
to Net Cash Used in Operating
Activities:
Depreciation and Amortization 5,930 2,798
Contribution of Services by Related Party 145,166 132,876
Equity in Loss of Unconsolidated Affiliate 921 -
Changes in Assets and Liabilities:
Increase in Accounts Payable
and Accrued Expenses 8,678 825
----------- -----------
Total Cash Used in Operating Activities ( 3,009) ( 1,924)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Equipment ( 1,187) ( 2,632)
Investment in Soccersite, Inc. - ( 2,800)
Acquisition of Soccersite, Inc.,
Net of Cash Acquired ( 4,725) -
----------- -----------
Total Cash Used in Investing Activities ( 5,912) ( 5,432)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from Related Party 8,100 12,100
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS: ( 821) 4,744
CASH AND CASH EQUIVALENTS -
Beginning Of Period 4,744 -
----------- -----------
CASH AND CASH EQUIVALENTS -
End Of Period $ 3,923 $ 4,744
========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
For the years ended December 31, 1998 and 1997, the Company paid no interest or
income taxes.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
A related company owned by the principal stockholder of the Company contributed
services and equipment. The fair value of these services and equipment amounted
to $179,921 and $149,047 for the years ended December 31, 1998 and 1997,
respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
F-28
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Sitestar Corporation (the "Company") began operations on January 1,
1997 as a sole proprietorship and was incorporated on February 20,
1997. Operations are conducted from facilities located in the state of
Maryland. The Company is a full service website marketing company
specializing in developing, marketing and hosting high quality
websites. In addition, the Company sells computer equipment to its
customers.
Acquisition
-----------
In November 1997, the Company entered into a joint venture with two
partners and each purchased a one-third interest in Soccersite, Inc.
In July 1998, the Company purchased the remaining two thirds interest.
This wholly owned subsidiary is a marketing website.
Basis of Presentation
---------------------
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company had minimal
revenue and significant net losses for the years ended December 31,
1998 and 1997. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
In view of the matters described in the preceding paragraph,
recoverability of the equipment and excess cost over fair value of net
assets acquired shown in the accompanying consolidated balance sheets
are dependent upon continued operations of the Company, which in turn
is dependent upon the Company's ability to generate positive cash
flows from operations. The financial statements do not include any
adjustments, relating to the recoverability and classification of
recorded asset amounts and classifications of liabilities that might
be necessary should the Company be unable to continue its existence.
Management plans to take the following steps that it believes will be
sufficient to provide the Company with the ability to continue in
existence:
o The Company has been acquired by a publicly held company (see
Note 7).
o The Company is working to raise additional capital and debt
financing to fund operations, increase revenue and reduce
operating costs.
F-29
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the Company and Soccersite, Inc. from the date of
acquisition July 7, 1998, after the elimination of intercompany
accounts and transactions.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments including cash,
accounts payable, accrued expenses and advances from related party,
the carrying amounts approximate fair value due to their short
maturities.
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company defines cash
equivalents as all highly liquid debt instruments purchased with a
maturity of three months or less, plus all certificates of deposit.
Concentration of Credit Risk
----------------------------
The Company places its cash in what it believes to be credit-worthy
financial institutions. Cash balances did not exceed FDIC insured
levels during the year.
Inventory
---------
The Company purchases inventory of equipment specifically against
customer orders. Inventory is stated at the lower of cost or market.
Cost is determined by the first-in, first-out method.
Equipment
---------
Equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful lives of the assets of 5 years.
F-30
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-Lived Assets
-----------------
Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. When required, impairment
losses on assets to be held and used are recognized based on the fair
value of the assets and long-lived assets to be disposed of are
reported at the lower of carrying amount of fair value less cost to
sell.
Excess of Cost Over Fair Value of Net Assets Acquired
-----------------------------------------------------
The Company continually monitors its excess of cost over fair value of
net assets acquired (which is amortized over ten years) to determine
whether any impairment of this asset has occurred. In making such
determination with respect to excess cost over fair value of net
assets acquired, the Company evaluates the performance, on an
undiscounted cash flow basis, of the underlying assets or group of
assets which gave rise to this amount.
Revenue Recognition
-------------------
Revenue from the sale of services or products is recognized at the
point the services are performed or products delivered and accepted by
the customer.
Income Taxes
------------
The Company has been a subchapter S corporation. Income is passed
through to the stockholders who pay personally their share of the
applicable taxes. Therefore, no provision for income taxes was made at
December 31, 1998 and 1997.
Subsequent to the termination of the Company's S Corporation election
(see Note 7), provisions for income taxes are based on taxes payable
or refundable for the current year and deferred taxes on temporary
differences between the amount of taxable income and pretax financial
income and between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or
settled as prescribed by Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
F-31
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Loss Per Share
------------------
In accordance with SFAS No. 128, "Earning Per Share", the basic loss
per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares
outstanding. Diluted loss per common share is computed similar to
basic loss per common share except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the
additional common shares were dilutive.
Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its
components in the financial statements. As of December 31, 1998 and
1997, the Company has no items that represent other comprehensive
income and, therefore, has not included a schedule of comprehensive
income in the financial statements.
Advertising Costs
-----------------
Advertising costs are charged to operations when incurred.
Impact of Year 2000 Issue
-------------------------
During the year ended December 31, 1998, the Company conducted an
assessment of issues related to the Year 2000 and determined that no
issues existed which would cause its computer systems not to properly
utilize dates beyond December 31, 1999. At this time, the Company
cannot fully determine the impact of Year 2000 issues will have on its
customers or suppliers with regard to their own business software. If
the Company's customers or suppliers don't convert their systems to
become Year 2000 compliant, the Company may be adversely impacted.
F-32
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - EQUIPMENT
Equipment is summarized as follows at December 31,:
1998 1997
---------- ----------
Computer Equipment $ 54,745 $ 18,803
Less: Accumulated Depreciation 8,352 2,798
---------- ----------
$ 46,393 $ 16,005
========== ==========
Depreciation expense was $5,554 and $2,798 for the years ended
December 31, 1998 and 1997, respectively.
NOTE 3 - RELATED PARTY
A related company owned by the principal stockholder of the Company
provided services (programming and administrative labor, use of
premises, insurance and telephone) and equipment. The fair value of
these services and equipment amounting to $179,921 and $149,047 for
the years ended December 31, 1998 and 1997, respectively, were
recorded as additional paid-in capital.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Office Space
------------
For the years ended December 31, 1998 and 1997, the Company was
provided office space by a related company (see Note 3), the fair
value of which was $13,222 and $12,194, respectively. The space was
occupied on a month-to-month basis.
NOTE 5 - ADVERTISING COSTS
Advertising costs incurred and recorded as expense in the consolidated
statements of operations were $13,825 and $12,911 for the years ended
December 31, 1998 and 1997, respectively.
NOTE 6 - ACQUISITION
On July 15, 1998, the Company acquired the remaining two-third
interest of Soccersite, Inc. for $6,000, in addition to the $1,879
original one-third interest for a total purchase price of $7,879. The
acquisition was accounted for by the purchase method of accounting;
accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on the estimated fair values at
the date of acquisition. The excess of the purchase price over
estimated fair value of net assets acquired of $10,104 has been
recorded as excess of cost over fair value of net assets acquired,
which is being amortized over ten years.
F-33
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 6 - ACQUISITION (continued)
The estimated fair value of assets acquired and liabilities assumed is
summarized as follows:
Cash $ 1,275
Other Assets 10,104
Liabilities ( 3,500)
--------
Purchase Price $ 7,879
========
NOTE 7 - SUBSEQUENT EVENTS
Leases
------
In 1999, the Company entered into various non-cancelable capital and
operating lease agreements for various equipment. The future minimum
lease payments under non-cancelable capital and operating leases with
initial or remaining terms of one year or more are as follows:
Capital Operating
Year Ended December 31, Leases Lease
---------- -----------
1999 $ 8,357 $ 2,425
2000 16,340 21,065
2001 16,340 -
2002 7,982 -
---------- ----------
Net Minimum Lease Payments 49,019 $ 23,490
==========
Less: Amounts Representing
Interest 4,010
----------
Present Value of Net Minimum
Lease Payment $ 45,009
==========
The assets of the Company are subject to a lien by the lessor of a
capital obligation. In addition, the lease is secured by the personal
guarantee of two stockholders of the Company.
Office Space
------------
In 1999, the Company continued to occupy the office space of a related
party through the termination of the lease. Upon termination of the
lease, the related party vacated the space and the Company is
occupying the premises on a month-to-month basis until such time a
lease is negotiated.
F-34
<PAGE>
SITESTAR CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 7 - SUBSEQUENT EVENTS (continued)
Sale of Company
---------------
On July 27, 1999, the stockholders of the Company consummated an
agreement exchanging all of the issued and outstanding shares of the
Company's common stock for 3,491,428 shares of a publicly held
corporation's common stock.
Income Taxes
------------
As a result of the sale of the Company described above, the Subchapter
S Corporation status has been terminated.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS' OF
NEOCOM MICROSPECIALISTS, INC.
We have audited the accompanying balance sheets of Neocom Microspecalists, Inc.
as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' deficiency and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Neocom Microspecialists, Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 of the
accompanying financial statements, the Company has had recurring losses,
incurred a cash operating deficit from operations, has a stockholders'
deficiency and a negative working capital which raises substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
Los Angeles, California
October 1, 1999
F-36
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
BALANCE SHEETS
DECEMBER 31,
December 31,
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,243 $ 22,064
Accounts receivable, less allowance for
doubtful accounts of $21,000 and $7,000 196,822 88,020
Other current assets 8,333 15,906
------------ -----------
Total current assets 213,398 125,990
PROPERTY AND EQUIPMENT, less accumulated
depreciation of $201,724 and $133,880 368,818 112,964
CAPITALIZED SOFTWARE DEVELOPMENT COSTS,
less accumulated amortization of
$23,194 and $9,194 28,805 32,805
EXCESS COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED, less accumulated amortization
of $1,623 47,054 -
OTHER ASSETS 12,911 -
---------- ----------
TOTAL ASSETS $ 670,986 $ 271,759
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 109,682 $ 251,584
Deferred revenue 230,457 46,294
Notes payable stockholders 120,000 -
Notes payable - current portion 159,094 170,408
Capital lease obligations - current portion 13,919 18,440
------------ -----------
Total current liabilities 633,152 486,726
NOTES PAYABLE, less current portion 534,703 8,798
CAPITAL LEASE OBLIGATIONS, less current portion 28,067 25,451
------------ ------------
TOTAL LIABILITIES 1,195,922 520,975
---------- -----------
COMMITMENTS AND CONTINGENCIES (Note 6) - -
STOCKHOLDERS' DEFICENCY
Common stock, no par value, 1,000 shares
authorized, 500 shares issued and
outstanding 480,000 480,000
Accumulated deficit (1,004,936) ( 729,216)
----------- -----------
Total stockholders' deficiency ( 524,936) ( 249,216)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICENCY $ 670,986 $ 271,759
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
---------------------------------
1998 1997
--------------- --------------
REVENUE $ 1,302,009 $ 1,236,470
COSTS OF REVENUE 497,922 488,923
--------------- --------------
GROSS PROFIT 804,087 747,547
OPERATING EXPENSES
Selling, general and administrative
expenses 999,692 838,492
Research and development costs 3,121 14,000
--------------- --------------
Total operating expenses 1,002,813 852,492
--------------- --------------
LOSS FROM OPERATIONS ( 198,726) ( 104,945)
INTEREST EXPENSE ( 76,994) ( 35,119)
--------------- --------------
LOSS BEFORE TAXES ( 275,720) ( 140,064)
PROVISION FOR INCOME TAXES - -
--------------- --------------
NET LOSS $( 275,720) $( 140,064)
=============== =============
BASIC AND DILUTED LOSS PER SHARE $( 551.4) $( 280.1)
=============== =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 500 500
=============== =============
The accompanying notes are an integral part of the financial statements.
F-38
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDING DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Accumulated
Shares Amount Deficit Total
----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 500 $ 480,000 $( 589,152) $( 109,152)
Net Loss - - ( 140,064) ( 140,064)
----------- ---------- ------------- -----------
Balance at December 31, 1997 500 480,000 ( 729,216) ( 249,216)
Net Loss - - ( 275,720) ( 275,720)
----------- ---------- ------------- -----------
Balance at December 31, 1998 500 $ 480,000 $ (1,004,936) $ ( 524,936)
=========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $( 275,720) $( 140,064)
Adjustments to reconcile net loss to cash
provided by (used in)
operating activities:
Allowance for doubtful accounts 14,000 7,000
Depreciation and amortization expense 83,467 57,367
(Increase) decrease in:
Accounts receivable ( 122,802) 43
Other current assets 7,573 ( 8,257)
Other assets ( 12,911) -
Increase (decrease) in:
Accounts payable and accrued expenses ( 141,902) 162,236
Deferred revenue 184,163 23,734
----------- -----------
Net cash provided by (used in) operating
activities ( 264,132) 102,059
----------- -----------
Cash flows from investing activities:
Purchase of equipment ( 205,035) ( 23,891)
Capitalization of software development costs ( 10,000) ( 19,000)
Acquisition of assets from Netsus, net of
cash received ( 55,000) -
----------- -----------
Net cash used in investing activities ( 270,035) ( 42,891)
----------- -----------
Cash flows from financing activities:
Advances from stockholders 120,000 -
Advances from notes payable 779,040 -
Repayment of notes payable ( 308,127) ( 17,828)
Repayment of capital lease obligations ( 70,567) ( 25,790)
----------- -----------
Net cash provided by (used in) financing
activities 520,346 ( 43,618)
----------- -----------
NET INCREASE (DECREASE) IN CASH ( 13,821) 15,550
CASH AND CASH EQUIVALENTS - Beginning of year 22,064 6,514
----------- -----------
CASH AND CASH EQUIVALENTS - End of year $ 8,243 $ 22,064
============ ==========
F-40
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
During the years ended December 31, 1998 and 1997, the Company paid no income
taxes and approximately $46,500 and $21,200, respectively, for interest.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
During the years ended December 31, 1998 and 1997, the Company purchased
equipment and furniture with fair market values of $68,663 and $58,615 by
capital lease obligations.
During the year ended December 31, 1998, the Company issued a promissory note in
the amount of $43,677 for the purchase of the assets of Netsus, LLC.
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
Neocom Microspecialists, Inc. (the "Company") is a sub chapter
S-Corporation formed in 1990 in the State of Virginia. The Company
provides Internet related services to companies and consumers and
develops computer software for sale to the furniture manufacturing
industry. The Company provides its services primarily in the Southwest
region of the state of Virginia.
Basis of Presentation
---------------------
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. For the years ended
December 31, 1998 and 1997, the Company has had net losses and
incurred a cash operating deficit from operations for the year ended
December 31, 1998, and as of December 31, 1998 and 1997, the Company
had a stockholders' deficiency and its current liabilities exceed its
current assets. These matters raise substantial doubt about the
Company's ability to continue as a going concern.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn is dependent upon the
Company's ability to generate positive cash flows from operations. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and
classifications of liabilities that might be necessary should the
Company be unable to continue its existence. Management plans to take
the following steps that it believes will be sufficient to provide the
Company with the ability to continue in existence:
On December 15, 1999, Sitestar Corporation acquired the Company. For
the eleven months ended November 30, 1999, the Company had positive
cash flow from operations. On an annualized basis, The Company's new
management projects to generate sales of approximately $2.0 million
and cash flows from operations of $555,000 or 28% in the first twelve
months of the new ownership. Management will achieve these targets in
the first twelve months through an aggressive cost cutting program,
which we will implement on our first month of operations. These costs
reductions will come from the reduction in personnel from 22 to 12 and
the reduction of our telecommunications costs by replacing our current
telecom provider to another national telecom provider. Management has
estimated an annual savings of approximately $195,000 from the
reduction of personnel and achieve as much as an 18% savings on our
telecommunications costs which would translate to approximately
$107,000 in annual savings.
F-42
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments including cash,
accounts receivable, accounts payable and accrued expenses and notes
payable stockholders, the carrying amounts approximate fair value due
to their short maturities. The amounts shown for notes payable and
capital lease obligations also approximate fair value because current
interest rates and terms offered to the Company for similar debt are
substantially the same.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and accounts
receivables. The Company places its cash with high quality financial
institutions and at times may exceed the FDIC $100,000 insurance
limit. The Company provides its services in the Southwest region of
the state of Virginia, and exposures to losses on receivables are
principally dependent on each customer's financial condition. The
Company performs ongoing credit evaluations of its customers'
financial conditions and generally does not require collateral on
accounts receivable. The Company monitors its exposure for credit
losses and maintains allowances for anticipated losses, when required.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is computed
using the double-declining balance method based on the following
estimated useful lives from 3 to 7 years and 39 years for buildings.
F-43
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Software Development Costs
--------------------------
Software development costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Cost of Computer Software to Be Sold, Leased, or
Otherwise Marketed." Capitalization of software development costs
begins upon the establishment of technological feasibility and is
discontinued when the product is available for sale. The establishment
of technological feasibility and the ongoing assessment for
recoverability of capitalized software development costs require
considerable judgment by management with respect to certain external
factors, including, but not limited to, technological feasibility,
anticipated future gross revenues, estimated economic life, and
changes in software and hardware technologies. Capitalized software
development costs are comprised primarily of salaries and payroll
costs.
Amortization of capitalized software development costs is provided on
a product-by-product basis on the straight-line method over the
estimated economic life of the products (not to exceed three years).
Management periodically compares estimated net realizable value by
product to the amount of software development costs capitalized for
that product to ensure the amount capitalized is not in excess of the
amount to be recovered through revenues. Any such excess of
capitalized software development costs over expected net realizable
value is expensed at that time.
Impairment of Long-Lived Assets
-------------------------------
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of",
long-lived assets are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amounts of such
assets may not be recoverable. Impairment losses would be recognized
if the carrying amounts of the assets exceed the fair value of the
assets.
Deferred Revenue
----------------
Deferred revenue represents collections from customers in advance for
services not yet performed and are recognized as revenue in the month
service is provided.
F-44
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
-------------------
The Company recognizes revenue related to software licenses and
software maintenance in compliance with the American Institute of
Certified Public Accountants ("AICPA") Statements of Position No.
97-2, "Software Revenue Recognition." Product revenue is recorded at
the time of shipment, net of estimated allowances and returns. Any
insignificant post-contract support obligations are accrued for at the
time of the sale. Post-contract customer support ("PCS") that is
bundled with an initial licensing fee and is for one year or less is
recognized at the time of the initial licensing, if collectability of
the resulting receivables is probable. The 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 at the
beginning of each month and any service hours incurred above the
contractual amount is bill as incurred. Revenue is recognized under
the agreements at the fixed monthly rate at the beginning of each
month of the contract period.
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 on monthly basis over the life of the
contract. Under the monthly contracts, the subscriber is billed at the
beginning of each month and the fee is recognized as revenue upon
billing.
Sales of computer hardware are recognized as revenue upon delivery and
acceptance of the product by the customer. Sales are adjusted for any
future returns or allowances.
Advertising and Marketing Costs
-------------------------------
The Company expenses costs associated with advertising and marketing
as they are incurred.
Research and Development Costs
------------------------------
Research and development costs are charged to expense as incurred.
These costs consist primarily of salaries and payroll costs related to
computer software development.
F-45
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - THE ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
------------
The Company elected to be taxed under the sub chapter S-corporation
provisions of the federal income tax laws. Under these provisions, the
stockholders are liable for income tax on their respective shares of
the Company's taxable income or loss.
Net Loss Per Share
------------------
The Company presents net loss per share in accordance with SFAS No.
128, "Earnings Per Share". The basic loss per common share is computed
by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding. Diluted loss per common
share is computed similar to basic loss per common share except that
the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common
shares had been issued and if the additional common shares were
dilutive.
Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its
components in the financial statements. As of December 31, 1998 and
1997, the Company has no items that represent other comprehensive
income and, therefore, has not included a schedule of comprehensive
income in the financial statements.
Impact of Year 2000 Issue
-------------------------
During the year ended December 31, 1998, the Company conducted an
assessment of issues related to the Year 2000 and determined that no
issues existed which would cause its computer systems not to properly
utilize dates beyond December 31, 1999. At this time, the Company
cannot fully determine the impact of Year 2000 issues will have on its
customers or suppliers. If the Company's customers and suppliers don't
convert their systems to become Year 2000 compliant, the Company may
be adversely impacted.
F-46
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - PROPERTY AND EQUIPMENT
The cost of property and equipment consisted of the following as of
December 31,:
1998 1997
------------ -------------
Land $ 8,000 $ -
Building 142,000 -
Computers 342,048 191,400
Furniture and Fixtures 78,494 55,444
------------ ------------
570,542 246,844
Less: Accumulated Depreciation 201,724 133,880
------------ ------------
$ 368,818 $ 112,964
=========== ===========
Depreciation expense was $67,844 and $48,172 for the years ended
December 31, 1998 and 1997, respectively.
NOTE 3 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997, the Company paid
approximately $20,000 for rent expense to a company owned by the
Company's majority stockholders. For the eight months ended August 30,
1998, the Company paid approximately $13,000 for rent expense to a
company related to the Company's majority stockholders. In August 1998
the Company purchased its facilities from a company related to the
majority Stockholders of the Company for $150,000, which was the
current market value at the date of acquisition.
NOTE 4 - NOTES PAYABLE STOCKHOLDERS
During the year ended December 31, 1998, the Company borrowed $120,000
from three stockholders. The notes bear interest at 10.0% and are due
on demand.
F-47
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 5 - NOTES PAYABLE
Notes payable consisted of the following as of December 31,:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
9.7% - Bank note payable in monthly interest
and principal payments of $1,140. The note is
guaranteed by a stockholder of the Company. $ 8,798 $ 20,976
9.0% - Bank note payable in monthly interest
only payments. Due on demand. - 65,000
8.5% - Bank note payable in monthly interest only
payments. Due on demand. 87,579 93,230
13.0% - Bank note payable in monthly interest and principal
payments of $1,784 and balance due December 2002. The note
is guaranteed by the majority stockholders of the Company
and secured by a deed of trust against personal
residencies of three stockholders and the Company's
building. Also, the bank has a blanket lien against all
other current and future assets of the Company. 139,957 -
Prime plus 1.5% - Bank note payable in monthly interest and
principal payments of $6,400 and balance due September
2003. The note is secured by a deed of trust against
personal residencies of three stockholders and the
Company's building. Also, the bank has a blanket lien
against all other current and future assets of the Company. 417,886 -
5.1% - Asset purchase note payable in monthly installments
of $2,050 for 10 months and $1,700
for 12 months. 39,577 -
------------ -----------
693,797 179,206
Less: Current Portion 159,094 170,408
------------ -----------
Long-term Portion $ 534,703 $ 8,798
=========== ===========
</TABLE>
The future principal maturities of these notes are as follows:
Year ending December 31,
1999 $ 159,094
2000 60,971
2001 49,124
2002 177,630
2003 246,978
-----------
Total $ 693,797
==========
F-48
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment under non-cancelable equipment
leases.
Future minimum lease payments under non-cancelable equipment leases
with initial or remaining terms of one year or more are as follows:
Year ending December 31,
1999 $ 18,428
2000 17,457
2001 8,143
2002 6,844
2003 3,113
-------------
Total 53,985
Less: Amount Representing Interest 11,999
------------
Minimum Lease Payments 41,986
Less: Current Portion 13,919
------------
Long-term Portion $ 28,067
The following is a summary of equipment held under capital leases as
of December 31,:
1998 1997
----------- ----------
Computers $ 110,245 $ 67,626
Furniture & Fixtures 34,775 8,587
----------- ----------
145,020 76,213
Less: Accumulated
Depreciation 54,114 28,848
----------- ----------
Total $ 90,906 $ 47,365
============ ==========
Litigation
----------
The Company is involved in certain legal proceedings and claims that
rise in the normal course of business. Management does not believe
that the outcome of these matters will have a material adverse effect
on the Company's financial position or results of operations.
F-49
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 7 - ACQUISITION
On October 22, 1998, the Company purchased assets, patents and trade
names from Netsus, L.L.C. ("Netsus") in exchange for $55,000 and a
non-interest bearing promissory note payable with installments in the
first 12 months of $2,050 and the subsequent 12 months of $1,700. The
Company estimated the net present value of the payments to be $98,677
by using an interest rate comparable to its other long-term debt,
which is the purchase price. Netsus is an Internet service provider in
the state of Virginia. The acquisition was accounted for by the
purchase method of accounting; accordingly, the purchase price has
been allocated to the assets acquired on the estimated fair values at
the date of acquisition. The excess of the purchase price over the
estimated fair value of the net assets acquired of $48,677 has been
recorded as excess cost over fair value of net assets required, which
is being amortized over five years. The acquired assets have been
incorporated in the operations of the Company since the date of
acquisition. The estimated fair value of the assets acquired is
summarized as follows:
Equipment $ 50,000
Other Assets 48,677
----------
Purchase Price $ 98,677
=========
The following table presents the unaudited pro forma condensed
statements of operations for the years ended December 31, 1998 and
1997 and reflects the results of operations of the Company as if the
acquisition of Netsus, assets had been effective January 1, 1997. The
pro forma amounts are not necessarily indicative of the combined
results of operations had the acquisition been effective as of the
date, or of the anticipated results of operations due to cost
reductions and operating efficiencies that are expected as a result of
the acquisition.
1998 1997
(Unaudited) (Unaudited)
----------- -----------
Net Sales $ 1,420,325 $ 1,363,104
Gross Profit $ 1,133,991 $ 971,528
Selling, General and
Administrative Expenses $ 1,398,369 $ 1,093,191
Net Loss $( 264,378) $( 121,663)
Net Loss Per Share $( 528.8) $( 243.3)
F-50
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - SEGMENT INFORMATION
During 1998 and 1997, the Company had two principal operating
segments: 1) the development and sale of software and 2) Internet
related services. The following table provides information segregated
by the two segments and the corporate activities:
Year Ended December 31,
1998 1997
------------ ------------
Revenue:
Hardware & Software $ 653,481 $ 844,758
ISP 648,528 391,712
Corporate - -
------------ ------------
Total Revenue: $ 1,302,009 $ 1,236,470
============ ===========
Cost of Revenue:
Hardware & Software $ 299,402 $ 376,791
ISP 198,520 112,132
Corporate - -
------------ ------------
Total Cost of Revenue: $ 497,922 $ 488,923
============ ============
Gross Profit:
Hardware & Software $ 354,079 $ 467,967
ISP 450,008 279,580
Corporate - -
------------ ------------
Total Gross Profit: $ 804,087 $ 747,547
============ ============
Operating Expenses:
Hardware & Software $ 661,176 $ 488,242
ISP 27,264 55,169
Corporate 314,373 309,081
------------ ------------
Total Operating Expenses: $ 1,002,813 $ 852,492
============ ============
F-51
<PAGE>
NEOCOM MICROSPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 8 - SEGMENT INFORMATION (Continued)
Year Ended December 31,
1998 1997
------------ ------------
Net Income (Loss):
Hardware & Software $( 307,097) $( 20,276)
ISP 422,744 224,411
Corporate ( 391,367) ( 344,199)
------------ ------------
Total Net Income (Loss): $( 275,720) $( 140,064)
============ ============
Identifiable Assets:
Hardware & Software $ 129,249 $ 82,001
ISP 168,902 29,031
Corporate 372,835 160,727
------------- -------------
Total Assets: $ 670,986 $ 271,759
============ ============
Depreciation and Amortization
Expense:
Hardware & Software $ 16,078 $ 17,310
ISP 21,010 6,128
Corporate 46,379 33,929
-------------- ------------
Total Depreciation and
Amortization Expense: $ 83,467 $ 57,367
============= ============
F-52
<PAGE>
PRO FORMA FINANCIAL INFORMATION
INTERFOODS CONSOLIDATED, INC.
On July 27, 1999, the registrant acquired Sitestar Corporation ("Sitestar") and
on December 15, 1999, the registrant acquired Neocom Microspecialists, Inc.
("Neocom"). Additionally, on September 30, 1999, the Company sold all of the
assets relating to its specialty foods operations. The details of these
transactions are presented in the notes to the financial statements presented
elsewhere in this document.
The pro forma balance sheets reflect the historical consolidated balance sheets
of the Company, after the sale of the specialty food assets, and the balance
sheets of Sitestar and Neocom as of September 30, 1999 and December 31, 1998, as
if the transactions had occurred on January 1, 1998.
The pro forma statements of operations for the nine months ended September 30,
1999 and the year ended December 31, 1998 reflect the historical statement of
operations of the Company, after the sale of the specialty food assets, and the
statement of operations of Sitestar and Neocom. Pro forma adjustments have been
made to give effect to these transactions as if they had occurred as of January
1, 1999.
F-53
<PAGE>
<TABLE>
INTERFOODS CONSOLDATED, INC.
PROFORMA BALANCE SHEET
DECEMBER 31, 1998
<CAPTION>
Proforma Adjustments to
Interfoods Sitestar Neocom Reflect Acquisitions as of
Balance Sheet Balance Sheet Balance Sheet 01/01/98 Adjusted
12/31/98 12/31/98 12/31/98 Dr Cr 12/31/98
------------ ------------- ------------- -------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash and
Cash Equivalents $ - $ 3,923 $ 8,243 $ 12,166
Accounts Receivable 196,206 196,822 393,028
Inventories 542,081 15,600 557,681
Notes Receivable-
Stockholder 71,657 71,657
Other Current Assets 20,381 8,333 28,714
------------ ------------- ------------- -----------
Total Current Assets 830,325 19,523 213,398 1,063,246
Equipment and Furniture, Net 18,643 46,393 368,818 433,854
Capitalized Software
Development Costs 28,805 28,805
Assets Sold -
Excess cost Over Fair Value -
of Net Assets Acquired - 9,728 47,054 1) 8,636,545 2) 1,727,309 6,966,018
Other Assets and Intangible Assets 12,911 1) 3,427,400 2) 1,051,800 2,388,511
Investment 125,000 125,000
------------ ------------- ------------- -----------
Total Assets $ 973,968 $ 75,644 $ 670,986 $11,005,434
============ ============= ============= ===========
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities
Book Overdraft $ 29,546 $ - $ 29,546
Accounts payable
and Accrued Expenses 372,725 28,603 109,682 511,010
Deferred Revenue 230,457 230,457
Line of Credit 200,000 - 200,000
Advance from Stockholders 302,960 20,200 120,000 443,160
Notes Payable - Current Portion 119,500 - 159,094 278,594
Capital Lease Obligations -
Less Current Portion - - 13,919 13,919
------------ ------------- ------------- -----------
Total Current Liabilities 1,024,731 48,803 633,152 1,706,686
Liabililities Sold -
Notes Payable 534,703 534,703
Captial Lease Obligations,
Less Current Portion - - 28,067 28,067
------------ ------------- ------------- -----------
Total Liablities 1,024,731 48,803 1,195,922 2,269,456
------------ ------------- ------------- -----------
Commitments and Contigencies
Stockholders Equity (Deficiency)
Common Stock 18,600 920 480,000 1) 480,920 1) 6,782 25,382
Additional Paid-in Capital 609,200 328,048 - 1) 148,127 1) 11,818,571 12,607,692
Accumulated Deficit (678,563) (302,127) (1,004,936) 2) 2,779,109 1) 867,639 (3,897,096)
------------ ------------- ------------- -----------
Total Stockholders
Equity (Deficiency) (50,763) 26,841 (524,936) 8,735,978
------------ ------------- ------------- -----------
Total Liabilities and
Stockholders Equity
(Deficiency) $ 973,968 $ 75,644 $ 670,986 $11,005,434
============ ============= ============= ===========
</TABLE>
F-54a
<PAGE>
Interfoods Consoldated, Inc.
Proforma Balance Sheet
December 31, 1998 - continued
<TABLE>
<CAPTION>
Proforma Adjustments to
Reflect Sale of Specialty food
Assets As of 1/1/98 Proforma
Dr Cr 12/31/98
----------- ----------------- ------------
<S> <C> <C> <C>
Assets
Current Assets
Cash and
Cash Equivalents $ 12,166
Accounts Receivable 3) 196,206 196,822
Inventories 3) 542,081 15,600
Notes Receivable-
Stockholder 71,657 -
Other Current Assets 3) 20,381 8,333
------------
Total Current Assets 232,921
Equipment and Furniture, Net 3) 18,643 415,211
Capitalized Software
Development Costs 28,805
Assets Sold 3) 1,087,812 1,087,812
Excess cost Over Fair Value -
of Net Assets Acquired 6,966,018
Other Assets and Intangible Assets 2,388,511
Investment 3) 125,000 -
------------
Total Assets $ 11,119,278
============
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities
Book Overdraft 3) 29,546 $ -
Accounts payable
and Accrued Expenses 3) 372,725 138,285
Deferred Revenue 230,457
Line of Credit 3) 200,000 -
Advance from Stockholders 3) 302,960 140,200
Notes Payable - Current Portion 3) 119,500 159,094
Capital Lease Obligations -
Less Current Portion 13,919
------------
Total Current Liabilities 681,955
Liabililities Sold 3) 1,024,731 1,024,731
Notes Payable 534,703
Captial Lease Obligations,
Less Current Portion 28,067
------------
Total Liablities 2,269,456
------------
Commitments and Contigencies
Stockholders Equity (Deficiency)
Common Stock 25,382
Additional Paid-in Capital 12,607,692
Accumulated Deficit 4) 113,844 (3,783,252)
------------
Total Stockholders
Equity (Deficiency) 8,849,822
------------
Total Liabilities and
Stockholders Equity
(Deficiency) $ 11,119,278
============
</TABLE>
F-54b
<PAGE>
<TABLE>
INTERFOODS CONSOLDATED, INC.
PROFORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<CAPTION>
Interfoods Sitestar Neocom Proforma Adjustments to
Statement Of Statement Of Statement Of Reflect Acquisitions as of
Operations Operations Operations January 1, 1998 Adjusted
12/31/98 12/31/98 12/31/98 Dr Cr 12/31/98
------------ ------------- ------------- -------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales $ - $ 69,128 $ 1,302,009 1,371,137
Cost of Goods Sold - 108,191 497,922 606,113
------------ ------------- ------------- -----------
Gross Profit (Loss) - (39,063) 804,087 765,024
Operating Expenses
Selling, General and
Administrative Expenses 370,650 123,720 999,692 2) 2,779,109 4,273,171
Equity in Loss of unconsolidated
affiliate 921 921
Research and Development costs - - 3,121 3,121
------------ ------------- ------------- -----------
Loss From Operations (370,650) (163,704) (198,726) (3,512,189)
Interest Expense - - 76,994 76,994
Loss Before Income Taxes (370,650) (163,704) (275,720) (3,589,183)
------------ ------------- ------------- -----------
Taxes - - - -
------------ ------------- ------------- -----------
Loss From Continuing Operations (370,650) (163,704) (275,720) (3,589,183)
Loss From Discontinued Operations (113,844) - - (113,844)
------------ ------------- ------------- -----------
Net Loss $ (484,494) $ (163,704) $ (275,720) $(3,703,027)
============ ============= ============= ===========
</TABLE>
F-55a
<PAGE>
Interfoods Consoldated, Inc.
Proforma Statement Of Operations
For the Year Ended December 31, 1998 - continued
<TABLE>
<CAPTION>
Proforma Adjustments to
Reflect Sale of Specialty
Food Assets as of
January 1, 1998 Proforma
Dr Cr 12/31/98
----------- ----------------- ------------
<S> <C> <C> <C>
Sales $ 1,371,137
Cost of Goods Sold 606,113
------------
Gross Profit (Loss) 765,024
Operating Expenses
Selling, General and
Administrative Expenses 4,273,171
Equity in Loss of unconsolidated
affiliate 921
Research and Development costs 3,121
------------
Loss From Operations (3,512,189)
Interest Expense 76,994
Loss Before Income Taxes (3,589,183)
------------
Taxes -
------------
Loss From Continuing Operations (3,589,183)
Loss From Discontinued Operations 4) 113,844 -
------------
Net Loss $ (3,589,183)
============
Basic and Diluted Net Loss Per
Share
Historical $ (0.03)
==========
Proforma $ (0.17)
==========
Weighted Average Shares
Outstanding
Historical 17,081,430
==========
Proforma 20,963,783
==========
</TABLE>
F-55b
<PAGE>
<TABLE>
INTERFOODS CONSOLDATED, INC.
PROFORMA BALANCE SHEET
SEPTEMBER 30, 1999
<CAPTION>
Proforma Adjustments to
Interfoods Sitestar Neocom Reflect Acquisitions as of
Balance Sheet Balance Sheet Balance Sheet 01/01/98 Adjusted
09/30/99 09/30/99 09/30/99 Dr Cr 09/30/99
------------ ------------- ------------- -------------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <
Assets
Current Assets
Cash and Cash Equivalents $ 54,809 $ 18,910 $ 73,719
Accounts Receivable - 188,344 188,344
Inventories - - -
Note Receivable - Stockholder 8,102 8,102
Other Current Assets 36,505 11,670 48,175
------------ ------------- ------------- -----------
Total Current Assets 99,416 - 218,924 318,340
Equipment and Furniture, Net 114,827 347,797 462,624
Capitalized Software Development
Costs 29,083 29,083
Assets Sold 844,081 844,081
Excess Cost Over Fair Value of -
Net Assets Acquired 7,476,936 42,854 1) 907,173 2) 2,765,369 5,661,594
Other Assets and Intangible Assets 118,433 1) 3,138,552 2) 1,833,683 1,423,302
Investment - -
------------ ------------- ------------- -----------
Total Assets $ 8,653,693 $ - $ 638,658 $ 8,739,024
============ ============= ============= ===========
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities
Book Overdraft $ - $ - $ -
Accounts payable and Accrued
Expenses 12,254 154,545 166,799
Deferred Revenue 149,368 149,368
Line of Credit - - -
Advance from Stockholders' 557,411 313,412 870,823
Notes Payable - Current Portion - 8,690 8,690
Captial Lease Obligations -
Current Portion 5,112 37,542 42,654
------------ ------------- ------------- -----------
Total Current Liabilities 574,777 - 663,557 1,238,334
Liabililities Sold 546,048 546,048
Notes Payable 534,703 534,703
Captial Lease Obligations, Less
Current Portion 12,908 28,067 40,975
------------ ------------- ------------- -----------
Total Liablities 1,133,733 - 1,226,327 2,360,060
------------ ------------- ------------- -----------
Commitments and Contigencies
Stockholders Equity (Deficiency)
Common Stock 18,600 480,000 1) 480,000 1) 6,782 25,382
Additional Paid-in Capital 10,692,475 - 1) (179,921) 1) 3,882,353 14,754,749
Accumulated Deficit (3,191,115) (1,067,669) 2) 4,599,052 1) 456,669 (8,401,167)
------------ ------------- ------------- -----------
Total Stockholders Equity
(Deficiency) 7,519,960 - (587,669) 6,378,964
------------ ------------- ------------- -----------
Total Liabilities and
Stockholders Equity
(Deficiency) $8,653,693 $ - $ 638,658 $ 8,739,024
============ ============= ============= ===========
</TABLE>
F-56a
<PAGE>
Interfoods Consoldated, Inc.
Proforma Balance Sheet
September 30, 1999 - continued
<TABLE>
<CAPTION>
Proforma Adjustments to
Reflect Sale of Specialty
Food Assets As of 1/1/98 Proforma
Dr Cr 09/30/99
----------- ----------------- ------------
<S> <C> <C> <C>
Assets
Current Assets
Cash and Cash Equivalents $ 73,719
Accounts Receivable 188,344
Inventories -
Note Receivable - Stockholder 8,102
Other Current Assets 48,175
------------
Total Current Assets 318,340
Equipment and Furniture, Net 462,624
Capitalized Software Development
Costs 29,083
Assets Sold 844,081
Excess Cost Over Fair Value of -
Net Assets Acquired 5,661,594
Other Assets and Intangible Assets 1,423,302
Investment -
------------
Total Assets $ 8,739,024
============
Liabilities and Stockholders' Equity (
Current Liabilities
Book Overdraft $ -
Accounts payable and Accrued
Expenses 166,799
Deferred Revenue 149,368
Line of Credit -
Advance from Stockholders' 870,823
Notes Payable - Current Portion 8,690
Captial Lease Obligations -
Current Portion 42,654
------------
Total Current Liabilities 1,238,334
Liabililities Sold 546,048
Notes Payable 534,703
Captial Lease Obligations, Less
Current Portion 40,975
------------
Total Liablities 2,360,060
------------
Commitments and Contigencies
Stockholders Equity (Deficiency)
Common Stock 25,382
Additional Paid-in Capital 14,754,749
Accumulated Deficit 4) 40,786 (8,360,381)
------------
Total Stockholders Equity
(Deficiency) 6,419,750
------------
Total Liabilities and
Stockholders Equity
(Deficiency) $ 8,779,810
============
</TABLE>
F-56b
<PAGE>
<TABLE>
INTERFOODS CONSOLIDATED, INC.
PROFORMA STATEMENT OF OPERATIONS
<CAPTION>
Interfoods Sitestar Neocom Proforma Adjustments to
Statement Of Statement Of Statement Of Reflect Acquisitions As Of
Operations Operations Operations 01/01/98 Adjusted
09/30/99 09/30/99 09/30/99 Dr Cr 09/30/99
------------ ------------- ------------- -------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 18,684 $ 135,464 $ 1,319,834 $ 1,473,982
Cost of Goods Sold 22,740 132,971 747,534 903,245
------------ ------------- ------------- -----------
Gross Profit (Loss) (4,056) 2,493 572,300 570,737
Selling, General and
Administrative Expenses 2,455,938 111,295 551,467 2) 1,819,943 4,938,643
------------ ------------- ------------- -----------
Income (Loss) From
Operations (2,459,994) (108,802) 20,833 (4,367,906)
Interest Expense 11,772 41 83,566 95,379
------------ ------------- ------------- -----------
Loss Before Income Taxes (2,471,766) (108,843) (62,733) (4,463,285)
Taxes - - - -
------------ ------------- ------------- -----------
Net Loss From Continuing
Operations (2,471,766) (108,843) (62,733) (4,463,285)
Loss From Discontinued
Operations (40,786) (40,786)
------------ ------------- ------------- -----------
Net Loss $ (2,512,552) $ (108,843) $ (62,733) $ (4,504,071)
============= ============= ============= ===========
</TABLE>
F-57a
<PAGE>
<TABLE>
Interfoods Consolidated, Inc.
Proforma Statement Of Operations - continued
<CAPTION>
Proforma Adjustments to
Reflect Sale of Specialty food
Assets As of 01/01/98 Proforma
Dr Cr 09/30/99
----------- ----------------- ------------
<S> <C> <C> <C>
Sales $ 1,473,982
Cost of Goods Sold 903,245
------------
Gross Profit (Loss) 570,737
Selling, General and
Administrative Expenses 4,938,643
------------
Income (Loss) From
Operations (4,367,906)
Interest Expense 95,379
------------
Loss Before Income Taxes (4,463,285)
Taxes -
------------
Net Loss From Continuing
Operations (4,463,285)
Loss From Discontinued
Operations 4) 40,786 -
------------
Net Loss $ (4,463,285)
============
Basic and Dilusted
Loss Per Share
Historical $ (0.14)
==========
Proforma $ (0.20)
==========
Weighted Average Shares
Outstanding
Historical 18,600,036
==========
Proforma 22,482,389
==========
</TABLE>
F-57b
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
INTERFOODS CONSOLIDATED, INC.
Balance Sheet, September 30, 1999 and December 31, 1998
-------------------------------------------------------
1) To reflect the acquisitions of Sitestar and Neocom as if it occurred
on January 1, 1998.
A) Sitestar was acquired by a group of the Company's stockholders
exchanging 3,491,428 of their issued and outstanding shares of
the Company for 100% of the issued and outstanding shares of
Sitestar. The acquisition has been accounted for as a purchase
with the fair market value of the stockholders shares recorded as
capital contribution of additional paid-in capital. The
historical acquisition price was $7,943,000 resulting in a pro
forma excess cost over fair value of net assets acquired of
$7,828,224 and a customer list valued at $125,400 was calculated
as follows:
Acquisition price $ 7,943,000
Net assets acquired 10,624
Customer list 125,400
Excess cost over fair
Value of net assets
Acquired $ 7,806,976
-----------
F-58
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
INTERFOODS CONSOLIDATED, INC.
Balance Sheet, September 30, 1999 and December 31, 1998 - continued
-------------------------------------------------------
B) Neocom was acquired by the Company exchanging 5,882,353 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 3,882,353 shares of its common stock. In addition,
the Company is required to issue an additional 2,000,000 shares
of its common stock on the second anniversary of the acquisition
date. The shares are held back for adjustment to the sales price
for any potential unrecorded liabilities. In addition, the
Company issued an additional 900,000 shares of common stock in
exchange for certain liabilities that the majority of Neocom's
selling shareholders have agreed to assume based on a debt
assumption agreement. For purposes of the pro forma adjustments
we have not presented the 900,000 shares, because the Company is
currently in negotiations to rescind the agreement. The
historical acquisition price was $3,882,353 resulting in a pro
forma excess cost over fair value of net assets acquired of
$829,569 and a customer list valued at $2,622,000 and covenant
not to compete valued at $680,000 was calculated as follows:
Acquisition price $ 3,882,353
Net deficit acquired 249,216
Customer list 2,622,000
Covenant not to compete 680,000
-----------
Excess cost over fair
Value of net assets
Acquired $ 829,569
-----------
Total Pro Forma Excess cost
over fair Value of net
assets Acquired $ 8,636,545
===========
3) To reflect the sale of the specialty foods assets as if it
occurred on January 1, 1998. 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 its-self 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 leverage company,
Company has not recognized the corresponding gain on the sale of
the net assets.
F-59
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
INTERFOODS CONSOLIDATED, INC.
Statement of Operations for the nine months September 30, 1999 and the year
ended December 31, 1998
---------------------------------------------------------------------------
2) To reflect amortization of excess cost over the fair value of net
assets acquired over a five-year period, the customer lists over
a three-year period and the covenant not-to-compete over
five-years.
4) To restate operations to remove the operations of the Specialty
foods assets.
F-60
<PAGE>
PART III
Item 1. INDEX TO EXHIBITS
The following exhibits are filed with this Registration Statement:
Exhibit
Number Description
- ------- -------------------------------
2.1.1 Agreement and Plan of Reorganization, dated October 25, 1998**
2.2.1 Agreement and Plan of Reorganization, dated July 27, 1999**
2.3 Asset Sale and Agreement re divestiture of Holland American
Specialties, dated September 30, 1999*
2.4 Asset Sale and Agreement re divestiture of Sierra Madre Foods, Inc.,
dated September 30, 1999*
2.5 Letter of Intent to Acquire Eastern Shore Net, dated August 17, 1999*
2.6 Letter of Intent to Acquire Neocom Microspecialists, Inc., dated
September 2, 1999*
2.7 Plan and Agreement of Share Exchange, re acquisition of Neocom Micro-
specialists, Inc., dated December 15, 1999
2.8 Neocom Debt Assumption Agreement dated December 15, 1999
3.1(i) Articles of Incorporation of the Registrant (December 17, 1992)*
3.1(ii) Amended Articles of Incorporation (July 29, 1998)*
3.1(iii) Amended Articles of Incorporation (October 26, 1998)*
3.1(iv) Amended Articles of Incorporation (July 14, 1999)*
3.1(v) Amended Articles of Incorporation (July 28, 1999)*
3.2(i) By-laws of the Registrant (December 17, 1992)*
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 Lease for Corporate Office
* Previously Filed
** Previously Filed (corrected in this amendment)
58
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
SITESTAR CORPORATION
(Registrant)
Date: January 6, 2000 By: /s/ Frederick T. Manlunas
-------------------------------
Frederick T. Manlunas
Chairman of the Board
Exhibit 2.1.1
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (hereinafter referred to as the
"Agreement") is entered into as of this 25th day of October, 1998, by and
between INTERFOODS CONSOLIDATED, INC. (hereinafter referred to as "HAIS"),
FREDERICK T. MANLUNAS, EDWARD C. REYES, CHRISTOPER P. TSENG, EILEEN LEE,
EMMANUEL CORPUS, RENATO A. LUTTAUA, ROSE FEJARDO, SOCORRO P. GIL and GLEN H.
PEREZ (hereinafter individually and collectively referred to as "Shareholder")
and WHITE DOVE SYSTEMS, INC. (hereinafter referred to as "WDVE").
WITNESSETH
WHEREAS, HAIS is a California corporation with 4,000,000 shares of common
stock issued and outstanding (hereinafter "HAIS Shares"); and
WHEREAS, WDVE is a Nevada corporation with authorized capital stock of
25,000,000 shares of Common Stock $.001 par value per share, of which 1,860,000
shares were issued and outstanding as of October 25, 1998, and
WHEREAS, Shareholder owns all of the issued and outstanding shares of stock
in HAIS; and
WHEREAS, WDVE desires to purchase from Shareholder all of the issued and
outstanding shares of HAIS owned by him in exchange for 5,580,000 shares of
common stock ("Stock"), and
WHEREAS, it is the intention of Shareholder to exchange the HAIS Shares
held by him f or Stock of WDVE, on the terms and conditions set forth herein;
and
WHEREAS, it is the intention of WDVE, HAIS and Shareholder that the
transactions contemplated hereby constitute a tax-free "reorganization" as
defined in Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended
("B Reorganization") and that all the terms and provisions of this Agreement be
interpreted, construed and enforced to effectuate this intent.
NOW THEREFORE in consideration of the foregoing and the mutual covenants,
promises, representations and warranties contained herein, the parties hereto
agree as follows:
-1-
<PAGE>
Article I
EXCHANGE
1. 1. Exchange of Stock of HAIS. At the Closing Date (as defined in Article
VIII hereof), in accordance with the provisions of this Agreement and applicable
law, Shareholder shall transfer and WDVE shall acquire all of the stock of HAIS
Shares owned by Shareholder.
Article II
CONSIDERATION
2.1. Exchange. Shareholder and WDVE agree that all of the HAIS Shares owned
by Shareholder shall be exchanged with WDVE for 5,580,000 shares of Stock of
WDVE. Such Stocks shall be issued in Certificates of such denominations, amounts
and names as may be requested by Shareholder.
2.2. Investment Intent and Delivery. Shareholder represents and warrants
that he is acquiring said stock for investment purposes only and not with a view
towards resale or redistribution. Shareholder agrees to deliver to WDVE on the
Closing Date, a letter setting forth an agreement that said Stock is being
acquired for investment purposes only and will not be sold except in compliance
with the Securities Act of 1933, as amended, and the Rules and Regulations
promulgated thereunder. At said closing, WDVE shall deliver certificates for the
HAIS Shares, duly endorsed in negotiable form, with signatures guaranteed, free
and clear from all claims and encumbrances.
Article III
REPRESENTATTONS AND WARRANTIES OF WDVE
WDVE represents the warrants to Shareholder as follows:
3.1. Organization. WDVE is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Nevada, has the
corporate power and authority to own or lease its properties and to carry on
business as now being conducted.
3.2. Capitalization. As of the date hereof, the authorized capital stock of
WDVE consists of 25,000,000 shares of capital stock, of which 1,860,000 shares
are presently issued and outstanding. All said Stock is validly issued and
outstanding, fully paid and nonassessable. As of the Closing Date, there will be
no shares of common stock subject to unexpired exercisable options.
-2-
<PAGE>
3.3. Financial Statements. WDVE has furnished to Shareholder financial
statements as of July 30, 1998. Said financial statements contain the balance
sheet and income statement of WDVE. All of said financial statements, (i) are in
accordance with WDVE's books and records, (ii) present fairly and financial
position of WDVE as of such dates, and its results of operations and changes in
financial position for the respective periods indicated, (iii) have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis, and (iv) consistent with prior business practice, contain
adequate reserves for all known or contingent liabilities, losses and refunds
with respect to services or products already rendered or sold.
3.4. Contracts. Prior to the Closing Date, WDVE will furnish HAIS with a
true and complete list and description of all contracts by and between WDVE and
with others. Each of the agreements, contracts, commitments, leases, plans and
other instruments, documents and undertakings to be supplied is valid and
enforceable in accordance with its terms except as the enforceability thereof
may be limited by bankruptcy, insolvency or similar laws affecting the rights of
creditors generally, and by equitable principles. WDVE is not in default of the
performance, observance or fulfillment of any material obligations, covenant or
condition contained therein; and no event has occurred which with or without the
giving of notice or lapse of time, or both, would constitute a default
thereunder; furthermore, except as may be disclosed in writing at the time of
delivery, no such agreement, contract, commitment, lease, plan or other
instrument, document or undertaking, in the reasonable opinion of WDVE, contains
any contractual requirement with which there is a likelihood WDVE will be unable
to comply.
3.5. Registration Rights. No shareholder of WDVE has any demands or "piggy
back" registration rights with regards to the outstanding shares or options of
WDVE.
3.6. Authorization. WDVE has the power to enter into this Agreement, and
this Agreement, when duly executed and delivered, will constitute the valid and
binding obligation of WDVE.
3.7. Effect of Agreement. The execution and delivery by WDVE of this
Agreement and the consummation of the transactions herein contemplated, (i) will
not conflict with or result in a breach of the terms of, or constitute any
default under or violation of, any law or regulation of any governmental
authority, or the Articles of Incorporation or By-Laws of WDVE, or any material
agreement or instrument to which WDVE is a party or by which it is bound or is
subject; (ii) now will it give to others any interest or rights, including
rights of termination, acceleration or cancellation, in or with respect to any
of the properties, assets, agreements, leases, or business of WDVE.
-3-
<PAGE>
Article IV
REPRESENTATIONS AND WARRANTIES OF HAIS AND SHAREHOLDER
HAIS and Shareholder, and each of them, represent and warrant to WDVE as
follows:
4.1. Organization. HAIS is a corporation duly organized, validly existing
and in good standing under the laws of the State of California, has the
corporate power and authority to own or lease its properties and to carry on
business as now being conducted.
4.2. Capitalization. The authorized capital stock of HAIS consists of one
class of common stock, 20,000,000 shares authorized, of which 4,000,000 are
outstanding Shares are validly issued and outstanding, fully paid and
nonassessable. All of the issued and outstanding shares are owned by
Shareholder.
4.3. Authority. HAIS and Shareholder have the full power and authority to
enter into this Agreement and to carry out its obligations hereunder. Other than
approval by the Board of Directors, no proceedings on the part of Shareholder is
necessary to authorize this Agreement or the transactions completed hereby. This
Agreement constitutes the legal, valid and binding obligation of HAIS and
Shareholder enforceable in accordance with its terms.
4.4. Financial Statements. HAIS and Shareholder had furnished to WDVE its
business plan and current financial statements. Said financial statements
contain the balance sheet and income statement of HAIS. All of said financial
statements, (i) are in accordance with HAIS books and records, (ii) present
fairly the financial position of HAIS as of such dates, and its results of
operations and changes in financial position for the respective periods
indicated, (iii) have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis, and (iv) consistent with
prior business practice, contain adequate reserves for all known or contingent
liabilities, losses and refunds with respect to services or products already
rendered or sold.
4.5. Contracts. Prior to the Closing Date, HAIS will furnish WDVE with a
true and complete list and description of all contracts by and between HAIS and
with others. Each of the agreements, contracts, commitments, leases, plans and
other instruments, documents and undertakings to be supplied is valid and
enforceable in accordance with its terms except as the enforceability thereof
may be limited by bankruptcy, insolvency or similar laws affecting the rights of
creditors generally, and by equitable principles. HAIS is not in default of the
performance, observance or fulfillment of any material obligations, covenant or
condition contained therein; and no event has occurred which with or without the
giving of notice or lapse of time, or both, would constitute a default
thereunder; furthermore, except as
-4-
<PAGE>
may be disclosed in writing at the time of delivery, no such agreement,
contract, commitment, lease, plan or other instrument, document or undertaking,
in the reasonable opinion of HAIS, contains any contractual requirement with
which there is a likelihood HAIS will be unable to comply.
4.6. Competition. Except as set forth in the contracts described in 4.5
above, neither HAIS, nor any officer or director or Shareholder of HAIS has any
material direct or indirect financial or economic interest in any related
industry entity or in any competition or customer of HAIS.
4.7. Effect of Agreement. The execution and delivery by HAIS of this
Agreement and the consummation of the transactions herein contemplated, (i) will
not conflict with, or result in a breach of the terms of, or constitute and
default under or violation of, any law or regulation of any governmental
authority, or the Articles of Incorporation or By-Laws of RAIS, or any material
agreement or instrument to which HAIS is a party or by which it is bound or is
subject; (ii) nor will it give to rise to any interests or rights, including
rights of termination, acceleration or cancellation, in or with respect to any
of the properties, assets, agreements, leases, or business of HAIS.
4.8. Properties. All of the property, assets and equipment owned by or used
by HAIS is in good repair, well maintained, and in good and satisfactory
operating condition consistent with their age, free from any known defects,
except such minor defects as do not substantially interfere with the continued
use thereof in the conduct of normal operations and such property, assets, and
equipment which is owned by HAIS is valued on the Balance Sheet at original
purchase price less reasonable depreciation consistently applied in accordance
with generally accepted accounting principles.
4.9. Minutes Book. The records of meetings and other corporate actions of
Shareholder and the Board of Directors (including any committees of the Board)
of HAIS which are contained in the Minute Books of HAIS contain complete and
accurate records of the matters reflected in such minutes.
4.10. Litigation; Claims. HAIS is not a party and there are no claims,
actions, suits, investigations or proceedings pending, threatened against HAIS
or its business, at law or in equity, or before or by any governmental
department, commission, board, bureau, agency, or instrumentality, domestic or
foreign, which if determined adversely would have a material effect on the
business or financial condition of HAIS or the ability of HAIS to carry on its
business. The consummation of the transactions herein contemplated will not
conflict with or result in the breach or violation of any judgement, order,
writ, injunction or decree of any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign.
-5-
<PAGE>
4.11. Taxes and Reports. At the Closing Date, HAIS (i) will have filed all
tax returns required to be filed by any jurisdiction, domestic or foreign, to
which it is or has been subject, (ii) has paid in full all taxes due and taxes
claimed to be due by each jurisdiction, and any interest and penalties with
respect thereto, and (iii) has adequately reflected as liabilities on its books,
all taxes that have accrued for any period to and including the Closing Date.
4.12. Compliance with Laws and Regulations. HAIS and Shareholder have
complied with, and is not in violation of any federal, state, local or foreign
statute, law, rule or regulation with respect to the conduct of its businesses,
which violation might have a material adverse effect on the business, financial
condition or earnings of HAIS.
4.13. Finders. HAIS is not obligated, absolutely or contingently, to any
person for financial advice, a finder's fee, brokerage commission, or other
similar payment in connection with the transactions contemplated by this
Agreement.
4.14. Nature of Representations. No representation, warranty or agreement
made by HAIS in this Agreement and no statement or disclosure furnished by
Shareholder in connection with the transactions herein contemplated contains, or
will contain, any untrue statement of a material fact necessary to make any
statement, representation, warranty or agreement not misleading.
Article V
ACCESS TO INFORMATION
5.1. Access to Information. HAIS and Shareholder shall afford
representatives of WDVE reasonable access to officers, personnel, and
professional representatives of HAIS and such of the financial, contractual and
corporate records of HAIS as shall be reasonably necessary for WDVE's
investigations and appraisal of HAIS.
5.2. Effect of Investigations. Any such investigation by WDVE of RAIS shall
not affect any of the representations and warranties hereunder and shall not be
conducted in such manner as to interfere unreasonably with the operation of the
business of HAIS.
Article VI
CONDITIONS TO OBLIGATIONS OF WDVE
The obligations of WDVE under this Agreement are, at the option of WDVE, subject
to the satisfaction, at and prior to the Closing Date, of the following
conditions:
-6-
<PAGE>
6.1. Fulfillment of Covenants. All the terms, covenants and conditions of
this Agreement to be complied with and performed by HAIS at or before the
Closing Date shall have been duly complied with and performed.
6.2. Accuracy of Representations and Warranties: Other Documents. All of
the representations and warranties made by all parties to this Agreement shall
be true as of the Closing Date.
6.3. No Litigation. Except for certain claims which may have their genesis
in connection with the rescission of that certain transaction by and between
Shareholder and Glenhills Corporation, there shall be no action, proceeding,
investigation or pending or actual litigation the purpose of which is to enjoin
or may be to enjoin the transactions contemplated by this Agreement or which
would have the effect, if successful, of imposing a material liability upon
WDVE, or any of the officers or directors thereof, because of this consummation
of the transactions contemplated by this Agreement.
Article VII
CONDITIONS TO OBLTGATIONS OF SHAREHOLDER
The obligations of Shareholder under this Agreement are, at the option of
Shareholder, subject to the satisfaction, at and prior to the Closing Date, of
the following conditions:
7.1. Fulfillment of Covenants. All the terms, covenants and conditions of
this Agreement to be complied with and performed by WDVE at or before the
Closing Date shall have been duly complied with and performed.
7.2. Accuracy of Representations and Warranties; Other Documents. All of
the representations and warranties made by all parties to this Agreement shall
be true as of the Closing Date.
7.3. No Litigation. There shall be no action, proceeding, investigation or
pending or actual litigation the purpose of which is to enjoin or may be to
enjoin the transactions contemplated by this Agreement or which would have the
effect, if successful, of imposing a material liability upon HAIS, or any of the
officers or directors thereof, because of the consummation of the transactions
contemplated by this Agreement.
7.4. Additional Conditions. Prior to the Closing Date, the Board of
Directors of WDVE will adopt a resolution to amend the Articles of Incorporation
as follows:
Article FIRST is hereby amended to read as follows:
"FIRST. The name of the corporation is: InterFoods Consolidated, Inc.
-7-
<PAGE>
Article FOURTH is hereby amended to read as follows:
"FOURTH. The aggregate number of shares which the corporation shall
have the authority to issue is Twenty-Five Million (25,000,000) shares
of common stock at $.001 par value, and Ten Million (10,000,000)
shares of Serial Preferred Stock at $.001 par value.
A. Each share of Common Stock shall entitle the holder thereof to
one vote on any matter submitted to a vote of or for consent of
holders of Common Stock. Subject to the provisions of applicable law
and this Article Fourth, any dividends paid or distributed on or with
respect to the Common Stock of the corporation shall be paid or
distributed ratably to the holders of its Common Stock. In the event
of any liquidation, dissolution or winding-up of the corporation,
whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of the corporation and any
amounts to which the holders of any Serial Preferred Stock shall be
entitled, as hereinafter provided, the holders of Common Stock shall
be entitled to share ratably in the remaining assets of the
corporation.
B. Subject to the terms and provisions of this Article Fourth,
the Board of Directors is authorized to provide from time to time for
the issuance of shares of Serial Preferred Stock in series and to fix
and determine from time to time before issuance the designation and
relative rights and preferences of the shares of each series of Serial
Preferred Stock and the restrictions or qualifications thereof,
including, without limiting the generality of the foregoing, the
following:
(1) The series designation and Authorized number of shares;
(2) The dividend rate and the date or dates on which such dividends
will be payable;
(3) The amount or amounts to be received by the holders in the event
of voluntary or involuntary dissolution or liquidation of the
corporation;
(4) The price or prices at which shares may be redeemed, if any, and
any terms, conditions, limitations upon such redemptions;
(5) The sinking fund provisions, if any, for redemption or purchase
of shares; and
-8-
<PAGE>
(6) The terms and conditions, if any, on which shares may be
converted at the election of the holders thereof into shares of
other capital stock, or of other series of Serial Preferred
Stock, of the corporation.
C. The holders of the shares of Common Stock or Serial Preferred
Stock shall not be entitled to cumulative voting on any matter.
D. Upon the amendment of this Article Fourth to read as
hereinabove set forth, each three (3) outstanding shares of common
stock is reverse split, reconstituted and converted into one (1)
share. No fractional shares shall be issued.
Article VIII
CLOSING
8.1. Closing Date. The consummation of the exchange shall take place at the
offices of White Dove Systems, Inc. 6767 West Tropicana Avenue, Suite 207, Las
Vegas, Nevada 89103, on November 20, 1998, or such other time or place as shall
be mutually agreed upon by the parties to this Agreement.
8.2. Actions to be Taken by Parties on the Closing Date. On the Closing
Date, each party shall deliver to the other all documents or agreements provided
or herein to be-delivered on the Closing Date.
Article IX
INDEMNIFICATION AND ARBITRATION
9.1. Indemnification. Each of the parties agree to indemnify and hold
harmless the other against any and all damages, claims, losses, expenses,
obligations and liabilities (including reasonable attorney's fees) resulting
from or related to any breach of, or failure by each of the parties to perform
any of their representations, warranties, covenants, conditions or agreements in
this Agreement or in any schedule, certificate, exhibit or other document
furnished, or to be furnished under this Agreement.
9.2. Claims of Indemnification. Any claim for indemnification pursuant to
this Agreement, unless otherwise received by means of direct negotiation among
the parties upon reasonable oral notification by the party seeking
indemnification to all other parties, shall be made by writing of the nature and
amount of the claim to the other.
-9-
<PAGE>
Article X
PAYMENT OF EXPENSES
10. 1. Expenses. Each party shall bear its own expenses.
Article XI
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
11.1. Survival. All statements contained in any schedules, any exhibit or
other instrument delivered by or on behalf of any party or in connection with
the transactions contemplated by this Agreement, shall be deemed to be
representations made by or on behalf of the parties to this Agreement, all
representations, warranties and agreements made by the parties to this Agreement
or pursuant hereto shall survive.
Article XII
GENERAL
12.1. Partial Invalidity. If any term or provision of this Agreement or the
application thereof to any person or circumstances shall, to any extent, be
invalid or unenforceable, the remainder of this Agreement or the application of
such term or provision to persons or circumstances other than those to which it
is held invalid or unenforceable, shall not be affected thereby, and each such
term and provision of this Agreement shall be valid and be enforced to the
fullest extent permitted by law.
12.2. Waiver. No waiver of any breach of any covenant or provision herein
contained shall be deemed a waiver of any pre- ceding or succeeding breach
thereof, or of any other covenant or provision herein contained. No extension of
time for performance of any obligation or act shall be deemed and extension of
the time for performance of any other obligation or act.
12.3. Notices. All notices or other communications required or permitted
hereunder shall be in writing, and shall be sent by registered or certified
mail, postage prepaid, return receipt requested, and shall be deemed received
upon mailing thereof.
To: White Dove Systems, Inc.
Shareholders
c/o InterFoods Consolidated, Inc.
16133 Ventura Boulevard, Suite 635
Encino, California 91436
InterFoods Consolidated, Inc.
16133 Ventura Boulevard, Suite 635
Encino, California 91436
-10-
<PAGE>
Notice of change of address shall be given by written notice in the manner
detailed in this subparagraph 12.3.
12.4. Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the permitted successors and assigns of the
parties hereto.
12.5. Professional Fees. in the event of the bringing of any action or suit
by a party hereto against another party hereunder by reason of any breach of any
of the covenants, agreements or provisions on the part of the other party
arising out of this Agreement, then in that event the prevailing party shall be
entitled to have and recover of and from the other party all costs and expenses
of the action or suit, including actual attorney's fees, accounting fees, and
other professional fees resulting therefrom.
12.6. Entire Agreement. This Agreement is the final expression of, and
contains the entire agreement between, the parties with respect to the subject
matter hereof and supersedes all prior understandings with respect thereto. This
Agreement may not be modified, changed, supplemented or terminated, nor may any
obligations hereunder be waived, except by written instrument signed by the
party to be charged or by his agent duly authorized in writing or as otherwise
expressly permitted herein. The parties do not intend to confer any benefit
hereunder on any person, firm or corporation other than the parties hereto.
12.7. Time of Essence. The parties hereby acknowledge and agree that time
is strictly of the essence with respect to each and every term, condition,
obligation and provision hereof and that failure to timely perform any of the
terms, conditions, obligations or provisions hereof by either party shall
constitute a material breach of and non-curable (but waivable) default under
this Agreement by the party so failing to perform.
12-8. Construction. Headings at the beginning of each paragraph and
subparagraph are solely for the convenience of the parties and are not a part of
the Agreement. Whenever required by the context of this Agreement, the singular
shall include the plural and the masculine shall include the feminine. This
Agreement shall not be construed as if it had been prepared by one of the
parties, but rather as if both parties had prepared the same. Unless otherwise
indicated, all references to paragraphs and subparagraphs are to this Agreement.
In the event the date on which any party is required to take any action under
the terms of this Agreement is not a business day, the action shall be taken on
the next succeeding day.
12.9. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which taken together
shall constitute one instrument.
-11-
<PAGE>
12.10. Governing Law. The parties hereto expressly agree that this
Agreement shall be governed by, interpreted under, and construed and enforced in
accordance with the laws of the State of Nevada.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date hereof.
INTERFOODS CONSOLIDATED, INC.
By: /s/ Frederick T. Manlunas
-----------------------------------
WHITE DOVE SYSTEMS, INC
By: /s/ Loretto Inglish
-----------------------------------
FREDERICK T. MANLUNAS
-----------------------------------
EDWARD C. REYES
-----------------------------------
CHRISTOPHER P. TSENG
-----------------------------------
EILEEN LEE
-----------------------------------
EMMANUEL CORPUS
-----------------------------------
RENATO A. LITTAUA
-12 -
<PAGE>
-----------------------------------
ROSE FAJARDO
-----------------------------------
SOCORRO P. GIL
-----------------------------------
GLENN H. PEREZ
INTERFOODS CONSOLIDATED, INC.
By: ____________________________
InterFood:Plan.Reorganization
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Exhibit 2.2.1
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (hereinafter referred to as the
"Agreement") is entered into as of this 27th day of July, 1999, by and between
SITESTAR CORPORATION (hereinafter referred to as "SCOR"), FRANKLIN CHRISTOPHER,
RICHARD RASCHKE, VANCE STONE, HAROLD SOUTHWELL and WILLIAM McCRACKEN
(hereinafter individually and collectively referred to as "Shareholder") and
INTERFOODS CONSOLIDATED, INC. (hereinafter referred to as "IFCO").
WITNESSETH
WHEREAS, SCOR is a Delaware corporation with 92,000 shares of common stock
issued and outstanding (hereinafter "SCOR Shares"); and
WHEREAS, IFCO is a Nevada corporation with authorized capital stock of
75,000,000 shares of Common Stock $.001 par value per share, of which 18,600,036
shares shall be issued and outstanding by July 27, 1999, and
WHEREAS, Shareholder owns all of the issued and outstanding shares of stock
in SCOR; and,
WHEREAS, IFCO desires to purchase from Shareholder all of the issued and
outstanding shares of SCOR owned by him in exchange for 3,491,428 shares of
common stock ("Stock"); and
WHEREAS, it is the intention of Shareholder to exchange the SCOR Shares
held by him for stock of IFCO, on the terms and conditions set forth herein; and
WHEREAS, it is the intention of IFCO, SCOR and Shareholder that the
transactions contemplated hereby constitute a tax-free "reorganization" as
defined in Section 268 (a) (1) (B) of the Internal Revenue Code of 1986, as
amended ("B Reorganization") and that all the terms and provisions of this
Agreement be interpreted, construed and enforced to effectuate this intent.
NOW THEREFORE in consideration of the foregoing and the mutual covenants,
promises, representations and warranties contained herein, the parties hereto
agree as follows: ARTICLE 1
EXCHANGE
1.1. Exchange of Stock of SCOR. At the Closing Date (as defined in Article
VIII hereof), in accordance with the provisions of this Agreement and applicable
law, shareholder shall transfer and IFCO shall acquire all of the stock of SCOR
shares owned by Shareholder.
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ARTICLE II
CONSIDERATION
2.1. Exchange. Shareholder and IFCO agree that all of the SCOR Shares
owned by Shareholder shall be exchanged with IFCO for 3,491,428 shares of Stock
of IFCO. Such Stocks shall be issued in Certificates of such denominations,
amounts and names as may be requested by Shareholder.
2.2. Investment Intent and Delivery. Shareholder represents and warrants
that he is acquiring said Stock for investment purposes only and not with a view
towards resale or redistribution. Shareholder agrees to deliver to IFCO on the
Closing Date, a letter setting forth an agreement that said Stock is being
acquired for investment purposes only and will not be sold except in compliance
with the Securities Act of 1933, as amended, and the Rules and Regulations
promulgated thereunder. At said closing, IFCO shall deliver certificates for the
SCOR Shares, duly endorsed in negotiable form, with signatures guaranteed, free
and clear from all claims and encumbrances.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF IFCO
IFCO represents the warrants to Shareholder as follows:
3.1. Organization. IFCO is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Nevada, has the
corporate power and authority to own or lease its properties and to carry on
business as now being conducted.
3.2. Capitalization. As of the date hereof, the authorized capital stock of
IFCO consists of 75,000,000 shares of capital stock, of which 18,600,036 shares
shall be issued and outstanding by July 27, 1999. All said stock shall be
validly issued and outstanding, fully paid and nonassessable. As of the Closing
Date, there will be no shares of common stock subject to unexpired exercisable
options.
3.3. Financial Statements. IFCO has furnished to Shareholder financial
statements as of June 30, 1999. Said financial statements contain the balance
sheet and income statement of IFCO. All of said financial statements, (I) are in
accordance with IFCO's books and records, (ii) present fairly and financial
position of IFCO as of such dates, and its results of operations and changes in
financial position for the respective periods indicated, (iii) have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis, and (iv) consistent with prior business practice, contain
adequate reserves for all known or contingent liabilities, losses and refunds
with respect to services or products already rendered or sold.
3.4. Contracts. Prior to the Closing Date, IFCO will furnish SCOR with a
true and complete list and description of all contracts by and between IFCO and
with others. Each of the agreements, contracts, commitments, leases, plans and
other instruments, documents and undertakings to be supplied is valid and
enforceable in accordance with its terms except as the enforceability thereof
may be limited by bankruptcy, insolvency or similar laws affecting the rights of
creditors generally, and by equitable principles. IFCO is not in default of the
performance, observance or fulfillment of any material obligations, covenant or
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condition contained therein; and no event has occurred which with or without the
giving of notice or lapse of time, or both, would constitute a default
thereunder; furthermore, except as may be disclosed in writing at the time of
delivery, no such agreement, contract, commitment, lease, plan or other
instrument, document or undertaking, in the reasonable opinion of IFCO, contains
any contractual requirement with which there is a likelihood IFCO will be unable
to comply.
3.5. Registration Rights. No shareholder of IFCO has any demands or "piggy
back" registration rights with regards to the outstanding shares or options of
IFCO.
3.6. Authorization. IFCO has the power to enter into this Agreement, and
this Agreement, when duly executed and delivered, will constitute the valid and
binding obligation of IFCO.
3.7. Effect of Agreement. The execution and delivery by IFCO of this
Agreement and the consummation of the transactions herein contemplated, (I) will
not conflict with, or result in a breach of the terms of, or constitute any
default under or violation of, any law or regulation of any governmental
authority, or the Articles of Incorporation or By-Laws of IFCO, or any material
agreement or instrument to which IFCO is a party or by which it is bound or is
subject; (ii) now will it give to others any interest or rights, including
rights of termination, acceleration or cancellation, in or with respect to any
of the properties, assets, agreements, leases, or business of IFCO.
3.8. Minute Book. The records of meetings and other corporate actions of
shareholders and the Boards of Directors (including any committees of the Board)
of IFCO which are contained in the Minute Books of IFCO contain complete and
accurate records of all corporate actions are reflected in such minutes.
3.9. Litigation; Claims. IFCO is not a party and there are no claims,
actions, suits, investigations or proceedings pending, threatened against or
affecting IFCO or its business, at law or in equity, or before or by any
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which if determined adversely would have a material effect
on the business or financial condition of IFCO or the ability of transactions
herein contemplated will not conflict with or result in the breach or violation
of any judgement, order, writ, injunction or decree of any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign.
3.10. Taxes and Reports. Prior to the Closing Date, IFCO (I) will have
filed all tax returns required to be filed by any jurisdiction, domestic or
foreign, to which it is or has been subject, (ii) has paid in full all taxes due
and taxes claimed to be due by each jurisdiction, and any interest and penalties
with respect thereto, and (iii) have adequately reflected as liabilities on its
books, all taxes that have accrued for any period to and including January 31,
1994.
3.11. Compliance with Laws and Regulations. IFCO has complied with, and is
not in violation of any federal, state, local or foreign statute, law, rule or
regulation with respect to the conduct of its businesses, which violation might
have a material adverse effect on the business, financial condition or earnings
of IFCO.
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3.12. Finders. IFCO is not obligated, absolutely or contingently, to any
person for financial advice, a finder's fee, brokerage commission, or other
similar payment in connection with the transactions contemplated by this
Agreement.
3.13. Nature of Representations. No representations, warranty or agreement
made by IFCO in this Agreement and no statement or disclosure furnished by IFCO
in connection with the transactions herein contemplated contains, or will
contain, any untrue statement of a material fact necessary to make any
statement, representation, warranty or agreement not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SCOR AND SHAREHOLDER
SCOR and Shareholder, and each of them, represent and warrant to IFCO as
follows:
4.1. Organization. SCOR is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, has the corporate
power and authority to own or lease its properties and to carry on business as
now being conducted.
4.2. Capitalization. The authorized capital stock of SCOR consists of one
class of common stock, 92,000 shares authorized, of which 92,000 are outstanding
Shares are validly issued and outstanding, fully paid and nonassessable. All of
the issued and outstanding shares are owned by Shareholder.
4.3. Authority. SCOR and Shareholder have the full power and authority to
enter into this agreement and to carry out its obligations hereunder. Other than
approval by the Board of Directors, no proceedings on the part of Shareholder is
necessary to authorize this Agreement or the transactions completed hereby. This
Agreement constitutes the legal, valid and binding obligation of SCOR and
Shareholder enforceable in accordance with its terms.
4.4. Financial Statements. SCOR and Shareholder had furnished to IFCO its
business plan and current financial statements. Said financial statements
contain the balance sheet and income statement of SCOR. All of said financial
statements, (I) are in accordance with SCOR books and records, (ii) present
fairly the financial position of SCOR as of such dates, and its results of
operations and changes in financial position for the respective periods
indicated, (iii) have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis, and (iv) consistent with
prior business practice, contain adequate reserves for all known or contingent
liabilities, losses and refunds with respect to services or products already
rendered or sold.
4.5. Contracts. Prior to the Closing Date, SCOR will furnish IFCO with a
true and complete list and description of all contracts by and between SCOR and
with others. Each of the agreements, contracts, commitments, leases, plans and
other instruments, documents and undertakings to be supplied is valid and
enforceable in accordance with its terms except as the enforceability thereof
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may be limited by bankruptcy, insolvency or similar laws affecting the rights of
creditors generally, and by equitable principles. SCOR is not in default of the
performance, observance or fulfillment of any material obligations, covenant or
condition contained therein; and no event has occurred which with or without the
giving of notice or lapse of time, or both, would constitute a default
thereunder; furthermore, except as may be disclosed in writing at the time of
delivery, no such agreement, contract, commitment, lease, plan or other
instrument, document or undertaking, in the reasonable opinion of SCOR, contains
any contractual requirement with which there is a likelihood SCOR will be unable
to comply.
4.6. Competition. Except as set forth in the contracts described in 4.5
above, neither SCOR, nor any officer or director or Shareholder of SCOR has any
material direct or indirect financial or economic interest in any related
industry entity or in any competition or customer of SCOR.
4.7. Effect of Agreement. The execution and delivery by SCOR of this
Agreement and the consummation of the transactions herein contemplated, (i) will
not conflict with, or result in a breach of the terms of, or constitute and
default under or violation of, any law or regulation of any governmental
authority, or the Articles of Incorporation or By-Laws of SCOR, or any material
agreement or instrument to which SCOR is a party or by which it is bound or is
subject; (ii) nor will it give to rise to any interests or rights, including
rights of termination, acceleration or cancellation, in or with respect to any
of the properties, assets, agreements, leases, or business of SCOR.
4.8. Properties. All of the property, assets and equipment owned by or used
by SCOR is in good repair, well maintained, and in good and satisfactory
operating condition consistent with their age, free from any known defects,
except such minor defects as do not substantially interfere with the continued
use thereof in the conduct of normal operations and such property, assets, and
equipment which is owned by SCOR is valued on the Balance Sheet at original
purchase price less reasonable depreciation consistently applied in accordance
with generally accepted accounting principles.
4.9. Minutes Book. The record of meetings and other corporate actions of
Shareholder and the Board of Directors (including any committees of the Board)
of SCOR which are contained in the Minute Books of SCOR contain complete and
accurate records of the matters reflected in such minutes.
4.10. Litigation; Claims. SCOR is not a party and there are no claims,
actions, suits, investigations or proceedings pending, threatened against SCOR
or its business, at law or in equity, or before or by any governmental
department, commission, board, bureau, agency, or instrumentality, domestic or
foreign, which is determined adversely would have a material effect on the
business or financial condition of SCOR or the ability of SCOR to carry on its
business. The consummation of the transactions herein contemplated will not
conflict with or result in the breach or violation of any judgement, order,
writ, injunction or decree of any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign.
4.11. Taxes and Reports. At the Closing Date, SCOR (i) will have filed all
tax returns required to be filed by any jurisdiction, domestic or foreign, to
which it is or has been subject, (ii) has paid in full all taxes due and taxes
claimed to be due by each jurisdiction, and any interest and penalties with
respect thereto, and (iii) has adequately reflected as liabilities on its books,
all taxes that have accrued for any period to and including the Closing Date.
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4.12. Compliance with Laws and Regulations. SCOR and Shareholder have
complied with, and is not in violation of any federal, state, local or foreign
statute, law, rule or regulation with respect to the conduct of its businesses,
which violation might have a material adverse effect on the business, financial
condition or earnings of SCOR.
4.13. Finders. SCOR is not obligated, absolutely or contingently, to any
person for financial advice, a finder's fee, brokerage commission, or other
similar payment in connection with the transactions contemplated by this
Agreement.
4.14. Nature of Representations. No representation, warranty or agreement
made by SCOR in this Agreement and no statement or disclosure furnished by
Shareholder in connection with the transactions herein contemplated contains, or
will contain, any untrue statement of a material fact necessary to make any
statement, representation, warranty or agreement not misleading.
ARTICLE V
ACCESS TO INFORMATION
5.1. Access to Information. SCOR and Shareholder shall afford
representatives of IFCO reasonable access to officers, personnel, and
professional representatives of SCOR and such of the financial, contractual and
corporate records of SCOR as shall be reasonably necessary for IFCO's
investigations and appraisals of SCOR.
5.2. Effect of Investigations. Any such investigation by IFCO of SCOR shall
not affect any of the representations and warranties hereunder and shall not be
conducted in such manner as to interfere unreasonably with the operation of the
business of SCOR.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF IFCO
The obligations of IFCO under this Agreement are, at the option of IFCO,
subject to the satisfaction, at and prior to the Closing Date, of the following
conditions:
6.1. Fulfillment of Covenants. All the terms, covenants and conditions of
this Agreement to be complied with and performed by SCOR at or before the
Closing Date shall have been duly complied with and performed.
6.2. Accuracy of Representations and Warranties; Other Documents. All of
the representations and warranties made by all parties to this Agreement shall
be true as of the Closing Date.
6.3. No Litigation. There shall be no action, proceeding, investigation or
pending or actual litigation to purpose of which is to enjoin or may be to
enjoin the transactions contemplated by this Agreement or which would have the
effect, if successful, of imposing a material liability upon IFCO, or any of the
officers or directors thereof, because of this consummation of the transactions
contemplated by this Agreement.
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ARTICLE VII
CONDITIONS TO OBLIGATIONS OF SHAREHOLDER
The obligations of Shareholder under this Agreement are, at the option of
Shareholder, subject to the satisfaction, at and prior to the Closing Date, of
the following conditions:
7.1. Fulfillment of Covenants. All the terms, covenants and conditions of
this Agreement to be complied with and performed by IFCO at or before the
Closing Date shall have been duly complied with and performed.
7.2. Accuracy of Representations and Warranties; Other Documents. All of
the representations and warranties made by all parties to this Agreement shall
be true as of the Closing Date.
7.3. No Litigation. There shall be no action, proceeding, investigation or
pending or actual litigation the purpose of which is to enjoin or may be to
enjoin the transactions contemplated by this Agreement or which would have the
effect, if successful, of imposing a material liability upon SCOR, or any of the
officers or directors thereof, because of the consummation of the transactions
contemplated by this Agreement.
ARTICLE VIII
CLOSING
8.1. Closing Date. The consummation of the exchange shall take place at the
offices of Interfoods Consolidated, Inc. 16133 Ventura Boulevard, Suite 635,
Encino, California 91436 on July 27, 1999, or such other time or place as shall
be mutually agreed upon by the parties to this Agreement.
8.2. Actions to be Taken by Parties on the Closing Date. On the Closing
Date, each party shall deliver to the other all documents or agreements provided
or herein to be delivered on the Closing Date.
ARTICLE IX
INDEMNIFICATION AND ARBITRATION
9.1. Indemnification. Each of the parties agree to indemnify and hold
harmless the other against any all damages, claims, losses, expenses,
obligations and liabilities (including reasonable attorney's fees) resulting
from or related to any breach of, or failure by each of the parties to perform
any of their representations, warranties, covenants, conditions or agreements in
this Agreement or in any schedule, certificate, exhibit or other document
furnished, or to be furnished under this Agreement.
9.2. Claims of Indemnification. Any claim for indemnification pursuant to
this Agreement, unless otherwise received by means of direct negotiation among
the parties upon reasonable oral notification by the party seeking
indemnification to all other parties, shall be made by writing of the nature and
amount of the claim to the other.
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ARTICLE X
PAYMENT OF EXPENSES
10.1. Expenses. Each party shall bear its own expenses.
ARTICLE XI
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
11.1. Survival. All statements contained in any schedules, any exhibit or
other instrument delivered by or on behalf of any party or in connection with
the transactions contemplated by this Agreement, shall be deemed to be
representations made by or on behalf of the parties to this Agreement, all
representations, warranties and agreements made by the parties to this Agreement
or pursuant hereto shall survive.
ARTICLE XII
GENERAL
12.1. Partial Invalidity. If any term or provision of this Agreement or the
application thereof to any person or circumstances shall, to any extent, be
valid or unenforceable, the remainder of this Agreement or the application of
such term or provision to persons or circumstances other than those to which it
is held invalid or unenforceable, shall not be affected thereby, and each such
term and provision of this Agreement shall be valid and be enforced to the
fullest extent permitted by law.
12.2. Waiver. No waiver of any breach of any covenant or provision herein
contained shall be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision herein contained. No extension of
time for performance of any obligation or act shall be deemed and extension of
the time for performance of any other obligation or act.
12.3. Notices. All notices or other communications required or permitted
hereunder shall be in writing, and shall be sent by registered or certified
mail, postage prepaid, return receipt requested, and shall de deemed received
upon mailing thereof.
To: Interfoods Consolidated, Inc.
16133 Ventura Boulevard
Suite 635
Encino, California 91436
Sitestar Corporation
Shareholders
326 First Street
Suite 26
Annapolis, Maryland 21403
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Notice of change of address shall be given by written notice in the manner
detailed in this subparagraph 12.3.
12.4. Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the permitted successors and assigns of the
parties hereto.
12.5. Professional Fees. In the event of the bringing of any action or suit
by a party hereto against another party hereunder by reason of any breach of any
of the covenants, agreements or provisions on the part of the other party
arising out of this Agreement, then in that event the prevailing party shall be
entitled to have and recover of and from the other party all costs and expenses
of the action or suit, including actual attorney's fees, accounting fees, and
other professional fees resulting therefrom.
12.6. Entire Agreement. This Agreement is the final expression of, and
contains the entire agreement between, the parties with respect to the subject
matter hereof and supersedes all prior understandings with respect thereto. This
Agreement may not be modified, changed, supplemented or terminated, nor may any
obligations hereunder be waived, except by written instrument signed by the
party to be charged or by his agent duly authorized in writing or as otherwise
expressly permitted herein. The parties do not intend to confer any benefit
hereunder on any person, firm or corporation other than the parties hereto.
12.7. Time of Essence. The parties hereby acknowledge and agree that time
is strictly of the essence with respect to each and every term, condition,
obligation and provision hereof and that failure to timely perform any of the
terms, conditions, obligations or provisions hereof by either party shall
constitute a material breach of and non-curable (but waivable) default under
this Agreement by the party so failing to perform.
12.8. Construction. Headings at the beginning of each paragraph and
subparagraph are solely for the convenience of the parties and are not a part of
the Agreement. Whenever required by the context of this Agreement, the singular
shall include the plural and the masculine shall include the feminine. This
Agreement shall not be construed as if it had been prepared by on of the
parties, but rather as if both parties had prepared the same. Unless otherwise
indicated, all references to paragraphs and subparagraphs are to this Agreement.
In the event the date on which any of the party is required to take any action
under the terms of this Agreement is not a business day, the action shall be
taken on the next succeeding day.
12.9. Counterparts. This Agreement may be executed in on or more
counterparts, each of which shall be an original and all of which taken together
shall constitute on instrument.
12.10. Governing Law. The parties hereto expressly agree that this
Agreement shall be governed by, interpreted under, and construed and enforced in
accordance with the laws of the State of California.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date hereof.
SITESTAR CORPORATION
/s/ Franklin Christopher
By:____________________________
President
INTERFOODS CONSOLIDATED, INC.
/s/ Frederick Manlunus
By:_________________________________
Chief Executive Officer
/s/ Franklin Christopher
---------------------------
Franklin Christopher
/s/ Richard Raschke
---------------------------
Richard Raschke
/s/ Vance Stone
---------------------------
Vance Stone
/s/ Harold Southwell
---------------------------
Harold Southwell
/s/ William McCracken
---------------------------
William McCracken
/s/ Franklin Christopher
By:___________________________
Sitestar Corporation
10
EXHIBIT 2.7
PLAN AND AGREEMENT OF SHARE EXCHANGE
THIS PLAN AND AGREEMENT OF SHARE EXCHANGE (this "Agreement") is made and
entered into as of the 15" day of December, 1999, by and among SITESTAR
CORPORATION, a Nevada corporation (the "Company") and TOM ALBANESE ("Tom"), JOE
ALBANESE ("Joe"), FRED HERRING ("Fred") (collectively, Tom, Joe and Fred are
sometimes referred to herein as the "Majority Shareholders"), and those
individuals listed on Annex I attached hereto and incorporated herein by
reference (all such persons, but including Tom, Joe and Fred, are sometimes
referred to herein individually as a "Seller"and collectively as the "Sellers".)
A. The Sellers own all of the issued and outstanding shares of the
capital stock of Neocom.
RECITALS
B. The Company and the Sellers' desire the transaction
contemplated by this Agreement (the "Transaction") to constitute a tax
free reorganization pursuant to SS368 (a) (1) (B) of the Internal Revenue
Code of 1986, as amended.
C. On the terms and subject to the conditions set forth in this
Agreement, at the Effective Time, all of the Neocom Shares shall be
exchanged for Sitestar Common Stock in accordance with the terms of this
Agreement.
AGREEMENT
NOW, THEREFORE, with reference to the foregoing facts, the
parties agree as follows:
1. Definitions.
(a) Certain Definitions. All terms defined in this
Agreement shall have the defined meanings when used in this Agreement or
in any agreement, note, certificate, report or other document made or
delivered pursuant to this Agreement, unless otherwise defined or the
context otherwise requires. The following terms shall have the following
meanings:
"Action" means any litigation, action, suit,
proceeding, arbitration or claim before any court or Governmental
Authority, or investigation by any Governmental Authority.
"Affiliate" shall mean, with respect to any specified
Person, (i) any other Person who, directly or indirectly, owns or
controls, is under common ownership or control with, or is owned or
controlled by, such specified Person, (ii) any other Person who is a
director, officer, partner or trustee of the specified Person or a Person
described in clause (i) of this definition or any spouse of the specified
Person or any such other Person, (iii) any relative of the specified
Person or any other
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Person described in clause (ii) of this definition, or (iv) any Person of
which the specified Person and/or any one or more of the Persons specified
in clause (i), (ii) or (iii) of this definition, individually or in the
aggregate, beneficially own 30% or more of any class of voting securities
or otherwise have a substantial beneficial interest.
"Annual Financial Statements" shall mean the audited
(audited by accountants hired by Sitestar) balance sheet of Neocom as of
December 31, 1998, the related statements of income and retained earnings
and cash flows for the fiscal year then ended, including the notes (and
schedules) to these financial statements.
"Assumption Agreement" shall mean the agreement
pursuant to which the Majority Shareholders assume the Assumed Debt.
"Assumed Debt" shall mean those certain loans
identified in Exhibit A to this Agreernent.
"Best Efforts" shall mean the efforts that a
reasonable Person desirous of achieving a result would use in similar
circumstances to ensure that the result is achieved as expeditiously as
practicable under the circumstances; provided, however, that an obligation
to use Best Efforts under this Agreement does not require the Person
subject to that obligation to (i) take actions that would result in a
material adverse change in the benefits to such Person under this
Agreement or the transactions contemplated by this Agreement, (ii) make
any significant cash payments or (iii) incur any significant liability or
obligation.
"Best knowledge" with respect to any Person shall mean
the actual knowledge of the Person, including, the actual knowledge of any
of the officers or directors of such Person.
"Business" shall mean website development and
providing Internet access, web hosting and custom applications software
development, all as currently conducted by Neocom.
"Business Condition" of any Person shall rnean the
financial condition, results of operations, business, or properties of
such Person, taken as a whole.
"Charter Documents" shall mean (i) the Articles of
Incorporation and (ii) the Bylaws.
"Company Annual Financial Statements" shall mean the
audited (audited by accountants hired by Sitestar) consolidated balance
sheet of the Company as of December 31, 1998, the related consolidated
statements of income and retained earnings and cash flows for the fiscal
year then ended, including the notes (and schedules) to these financial
statements.
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"Company Current Financial Statements" shall mean the unaudited
consolidated balance sheet of the Company as of September 30, 1999 and
the related consolidated statements of income and retained earnings
for the nine-months then ended.
"Contract" shall mean any written or oral note, bond,
debenture, mortgage, license, agreement, commitment, contract or
understanding.
"Copyrights" shall mean all United States and foreign
copyrights, whether or not registered.
"Current Balance Sheet" shall mean the unaudited
balance sheet of Neocom as at September 30, 1999 included in the Current
Financial Statements.
"Current Financial Statements" shall mean the
unaudited balance sheet of Neocom as of September 30, 1999 and the related
statements of income and retained earnings for the nine- months then
ended.
"Effective Time" shall mean December 15,1999 as
between the parties, subject to the articles of share exchange being made
effective by the Virginia State Corporation Commission and the State of
Nevada, if necessary.
"Employment Agreements" shall mean employment
agreements entered into between the Company, on one hand, and each of the
Majority Shareholders, on the other hand, on the date of this Agreement.
"Employee Plan" with respect to any Person shall mean
any plan, arrangement or Contract providing compensation or benefits to,
for or on behalf of employees and/or directors of such Person and/or
Affiliates of such Person, including employment, deferred compensation,
retirement or severance Contracts; plans pursuant to which Equity
Securities are issued, including stock purchase, stock option, stock
appreciation rights plans; bonus, severance, phantom stock or incentive
compensation plans or arrangements; supplemental unemployment benefit,
hospitalization or other medical, life or other insurance; and ERISA
Plans.
"Environmental Laws" shall mean all present and future
statutes, regulations, rules, ordinances, codes, licenses, permits,
orders, approvals, plans, authorizations, concessions, franchises, and
similar items, of all Governmental Authorities and all applicable
judicial, administrative, and regulatory decrees, judgments, and orders
relating to Hazardous Substances or the protection of the environment in
any respect, including, without limitation: (i) all requirements,
including, without limitation, those pertaining to notification, warning,
reporting, licensing, permitting, investigation, and remediation of
Hazardous Substances; (ii) all requirements pertaining to the protection
of employees or the public from exposure to Hazardous Substances or
injuries or harm associated therewith; and (iii) the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. ss.9601
et seq.), the Resource Conservation and Recovery Act (49 U.S.C. ss.6901 et
seq.),
3.
<PAGE>
the Hazardous Materials Transportation Act (49 U.S.C. ss.1801 et seq.), the
Clean Air Act (42 U.S.C. ss.7401 et seq.), the Occupational Safety and
Health Act (29 U.S.C. ss.600 et seq.) and all similar applicable federal,
state, local and municipal laws as they may from time to time be modified,
amended or superseded.
"Equity Securities" of any Person shall mean the
capital stock of such Person and/or any Stock Equivalents of such Person.
"ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
"Exploit" shall mean manufacture, advertise, license,
market, merchandise, promote, publicize, sell, use, market, supply or
distribute, and "Exploitation" and "Exploited" shall have a correlative
meaning.
"GAAP" shall mean generally accepted accounting
principles, consistently applied.
"Governmental Authority" shall mean any nation or
government, any state or other political subdivision thereof, and any
entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Hazardous Substance" means those substances defined
as hazardous substances in 42 U.S.C. ss. 9601(14) and all other substances
defined as hazardous under other applicable Laws.
"Indebtedness" means, with respect to any Person, (i)
any liability, contingent or otherwise, (a) for borrowed money,
capitalized lease obligations, purchase money obligations or other
obligations relating to the deferred purchase price of assets or property
or (b) evidenced by a note, bond, debenture, letter of credit or similar
instrument given in connection with the acquisition, other than in the
ordinary course of business, of any property, assets, securities or
otherwise, including indebtedness created or arising under conditional
sale or other title retention agreements (even though the rights and
remedies of the lender under the agreements in the event of default are
limited to repossession or sale of the property), (ii) any liability of
others described in the preceding clause which such Person has guaranteed
or which otherwise is its legal liability, (iii) all indebtedness referred
to above secured by (or for which the holder of the indebtedness has an
existing right, contingent or otherwise, to be secured by), any Lien upon
the property of such Person, whether or not the obligations secured
thereby have been assumed, and (iv) any amendment, renewal, extension or
refunding of any liability referred to in clauses (i), (ii) and (iii)
above; provided, however, that Indebtedness does not include any trade
payables of any Person incurred in the ordinary course of business. The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at the date of all unconditional obligations as described above
and the maximum amount of any contingent obligations at the date.
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"IP" shall mean Patents, Trademarks, Copyrights, Know-How and
other rights and property commonly referred to as intellectual
property, and rights or licenses to use the same, and any and all
applications therefor.
"Know-How" shall mean all lab journals, inventions,
trade secrets, know-how (including, without limitation, proprietary
know-how and use and application know-how), product designs,
manufacturing, engineering and other drawings, technology, other
intangibles, technical information, safety information, engineering data
and design and engineering specifications, research records, market
surveys, promotional literature, supplier lists, similar data and formulas
and processes.
"Law" shall mean any federal, state or local statute,
law, rule, regulation, ordinance, order, code, policy or rule of common
law, now or hereafter in effect, and in each case as amended, and
anyjudicial or administrative interpretation thereof by a Governmental
Authority or otherwise, including anyjudicial or administrative order,
consent, decree orjudgment.
"Lien" shall mean any mortgage, deed of trust, pledge,
security interest, hypothecation, assignment, deposit arrangement,
encumbrance, lien (statutory or other), or preference, priority, or other
security agreement or preferential arrangement, charge, or encumbrance of
any kind or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement, any financing lease
having substantially the same economic effect as any of the foregoing, and
the filing of any financing statement under the Uniform Commercial Code or
comparable law of any jurisdiction to evidence any of the foregoing).
"Material Contract" shall mean, with respect to any
Person, any Contract to which Person is a party or is otherwise bound
which is:
(i) A Contract which is to be performed in whole or in
part at or after the date of this Agreement and which (A) cannot be
canceled upon 30 days' notice or less and involves aggregate future
payments by or to such Person of more than $10,000; (B) involves material
nonmonetary obligations to be performed later than one year from the date
hereof-, (C) otherwise materially affects such Person; or (D) was not
entered into in the ordinary course of business;
(ii) A Contract pursuant to which such Person (A) has
borrowed or is committed or entitled to borrow money in an amount in
excess of $ 1 0,000; (B) has lent or committed to lend money; (C) has
given or is committed to give a guarantee of, or otherwise to incur
primary or secondary liability for (including any letter of credit), any
obligation of any other party in any amount;
(iii) A Contract regarding advertising, brokerage,
licensing, management, representative or agency relationships;
(iv) A Contract with or concerning any labor or
employee organization,
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(v) A Contract for the sale of any properties, assets
or rights of such Person for a purchase price in excess of $25,000 or for
the grant of any preferential right to purchase any of such assets,
properties or rights, or which requires the consent of any third party to
the transfer and assignment of such assets, properties or rights;
(vi) A Contract with any Affiliate of such Person;
(vii) A Contract (A) under which the benefits cannot
be retained upon the consummation of the transactions contemplated by this
Agreement without the written consent or approval of other parties or (B)
under which there will be a default as a result of the consummation of the
transactions contemplated by this Agreement unless such other parties
provide written consent or approval;
(viii) A Contract involving the lease of real or
personal property; and
(ix) A Contract requiring such Person to make capital
expenditures in excess of $10,000
"Neocom Common Stock" shall mean the Common Stock, par value
$__-per share, of Neocom.
"Neocom IP" shall rnean all IP that Neocom owns, licenses and/or
uses.
"Neocom Material Contract" shall mean a Material Contract of
Neocom.
"Neocom Shares" shall mean all of the shares of Neocom Common
Stock held by the Sellers.
"Patents" shall mean all patents (including all
reissues, divisions, continuations, continuations in part and extensions
thereod, patent applications and patent disclosures docketed and all other
patent rights.
"Permitted Liens" shall mean (i) Liens for current
taxes not yet delinquent; (ii) restrictions imposed by Law; and (iii)
easements and restrictions which are neither individually nor in the
aggregate material to Neocom.
"Person" shall mean an individual or a partnership,
corporation, trust, association, Limited Liability Company, Governmental
Authority or other entity.
"Real Estate" shall mean that certain real property
located at 29 West Main Street, Martinsville, VA 24112.
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"SEC" shall mean the Securities and Exchange
Commission, or any other federal agency at the time administering the
Securities Act.
"Securities Act" shall mean the Securities Act of
1933, as amended, or any successor federal statute, and the rules and
regulations of the SEC thereunder.
" Securities " of any Person shall mean Equity
Securities, Stock Equivalents and any other "security" as that term is
defined under the Securities Act of such Person.
"Seller Representative" shall mean Joe Albanese, or
such other Seller as may from time to time be elected by the holders of a
majority of the Neocom Shares.
"Sitestar Shares" shall mean the shares of Sitestar
Common Stock to be issued to the Sellers upon conversion of their Neocom
Shares.
"Sitestar Common Stock" shall mean the Common Stock,
par value $.001 per share, of the Company.
"Stock Equivalents" of any Person shall mean options,
warrants, calls, rights, commitments, convertible securities and other
securities pursuant to which the holder, directly or indirectly, has the
right to acquire (with or without additional consideration) capital stock
or equity of such Person.
"Subsidiary" of any Person shall mean any entity of
which securities or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other persons performing
similar functions are owned directly or indirectly by such Person.
"Systems" shall mean all items, products or systems of
Neocom or the Company, as the case may be, used in the operation of the
Business which incorporate the processing of dates and date-related data
(including, without limitation, calculating, comparing and sequencing)
that are operationally material to the Business as conducted by Neocom or
its agents or other Persons, including, without limitation, computer
systems, infrastructure items, software applications, hardware, and
related equipment and utilities.
"Trademarks" shall mean all trademark, service mark
and trade name rights (including all registrations of trademarks and of
other marks, all registrations of trade names, labels and other trade
rights and applications for any of the foregoing) and all associated
goodwill symbolized thereby or connected therewith.
"Transfer" shall mean sell, assign, transfer, pledge,
grant a security interest in, or otherwise dispose of, with or without
consideration, and "Transferred" shall have a correlative meaning.
Notwithstanding the foregoing, the definition of Transfer shall not
include the pledge of Sitestar Common Stock in connection with the
borrowing of money.
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<PAGE>
"Year 2000 Compliant" shall mean that all Systems
accurately process dates and date-related data (including, without
limitation, calculating, comparing and sequencing) in all material
respects before, during and after the year 2000.
(b) Other Definitions. In addition to the terms
defined in the foregoing provisions of this Agreement, the following terms
shall have the meanings given the terms in the Sections set forth below:
Term Section
Acquisition 6 (c)
Proposal
Clairn 10(c)
Claim Notice 10(c)
Claim Dispute 10(f)
Notice
Closing 3(a)
Closing Date 3(a)
Company 10(b)
Indemnified
Party
Company 10(b)
Indemnified
Parties
Contingent 2(b)
Shares
Darnages 10(b)
Direct Claim 10(c)
Employees 9(c)
Indemnification 10(h)
Market Price
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Indemnifying 10(c)
Party
Indemnified 10(c)
Party
Initial Shares 2(b)
Market Price 2(b)
Notices 16(a)
Released Claims 6(e)
Remaining 2
Shares
Retums 4(y)(ii)
Sellers 4
Disclosure Letter
Short Period 4 (y)(i)(D)
Tax Return 4 (y) (i) (A)
Tax 4 (y) (i) (B)
Taxing Authority 4(y)(i)(C)
Third Party 10(c)
Claim
2. Exchange of Shares.
(a) Exchange of Shares. On the terms and subject to
the conditions of this Agreement, at the Effective Time, each share of
Neocom Common Stock issued and outstanding shall, and without any action
by the holder thereof, be exchanged into a number of shares of Sitestar
Common Stock as follows: (i) each Neocom Share owned by a Seller (other
than the Majority Shareholders) shall be converted into a number of shares
of Sitestar Common Stock equal to the quotient (rounded to the nearest
whole share) of Total Sitestar Shares divided by the number of Neocom
Shares. (ii) each Majority Shareholder shall receive his pro-rata portion
(rounded to the nearest whole share) of the Remaining Shares plus the
right to receive the Contingent Shares. The
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<PAGE>
"Total Sitestar Shares" shall mean a number of shares (rounded to the
nearest whole share) equal to $6,918,000 divided by the Market Price. The
"Remaining Shares" shall mean the Total Sitestar Shares less 2,000,000
less the number of Sitestar Shares issued to the Sellers (other than
Majority Shareholders) under (i) above. The "Contingent Shares" shall mean
a number of shares (rounded to the nearest whole share) equal to (i)
2,000,000 less (ii) the aggregate amount of unreimbursed Indemnification
Claims of the Company Indemnified Parties under Section 10 of this
Agreement divided by the Indemnification Market Price. The "Market Price"
shall be deemed to be $1.02. The "Indemnification Market Price" shall be
as defined in Section 10(h).
The foregoing notwithstanding, Sitestar agrees to issue
additional Sitestar shares for distribution on a pro rata basis to all
Shareholders of Neocom equal in value to the tax liability suffered by the
Majority Shareholders as defined below. The Majority Shareholders may sell
enough Sitestar shares on or before July 31, 2001 in order to pay off
assumed liabilities under the Assumption Agreement of even date herewith
and/or "put" certain shares back to Neocom and/or Sitestar under said
Assumption Agreement. Such sale and/or "put" under the preceding sentence
will cause the Majority Shareholders to incur federal and state tax
liability. The aggregate of such federal and tax liability for the
Majority Shareholders is defined to be the "tax liability" above. Within
ninety days of July 31, 2001, the Shareholders of Neocom shall present in
writing to Sitestar a calculation of such liability. Within thirty days
thereafter, Sitestar shall issue as part of this section 368 (a) (1) (B)
stock exchange additional Sitestar shares equal in value to the tax
liability with such shares to be distributed to all Shareholders of Neocom
in proportion to their shareholding of Neocom on the closing date of this
Agreement. For purposes of the preceding sentence, such Sitestar shares
shall be valued at their market price at time of such distribution.
3. Closing and Deliveries.
(a) The Closin . The closing of the tender of the
Neocom Shares (the "Closing") shall take place on December 16, 1999, at
2:00 p.m., E.S.T. time, at 29 West Main Street, Martinsville, Virginia, or
at such other place or time as the parties to this Agreement shall
mutually agree upon in writing and shall be effective at the Effective
Time. The date of the Closing is referred to in this Agreement as the
"Closing Date".
(b) Manner of Exchange. Each holder of a certificate
of Neocom Common Stock, upon surrender of such certificate to Company's
registrar and transfer company (which shall act as exchange agent),
accompanied by a letter of transmittal or endorsed in blank or accompanied
by a stock power shall be entitled to receive in exchange therefor a
certificate or certificates representing the number of full shares of
Sitestar Common Stock for which shares of Neocom Common Stock theretofore
represented by the certificate or certificates so surrendered shall have
been exchanged as provided herein. Until so surrendered, each outstanding
certificate, prior to the Effective Time, represented Neocom Common Stock
will be deemed to evidence the right to receive the number of full shares
of Sitestar Common Stock into which the shares of Neocom Common Stock
thereby may be converted. Until such outstanding certificate formerly
representing Neocom Common Stock are surrendered, no dividend payable to
holders of record of Sitestar Common Stock
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<PAGE>
for any period as of any date subsequent to the Effective Time shall be paid to
the holder of such outstanding certificates in respect thereof. After the
Effective Time, there shall be no further registry or transfer on the records of
Neocom of shares of Neocom Common Stock. If a certificate representing such
shares is presented to the exchange agent, it shall be canceled and exchanged
for a certificate representing shares of Sitestar Common Stock as herein
provided. Company will also issue a certificate in exchange for shares evidenced
by lost certificate (s) provided the record owner thereof provides Company with
such substantiation, indemnification and security as Company may reasonably
require. Upon surrender of certificates of Neocom Common Stock in exchange for
Sitestar Common Stock, there shall be paid to the recordholder of the
certificates of Sitestar Common Stock issued in exchange thereof (i) the amount
of dividends theretofore paid with respect to such full shares of Sitestar
Common Stock as of any date subsequent to the Effective Time which have not yet
been paid to a public official pursuant to abandoned property laws and (ii) at
the appropriate payment date the amount of dividends with a record date after
the Effective Time, but prior to surrender and payment date subsequent to
surrender. No interest shall be payable with respect to such dividends upon
surrender of outstanding certificates.
(c) Deliveries by the Sellers at the Closing. At the
Closing, the Sellers shall deliver to the Company:
(i) a certificate or certificates evidencing the
Neocom Shares, duly endorsed for transfer in blank or accompanied by a
stock power duly endorsed in blank;
(ii) the Assumption Agreement duly executed by the
Majority Shareholders; and
(iii) such documents and instruments as the Company
may reasonably request to evidence the satisfaction of all conditions
precedent set forth in Section 7 of this Agreement.
(d) Deliveries by the Company after the Closing. The
Company shall deliver the Contingent Shares to the Majority Shareholders
on the second anniversary of the Closing; provided, however, that if as of
the second anniversary there remain any unresolved Claims (because of a
dispute between the Company and the Sellers, or because the amount of the
Claim has not been determined, such as a Third Party Claim which has not
been resolved, or otherwise), then the Company may elect not to issue such
number of Contingent Shares as may equal the maximum amount of such
disputed or unresolved Claims (as determined in good faith by the Company)
divided by the Market Price; provided, further, however, that at such time
as such Claim is resolved, if it is resolved for less than such maximum
amount, the Company shall promptly issue to the Sellers such additional
Contingent Shares as shall equal such maximum amount less the actual
amount of such Claim, divided by the Indemnification Market Price. It is
agreed that the Contingent Shares shall be allocated to, and withheld
from, the Majority Shareholders.
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<PAGE>
(e) Further Assurances' At the Closing, each party to
this Agreement shall deliver or cause to be delivered, as appropriate,
such further certificates, consents and other documents as may be
necessary to carry out the terms of this Agreement, including but not
limited to articles of share exchange to be filed with the Virginia State
Corporation Commission and Nevada Secretary of State.
4. Representations and Warranties of the Majority Shareholders.
Except as set forth in the disclosure letter delivered
by the Sellers to the Company concurrently with the execution and delivery
of this Agreement, which letter shall refer to the relevant Sections of
this Agreement (the "Sellers Disclosure Letter"), the Majority
Shareholders, represent and warrant to the Company, as follows:
(a) Organization, Standing and Corporate Power. Neocom
is a corporation duly organized, validly existing and in good standing
under the laws of the Commonwealth of Virginia and has all requisite
corporate power and corporate authority to own, lease and operate its
properties and assets and to carry on its business as now being conducted.
Complete and correct copies of the Charter Documents of Neocom have been
delivered to the Company. Neocom is duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions where the
failure to qualify would have a material adverse effect on the Business
Condition of Neocom.
(b) Capitalization.
(i) The authorized capital stock of Neocom consists
solely of 1,000 shares of Neocom Common Stock. Except for 500 shares of
Neocom Common Stock, there are no outstanding Equity Securities of Neocom.
All of the outstanding Equity Securities of Neocom are owned of record and
beneficially as set forth in the Sellers Disclosure Letter. All Equity
Securities issued by Neocom have been duly authorized and validly issued
and are fully paid and nonassessable. The Neocom Common Stock is the only
class of voting stock issued or authorized by Neocom.
(ii) There are no outstanding Stock Equivalents of
Neocom. Neocom is not obligated to purchase or redeem any Equity
Securities or Stock Equivalents.
(iii) Neocom has not, either directly or through any
agent, offered any Securities of Neocom to or solicited any offers to
acquire any such Securities from, or otherwise approached, negotiated, or
communicated in respect of any such Securities with, any Person in such a
manner as to require that the offer or sale of such Securities be
registered pursuant to the provisions of Section 5 of the Securities Act
and the rules and regulations of the SEC thereunder or the securities laws
of any state. No Majority Shareholder has any reason to believe that
Neocom has not complied with all federal and state securities and blue sky
laws in all offers, sales and purchases of its Securities prior to the
date hereof or any applicable law in making such issuances and purchases
of any Securities prior to the date hereof. Any notices required to be
filed under federal and state
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<PAGE>
securities and blue sky laws prior to the date hereof have been filed on a
timely basis prior to or as so required.
(iv) At the Closing Date, the Company will receive
good and marketable title to the Neocom Shares free and clear of all
Liens. The Neocom Shares are not subject to any Stock Equivalents.
(c) Authority: Enforceability. Effect of Agreement.
(i) Each Seller has the requisite capacity to enter
into, execute and deliver this Agreement and perform his obligations
hereunder. Sellers have approved this Agreement by unanimous written
consent and as a result no Seller is entitled to exercise dissenter's
rights under Virginia law. This Agreement has been duly executed and
delivered by each Seller and, assuming this Agreement is duly executed and
delivered by the Company, constitutes a valid and legally binding
obligation of each Seller enforceable against such Seller in accordance
with its terms, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other similar laws
relating to or affecting creditors' rights generally, or the availability
of equitable remedies.
(ii) The execution and delivery by each Seller of this
Agreement does not, and compliance by each Seller with the provisions of
this Agreement will not, (A) conflict with or result in a breach or
default under any of the terms, conditions or provisions of any Material
Contract to which any Seller or Neocom is a party or otherwise bound, or
to which any property or asset of any Seller or Neocom is subject; (B)
violate any Law applicable to any Seller or Neocom; or (C) result in the
creation or imposition of any Lien on any asset of Neocom.
(d) Assets.
(i) Neocom has good and marketable title to all of its
assets free and clear of all Liens, other than Permitted Liens and Liens
identified in the Sellers Disclosure Letter.
(ii) Neocom's assets consist of all of the properties
and assets used in the conduct of the Business, including all of the
properties and assets reflected on the Current Balance Sheet, other than
assets sold or transferred in the ordinary course of business since the
date of the Current Balance Sheet or leased or licensed in the ordinary
course of business. Substantially all items of material tangible personal
property of Neocom, taken as a whole, are in good operating condition and
repair, ordinary wear and tear excepted, and those items constitute
sufficient material tangible personal property for the requirements of the
Business as currently conducted.
(e) Accounts Receivable; Subscribers.
(i) The Sellers Disclosure Letter sets forth a true
and complete schedule of the Accounts Receivable of Neocom as of the date
of the Current Balance Sheet, setting forth a
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<PAGE>
description of the Accounts Receivable including the names and addresses of
the account debtors, the balance amount and auinly as of the date indicated
therein. The Accounts Receivable, whether reflected on the Current Balance
Sheet or subsequently created, and all books, records and documents
relating to such Accounts Receivable, are genuine and materially accurate.
All Accounts Receivable of Neocom, whether reflected on the Current Balance
Sheet or subsequently created: (A) constitute bona fide and valid rights of
Neocom to collect payments from other Persons; (B) represent credit
extended in a manner consistent with Neocom's trade practices; (C) are not
believed to be subject to any defense, counterclaim or offset; (D) except
for reserves for returns and bad debts set forth in the Current Balance
Sheet and arising in the ordinary course of business since the date of the
Current Balance Sheet and an additional 5% reserve of such Accounts
Receivable, are believed to be collectable in accordance with Neocom's past
practices. Except as identified in the Sellers Disclosure Schedule, since
the date of the Current Balance Sheet, there have not been any write-offs
in excess of $500.00 as uncollectable of any Accounts Receivable.
(ii) The Sellers Disclosure Letter sets forth a true
and correct list of the names and addresses of all Persons for whom the
Company is providing Internet access as of December 16, 1999.
(f) Material Contracts. To the Best Knowledge of the
Majority Shareholders, Neocom is not a party to any Material Contract
except as identified as such in the Sellers Disclosure Schedule. True and
correct copies of each written Neocom Material Contract, including all
amendments and modifications thereof and waivers thereunder, have been
delivered to the Company. Except as identified in Sellers Disclosure
Schedule: (i) each Neocom Material Contract is believed to be in full
force and effect, and is the valid and binding obligation of each party to
the Material Contract; (ii) Neocom has performed all of the obligations
required to be performed by it to date under each Material Contract; and
(iii) Neocom is not in material breach of or default under any Material
Contract. To the Best Knowledge of the Majority Shareholders, each other
party to each Material Contract is believed to have performed all of the
obligations required to be performed by it to date under the Material
Contract and is not in material breach of or in default under the Material
Contract, and to the Best knowledge of the Majority Shareholders no event
has occurred or circumstance exists which, with notice or lapse of time or
both, would constitute a material breach of or default under any Material
Contract.
(g) Intellectual Prope . The Sellers Disclosure Letter
contains a true and complete list of all Patents, Trademarks and
registered Copyrights of Neocom and the basis of the right of Neocom to
use such Patents, Trademarks and Copyrights. The Neocom IP constitutes all
of the IP that is required to enable Neocom to conduct the Business as
presently conducted.
(h) Subsidiaries. Neocom does not own, directly or
indirectly, any shares of stock or any other financial interest or
investment (equity or debt) in any Person, and is not subject to any
agreement, obligation or commitment to make such investment. The Business
has been conducted solely by Neocom in its own name.
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(i) Financial Statements. The Annual Financial
Statements (as delivered to the Company), taken as whole, fairly present
the financial position and results of operations of Neocom as at the dates
of and for the periods set forth in the Annual Financial Statements in
accordance with GAAP. The Current Financial Statements have been prepared
in accordance with GAAP (with the only exceptions that no notes have been
prepared with respect to the Current Financial Statements and they are
subject to customary year end adjustments), consistent with the Annual
Financial Statements, and taken as a whole, fairly present the financial
position and results of operations of Neocom as at and for the nine months
ended September 30, 1999. Except as set forth in the Current Balance
Sheet, Neocom does not have any known Indebtedness.
0) Absence of Certain Changes and Events. Except as
otherwise disclosed in Sellers Disclosure Letter, since December 31, 1998,
except for this Agreement and changes contemplated by this Agreement,
Neocom has conducted its business only in the ordinary course of business
and there has not been any:
(i) purchase, redemption, retirement or other
acquisition by Neocom of any Equity Securities of Seller;
(ii) declaration or payment of any dividend or other
distribution or payment to any shareholder of Neocom in respect of any
Equity Securities of Neocom;
(iii) material increase by Neocom in the compensation
payable or to become payable by Neocom to any shareholder or to any
director, officer or employee of Neocom being paid $25,000 or more at or
at any time after October 31, 1998;
(iv) payment of any bonus, pension, retirement or
insurance payment or arrangement to or with, or advance or loan of any
money to, any Person, or entry into any employment, severance, loan or
similar Contract with any Person, other than payment of salaries and other
employee benefits in the ordinary course consistent with past practice;
(v) incurrence by Neocom of any Indebtedness other
than trade payables incurred by Neocom in the ordinary course of business
which do not exceed $5,000;
(vi) transfer of any assets to, or entry into any
agreement or arrangement with, any Seller or any officer or director of
Neocom (other than payment of salaries and other benefits in the ordinary
course of business and consistent with past practice) or any of their
respective Affiliates.
(k) Litigation and Proceedings-. Except as identified
in Sellers Disclosure Letter, and with the exception of potential
litigation with safedepositbox.com and Intellimedia Commerce, there is no
pending or, to the Best knowledge of the Majority Shareholders, threatened
Action to which Neocom is a party or involving any of the assets, and
Neocom is not subject to any judgment,
15
<PAGE>
order, writ, injunction, decree or regulatory directive or agreement, which
could have a material adverse effect on the Business Condition of Neocom.
(1) Brokers. Sellers retained and employed a Person as a
finder or broker in connection with this Agreement or the transactions
contemplated hereby and will pay at their expense all fees and charges
relating thereto.
(m) No Consents Required. Other than filing articles of
share exchange with the Virginia State Corporation Commission and complying
with provisions of Nevada corporate law applicable to the Company in order
to effect a merger, there are no approvals, authorizations, consents,
orders or other actions of, or filings with, any Governmental Authority
that are required to be obtained or made by Neocom in connection with the
execution of, and the consummation of the transactions contemplated under,
this Agreement.
(n) Environmental Compliance Matters.(i) The Real Estate
constitutes all of the real property used or occupied by Neocom; (ii)
Neocom and the Majority Shareholders have inspected the Real Estate and to
the knowledge of Neocom and the Majority Shareholders, there are no
Hazardous Substances incorporated in or deposited, stored or buried at or
upon the Real Estate; (iii) to the Best knowledge of Majority Shareholders
the Real Estate has never been used as a waste disposal site or a storage
site for petroleum products or chemicals; (iv) to the Best knowledge of
Majority Shareholders no existing structures on the Real Estate contain
asbestos so as to present an imminent and substantial endangerment to human
health to human health or the environment; (v) there are not now any
underground storage tanks on the Real Estate; (vi) Neocom has not allowed,
with the knowledge or consent of Neocom or any Seller, any Person occupying
the Real Estate to bring Hazardous Substances onto the Real Estate or to
process or store any Hazardous Substances on the Real Estate and, to the
knowledge of the Majority Shareholders, no Hazardous Substance has been
released into the environment by Neocom that may present an imminent and
substantial endangerment to human health; (vii) neither Neocom nor any
Majority Shareholder is aware of any complaints on file or matters pending
in any federal or state environmental protection offices involving any
allegation of Hazardous Substances on the Real Estate; and (viii) neither
Neocom nor any Majority Shareholder has received notice from any
environmental board, agency or authority requiring the removal of any
Hazardous Substances or other alleged harmful materials or wastes, or
advising of any pending or contemplated search or investigation of the Real
Estate or any portion of the Real Estate with respect the removal of any
Hazardous Substances or other alleged harmful materials or wastes.
(o) Securities Purchase. Each Seller has represented and
warranted as follows:
(i) Each Seller is acquiring the Sitestar Shares
for such Seller's own account, for investment purposes only.
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(ii) Each Seller understands that an investment in the
Sitestar Shares involves a high degree of risk, and each Seller has the
financial ability to bear the economic risk of this investment in the
Sitestar Shares;
(iii) Each Seller has such knowledge and experience in
financial and business matters that such Seller is capable of evaluating
the merits and risks of an investment in the Sitestar Shares and in
protecting such Seller's own interest in connection with the investment;
(iv) Each Seller understands that the Sitestar Shares have
not been registered under the Securities Act or under any state securities
laws.
(v) Each Seller believes that such Seller has received all
the information such Seller considers necessary or appropriate for deciding
whether to invest in the Sitestar Shares, and such Seller has had an
opportunity to ask questions and receive answers from the Company and its
officers and directors regarding the business, prospects and financial
condition of the Company.
(vi) Each Seller agrees not to Transfer, with or without
consideration, any of the Shares except pursuant to an effective
registration statement under the Securities Act or an exemption from
registration. As a further condition to any such Transfer, except in the
event that such Transfer is made pursuant to an effective registration
statement under the Securities Act, if in the reasonable opinion of counsel
to the Company any Transfer of the Sitestar Shares by the contemplated
transferee thereof would not be exempt from the registration and prospectus
delivery requirements of the Securities Act, the Company may require the
contemplated transferee to furnish the Company with an investment letter
setting forth such information and agreements as may be reasonably
requested by the Company to ensure compliance by such transferee with the
Securities Act.
(vii) Each Seller agrees that each certificate evidencing
any of the Sitestar Shares shall contain the following legend:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED, ASSIGNED, HYPOTHECATED OR OTHERWISE DISPOSED OF
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR AN EXEMPTION FROM REGISTRATION.
(p) Employee Plans. Except as set forth in the Sellers
Disclosure Letter, Neocom is not a party to, or obligated under, any
Employee Plan.
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(q) Licenses, Compliance with Laws. Neocom:
(i) has all franchises, permits, licenses, and other rights which
it currently deems reasonably necessary for the conduct of its
business, except for franchises, permits, licenses and other rights
the failure of which to obtain would not have a material adverse
effect on the Business Condition and to the Best knowledge of the
Majority Shareholders there is not any basis for the denial of such
rights in the future;
(ii) is in compliance with, and is not in violation of, any Law
except where the failure to so comply, or such violations, in the
aggregate, will not have a material adverse effect on the Business
Condition.
(r) Insurance. Neocom has in full force and effect insurance with
respect to its assets and businesses against such casualties and
contingencies and of such types and forms and to such extent as it
deems reasonable and customary in the case of corporations or
organizations engaged in its businesses and in its respective areas.
Neocom has separately provided to the Company a true and correct list
of all insurance policies maintained by Neocom.
(s) Labor Relations. There is no pending or, to the Best knowledge of the
Majority Shareholders, threatened labor dispute, strike or work stoppage
affecting the business of Neocom.
(t) Banks, Agents, etc. The Sellers Disclosure Schedule contains a complete
and correct list setting forth the name of (i) each financial institution in
which Neocom has an account, safe deposit box or borrowing privilege and the
names of all persons authorized to draw thereon, to have access thereto or to
borrow thereupon, as the case may be, and (ii) each agent to whom Neocom has
granted a written power of attorney or similar authority to act on its behalf.
(u) Minute Books. The minute books of Neocom contain a complete summary of
all material meetings of directors and stockholders since the time of
incorporation and reflect all transactions referred to in such minutes
accurately in all material respects.
(v) Conflicts of Interest. Neither Neocom nor any officer, employee, agent
or any other Person acting on behalf of Neocom has, directly or indirectly,
given or agreed to give or received or agreed to receive any money, gift or
similar benefit (other than legal price concessions to customers in the ordinary
course of business) to any customer, supplier, employee or agent of a customer
or supplier, or official or employee of any Governmental Authority or other
Person who is in of a position to help or hinder the business of (or assist in
connection with any actual of proposed transaction) Neocom which (a) might
subject Neocom to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (b) if not given in the past, might have had a
material adverse effect on the Business Condition of Neocom or (e) if not
continued in the future, might materially adversely affect the Business
Condition of Neocom.
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(w) Year 2000. To the Best knowledge of the Majority Shareholders, all
Systems of Neocom are Year 2000 Compliant, except where the failure to be Year
2000 Compliant would not have a material, adverse effect on the Business
Condition of Neocom.
(X) Taxes.
(i) For the purposes of this Agreement, the following terms shall have
the respective meanings set forth below:
(A) "Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Income Taxes,
including any schedule or attachment thereto, and including any
amendment thereof
(B) "Tax" (including with correlative meaning, the term "Taxes"
and "Taxable") shall mean, with respect to Neocom, any federal, state,
local, foreign or other material tax or governmental charge, together
with any interest and any penalty, addition to Tax or additional
amount imposed by any Taxing Authority due from or allocable under any
applicable law or agreement to, Neocom.
(C) "Taxing Authority" shall mean any governmental authority
(domestic or foreign) responsible for the imposition of any such Tax.
(ii) Except as set forth in Sellers Disclosure Letter, Neocom has
filed all Tax Returns that it was required to file. All such Tax Returns
were correct and complete in all material respects. Except as set forth on
Sellers Disclosure Letter, all Taxes owed by Neocom (whether or not shown
on any Tax Return) have been paid or provision therefore made on the
financial statements of Neocom. Neocom currently is not the beneficiary of
any extension of time within which to file any Tax Return.
(iii) There is no material dispute or claim concerning any Income Tax
liability of Neocom either (A) claimed or raised by any Taxing Authority in
writing or (B) as to which any of the Sellers and the directors and
officers of Neocom has based upon personal contact with any agent of such
authority.
(iv) Sellers Disclosure Schedule lists all federal, state, local, and
foreign Tax Returns filed with respect to Neocom for taxable periods ended
on or after December 31, 1995, that have been audited, and indicates those
Tax Returns that currently are the subject of audit. The Majority
Shareholders have delivered to the Company correct and complete copies of
all federal Tax Returns, examination reports, and statements of
deficiencies assessed against, or agreed to by Neocom since December 31,
1996, by or with any Taxing Authority. Neocom has not waived any statute of
limitations in respect of Income Taxes or agreed to any extension of time
with respect to an Income Tax assessment or deficiency.
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(v) Except as set forth in Sellers Disclosure Letter, the unpaid Taxes
of Neocom (A) did not, as of the most recent fiscal month end, exceed by
any material amount the reserve for Income Tax liability (rather than any
reserve for deferred taxes established to reflect timing differences
between book and tax income) set forth on the face of the most recent
balance sheet (rather than in any notes thereto) and (B) will not exceed by
any material amount that reserve as adjusted for operations and
transactions through the Closing Date in accordance with the past custom
and practice of Neocom in filing their Tax Returns.
(vi) Neocom (and any predecessor of Neocom) has been a validly
electing S corporation within the meaning of Code Sections 1361 and 1362 at
all times during its existence and Neocom will be an S corporation up to
and including the Closing Date.
(y) Adverse Change. Since September 30, 1999, there has been no
material adverse change in the Business Condition of Neocom.
5. Representations and Warranties of the Company .
The Company represents and warrants to the Sellers (with full
knowledge that the Sellers are relying on the same) as follows:
(a) Organization, Standing and Corporate Power. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Nevada and has all requisite corporate power and
corporate authority to own, lease and operate its properties and assets and
to carry on its business as now being conducted. The Company is duly
qualified to do business in all jurisdictions where the failure to qualify
would have a material adverse effect upon the Company's properties and
business. The Company has delivered true, accurate and complete copies of
its Charter Documents to Neocom.
(b) Authority, Enforceabiliiy, Effect of Agreement.
(i) The Company has full corporate power and corporate authority
to enter into, execute and deliver this Agreement and perform its
obligations hereunder. This Agreement has been duly authorized by all
necessary corporate action of the Company. The Company represents and
warrants to each Seller that shareholder approval of this Agreement
and the issuance of shares hereunder is not required under applicable
law. This Agreement has been duly executed and delivered by the
Company and constitutes a valid and legally binding obligation of the
Company and is enforceable against the Company in accordance with its
terms, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other similar
laws relating to or affecting creditors' rights generally, or the
availability of equitable remedies.
(ii) The execution and delivery by the Company of this Agreement
do not, and compliance by the Company with the provisions hereof will
not, (A) conflict with or result in a breach or default under any of
the terms, conditions or provisions of any Contract to which the
20
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Company is a party or otherwise bound, or to which any asset or
property of the Company is subject; or (B) violate any Law applicable
to the Company; or (C) result in the creation or imposition of any
Lien on any asset of the Company.
(c) Financial Statements. The Annual Company Financial Statements
(as delivered to the Sellers) fairly present the financial position
and results of operations of the Company as at the dates of and for
the periods set forth in the Annual Company Financial Statements in
accordance with GAAP. The Current Company Financial Statements have
been prepared in accordance with GAAP (with the only exceptions that
no notes have been prepared with respect to the Current Financial
Statements), consistent with the Annual Company Financial Statements,
and fairly present the financial position and results of operations of
the Company as at and for the nine months ended September 30, 1999,
and are not subject to year-end adjustments except for normal year-end
adjustments that may be required in the ordinary course of business.
(d) Litigation and Proceedings. There is no pending or, to the
best knowledge of the Company, threatened Action (or basis for any
Action) to which the Company is a party or involving any of it assets,
and the Company is not subject to any judgment, order, writ,
injunction, decree or regulatory directive or agreement, which could
any material adverse affect on the Business Condition of the Company.
(e) Sitestar Shares. Upon issuance, the Sitestar Shares will be
duly authorized, validly issued, fully paid and non-assessable shares
of the Common Stock of the Company.
(f) Brokers. The Company has not retained or otherwise engaged or
employed any Person, or paid or agreed to pay any fee or commission to
any Person, for or on account of acting as a finder or broker in
connection with this Agreement or the transactions contemplated
hereby.
(g) No Consents Required. There are no approvals, authorizations,
consents, orders or other actions of, or filings with, any Person that
are required to be obtained or made by the Company in connection with
the execution of, and the consummation of the transactions
contemplated under, this Agreement.
(h) Reliance upon Small Business Registration Circular filed with
SEC. The Company acknowledges the reliance of the Sellers upon the
accuracy and completeness of Form I 0- SB currently filed with the SEC
and any and all amendments thereto prior to the Closing Date. The
Company represents and warrants that the statements contained in such
Statement together with any such Form are true, accurate and complete
in all material respects and there are no omissions or statements
therein which cause same to be misleading. The Form 10-SB filed with
the SEC in October, 1999, did not at the time filed contain any
misstatement of fact or omit to state any fact, and no event or
circumstance has occurred since the date thereof that would make any
information contained therein materially misleading or incorrect, in
each case which fact would be material to the Sellers' decision to
exchange Neocom Shares for Sitestar Shares pursuant to this Agreement.
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(i) Capitalization,
(i) The authorized capital stock of the Company consists
solely of 75,000,000 shares of Sitestar Common Stock and
10,000,000 shares of preferred stock. Except for approximately
18,600,000 shares of Sitestar Common Stock, there are no
outstanding Equity Securities of the Company. All Equity
Securities issued by the Company have been duly authorized and
validly issued and are fully paid and nonassessable. The Sitestar
Common Stock is the only class of voting stock issued or
authorized by the Company.
(ii) There are no outstanding Stock Equivalents of the
Company. The Company is not obligated to purchase or redeem any
Equity Securities or Stock Equivalents.
(iii) The Company has complied with all federal and state
securities and blue sky laws in all offers, sales and purchases
of its Securities prior to the date hereof or any applicable law
in making such issuances and purchases of any Securities prior to
the date hereof.
(iv) At the Closing Date, the Sellers will receive good and
marketable title to the Sitestar Shares free and clear of all
Liens. The Sitestar Shares are not subject to any Stock
Equivalents.
(j) Labor Relations. There is no pending or, to the Best knowledge of
the Company and its officers, threatened labor dispute, strike or work
stoppage affecting the business of the Company.
(k) Year 2000. To the Best Knowledge of the Company and its officers,
all Systems of Company are Year 2000 Compliant, except where the failure to
be Year 2000 Compliant would not have a material, adverse effect on the
Business Condition of the Company.
(l) Taxes.
(i) For the purposes of this Agreement, the following terms shall
have the respective meanings set forth below:
(A) "Tax Return" means any return, declaration, report,
claim for refund, or information return or statement relating to
Income Taxes, including any schedule or attachment thereto, and
including any amendment thereof.
(B) "Tax" (including with correlative meaning, the term
"Taxes" and "Taxable") shall mean, with respect to the Company,
any federal, state, local, foreign or other material tax or
governmental charge, together with any interest and any penalty,
addition to Tax or additional amount imposed by any Taxing
Authority due from or allocable under any applicable law or
agreement to, the Company.
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(C) "Taxing Authority" shall mean any governmental authority
(domestic or foreign) responsible for the imposition of any such
Tax.
(ii) The Company has filed all Tax Returns that it was required
to file. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Company (whether or not shown
on any Tax Return) have been paid. The Company currently is not the
beneficiary of any extension of time within which to file any Tax
Return.
(iii) There is no material dispute or claim concerning any Income
Tax liability of the Company either (A) claimed or raised by any
Taxing Authority in writing or (B) as to which any directors and
officers of the Company have knowledge based upon personal contact
with any agent of such authority.
(iv) The Company has not waived any statute of limitations in
respect of Income Taxes or agreed to any extension of time with
respect to an Income Tax assessment or deficiency.
(v) The unpaid Taxes of the Company (A) did not, as of the most
recent fiscal month end, exceed by any material amount the reserve for
Income Tax liability (rather than any reserve for deferred taxes
established to reflect timing differences between book and tax income)
set forth on the face of the most recent balance sheet (rather than in
any notes thereto) and (B) will not exceed by any material amount that
reserve as adjusted for operations and transactions through the
Closing Date in accordance with the past custom and practice of the
Company in filing their Tax Returns.
6. Conduct and Transactions Prior to Closing.
(a) Conduct of Business. Prior to the Closing, except as contemplated by
this Agreement or with the prior written consent of the Company, each Majority
Shareholder agrees to cause Neocom:
(i) to conduct its operations according to its ordinary and usual
course;
(ii) not to Transfer any assets-,
(iii) not to amend, modify or terminate, or grant any waiver of any
right under, any Material Contract, and not to make any payment under any
Neocom Contract which is not required to be made in accordance with the
terms of the Neocom Contract;
(iv) to comply in all material respects with all of its obligations
and duties under any Neocom Contract and not to create or permit to exist
any material default or event of default on behalf of Neocom under any
Neocom Contract, or any event or circumstance which, with lapse of time or
notice, or both, would constitute a material default under a Neocom
Contract;
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(v) to use its Best Efforts to preserve intact its business
organization and goodwill, keep available the services of its officers and
employees and maintain satisfactory relationships with those Persons having
business relationships with Neocom;
(vi) to duly comply with all Laws applicable to Neocom and to the
conduct of the Business;
(vii) not to make or agree to make any capital expenditures, other
than in the ordinary and usual course of business;
(viii) not to incur any material fixed or contingent obligation or
enter into any Contract or other transaction or arrangement relating to the
Business or the Assets outside the ordinary course of business which would
be a Material Contract;
(ix) to maintain its tangible personal property in a good condition
and state of repair, reasonable wear and tear excepted;
(x) not to commit any act or omit to do any act which would be or
result in a breach of any of its obligations, duties, agreements or
representations under any Neocom Contract to which it is a party or to
which it enters into subsequent to the date of this Agreement which would
have a material effect on the Business Condition of Neocom,
(xi) to bear the risk of loss or damage to the assets of Neocom on and
prior to the Closing Date, and maintain all properties necessary for the
conduct of the Business, whether owned or leased, in substantially the same
condition as they now are, normal wear and tear excepted;
(xii) to maintain the books, records and accounts of Neocom in the
usual, regular and ordinary manner, on a basis consistent with prior
periods;
(xiii) not to enter into any Material Contract of any kind or nature
with any Affiliate of Neocom, any Seller or any Affiliate of any Seller;
(xiv) not to enter into any transaction or perform any act which would
make any of the representations, warranties or agreements contained in this
Agreement false or misleading in any material respect if made again
immediately after such transaction or act; and
(xv) not to take any affirmative action or fail to take any action
within its control that is likely to cause any of the changes or events
listed in Section 6 (a) (i) to occur.
(b) Inspection of Records. Between the date of this Agreement and the
Closing, the Sellers shall allow the duly authorized officers, attorneys,
accountants and other representatives of the Company access at all reasonable
times, upon reasonable advance notice and during normal
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<PAGE>
business hours, to the records and files, correspondence, audits and properties,
as well as to all information in each case relating the business and affairs of
Neocom.
(c) Acquisition Proposals. During the period from the date of this
Agreement and extending through the earlier of termination of this Agreement or
the Closing Date, Neocom and each Seller agrees that (i) neither Neocom nor such
Seller nor any agent or representative of Neocom or any Seller, including
without limitation any investment banker, attorney or accountant, shall
initiate, solicit, intentionally encourage or accept the submission of any
proposal or offer with respect to a merger, acquisition, sale, consolidation or
similar transaction involving all or any significant portion of the assets or
any Equity Securities of Neocom (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal") or engage in any negotiations or
discussions concerning, or provide any confidential information or data to, any
Person relating to an Acquisition Proposal, and (ii) the Sellers shall notify
the Company immediately if any Acquisition Proposal is received by Neocom and/or
any Seller or agent or representative or any negotiations of discussions
relating to a potential Acquisition Proposal are sought to be initiated or
continued with Neocom and/or such Seller.
(d) Best Efforts. Between the date of this Agreement and the Closing, each
of the parties to this Agreement will use its or his Best Efforts to cause the
conditions to the obligations of the other parties set forth in Sections 6, 7, 8
or 9 of this Agreement, as the case may be, to be satisfied.
(e) Release. Except for salary and benefits accruing in the ordinary course
of business, each Seller hereby forever relieves, releases and discharges Neocom
from any and all claims, debts, liabilities, losses, demands, obligations,
promises, acts, agreements, costs and expenses, damages, actions and causes of
action, of whatever kind or nature, whether known or unknown, suspected or
unsuspected, existing now, existing as of the Closing or accruing after the
Closing based on, arising out of, or in connection with any action or omission
of Neocom prior to the Closing (collectively, "Released Claims") and agrees that
neither the Company nor Neocom shall have any liability or obligation whatsoever
to such Seller (or any Person claiming by or through it) arising out of or in
connection with the Released Claims. Each Seller represents that he has not
Transferred any Released Claims.
7. Conditions to the Obligations of the Company.
The obligation of the Company to purchase the Neocom Shares and to take the
other actions required to be taken by the Company at the Closing is subject to
the satisfaction, at or prior to the Closing, of each of the following
conditions (any of which may be waived by the Company in writing, in whole or in
part):
(a) Representations and Warranties. The representations and warranties of
the Majority Shareholders and of the Sellers (contained in this Agreement, any
exhibit or schedule hereto, or any certificate, instrument or other writing
delivered to the Company or its representatives
25
<PAGE>
by any Seller, or any of their respective representatives) shall be true and
correct on the Closing Date with the same force and effect as though made on and
as of the Closing Date i.e., with respect to a representation that a state of
facts exists on or as of the date hereof, it is a condition that such state of
facts exists in all material respects on or as of the Closing Date, and with
respect to a representation that a state of facts has or has not changed between
a date prior to the date hereof and the date hereof, it is a condition that such
state of facts has or has not changed between such prior date and the Closing
Date), except as affected by transactions contemplated hereby and thereby and
except that any such representation or warranty made as of a specified date
(other than the date of this Agreement) shall only need to have been true on and
as of such date;
(b) Performance. Each Seller shall have performed all obligations and
complied with all covenants required by this Agreement to be performed or
complied with by such Seller on or prior to the Closing Date;
(c) Title to Neocom Shares. The Company shall have received good and
marketable title to the Neocom Shares, free and clear of all Liens except
Permitted Lien;
(d) Consents. The Sellers shall have delivered to the Company all consents
of third parties necessary so that Neocom will not be in breach of any Contract
as a result of the purchase of the Neocom Shares by the Company,
(e) Employment Agreements. The Sellers shall have executed and delivered to
the Company the Employment Agreements;
(f) Subscribers. Neocom shall have received monthly internet access, web
hosting or other recurring service fees from not less than 4, 1 00 Persons in an
aggregate amount of not less than $82,000 during the calendar month immediately
preceding the month in which the Closing occurs;
(g) Assumption Agreement. Neocom, the Majority Shareholders shall have
entered into the Assumption Agreement and it shall be in full force and effect.
(h) Other Matters. All corporate and other proceedings and actions taken in
connection with this Agreement and all agreements, instruments and documents
mentioned in this Agreement or incident to any such transactions shall be
reasonably satisfactory in form and substance to the Company and its counsel;
the Agreement and Plan shall have been approved by the Company and Neocom in
accordance with applicable law; no Seller shall have provided notice of exercise
of dissenter's rights under applicable law; and articles of share exchange shall
have been approved by all applicable regulatory action.
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8. Conditions to the Obligations of the Sellers.
The obligation of the Sellers to sell the Neocom Shares and to take the
other actions required to be taken by the Sellers at the Closing is subject to
the satisfaction, at or prior to the Closing, of each of the following
conditions (any of which may be waived by the Sellers in writing, in whole or in
part):
(a) Representations and Warranties. The representations and warranties of
the Company (contained in this Agreement, any exhibit or schedule hereto, the
small Business Offering Circular and any amendment thereto filed with the SEC or
any certificate, instrument or other writing delivered to the Sellers or their
representatives by the Company, or any of its representatives) shall be true and
correct on the Closing Date with the same force and effect as though made on and
as of the Closing Date ia., with respect to a representation that a state of
facts exists on or as of the date hereof, it is a condition that such state of
facts exists in all material respects on or as of the Closing Date, and with
respect to a representation that a state of facts has or has not changed between
a date prior to the date hereof and the date hereof, it is a condition that such
state of facts has or has not changed between such prior date and the Closing
Date), except as affected by transactions contemplated hereby and thereby and
except that any such representation or warranty made as of a specified date
(other than the date of this Agreement) shall only need to have been true on and
as of such date;
(b) Performance. The Company shall have performed all obligations and
compiled with all covenants required by this Agreement to be performed or
complied with by the Company on or prior to the Closing Date-,
(c) Employment Agceements. The Company shall have executed and delivered to
the Sellers the Employment Agreements;
(d) Title to Sitestar Shares. Sellers shall have received good and
marketable title to the Sitestar Shares, free and clear of all Liens, except for
restrictions set forth herein;
(e) Other Matters. All corporate and other proceedings and actions taken in
connection with this Agreement and all agreements, instruments and documents
mentioned in this Agreement or incident to any such transactions shall be
reasonably satisfactory in form and substance to the Company and its counsel;
the Agreement and Plan shall have been approved by the Company and Neocom and
the holders'of Neocom Shares in accordance with applicable law; no Seller shall
have provided notice of exercise of dissenter's rights under applicable law; and
articles of share exchange shall have been filed with and approved by all
applicable regulatory authorities.
9. Further Agreements of the Parties.
(a) Further Agreements of the Sellers. The Majority Shareholders shall upon
the request of the Company from time to time execute and deliver to the Company
such further
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documents and instruments of title, conveyance, transfer and assignment as may
be necessary or desirable in order to vest in the Company, free and clear of all
Liens (other than Permitted Liens), all right, title and interest in and to any
and all of the Neocom Shares.
(b) 8-K Financial Statements. The Majority Shareholders, at the expense of
the Company, shall promptly provide such assistance reasonably requested by the
Company to enable it to prepare financial statements and pro forma financial
statements sufficient to permit the Company to fully, completely and timely
comply with the Company's obligations to file financial statements relating to
the Business with the SEC and to obtain an audit of those statements, including
signing such representation letters as may reasonably be requested by the
auditors.
(c) Employees
(i) Schedule 8(c) lists the name, job title, current base salary or
hourly wage, date of hire and social security number of employees actively
employed by Neocom including individuals on short-term disability who were
so employed immediately before their disability (collectively, the
"Employees"). As to any individual on short-term disability, Schedule 8(c)
indicates the reason for such absence and the date the individual is
reasonably expected to return to active employment. Schedule 8(c) also
indicates the accumulated vacation pay accrued for each Employee as of the
Closing Date.
(ii) The Majority Shareholders jointly and severally agree to pay all
costs and expenses related to the termination of employment of any employee
of Neocom who is entitled to any severance in connection with his or her
termination (including indirect severance because such employee is entitled
to at least 10 days or more notice of termination).
(d) Public Offering, Bridge Funding and Right to Put Indebtedness of
Neocom. The Company agrees to file a registration statement with the SEC and to
grant Majority Shareholders registration rights pursuant to Section 9 hereof
within I 20 days following the Closing for a public offering of Sitestar Common
Stock and to register a sufficient number of Sitestar Shares such that the
proceeds to the Majority Shareholders will be sufficient to satisfy the Assumed
Debt, and shall use its best efforts to cause the registration statement to be
declared effective by the SEC. If on June 30, 2001 there is any Assumed Debt
and/or Advances (as defined in the Assumption Agreement), then the Majority
Shareholders shall have the put rights and other rights set forth in the
Assumption Agreement. The Majority Shareholders shall provide such information
regarding themselves and their plan of distribution as the Company may
reasonably request in order to complete the registration statement. The Majority
Shareholders agree not to sell their Sitestar Shares pursuant to the
registration statement during any period which Sitestar request the Majority
Shareholders to refrain from such sales.
10. [Intentionally Left Blank.
11. Survival of Representations and Warranties: Indemnity.
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(a) Survival of Representations and Warranties. All representations and
warranties made in this Agreement or made in any document delivered pursuant to
this Agreement by or on behalf of any party shall survive the execution and
delivery of this Agreement and the Closing, regardless of notice of or any
investigation or right of investigation made prior to or after the date of this
Agreement by or on behalf of any party, and shall terminate and expire one year
following the Closing Date after which date they shall be of no further force or
effect.
(b) Indemnification by the Majority Shareholders. The Majority Shareholders
shall jointly and severally, indemnify, save and hold harmless the Company and
each of its officers, directors, employees, agents and affiliates, and each of
their successors and assigns (individually, a "Company Indemnified Party" and
collectively, the "Company Indemnified Parties") from and against any and all
costs, losses, claims, liabilities, fines, penalties, incidental and
consequential damages, lost profits and expenses (including interest which may
be imposed in connection therewith and court costs and reasonable fees and
disbursements of counsel) ("Damages") incurred in connection with, arising out
of, resulting from or incident to:
(i) any material breach of, or any material inaccuracy in any of, the
representations or warranties, or any default in any agreements, made by
the Sellers in this Agreement, any exhibit or schedule to this Agreement or
any certificate, instrument or writing delivered in connection with this
Agreement or in connection with any exhibit or schedule to this Agreement;
(ii) any claim and/or Action of Intellimedia Commerce, or any
successor or assign, as described in the Sellers Disclosure Schedule; or
(iii) the Assumed Debt, but subject to the Company's obligations as
set forth above and in the Assumption Agreement;
(c) Notice of Claim. If a claim for Damages (a "Claim") is to be made by a
party entitled to indemnification hereunder (an "Indemnified Party") against the
indemnifying party (the "Indemnifying Party"), the Indemnified Party shall give
written notice (a "Claim Notice") to the Indemnifying Party, and shall also
specify (to the extent that the information is available) the factual basis for
the Claim and the amount of the Damages, if known. The Indemnified Party shall
provide the Claim Notice as soon as practicable after such party becomes aware
of such Claim. If any Action is filed against any Indemnified Party, written
notice thereof shall be given to the Indemnifying Party as promptly as
practicable (and in any event within 15 calendar days after the service of the
citation or summons). The failure of any Indemnified Party to give timely notice
hereunder shall not affect rights to indemnification hereunder, except to the
extent that the Indemnifying Party has been damaged by such failure.
(d) Defense of Claims. With respect to a claim filed by a third party
against an Indemnified Party, the Indemnified Party shall not in any event be
entitled to indemnification hereunder unless prompt notice is provided to the
Indemnifying Party. If after receipt of the Claim
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<PAGE>
Notice of a claim by a third party, the Indemnifying Party acknowledges in
writing to the Indemnified Party that the Indemnifying Party shall be obligated
under the terms of its indemnity hereunder in connection with such lawsuit or
action, the Indemnifying Party shall be entitled, if it so elects at its own
cost, risk and expense, (i) to take control of the defense and investigation of
such Action, (ii) to employ and engage attorneys of its own choice, but, in any
event, reasonably acceptable to the Indemnified Party, to handle and defend the
same unless the named parties to such Action (including any impleaded parties)
include both the Indemnifying Party and the Indemnified Party and the
Indemnified Party has been advised in writing by counsel that there may be one
or more legal defenses available to such Indemnified Party that are different
from or additional to those available to the Indemnifying Party, in which event
the Indemnified Party shall be entitled, at the Indemnifying Party's cost, risk
and expense, to separate counsel of its own choosing, and (iii) to compromise or
settle such Action, which compromise or settlement shall be made only with the
written consent of the Indemnified Party, such consent not to be unreasonably
withheld.
If the Indemnifying Party fails to assume the defense of such Claim within
15 calendar days after receipt of the Claim Notice and the Indemnifying Party is
otherwise obligated hereunder to indemnify against such Claim, the Indemnified
Party against which such Claim has been asserted will (upon delivering notice to
such effect to the Indemnifying Party) undertake, at the Indemnifying Party's
cost and expense, the defense, compromise or settlement of such Claim on behalf
of and for the account and risk of the Indemnifying Party. The Indemnified Party
assuming the defense of any Claim will keep the Indemnifying Party reasonably
informed of the progress of any such defense, compromise or settlement. Provided
the Indemnifying Party is liable hereunder for the underlying Claim, the
Indemnifying Party shall be liable for any settlement of any Action effected
pursuant to and in accordance with the terms hereof and for any final judgment
(subject to any right of appeal) and the Indemnifying Party agrees to indemnify
and hold harmless an Indemnified Party from and against any Damages by reason of
such settlement or judgment.
(e) No Claim by the Sellers. Although the Sellers may have relied on
information supplied by Neocom in making certain representations and warranties
contained in this Agreement and the Sellers' Disclosure Schedule, each Seller
agrees that he or she has no claim, and shall assert no claim, for contribution,
indemnification or otherwise, against Neocom with respect to any breach of any
covenant or of any of the representations and warranties or any inaccuracy in
the Sellers' Disclosure Schedule irrespective of whether the information
supplied by Neocom and relied upon by such Seller was incomplete or inaccurate
in any way or for whatsoever reason; further, the Sellers acknowledge that
Neocom has made no representation or warranty to the Sellers with respect to the
information supplied by it to the Sellers whatsoever.
(d) Liquidation of Indemnification Claims. Any Claim set forth in any Claim
Notice shall be deemed valid and binding upon the Majority Shareholders unless
the Majority Shareholders give written notice of dispute of the Claim, or a
portion of the Claim (a "Claim Dispute Notice"), within forty-five days from
receipt of the Claim Notice, which Claim Dispute Notice sets forth in reasonable
detail the basis for disputing the Claim (of portion of the Claim). Within
forty-five days following receipt of the Claims Dispute Notice, the Company and
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the Majority Shareholders or their designated representative shall discuss the
Claim in person or by telephone. If the parties are unable to resolve the
dispute, either the Majority Shareholders or the Company shall have the right to
have the claim submitted to and settled by arbitration as hereinafter provided
(it being expressly understood and agreed that if such Claims Dispute Notice is
duly given, it is the intention of the parties to this Agreement that any such
indemnification claim shall be resolved by arbitration as provided in this
Section 10(e)). The arbitration shall be by a single arbitrator experienced in
the matters at issue selected by, and mutually acceptable to, the Indemnifying
Party and the Indemnified Party and shall be conducted in accordance with the
arbitration rules of the American Arbitration Association. The arbitrator must
be independent (not an agent, officer, director, attorney, employee, or
shareholder of the Company or any Seller or a relative or Affiliate of any of
those persons) without any economic or financial interest of any kind in the
outcome of the arbitration. Each arbitrator's conduct will be governed by the
Code of Ethics for Arbitrators in Commercial Disputes (1986) that has been
approved and recommended by the American Bar Association and the American
Arbitration Association. The parties shall request the arbitrator to convene a
hearing as promptly as practicable for the dispute to be held on such date and
at such time and place in Henry County, Virginia, as the arbitrator designates
upon 30 days' advance notice to each Indemnified Party and each Indemnifying
Party. The parties shall request that the arbitrator render his decision within
30 days after the conclusion of the hearing. The arbitrator shall hear and
decide the dispute based on the evidence produced, notwithstanding the failure
or refusal to appear by a party who has been duly notified of the date, time,
and place of the hearing. The decision of the arbitrator shall be final and
binding as to any matters submitted under this Agreement, and to the extent that
the arbitrator's decision is that Damages have been incurred for which a party
is to be indemnified under this Agreement, the Damages shall be promptly
satisfied; provided, however, that, if necessary, such decision may be enforced
by either the Indemnifying Party or the Indemnified Party in any court of record
having jurisdiction over the subject matter or over any of the parties hereto.
The prevailing party shall recover all of such party's costs, and reasonable
attorneys' fees incurred in connection with any such arbitration.
(g) Company Indemnified Parties shall not be permitted to enforce any claim
for indemnification against the Majority Shareholders pursuant to this Agreement
until the aggregate amount of all claims for indemnification by such party
exceeds $125,000 (the "Threshold Amount"), in which event such party shall be
entitled to receive indemnification payments only to the extent such party's
damages exceed the Threshold Amount.
(h) For all claims of indemnification other than claims made for fraud, the
aggregate amount of Majority Shareholders' liability for indemnification shall
not exceed the Contingent Shares multiplied by the Market Price. Claims for
indemnification shall be satisfied solely out of the Contingent Shares and the
such shares shall be valued for purposes of indemnification shall be the greater
of (i) the Market Price or (ii) the average closing price of Sitestar Common
Stock on the over the counter market during the five trading days ending on the
third day prior to the date of the Claim Notice (the "Indemnification Market
Price").
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(i) The indemnification provided for in this Paragraph I 1, subject to
the limitations set forth herein, shall be the exclusive remedy for damages
available to the parties for any breach of representation, warranty or
covenant by any party under this Agreement, except for matters of fraud. No
remedy conferred by any of the specific basis for indemnification under
this Agreement is intended to be exclusive of any other basis for indemnity
hereunder, and each and every basis for indemnity hereunder shall be
cumulative.
12. Non-Competition. During a Majority Shareholder's employment by the Company
and for three years from the effective date of termination with cause, or one
year from the effective date of termination without cause (together, the
"Covenant Period"), each Majority Shareholder agrees that he will not:
(i) engage or participate, in the state of Virginia, North Carolina,
Tennessee, West Virginia, Kentucky, Maryland or Washington D.C., directly
or indirectly in any business activity competitive with the business
conducted by the Company;
(ii) become interested (as owner, stockholder, lender, partner,
co-venturer, director, officer, employee, agent, consultant, or otherwise)
in any person, firm, corporation, association or other entity engaged in
any business that is competitive with the Business; provided, however,
notwithstanding the foregoing the Employee may beneficially own not more
than four percent (4%) of the outstanding securities of any class of any
publicly-traded securities of a Company that is engaged in activities
competitive with the Business;
(iii) solicit or call on, either directly or indirectly, for any
business purpose any customer with whom the Company shall have dealt at any
time during the Covenant Period;
(iv) influence or attempt to influence any supplier, customer or
potential customer of the Company to terminate or modify any written, oral
agreement or course of dealing with the Company; or
(v) directly or indirectly solicit for employment, or advise or
recommend to any other person that they solicit for employment, any
employee of the Company or any of its Affiliates.
(a) Remedies. Each Majority Shareholder acknowledges and agrees that, in
the event of a violation by such Majority Shareholder of the terms and
provisions of this Section 12, the remedies at law would not be adequate; and
accordingly, in such event the Company may proceed to protect and enforce its
rights under this Section 12 by an Action in equity for specific performance and
temporary, preliminary and permanent injunctive relief from violation of any of
the provisions of this Section 12 from any court of competent jurisdiction
without the necessity of proving the amount of any actual damages to the Company
resulting from the breach.
(b) Modification. If for any reason there should be a determination by a
court of competent jurisdiction that the provision of this Section 12 are too
broad or unreasonable and
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therefore unenforceable, the provision of this Section 12 shall be deemed
modified, and fully enforceable as so modified, to the extent that the court
would find them to be fair, reasonable and enforceable under the circumstances.
13. Termination.
(a) Termination by Mutual Consent. This Agreement may be terminated at any
time prior to the Closing by the mutual agreement, in writing, of each of the
parties to this Agreement.
(b) Termination by the Company. The Company may (but shall not be obligated
to) terminate this Agreement prior to the Closing by giving written notice to
the Sellers if-
(i) there has been a material violation or breach by any Seller of any
agreement, covenant, representation or warranty contained in this
Agreement, which violation or breach shall not have been cured or corrected
within 15 days after receipt of notice thereof,
(ii) the Closing does not occur on or prior to December 31, 1999, or
such later date as may be agreed to in writing by the parties; or
(iii) any of the conditions in Section 7 have not been satisfied as of
the Closing or if the Company is made aware and determines in its
reasonable discretion that any condition will not be satisfied as of the
Closing (other than through the failure of the Company to comply with its
obligations under this Agreement) and the Company has not expressly waived
such condition in writing on or before the Closing.
(c) Termination by the Sellers. The Sellers may (but shall not be obligated
to) terminate this Agreement prior to the Closing by giving written notice to
the Company if-
(i) there has been a material violation or breach by the Company of
any agreement, covenant, representation or warranty contained in this
Agreement, which violation or breach shall not have been cured or corrected
within 15 days after receipt of notice thereof-,
(ii) the Closing does not occur on or prior to December 31, 1999, or
such later date as may be agreed to in writing by the parties; or
(iii) any of the conditions in Section 8 have not been satisfied as of
the Closing or if the Sellers are made aware and determine in their
reasonable discretion that any condition will not be satisfied as of the
Closing (other than through the failure of Neocom or the Sellers to comply
with its or their obligations under this Agreement) and Neocom has not
expressly waived such condition in writing on or before the Closing; or the
minimum tender referenced in Section 8 has not occurred.
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In the event of such termination, no party shall have any obligation or
liability to any other in respect to this Agreement, except for any breach
of contract occurring prior to such termination.
14. Certain Tax Matters.
The following provisions shall govern the allocation of responsibility as
between the Company and Sellers for certain tax matters following the Closing
Date:
(a) Tax Periods Ending on or Before the Closing Date. The Company shall
prepare or cause to be prepared and file or cause to be filed all Tax Returns
for Neocom for all periods ending on or prior to the Closing Date which are
filed after the Closing Date. The Company shall permit the Seller Representative
to review and comment on each such Tax Return described in the preceding
sentence prior to filing and shall make such revisions to such Tax Returns as
are reasonably requested by the Seller Representative. To the extent permitted
by applicable law, Sellers shall include any income, gain, loss, deduction or
other tax items for such periods on their Tax Returns in a manner consistent
with the Schedule K- Is furnished by Neocom to the Sellers for such periods. The
Sellers shall reimburse the Company for any Taxes of Neocom with respect to such
periods within 15 days after payment by the Company or Neocom of such Taxes to
the extent such Taxes are not reflected in the reserve for Tax liability (rather
than any reserve for deferred Taxes established to reflect timing differences
between book and Tax income) shown on the face of the Current Balance Sheet.
(b) Tax Periods Beginning Before and Ending After the Closing Date. The
Company shall prepare or cause to be prepared and file or cause to be filed any
Tax Returns of Neocom for Tax periods which begin before the Closing Date and
end after the Closing Date. The Sellers shall pay to the Company within 15 days
after the date on which Taxes are paid with respect to such periods an amount
equal to the portion of such Taxes which relates to the portion of such Taxable
period ending on the Closing Date to the extent such Taxes are not reflected in
the reserve for Tax Liability (rather than any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) shown on
the face of the Current Balance Sheet. For purposes of this Section, in the case
of any Taxes that are imposed on a periodic basis and are payable for a Taxable
period that includes (but does not end on) the Closing Date, the portion of such
Tax which relates to the portion of such Taxable period ending on the Closing
Date shall (x) in the case of any Taxes other than Taxes based upon or related
to income or receipts, be deemed to be the amount of such Tax for the entire
Taxable period multiplied by a fraction the numerator of which is the number of
days in the Taxable period ending on the Closing Date and the denominator of
which is the number of days in the entire Taxable period, and (y) in the case of
any Tax based upon or related to income or receipts be deemed equal to the
amount which would be payable if the relevant Taxable period ended on the
Closing Date. Any credits relating to a Taxable period that begins before and
ends after the Closing Date shall be taken into account as though the relevant
Taxable period ended on the Closing Date. All determinations necessary to give
effect to the foregoing allocations shall be made in a manner consistent with
prior practice of Neocom.
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(c) Refunds and Tax Benefits. Any Tax refunds that are received by the
Company or Neocom, and any amounts credited against Tax to which the Company or
Neocom become entitled, that relate to Tax periods or portions thereof ending on
or before the Closing Date shall be for the account of the Sellers, and the
Company shall pay over to the Sellers any such refund or the amount of any such
credit within fifteen (I 5) days after receipt or entitlement thereto. In
addition, to the extent that a claim for refund or a proceeding results in a
payment or credit against Tax by a taxing authority to the Company or Neocom of
any amount accrued on the Current Balance Sheet, the Company shall pay such
amount to the Sellers within fifteen (I 5) days after receipt or entitlement
thereto.
(d) Cooperation on Tax Matters.
(i) The Company and the Sellers shall cooperate fully, as and to the
extent reasonably requested by the other party, in connection with the
filing of Tax Returns pursuant to this Section and any audit, litigation or
other proceeding with respect to Taxes. Such cooperation shall include the
retention and (upon the other party's request) the provision of records and
information which are reasonably relevant to any such audit, litigation or
other proceeding and making employees available on a mutually convenient
basis to provide additional information and explanation of any material
provided hereunder. The Company and the Sellers agree (A) to retain all
books and records with respect to Tax matters pertinent to Neocom relating
to any taxable period beginning before the Closing Date until the
expiration of the statute of limitations (and, to the extent notified by
Company or the Sellers, any extensions thereof) of the respective taxable
periods, and to abide by all record retention agreements entered into with
any taxing authority, and (B) to give the other party reasonable written
notice prior to transferring, destroying or discarding any such books and
records and, if the other party so requests, Neocom or the Sellers, as the
case may be, shall allow the other party to take possession of such books
and records.
(ii) The Company and the Sellers further agree, upon request, to use
their Best Efforts to obtain any certificate or other document from any
governmental authority or any other Person as may be necessary to mitigate,
reduce or eliminate any Tax that could be imposed (including, but not
limited to, with respect to the transactions contemplated hereby).
(iii) The Company and Sellers further agree, upon request, to provide
the other party with all information that either party may be required to
report pursuant to Section 6043 of the Code and all Treasury Department
Regulations promulgated thereunder.
(e) Tax Sharing Agreements. All tax sharing agreements or similar
agreements with respect to or involving Neocom shall be terminated as of the
Closing Date and, after the Closing Date, Neocom shall not be bound thereby or
have any liability thereunder.
(f) Certain Taxes. All transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement (including any tax imposed
by the state of Virginia) shall be paid by the Sellers when
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due, and the Sellers will, at their own expense, file all necessary Tax Returns
and other documentation with respect to all such transfer, documentary, sales,
use, stamp, registration and other Taxes and fees, and, if required by
applicable law, Company will, and will cause its affiliates to, join in the
execution of any such Tax Returns and other documentation.
(g) S Corporation Status. Prior to the Effective Time, Neocom and the
Sellers will not revoke Neocom's election to be taxed as an S corporation within
the meaning of Code Sections 1361 and 1362. Neocom and the Sellers will not take
or allow any action other than the sale of Neocom Common Stock pursuant to this
Agreement that would result in the termination of Neocom's status as a validly
electing S corporation within the meaning of Code Sections 1361 and 1362.
15. Miscellaneous
(a) Notices. All notices, requests, demands and other communications
(collectively, "Notices") given pursuant to this Agreement shall be in writing,
and shall be delivered by personal service, courier, facsimile transmission
(which must be confirmed) or by United States first class, registered or
certified mail, postage prepaid, to the following addresses:
(i) if to the Company, to: Sitestar Corporation.
ATTN: Clinton 1. Sallee
16133 Ventura Boulevard Suite 635
Encino, California 91436
Tel No. 818-981-4519 Fax No. 818-981-2658
(ii) if to the Sellers, to:
Joseph Albanese
29 West Main Street
Martinsville, VA 24112
Tel No. 540-666-9533 Fax No. 540-666-9534
with a copy to: A. 1. Saunders, Esq., 10 S. Jefferson Street, Suite
1400, Roanoke, Virginia 2401 1.
Any Notice, other than a Notice sent by registered or certified mail, shall be
effective when received; a Notice sent by registered or certified mail, postage
prepaid return receipt requested, shall be effective on the earlier of when
received or the third day following deposit in the United States mails. Any
party may from time to time change its address for further Notices hereunder by
giving notice to the other parties in the manner prescribed in this Section.
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(b) Entire Ageement. This Agreement contains the sole and entire agreement
and understanding of the parties with respect to the entire subject matter of
this Agreement, and any and all prior discussions, negotiations, commitments and
understandings, whether oral or otherwise, related to the subject matter of this
Agreement are hereby merged herein.
(c) Assignment. No party may assign this Agreement, and any attempted or
purported assignment or any delegation of any partys duties or obligations
arising under this Agreement to any third party or entity shall be deemed to be
null and void, and shall constitute a material breach by such party of its
duties and obligations under this Agreement. This Agreement shall inure to the
benefit of and be binding upon any successors of each party by way of merger or
consolidation.
(d) Waiver and Amendment. No provision of this Agreement may be waived
unless in writing signed by all the parties to this Agreement, and waiver of any
one provision of this Agreement shall not be deemed to be a waiver of any other
provision. This Agreement may be amended only by a written agreement executed by
all of the parties to this Agreement.
(e) Governing Law. This Agreement has been made and entered into in the
Commonwealth of Virginia and shall be construed in accordance with the laws of
the Commonwealth of Virginia without giving effect to the principles of
conflicts of law thereof.
(f) Severability . Whenever possible each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be or become prohibited or invalid
under applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
(g) Captions. The various captions of this Agreement are for reference only
and shall not be considered or referred to in resolving questions of
interpretation of this Agreement.
(h) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
(i) Costs and Attorneys' Fees. If any action, suit, arbitration or other
proceeding is instituted to remedy, prevent or obtain relief from a default in
the performance by any party to this Agreement of its obligations under this
Agreement, the prevailing party shall recover all of such party's attorneys'
fees incurred in each and every such action, suit, arbitration or other
proceeding, including any and all appeals or petitions therefrom. As used in
this Section, attorneys' fees shall be deemed to mean the full and actual costs
of any legal services actually performed in connection with the matters involved
calculated on the basis of the usual fee charged by the attorney performing such
services and shall not be limited to "reasonable attomeys' fees" as defined in
any statute or rule of court.
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(j) Rights Cumulative. No right granted to the parties under this Agreement
on default or breach is intended to be in full or complete satisfaction of any
damages arising out of such default or breach, and each and every right under
this Agreement, or under any other document or instrument delivered hereunder,
or allowed by law or equity, shall be cumulative and may be exercised from time
to time.
(k) Force Maieure. If any party to this Agreement is delayed in the
performance of any of its obligations under this Agreement or is prevented from
performing any such obligations due to causes or events beyond its control,
including, without limitation, acts of God, fire, flood, earthquake, strike or
other labor problem, injunction or other legal restraint, present or future law,
governmental order, rule or regulation, then such delay or nonperformance shall
be excused and the time for performance thereof shall be extended to include the
period of such delay or nonperformance.
(l) Seller Representative. Any consent, approval, demand or waiver required
of or made by the Sellers pursuant to this Agreement shall be made by the
Majority Shareholders. The Company shall be entitled to rely, without
investigation or inquiry, upon any consent, approval or waiver of the Sellers
set forth in any written certificate, instrument or other document signed by the
Seller Representative as to any such approval, consent, waiver or notice of the
Sellers, and any such written agreement, certificate or other document shall be
binding upon all Sellers.
IN WITNESS WHEREOF, this Agreement has been made and entered into as of the date
and year first above written.
SITESTAR CORPORATION a Nevada corporation
/s/ Clinton Sallee
By: _______________________________
Its: President
/s/ Tom Albanese
----------------------------------
Tom Albanese
/s/ Joe Albanese
----------------------------------
Joe Albanese
/s/ Fred Herring
----------------------------------
Fred Herring
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EXHIBIT 2.7
ASSUMPTION AGREEMENT
This Agreement is made and entered into as of the 15 th day of
December, 1999 by and among SITESTAR CORPORATION, a Nevada corporation
("Sitestar"), NEOCOM MICROSPECIALISTS, INC., a Virginia corporation
("Neocom"), TOM ALBANESE ("Tom"), JOE ALBANESE ("Joe") and FRED HERRING
("Fred") (Tom, Joe and Fred are referred to herein as the" Shareholders"),
with reference to the following facts:
A. Concurrently herewith the Shareholders and other shareholders of
Neocom have entered into that certain Plan and Agreement of Share Exchange
(" Reorganization Agreement") with Sitestar pursuant to which they have
exchanged all of their shares (the " Neocom Shares") of the Common Stock of
Neocom for shares of the Common Stock of Sitestar.
B. Neocom has certain indebtedness, as described in Exhibit" A" to
this Agreement (the "Assumed Debt), some of which has been guaranteed by one
or more of the Shareholders.
C. Shareholders are willing to assume and pay the Assumed Debt
in order to facilitate the Reorganization agreement between Sitestar and
Neocom.
NOW THEREFOR with reference to the foregoing facts, the parties agree
as follows:
1. Assumption of Assumed Debt.
1.1 The Shareholders hereby assume and agree to timely pay the
Assumed Debt and to fully and timely perform all obligations of Neocom under
the Assumed Debt. The Shareholders represent and warrant that the schedule
of the Assumed Debt attached as Exhibit A is accurate and complete, and that
Neocom has no other indebtedness other than trade payables in the ordinary
course of business and Lease obligations.
1.2 Fred hereby contributes to the capital of Neocom one-third of
any obligation or liability under that portion of the Assumed Debt which is
payable to him and is evidenced by that certain promissory note (the"
Original Herring Note") dated as of December 15, 1999, bearing interest at
the rate of 10% per annum due and payable on demand and simultaneously with
the closing of the Plan and Agreement of Share Exchange, Tom and Joe assume
the other two-thirds of the Original Herring Note. Each of Tom and Joe shall
execute and deliver to Fred a new note (the "Herring Notes") in the amount
of one-third of the outstanding amount on the Note as of the Effective Date.
1.3 The Shareholders shall jointly and severally, indemnify, save
and hold harmless Sitestar, Neocom and each of their respective officers,
directors, employees, agents and
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affiliates, and each of their successors and assigns, other than the
Shareholders (individually, a" Neocom Indemnified Party" and collectively,
the" Neocom Indemnified Parties") from and against any and all costs,
losses, claims, liabilities, fines, penalties, and expenses (including
interest which may be imposed in connection therewith and court costs and
reasonable fees and disbursements of counsel) (" Damages") incurred in
connection with, arising out of, resulting from or incident to any breach
of, or any inaccuracy in any of, the representations or warranties, or any
default in any agreements, made by the Shareholders in this Agreement except
as provided below.
2. Payment of Assumed Debt.
2.1 Sitestar hereby agrees to file a registration statement with
the SEC and to grant the Shareholders registration rights as provided in the
Reorganization Agreement within 120 days following the effective date of the
Sitestar Form I OSB Registration Statement for a public offering of Sitestar
shares and to register a sufficient number of Sitestar shares such that the
proceeds to the Shareholders will be sufficient to satisfy the Assumed Debt,
and shall use its best efforts to cause the registration statement to be
declared effective by the SEC.
2.2 Neocom and Sitestar agree that until the Advance Termination
Date, and provided that no Shareholder is in breach of any obligation under
this Agreement they will advance all scheduled payments of principal and
interest on the Assumed Debt directly to the creditor on behalf of the
Shareholders. Each such advance (and "Advance) shall: (a) be deemed to be a
loan from Neocom or Sitestar which the Shareholders shall be jointly and
severally obligated to repay to Neocom or Sitestar (subject to the
provisions below); (b) shall bear interest from the date of the advance at
the rate of interest payable on the underlying Assumed Debt; (c) at the
request of Neocom or Sitestar, shall be evidenced by a Promissory Note
executed by the Shareholders; and (d) shall be due and payable on July 31,
2001, subject to earlier payment in accordance with this Agreement.
2.3 The" Advanced Termination Date" shall be the earlier to occur
of (i) the date which is six months from the date that Sitestar has
registered under the Securities Act of 1933 not less than 900, 000 shares of
Sitestar Common Stock (the" Sitestar Shares") for resale by the
Shareholders; provided, however, that if following the effective date of the
registration statement covering the Sitestar Shares, Sitestar requests that
the Shareholders not sell any Sitestar Shares for a certain period or until
further notice from Sitestar (each a " No-Sale Period") (and the
Shareholders hereby agree to comply with such request), them such six month
period shall be extended by the number of days in the No-Sale. The
Shareholders shall not be charged interest on Advances during the No-Sale
Period.
3. Pledge of Shares.
Shareholders agree that they shall pledge the Sitestar Shares to
Neocom or Sitestar to secure their obligations under this Agreement (the
value of such shares based upon
2
<PAGE>
a price of $1.02 not to exceed the Assumed Debt), and in connection
therewith shall (a) execute and deliver in favor of Neocom or Sitestar a
pledge agreement in form and substance reasonably acceptable to Neocom and
Sitestar; (b) deliver to Neocom or Sitestar certificates evidencing the
pledged shares accompanied by stock powers duly executed in blank. Sitestar
is hereby authorized to deliver certificates evidencing the pledged shares
directly to Neocom or hold them for its own account as the case may be. 4.
4. Proceeds from Sale of Sitestar Shares.
4.1 These Shareholders agree that all proceeds from the sale by
them of any shares of the Common Stock of Sitestar (whether pledged or not
or whether pursuant to the registration statement or otherwise), shall be
applied and paid as follows:
(a) First to Neocom or Sitestar, as the case maybe, until all
Advances and interest thereon shall have been repaid; and (b) second, to pay
the Assumed Debt, in such order as Neocom or Sitestar, as the case maybe,
shall reasonably request. The Shareholders agree that Neocom and Sitestar
may require any purchaser of the shares to make payment for the shares
directly to Neocom or Sitestar as a condition to registering the transfer of
the shares, such payment not to exceed any balances owed under this
paragraph.
5. The Legend and Certificates.
5.1 The Shareholders agree that until the Assumed Debt has been
paid and discharged in full, each certificates evidencing shares of Sitestar
Common Stock owned beneficially by such Shareholders shall contain a legend
evidencing the restrictions with regard to such shares under this Agreement
and the Shareholders hereby authorize Sitestar to place such legend on each
such certificate.
6. Miscellaneous.
6.1 Notices. All notices, requests, demands and other
communications (collectively, "Notices") given pursuant to this Agreement
shall be in writing and shall be delivered by personal service, courier,
facsimile transmission (which must be confirmed) or by United States first
class, registered or certified mail, postage prepaid, to the following
addresses:
(i) if to Neocom, to
Sitestar Corporation.
1613 3 Ventura Boulevard
Suite 635
Encino, California 91436
Facsimile No. (818) 981-2658
Attn Frederic Manlunas
3
<PAGE>
(ii) if to the Shareholders, to.
Joseph M. Albanese
29 West Main Street
Martinsville, V A 24112
Facsimile No. 540-666-9533
Any Notice, other than a Notice sent by registered or certified mail, shall
be effective when received; a Notice sent by registered or certified mail,
postage prepaid return receipt requested, shall be effective on the earlier
of when received or the third day following deposit in the United States
mails. Any party may from time to time change its address for further
Notices hereunder by giving notice to the other parties in the manner
prescribed in this Section.
6.2 Entire Agreement. This Agreement and the Reorganization
Agreement contain the sole and entire agreement and understanding of the
parties with respect to the entire subject matter of this Agreement and any
and all prior discussions, negotiations, commitments and understandings,
whether oral or otherwise, related to the subject matter of this Agreement
are hereby merged herein.
6.3 Assignment. No party may assign this Agreement and any
attempted or purported assignment or any delegation of any party's duties or
obligations arising under this Agreement to any third party or entity shall
be deemed to be null and void, and shall constitute a material breach by
such party of its duties and obligations under this Agreement. This
Agreement shall inure to the benefit of and be binding upon any successors
of each party by way of merger or consolidation.
6.4 Waiver and Amendment. No provision of this Agreement may be
waived unless in writing signed by all the parties to this Agreement and
waiver of any one provision of this Agreement shall not be deemed to be a
waiver of any other provision. This Agreement may be amended only by a
written agreement executed by all of the parties to this Agreement.
6.5 Governing Law. This Agreement has been made and entered into
in the Commonwealth of Virginia and shall be construed in accordance with
the laws of the' Commonwealth of V Virginia without giving effect to the
principles of conflicts of law thereof.
6.6 Severability. Whenever possible each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be or
become prohibited or invalid under applicable law, such provisions shall be
ineffective to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
4
<PAGE>
6.7 Captions The various captions of this Agreement are for
reference only and shall not be considered or referred to in resolving
questions of interpretation of this Agreement.
6.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
6.9 Costs and Attorneys' Fees If any action, suit arbitration or
other proceeding is instituted to remedy, prevent or obtain relief from a
default in the performance by any party to this Agreement of its obligations
under this Agreement the prevailing party shall recover all of such party's
attorneys' fees incurred in each and every such action, suit arbitration or
other proceeding including any and all appeals or petitions therefrom. As
used in this Section, attorneys' fees shall be deemed to mean " reasonable
attorneys fees".
6.10 Rights Cumulative. No right granted to the parties under this
Agreement on default or breach is intended to be in full or complete
satisfaction of any damages arising out of such default or breach, and each
and every right under this Agreement or under any other document or
instrument delivered hereunder, or allowed by law or equity, shall be
cumulative and may be exercised from time to time.
6.11 Judicial Interpretation. Should any provision of this
Agreement require judicial interpretation, it is agreed that a court
interpreting or construing the same shall not apply a presumption that the
terms hereof shall be more strictly construed against any Person by reason
of the rule of construction that a document is to be construed more strictly
against the Person who itself or through its agent prepared the same, it
being agreed that all parties have participated in the preparation of this
Agreement.
6.12 Force Majeure. If any party to this Agreement is delayed in
the performance of any of its obligations under this Agreement or is
prevented from performing any such obligations due to causes or events
beyond its control, including without limitation, acts of God, fire, flood,
earthquake, strike or other labor problem injunction or other legal
restraint present or future law, governmental order, rule or regulation,
then such delay or nonperformance shall be excused and the time for
performance thereof shall be extended to include the period of such delay or
nonperformance
7. Shareholder Put.
7.1 If there is any Assumed Debt and/or Advances outstanding on
June 30, 2001, at any time prior to July 31, 2001 the Shareholders may by
written demand (the "Put Notice) require Neocom to cancel the Advances up to
fifty percent of the Total Amount
5
<PAGE>
and if the Advances are less than fifty percent of the Total Amount, to
assume such portion of the outstanding Assumed Debt as maybe necessary such
that the amount of the Advances canceled and Assumed Debt assumed shall
equal fifty percent of the Total Amount provided that the Shareholders
deliver to Neocom a number of shares of Sitestar Common Stock equal to fifty
percent of the Total Amount divided by $1.02 (the" Base Price").
The" Total Amount" shall mean the amount of Assumed Debt and Advances
outstanding on the date of the Put Notice.
Notwithstanding the foregoing, Neocom shall not be obligated to cancel
such portion of the Advances or assume such portion of the Assumed Debt as
shall equal an amount equal to the number of Saleable Shares multiplied by
the Base Price. "Saleable Shares shall be: (a) ff Sitestar or Neocom
advises the Shareholders of a potential qualified buyer of shares of
Sitestar in a private transaction for cash in excess of the Base Price and
such potential qualified buyer can be demonstrated to have been willing to
buy such stock "Saleable Shares" shares shall mean any shares which the
Shareholders refuse to sell to such buyer in such private transactions if
such sale would have been permissible under the applicable securities laws;
and (b) if Sitestar, following registration of the Sitestar Shares under
the Securities Act as contemplated by Section 2.2, requests that the
Shareholders sell up to a specified number of Sitestar shares pursuant to
the registration statement in the open market and at the time the market
price is at least one hundred ten percent of the Base Price and the
Shareholders refuse to consummate such sale, and such sale would have been
permissible under the applicable securities laws, "Saleable Shares" shall
mean such part of such specified shares as the Shareholders shall not sell
in the open market as aforesaid up to a number of shares per week equal to
one-half of the trading volume of the shares during the prior week.
IN WITNESS WHEREOF, this Agreement has been made and entered into
as of the date and year first above written.
SITESTAR CORPORATION,
a Nevada corporation
/s/ Clinton Sallee
By - ----------------------------
Its: President
NEOCOM MICROSPECIALISTS, INC.
a Virginia corporation
6
<PAGE>
By /s/ Thomas Albanese
Its: President
------------------------
Tom Albanese
------------------------
Joe Albanesee
------------------------
Fred Herring
7
<PAGE>
ASSUMPTION AGREEMENT
EXHIBIT A
ASSUMED DEBT
Amount as of Description of
October 31, Underlying
Creditor & Description 1999 Agreements
- ---------------------- ----------- -------------
BB& T Bank $384,227 Loan Agreement dated
Prime plus 1.5% , payable in monthly -------------------
interest and principal payments of
$6,400 and balance due September 2003 Note dated --------
, secured by a deed of trust against
personal residences of
Joseph Albanese and Frederick Herring.
Fred Herring $312,573 Note dated
10.0% , payable in monthly interest only. -----------
Due on demand.
First Home Loan of Virginia $135,701
13.0% , payable in monthly interest and
principal payments of $1,784 and balance
due December 2002, guaranteed by Joseph
Albanese, Frederick Herring and Thomas
Albanese.
- ----------------- $ 65,948 Note dated
8.5% , payable in monthly interest only ------------
payments. Due on demand.
C. Rogers/Netsus LLC $ 19,863 Note dated
5.1 % , asset purchase note payable in ------------
monthly installments of $ 2,05 0 for 10
months and $1,700 for 12 months
D. Note Payable to Dr. Robert Albanese $ 50,000 Note dated
under the amount as of October 31 plus accrued interest ------------
E. Note Payable to Mr. Frank Lacy. $ 50,000 Note dated
Due on demand plus accrued interest ----------
8
EXHIBIT 21
The following are the subsidiaries of Sitestar Corporation as of December 31,
1999:
Sitestar.net
Soccersite.com
Greattools.com
Holland-American.com
Neocom Microspecialists, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> Dec-31-1999 DEC-31-1998
<PERIOD-START> Jan-01-1999 JAN-01-1998
<PERIOD-END> Sep-30-1999 DEC-31-1998
<CASH> 59,306 0
<SECURITIES> 0 0
<RECEIVABLES> 0 212,584
<ALLOWANCES> 0 16,378
<INVENTORY> 0 542,081
<CURRENT-ASSETS> 99,416 830,325
<PP&E> 139,025 20,321
<DEPRECIATION> 24,198 1,678
<TOTAL-ASSETS> 8,653,693 973,968
<CURRENT-LIABILITIES> 574,777 1,024,731
<BONDS> 0 0
0 0
0 0
<COMMON> 18,600 18,600
<OTHER-SE> 7,501,360 (69,363)
<TOTAL-LIABILITY-AND-EQUITY> 8,653,693 973,968
<SALES> 18,684 0
<TOTAL-REVENUES> 18,684 0
<CGS> 22,740 0
<TOTAL-COSTS> 2,478,678 370,650
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11,772 0
<INCOME-PRETAX> (2,471,766) (370,650)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,471,766) (370,650)
<DISCONTINUED> (40,786) (113,844)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,512,552) (484,494)
<EPS-BASIC> (0.14) (0.03)
<EPS-DILUTED> (0.14) (0.03)
</TABLE>
ENCINO FINANCIAL CENTER
OFFICE LEASE
FOR
SITESTAR CORPORATION
SUITE 635
DATED: JUNE 15,1998
<PAGE>
TABLE OF CONTENTS
Page
1. TERMS. I
A. Base Rent I
B. Brokers I
C. Building I
D. Building Area 1
E. Building Manager I
F. Building Systems I
G. Commencement Date I
H. Common Area I
1. CC&Rs 1
J. C-44 1
K. Ground Leases and Mortgages I
L. Guarantee I
M Landlord's Mailing Address I
N. Landlord's Representatives I
0. Lease Year I
P. Monthly Installments of Base Rent 1
Q. Normal Business Hours I
R. Parking Area I
S. Parking Rate 1
T. Parking Spaces I
U. Pennitted Use I
V. Possession 2
W. Rules and Regulations 2
X. Premises 2
Y. Security Deposit 2
Z. Tenant's Mailing Address 2
AA. Tenant's Proportionate Share 2
BB. Tenant's Representatives 2
cc. Tenn 2
DD. Termination Date 2
EE. Total Expenses Allowance 2
FF. Total Tax Allowance 2
GG. Watt Load 2
11. EXHIBITS 2
Ill. AMOUNT DUE ON EXECUTION OF THIS LEASE 2
IV. DEMISE OF PREMISES 3
V. GENERAL TERMS, COVENANTS AND CONDITIONS 4
<PAGE>
1 . POSSESSION 4
1.1 Early Possession 4
1.2 Confirmation of Possession and Lease
Commencement and Termination Dates 4
2. CONDITION OF THE PREMISES 4
3. RENT 4
3.1 Base Rent 4
3.2 CPI Adjustments 4
3.3 Additional Rent 4
3.4 Late Payments 4
4. TAXES AND OPERATING EXPENSES 4
4.1 Operating Expenses 4
4.2 Taxes 5
4.3 Portion Attributable to the Premises 5
4.4 Payments of Over-Allowance Expenses
and Over-Allowance Taxes 5
4.5 Effect on Rent 6
5. SERVICES
6
TABLE OF CONTENTS
(Continued) Page
(c) Compliance with Laws 9
(d) Environmental Problems 9
(e) Indemnity 9
(f) Landlord's Right to Information 9
7.5 Americans with Disability Act 9
8. RULES AND REGULATIONS 10
9. PARKING 10
9.1 Use of the Parking Spaces 10
9.2 Parking Rate 10
9.3 Identification Procedures 10
9.4 Additional Parking Space 10
9.5 Waiver of Landlord Responsibility 10
9.6 Parking Rules 10
9.7 Landlord's Termination Rights 11
9.8 Towing Rights 11
9.9 Security Programs 11
9.10 Independent Operator/Lessee 11
<PAGE>
10. COMMON AREA USE 11
10.1 Right to Use Common Area 11
10.2 Control of Common Area 11
10.3 Prescriptive Easements 11
10.4 Changes in Common Area 11
11. REPAIRS AND MAINTENANCE 11
11.1 Tenant's Obligations 11
11.2 Landlord's Obligations 12
11.3 Waiver 12
11.4 Landlords Access 12
12. ALTERATIONS 12
12.1 Consent Requirement 12
12.2 Conditions 12
12.3 Mechanic's Liens 12
13. TENANT'S PROPERTY AND LEASEHOLD IMPROVEMENTS 12
13.1 Tenant's Property 12
13.2 Leasehold Improvements 12
14. CERTAIN RIGHTS RESERVED TO LANDLORD 12
15. ASSIGNMENT AND SUBLETTING 13
15.1 Certain Transfers 13
15.2 Transfer Notice 13
15.3 Landlord's Rights 13
15.4 Reasonableness Standards 13
15.5 Offer to Reconvey 14
15.6 Additional Rent 14
15.7 Continuing Liability of Tenant 14
15.8 Security 14
16. HOLDING OVER14
17. SURRENDER OF THE PREMISES 14
18. DESTRUCTION OR DAMAGE 14
18.1 Repair or Replacement 14
18.2 Landlord's Option to Terminate 14
18.3 Termination by Tenant 15
18.4 Abatement of Rent 15
19. EMINENT DOMAIN 15
19.1 When Voluntary Sale is a Taking 15
19.2 Condemnation Award 15
20. FORCE MAJEURE 15
20.1 Payment of Rent 15
20.2 Self-Help 15
20.3 Notice by Tenant 15
21. INDEMNITY 15
21.1 By Tenant 15
21.2 Tenant's Assumption of Risk 15
<PAGE>
1
TABLE OF CONTENTS
(Continued) Page
25. EVENTS OF DEFAULT; REMEDIES OF LANDLORD 17
25.1 Events of Default 17
25.2 Notice of Event of Default is
25.3 Remedies of Landlord 18
25.4 Notice of Termination; Damages 18
25.5 Reentry Not Tennination 18
25.6 No Waiver by Landlord 18
25.7 Injunctive Relief 18
25.8 Waivers 18
26. CURING TENANT'S DEFAULTS 19
26.1 Landlord's Right to Cure 19
26.2 Additional Rent 19
27. DEFAULTS BY LANDLORD 19
28. BROKERAGE FEES 19
29. NOTICES 19
30. TRANSFER OF LANDLORD'S INTEREST 19
31. RELOCATION OF PREMISES 19
32. QUIET ENJOYMENT 19
33. LIMITATION OF LANDLORD'S LIABILITY 19
34. ARBITRATION 19
35. SIGN CONTROL20
36. EXPANSION 20
37. SHORING 17
38. MISCELLANEOUS 20
38.1 Authority; Due Organization 20
38.2 Other Tenancies in the Building 20
38.3 Landlord-Tenant Relationship 20
38.4 Joint and Several Liability 20
38.5 No Accord and Satisfaction 20
38.6 No Non-Mandatory Counterclaim 20
38.7 Waiver of Jury Trial 20
38.8 No Merger 20
38.9 Refusal to Consent 20
38.10 Costs and Attorneys' Fees 21
38.11 Validity of Clauses 21
38.12 Successors and Assigns 21
38.13 Complete Agreement 21
38.14 Captions 21
38.15 Memorandum of Lease 21
38.16 Exhibits, Riders, Attachments and
Addenda 21
38.17 Counterparts 21
38.18 Language Interpretation 21
38.19 Governing Law 21
38.20 Time of the Essence 21
38.21 Financial Statements 21
38.22 Computation of Time 21
<PAGE>
OFFICE LEASE
Property Address: 16133 Ventura Boulevard,
Encino California 91436
Tenant Name: Glenhills Comoration
Suite Number: 635
THIS OFFICE LEASE (this "Lease") dated as of the 15th day of June, 1998, is
entered into by and between LOWE ENTERPRISES COMMERCIAL GROUP, a California
corporation, as agent for EFC Investors, Ltd. , a California Limited
Partnership, dba Encino Financial Center., ("Landlord") and Glenhills
Corporation ("Tenant").
1. TERMS. As used in this Lease, the following terms shall have the
following meanings:
A. Base Rent: [$24,064.80 per annum, as from time to time increased as
ovided in 9 of the 6eviend +emrr, v enairts ----------- and [or] [ RIDER 1
hereto.
B. Brokers: Landlord's: Lowe Enterprises Commercial Group Tenant's:
None.
C. Building,2: That certain building located at 16133 Ventura
Boulevard, Encino, California, as more particularly described in EXHIBIT A
hereto.
D. Building Area: The Building, the land underlying the Building and
the Common Areas.
E. Buildin2 Manage : Lowe Enterprises Cormnercial Group, or such other person or
entity as Landlord may from time to time designate.
F. Building Systems: The mechanical, electrical, telecommunication, plumbing,
heating, ventilating, air-conditioning and other equipment, facilities and
systems located within or serving the Building Area.
G. Commencement Date: The date set forth in the "Statement of Lease
Commencement, Possession and Termination" in the form of EXHIBIT B hereto
delivered by Landlord to Tenant in accordance herewith or if no date is
specified in such a Statement, then July 1, 1998.
H. Common Area: All areas, spaces, equipment, special services, improvements and
facilities in or near the Building provided by Landlord for the common or joint
use and benefit of the occupants of the Building, their officers, agents,
employees, servants, customers and invitees, including, but not limited to, all
parking areas, access roads, streets, driveways, entrances, exits, sidewalks,
malls, courts, loading docks, package pick-up stations, ramps, corridors, halls,
stairs, retaining walls and landscaped areas.
<PAGE>
I. CC&Rs: Any recorded covenants, conditions, restrictions and reciprocal
easement agreements with respect to any portion of the Building Area, including,
without limitation, the documents listed on EXHIBIT G hereto.
J. Gpl~ The Genstiffier- Pr-iee 1fidelE for- All Urban Genstifner-s (All
Reffis), Les Angeles Long BeaehAnaheim, Galifei%ia aver-age (1992 84 equals
100), poblished by the Bur-eau of Labor- Statisties of the United States
Department of Labor- (the T1W GPI for- a speeifie Rieffth shall be deemed to
fneaft the GPI p4lished for- sueh fnen4h or-, if not published for- that fneff*,
the GPI publish for- a menth most r-eeefftly prior- to stieh flienth. in the
event that the Bur-eft should eease pubheation of said GPI, GPI shall r-efer- to
the eempafable ee . . . de* seleeted by Landlord in its Y-easenable judgment.
K. Ground Leases and Mortgages: All ground leases, overriding leases and
underlying leases ("Ground Leases"), and all mortgages and deeds of trust
("Mortgages"), affecting the Building Area or any portion thereof, now or
hereafter existing (w]Yether or not covering other lands, buildings or leases),
and all renewals, modifications, replacements and extensions thereof.
L. The lay _Rdldy Qr-dofwig OfTwiaffs's this Lease, a form efwltieh
itt:thtehed
M. Landlord's Mailin2 Address: 16133 Ventura Boulevard, #535, Encino, California
91436, with a copy to: Lowe Enterprises Commercial Group, 11777 San Vicente
Boulevard, Suite 900, Los Angeles, California, 90049.
N. Landlord's Representatives: Landlord's directors, officers, shareholders,
partners, members, principals, employees, agents, servants, contractors,
subcontractors, visitors, licensees, invitees, successors and assigns.
0. Lease Year: Each twelve month period during the Term ending on December
31, provided that the first Lease Year shall commence upon the Commencement Date
and shall end on the next succeeding December 3 1, and the last Lease Year shall
end upon the expiration of the Term.
P. Monthly Installments of Base Rent: [$2,005.4 per month as from time to time
increased as provided in *, ticte 3 of die tten=l 'Ternns, CniremaptE 2ad
1-~LV.J L ii f8ee RIDER I hereto. (DEr-ET? SEC I TON 1.2)
Q. Normal Business Hours: The hours from 8:00 a.m. to 5:30 p.m. Monday through
Friday, except recognized legal holidays.
<PAGE>
V. Possession: Possession of the Premises shall be deemed to have occurred on
the earlier of the date on which Tenant actually is given possession of the
Premises by Landlord or the date specified in the Statement of Lease
Commencement, Possession and Termination.
W. Rules and Reaulations: The current Rules and Regulations for the Building, a
copy of which are attached hereto as EXHIBIT F.
X. Premises: That portion of the Building outlined in EXHIBIT C hereto,
consisting of approximately 970 usable square feet and 1,084 rentable square
feet (measured in accordance with the BOMA Standard ANSI 265.1-1980) and
including any and all improvements made by Landlord pursuant to the Work Letter
attached hereto as EXHIBIT E. Landlord reserves to itself the use of the
exterior walls, the roof and the right to install, maintain, use, repair and
replace pipes, ducts, conduits, vents, cables and wire leading in, through, over
or under the Premises.
Y. Securi1y Dgposit: Two Thousand One Hundred Thirteen Dollars and 80/100
($2,113.80).
- --------------------------------------------------------------------------------
Z. Tenant's Mailing Address: Before Occupancy: 1800 Century Park East, Suite
600, Los Angeles, California 90067.
After Occupancy: 16133 Ventura Boulevard, Suite 635, Encino, California 91436.
AA. Tenant' s Proportionate Share: The proportion the rentable area of the
Premises bears to the total rentable area of the entire Building (excluding the
Common Areas). Initially, said proportion shall be 12oint zero zero five percent
(.0qL!j)
(1,084 rentable sg. ft./225,498 rentable so. ft.) (subject to change in the
event that the rentable area of the Building or the Premises changes).
BB. Tenant Representatives: Tenant's agents, servants, employees, contractors,
subcontractors, visitors, licensees or invitees.
Term: That period commencing on the Commencement Date and ending on the
Termination Date.
DD. Termination Date: The date set forth in the Statement of Lease Commencement,
Possession and Termination, or if no date is specified in such a Statement, then
June 30, 2001; provided, however, that if this Lease is sooner terminated
pursuant to the provisions hereof, the Termination Date shall be the effective
date of such early termination.
<PAGE>
EE. Total Expenses Allowance: The Total Expenses Allowance shall be equal to the
actual Operating Expenses incurred with respect to the Building Area during the
1998 calendar year, adjusted for at least a ninety-five percent (95%) occupancy.
FF. Total Tax Allowance: Tenant's Proportionate Share of Real Estate Taxes for
the tax year July 1, 1997 through June 30, 1998. GG. Watt Load: 3 watts per
useable square foot for power and 3 watts per useable square foot for lighting.
ii. EXHIBITS. 'Me following exhibits, rider(s), attachment and addendum are
incorporated in this Lease as part hereof.
Exhibit A - Description of the Building. Exhibit B - Statement of Lease
Commencement. Exhibit C - Outline of the Premises. Exhibit D - Policies for the
Management of Telecommunications Risers and Telephone Closets. Exhibit E - Work
Letter. Exhibit F - Current Rules and Regulations. Exhibit G -CC&Ts.
[Rider 1 - Base Rent Schedule.]
Ili. AMOUNT DUE ON EXECUTION OF THIS LEASE. Upon execution of this Lease, Tenant
shall pay the following amount to Landlord:
Monthly Rent for the Month(s) of July: $2,005.40
Prorated Rent Payment on Execution of
Lease for Period from * to $ 0.00
Security Deposit: $2,113.80
Monthly Parking Fee: $ 0.00
Other (Description): $ 0.00
[GRAPHIC OMITTED][GRAPHIC OMITTED]
IV. DEMISE OF PREMISES. In consideration of the rent and the covenants and
agreements made herein, including the General Terms, Covenants and Conditions
attached hereto and made a part hereof, and in accordance with the terms of such
covenants and agreements, Landlord leases to Tenant and Tenant leases from
Landlord the Premises.
IN WITNESS WHEREOF, Landlord and Tenant have executed or caused to be executed
this Lease as of the date first written above.
LANDLORD: TENANT:
Lowe Enterprises Commercial Group, Glenhills Corporation
A California corporation, as agent for
EFC INVESTORS, LTD., a California Limited Partnership
dba Encino Financial Center
BY: By:
It&:'/Senior Vice President Its:
Date: Date: /0
[GRAPHIC OMITTED][GRAPHIC OMITTED]
<PAGE>
V. GENERAL TERMS, COVENANTS AND CONDITIONS
I POSSESSION.
1.1 Early Possession. If Landlord gives Tenant permission to enter into
possession of the Premises, for purposes of inspection or construction of the
Premises, prior to the Commencement Date, such possession shall be deemed to be
upon all the terms, covenants, conditions and provisions of this Lease,
excluding payment of Rent (as defined in Article 3 hereof).
1.2 Confirmation of Possession and Lease Commencement and Termination Dates.
Landlords delivery to Tenant of the Statement of Lease Commencement, Possession
and Termination shall be conclusive as to Landlord and Tenant that the dates set
forth therein are the dates for the Commencement Date, the Date Tenant received
Possession of the Premises, and the Termination Date unless Tenant amends such
dates in writing within five (5) days after Landlord has delivered such
Statement to Tenant. If Tenant so amends such dates, then Landlord and Tenant
shall agree on such dates within fifteen (15) days after the date on which
Tenant delivers notice of such amended dates to Landlord. If Landlord and Tenant
are unable to so agree, then the Commencement Date, Termination Date and date on
which Tenant received possession of the Premises shall be determined by
arbitration in accordance with Article 34 hereof.
2. CONDITION OF THE PREMISES. Tenant's taking possession of the Premises shall
be conclusive evidence that the Premises were in good order, condition and
repair (except for latent defects and punchlist items), that Substantial
Completion of the Premises has occurred as defined in EXHIBIT E and that the
Premises had an adequate security system for Tenant and Tenant's Representatives
when Tenant took possession, except for such matters of which Tenant gives
Landlord notice on or before the Commencement Date. No promise of Landlord to
alter, remodel, repair or improve the Premises or the Building and no
representation, either expressed or implied, respecting any matter or thing
relating to the Building or this Lease (including the condition of the Premises
or the Building) have been made by Landlord to Tenant, other than as may be
contained herein or in the Work Letter attached hereto as EXHIBIT E.
3. RENT. The rental reserved to Landlord during the Tenn, which Tenant covenants
and agrees to pay to Landlord as herein provided, without prior demand therefor
and without any deduction or set-off whatsoever, shall consist of Base Rent and
Additional Rent (separately, "Base Rent" and "Additional Rent," and jointly,
"Rent"). All Rent and other payments required to be made by Tenant to Landlord
under this Lease shall be paid in lawful money of the United States and shall be
paid and delivered to Landlord at Landlord's Mailing Address, or at such other
place as Landlord may from time to time direct.
3.1 Base Rent. Tenant shall pay Landlord Monthly Installments of Base Rent in
advance, commencing on the Commencement Date and on the first day of each month
of the Term thereafter. If Tenant shall commence payment of Rent on a day other
than the first day of a month, the Monthly Installments of Base Rent for that
first month shall be prorated on a per them basis.
<PAGE>
3.3 Additional Rent. Tenant shall pay Landlord as Additional Rent all sums
(other than Base Rent) required to be paid by Tenant pursuant to the provisions
of this Lease.
3.4 Late Payments. If any part of Rent is not paid within ten days after it is
due, Tenant shall pay Landlord (a) a late charge of $100.00 and (b) interest at
the greater of 10% per annum, or five, (5) points over the San Francisco Federal
Reserve Bank discount rate in effect on the 25th day of the month preceding the
date upon which the amount in question was due, on the amount due from its due
date until paid. Such amounts shall constitute Additional Rent hereunder. Tenant
hereby agrees that if Tenant is subject to a late charge for three (3)
consecutive months, Base Rent for the following twelve months shall
automatically be adjusted to be payable quarterly in advance, commencing upon
the first day of the month following such third consecutive late month and
continuing for the next twelve months on a quarterly basis in advance.
4. TAXES AND OPERATING EXPENSES. Tenant shall pay to Landlord in accordance with
Section 4.4 below, as Additional Rent, all Taxes and all Operating Expenses
attributable to the Premises during the Term (jointly, to the extent
attributable to the Premises as set forth herein, "Tenant's Share of Expenses")
which are in excess of the Total Expenses Allowance and the Total Tax Allowance,
respectively.
4.1 Operating Expenses. "Operating Expenses" shall mean all expenses paid or
incurred by Landlord or on Landlords behalf in respect of the management,
repair, operation and maintenance of the Building Area, including without
limitation: (a) salaries, wages, other compensation and benefits of employees of
Landlord engaged in the management, repair, operation and maintenance of the
Building Area (prorated, in the case of employees who devote less than all of
their working time to the Building Area, to reflect the proportion of their
working time devoted to the Building Area); (b) payroll taxes, social security
taxes, federal, state and local unemployment taxes, workers' compensation,
uniforms and related expenses for such employees; (c) the cost of all charges
for oil, gas, steam, electricity, any alternate source of energy, heat,
ventilation, air-conditioning, water, sewers and other utilities furnished to
the
<PAGE>
such costs shall be reasonably amortized by Landlord over the useful life of any
improvements, additions, machinery or equipment, and the Landlord shall receive
interest on the unamortized costs at the prime rate then available from the
largest bank in the state in which the Building is located; (m) management and
other personnel fees for management and operation of the Building and Common
Area or, if no managing agent is employed by Landlord, a sum in lieu thereof
which is not in excess of the then prevailing rates for management fees of other
first class office buildings in the area in which the Building is located; (n)
the cost of installing, purchasing, operating, maintaining and repairing any
security system or Common INC (as defined in Section 5.5 hereof); (o) the cost
of any capital improvements or additions to the Building Area and of any
machinery or equipment installed in the Building Area which are made or become
operational, as the case may be, during the Term and which have the effect of
reducing the expenses which otherwise would be included in Operating Expenses to
the extent of the lesser of (i) such cost, as reasonably amortized by Landlord
over the useful life of the improvements, additions, machinery or equipment,
plus interest on the unamortized amount at the prime rate then generally
available in the State in which the Building is located, or (ii) the reasonably
estimated amount of such reduction in Operating Expenses; (p) reasonable legal,
accounting and other professional fees incurred in connection with the
operation, maintenance and management of the Building Area; (q) the proportion
of all administrative and other expenses of maintaining an office for management
attributable to the Building Area; (r) license, permit and inspection fees
required in connection with operation of the Building Area; (s) all charges and
assessments on the Building pursuant to any applicable CC&Rs; and (t) all other
charges properly allocable to the repair, operation and maintenance of the
Building Area in accordance with generally accepted BONIA building operating
standards. If the Building is not fully occupied, Operating Expenses shall be
adjusted at the expiration of each Lease Year as if the Building were fully
occupied. "Fully occupied" shall be defined as the greater of actual occupancy
or occupancy of ninety five percent (95%) of the net rentable area of the
Building.
Notwithstanding the above, the following shall be excluded from Operating
Expenses: (aa) depreciation (except as provided above); (bb) interest on and
amortization of debts; (cc) leasehold improvements including redecorating made
for tenants of the Building; (dd) brokerage commissions and advertising expenses
for procuring new tenants of the Building; (ee) refinancing costs; (ff) the cost
of any repair or replacement (other than as described in clauses (a) through (t)
above) which would be required to be capitalized under generally accepted
accounting principles, except that if under such principles such costs may be
amortized over a period of not more than ten years, then a proportionate part of
such cost may be included each year in Operating Expenses over the useful life
(as reasonably estimated by Landlord) of such repair or replacement; (gg) Taxes
(as defined in Section 4.2 hereof); (hh) the cost of any repair, replacement or
alteration to the Building Area necessary to comply with the ADA to the extent
such repair, replacement or alteration is not caused by Tenant's use of the
Premises or other of Tenant's actions; (ii) the cost of any item included in
Operating Expenses under clauses (a) through (t) above to the extent that such
cost is reimbursed by an insurance company or a condemnor or a tenant (except as
a reimbursement of Operating Expenses) or any other party, but if at the time
Operating Expenses are determined for a calendar year such reimbursement has not
been made, such expenses may be included in Operating Expenses and an adjustment
shall be made when and if such reimbursement is actually received.
<PAGE>
4.2 Taxes. "Taxes" means the amount of any and all taxes, assessments,
re-assessments, special assessments, levies, fees, license fees, license taxes,
business license taxes, in-lieu taxes, in-lieu fees, commercial rental taxes,
charges, penalties and impositions whatsoever levied or imposed or assessed by
any authority having the direct or indirect power to tax, including, without
limitation, any city, county, state or federal government or any school,
agricultural, lighting, drainage or other improvement or special assessment
district, or any other agency or other public body, whether or not consented to
or joined in by Landlord and whether or not retroactive, payable by Landlord
(other than income taxes, measured by the net income of Landlord from all
sources), whether or not now customary or within the contemplation of the
parties hereto on the date of this Lease, which are:
(a) Upon, measured by or reasonably attributable to the cost or value of Tenants
personal property installed or located in or on the Premises, including, without
limitation, trade fixtures, furniture, counters, appliances, computers and other
equipment, shelving, movable partitions and such other personal property of
Tenant placed in or on the Premises by Tenant or by the cost or value of any
leasehold improvements made in or to the Premises by or for Tenant, regardless
of whether title to such improvements shall be in Tenant or Landlord, except
such improvements that are affixed to the Building or the Premises
(collectively, the "Fixtures"), to the extent that taxes on such personal
property are included in Landlord's real property tax assessment for the land
and the Building on which the Premises are located;
(b) Upon, measured by or reasonably attributable to the value from time to time
of the real property (including the land and the Building) on which the Premises
are located and any Fixtures affixed thereto ("Real Property Taxes");
(c) Upon or measured by the rental payable hereunder, including, without
limitation, any gross income tax or excise tax levied by any city, county,
state, federal or other governmental body with respect to the receipt of such
rental, provided any such gross income tax is instituted as the means of
replacing tax or excise revenues currently levied by governmental authorities as
property taxes; and
(d) Upon or with respect to the possession, leasing, operation, management,
maintenance, improvement, alteration, repair, use or occupancy by Tenant of the
Premises or any portion thereof.
4.3 Portion Attributable to the Premises. The portion of Operating
Expenses attributable to the Premises, and included in Tenant's Share of
Expenses, shall equal Tenant's Proportionate Share of Operating Expenses, The
portion of Taxes attributable to the Premises, and included in Tenant's Share of
Expenses, shall equal the sum of: (a) all Taxes described in subsections 4.2(a),
4.2(c) and 4.2(d) above, plus (b) Tenant' s Proportionate Share of the
assessor's valuation of Real Property Taxes for the Building Area; provided,
however, that if the assessor's valuation of Real Property Taxes includes
buildings, improvements or land other than and in addition to the
A--- Ilk- 'F-~ nftrihiltnhie to the Premises shall be determined by
equitably allocating the amount of Real Property Taxes
<PAGE>
point(s) or minimum point(s) of entry to the Premises (collectively, "Common
INC"). As used herein, the term "demarcation point(s) or minimum point(s) of
entry means that point in the Building Area at which the local exchange
company's or LEC's liability for telecommunications plant ends. As used herein,
the term "inside telephone or telecommunications wire" means that portion of the
telephone or telecommunications wire that connects the Common INC to the LEC's
telephone or telecommunications network at a demarcation point or minimum point
of entry. Tenant, at its sole cost and expense, shall be responsible for
purchasing, installing, operating, maintaining and repairing (and removing under
Article 13 hereof) any telephone or other telecommunications equipment, system,
wire, jack or cable within the Premises other than the Common INC. Except for
termination blocks, Tenant shall not be permitted to install or locate any
telephone or telecommunications equipment, wires or cables within any phone
closets or riser shafts in the Building. Tenant shall not enter or attempt to
gain access to any phone closets or riser shafts in the Building without the
prior written consent of Landlord, which consent may be given, conditioned or
withheld in Landlords sole discretion. Landlord hereby grants to Tenant a
non-exclusive license during the Term to use the Common INC; provided, however,
that Landlord shall have the exclusive right to install, operate, maintain and
repair the Common INC (subject to Article 4 hereof). Tenant expressly agrees
that the cost and expense of Landlord's purchase, installation, operation,
maintenance and repair of the Common INC is an Operating Expense. Without
limiting the foregoing, Tenant shall comply with Landlord's Policies for the
Management of Telecommunications Riser Systems and Telephone Closets, a copy of
which is attached hereto as Exhibit D.
5.6 Meters. Landlord may install separate meters for the Premises to register
the usage of all or any one of the utilities and in such event Tenant shall pay
for the cost of electricity usage as metered which is in excess of the Watt Load
(or in the case of other utilities, the metered usage in excess of that usage
reasonably anticipated by Landlord). Tenant shall reimburse Landlord for the
cost of installation of meters if such usage exceeds the Watt Load (or such
anticipated usage, as the case may be) by more than 10%. In any event, Landlord
may require Tenant to reduce its consumption to the Watt Load or such
anticipated usage.
5.7 Interruption of Services. Landlord does not warrant that any of the services
referred to above (including, without limitation, the Common INC), or any other
services which Landlord may supply, will be free from interruption. Tenant
acknowledges that any one or more such services may be interrupted by reason of
accident, damage, power surges, repairs, installation, inspections, maintenance,
alterations or improvements necessary to be made, or by strikes or lockouts, or
by reason of operation of law, or causes beyond the reasonable control of
Landlord, and Tenant hereby assumes all risk of injury to persons, damage to
property and loss of business or profits which may result from such interruption
or inadequacy of service. Any interruption or discontinuance of service shall
not be deemed an eviction or disturbance of Tenant's use and possession of the
Premises, or any part thereof, nor shall it render Landlord liable to Tenant for
any injury, loss or damage by abatement of Rent or otherwise (except as provided
in Section 18.4 hereof), nor shall it relieve Tenant from performance of
Tenant's obligations under this Lease. Landlord shall, however, exercise
reasonable diligence to restore any service so interrupted.
<PAGE>
6. SECURITY DEPOSIT. Tenant has deposited with Landlord the Security Deposit as
security for the full and faithful performance of every provision of this Lease
to be performed by Tenant. If Tenant defaults with respect to any provision of
this Lease, including payment of Rent, Landlord may appropriate and apply any
portion of the Security Deposit reasonably necessary to remedy Tenant's failure
to pay Rent, or to compensate Landlord for any other loss, cost or damage which
Landlord may suffer by reason of Tenant's default. If any portion of the
Security Deposit is so used or applied, Tenant shall, within five (5) business
days after notice thereof, deposit with Landlord an amount sufficient to restore
the Security Deposit to its original amount, and Tenants failure to do so shall
be a breach of this Lease. Tenant hereby waives the provisions of Section 1950.7
of the California Civil Code and all other provisions of law, now or hereafter
in force, which provide that Landlord may claim from a security deposit only
those sums reasonably necessary to remedy defaults in the payment of rent, to
repair damage caused by Tenant, or to clean the Premises, it being agreed that
Landlord may, in addition, claim those sums reasonably necessary to compensate
Landlord for any other loss or damage, foreseeable or unforeseeable, caused by
the act or omission of Tenant or any of Tenant's Representatives. Landlord shall
not, unless otherwise required by law, be required to keep the Security Deposit
separate from its general funds, nor pay interest to Tenant. In the event of a
termination of Landlords interest in the Lease, the Security Deposit or any
portion thereof not previously applied shall be transferred by Landlord to
Landlords grantee and, upon such transfer, Landlord shall be discharged from
further liability with respect thereto and Tenant agrees to look solely to such
grantee for proper application and return of the Security Deposit in accordance
with this Article. The holder or beneficiary of any Mortgage shall not be
responsible to Tenant for the return or application of any Security Deposit,
whether or not such holder or beneficiary succeeds to the position of Landlord
hereunder, unless such Security Deposit shall have been received in hand by such
holder or beneficiary. Upon expiration of the Term, Landlord shall, provided
that Tenant is not in default under this Lease, return the Security Deposit to
Tenant, less such portion as Landlord shall have appropriated to make good any
default by Tenant. The unapplied balance of the Security Deposit shall be
refunded to Tenant within thirty (30) days after the date on which Tenant has
delivered possession of the Premises to Landlord.
7. USE OF THE PREMISES.
7.1 Permitted Use. Tenant shall use the Premises only for the Permitted Use and
all other uses or purposes are strictly prohibited. ---------------
7.2 Compliance with Laws. Tenant shall comply with all existing and future
(whether or not presently foreseeable) laws, rules, orders, ordinances,
directions, decrees, regulations and requirements ("Law" or "Laws") of all
federal, state and local governmental or regulatory agencies, offices,
departments, bureaus, boards and bodies having jurisdiction over the Premises or
Tenants use thereof ("Governmental Authorily"), and Tenant shall, at Tenant! s
sole cost, alter, improve, upgrade, retrofit, maintain, repair and restore the
Premises in compliance and conformity with all Laws relating to the condition,
use or occupancy thereof. Without limiting the foregoing, Tenant shall comply
with all police, fire and sanitary regulations imposed by any Governmental
Authority, or made by insurance underwriters, and shall observe and obey all
other requirements governing the conduct of any business conducted in the
Premises.
<PAGE>
(c) The parties have expressly negotiated this Section 7.2 and have agreed to
allocate the cost to comply with Laws as provided herein based on the amount of
Rent and other consideration given to Tenant under the terms hereof Tenant
acknowledges that Landlord would have demanded a higher Rent absent Tenant's
agreement to such cost allocation. Tenant further acknowledges that efforts to
comply with Laws may interfere with Tenant's quiet enjoyment of the Premises.
Nevertheless, Tenant agrees to accept any such interference and that such
interference shall not excuse Tenant's obligations to comply with Laws as set
forth herein or any other obligations under this Lease.
7.3 Certain Use Restrictions. Tenant and Tenant's Representatives each shall
not:
(a) Use the Premises in any manner that will constitute waste, nuisance, or
annoyance or is liable to cause injury to other tenants in the Building,
including, without limitation, the emission of noxious or offensive odors or the
use of loudspeakers or sound or light apparatus that can be heard or seen
outside the Premises;
(b) Cause or permit any cooking on the Premises or Building Area (except for use
of microwave ovens or coffee machines) without the prior written approval of
Landlord, which shall not be unreasonably withheld, or conduct any restaurant,
luncheonette or cafeteria for the sale or service of food or beverages to its
employees or to others on the Premises;
(c) Install, use, or permit the installation or use of any vending machines
without the prior written consent of Landlord, which shall not be unreasonably
withheld;
(d) Use or permit the use of the Premises for lodging or sleeping, or for any
illegal purpose; or do anything on or about the Premises that will cause damage
to the Building Area or any part thereof or will impair or might tend to impair
the character, reputation or appearance of the Building as a first class office
building;
(e) Use or operate any machinery, apparatus, device, equipment or other
appliance in, on or about the Premises that will in any manner injure, vibrate,
or shake the Building, or place any load on any floor which exceeds the load per
square foot the floor was designed to carry;
(f) Use, keep, or store any materials of a dangerous or highly flammable nature
in any form upon the Premises, or otherwise do, bring or keep anything in, on or
about the Premises that will cause a cancellation of any insurance policy
insuring the Building Area or to be maintained by Tenant pursuant to Article 22
hereof or an increase in the premiums therefor or that will constitute a
nuisance to or interference with the other property of Landlord or its business
or the property or business of other tenants of the Building; and Tenant agrees
to pay to Landlord forthwith upon demand the amount of any increase in premium
for insurance that may be charged during the Tenn on the amount of insurance to
be carried by Landlord on the Building Area resulting from the foregoing,
whether or not Landlord shall have consented to such act on the part of Tenant;
(g) Allow carts, portable signs, devices or any other objects to be stored or to
remain outside the Premises except in the areas that Landlord has agreed in
writing can be used for storage of such items and that are clearly designated
for such storage;
<PAGE>
(h) Erect any signs, show cases, aerial or antenna, or other articles in the
Common Area, or on the roof or exterior walls of the Premises or the Building,
without, in each instance, the prior written consent of Landlord, and any
articles installed without such written consent shall be subject to removal
without notice at any time;
(i) Use or permit any portion of the Premises to be used or occupied as a barber
or manicure shop; or engage or pay any employees in the Building except those
actually working for Tenant in the Building; or advertise for laborers giving an
address at the Building without Landlord's prior written consent;
Use any space in the Premises or Building Area for manufacturing, for storage or
merchandise, for sale or display of merchandise, goods or property of any kind
(as a store or at auction), or for the conduct of a shop, booth, bootblack, or
other stand or business or occupation which predominantly involves direct
patronage of the general public in the Premises, without the prior written
consent of Landlord; or
(k) Solicit in any manner in any of the automobile parking or other portions of
the Common Area.
7.4 Hazardous and Toxic Substances.
(a) Certain Definitions. As used in this Lease, the following terms shall have
the definitions set forth below whenever used with initial capital letters:
(i) "Hazardous Substance" shall mean any hazardous, toxic, explosive,
radioactive, infectious or dangerous substance, material, chemical, waste,
contaminant or pollutant, including, without limitation, (A) any "hazardous
substance" within the meaning of the Comprehensive Environmental Response
Compensation and Liability Act (42 U.S.C. ss.ss. 9601 et seq.) or the
Carpenter-Presley-Tanner Hazardous Substance Account Act (CA Health & Safety
Code ss.ss. 25300 et seq.), as each may be amended from time to time, (B) any
"hazardous waste" within the meaning of the Resource Conservation and Recovery
Act (42 U.S.C. ss.ss. 6901 et seq.), as amended from time to time, (C) any
"hazardous waste," "extremely hazardous waste" or "restricted hazardous waste"
within the meaning of the California Hazardous Waste Control Act (CA Health &
Safetv Code 25100 et sea.). as amended from time to time, of the California
Hazardous Waste Cont I Act (CA Health & Safetv Code 25100 et sea.). as amended
fro time to time
<PAGE>
Water and Toxic Enforcement Act of 1986 (CA Health & Safety Codess.ss.25249.5 et
seq.) and the Porter-Cologne Water Quality Control Act (CA Water Codess.ss.
13000 et seq.), as each may be amended from time to time.
(iii) "Environmental Problem" shall mean (A) any release or discharge, or
threatened release or discharge, of a Hazardous Substance in, on, under, from or
about the Premises, the Building Area or (B) any violation or threatened
violation of any Environmental Protection Law, whether or not intentional, in,
on, under or about the Premises or the Building Area.
OV) "Tenant Related Environmental Problem" shall mean any Enviromental Problem
resulting from or related to (A) any act or omission of Tenant, Tenant's
Representatives or anyone allowed to enter onto the Premises or the Building
Area by Tenant or (B) Tenant's use of the Premises or the Building Area.
(b) Prohibition. Tenant shall not cause or permit the manufacture, generation,
production, storage, use, transportation, treatment, incineration, disposal,
discharge, threatened discharge, release or threatened release of any Hazardous
Substance in, on, under, from or about the Premises or the Building Area, or
into the environment surrounding the Building Area. Notwithstanding the
preceding sentence, Tenant may store and use cleaning or office supplies
("Supplies") containing Hazardous Substances so long as (i) the Supplies are of
a type and chemical composition commonly used by businesses in general (and not
used solely as an incident to Tenant's particular business or use of the
Premises); (ii) Tenant stores and uses the Supplies only in such quantities as
may reasonably be expected to be stored or used by persons occupying space the
size of the Premises for general office purposes; and (iii) Tenant stores and
uses the Supplies in compliance with any manufacturer's directions or warnings
and all applicable federal, state or local Laws, regulations and judicial
decrees or orders. Tenant shall store and use all Supplies in a manner which
minimizes to the greatest extent reasonably practical the threat of any spill or
release of such Supplies into or onto the Premises, the Building Area or the
environment and shall promptly and with reasonable care clean up any such spill
or release to the satisfaction of Landlord and any Governmental Authority having
jurisdiction thereof. In no event shall Tenant use or store any
asbestos-containing materials or PCBs on the Premises.
(c) Compliance with Laws. Tenant and Tenants Representatives shall comply in all
respects with any and all Environmental Protection Laws applicable to the
Premises or Tenant's use thereof Without limiting the generality of the
foregoing, Tenant shall give all warnings required by the California Safe
Drinking Water and Toxic Enforcement Act of 1986 (CA Health & Safety Code ss.ss.
25249.5 et seq.), as amended from time to time, with respect to any exposures
occurring in the Premises or as a result of Tenant's use of the Premises or the
Common Area.
(d) Environmental Problems. Tenant shall exercise reasonable care to avoid the
occurrence of any Tenant Related Enviromental Problem. If Tenant causes, permits
or learns of any Environmental Problem, Tenant shall immediately notify
Landlord. Tenant shall give any and all notices of any Tenant Related
Environmental Problem required by applicable Environmental Protection Laws,
including, without limitation, any notice required by Section 103 of the
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
ss.ss. 9601 et seq.) and any notice required by Sections 13271 or 13272 of the
<PAGE>
California Water Code, as each may be amended from time to time. Tenant shall
immediately give Landlord notice of any governmental investigation or any
governmental or regulatory action, proceeding, order or decree relating to any
Tenant Related Environmental Problem and, at Tenant's expense, shall comply in
all respects with any such order or decree within the time period allowed
thereby for compliance, unless Landlord notifies Tenant that Landlord intends to
contest such order or decree. Prior to commencing any corrective or remedial
action with respect to any Environmental Problem (except for any such action
taken to comply with an order or decree which Landlord has not elected to
contest), Tenant shall obtain the consent of Landlord (which shall not be
unreasonably withheld or delayed) and all Governmental Authority having
jurisdiction thereof. Tenant shall not be responsible or liable to Landlord for
any costs incurred due to any Hazardous Substance which was present on the
Premises prior to Tenant's occupancy thereof.
(e) Indemnity . Tenant shall indemnify, defend and hold harmless Landlord
(through counsel reasonably satisfactory to Landlord) against any and all
claims, demands, actions, proceedings, liabilities, punitive damages, civil,
administrative or criminal penalties, costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses, fines and forfeitures)
incurred by Landlord or to which Landlord may be exposed by reason of any of the
following (an "Environmental Default"): (i) the manufacture, generation,
production, storage, use, transportation, treatment, incineration, disposal,
discharge, threatened discharge, release or threatened release of any Hazardous
Substance (including any Supplies) in, on, or from the Premises or by Tenant or
Tenant's Representatives, in, on or about the Building Area during the term of
this Lease; (ii) Tenant's violation of any of the provisions of this Section
7.4; or (iii) any Tenant Related Environmental Problem. Without limiting the
generality of the foregoing, Tenant shall reimburse Landlord upon demand for (1)
any reduction in the value of the land on which, or the improvements in which,
the Premises are located or any of Landlord's property as a result of any
Environmental Default; (II) any investigative, consulting, legal, response,
remedial, monitoring or clean up costs incurred by Landlord (whether or not in
response to any governmental or judicial action, decree or order) relating to
any Environmental Default; and (111) any investigative, consulting or legal
costs incurred by Landlord in defending against any regulatory or judicial order
or decree, or satisfying any judgment or the terms of any settlement or consent
decree, relating to any Environmental Default. Tenant's indemnity obligations
under this Section 7.4(e) shall survive the expiration or earlier termination of
this Lease.
(f) Landlord's Right to Information. Within ten (10) business days after
Landlord's request therefor (or within such shorter time as may be reasonably
required by Landlord), Tenant shall provide Landlord with any information
reasonably requested by Landlord, and shall allow Landlord reasonable access to
the Premises, to ensure Tenant's compliance with this Section 7.4 or to enable
Landlord to comply with any Environmental Protection Law or any governmental or
judicial order or decree entered pursuant thereto and applicable to the
Premises, the Building Area or Tenant's use of any of the foregoing. The
provisions of this Section 7.4 shall survive the expiration or earlier
termination of this Lease.
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<PAGE>
(a) Tenant agrees that it shall familiarize itself with the requirements of the
ADA and that it shall be responsible for complying with the ADA in all respects,
as it affects the Premises including but not limited to, making required
"readily achievable" changes to remove any architectural or communication
barriers, and providing auxiliary aides and services within the Premises.
(b) Tenant farther agrees that any and all alterations made to the Premises
during the term of this Lease will comply with requirements of the ADA. All
plans for alterations which must be submitted to the Landlord hereunder must
include a statement from a licensed Architect or Engineer certifying that they
have reviewed the plans, and that the plans comply with all applicable
provisions of the ADA. Any subsequent approval or consent to the plans by
Landlord shall not be deemed to be a representation on Landlord's part that the
plans comply with the ADA, which obligation shall remain with the Tenant.
Tenant agrees that it will defend, indemnify and hold harmless Landlord from and
against any and all liability, claims, damages and expenses (including
reasonable attorneys' fees and costs) which may arise out of any legitimate
claim by any person for failure of Tenant to comply with its obligation under
this Paragraph 7.5.
(c) Without limiting the generality of the foregoing, it is expressly understood
and agreed that, subject to performance by Landlord of Landlord's Work described
in Exhibit E to the Lease, Tenant is accepting the Premises "AS IS " in its
present state and condition, without any representations or warranties from
Landlord of any kind whatsoever, either express or implied, with respect to the
Premises or the Building Area, including without limitation the compliance of
the Premises or the Building Area with the ADA and the rules and regulations
promulgated thereunder, as amended from time to time. Except as otherwise
provided for in Exhibit E to the Lease, if Tenant' s use of the Premises or
operations therein cause Landlord to incur any obligation under the ADA, as
reasonably determined by Landlord, then Tenant shall reimburse Landlord for
Landlord's cost and expenses in connection therewith. If Tenants initial use of
the Premises is not a "place of public accommodation" within the meaning of the
ADA, then Tenant may not thereafter change the use of the Premises to cause the
Premises to become a "place of public accommodation." In the event that Tenant
desires or is required hereby to make alterations to the Premises in order to
satisfy its obligations under the ADA, then all such alterations shall be
subject to any requirements in the Lease with respect to alterations of the
Premises, and shall be performed at Tenant's sole cost and expense. Except for
alterations to the Premises, Tenant shall have no right whatsoever to make any
alterations or modifications to any portion of the Building or its appurtenant
facilities. Tenant shall be responsible for insuring that the Premises and
Tenant's use thereof and operations therein fully and completely comply with the
ADA.
(d) Nothing contained herein is intended to create any rights in third parties.
<PAGE>
8. RULES AND REGULATIONS. Tenant shall comply with (and cause Tenant's
Representatives to comply with) the CC&Rs and the Rules and Regulations
affecting use of the Building Area by Tenant and Tenant's Representatives, as
promulgated by Landlord and with such reasonable modifications thereof and
additions thereto as Landlord may from time to time make; provided, however, in
no event shall such Rules and Regulations contradict or abrogate any right or
privilege herein expressly granted to Tenant in this Lease. A copy of the Rules
and Regulations in effect as of the date of this Lease is attached hereto as
EXHIBIT F. Landlord shall not be responsible to Tenant or any other person or
entity for the violation by anyone of any of the Rules and Regulations.
9. PARKING.
9.1 Use of the Parking Spaces. Subject to the terms and conditions of this
Lease, any CC&Rs and the Rules and Regulations, Landlord hereby grants to Tenant
the right for Tenant and Tenant's Representatives to use the Parking Spaces and
Tenant shall not use or permit any of Tenants Representatives to use any other
parking spaces in the Building Area. Landlord, at its sole election, may
designate the types and locations of the Parking Spaces in the Parking Area and
Landlord shall have the right, in Landlord's reasonable discretion, to change
said types and locations from time to time. In no instance shall Tenant use any
spaces which have been specifically assigned by Landlord to other tenants or for
other uses or as visitor parking or which have been designated by. government
entities with competent jurisdiction as being restricted to certain uses.
9.2 Parking Rate. Commencing on the Commencement Date, subject to Section 9. 10
hereof, Tenant shall pay Landlord the applicable Parking Rate multiplied by the
number of spaces assigned, if any, as Additional Rent, payable monthly in
advance with Monthly Installments of Base Rent. Thereafter, and throughout the
Term, Landlord shall have the right to adjust the Parking Rate to the prevailing
parking rate, in Landlords absolute discretion, for each type of parking space
provided to Tenant hereunder; provided, however, that such Parking Rate shall be
consistent with the parking rates being charged by landlords of comparable
buildings. In addition, Landlord shall have the right to change the Parking Rate
at any time to include therein any amounts levied, assessed, imposed or required
to be paid to any governmental authority on account of the parking of motor
vehicles, including all sums required to be paid pursuant to transportation
controls imposed by the Environmental Protection Agency under the Clean Air Act
of 1970 (as from time to time amended), or otherwise required to be paid by any
governmental authority with respect to the parking, use, or transportation of
motor vehicles, or the reduction or control of motor vehicle traffic, or motor
vehicle pollution.
9.3 Identification Procedures. If requested by Landlord, Tenant shall notify
Landlord of the license plate number, year, make and model of the automobiles
entitled to use the Parking Spaces and if requested by Landlord, such
automobiles shall be identified by automobile window or bumper stickers provided
by the Landlord, and only such designated automobiles shall be permitted to use
the Parking Spaces.
9.4 Additional Parking Space. Landlord may, in Landlords sole discretion,
provide additional parking spaces for use by TP, and Tenant's customers and
invitees on a daily or monthly basis at landlords then-current Parking Rate.
Landlord may make
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<PAGE>
9.7 Landlord's Termination Rights. Landlord shall have the right to terminate
parking privileges within the Parking Area for any individual who violates on
three or more occasions any provision of these parking rules or any provisions
of any other rules affecting parking adopted by Landlord so long as Landlord has
given Tenant written notice of such violations.
9.8 Towing Rights. In the event that Tenant permits any vehicles to use the
Parking Area in violation of this Lease, Landlord shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away and store the vehicle involved or with notice to Tenant to
construct additional parking facilities to accommodate such improperly parked
vehicles, and charge the cost to Tenant, which cost shall be immediately payable
upon demand by Landlord.
9.9 Security Programs. Tenant shall reasonably comply with any security programs
and with any commuter programs or special parking arrangements designed to
reduce the number of automobiles traveling to and from the Building, such as
(but not limited to) carpooling or variable work hour programs, if such programs
are required by Landlord, in Landlord!s sole and absolute discretion, or by Law.
9.10 Independent Operator/Lessee. Landlord shall have the right to retain an
independent operator for the Parking Area and/or to lease the Parking Area to an
independent lessee. In such event, Tenant shall pay any amounts due with respect
to parking directly to such independent operator or lessee.
10. COMMON AREA USE.
10.1 Right to Use Common Area. Except as provided in Article 9 above, and
subject to the terms and provisions of this Lease, the CC&Rs and the Rules and
Regulations, Tenant's use and occupation by Tenant of the Premises shall include
a right for Tenant and Tenants Representatives to use, in common with others
entitled thereto, the Common Area. All Common Area, other than the Parking
Spaces, which is not within the Premises and which Tenant may be permitted to
use and occupy pursuant to this Article are to be used and occupied under a
revocable license, and if the amount of such areas be diminished, Landlord shall
not be subject to any liability nor shall Tenant be entitled to any compensation
or diminution or abatement of rent, nor shall such diminution of such areas be
deemed constructive or actual eviction, provided Tenant's access to and quiet
enjoyment of the Premises shall not be affected in a materially adverse manner.
10.2 Control of Common Area. Landlord shall have the sole and exclusive control
of the Common Area and at any time and from time to time to exclude and restrain
any person from use or occupancy thereof, excepting, however, bona fide Tenant's
Representatives, service suppliers and tenants of Landlord who make use of the
Common Area in accordance with the CC&Rs and the Rules and Regulations. If in
the opinion of Landlord unauthorized persons are using any of the Parking Area
or any other portion of the Common Area by reason of the presence of Tenant in
the Premises, upon demand of Landlord, Tenant shall enforce such rights against
all such unauthorized persons by appropriate proceedings. Nothing herein shall
limit the rights of Landlord at any time to remove any unauthorized persons from
the Common Area or to restrain the use of any of said areas by unauthorized
persons. Tenant shall keep all of the Common Area free and clear of any
obstructions created or permitted by Tenant or resulting from Tenant's operation
and to permit the use of the Common Area only for the purpose hereinabove set
forth.
<PAGE>
10.3 Prescriptive Easements. Landlord shall have the right to post temporary or
permanent signs and, upon ten days' prior notice to Tenant, to temporarily close
any portion or all of the Common Area from time to time and to such extent as
Landlord reasonably deems necessary to prevent a dedication or other
prescriptive right therein in favor of the public or any group or individual and
to prevent the accrual of any such right and Landlord shall have the right by
temporary closure or other reasonable means to discourage or prevent the use of
the Common Area by persons other than those expressly authorized hereby.
10.4 Changes in Common Area. Provided Tenant's access to and quiet enjoyment of
the Premises shall not be affected in a materially adverse manner, Landlord
shall have the right, in its sole discretion, to relocate and change the Common
Area and portions thereof, if Landlord shall determine such relocation to be in
the best interest of the Building. Should Landlord acquire or make available
additional land or facilities not shown as part of the Building Area in the
exhibits attached hereto and make the same available as Common Area, the
expenses incurred by Landlord in connection with the operation, maintenance and
repair of Common Area and attributed to Operating Expenses shall also include
all of the aforementioned expenses incurred and paid in connection with said
additional land and facilities.
11. REPAIRS AND MAINTENANCE.
11.1 Tenant' s Obligations. Tenant shall keep the Premises, including the
Leasehold Improvements and Tenant' s Property (as those terms are defined in
Article 13 hereof), neat, clean and in good order and condition, normal wear and
tear excepted. Tenant shall give Landlord prompt notice of any damage to or
defective condition in any part or appurtenance of the Premises, the Leasehold
Improvements, Tenant's Property, or the Building or the Building Systems. Tenant
shall not construct or place partitions or other obstructions, including,
without limitation, heavy furniture and file cabinets, which might interfere
with the free access of Landlord or Landlords agents to the Building Systems.
Neither Tenant nor any of Tenant's Representatives shall at any time enter
Building Systems enclosures or tamper with, adjust, touch or otherwise affect
the Building Systems. Tenant shall be responsible for all repairs, replacements
and alterations in and to the Premises, the Leasehold Improvements and Tenant's
Property and for all repairs, replacements and alterations in and to the
Building and the Building Systems, normal wear and tear excepted, the need for
which arises out of. (a) Tenant's use or occupancy of the Premises; (b) the
installation or use of Tenant's Property in the Premises; (c) the moving of
Tenant's
<PAGE>
(b) Tenant shall not install business machines or mechanical equipment which
causes odors, noise or vibration (in excess of the normal levels caused by
normal business machines or mechanical equipment) that may be transmitted to
other premises, Common Area or through the structure of the Building.
11.2 Landlord's Obligations. Except as provided in Section 11. 1 above, and
subject to Article 4 hereof, Landlord shall repair, replace and maintain the
external and structural parts of the Building Area which do not constitute a
part of the Premises and are not leased to others and the Building Systems, and
shall perform such repairs, replacements and maintenance with reasonable
dispatch, in a good and workmanlike manner. Landlord shall have no liability to
Tenant nor shall Tenants covenants and obligations under this Lease be reduced
or abated in any manner whatsoever by reason of any inconvenience, annoyance,
interruption or injury to business arising from Landlords making any repairs or
changes which Landlord is required or permitted by this Lease or by any other
tenant's lease or required by Law to make in or to any portion of the Premises,
the Building Area or the Building Systems. Landlord shall nevertheless use its
best efforts to minimize any interference with Tenant's business in the
Premises.
11.3 Waiver. Tenant hereby waives all rights under any Law in existence during
the term of this Lease authorizing a tenant to make repairs at the expense of a
landlord or to terminate a lease upon the complete or partial destruction of the
Premises, including, without limitation, all rights under the provisions of
Sections 1932, 1933, and 1942 of the Civil Code of the State of California, as
amended or replaced from time to time (if applicable).
11.4 Landlord's Access. Tenant hereby grants to Landlord such licenses or
easements in or over the Premises or any portion thereof as shall be reasonably
required for the installation or maintenance of the Building Systems or the
Building Area or any part thereof, including, but not by way of limitation, the
premises of any occupant of the Building; provided, however, that Landlord shall
pay for any alteration required on the Premises as a result of any such
exercise, occupancy under or enjoyment of any such license or easement; and
providing, further, that the exercise, occupancy under or enjoyment of any such
license or easement shall not result in any unreasonable interference with
Tenant's use, occupancy or enjoyment of the Premises as contemplated by this
Lease.
12. ALTERATIONS.
12.1 Consent Requirement. Tenant shall not make any alteration in or to the
Premises without the prior written consent of Landlord, which consent shall not
be unreasonably withheld or delayed.
12.2 Conditions. (a) All alterations shall be made in accordance with such
conditions as Landlord may reasonably impose and at such times and in such
manner as Landlord may from time to time reasonably designate. Tenant shall give
Landlord at least thirty (30) days' prior written notice of the proposed
commencement of any work, and Landlord shall have the right to post and record
appropriate notices of nonresponsibility on or about the Building and with any
recorder's office. Tenant shall secure, at Tenant's sole cost, a lien and
completion indemnity bond for the benefit of Landlord, in an amount satisfactory
to Landlord, insuring the completion of said work.
<PAGE>
(b) If alterations requested by Tenant are made by Landlord, Tenant shall pay
Landlord within ten (10) days of demand the cost therefor plus ten percent (10%)
for Landlord's overhead and profit. If Landlord gives its consent to the making
of alterations by Tenant, Tenant shall, within ten (10) days of demand, pay to
Landlord five percent (5%) of the cost of said work for Landlord's overhead, and
all such work shall be done in accordance with such requirements and upon such
conditions as Landlord, in its sole discretion, may impose. Any review or
approval by Landlord of any plans or specifications with respect to any
alteration is solely for Landlords benefit, and without any representation or
warranty whatsoever to Tenant with respect to the adequacy, correctness or
sufficiency thereof or otherwise.
(c) In the event Tenant shall make any permitted alterations, additions or
changes to the Premises, Landlord may require that Tenant carry "Builder's All
Risk" insurance in an appropriate amount covering the construction of such
alterations, additions or changes, and such other insurance as Landlord may
require, it being understood and agreed that all of such alterations, additions
or changes shall be insured by Tenant pursuant to Article 22 hereof.
12.3 Mechanic's Liens. Tenant shall defend, indemnify and save harmless Landlord
from and against any and all mechanic's and other liens and encumbrances filed
by any person claiming by, through or under Tenant, including security interests
in any materials, fixtures, equipment or any other improvements or appurtenances
installed in, located on or constituting part of the Premises and against all
costs, expenses and liabilities (including reasonable attorneys' fees and
expenses) incurred in connection with any such lien or encumbrance or any action
or proceeding brought thereon. Tenant, at Tenant's sole expense, shall procure
the satisfaction or discharge of record of all such liens and encumbrances
within twenty (20) days after the filing thereof.
13. TENANT'S PROPERTY AND LEASEHOLD IMPROVEMENTS.
13.1 Tenant's Property. All movable partitions, other business and trade
fixtures, furnishings, furniture, machinery and equipment, communications
system, equipment, wire and cable, and other personal property located in the
Premises and acquired by or for the account of Tenant, which can be removed
without material damage to the Premises (collectively sometimes called "Tenant's
Property"), shall be and shall remain the property of Tenant and, except as
otherwise prohibited by this Lease, may be removed by Tenant at any time during
the Term; provided, however, that if any of Tenant's Property is removed, Tenant
shall pay the cost of repairing any damage to the Premises or to the Building
Area resulting from such removal in accordance with Section 11. 1 above.
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<PAGE>
14.2 To install and maintain signs on the exterior and interior of the Building;
14.3 During the last ninety (90) days of the Tenn, if Tenant has vacated the
Premises, to decorate, remodel, repair, alter or otherwise prepare the Premises
for reoccupancy, without affecting Tenant's obligation to pay Rent for the
Premises;
14.4 To have pass keys to the Premises and all doors therein, excluding Tenant's
vaults and safes;
14.5 On reasonable prior notice to Tenant, to exhibit the Premises to any
prospective purchaser, tenant, mortgagee, or assignee of any mortgage on the
Building and to others having an interest therein at any time during the Term;
14.6 To take any and all measures, including entering the Premises, for the
purpose of making inspections, repairs, alterations, additions and improvements
to the Premises, the Common Area and the Building (including for the purpose of
checking, calibrating, adjusting and balancing controls and other parts of the
Building Systems), as may be necessary or desirable for the operation,
improvement, safety, protection or preservation of the Premises, the Common Area
and the Building, or in order to comply with all laws, orders and requirements
of governmental or other authority, or as may otherwise be permitted or required
by this Lease; and
14.7 To install, or to permit an independent contractor or concessionaire to
install, pay-telephones or other vending or other machines in the Common Area
and the exterior of the Building and to receive all revenue derived therefrom.
15. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, mortgage or encumber
this Lease, nor sublet, suffer or permit the Premises or any part thereof to be
used by others (a "Transfer"), without the prior written consent of Landlord in
each instance, which shall not be unreasonably withheld. Any Transfer without
Landlord's prior written consent shall be void and invalid. Upon any Transfer
without Landlords prior written consent, Landlord may collect rent from the
assignee, subtenant, occupant or transferee ("Transferee") and apply the net
amount collected to the Rent, but no such Transfer or collection shall be deemed
a waiver of this covenant, or the acceptance of the Transferee or a release of
Tenant from the further performance of its covenants herein contained.
15.1 Certain Transfers. A "Transfer" prohibited by this Article shall include,
without limitation, the following: if Tenant is a partnership, a withdrawal or
change (voluntary, involuntary, by operation of law or otherwise) of any of the
general partners thereof, or the dissolution of the partnership; if Tenant
consists of more than one person, a purported assignment, transfer, mortgage or
encumbrance (voluntary, involuntary, by operation of law or otherwise) from one
thereof unto the other or others thereof, if Tenant is a corporation, any
dissolution, merger, consolidation or other reorganization of Tenant, or any
change in the ownership (voluntary, involuntary, by operation of law, creation
of new stock or otherwise) of fifty percent (50%) or more of its capital stock
from the ownership existing on the date of execution hereof, if Tenant is a
<PAGE>
limited liability company, any dissolution of Tenant, or any change in the
ownership (voluntary, involuntary, by operation of law, creation of new
membership interest or otherwise) of fifty percent (50%) or more of its
membership interest from the ownership existing on the date of execution
hereof-, if Tenant is a partnership and any of its general partners is a
corporation or a limited liability company, or if Tenant is a subsidiary
corporation, any change in the ownership of fifty percent (50%) or more of such
general partner's or the parent' s (as the case may be) capital stock or
membership interest from the ownership existing on the date of execution hereof,
or the sale of fifty percent (50%) or more of the value of the assets of Tenant.
(a) Notwithstanding the foregoing, without Landlords consent but upon ten (10)
working days notice to Landlord, this Lease may be assigned, or the Premises may
be sublet, to any corporation which is a parent, subsidiary or affiliate of
Tenant. For the purposes of this Section, a "parent" shall mean a corporation or
limited liability company which owns not less than 100% of the outstanding
capital stock of Tenant, a "subsidiar " shall mean any corporation not less than
one hundred percent (100%) of whose outstanding capital stock shall be owned by
Tenant, and an "affiliate" shall mean any corporation not less than one hundred
percent (100%) of whose outstanding capital stock shall be owned by Tenant's
parent.
(b) In no instance shall Tenant make any Transfer which would result in a use of
any part of the Premises which violates any agreement under which the Landlord
is obligated at the time of the assignment. Tenant also shall not make a
collateral assignment of the Lease or any part of Tenant's interest therein for
financing purposes.
15.2 Transfer Notice. To obtain Landlord's consent, at least thirty (30) days
but no more than ninety (90) days prior to the date the proposed Transfer is to
be effective (the "Transfer Date"), Tenant shall give Landlord a written notice
(the "Transfer Notice") setting forth: the name, address and business of the
proposed Transferee; information on the nature of the business proposed to be
conduct in the Premises and on the financial condition and reputation of the
proposed Transferee; the Transfer Date; and the material terms of the proposed
Transfer. If Landlord requests additional detail or documentation, the Transfer
Notice shall be deemed to be received as of the date Landlord receives the
additional detail or documentation. Tenant shall pay to Landlord upon demand all
reasonable costs (including attorneys' fees and expenses) incurred by Landlord
in connection with Landlord's review of the Transfer Notice.
15.3 Landlords Rights. Upon receipt of the Transfer Notice, Landlord shall have
the option to: (a) consent to the proposed transfer, (b) reject the proposed
transfer on reasonable grounds, or (c) terminate this Lease, in Landlord's
absolute discretion, as to all of the Premises or that portion of the Premises
which Tenant proposes to assign or sublease, by providing Tenant written notice
of such termination within sixty (60) days of Landlord's receipt of the Transfer
Notice.
Neither the consent by Landlord to any Transfer nor any failure by Landlord to
terminate this Lease on receipt of any
[illegible]
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<PAGE>
If Landlord elects to terminate the Lease pursuant to this Section 18.2, it
shall notify Tenant as to its election within ninety (90) days after the fire or
other casualty, and this Lease shall terminate thirty (30) days after such
notice; provided, however, that if the Premises are unusable by Tenant, then
this Lease shall terminate as of the date of the damage or destruction.
18.3 Termination by Tenant. Tenant may not terminate this Lease or repair the
Premises at Landlord's expense as a result of a casualty; provided, however,
that Tenant may, at its option, terminate this Lease prior to Landlord%
completion of repairs required by damage or destruction of the Premises if
Landlord fails to substantially complete the repairs or restoration within
twelve (12) months after the date of the occurrence of the damage or destruction
(subject to Article 20 below), No damages, compensation or claim shall be
payable by Landlord for any casualty or any inconvenience, loss of business or
annoyance arising from any repair or restoration of any portion of the Premises
or of the Building pursuant to this Article 18. In the event the Premises are
damaged or destroyed and Landlord repairs or restores the same, Tenant shall
repair or restore Tenant Property (and any Leasehold Improvements installed by
Tenant) and shall, to the extent reasonably practicable, continue the operation
of its business in the Premises.
18.4 Abatement of Rent. In the event the Premises are damaged or destroyed by
fire or other casualty not occasioned by the negligence or willful misconduct of
Tenant or Tenant's Representatives and this Lease is not terminated as provided
herein and the Premises are not repaired or restored within twelve (12) months
of such damage or destruction, the Base Rent thereafter shall be reduced by the
ratio that the rentable square footage of the Premises so damaged or destroyed
(and rendered untenantable bears to the total rentable square footage of the
Premises until the damage or destruction is repaired or restored; provided,
however, that there shall be no such reduction so long as Tenant's business
interruption or rental loss insurance under Section 22. 1 (c) hereof covers
Tenant's obligation to pay Base Rent under this Lease.
19. EMINENT DOMAIN. If the whole of the Building Area is lawfully taken by
condemnation or any other manner for any public or quasi-public purpose, this
Lease shall terminate as of the date of vesting of title in such condemning
authority (the "Date of Taking"), and Rent shall be prorated to such date. If
any part of the Building Area is so taken, this Lease shall be unaffected by
such taking, except that (a) Landlord may, at Landlords sole option, terminate
this Lease by notice to Tenant within ninety (90) days after the Date of Taking,
and (b) if forty percent (40%) or more of the Premises shall be taken and the
remaining area of the Premises shall not be reasonably sufficient for Tenant to
continue operation of its business, Tenant may terminate this Lease by notice to
Landlord within ninety (90) days after the Date of Taking. This Lease shall
terminate on the thirtieth day after such notice, by which date Tenant shall
vacate and surrender the Premises to Landlord. The Rent shall be prorated to the
earlier of the expiration of the Tenn or such date as Tenant is required to
vacate the Premises by reason of the taking. If this Lease continues in force
upon such partial taking, the Base Rent shall be reduced in the same percentage
as the percentage reduction in rentable space of the Premises caused by the
taking.
<PAGE>
19.1 When Voluntary Sale is a Taking. A voluntary sale by Landlord to any public
or quasi-public body, agency or person having the power of eminent domain,
either under threat of condemnation or while condemnation proceedings are
pending, shall be deemed to be a taking by eminent domain.
19.2 Condemnation Award. In the event of any taking, all of the proceeds of any
award, judgment or settlement payable by the condemning authority shall be and
remain the sole and exclusive property of Landlord, and Tenant hereby assigns
all of its right, title and interest in and to any such award, judgment or
settlement to Landlord. Tenant, however, shall have the right, to the extent
that the same shall not reduce or prejudice Landlord's award, to claim from the
condemning authority, but not from Landlord, such compensation as may be
recoverable by Tenant in its own right for moving expenses and damage to
Tenant's Property or business.
20. FORCE MAJEURE. Landlord shall be excused for the period of any delay in the
performance of any obligation hereunder when prevented from so doing by a cause
or causes beyond its control, including, without limitation, all labor disputes
or shortage, civil commotion, war, war-like operations, invasion, rebellion,
hostilities, military or usurped power, sabotage, governmental regulations or
controls, fire or other casualty, inability to obtain any material, services or
financing, or through adverse weather or acts of God. Tenant shall similarly be
excused for delay in the performance of any obligation hereunder provided:
20.1 Payment of Rent. Nothing contained in this Article or elsewhere in this
Lease shall be deemed to excuse or permit any delay in the payment of Rent, or
any delay in the cure of any default which may be cured by the payment of money;
20.2 Self-Help. No reliance by Tenant upon this Article shall limit or restrict
in any way Landlord's right of self-help as provided in ------------ this Lease;
and
20.3 Notice by Tenant. Tenant shall not be entitled to rely upon this Article
unless it shall give Landlord notice of the existence of any force majeure
preventing the performance of an obligation of Tenant within five days after the
commencement of the force majeure.
21. INDEMNITY.
21.1 By Tenant . Tenant hereby agrees to indemnify Landlord and Landlord's
Representatives against and save Landlord and Landlords Representatives harmless
from any and all losses, costs, damages, charges, liabilities, obligations,
fines, penalties, claims, demands, or judgments and any and all expenses,
including, without limitation, reasonable attorneys' fees and expenses, court
costs, and costs of appeal, settlement and negotiations, arising out of or in
connection with: (a) Tenant' s use of the Premises; (b) the conduct of Tenant's
business or any activity, work or thing done, permitted or suffered by Tenant
in, on or about the Premises or the Building Area; (c) any failure to perform or
observe any of the terms, covenants, conditions or provisions required to be
performed or observed by Tenant under this Lease; (d) any negligence or other
misconduct of Tenant or any of Tenant's Representatives in connection with the
<PAGE>
occupying other premises in the Building, or (ii) Landlord or Landlords
Representatives unless proximately caused by (A) the gross negligence or willful
misconduct of Landlord or Landlord's Representatives or (B) the negligence of
Landlord or Landlord's Representatives if such negligence is covered by and
compensable under Landlord's insurance obtained pursuant to Section 22.5 hereof
Landlord shall not be responsible or liable to Tenant for any defect or failure,
in (or any act or omission in the construction of) the Building Area, the
Premises or any of the Building Systems (including, without limitation, the
Common INC, nor shall it be responsible or liable for any injury, loss or damage
to any person or property of Tenant or Tenant's Representatives or any other
person caused by or resulting from fire, electricity, gas, water, or other
utility (or interruption therein) or from rain, snow, ice, theft, bursting,
breakage, explosion, implosion, leakage, steam, running, backing up, seepage, or
the overflow of water or sewerage in any part of the Building or for any injury,
loss or damage caused by or resulting from acts of God or the elements. Tenant
shall give prompt notice to Landlord in case of fire, casualty, defect or
accident in the Premises or in the Building or of defects therein or in any
Building Systems.
21.4 Duration of indemnity. The provisions of this Article 21 shall survive the
termination of this Lease with respect to any damage, ------------------------
injury or death occurring prior to such termination.
22. INSURANCE.
22.1 Insurance Maintained by Tenant. Tenant shall maintain in full force and
effect during the entire Term, at its own cost and expense, the following
policies of insurance:
(a) Comprehensive/Commercial General Liability Insurance with a combined single
limit for bodily injury and property damage of not less than $3,000,000 per
occurrence, including the Broad Form Comprehensive General Liability endorsement
(or its equivalent), completed operations and products liability coverage,
covering the insuring provisions of this Lease and the performance of Tenant of
the indemnity agreements set forth in Article 21 above. Not more frequently than
once each three years, if, in the opinion of Landlord's insurance advisor, the
amount of public liability and property damage insurance coverage at that time
is not adequate, Tenant shall increase the insurance coverage as reasonably
recommended by Landlord's insurance advisor, but in no event in excess of the
amount customarily required by landlords for comparable buildings.
(b) Standard fire, extended coverage and special extended coverage insurance
(all risk), vandalism and malicious mischief endorsements, and sprinkler leakage
coverage, insuring the Leasehold Improvements installed by Tenant, fixtures,
glass, equipment, merchandise, inventory and personal property in and all other
contents of the Premises, and (if any) all mechanical, plumbing, heating,
ventilating, air conditioning, electrical, telecommunication and other
equipment, systems and facilities located on the Premises. Such insurance shall
be in an amount equal to 100% of the replacement value thereof from time to time
(and Tenant shall redetermine the same as frequently as necessary in order to
comply herewith). The proceeds of such insurance, so long as this Lease remains
<PAGE>
in effect, shall be used to repair and/or replace the Premises, and the
Leasehold Improvements, fixtures, glass, equipment, mechanical, plumbing,
heating, ventilating, air conditioning, electrical, telecommunication and other
equipment, systems and facilities so insured.
(c) Business interruption or rental loss insurance sufficient to cover, for a
period of not less than one year, all rental, expense and other payment
obligations of Tenant under this Lease, including, without limitation, Base Rent
and adjustments thereto and Taxes, Operating Expenses and all other costs, fees,
charges and payments which would be borne by or due from Tenant under this Lease
if the Premises and Tenant's business were fully open and operating.
(d) Worker's compensation insurance to the extent required by law and employees
liability insurance; and
(e) Any other forms of insurance Landlord may require from time to time, in form
and amounts and for insurance risks against which a prudent tenant of comparable
size in a comparable business would protect itself.
Nothing herein shall in any manner limit the liability of Tenant for
nonperformance of its obligations or for loss or damage for which Tenant is
responsible. The aforementioned minimum limits of policies shall in no event
limit the liability of Tenant hereunder.
22.2 Form of Insurance. All insurance required to be carried by Tenant hereunder
shall insure Tenant and, as additional insured parties, Landlord and such other
person or persons as Landlord shall designate to Tenant who have an insurable
interest in the Premises. Any claim for loss under said insurance policies shall
be payable notwithstanding any act, omission negligence, representation,
misrepresentation or other conduct or misconduct of Tenant which might otherwise
cause cancellation, forfeiture or reduction of such insurance. All such
insurance policies: (a) shall be issued by reputable companies authorized to do
business, operating in the State of California and rated A-X or better in Best's
Insurance Guide; (b) shall be subject to the prior approval of Landlord (which
approval shall not be unreasonably withheld) as to form, as to substance and as
to insurer; (c) shall only provide for a deductible so long as Tenant shall
remain liable for payment of any such deductible in the event of any casualty;
(d) shall contain appropriate cross-liability endorsements denying Tenants
insurers the right of subrogation against Landlord and Landlord!s
Representatives as to risks covered by such insurance, without prejudice to any
waiver or indemnity provisions applicable to Tenant and any limitation of
liability provisions applicable to Landlord hereunder, of which provisions
Tenant shall notify all insurance carriers; (e) shall contain a provision
whereby each insurer agrees to give Landlord at least thirty (30) days' prior
written notice in advance of any cancellation or lapse or the effective date of
any reduction in the amounts of insurance; (f) shall be written as primary
insurance and endorsed as not contributing with, and not in excess of, any
coverage carried by Landlord; and (g) shall contain such additional endorsements
required by Landlord. On or before the Commencement Date, Tenant shall furnish
Landlord with certificates evidencing the aforesaid insurance coverage, and
renewal certificates shall be furnished to Landlord at least thirty (30) days
prior to the expiration date of such insurance. Claims Made insurance does not
satisfy the above requirements.
<PAGE>
flood coverage and rent interruption coverage beyond any such rent interruption
coverage held by Tenant and naming Landlord as additional insured), in an amount
not less than that required by all Mortgages and/or all Ground Leases, and all
risk as per ISO, comprehensive/commercial general liability insurance (including
Broad Form Extended Liability Endorsement or its equivalent) in an amount of not
less than $5,000,000. Tenant shall pay to Landlord as Additional Rent Tenant' s
Proportionate Share of the cost of the premiums for all such insurance and of
the reasonable cost of Landlord's insurance consultants. Notwithstanding any
contribution by Tenant to the cost of insurance premiums as provided herein,
Tenant acknowledges that Tenant has no right to receive any proceeds from any
insurance policies carried by Landlord.
23. SUBORDINATION, ATTORNMENT AND MODIFICATION.
23.1 Subordination. This Lease and all rights of Tenant hereunder shall be
subordinate to all Ground Leases and Mortgages, unless Landlord or the holder of
any such Ground Lease or Mortgage, elects (by written notice to Tenant) not to
require such subordination. This Section shall be self-operative and no further
instruments of subordination shall be required. (Each Ground Lease to which this
Lease is so subordinated is referred to herein as a "Superior Lease," and each
Mortgage to which this Lease is so subordinated is referred to herein as a
"Superior Mortgage.") In confirmation of such subordination, Tenant shall
promptly execute, acknowledge and deliver any instrument that Landlord, the
lessor under any of the Superior Leases (a "Superior Lessor"), or the holder of
any of the Superior Mortgages (a "Superior Mortgagee"), or any of their
respective assigns or successors in interest may reasonably request to evidence
such subordination. If a Superior Lessor or Superior Mortgagee requires that
such instruments be executed by Tenant, Tenant's failure to do so within twenty
(20) days after request therefor shall be deemed a material default under this
Lease.
23.2 Attomment. If any Superior Lessor or Superior Mortgagee (or any purchaser
at a foreclosure sale) succeeds to the rights of Landlord under this Lease,
whether through possession or foreclosure action or delivery of a new lease or
deed (a "Successor Landlord"), Tenant shall attorn to and recognize such
Successor Landlord as Tenant's landlord under this Lease and shall promptly
execute and deliver any instrument that such Successor Landlord may reasonably
request to evidence such attornment so long as such Successor Landlord agrees to
recognize the validity and continuance of this Lease and not to disturb Tenant's
possession of the Premises so long as Tenant shall not be in default of this
Lease, except that Successor Landlord shall in no event: (a) be liable for any
previous act or omission of a prior landlord under this Lease; (b) be subject to
any offset for a claim arising prior to its succession to the rights of Landlord
under this Lease; or (c) after notice to Tenant of the existence of a Superior
Lessor or a Superior Mortgagee, be bound by any subsequent modification of this
Lease or by any subsequent prepayment of more than one month's Rent, unless such
modification or prepayment shall have been expressly approved by the Successor
Landlord.
<PAGE>
23.3 Modification, Financing Conditions. If any Mortgage lender should require
as a condition to such financing or pursuant to rights of approval set forth in
any Mortgages, or if any lessor under any Ground Lease, as a condition of such
Ground Lease or pursuant to rights of approval set forth therein, any
modification of the terms or conditions of this Lease, Tenant agrees to execute
such modification or amendment, provided that such modification or amendment:
(a) shall not increase Tenant's Rent hereunder, (b) shall not materially
interfere with Tenant's use or occupancy of the Premises or otherwise diminish
Tenant's rights or remedies or increase Tenant's obligations under this Lease
and (c) if requested by a Mortgage lender with a lien on the Building or a
lessor pursuant to any Ground Lease effective as of the date hereof, such
request shall have been made within thirty (30) days after the date hereof. If
Tenant should refuse to execute any modifications so required within ten (10)
days after receipt of same, Landlord shall have the right by notice to Tenant to
terminate this Lease and upon such termination Landlord shall refund any
unearned rental or security deposit, and neither party shall have any liability
thereafter accruing under this Lease, except as provided in Section 21.4 above.
24. ESTOPPEL CERTIFICATE. From time to time upon not less than ten (10) days
prior request by Landlord, Tenant shall deliver to Landlord a written statement
certifying (with the understanding that such statement so delivered may be
relied upon in connection with any lease, mortgage or transfer): (a) that this
Lease is unmodified and in full force and effect (or if there have been
modifications, identifying such modifications and certifying that the Lease, as
modified, is in full force and effect), (b) the annual base rent, monthly base
rent, annual operating expenses and monthly operating expenses under the Lease,
(c) the dates to which Rent has been paid, (d) that Tenant has not prepaid rent
more than thirty (30) days in advance and that Tenant has not delivered to
Landlord a security deposit other than the Security Deposit, (e) that Tenant has
no right to extend the term of this Lease or to expand the Premises, except as
expressly provided in this Lease, (f) that Landlord is not in default under any
provision of this Lease (or if Landlord is in default, specifying each such
default), (g) the address to which notices to Tenant shall be sent, and (h) such
other matters pertaining to the Lease as Landlord may reasonably request.
Tenant's failure to deliver such statement within ten (10) days shall be
conclusive upon Tenant that: (a) this Lease is in full force and effect and not
modified except as Landlord may represent; (b) not more than one month's Rent
has been paid in advance; (c) Landlord is not in default under any provision of
this Lease; and (d) that Tenant hereby irrevocably constitutes and appoints
Landlord as Tenant's special attomey-in-fact, coupled with an interest, to
execute and deliver such a statement for and on behalf of Tenant.
Notwithstanding the presumptions of this Section, Tenant's failure to deliver
such a statement within three (3) business days following a second request from
Landlord therefor (which notice Landlord shall have the right to give at any
time on or after the tenth (10th) day after Landlord's first request therefor)
shall constitute an immediate Event of Default.
25. EVENTS OF DEFAULT, REMEDIES OF LANDLORD.
25.1 Events of Default. The following are Events of Default hereunder:
(a) Failure of Tenant to pay Rent, when and as the same becomes due and
payable, and such failure shall continue
<PAGE>
(d) In the event that within thirty (30) days after the commencement of any
proceeding against Tenant seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief, under any present or
future Law, such proceeding shall not have been dismissed, or if within thirty
(30) days after the appointment, without the consent or acquiescence of Tenant,
of any trustee, receiver or liquidator of Tenant or of any material part of
Tenant's properties, such appointment shall not have been vacated; and
(e)Without need for notice or opportunity to cure, the occurrence of any failure
of the type specified in clause (a) or (b) above after Landlord has given notice
under either clause on three or more separate previous occasions (whether or not
on such previous occasions, Tenant cured such failure before it matured into an
Event of Default); and
(f) Tenant's failure to deliver an estoppel certificate under Section 24 hereof,
as provided in said Section.
25.2 Notice of Event of Default. Notices given under this Article 25 shall
specify the Event of Default and shall demand that Tenant cure such Event of
Default, if curable, within the applicable period of time.
25.3 Remedies of Landlord. In the event of the occurrence of an Event of
Default, Landlord, at its sole election, shall have the following remedies, in
addition to any remedies now or hereafter allowed by Law or provided for herein:
(a) To terminate this Lease, and re-enter and take possession of the Premises
and remove all persons therefrom by any lawful means, and Tenant shall thereupon
have no further claim in or to the Premises under this Lease;
(b) To re-enter and take possession of the Premises and terminate all rights of
Tenant thereto without terminating this Lease, and from time to time occupy or
lease (without notice to Tenant) the whole or any part of the Premises for or on
account of Tenant and for such term (which may be for a term less than or
extending beyond the term then remaining of this Lease) and upon such terms and
conditions and for such rent as Landlord may obtain, and to collect said rent or
any other rent that may thereafter become due and payable and to apply the same
toward the amount of Rent due or thereafter to become due from Tenant and toward
the amount of any costs and expenses Landlord may incur by reason of such
reletting, including, without limitation, court costs, reasonable attorneys'
fees, operating expenses, alteration expenses, brokers' commissions, and
expenses in preparation for reletting and any other damages sustained by
Landlord (collectively, "Additional Expenses"). Should the amount of such rent
collected by Landlord be less than Rent, Tenant agrees to pay the amount of such
deficiency to Landlord at the time the Base Rent would otherwise be payable
hereunder, and should the amount of such rent collected by Landlord be
insufficient to cover the Additional Expenses (in addition to Rent), Tenant
agrees to pay the amount of such deficiency as Additional Rent immediately upon
presentment of a bill or bills therefor. Should Landlord relet the Premises or
any part thereof, Landlord may, at Landlord's sole election, relet the same in
its own name or in Tenant's name and Tenant shall have no right or authority to
collect any rent or charges under said reletting and Landlord shall have no
responsibility or liability to Tenant for any failure to collect said rent or
said charges. This provision provides to Landlord the remedy described in
California Civil Code Section 1951.4 (lessor may continue lease in effect after
lessee's breach and abandonment and recover rent when it becomes due if lessee
has right to sublet or assign subject only to reasonable limitations);
<PAGE>
(c) Even though Landlord may have relet the Premises pursuant to Section 25.3(b)
hereof, to terminate this Lease; or
(d) To allow Tenant to retain possession of the Premises subject to the terms,
covenants, conditions and provisions of this Lease, in which event Landlord may
cure any Event of Default susceptible of being cured by Landlord, at Tenant's
sole cost, and Tenant shall pay to Landlord as Additional Rent, immediately upon
presentment of a bill or bills therefor, any sums expended by Landlord in
connection therewith.
25.4 Notice of Termination; Damages. This Lease may be terminated pursuant to
Section 25.3(a) or Section 25.3(c) hereof only by written notice from Landlord
to Tenant and such termination shall be effective as of the date specified in
such notice. In the event of any such termination, Landlord shall be entitled to
recover from Tenant an amount equal to the sum of- (a) the worth at the time of
award of the unpaid Rent which had been earned at the time of said termination;
(b) the worth at the time of award of the amount by which the unpaid Rent which
would have been earned after termination until the time of award exceeds the
amount of rental loss that Tenant proves could be reasonably avoided; (c) the
worth at the time of award of the amount by which the unpaid Rent for the
balance of the term of this Lease after the time of award exceeds the amount of
rental loss that Tenant proves could be reasonably avoided; and (d) any other
amount necessary to compensate Landlord for all the detriment caused by Tenant's
failure to perform or observe any of the terms, covenants, conditions or
provisions of this Lease to be performed or observed by Tenant under the terms
of this Lease, or which in the ordinary course of things would be likely to
result therefrom. As used herein, "worth at the time of award" shall have the
meaning or meanings set forth in Section 1951.2(b) of the Civil Code of the
State of California, as from time to time amended; provided, however, that the
"worth at the time of award" of the amounts referred to in clauses (a) and (b)
of this Section shall be computed by allowing interest thereon at the greater of
ten percent (10%) or five (5) points over the San Francisco Federal Reserve Bank
discount rate in effect on the 25th day of the month preceding the date upon
which the amount in question was due.
25.5 Reentry Not Termination. No reentry, occupancy or reletting of the Premises
pursuant to Section 25.3(b) hereof, and no alteration or preparation of the
Premises for any such reletting, and no legal proceedings to obtain possession
of the Premises, shall be deemed a termination of this Lease, unless Landlord
shall have given Tenant notice as provided in Section 25.4 hereof.
<PAGE>
terms, covenants, conditions or provisions to be performed or observed by Tenant
under this Lease. Tenant hereby expressly waives any and all rights of
redemption granted by or under any present or future Law in the event of Tenant
being evicted or dispossessed from the Premises for any cause or in the event of
Landlord obtaining possession of the Premises by reason of the occurrence of an
Event of Default or otherwise.
26. CURING TENANTS DEFAULTS.
26.1 Landlord's Right to Cure. If Tenant defaults in the performance of any of
its obligations under this Lease, Landlord, without thereby waiving such
default, may (but shall not be obligated to) perform the same for the account
and at the expense of Tenant, without notice in a case of emergency, and in any
other case only if such default continues after the expiration of the later of.
(a) ten (10) days from the date Landlord gives Tenant notice of its intention so
to do; or (b) the expiration of the applicable grace period provided in this
Lease for cure of such default.
26.2 Additional Rent. Any costs or expenses incurred by Landlord, including
reasonable attorneys' fees, involved in collection or endeavoring to collect
Rent or any part thereof or enforcing or endeavoring to enforce any rights
against Tenant, including the rights set forth in this Article 26, or curing or
endeavoring to cure any default of Tenant, under or in connection with this
Lease, or pursuant to law, including any such cost, expense or disbursement
involved in instituting and prosecuting summary proceedings, shall be due and
payable within ten (10) days of Landlord's demand therefor as Additional Rent.
27. DEFAULTS BY LANDLORD. Should Landlord at any time fail to perform or observe
any of the terms, covenants, conditions or provisions to be performed or
observed by Landlord under this Lease, Tenant shall not have the right to
exercise any of its rights or remedies in connection therewith, if any, unless
Landlord fails to cure said failure within thirty (30) days after written notice
thereof from Tenant or, in the case of a failure which is susceptible of being
cured but cannot with due diligence be cured within such thirty (30) day period,
Landlord fails to proceed with all due diligence within such thirty (30) day
period to cure the same and thereafter to prosecute such curing with all due
diligence to completion. Any notice from Tenant to Landlord provided for in this
Article 27 shall specify the particulars of any such failure.
28. BROKERAGE FEES. Tenant warrants and represents that Tenant has not engaged,
entered into an agreement with or otherwise dealt with any realtor, broker,
agent or finder in connection with this Lease except the Brokers. Tenant shall
indemnify and hold Landlord harmless from any cost, expense or liability
(including cost of suit and reasonable attorneys' fees) for any compensation,
commissions, fees or charges claimed by any realtor, broker, agent or finder in
connection with this Lease or by reason of any act of Tenant.
<PAGE>
29. NOTICES. All notices, demands or other communications ("Notices") permitted
or required to be given hereunder shall be in writing and, if mailed postage
prepaid by certified or registered mail, return receipt requested, shall be
deemed given three days after the date of mailing thereof or on the date of
actual receipt, if sooner; all other Notices not so mailed shall be deemed given
on the date of actual receipt. Notices shall be addressed as follows: (a) if to
Landlord, to the Landlord's Mailing Address and to the Building manager
designated by Landlord, and (b) if to Tenant, to the Tenant's Mailing Address.
Landlord and Tenant may from time to time by notice to the other, designate such
other place or places for the receipt of future Notices.
30. TRANSFER OF LANDLORD'S INTEREST. The term "Landlord" as used in this Lease,
so far as covenants or agreements on the part of Landlord are concerned, shall
be limited to mean and include only the owner or owners of Landlord's interest
in this Lease at the time in question. Upon any transfer or transfers of such
interest, Landlord herein named (and in case of any subsequent transfer, the
then-transferor) shall thereafter be relieved of all liability for the
performance of any covenants or agreements on the part of Landlord contained in
this Lease or relating to the Premises.
31. RELOCATION OF PREMISES. Landlord shall have the sole right to relocate the
Premises to another location within the Building or comparable building in the
area at any time by giving not less than sixty (60) days' prior written notice,
provided: (a) the new premises are substantially equivalent in rentable area;
(b) Tenant shall incur no cost or expense in connection with the relocation; (c)
the Base Rent shall be the same (unless the new premises are smaller, in which
case, the Base Rent shall be decreased in the same proportion as the reduction
in the rentable square footage); and (d) the relocation does not otherwise
materially impair Tenant's capacity to conduct its business within the Building
or the comparable building in the area. If relocation occurs, this Lease shall
remain in full force and effect, and the new premises shall become the
"Premises" (and, if applicable, the new Base Rent shall become the "Base Rent")
for all purposes set forth in this Lease.
32. QUIET ENJOYMENT. Tenant, upon paying Rent and performing all of the terms on
its part to be performed, shall peaceably and quietly enjoy the Premises
subject, nevertheless, to (a) the terms of this Lease, (b) to any document or
documents now or hereafter executed by and between Landlord and the owner(s) or
lessee(s) of certain parcels of Real Property within the Building Area, or other
adjacent or neighboring properties, which may provide, in part, for a scheme of
reciprocal easements for the benefit of tenants and customers of the Building
and said adjacent or neighboring properties, and (c) to any Superior Mortgage or
Superior Lease, as defined in Section 23.1 hereof, or other agreement to which
this Lease is subordinated, as such documents may hereafter be supplemented,
implemented, modified or amended, it being understood that none of the
aforementioned documents shall prevent Tenant from using the Premises for the
Permitted Use.
33. LIMITATION OF LANDLORD'S LIABILITY. If Landlord becomes obligated to pay
Tenant a money judgment arising out of any failure by Landlord to perform or
observe any of the terms, covenants, conditions or provisions to be performed or
observed by Landlord hereunder, Tenant shall be limited for the satisfaction of
said money judgment solely to Landlords interest in the Building or
<PAGE>
to either party in any award rendered pursuant to such arbitration. This
provision shall constitute a written agreement to submit to arbitration.
Judgment upon any award rendered pursuant to such arbitration may be entered in
any court of competent jurisdiction.
35. SIGN CONTROL. Tenant shall not obstruct or permit the obstruction of light,
halls, Common Areas, roofs, parapets, stairways or entrances to the Building or
the Premises and will not affix, paint, erect or inscribe any sign, projection,
awning, signal or advertisement of any kind to any part of the Building or the
Premises, including the inside or outside of the windows or doors, without the
written consent of Landlord. Landlord shall have the right to withdraw such
consent at any time and to require Tenant to remove any sign, projection,
awning, signal or advertisement to be affixed to the Building or the Premises
and to repair any damage caused by such removal and restore the Building or the
Premises to the condition existing before such installation. If such work is
done by Tenant through any person, firm or corporation not designated by
Landlord, or without the express written consent of Landlord, Landlord shall
have the right to remove such signs, projections, awnings, signals or
advertisements without being liable to the Tenant by reason thereof and to
charge the cost of such removal, repair and restoration to Tenant as Additional
Rent, payable within ten (10) days of Landlord's demand therefor.
36. EXPANSION. Landlord may at its election (but shall in no event be obligated
to) expand the Building, and expand, construct improvements and structures on,
and make changes to the Common Area. Tenant acknowledges that such changes and
expansion, if and when they may occur, will involve barricading, materials
storage, noise, the presence of workers and equipment, relocation and
rearrangement of parking areas, roadways and lighting facilities, and other
inconvenience typically associated with construction. Tenant waives any claim of
defense it may have against Landlord and any right of setoff against or
deductions from rent or any other sum payable under this Lease based upon
interruption of or interference with Tenant's conduct of business or
inconvenience to its customers caused by such construction, provided that such
work by Landlord shall not materially affect Tenant's use of the Premises or
Tenant's ingress to or egress from the Premises.
37. SHORING. If any excavation or construction is made adjacent to, upon or
within the Building, or any part thereof, Tenant shall afford to any and all
persons causing or authorized to cause such excavation or construction license
to enter upon the Premises for the purpose of doing such work as such persons
shall deem necessary to preserve the Building or any portion thereof from injury
or damage and to support the same by proper foundations, braces and supports,
without any claim for damages or indemnity or abatement of Rent, or of a
constructive or actual eviction of Tenant, provided that any such work caused by
Landlord shall not materially affect Tenant's reasonable ingress to or egress
from the Premises.
38. MISCELLANEOUS.
<PAGE>
38.1 Authori1y, Due Organization. Each person executing this Lease on behalf of
either party hereto represents and warrants that he or she is duly authorized to
execute and deliver this Lease on such party's behalf and to bind such party
hereto. Tenant represents and warrants that (a) this Lease is valid, binding and
enforceable against Tenant, and, if Tenant is a corporation, that: (b) Tenant is
a duly organized corporation and Tenant is authorized to enter into this Lease
by its board of directors in accordance with its bylaws; (c) all steps have been
taken prior to the date hereof to qualify Tenant to do business in California;
(d) all franchise and corporate taxes have been paid to date; and (e) all forms,
reports, fees and other documents necessary to comply with applicable laws will
be filed when due.
38.2 Other Tenancies in the Building. Landlord reserves the absolute right to
effect such other tenancies in the Building as Landlord in the exercise of its
sole business judgment shall determine to best promote the interests of the
Building. Tenant does not rely on the fact, nor does Landlord represent, that
any specific tenant or type or number of tenants shall during the Term occupy
any space in the Building.
38.3 Landlord-Tenant Relationship. Nothing contained in this Lease shall be
deemed or construed by the parties hereto or by any third person to create the
relationship of principal and agent or of partnership or of joint venture or of
any association between Landlord and Tenant, and neither the method of
computation of rent nor any other provision contained in this Lease nor any acts
of the parties hereto shall be deemed to create any relationship between
Landlord and Tenant other than the relationship of landlord and tenant.
38.4 Joint and Several Liability. If more than one person or entity executes
this Lease as Tenant, each such person or entity shall be jointly and severally
liable for observing and performing each of the terms, covenants, conditions and
provisions to be observed or performed by Tenant.
38.5 No Accord and Satisfaction. No payment by Tenant or receipt by Landlord of
a lesser amount than Rent payment herein stipulated shall be deemed to be other
than on account of Rent, nor shall any endorsement or statement on any check or
any letter accompanying any check or payment as Rent be deemed an accord and
satisfaction (unless Landlord expressly agrees to an accord and satisfaction in
a separate agreement duly accepted by Landlord's appropriate officer or
officers), and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such Rent or pursue any other remedy
provided in this Lease. Landlord may receive and retain, absolutely and for
itself, any and all payments so tendered, notwithstanding any accompanying
instructions by Tenant to the contrary, and any such payment shall be treated by
Landlord at its option as being received solely on account of any amounts due
and owing Landlord, including Rent, and to such items and in such order as
Landlord in its sole discretion shall determine.
38.6 No Non-Mandatory Counterclaim. If Landlord commences any summary
proceedings, Tenant shall not interpose any non-mandatory counterclaim of any
nature or description in any such proceedings or action.
<PAGE>
38.10 Costs and Attorneys' Fees. In any action or proceeding which Landlord or
Tenant may be required to prosecute to enforce its respective rights hereunder
(including without limitation any court or arbitration proceeding), the
unsuccessful party agrees to pay all reasonable costs incurred by the prevailing
party therein, including reasonable attorneys' fees and expenses.
38.11 Validity of Clauses. If any clause or provision of this Lease is or
becomes illegal or unenforceable because of present or future laws or any rule
or regulation of any governmental body or entity, effective during the Tenn, the
intention of the parties hereto is that the remaining parts of this Lease shall
not be affected thereby unless such clause or provision is, in the reasonable
determination of Landlord, essential and material to its rights, in which event
Landlord shall have the right to terminate this Lease by notice to Tenant unless
Tenant agrees to modify such provision to Landlord's reasonable satisfaction.
38.12 Successors and Assigns. All the terms and provisions of this Lease shall
be binding upon and, except as prohibited or limited by Article 15, inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
successors and assigns.
38.13 Complete Agreement. This Lease sets forth all the covenants, promises,
agreements, conditions and understandings between Landlord and Tenant concerning
the Premises and Building Area and there are no covenants, promises, agreements,
conditions or understandings, either oral or written, between them other than as
are herein set forth. Except as herein otherwise provided, no subsequent
alteration, amendment, change or addition to this Lease shall be binding upon
Landlord or Tenant unless reduced to writing and signed by them. No agreement to
accept a surrender of all or any part of the Premises shall be valid unless in
writing and signed by Landlord.
38.14 Captions. The captions appearing within the body of this Lease have been
inserted as a matter of convenience and for reference only and in no way define,
limit or enlarge the scope or meaning of this Lease or of any provision hereof.
38.15 Memorandum of Lease. At the sole option of Landlord, Tenant shall promptly
execute, acknowledge and deliver to Landlord a memorandum with respect to this
Lease sufficient for recording. In no event shall this Lease be recorded and if
Tenant records this Lease in violation of the terms hereof, in addition to any
other remedy available to Landlord upon Tenant's default, Landlord shall have
the option to terminate this Lease by recording a notice to such effect. If a
memorandum of lease is recorded, on the expiration of the Term Tenant shall
execute, acknowledge and deliver to Landlord an instrument in writing releasing
and quitclaiming to Landlord all right, title and interest of Tenant in and to
the Premises by reason of this Lease or otherwise.
38.16 Exhibits, Riders, Attachments and Addenda. If any provision contained in
an exhibit, rider, attachment or addendum is inconsistent with any other
provision of this Lease, the provision contained in said exhibit, rider,
attachment or addendum shall supersede said other provision, unless otherwise
provided in said exhibit, rider, attachment or addendum.
38.17 Counterparts. This Lease may be executed in multiple counterparts, each of
which shall be deemed an original and all of which shall constitute one and the
same instrument.
<PAGE>
38.18 Language Intepretation . The language of this Lease shall be construed
according to its normal and usual meaning and not strictly for or against either
Landlord or Tenant. As used in this Lease, any list of one or more items
preceded by the word "including" shall not be deemed limited to the stated items
but shall be deemed without limitation. The use of the neuter singular pronoun
to refer to either party shall be deemed a proper reference even though it may
be an individual, partnership, company, corporation or a group of two or more
individuals or corporations. The necessary grammatical changes required to make
the provisions of this Lease apply in the plural number where there is more than
one Landlord or Tenant and to either corporations, associations, partnerships,
companies or individuals, males or females, shall in all instances be assumed as
though in each case fully expressed.
38.19 Governing Law. This Lease shall be deemed to have been made in and shall
be construed in accordance with the laws of the State of California, without
regard to its conflict of laws principles.
38.20 Time of the Essence. Time is of the essence with respect to the
performances of any and all obligations and the observance of any and all
conditions by Tenant under this Lease.
38.21 Financial Statements. At any time during the Term, Tenant shall, upon ten
(10) days prior written notice from Landlord, provide Landlord with financial
statements of Tenant for the three (3) most recently ended fiscal years of
Tenant. Such statements shall be prepared in accordance with generally accepted
accounting principles and, if such is the normal practice of Tenant, shall be
certified by an independent certified public accountant. Landlord shall not
disclose such financial statements or any information obtained from such
statements to any other person without prior written consent from Tenant, except
that Landlord may disclose such statements to the holder of any Ground Lease or
Mortgage or to any prospective purchaser or encumbrancer of the Building if such
person agrees to respect the confidentiality thereof.
38.22 Computation of Time. Unless this Lease specifically refers to business
days, the word "#ay" as used herein shall mean calendar day. Whenever in this
Lease any prescribed time period would end on a Saturday, Sunday or legal
holiday, such period shall be deemed to end upon the next day following that is
not a Saturday, Sunday or legal holiday.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
EXHIBIT A -- DESCRIPTION OF THE BUILDING
PARCEL A:
A parcel of land situated in the City of Encino, County of Los Angeles, State of
California, being a portion of Lot 2, in Block 24 of Tract Number 2955,
according to map thereof recorded in Book 3 1, Pages 62 to 70 inclusive, of
Maps, records in the office of the County Recorder of Los Angeles, County, being
more particularly described as a whole as follows:
<PAGE>
Beginning at the Southwest comer of Lot 14 of tract Number 16277, according to
map thereof record in Book 430, Pages 2 and 3, of Maps, records in the office of
the County recorder of said county, said point being on the Westerly Line South
0' 03" 30" East 279.73 feet to the North Line of Ventura Boulevard, 100 feet
wide, being also a point on the Northerly Line of the Southerly 20.00 feet of
said Lot 2, Block 24, Tract Number 2955; then along said North Line South 80'
38'45" East 267.72 feet to an intersection with the east Line of said Lot 2;
thence along said East Line North 0' 03'30" West 279.73 feet to an intersection
with the Easterly prolongation North 80' 38'45" West 267.72 feet to the point of
beginning.
PARCEL B:
The Southerly 20.00 feet of Lot 2 in Block 24 of Tract Number 2955, in the City
of Encino, County of Los Angeles, State of California, as per map recorded in
Book 3 1, Pages 62 to 70 inclusive, of Maps, records of said County.
EASEMENT 1:
Together with an easement for Drainage and Sanitary Sewer Purposes over, through
of ingress and egress over said easement for the purpose of constructing,
maintaining and repairing drainage and sanitary sewer lines described as
follows:
Beginning at the intersection of the easterly Line of Lot 2, Block 24, of said
Tract Number 2955, with the Easterly prolongation of the Southerly Line of Lots
11 through 14 inclusive of Said Tract Number 16227; then North 80' 38'45" West
along said Southerly Line 5.07 feet to the intersection of the Westerly Line of
the Easterly 5 feet of Lot 2, Block 24 of said tract Number 2955; then North 0'
03' 30" West along said Westerly Line 164.67 feet to the intersection of the
Southerly Line of the Northerly 5 feet to the intersection of the Southerly Line
of the Northerly 5 feet of that portion of Lot 2, of said Block 24, lying
Southerly of the Easterly prolongation of the Northerly Line of Moorpark Street,
54 feet wide, as shown on Map of said Tract Number 16227; thence North 0' 03'30"
West 5.07 feet to the Easterly prolongation of said Northerly Line of Moorpark
Street; thence South 80' 38'45" East along said prolongation 119.43 feet to the
Easterly Line of Lot 2, of said Block 24; then South 0' 03'30" East along said
easterly line 169.74 feet to the point of beginning.
EASEMENT 2:
AND ALSO TOGETHER WITH an easement for drainage purposes over, through and
across that portion of Lot 2, Block 24, of said Tract Number 2955, with the
right of ingress and egress over said easement for the purpose of constructing,
maintaining and repairing drainage lines, described as follows:
The Westerly 5 feet of Lot 2 of said Block 24, bounded Southerly by the Easterly
prolongation of the Southerly line of Moorpark Street, as shown on map of said
Tract Number 16227
<PAGE>
RIDER 1
BASE RENT SCHEDULE
Per Rentable
Months Square Foot Per Month Per Annum.
1-12* $1.85 $2,005.40 $24,064.80
13-24 $1.90 $2,059.60 $24,715.20
25-36 $1.95 $2,113.80 $25,365.60
*Landlord shall grant Tenant a total of 1/2 months of conditionally excused
abatement of Base Rent and Operating Expenses for the month V., of August, 1998.
